NOC-AE-04001753, Application for Order Approving Transfers of Control of Licenses and Conforming License Amendments
ML043030240 | |
Person / Time | |
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Site: | South Texas ![]() |
Issue date: | 10/21/2004 |
From: | Parkey G South Texas |
To: | Dyer J Office of Nuclear Reactor Regulation |
References | |
NOC-AE-04001753 | |
Download: ML043030240 (163) | |
Text
Nuclear Operating Company South Tcxs /rertd Ekdrtc Gerfathng Staton P.O 5x 289 fl~dslsvdh Tcm 77483 October 21, 2004 NOC-AE-04001 753 10 CFR 50.80 10 CFR 50.90 U. S. Nuclear Regulatory Commission Attention: James E. Dyer Director, Office of Nuclear Reactor Regulation c E I I One White Flint North 11555 Rockville Pike Rockville, MD 20852 South Texas Project Units I and 2 Docket Nos. STN 50-498 and STN 50-499 Application for Order Approving Transfers of Control of Licenses and Conforming License Amendments Pursuant to Section 184 of the Atomic Energy Act of 1954, as amended (AEA or the Act), and 10 CFR 50.80, STP Nuclear Operating Company (STPNOC), acting on behalf of Texas Genco, LP (Texas Genco), the City of San Antonio, Texas, acting by and through the City Public Service Board, operating as City Public Service of San Antonio (CPS), and AEP Texas Central Company (TCC) (together, the Applicants), requests that the Nuclear Regulatory Commission (NRC) consent to the transfer of TCC's 25.2% undivided ownership interest in South Texas Project, Units 1 and 2 (STP) (TCC's ownership interest in STP) to STP owners Texas Genco and CPS. The Applicants currently anticipate that the following proportionate shares of TCC's ownership interest in STP will be transferred to Texas Genco and CPS: a 13.2% undivided ownership interest to Texas Genco and a 12% undivided ownership interest to CPS. The Applicants request NRC approval for such transfers. If, however, the transfer to either Texas Genco or CPS fails to take place, the party whose transfer has not failed to take place will be obligated, subject to the terms and conditions of a September 3, 2004 Purchase and Sale Agreement between TCC, CPS and Texas Genco (Purchase and Sale Agreement), to purchase all of TCC's ownership interest in STP. In that event, the Applicants request NRC approval for transfer of TCC's entire 25.2% interest to the party whose transfer is completed. Approval of the transfer of all or a portion of TCC's interest to either Texas Genco or CPS by a single Commission order, as requested herein, will avoid the potential need for consecutive, duplicative applications and Staff reviews in the event that the transfer of TCC's entire interest in STP is made to a single party and the transfer occurs in two stages. Pursuant to 10 CFR 50.90, the Applicants also request NRC approval of administrative amendments to the STP licenses pursuant to 10 CFR 50.92 and 10 CFR 2.1315 to conform the licenses to reflect the proposed transfers, at such time as such amendments become necessary because TCC has transferred its entire ownership interest in STP to Texas Genco and/or CPS.
NOC-AE-04001753 Page 2 of 8 In addition to its 25.2% undivided ownership interest in STP, TCC has certain rights to participate in the corporate governance of STPNOC, a not-for-profit Texas corporation, which is the licensed operator of STP. A proportionate share of these rights will be assigned to each of Texas Genco and CPS, unless either Texas Genco or CPS acquires all of TCC's ownership interest in STP, in which case all of these rights will be assigned to the STP owner that acquires all of TCC's ownership interest. However, no single STP owner currently exercises control over STPNOC, and neither Texas Genco nor CPS will be able individually to exercise control over STPNOC as a result of the transfer to it of all or a portion of TCC's ownership interest in STP.
Therefore, there will be no indirect transfer of control of STPNOC's licenses to operate STP on behalf of the owners. If the NRC concludes that the transfers of TCC's rights to participate in the governance of STPNOC also require prior NRC consent, such consent is hereby requested.
Through the attached Application, the Applicants request that the NRC consent to the transfers of control of all or a portion of TCC's interest in STP and the licenses held by TCC to each of Texas Genco and CPS. Texas Genco currently owns a 30.8% undivided interest in STP, and CPS currently owns a 28% undivided interest in STP. As a result of the currently anticipated sale of TCC's interest in STP, under which there will be the transfer of a 13.2% undivided ownership interest to Texas Genco and a 12% undivided ownership interest to CPS, these current STP owners will own total undivided interests in STP of 44% and 40%, respectively. In the event TCC's entire interest in STP is transferred to Texas Genco, Texas Genco and CPS will own total undivided interests of 56% and 28%, respectively. In the event TCC's entire interest in STP is transferred to CPS, Texas Genco and CPS will own total undivided interests of 30.8% and 53.2%, respectively.
The information contained in this Application demonstrates that Texas Genco and CPS possess the requisite qualifications to own, respectively, up to 56% and 53.2% undivided ownership interests in STP. The proposed transfers of control of TCC's interest will not result in any change in the role of STPNOC as the licensed operator of the facility and will not result in any changes to its technical qualifications. Finally, this request for transfers of control of licenses does not involve any entities that are owned, controlled, or dominated by a foreign entity.
In summary, the proposed transfers will be consistent with the requirements set forth in the Act, NRC regulations, and the relevant NRC licenses and orders. No physical changes will be made to STP and there will be no changes in the day-to-day operation of STP as a result of these transfers. The proposed transfers of control of the TCC licenses will not involve any changes to the current STP licensing basis. They will neither have any adverse impact on the public health and safety, nor be inimical to the common defense and security. The proposed transfers are merely transfers of ownership interests to current STP owners. The Applicants therefore respectfully request that the NRC consent to the transfers of control in accordance with 10 CFR 50.80.
The actual date for any transfer of control of TCC's 25.2% interest in STP to Texas Genco and/or CPS will be dependent upon the actual date of satisfying the conditions for closing the sale by TCC in accordance with the terms and conditions of the Purchase and Sale Agreement, including receipt of any other required regulatory approvals and rulings. In particular, the actual date for the transfer of control of TCC's interest in STP to CPS beyond the 12% currently
NOC-AE-04001753 Page 3 of 8 contemplated, should it occur, will be contingent upon a determination that the transfer of TCC's remaining 13.2% undivided interest to Texas Genco will not take place. Likewise, the actual date for the transfer of control of TCC's interest in STP to Texas Genco beyond the 13.2%
currently contemplated, should it occur, will be contingent upon a determination that the transfer of TCC's remaining 12% undivided interest to CPS will not take place. STPNOC will advise the Commission of any developments relevant to any such additional transfers.
