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U.S. Securities and Exchange Commission


(Release No. 35-27680; 70-9895)

CenterPoint Energy, Inc., f/k/a Reliant Energy, Inc., et al.

Supplemental Order Authorizing Issuance and Sale of Secured Debt and Warrants

May 28, 2003

CenterPoint Energy, Inc. ("CenterPoint"), Houston, Texas, a registered public-utility holding company, and its direct wholly owned registered holding company subsidiary, Utility Holding, LLC ("Utility Holding"), Wilmington, Delaware (together, "Applicants"), have filed with the Securities and Exchange Commission ("Commission") a post-effective amendment to their application-declaration in this filing ("Application") under sections 6(a) and 7 of the Public Utility Holding Company Act of 1935, as amended ("Act") and rules 44 and 54. The Commission issued a notice of the filing of the post-effective amendment on January 27, 2003.1 The Commission did not receive any request for a hearing.

I. Background

By order dated July 5, 2002 in this filing ("July Order"),2 the Commission authorized the formation of CenterPoint as a registered holding company and approved various financing proposals. Among other things, the July Order authorized CenterPoint to issue up to $5 billion in unsecured long-term debt and $6 billion in unsecured short-term debt, subject to an overall limit of no more than $6 billion ("Financing Limit") in financings at any one time outstanding through June 30, 2003 ("Authorization Period").

In the July Order, CenterPoint committed that debt issued pursuant to such authorization would be unsecured.

Applicants now seek a modification of the July Order to permit them to issue warrants to purchase the common stock of CenterPoint, subject to the terms and conditions of the July Order, and to pledge the stock of Texas Genco Holdings, Inc. ("Texas Genco"), a section 3(a)(1) exempt holding company subsidiary of Utility Holding, in connection with the refinancing of approximately $3.85 billion of CenterPoint debt. Issuances of the secured debt securities would be included in, and subject to, the Financing Limit and all other terms and conditions of the July Order.

A. The CenterPoint System and the Texas Restructuring Law

CenterPoint was created on August 31, 2002 as part of a corporate restructuring of Reliant Energy, Inc. ("Reliant Energy"). The restructuring was carried out in part to comply with legislation enacted by the Texas legislature in June 1999 (the "Texas Law"). The Texas Law substantially amended the regulatory structure governing electric utilities in Texas, as explained in greater detail in the July Order. Under the Texas Law, the power generation and retail sales functions of integrated utilities in Texas ceased to be subject to traditional cost-based regulation and utilities were required to separate their generation, retail and transmission and distribution functions into separate units.

As the Texas Law contemplated, the generation assets of Reliant Energy were "unbundled" and placed in two indirect electric utility subsidiaries of Centerpoint.3 The first subsidiary, CenterPoint Energy Houston Electric, LLC (the "T&D Utility"), engages solely in the transmission and distribution of electric energy in a 5,000 square mile area of the Texas Gulf Coast that includes Houston. The T&D Utility remains subject to rate regulation by the Public Utility Commission of Texas (the "Texas Commission").

The second electric utility subsidiary is Texas Genco, LP, directly owned by Texas Genco.4 Texas Genco, LP directly owns the Texas generating plants that were formerly owned by Reliant Energy (the "Texas Genco Assets"). Texas Genco, LP is one of the largest wholesale electric power generating companies in the United States. As of December 31, 2002, Texas Genco, LP owned and operated 11 power generating stations (60 generating units) and had a 30.8% interest in the South Texas Project Electric Generating Station, a nuclear generating station, for a total net generating capacity of 14,175 megawatts ("MW"). Since January 1, 2002, Texas Genco, LP has been selling generation capacity, energy and ancillary services to wholesale purchasers at prices determined by the market, as contemplated by the Texas Law. Texas Genco, LP is not subject to regulation by the Texas Commission.

Texas electric transmission and distribution utilities whose generation assets were "unbundled" pursuant to the Texas electric restructuring law, may in 2004 recover (i) "stranded costs," which consist of the positive excess of the net regulatory book value of generation assets over the market value of those assets, taking specified factors into account; and (ii) the value of other generation-related "regulatory assets." The Texas Law permits utilities to recover regulatory asset value and stranded costs through non-bypassable charges authorized by the Texas Commission, to the extent that such assets and costs are established in certain regulatory proceedings. The Texas Law also authorizes the Texas Commission to permit utilities, through the use of special purpose entities, to issue securitization bonds based on the revenue associated with the non-bypassable charge. These features of the Texas Law, which are relevant to the Application, are discussed further below.

