SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27850; 70-10128)
CenterPoint Energy, Inc.
Supplemental Order Authorizing Release of Jurisdiction over the Declaration and Payment of Dividends Out of Capital or Unearned Surplus and Reserving Jurisdiction
May 28, 2004
CenterPoint Energy, Inc. ("CenterPoint"), Houston, Texas, a registered holding company under the Public Utility Holding Company Act of 1935, as amended ("Act"), has filed with the Securities and Exchange Commission ("Commission") a post-effective amendment under section 12(c) of the Act and rules 46 and 54 under the Act ("Declaration") to its previously filed application-declaration. The Commission issued a notice of the proposed transaction on June 2, 2003 (Holding Company Act Release No. 35-27683). No request for a hearing was received.
By order dated June 30, 2003 (Holding Company Act Release No. 35-27692) ("Omnibus Financing Order"), the Commission authorized CenterPoint and its subsidiaries to engage in certain financing and related transactions through June 30, 2005 ("Authorization Period"). The Commission reserved jurisdiction, pending completion of the record, over CenterPoint's request for authority to declare and pay dividends out of capital or unearned surplus in an amount up to $500 million through the Authorization Period.
CenterPoint now requests the Commission to release jurisdiction over the declaration and payment by CenterPoint of dividends out of capital or unearned surplus of approximately $31 million per quarter for the second and third quarters of 2004 ("Dividend Authorization Period"), but only if CenterPoint's then current earnings are insufficient to pay the dividends solely due to the occurrence of certain one-time events relating to (1) the monetization of CenterPoint's 81% interest in Texas Genco Holdings, Inc. ("Texas Genco"); and (2) the determination by the Public Utility Commission of Texas ("Texas Commission") of certain amounts, including stranded costs, that may be recovered from ratepayers ("Stranded Cost Proceeding") by CenterPoint Energy Houston Electric, LLC ("T&D Utility). CenterPoint would not rely on the requested authority if it appeared that payment of the dividend would cause CenterPoint to fail to achieve a minimum of 30% consolidated equity capitalization by the end of 2006 (net of securitization debt).
By order dated July 5, 2002, the Commission authorized the formation of CenterPoint as a new registered holding company and CenterPoint's distribution to shareholders of the remaining stock of Reliant Resources, Inc. ("Reliant"), a merchant power generation and energy trading and marketing business (Holding Company Act Release No. 27548). The distribution of Reliant was in response to the enactment of Texas' electric utility restructuring law, which required unbundling of the generation, transmission and distribution, and retail sales functions of electric utilities. As a result of the distribution, CenterPoint recorded a non-cash loss on the disposal of the discontinued operations of $4.3 billion, which represented the excess of the carrying value of CenterPoint's net investment in Reliant over the market value of Reliant stock at the time of the distribution.
To account for the distribution, CenterPoint reduced its retained earnings to reflect the impairment in the value of its investment in Reliant and then reduced its additional paid-in capital by the net book value of the investment (following the adjustment). The impairment adjustment resulted in negative retained earnings for CenterPoint. As of December 31, 2002 CenterPoint had a negative retained earnings balance of approximately $1.1 billion and positive additional paid-in capital of $3.1 billion. As a result of earnings at CenterPoint since its restructuring and divestiture of its unregulated operations, that deficit was reduced to negative $700 million at December 31, 2003, but the balance is expected to remain negative for some years. Additional paid-in capital at December 31, 2003 was approximately $2.9 billion.
Because it has negative retained earnings, CenterPoint has been declaring and paying dividends out of current earnings. Currently CenterPoint is paying a quarterly cash dividend of $0.10 per share on the approximately 306 million shares of common stock outstanding, or approximately $31 million per quarter. This is the maximum permitted under CenterPoint's existing credit facility.
During 2004 and possibly early 2005, CenterPoint expects to complete the following additional steps in its restructuring: (1) the monetization of its interest in Texas Genco; (2) the completion of the Stranded Cost Proceeding; and (3) the issuance of securitization bonds to recover the amounts authorized in the Stranded Cost Proceeding and the use of the bond proceeds to redeem debt.
CenterPoint is currently pursuing a sale of its remaining interest in Texas Genco through a bidding process. Depending on the results of that effort, CenterPoint may pursue other monetization alternatives. The timing of the accounting impact of the sale of Texas Genco on CenterPoint's books is uncertain. Under generally accepted accounting principles, at the time CenterPoint determines that it is probable it will dispose of its interest in Texas Genco within twelve months, it must adjust its investment account to reflect the net realizable value for the asset. If the net realizable value is less that the carrying amount, CenterPoint would be required to reduce its investment account accordingly and recognize an expense in the amount of the reduction. Any charge would reduce earnings for the quarter when the adjustments are made. If the charges reduce current earnings for that quarter below approximately $31 million, CenterPoint will be unable to pay dividends for that quarter.
In the Stranded Cost Proceeding, CenterPoint, through the T&D Utility, is seeking recovery of more than $3.8 billion of stranded costs. Determination of the amounts actually recovered will be made in a contested proceeding in which it is expected that various parties will challenge CenterPoint's claims. An ultimate determination (or even a settlement) at a level less than amount recorded on CenterPoint's books could lead to a charge that would affect the level of current earnings available for payment of CenterPoint's dividend.
CenterPoint made the filing to initiate the Stranded Cost Proceeding on March 31, 2004. The Texas Commission is scheduled to begin hearing the case on June 21, 2004. The Texas restructuring law requires the Texas Commission to reach a decision within 150 days after the filing, which would be August 28, 2004. CenterPoint states that it is possible that the parties will reach a negotiated settlement at any time, even prior to June 21, 2004. Accounting principles may require CenterPoint to reflect any disallowance even prior to formal action by the Texas Commission on a proposed settlement.