The Applicants request that the NRC review this Application on a schedule that will permit the issuance of NRC consent to the transfers of control and conforming license amendments as soon as possible, and are prepared to work closely with the NRC Staff to help expedite the Application's review, but request approval by no later than March 15, 2005. Such consent should be immediately effective upon issuance and should permit the transfers of control at any time within twelve months of the date of approval of this Application. STPNOC will inform the NRC if there are any significant changes in the status of any other required approvals or any other developments that have an impact on the schedule.
This Application is also supported by information provided in a separate Application submitted on October 12, 2004, in connection with another transaction involving the indirect transfer of control of Texas Genco. That information includes a proprietary Attachment 5A to that application which provides Texas Genco's Projected Income Statement, including specific line items reflecting the projected operation of a 44% undivided ownership interest in STP, for the five-year period 2005-2009. The STPNOC Plant Operations Review Committee has reviewed this request for license amendments and has recommended its approval. STPNOC has notified the State of Texas in accordance with 10 CFR 50.91 (b).
If there are any questions regarding this request for transfers of control of licenses, please contact John Conly at (361) 972-7336 or me at (361) 972-7800. Service of any comments, hearing requests, intervention petitions, or other filings should be made to: John E. Matthews at Morgan, Lewis and Bockius LLP, 1111 Pennsylvania Ave. N.W., Washington, DC 20004 (Omatthewvsemorganlewis.com) (tel: 202-739-5524) on behalf of STPNOC and Texas Genco; Robert K. Temple at City Public Service of San Antonio, P.O. Box 1771 San Antonio, TX 78296-1771 (physical address: 145 Navarro Street San Antonio, TX 78205) (rktemplegcps-satx.com) (tel: 210-353-3113) on behalf of CPS; and Jay E. Silberg at Shaw Pittman LLP, 2300 N Street, N.W., Washington, DC 20037, (6ay.silbergeshawApittman.com) (tel: 202-663-8063) on behalf of TCC.
G. L. Parkey Vice President, Generation and Plant General Manager jtc
Enclosure:
Application
NOC-AE-04001753 Page 4 of 8 cc:
(paper copy) (electronic copy)
Regional Administrator, Region IV A. H. Gutterman U.S. Nuclear Regulatory Commission J. E. Matthews 611 Ryan Plaza Drive, Suite 400 Morgan, Lewis & Bockius LLP Arlington, TX 76011-8064 James J. Nesrsta U. S. Nuclear Regulatory Commission Robert K. Temple Attention: Document Control Desk City Public Service One White Flint North 11555 Rockville Pike R. L. Balcom Rockville, MD 20852 Texas Genco, LP Catherine L. Marco C. A. Johnson Steven R. Hom AEP Texas Central Company U. S. Nuclear Regulatory Commission One White Flint North Jon C. Wood 11555 Rockville Pike Cox Smith Matthews, Inc.
Rockville, MD 20852 Mail Stop OWFN/15-D21 Chris Kirksey City of Austin Jeffrey Cruz U. S. Nuclear Regulatory Commission Jay E. Silberg P. 0. Box 289, Mail Code: MN1 16 Matias F. Travieso-Diaz Wadsworth, TX 77483 Shaw Pittman LLP Richard A. Ratliff David H. Jaffe Bureau of Radiation Control U. S. Nuclear Regulatory Commission Texas Department of State Health Services 1100 West 49th Street Rocky Miracle Austin, TX 78756-3189 AEP C. M. Canady City of Austin Electric Utility Department 721 Barton Springs Road Austin, TX 78704
NOC-AE-04001753 Page 5 of 8 UNITED STATES OF AMERICA NUCLEAR REGULATORY COMMISSION In the Matter of )
)
STP Nuclear Operating Company ) Docket Nos. 50498
) 50499 South Texas Project Units 1 and 2 )
AFFIRMATION 1, G. L. Parkey, being duly sworn, hereby depose and state that I am Vice President, Generation and Plant General Manager of STP Nuclear Operating Company (STPNOC); that I am duly authorized to submit to the Nuclear Regulatory Commission the attached Application for Order Approving Transfers of Control of Licenses and Conforming License Amendments; that I am familiar with the content thereof; and that the matters set forth therein with regard to STPNOC are true and correct to the best of my knowledge and belief.
G.. Parkey Vice President, Generation and Plant General Manager STATE OF TEXAS )
)
COUNTY OF MATAGORDA )
Subscribed and sworn to before me, a Notary Public in and for the State of Texas, this / day of (00,4,yki z' ,2004.
-Noary Pubic, State of Texas Mycofmmission Exres NotarPublic inand for the JULY27,2007 State of Texas
NOC-AE-04001 753 Page 7 of 8 UNITED STATES OF AMERICA NUCLEAR REGULATORY COMMISSION In the Matter of )
)
STP Nuclear Operating Company ) Docket Nos. 50-498
) 50-499
)
South Texas Project )
Units I and2 )
AFFIRMATION I, David G. Tees, being duly sworn, hereby depose and state that I am Manager and President of Texas Genco GP, LLC, which is the General Partner of Texas Genco, LP (Texas Genco), and as such exercises control over Texas Genco; that I am familiar with the content of the attached Application for Order Approving Transfers of Control of Licenses and Conforming License Amendments; and that the matters set forth therein with regard to Texas Genco and its affiliates are tnre and correct to the best of my knowledge and belief.
David G. Tees Manager and President STATE OF TEXAS )
)
COUNTY OF HARRIS )
Subscribed and sworn to before me, a Notary Public in and for the State of Texas, this ci by day C
of (9)Q~ tcHQC ,2004.
ot Public in and for the State of Texas
NOC-AE-0400 1753 Page 7 of 8 UNITED STATES OF AMERICA NUCLEAR REGULATORY COMMISSION In the Matter of )
)
STP Nuclear Operating Company ) Docket Nos. 50-498
) 50-499 South Texas Project Units I and 2 )
AFFIRMATION I, Ronald B. Seidel, being duly sworn, hereby depose and state that I am Senior Vice President, Energy Supply, City Public Service of San Antonio (CPS); that I am familiar with the content of the attached Application for Order Approving Transfers of Control of Licenses and Conforming License Amendments; and that the matters set forth therein with regard to CPS are true and correct to the best of my knowledge and belief.