A third utility subsidiary of Centerpoint, CenterPoint Energy Resources Corp. ("GasCo"), owns gas distribution systems that together form one of the United States' largest natural gas distribution operations, in terms of customers served. Through unincorporated divisions, GasCo provides natural gas distribution services in Louisiana, Mississippi and Texas (Entex Division), Arkansas, Louisiana, Oklahoma and Texas (Arkla Division) and Minnesota (Minnegasco Division). Through wholly owned subsidiaries, GasCo also owns two interstate natural gas pipelines and gas gathering systems, and provides various ancillary services.

On September 30, 2002, CenterPoint completed the distribution ("Distribution") to shareholders of the remaining stock of Reliant Resources, Inc. ("Reliant Resources"), a nonutility subsidiary of Reliant Energy. The Distribution completed the separation from CenterPoint of the merchant power generation and energy trading and marketing business of Reliant Resources.5

For the year ended December 31, 2002, CenterPoint had revenues of $7.9 billion and operating income of $1.3 billion. As of December 31, 2002, CenterPoint had assets totaling $19.6 billion.

B. Sale of Texas Genco

Reliant Resources has an option that may be exercised in January 2004 to purchase all of the shares of Texas Genco common stock then owned by CenterPoint.6 The exercise price of the option is based upon the generation asset valuation in the Texas Law.

C. The CenterPoint Facility

Pursuant to the July Order, CenterPoint entered into a $3.85 billion, 364-day credit facility ("CenterPoint Facility") on October 10, 2002 to replace a similar facility that had expired. The CenterPoint Facility required, among other things, two mandatory commitment reductions of $600 million, one by February 28, 2003, and the other by June 30, 2003.

On February 28, 2003, CenterPoint reached agreement with a syndicate of banks on a second amendment to the CenterPoint Facility ("Second Amendment"). Under the Second Amendment:

  • The maturity date of the CenterPoint Facility has been extended from October 2003 to June 30, 2005.

  • The $1.2 billion in mandatory prepayments that would have been required this year (including the $600 million due on February 28 and June 30, 2003) have been eliminated.

  • At current credit ratings, pricing for loans under the Second Amendment remains the same as under the original CenterPoint Facility.7

As consideration to the banks for the extended maturity and the elimination of the mandatory prepayments, CenterPoint has made two commitments under the Second Amendment, subject to Commission approval. First, CenterPoint has agreed to grant the banks, on or before May 28, 2003, warrants to purchase 10 percent, on a fully diluted basis, of CenterPoint's common stock. Centerpoint and the banks have agreed that the exercise price for the warrants will be the greater of (i) $6.56 or (ii) 110 percent of the closing price of CenterPoint's common stock on the New York Stock Exchange on the date the warrants are issued. The warrants would be issued upon receipt of Commission approval and would remain outstanding for four years. They would not, however, be exercisable for a year after issuance.

CenterPoint has the opportunity to reduce or extinguish the warrants to the extent that it reduces the bank facility during 2003 by specified amounts. To the extent that CenterPoint reduces the CenterPoint Facility by up to $400 million on or before May 28, 2003, up to half of the warrants will be extinguished on a basis proportionate to the reduction in the CenterPoint Facility. To the extent that half of the warrants are not extinguished on or before May 28, 2003, they will vest and become exercisable in accordance with their terms. Whether or not CenterPoint is able to extinguish warrants on or before May 28, 2003, the remaining 50 percent of the warrants will be extinguished, again on a proportionate basis, if CenterPoint reduces the CenterPoint facility by up to $400 million by the end of 2003. Thus, all of the warrants will be extinguished by the end of 2003 if CenterPoint pays $800 million to the banks in accordance with these parameters.8

The warrants and the underlying common stock would be registered with the Commission. The warrants could be exercised either through the payment of the purchase price or on a "cashless" basis, under which CenterPoint would issue a number of shares having a value equal to the difference between the then current market price and the warrant exercise price. If Commission approval to issue the warrants is not obtained on or before May 28, 2003, CenterPoint is obligated to provide the banks equivalent cash compensation over the term that the warrants would have been exercisable (to the extent they are not otherwise extinguished).