Once the amount of recoverable costs are determined in the Stranded Cost Proceeding, the T&D Utility will recover them through rates and the issuance of securitization bonds. CenterPoint contemplates that the bonds would be issued in early 2005. The proceeds received from the sale of the bonds and from rates will be used to repay existing debt.
Section 12 (c) of the Act makes it unlawful for a registered holding company to declare or pay a dividend in contravention of rules and regulations or orders the Commission may prescribe "to protect the financial integrity of companies in holding-company systems, to safeguard the working capital of public-utility companies, to prevent the payment of dividends out of capital or unearned surplus, or to prevent the circumvention of the provisions of" the Act. Under Commission precedent, CenterPoint must demonstrate that the proposed dividend payment will not impair the financial integrity of companies in the CenterPoint system and that the payment is appropriate in the public interest and is in the best interests of security holders.1
In support of its contention that it is in sound financial condition notwithstanding the proposed payment of dividends out of capital or unearned surplus, CenterPoint states that the deficit in retained earnings is not representative of its ongoing ability to fund its dividends from earnings generated since the distribution of Reliant. CenterPoint notes that since its restructuring in the fall of 2003, it has reported sound earnings from continuing operations and refinanced the $4.7 billion in bank debt it had when it distributed the stock of Reliant. CenterPoint states that it has reshaped its debt through over $3.9 billion in capital markets transactions undertaken during 2003 in order to reduce reliance on bank debt, extend maturities dates and, in certain instances, lower borrowing costs. In addition, CenterPoint states that the level of the current dividend does not reflect any wasting of capital necessary for the viability of the business. Finally, CenterPoint notes that its long-term capital structure will be enhanced by the proceeds expected from the sale of its interest in Texas Genco and the finalization of the Stranded Cost Proceeding.
Although CenterPoint does not comply with the Commission's general requirement to maintain common equity of at least 30% of its consolidated capitalization2 each of CenterPoint's utility subsidiaries does comply with this requirement. In addition, CenterPoint has represented that it will not rely on the requested authority to pay dividends out of capital or unearned surplus if it appears that payment of the dividend would cause CenterPoint to fail to achieve a minimum of 30% consolidated equity capitalization by the end of 2006 (net of securitization debt).
Authorizing CenterPoint's request to pay dividends out of capital or unearned surplus during the Dividend Authorization Period appears to be in the public interest and the best interest of security holders. First, the proposed payment is not related to the type of abuse that section 12(c) of the Act was designed to prevent. As the Commission has noted previously, Congress intended section 12(c) to prevent the milking of operating companies in the interest of the controlling holding company groups and to safeguard the working capital of the public utility companies.3 CenterPoint's request is motivated by exceptional circumstances, specifically charges to earnings that may result from actions taken to finalize the restructuring of the electric utility industry in Texas.
Second, it is more consistent with the public interest and the best interest of security holders to permit the payment of a relatively small dividend out of capital or unearned surplus than to require that CenterPoint forego payment of a dividend during the Dividend Authorization Period. Accordingly, the Commission finds that the standards of section 12(c) are satisfied in this matter.
The proposed transaction is subject to rule 54 under the Act, which refers to rule 53. Rule 54 provides that, in determining whether to approve certain transactions other than those involving exempt wholesale generators ("EWGs") or foreign utility companies ("FUCOs"), as defined under the Act, the Commission will not consider the effect of the capitalization or earnings of any subsidiary EWG or FUCO if the requirements of rule 53(a), (b) and (c) under the Act are satisfied.
As a result of the distribution of Reliant as discussed above, CenterPoint has negative retained earnings and is not in compliance with the requirements of rule 53(a)(1) under the Act. As a result, the Commission has considered the effect on the CenterPoint system of the capitalization and earnings of all subsidiary companies of CenterPoint in determining whether to grant the authority requested in the Declaration.
CenterPoint complies with, and will continue to comply with, the record-keeping requirements of rule 53(a)(2) under the Act, the limitation under rule 53(a)(3) under the Act on the use of domestic public-utility company personnel to render services to EWGs and FUCOs, and the requirements of rule 53(a)(4) under the Act concerning the submission of copies of certain filings under the Act to retail regulatory commissions. Further, none of the circumstances described in rule 53(b) under the Act has occurred or is continuing. Rule 53(c) under the Act is by its terms inapplicable to the proposed transaction as it does not involve the issue and sale of securities (including guarantees) to finance an acquisition of an EWG or FUCO.
CenterPoint states that no state or federal commission, other than this Commission, has jurisdiction over the proposed transaction. CenterPoint states that the fees, commissions and expenses paid or incurred or to be incurred in connection with the Declaration are estimated to be $20,000, plus fees paid in connection with any refunding transactions.
Due notice of the filing of the application-declaration 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, except for those matters over which jurisdiction has been reserved, the applicable standards of the Act are satisfied and that no adverse findings are necessary.
IT IS ORDERED, under the applicable provisions of the Act and rules under the Act, that the Declaration is permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act.
IT IS FURTHER ORDERED, that jurisdiction continues to be reserved, pending completion of the record, over the payment of dividends out of capital or unearned surplus (1) for any reason other than if the accounting treatment of either the sale of Texas Genco or a determination of the amounts recoverable in the Stranded Cost Proceeding result in a reduction of CenterPoint's current earnings below the level needed for it to pay its quarterly dividend, and (2) at any time other than during the Dividend Authorization Period.
IT IS FURTHER ORDERED, that jurisdiction continues to be reserved, pending completion of the record, over the other matters listed in the Omnibus Financing Order.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
Margaret H. McFarland
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