Ronald B. Seidel Senior Vice President, Energy Supply STATE OF TEXAS )
)
COUNTY OF BEXAR )
Subscribed and sworn to before me, a Notary Public in and for the State of Texas, this day of O[ k bm 2004.
BRENDA MARTINEZ Notary Public in and for the NOTARY PUBLIC S Tea and fo Texa
NOC-AE-04001753 Page 8 of 8 UNITED STATES OF AMERICA NUCLEAR REGULATORY COMMISSION In the Matter of )
)
STP Nuclear Operating Company ) Docket Nos. 50-498
) 50-499
)
South Texas Project )
Units 1 and 2 )
AFFIRMATION I, Robert P. Powers, being duly sworn, hereby depose and state that I am Executive Vice President - Generation of American Electric Power Company and a Vice President of AEP Texas Central Company (TCC); that I am familiar with the contents of the attached Application for Order Approving Transfers of Control of Licenses and Conforming License Amendments; and that the matters set forth therein with regard to TCC are true and correct to the best of my knowledge and belief.
-,P Robert P. Powers STATE OF OHIO )
)
COUNTY OF FRANKLIN )
Sucbe4 and sworn to before me, a Notary Public in and for the State of Ohio, this _ day of 2004.
Notary Public in and or e State of Ohio PLSNDAtJEFFROES My Commission expires___
4 'o My Ccmfnss$rn Ed= 10-290 II z
I
NOC-AE-0400 1753 Nuclear Operating Company
&"thTzPsmfl P klq Gfkafi&,SL7Ubn PO S 2SP Wlids.a.Inh 7s77S3 APPLICATION FOR ORDER APPROVING TRANSFERS OF CONTROL OF LICENSES AND CONFORMING LICENSE AMENDMENTS October 21, 2004 submitted by STP Nuclear Operating Company, Texas Genco, LP, City Public Service of San Antonio, and AEP Texas Central Company South Texas Project, Units 1 and 2 NRC Facility Operating License Nos. NPF-76 and NPF-80 Docket Nos. STN 50-498 and STN 50-499
NOC-AE-04001 753 Application APPLICATION FOR ORDER APPROVING TRANSFERS OF CONTROL OF LICENSES AND CONFORMING LICENSE AMENDMIENTS TABLE OF CONTENTS
- 1. INTRODUCTION.................................................................................................. I II. STATEMENT OF PURPOSE OF THE TRANSFERS AND NATURE OF THE TRANSACTION MAKING THE TRANSFERS NECESSARY OR DESIRABLE.......................................................................................................... 6 Ill. GENERAL CORPORATE INFORMATION REGARDING THE TEXAS GENCO ENTITIES. . . 7 A. Names ...................................... . 7 B. Address ....................................... . 8 C. Description of Business or Occupation .................. ..................... 8 D. Organization and Management ...................................... 8
- 1. States of Establishment and Place of Business ............................... 8
- 2. Directors, Executive Officers ............... ........................ 9 IV. GENERAL CORPORATE INFORMATION REGARDING CPS .................. ... 10 A. Name ...................................... . 10 B. Address ...................................... . 10 C. Description of Business or Occupation ...................................... 10 D. Organization and Management .. 1 1............................
- 1. State of Establishment and Place of Business ............................... I1
- 2. Board of Trustees, Executive Officers........................................... I1 V. FOREIGN OWNERSHIP OR CONTROL ........................................... 12 VI. TECHNICAL QUALIFICATIONS ......................................... 13 VIl. FINANCIAL QUALIFICATIONS OF TEXAS GENCO . ....................................
13 A. Projected Operating Revenues and Operating Costs ................................. 13 B. Decommissioning Funding ........................................... 14 Vill. FINANCIAL QUALIFICATIONS OF CPS ........................................... 17 A. Operating Financial Qualifications ........................................... 17 B. Decommissioning Funding ........................................... 18 IX. ANTITRUST INFORMATION ........................................... 22 i
NOC-AE-0400 1753 Application X. RESTRICTED DATA AND CLASSIFIED NATIONAL SECURITY INFORMATION ................................................... 22 XI. ENVIRONMENTAL CONSIDERATIONS ................................................... 23 XII. PRICE-ANDERSON INDEMNITY AND NUCLEAR INSURANCE ................ 23 XIII. MISCELLANEOUS ................................................... 24 XIV. EFFECTIVE DATES ................................................... 24 XV. CONCLUSION ................................................... 25 Figure 1 Ownership of Texas Genco, LP Attachment I Mark-ed-up Pages for Proposed Conforming Changes to Unit I License Marked-up Pages for Proposed Conforming Changes to Unit 2 License No Significant Hazards Determination 2003 Annual Report (Form 10-K) of Texas Genco Holdings, Inc. City Public Service of San Antonio 2003-2004 Annual Report ii
NOC-AE-0400 1753 Application I. INTRODUCTION Pursuant to Section 184 of the Atomic Energy Act of 1954, as amended (AEA or the Act), and 10 CFR 50.80, STP Nuclear Operating Company (STPNOC), acting on behalf of Texas Genco, LP (Texas Genco), the City of San Antonio, Texas, acting by and through the City Public Service Board, operating as City Public Service of San Antonio (CPS), and AEP Texas Central Company (TCC) (together, the Applicants), requests that the Nuclear Regulatory Commission (NRC) consent to the transfer of TCC's 25.2% undivided ownership interest in South Texas Project, Units 1 and 2 (STP) (TCC's ownership interest in STP) to STP owners Texas Genco and CPS. The Applicants currently anticipate that the following proportionate shares of TCC's ownership interest in STP will be transferred to Texas Genco and CPS: a 13.2%
undivided ownership interest to Texas Genco and a 12% undivided ownership interest to CPS.