Second, CenterPoint has committed to grant the banks a security interest in its 81% stock ownership of Texas Genco. If the security is not provided, the interest rates will increase by 25 basis points beginning May 28, 2003.9

Applicants state that the Second Amendment has enhanced the ability of CenterPoint and its subsidiaries to access the capital markets. Since the Second Amendment was executed, the companies have successfully engaged in $1.7 billion in capital markets transactions.

II. Requested Supplemental Order and Current Financial Condition

Applicants seek authorization under sections 6(a) and 7 of the Act to issue warrants to purchase the common stock of CenterPoint and to pledge the stock of Texas Genco to secure up to $3.85 billion of long-term debt, as contemplated by the Second Amendment. The proposed financing transactions will otherwise be subject to the terms and conditions of the July Order.

Applicants state that the requested authorizations are necessary to meet CenterPoint's short-term liquidity needs, due to the lenders' insistence that the longer-term loan be supported by the warrants and pledge of the Texas Genco stock. Applicants explain that deteriorating market conditions have made it difficult to refinance CenterPoint's debt on reasonable terms without providing some security. Applicants state that with the ability to provide collateral, a preferable financing arrangement can be implemented. Applicants note that, through the extension of the maturity of the CenterPoint Facility into 2005, the Second Amendment addressed what had been a serious mismatch between debt terms and cash flows anticipated from the sale of Texas Genco and securitization of stranded costs and other generation-related asset values. By 2005, CenterPoint expects to have sold its generation assets and recovered its stranded costs and other generation-related asset values, as provided by the Texas Law.

As discussed previously, Applicants expect to sell Texas Genco in 2004, either to Reliant Resources or to another unaffiliated party, and to use the proceeds to pay down debt. Applicants also anticipate that a special purpose subsidiary of the T&D Utility will issue securitization bonds in 2004 or 2005 to monetize and recover the balance of stranded costs and other values relating to the Texas Genco Assets, as determined in a 2004 true-up proceeding envisaged by the Texas Law.

The issuance will be undertaken pursuant to a financing order to be issued by the Texas Commission. The holders of the securitization bonds would only have recourse to the special purpose transition bond company. Furthermore, the CenterPoint system's creditors would have no recourse to this special purpose entity. All or a portion of the proceeds from the issuance of the securitization bonds would be used to repay debt of CenterPoint and its subsidiary companies.10

Applicants anticipate that proceeds from the Texas Genco sale, plus proceeds from the securitization in 2004 or 2005 will aggregate in excess of $5 billion.

Prior to the execution of the Second Amendment, Moody's Investors Service, Inc. had rated the senior unsecured debt of CenterPoint Ba1 with a negative outlook, and Standard & Poor's ("S&P") and Fitch, Inc. ("Fitch") had assigned CenterPoint a rating of BBB- with a negative outlook. On March 4, 2003, S&P affirmed its ratings of CenterPoint and removed it from CreditWatch with negative implications. The outlook at S&P is now stable and the senior unsecured debt of CenterPoint is rated BBB-. On March 4, 2003, Fitch also revised the Rating Outlook for CenterPoint to "stable" from "negative."11

When the Commission issued the July Order, Applicants contemplated that, by the end of 2005, common equity as a percentage of total capitalization of the CenterPoint system ("Common Equity Percentage"), net of securitization debt, would either meet or exceed the 30% minimum that the Commission generally requires registered holding companies to maintain ("June 2002 projections"). Applicants' most recent projections indicate, however, that Centerpoint will achieve the 30% goal over a longer period of time. CenterPoint now projects that the system's common stock equity capitalization will reach 34.4% in 2006, net of securitization debt (19.7% including securitization debt) and will continue to increase thereafter ("April 2003 projections").12 Applicants explain that the difference between the June 2002 projections and the April 2003 projections is largely a result of two factors: (i) increased interest expense, and (ii) anticipated charges to Other Comprehensive Income related to declines in the market value of the assets of the CenterPoint pension plan and the settlement of certain long-term interest rate swaps.

CenterPoint states that it is undertaking various initiatives to strengthen its financial profile in an effort to deliver long-term sustainable value for its shareholders. CenterPoint is limiting its capital expenditures during the next three years to those necessary to maintain the integrity of the physical plant and to ensure the continued provision of quality service to its customers. CenterPoint has also reduced its dividend to a maximum of $.10 per quarter, a reduction of nearly 40%, and the company is undergoing a series of work force reductions. In addition to these measures, in October 2002, Texas Genco announced a plan to remove from service temporarily approximately 3,400 MW of gas-fired generating units in order to minimize the operating and maintenance expenses associated with these units.