The Applicants request NRC approval for such transfers. If, however, the transfer of either Texas Genco or CPS fails to take place, the party whose transfer has not failed will be obligated, subject to the terms and conditions of a September 3, 2004 Purchase and Sale Agreement between TCC, CPS and Texas Genco (Purchase and Sale Agreement), to purchase all of TCC's ownership interest in STP. In that event, the Applicants request NRC approval for transfer of TCC's entire 25.2% interest to the party whose transfer is completed. Approval of the transfer of all or a portion of TCC's interest to either Texas Genco or CPS by a single NRC order, as requested herein, will avoid the potential need for consecutive, duplicative applications and Staff reviews in the event that the transfer of TCC's entire interest in STP is made to a single party and the transfer occurs in two stages. Pursuant to 10 CFR 50.90, the Applicants also request NRC approval of administrative amendments to the STP licenses pursuant to 10 CFR 50.92 and 10 CFR 2.1315 to conform the licenses to reflect the proposed transfers, at such time as such I
NOC-AE-04001 753 Application amendments are necessary. In a separate Application dated October 12, 2004, Texas Genco has sought NRC consent to an indirect transfer of control of its STP licenses in connection with a transaction involving GC Power Acquisition LLC (GC Power).' Issues relating to the GC Power Application should be addressed separately in connection with NRC's review of that request and each Application should be processed separately without regard to the timing or outcome of NRC's review of the other. To the extent that the NRC deems GC Power's potential future indirect interest in STP (through ownership of Texas Genco's parent companies) material to the approvals sought in this Application, those issues are addressed in the separate GC Power Application. Rather than conducting duplicative reviews of these issues, the approvals sought in this Application can rely upon the fact that, in order to become relevant to the approvals sought here, any such issues will have been reviewed and addressed by NRC in connection with the approvals sought in the GC Power Application.
Should the transfer of a 12% interest in STP from TCC to CPS be completed in advance of completion of the transfer of TCC's remaining 13.2% interest in STP to Texas Genco, or should the transfer of a 13.2% interest in STP from TCC to Texas Genco be completed in advance of completion of the transfer of TCC's remaining 12% interest in STP to CPS, it will not yet be necessary to amend the existing licenses for STP Units I and 2 as, in either case, following the transfer TCC will still remain an STP owner. At such time, however, as both anticipated transfers of proportionate shares of TCC's interest in STP to Texas Genco and CPS have occurred, or if TCC ultimately transfers its entire 25.2% interest to Texas Genco or CPS, then at such time as the transfer(s) to either Texas Genco or CPS of all of TCC's ownership interest in STP has (have) occurred, administrative amendments to the STP licenses pursuant to This "GC Power Application" was submitted by STPNOC letter dated October 12, 2004 (NOC-AE-04001801).
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NOC-AE-0400 1753 Application 10 CFR 50.92 and 10 CFR 2.1315 to conform the licenses to reflect the transfer of TCC's entire interest in STP will be necessary.
In addition to its 25.2% undivided ownership interest in STP, TCC has certain rights to participate in the corporate governance of STPNOC, a not-for-profit Texas corporation, which is the licensed operator of STP. A proportionate share of these rights will be assigned to each of Texas Genco and CPS, unless either Texas Genco or CPS acquires all of TCC's ownership interest in STP, in which case all of these rights will be assigned to the STP owner that acquires all of TCC's ownership interest. However, no single STP owner currently exercises control over STPNOC and neither Texas Genco nor CPS will be able individually to exercise control over STPNOC as a result of the transfer to it of TCC's ownership interest in STP. Therefore, there will be no indirect transfer of control of STPNOC's licenses to operate STP on behalf of the owners. Even if Texas Genco obtains TCC's entire 25.2% interest and thus controls a 56%
ownership interest in STP, or if CPS obtains TCC's entire 25.2% interest and thus controls a 53.2% ownership interest in STP, neither will be able individually to exercise control over STP because significant decisions by STP owners are required to be made by at least two STP owners having at least a combined 60% interest in STP. Accordingly, as further described below, neither Texas Genco nor CPS will be able to control decisionmaking by the STP owners. If the NRC concludes that the transfer of all or a portion of TCC's rights to participate in the governance of STPNOC to Texas Genco or CPS also requires prior NRC consent, such consent is hereby requested.
As discussed below, Texas Genco currently owns a 30.8% undivided interest in STP and CPS currently owns a 28% undivided interest in STP. An additional owner, the City of Austin, Texas owns a 16% undivided interest in STP. To the extent that the owners exert control over 3
NOC-AE-04001753 Application STP, decisions are made by an Owners Committee under the Amended and Restated South Texas Project Participation Agreement (STP Participation Agreement). Voting weight on this committee is in proportion to each owner's interest in STP. The STP Participation Agreement requires, with limited exceptions, that "[a]ll matters coming under the authority of the Owners Committee shall be decided by agreement of the representatives of two or more Participants having in excess of sixty percent (60%) interest in the Generating Unit or Units affected by the decision." As a result of the TCC ownership transfer, either or both of Texas Genco and CPS wvill own at least 40% and hence either or both wvill acquire an effective "veto" regarding such decisions. However, under no circumstances wvill either be able individually to exercise control over such decisions. In addition, STPNOC wvill continue to be governed by a Board of Directors and neither Texas Genco nor CPS will exercise control over this Board of Directors.2 There is no change expected in the executive management of STPNOC.
STP is composed of two 1,268 megawatt electric (MWe) (net) (3,853 MWt) nuclear power plants, each consisting of a Westinghouse four-loop pressurized water reactor and other associated plant equipment, and related site facilities. STP is located in southwest Matagorda County, approximately 12 miles south-southwest of Bay City and 10 miles north of Matagorda Bay. STPNOC is the licensed operator for STP, pursuant to licenses issued by the NRC. Four STP owners currently each own an undivided ownership interest in the two units, in the following percentages:
Texas Genco 30.8 CPS 28.0 TCC 25.2 City of Austin, Texas 16.0 2 STPNOC is governed by a Board of Directors comprised of a representative of each of the current owners plus STPNOC's Chief Executive Officer. Voting is by majority of a quorum, with the voting being per capita, not weighted by percent ownership.
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NOC-AE-0400 1753 Application These same entities pay corresponding shares of the costs of operating STP and have certain rights with respect to the governance of STPNOC.
Following the currently anticipated transfers, three STP owners will each own an undivided ownership interest in STP, in the following percentages:
Texas Genco 44.0 CPS 40.0 City of Austin, Texas 16.0 In the event the entire TCC interest is transferred to Texas Genco, three STP owners will each own an undivided ownership interest in STP, in the following percentages:
Texas Genco 56.0 CPS 28.0 City of Austin, Texas 16.0 In the event the entire TCC interest is transferred to CPS, three STP owners will each own an undivided ownership interest in STP, in the following percentages:
Texas Genco 30.8 CPS 53.2 City of Austin, Texas 16.0 The information contained in this Application demonstrates that Texas Genco and CPS possess the requisite qualifications to own their respective undivided ownership interests in STP.