Applicants emphasize, however, that the most important consideration with respect to the improvement of CenterPoint's financial condition is the regulatory assurance that the Texas Law provides. Applicants note that, while the measures described above are both necessary and appropriate, it is the sale of Texas Genco and the securitization of recoverable generation-related costs and values in 2004 and 2005 that will ultimately help CenterPoint to achieve a more traditional capital structure and return to a more secure financial footing.

III. Discussion

The proposed issuance of warrants and debt secured by a pledge of the Texas Genco stock is subject to sections 6(a) and 7 of the Act and rules 44 and 54. Section 6(a) requires the filing of a declaration with the Commission in connection with (1) an issuance and sale of any security by a registered holding company or subsidiary company or (2) an exercise of "any privilege or right to alter the priorities, preferences, voting power or other rights of the holders of an outstanding security" of the registered holding company or subsidiary. Commission approval of a declaration is subject to section 7(c), which concerns the type of security and purpose for which it is issued. If the standards of section 7(c) and 7(g) (which concerns any necessary state approvals and is inapplicable in this matter) are met, the Commission "shall" permit a declaration to become effective, unless it makes certain findings described in section 7(d) of the Act. Rule 44 requires the filing of a declaration in connection with the proposed sale of a security of a public-utility company by a registered holding company.13

Section 7(c) of the Act provides in pertinent part that the Commission shall not permit a declaration regarding the issue or sale of a security to become effective unless it finds that: (1) "such security is . . . (B) a bond . . . (iii) secured by any other assets of the type and character which the Commission by rules and regulations or order may prescribe as appropriate in the public interest or for the protection of investors." Section 7(c) of the Act was based upon the recommendations of the National Power Policy Committee that:

There should be an end to the pyramiding of holding-company securities. Except for necessary discretionary power in the Commission in the case of refunding issues, new securities should be limited to par value common stock, with appropriate voting rights, and to first-lien bonds, i.e., bonds having a first lien either on the physical assets of the issuer or upon first-mortgage bonds of operating subsidiaries. It is apparent that where pyramiding would result from the issuance of debt securities by a holding company the protection of the public and investor interests requires that the collateral be such that under the circumstances the speculative element which is inherent in holding company senior securities based upon the junior equity of subsidiaries will be eliminated or minimized. (Emphasis added).14

Traditionally, the Commission has been reluctant to permit debt at the parent level because of a concern about the pyramiding that occurs when senior securities are issued by a holding company whose sole or principal assets consists of the securities of its subsidiary companies.15 During the early years of its administration of the Act, the Commission nonetheless permitted the issuance of parent level secured debt in a number of matters that involved the establishment of appropriate capital structures for newly registered holding companies that had come into existence before the passage of the Act.16 The Commission broadly interpreted the term "bond" in section 7(c)(1)(B) of the Act to apply to a variety of debt instruments, including loan agreements such as the one for which Centerpoint is seeking approval, when:

The note is to be issued pursuant to a loan agreement between the borrower and the bank setting forth the terms and conditions on which the security of the loan is to be held and containing various covenants on the part of the borrower. Because of that fact and the other circumstances surrounding the issuance of the note, the Commission deems that the note constitutes a "bond" within the meaning of that word as used in Section 7(c).17

The Commission has explained that:

The addition to Section 7(c)(1)(B) of subparagraph (iii) did not reflect an intention by Congress to permit pyramiding. It embodied the specific requirement that we find the security for proposed bonds to be of a type and character appropriate in the public interest and for the protection of investors.18

With the passage of time, registered holding companies came to assume a more "classical" capital structure, i.e., one in keeping with the Commission's standard of appropriate capitalization, and the need for such relief faded. As late as 1958, however, the Commission continued to cite these early decisions as precedent:

In general, in the case in which we have approved under Section 7(c)(1)(B)(iii) the issuance of holding company debt securities secured by the common stock of subsidiaries, the nature of and the circumstances surrounding the proposed debt issue and the proposed security - such as the absence of substantial debt or other senior securities in the subsidiaries, the short maturity of the proposed securities or the likelihood of their early retirement - have been such as to satisfy us that the public and investor interests were being appropriately safeguarded.19

The situation of CenterPoint, which is newly registered and has a capital structure that has been affected by the Texas Law and the Distribution of Reliant Resources, is comparable to that of the registered holding companies in these early matters. Here also the Commission is satisfied that the proposed issuance and sale of warrants and secured debt is within our precedent under section 7(c)(1)(B)(iii) of the Act.