The proposed transfers of control of TCC's interest will not result in any change in the role of STPNOC as the licensed operator of the facility and will not result in any changes to its technical qualifications. In addition, Texas Genco and CPS will remain financially qualified to own their respective interests. Finally, this request for consent to transfers of control of licenses does not involve any entities that are owned, controlled, or dominated by a foreign entity.
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NOC-AE-0400 1753 Application
- 11. STATEMENT OF PURPOSE OF THE TRANSFERS AND NATURE OF THE TRANSACTION MAKING THE TRANSFERS NECESSARY OR DESIRABLE TCC offered for sale, through auction, its electric generation facilities as provided for under Texas electric restructuring legislation (Texas Senate Bill 7). TCC received and accepted an offer from Cameco Corporation to purchase its interest in STP.2 The offer from Cameco Corporation and TCC's acceptance of that offer triggered certain rights of first refusal, contained in the STP Participation Agreement and held by the other STP owners, to purchase the interest being offered for sale. STP owners Texas Genco and CPS exercised their respective rights of first refusal to acquire TCC's ownership interest in STP, and they entered into a Purchase and Sale Agreement with TCC. Pursuant to the provisions of the STP Participation Agreement and the terms of the Purchase and Sale Agreement, Texas Genco wxill acquire a proportionate part of TCC's interest equating to a 13.2% undivided ownership interest in STP and CPS will acquire a proportionate part of TCC's interest equating to a 12% undivided ownership interest in STP.4 Pursuant to the Purchase and Sale Agreement, "in the event that there is a termination as to the Texas Genco Purchased Interest [in STP from TCC], CPS shall purchase all of the STP Interest and the CPS Purchased Interest (and its Proportionate Share) shall equal 100% of the [TCC] STP Interest." Also, "in the event that there is a termination as to the CPS Purchased Interest [in STP from TCC], Texas Genco shall purchase all of the STP Interest and the Texas Genco Purchased Interest (and its Proportionate Share) shall equal 100% of the [TCC] STP Interest." Thus, the On April 21, 2004, STPNOC filed an NRC license transfer application on behalf of TCC and Cameco South Texas Project LP (Cameco STP), a subsidiary of Cameco Corporation, in anticipation of the sale of TCC's interest in STP to Cameco STP (NOC-AE-04001712)
(hereinafter, the "April 21, 2004, NRC license transfer application").
On June 10, 2004, STPNOC requested that the NRC Staff suspend its review of the April 21, 2004, NRC license transfer application (NOC-AE-04001740) based upon the exercise by Texas Genco and CPS of their rights of first refusal to acquire TCC's ownership interest in STP. The April 21, 2004, license transfer application was later withdrawn by letter dated September 15, 2004 (NOC-AE-04001790).
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NOC-AE-04001 753 Application Purchase and Sale Agreement prescribes terms under which, if the transfer of the proportionate part of TCC's interest in STP to Texas Genco does not take place, CPS will acquire the entire interest being sold by TCC, or if the transfer of the proportionate part of TCC's interest in STP to CPS does not take place, Texas Genco wvill acquire the entire interest being sold by TCC. In either case, following the closing of either of these transfer alternatives TCC will no longer have any interest in STP.
Texas Genco currently sells its pro rata share of electricity from STP at wholesale, and, whether Texas Genco acquires an additional 13.2% or 25.2% ownership interest in STP, it intends to sell its additional pro rala share of electricity from STP at wholesale. CPS currently serves its native load customers with its pro rata share of electricity from STP, and whether CPS acquires an additional 12% or 25.2% ownership interest in STP, it intends to serve its native load customers with its additional pro rala share of electricity from STP.
111. GENERAL CORPORATE INFORIATION REGARDING TIE TEXAS GENCO ENTITI ES Detailed information regarding the business and management of the Texas Genco Entities (defined below) is provided in the 2003 Annual Report for Texas Genco Holdings, Inc. (TGN)
(Attachment 4). However, certain key information is provided below. This infornation is not affected by the proposed transfer that is the subject of this Application. Potential changes in the general corporate information regarding Texas Genco are addressed separately in the GC Power Application and are not implicated by the consents requested in this application.
A. Names Texas Genco Holdings, Inc.
Texas Genco GP, LLC Texas Genco LP, LLC Texas Genco, LP 7
NOC-AE-0400 1753 Application Together, these entities arc referred to herein as the Texas Genco Entities.
B. Address 1111 Louisiana, Houston, TX 77002.
C. Description of Business or Occupation The Texas Genco Entities constitute one of the largest wholesale electric generating companies in the United States. Through its subsidiaries, TGN owns 60 generating units at eleven electric power generation facilities located in Texas, plus a 30.8% interest in STP. TGN sells electric generation capacity, energy, and ancillary services within the Electric Reliability Council of Texas (ERCOT) market. The ERCOT market consists of the majority of the population centers in Texas and transmission facilities utilized to provide reliable grid operations for approximately 85% of the demand for power in the state.
D. Organization and Management
- 1. States of Establishment and Place of Business TGN was incorporated in Texas in August 2001, and Texas is its principal place of business. Texas Genco is a Texas limited partnership that is wholly owned indirectly by TGN.
Texas Genco LP, LLC is a Delaware limited liability corporation, which directly owns 99% of Texas Genco. Texas Genco GP, LLC is a Texas limited liability corporation, which directly owns 1% of Texas Genco (refer to Figure 1). Texas is the principal place of business for all of the Texas Genco Entities.