The warrants achieve the goal of allowing CenterPoint to postpone debt repayment on an interim basis, without providing additional collateral. With respect to the pledge of stock, we note that Texas Genco was formed to satisfy the restructuring requirements of the Texas Law.20 CenterPoint has intended from the beginning to sell or otherwise monetize Texas Genco and to use the proceeds to reduce system debt. Use of the Texas Genco securities as collateral for a loan is consistent with its purpose under Texas Law insofar as the pledge permits an early monetization of the Texas Genco Assets that allows the holding company to match its cash flow and its debt service more closely.

Further, the Commission has previously noted that the warrants may be extinguished within 2003. The pledge of the Texas Genco stock will be of short duration. Either it will be released in early 2004 in connection with the sale of Texas Genco; or, in the worst case, the underlying facility will expire by its terms in June 2005.21

Also consistent with our precedent, the lenders in the CenterPoint bank group are sophisticated institutional investors.22 Applicants note that the lenders' interests are well protected under the Second Amendment to the CenterPoint Facility. Among other things, the Second Amendment limits to $250 million the amount of debt that Texas Genco and its subsidiary companies can issue, whereas the market value of the Texas Genco assets is an estimated $1.5 billion.23 Further, the banks have the benefit of the July Order, under which Texas Genco must maintain a minimum of 30% common equity capitalization. As of December 31, 2002, Texas Genco had a Common Equity Percentage of 96%.

Finally, in this matter, as in the precedent, the declaration concerns "transactions involved in carrying out a general program of refunding, upon more favorable terms, outstanding indebtedness" of a newly registered holding company.24 Accordingly, the Commission finds that the warrants and secured debt are permissible under section 7(c)(1)(B)(iii) of the Act. 25

Having reached this determination, the Commission further finds that no adverse findings are required under section 7(d) of the Act. In particular, no adverse finding is required under section 7(d)(1) or (2) concerning the issuance of warrants and the pledge of the stock. Among other things, section 7(d) authorizes the Commission to authorize the issuance of a security unless it finds that: (1) "the security is not reasonably adapted to the security structure of the declarant and other companies in the same holding company system; or (2) the security is not reasonably adapted to the earning power of the declarant."

The Commission has granted other registered holding companies the ability to engage in various types of secured financings.26 In addition, the Commission has permitted a registered holding company to establish a secured credit facility for the purpose of maintaining liquidity during a financial crisis as part of an effort to return to a more secure financial footing.27 The decision was largely based on the Commission's recognition of the "urgent and necessary cash requirements of applicants' operations as public utility companies, or . . . as the parent."28

The circumstances of this matter warrant authorizing secured debt of the type that CenterPoint proposes under section 7(d). In particular, the Second Amendment has relieved CenterPoint's short-term liquidity concerns by extending the maturity date of the CenterPoint Facility and by eliminating mandatory prepayments that would have been required this year. In order to meet its obligations in the most cost-effective way possible, Centerpoint has agreed, subject to Commission approval, to pledge the stock of Texas Genco and to issue the warrants in support of the underlying $3.85 billion debt obligation. Unlike some previous matters also, these measures are not being proposed in connection with CenterPoint's taking on any additional debt, but solely in connection with a refinancing of existing debt.

Furthermore, the value of the collateral and the holding company's other unencumbered assets exceeds the amount of CenterPoint's total indebtedness and other liabilities. The stock pledge will not increase the risk of default on any of CenterPoint's other obligations; to the contrary, the pledge will support an extension of the maturity date of the CenterPoint Facility that the holding company needs to eliminate what would otherwise have been serious short-term liquidity concerns.

The Commission notes further that the obligations under the CenterPoint Facility will be secured to the extent of the value of the Texas Genco stock and unsecured as to the remainder. Other agreements governing other borrowings do not prohibit the issuance of secured debt by CenterPoint. Indeed, under the terms of the applicable indentures, certain pre-existing secured debt did migrate to CenterPoint as a result of the restructuring authorized by the Commission's July Order.29

Applicants state that CenterPoint and its subsidiary companies expect to meet their capital requirements through cash flows from operations, bank borrowings and proceeds from debt and/or equity offerings. Applicants have provided cash flow projections that show that the CenterPoint system's current liquidity, along with anticipated cash flows from operations and proceeds from borrowings, including proposed extension of existing bank facilities, and anticipated sales of securities in the capital markets, will be sufficient to meet cash needs. In each year from 2003 through 2007, CenterPoint projects that its internally generated cash will be more than sufficient to cover its anticipated capital expenditures and other internal operating cash needs of the CenterPoint system.

As noted previously, the early cases focused as well on the protection of the secured creditor. The value of the pledge of Texas Genco stock could be diminished if, for example, the holding company were to issue excessive amounts of debt at the Texas Genco level. To that end, the lenders in connection with the Second Amendment have placed a contractual limit of $250 million on the amount of debt that can be issued by Texas Genco and its subsidiaries (as compared to the estimated $1.5 billion market value of Texas Genco assets). Accordingly, the Commission makes no adverse finding under section 7(d)(1).

The Commission further believes that no adverse finding is necessary under section 7(d)(2), which concerns the earning power of the declarant. The CenterPoint system appears to be a fundamentally sound utility system that lacks the risks associated with merchant energy generation and marketing. Following the restructuring, CenterPoint is no longer responsible for making retail electric sales to customers, as that role is now the responsibility of Reliant Resources' retail segment; the T&D Utility is precluded by the Texas Act from selling electricity at retail; and unlike the regulated entity under most other deregulation schemes, the T&D Utility has no obligation to serve as a provider of last resort and only provides the wires and service to deliver the electricity from the generating company to the retail provider's customers. Nor does the T&D Utility retain the electric power-sourcing obligation that has traditionally been the origin of most risk for electric utilities.

With the refinancing of its bank debt, CenterPoint expects to have greater certainty in meeting its financing needs. Further, although the Distribution of Reliant Resources stock in the fall of 2002 reduced the CenterPoint system's common equity, the Distribution also had the effect of reducing the business risk profile of the regulated business. In addition, as discussed previously, CenterPoint's capital structure will improve significantly with the sale of Texas Genco and the securitization of any stranded investment in 2004. Net of securitization debt, CenterPoint's equity capitalization is projected to be 30% or more in 2006, and the growth of equity as a percentage of capitalization is expected to continue in subsequent years.

With respect to the long-term financial health of the new registered system, CenterPoint has identified a number of other underlying indicators of financial stability, including: (i) a growing, stable customer rate base that the CenterPoint utilities have served for many years; (ii) a state regulatory regime that has avoided the mistakes of other deregulation plans by allowing for a market adjustment of retail rates; (iii) positive and substantial cash flow from operations; and (iv) the ability, under Texas Commission orders, to securitize stranded costs and regulatory assets and to repay obligations to holders of securitization bonds through non-bypassable transition charges which are creatures of state law.30 In view of the circumstances of this matter, including the specific protections afforded by the Texas Law, the Commission makes no adverse finding under section 7(d)(2) of the Act.

Finally, the Commission does not find that any adverse finding is required under section 7(d)(3) of the Act, which concerns the necessity and appropriateness of a proposed financing to the economical and efficient operations of a registered system. As noted above, the proposed pledge of Texas Genco stock and issuance of warrants are intended to minimize the costs of the associated financing and so provide for the economical and efficient operations of CenterPoint's businesses. There are economic consequences if CenterPoint is unable to obtain the requested authority in a timely manner. As noted previously, the interest rates on the $3.85 billion CenterPoint Facility will increase by 25 basis points if CenterPoint is unable to grant the lenders a security interest in its 81% stock ownership interest in Texas Genco on or before May 28, 2003. Further, in the event that CenterPoint does not have authority to issue the warrants by that date, CenterPoint must provide the banks equivalent cash compensation. The amount of any borrowings necessary to fund those payments could increase the overall debt of the CenterPoint System and reduce its equity capitalization ratios. The Commission makes no adverse finding under section 7(d)(3) of the Act.

In conclusion, the presumptions underlying the projections, particularly those related to the sale of Texas Genco and the securitization of stranded costs in 2004 and 2005, appear to be reasonable. The Commission believes that, based on the Applicants' representations, the requested authority represents a reasonable measure whereby CenterPoint can obtain the flexibility needed to restructure its existing debt. Further, it does not appear that these measures would be detrimental to the public interest or the interest of investors and consumers.

Applicants state that the fees, commissions and expenses to be incurred in connection with the proposed transactions are estimated to be $120,000. Applicants state that no state or federal commission, other than this Commission, has jurisdiction over the proposed transactions.