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NOC-AE-0400 1753 Application
- 2. Directors, Executive Officers The following individuals, all of whom are U.S. citizens, are the directors of TGN:
J. Evans Attwell Donald R. Campbell Robert J. Cruikshank Patricia A. Hemingway Hall David M. McClanahan Scott E. Rozzell David G. Tees Gary L. Whitlock The following individuals, all of whom are U.S. citizens, are the executive officers of TGN:
David M. McClannahan, Chairman David G. Tees, President & Chief Executive Officer Scott E. Rozzell, Executive Vice President, General Counsel
& Corporate Secretary Gary L. Whitlock, Executive Vice President & Chief Financial Officer James S. Brian, Senior Vice President & Chief Accounting Officer The following individual, a U.S. citizen, is the Manager of Texas Genco GP, LLC, which is the General Partner that manages and controls Texas Genco:
David G. Tees, Manager The following individuals, all of whom are U.S. citizens, are the executive officers of Texas Genco GP, LLC:
David G. Tees, President and Chief Executive Officer Scott E. Rozzell, Executive Vice President General Counsel and Secretary Gary L. Whitlock, Executive Vice President and Chief Financial Officer James S. Brian, Senior Vice President and Chief Accounting Officer Walter L. Fitzgerald, Vice President and Controller Marc Kilbride,Vice President and Treasurer Michael A. Reed, Vice President Rufus S. Scott, Vice President, Deputy General Counsel and Assistant Secretary Jerome D. Svatek, Vice President, Asset Management Richard B. Dauphin, Assistant Secretary Linda Geiger, Assistant Treasurer 9
NOC-AE-0400 1753 Application The following individual, a U.S. citizen, is the only officer for Texas Genco LP, LLC:
Patricia F. Genzel, President and Secretary Texas Genco is a limited partnership and does not have any officers or directors. Control of Texas Genco is exercised by its General Partner, Texas Genco GP, LLC, by and through its Manager, President and Chief Executive Officer, David G. Tees.
IV. GENERAL CORPORATE INFORMATION REGARDING CPS A. Name City of San Antonio, Texas, acting by and through the City Public Service Board, operating as City Public Service of San Antonio (CPS).
B. Address 145 Navarro San Antonio, TX 78205 Mailing Address:
P.O. Box 1771 San Antonio, TX 78296-1771 C. Description of Business or Occupation CPS is the nation's largest municipally-owned energy company providing both natural gas and electric service to residential and business customers in a service territory that includes the city of San Antonio and certain surrounding areas. CPS serves more than 600,000 electric customers and more than 300,000 natural gas customers in and around the eighth largest city in the United States. Proceeds from CPS remain in San Antonio and account for more than one-fourth of the city's annual operating budget for police and fire protection, street improvements, parks, and other services. CPS has earned the highest financial rating of any electric system in the nation.
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NOC-AE-04001 753 Application D. Organization and Mlanagement
- 1. State of Establishment and Place of Business The gas and electric system which is now CPS was acquired by the City of San Antonio, Texas in 1942.
- 2. Board of Trustees, Executive Officers In accordance with certain bond ordinances, the CPS Board of Trustees governs the natural gas and electric utility. The Board consists of the Mayor of San Antonio, as an cx-officio member, and four citizens representing the four geographical quadrants of the city of San Antonio, located in Bexar County, Texas. Trustees must reside within the CPS quadrant that they represent. The following individuals, all of whom are U.S. citizens, are the members of the CPS Board of Trustees:
Aurora Ortega-Geis, Chairman Alvaro Sanchez, Jr., Vice Chairman Ed Garza, Mayor of San Antonio and ex officio member Clayton T. Gay, Jr.
Stephen S. Hennigan The CPS Board of Trustees appoints CPS's General Manager and CEO, who in turn appoints the appropriate staff to help manage the utility. The following individuals, all of whom are U.S. citizens, are the senior management team of CPS:
Milton B. Lee, General Manager & CEO Kenneth C. Emery, Jr., Information Management and Shared Services Ronald B. Seidel, Energy Supply Alfonso R. Lujan, Electric Delivery Systems Richard E. Williamson, Financial & Corporate Services, Treasurer, & Chief Financial Officer N. Beth Emery, General Counsel & Secretary 11
NOC-AE-0400 1753 Application V7. FOREIGN OWNERSHIP OR CONTROL CPS is owned by the City of San Antonio, Texas, and as such, CPS is neither owned, controlled, nor dominated by any foreign entity. All of the officers and trustees of CPS are United States citizens.
TGN and its indirect parent company, CenterPoint Energy, are publicly traded companies, and their securities are traded on the NYSE and widely held. Section 13 of the Securities and Exchange Act of 1934, as amended, 15 U.S.C. § 78m(d), requires that a person or entity that owns or controls more than 5% of the stock of a company must file notice with the Securities and Exchange Commission (SEC). Based upon its review of the relevant filings with the SEC, TGN and CenterPoint Energy are not aware of any alien, foreign corporation, or foreign government that holds more than 5% of the securities of TGN or CenterPoint Energy.
All of the directors and officers of CenterPoint Energy and the Texas Genco Entities are United States citizens. As such, there is no reason to believe that either TGN or CenterPoint Energy is owned, controlled, or dominated by any alien, foreign corporation, or foreign government. To the extent the NRC deems the proposed GC Power indirect interest in STP through its ownership of TGN material to its finding of no foreign ownership or control in reviewing this Application, such issues are addressed separately in the GC Power Application.
Thus, the transfers of all or a portion of TCC's ownership interest in STP to CPS and/or Texas Genco will not result in any foreign ownership, domination, or control of STP within the meaning of the AEA.
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NOC-AE-0400 1753 Application V7I. TECHNICAL QUALIFICATIONS The technical qualifications of STPNOC are not affected by the proposed transfers of control of all or a portion of TCC's owvnership interest in STP. There will be no physical changes to STP and no changes in the day-to-day operations of STP in connection with the transfers of control of TCC's ownership interest in STP. STPNOC will at all times remain the licensed operator of STP and there will be no changes in the STPNOC senior management team resulting from the proposed license transfers.
VII1. FINANCIAL QUALIFICATIONS OF TEXAS GENCO A. Projected Operating Revenues and Operating Costs Historical financial infonnation regarding TGN and its subsidiaries is in its 2003 Annual Report that is appended as Attachment 4. Additional infonnation regarding the financial qualifications of Texas Genco is provided in Section VI.A. I of the GC Power Application, as well as the proprietary Attachment 5A to that application. The infornation provided in Section VI.A. I of the GC Power Application, together with its Attachment 5A, is incorporated by reference as if fully set forth herein. That infornation establishes that Texas Genco possesses, or has reasonable assurance of obtaining, the funds necessary to cover its increased pro rata share of the estimated operating costs associated with up to a total 44% undivided ownership interest in STP for the period of the licenses in accordance with 10 CFR 50.33(f)(2) and the Standard Review Plan on Power Reactor Licensee Financial Qualifications and Decommissioning Funding Assurance (NUREG-I 577, Rev. 1). By extrapolation, this same information supports a finding that Texas Genco possesses, or has reasonable assurance of obtaining, the funds necessary to cover its increased pro rata share of the estimated operating 13
NOC-AE-04001753 Application costs associated with up to a total 56% undivided ownership interest in STP for the period of the licenses.