Due notice of the filing of the post-effective amendment has been given in the manner prescribed by rule 23 under the Act, and no hearing has been requested of or ordered by the Commission. Based on the facts in the record, the Commission finds that the applicable standards of the Act are satisfied and that no adverse findings are necessary.

IT IS ORDERED, that the post-effective amendment be permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act.

By the Commission.

Jill M. Peterson
Assistant Secretary


1 Holding Co. Act Release No. 27641.

2 Holding Co. Act Release No. 27548.

3 CenterPoint holds its utility interests through Utility Holding, a Delaware limited liability company that is a conduit entity formed solely to minimize tax liability. See the July Order, supra note 2.

4 On January 6, 2003, CenterPoint distributed to its shareholders approximately 19% of the common stock of Texas Genco. Centerpoint now indirectly owns the remaining 81% of the common stock of Texas Genco through Utility Holding.

5 As a result of the Distribution, CenterPoint recorded a non-cash loss on the disposal of discontinued operations of $4.3 billion in the third quarter of 2002.

6 If Reliant Resources does not exercise the option, CenterPoint plans to sell or otherwise monetize its interest in Texas Genco (approximately $2.8 billion equity capitalization, as of December 31, 2002). CenterPoint, among other things, could conduct an auction of its remaining interest in Texas Genco.

Texas Genco is currently pursuing the possibility of obtaining financing. Texas Genco and its subsidiaries could issue additional debt subject to certain conditions. Specifically, (i) under the July Order, Texas Genco must maintain a minimum of 30% common equity capitalization, and (ii) in connection with the Second Amendment (defined below), the lenders are limiting to $250 million the amount of borrowing by Texas Genco or its subsidiary companies, at any one time outstanding. Texas Genco would use the proceeds of the financing, which would likely be secured by a pledge of the Texas Genco Assets, to repay existing intrasystem indebtedness and to provide working capital for Texas Genco. Such financing would be in compliance with the terms and conditions of the July Order, which authorizes Texas Genco to issue secured and unsecured debt in an amount up to $500 million at any one time outstanding during the Authorization Period. While the specific amount of the proposed financing has not yet been determined, Texas Genco will not issue debt in excess of $250 million without additional Commission approval.

7 CenterPoint has agreed to pay the banks an extension fee of 75 basis points on the amounts outstanding on October 9, 2003, the maturity date of the original CenterPoint Facility. CenterPoint also paid $41 million in fees that were due on February 28, 2003, and agreed to accelerate payment of $20 million in fees that were otherwise due on June 30, 2003, under the terms of the existing facility.

8 By issuing warrants, CenterPoint is able to avoid having recourse to existing cash or additional borrowings to pay the lenders for the extension of the credit facility.

9 In that event, CenterPoint estimates a cost of approximately $10 million in increased annual interest charges.

10 A portion of the proceeds will be used to repay an existing $1.31 billion loan at the T&D Utility and to retire the associated General Mortgage Bonds. Other third-party indebtedness then outstanding at the T&D Utility, such as callable debt, will also be repaid.

11 In the July Order, CenterPoint committed that all ratable long-term debt, preferred securities and preferred stock that are issued to third parties will, when issued, be rated investment grade by a Nationally Recognized Statistical Rating Organization.

12 This change affects only CenterPoint. As reflected in the July Order, the Common Equity Percentage of each of Texas Genco, the T&D Utility and GasCo will remain in excess of 30% through the Authorization Period. As of December 31, 2002, the T&D Utility had 38% common equity, Texas Genco, LP had 96.4% common equity, GasCo had 46% common equity and CenterPoint had consolidated common stock equity capitalization of 11.4%.

13 Rule 54 in pertinent part provides that the Commission, in determining whether to approve the issue or sale of a security by a registered holding company for purposes other than the acquisition of an exempt wholesale generator ("EWG") or a foreign utility company ("FUCO"), shall not consider the effect of the capitalization or earnings of any subsidiary that is such an exempt entity, if the requirements of rule 53 are satisfied. Applicants state that, for purposes of rule 54, the conditions specified in rule 53(a) are satisfied, with the exception of 53(a)(1), and that none of the adverse conditions specified in rule 53(b) exist. The Commission has therefore considered the effect on the CenterPoint system of the capitalization or earnings of CenterPoint subsidiaries that are an EWG or FUCO in determining whether to approve the proposed transactions. CenterPoint represents that it will remain in compliance with the requirements of rule 53(a), other than rule 53(a)(1), at all times during the Authorization Period.