To the extent the NRC deems the proposed GC Power indirect interest in STP through its ownership of TGN material to its findings regarding financial qualifications in its review of this Application, such issues are addressed separately in the GC Power Application.
B. Decommissioning Funding The financial qualifications of Texas Genco to own up to a total 56% undivided ownership interest in STP are further demonstrated by the fact that Texas Genco will receive a proportionate share of TCC's decommissioning trust funds that corresponds with the interest in STP being acquired. Texas Genco will also continue to maintain its existing decommissioning trust funds for its 30.8% interest. Texas Genco will continue to maintain these external sinking funds segregated from its assets and outside its administrative control in accordance with the requirements of 10 CFR 50.75(e)(1). Texas Genco will maintain separate sub-accounts within the trusts to account for balances in the trusts attributable to its existing 30.8% interest in STP and the newly acquired interest from TCC.
TCC currently provides decommissioning funding assurance for its share of STP by maintaining external nuclear decommissioning trust funds in accordance with 10 CFR 50.75(e)(1)(ii). The status of TCC's decommissioning funding as of December 31, 2003, was reported to the NRC in Attachment 2 to STPNOC's letter (NOC-AE-04001699) dated March 29, 2004. These funds are sinking funds, with contributions made periodically based on collections from an established regulatory charge mechanism described further below.
A proportionate share of the funds accumulated in the TCC nuclear decommissioning trust funds as of the date of closing will be transferred to Texas Genco's external nuclear 14
NOC-AE-04001753 Application decommissioning trust funds. These trust funds will be consistent with NRC requirements of 10 CFR 50.75(e)(1)(ii) for the external sinking fund assurance method. Periodic contributions to Texas Genco's nuclear decommissioning trust funds for the newly acquired STP interest will continue to be based on collections from a non-bypassable charge mechanism consistent with NRC requirements in 10 CFR 50.75(e)(1)(ii)(B).
Specifically, Section 39.205 of the Texas Utilities Code provides that, after January 1, 2002, costs associated with nuclear decommissioning obligations shall continue to be subject to cost-of-service rate regulation and will be included as a non-bypassable charge to retail customers. Pursuant to that statutory provision and in accordance With an October 5, 2001 order issued by the Public Utility Commission of Texas (PUCT) in Docket No. 22352, TCC's share of STP decommissioning charges is collected from Texas ratepayers through a non-bypassable charge that is included in TCC's base rates collected from ratepayers within the retail service area historically served by TCC's electric distribution facilities. On February 19, 2003, the PUCT issued an order in Docket No. 26844,5 clarifying that TCC's collection of decommissioning charges in its base rates is for the benefit of the owner of TCC's interest in STP and its successor, who is obligated to contribute the decommissioning charges collected by TCC into the owner's decommissioning trust. On November 3, 2003, TCC initiated a rate proceeding to remove the decommissioning charges from its base rates and establish a separate rider for those charges ("Rider NDC"). A PUCT order approving Rider NDC is expected in late 2004.
Accordingly, from and after closing, TCC will, as agent for the customers' retail electric power supplier, provide for deposit into Texas Genco's nuclear decommissioning trust funds the A copy of PUCT's order in Docket No. 26844 is provided as Enclosure 9 to the April 21, 2004, NRC license transfer application.
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NOC-AE-0400 1753 Application decommissioning charges collected through a non-bypassable charge mechanism from Texas retail ratepayers within the service territory historically serviced by TCC's electric distribution facilities. These decommissioning charges collected by TCC will be remitted weekly following collection to Texas Genco's nuclear decommissioning trusts pursuant to a form of Decommissioning Funds Collection Agreement between TCC and Texas Genco to be entered into at the closing. This Agreement is subject to PUCT approval pursuant to PUCT Substantive Rule § 25.303 that the PUCT adopted on September 30, 2004. Pursuant to the Texas Utilities Code, the form of Decommissioning Funds Collection Agreement, and PUCT Substantive Rule
§ 25.303, after the transfer to Texas Genco, decommissioning costs relating to STP will continue to be subject to cost-of-serv'ice rate regulation by the PUCT.
In addition, the regulated electric distribution company owned by CenterPoint Energy or its successor will continue to collect from its electric utility ratepayers costs associated with the decommissioning of Texas Genco's existing 30.8% interest in STP "pursuant to a non-bypassable charge" within the meaning of 10 CFR 50.75(e)(1)(ii)(B) and transfer all such funds to Texas Genco or to the decommissioning trust for the benefit of Texas Genco. Texas Genco, in turn, wvill deposit the amounts received for this purpose into the decommissioning trust. These decommissioning funding arrangements were specifically approved by the PUCT. See PUCT Order, Docket 21956 (March 15, 2001). These arrangements assure that Texas Genco will have the total amount of funds estimated to be needed for decommissioning pursuant to 10 CFR 50.75(c), 50.75(f and 50.82.
The status of Texas Genco's decommissioning funding, as of December 31, 2003, was reported to the NRC in Attachment I to STPNOC's letter (NOC-AE-04001699) dated March 29, 2004. Additional information regarding the decommissioning trusts is provided on page 60 of 16
NOC-AE-0400 1753 Application Texas Genco's 2003 Annual Report (Attachment 4). In the coming months, the PUCT may issue one or more orders or rules affecting the administration of the trusts and Texas Genco anticipates that the actions of the PUCT may require amendments to the Texas Genco Nuclear Decommissioning Master Trust Fund Agreement in connection with the proposed transfer of control. If any amendments are to be made, the existing trust agreement requires prior written notice be made to the NRC and such notice will be provided to the NRC.
As is amply demonstrated above, in accordance with 10 CFR 50.75, there is reasonable assurance that Texas Genco will obtain the funds necessary to cover its share of the estimated decommissioning costs of STP at the end of licensed operation.
VIII. FINANCIAL QUALIFICATIONS OF CPS CPS owns and operates 16 electric generating units, with a capacity of 4,446 MWe of power from natural gas, oil and coal. As a result of its 28% interest in STP, CPS owns just over 700 MWe of nuclear generating capacity. CPS also owns long-term rights to 160 MWe of wind-generating capacity, which brings the total CPS native electricity generating capacity to 5,306 MWc.