14 Sen. Rep. 721, 74th Cong., 1st Sess. 59.

15 See generally section 1(b) of the Act.

16 See, e.g., Lone Star Gas Corp., Holding Co. Act Release No. 1244 (Sept. 19, 1938) (authorizing pledge of common stock of subsidiary companies as collateral for the debentures and bank notes of the registered holding company); Consolidated Electric and Gas Co., 15 S.E.C. 1 (Dec. 16, 1943) (permitting, among other things, the pledge by a registered holding company of the stock of its public-utility subsidiary company).

17 Southwestern Development Co., 2 S.E.C. 815 (Oct. 28, 1937). See also International Utilities Corp., 5 S.E.C. 765 (Aug. 24, 1939); Ogden Corp., 7 S.E.C. 610 (June 29, 1940) ("Secured notes have been found to be 'bonds' within the meaning of Section 7(c)"), citing North Boston Lighting Properties, 2 S.E.C. 799 (1937); Southwestern Development Co., supra; Community Power and Light Co., 4 S.E.C. 951 (1939); International Utilities Corp., supra; and Central and South West Utilities Co., 7 S.E.C. 159 (1940).

18 Eastern Utilities Associates, 38 S.E.C. 728 (Dec. 15, 1958).

19 Eastern Utilities Associates, supra note 18.

20 Texas Genco is not a traditional state-regulated utility, although it is a "public-utility company" within the meaning of the Act. As a result, this matter differs from the orders involving GPU and its state-regulated operating companies that are discussed below.

21 Compare Eastern Utilities Associates, supra note 18, citing Central and Southwest Utilities Co., id. at 165.

22 See Ogden Corp., supra note 17 (security issued to a "well informed investor, who has carefully examined the securities proposed as collateral").

23 Compare Eastern Utilities Associates, supra note 18, citing Cities Service Power & Light Co., 16 S.E.C. 461, 474 (1944) and Derby Gas & Electric Corp., 23 S.E.C. 375, 385 (1946).

24 See Southwestern Development Co., supra note17.

25 The Commission observes that the warrants and secured debt could be characterized differently under section 7(c). As noted in the legislative history quoted above, Congress expressly gave the Commission discretionary authority to permit this type of financing "in the case of refunding" outstanding securities. Sen. Rep. No. 721, supra, note 14. To that end, section 7(c)(2)(A) of the Act provides for a transaction such as this because it will be "solely for the purposes of refunding, extending, exchanging, or discharging" the existing outstanding CenterPoint Facility. Reliance on section 7(c)(1)(B)(ii) could also be appropriate in this matter.

26 See, e.g., Allegheny Energy, Inc., Holding Co Act Release No. 27579 (Oct. 17, 2002); Interstate Power Co., Holding Co. Act Release No. 26946 (Nov. 25, 1998), as modified by Interstate Power Co., Holding Co. Act Release No. 27305 (Dec. 15, 2000).

27 See, e.g., Allegheny Energy, Inc., supra note 26. See also General Public Utilities Corp., Holding Co. Act Release No. 21107 (June 19, 1979) and Holding Co. Act Release Nos. 21276 (Oct. 30, 1979), 21410 (Jan. 28, 1980), 22211 (Sept. 30, 1981), 22790 (Dec. 21, 1982), 23072 (Sept. 26, 1983) and 23079 (Sept. 30, 1983)(authorizing amendments, extensions, renewals and replacements of secured bank facilities through 1983). The GPU orders were issued in response to the financial damage GPU suffered as a result of the Three Mile Island incident and permitted the parent company to obtain credit secured by the stock it held in its utility subsidiaries.

28 General Public Utilities Corp., Holding Co. Act Release No. 21107, supra note 27.

29 As of December 31, 2002, CenterPoint's existing bank borrowings totaled approximately $3.85 billion. Other CenterPoint indebtedness includes $840 million of Zero Premium Subordinated Exchangeable Notes, $150 million of collateralized Medium Term Notes and $1.443 billion of Pollution Control Bonds. The Medium Term Notes and a substantial portion of the Pollution Control Bonds are collateralized.

30 CenterPoint also has an overall "business risk profile" that is consistent with other "pure" companies. Whereas S&P assigned Reliant Energy (the CenterPoint predecessor) a business risk profile of 5 prior to the announcement regarding the proposed spin-off of Reliant Resources, it assigned CenterPoint a business risk profile of 3.



Modified: 08/05/2003