A. Operating Financial Qualifications CPS is an Electric Utility, as that term is defined in 10 CFR 50.2. CPS recovers its cost of service, including the costs associated with the operation of its electric generating stations, through rates set by the City of San Antonio. As a result, pursuant to 10 CFR 50.33(f), CPS has the requisite financial qualifications to be an NRC licensee and to own an undivided ownership interest in STP.
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NOC-AE-0400 1753 Application B. Decommissioning Funding The financial qualifications of CPS to own up to a total 53.2% undivided ownership interest in STP are further demonstrated by the fact that, in accordance with the Purchase and Sale Agreement, CPS will also receive a proportionate share of TCC's decommissioning trust funds that corresponds with the interest in STP being acquired and will continue to maintain its existing decommissioning trust funds for its 28% interest in STP. CPS will continue to maintain these external sinking funds segregated from its assets and outside its administrative control in accordance with the requirements of 10 CFR 50.75(e)(1). As explained below, since decommissioning funds for the new interest in STP that CPS is acquiring will be collected from ratepayers within the retail service area historically served by TCC's electric distribution facilities, CPS intends to keep these decommissioning funds in their own trust accounts segregated from funds that CPS collects from ratepayers wvithin its own service territory. Section 39.205 of the Texas Utilities Code provides that, after January 1, 2002, costs associated with nuclear decommissioning obligations shall continue to be subject to cost-of-service rate regulation and wvill be included as a non-bypassable charge to retail customers. Pursuant to that statutory provision, CPS's existing share of STP decommissioning charges is collected from its ratepayers through a non-bypassable charge that is included in CPS's base rates collected from ratepayers ,within its certificated retail service area. CPS's decommissioning trust funds are maintained in grantor trusts, as provided in Section 671 of the Internal Revenue Code of 1986, as amended (IRC), and CPS is the grantor of each such trust.
TCC currently provides decommissioning funding assurance for its share of STP by maintaining external nuclear decommissioning trust funds in accordance with 10 CFR 50.75(e)(1)(ii). CPS's decommissioning funds are also in external sinking funds, 18
NOC-AE-0400 1753 Application consistent with 10 CFR 50.75(e)(1)(ii), with contributions made periodically based on collections from an established regulatory charge mechanism described further below.
As reported to the NRC in March 2004, TCC maintains its decommissioning funds in two separate trust funds per STP unit - one qualified nuclear decommissioning reserve fund (within the meaning of IRC Section 468A and the regulations thereunder) and one non-qualified trust fund; thus, all told these TCC decommissioning monies are maintained in four separate trust funds. Upon close of the sale of all or a portion of TCC's interest to CPS, a proportionate share of the funds accumulated in the TCC nuclear decommissioning trust funds as of the date of closing that corresponds with the interest in STP being acquired wvill be transferred to external nuclear decommissioning trust funds established by CPS for the purpose of receiving TCC's qualified and non-qualified decommissioning trust funds. Because CPS is a municipality, not normally subject to federal taxation, once the funds are under CPS's trustee's control, the former TCC funds will be rolled into CPS grantor trust funds - one per unit - for decommissioning the newly acquired interest in STP that will be owned by CPS. CPS has filed a private letter ruling request with the Internal Revenue Servicc to ensure that the proposed transfer will not result in tax consequences adverse to the corpus of the trust or to CPS.
On February 19, 2003, the PUCT issued an order in Docket No. 26844,6 clarifying that TCC's collection of decommissioning charges in its base rates is for the benefit of the owner of TCC's interest in STP and its successor, who is obligated to contribute the decommissioning charges collected by TCC into the owner's decommissioning trust. On November 3, 2003, TCC initiated a rate proceeding to remove the decommissioning charges from its base rates and establish a separate rider for those charges ("Rider NDC"). A PUCT order approving Rider A copy of PUCT's order in Docket No. 26844 is provided as Enclosure 9 to the April 21, 2004, NRC license transfer application.
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NOC-AE-0400 1753 Application NDC is expected in late 2004. Thus, TCC's retail customers remain responsible for the costs of decommissioning TCC's original interest in STP. Therefore, CPS will maintain the new grantor trusts separate from the grantor trusts currently used to collect decommissioning funds for CPS's current 28% interest in STP. These trust funds will be consistent with NRC requirements of 10 CFR 50.75(e)( 1)(ii) for the external sinking fund assurance method. Periodic contributions to CPS's nuclear decommissioning trust funds for the newly acquired STP interest will continue to be based on collections from a non-bypassable charge mechanism from TCC's customers consistent with NRC requirements in 10 CFR 50.75(e)(1)(ii)(B), and as described above.
From and after closing, TCC ,Xill, as agent for the customers' retail electric power supplier, provide for deposit into CPS's nuclear decommissioning trust funds the decommissioning charges collected by TCC and its successors from Texas ratepayers through the non-bypassable charge mechanism. These decommissioning charges collected by TCC will be remitted weekly following collection to CPS's nuclear decommissioning trusts pursuant to a form of Decommissioning Funds Collection Agreement between TCC and CPS to be entered into at the closing. This Agreement is subject to PUCT approval pursuant to PUCT Substantive Rule § 25.303 that the PUCT adopted on September 30, 2004. Pursuant to the Texas Utilities Code, the fonn of Decommissioning Funds Collection Agreement, and PUCT Substantive Rule
§ 25.303, after the sale and transfer, decommissioning costs relating to STP and that are collected from TCC customers will continue to be subject to cost-of-service rate regulation by the PUCT.
In addition, CPS will continue to collect from its electric utility ratepayers costs associated with the decommissioning its existing 28% interest in STP "pursuant to a non-bypassable charge" within the meaning of 10 CFR 50.75(e)(1)(ii)(B) and will deposit the amounts received for this purpose into the existing decommissioning trust. These arrangements 20
NOC-AE-04001753 Application assure that CPS will have the total amount of funds estimated to be needed for decommissioning pursuant to 10 CFR 50.75(c), 50.75(f) and 50.82. Additional information regarding the status of CPS's existing decommissioning trusts is provided on page 35 of the City Public Service of San Antonio 2003-2004 Annual Report (Attachment 5) and will be the subject of a separate submittal to the Commission by CPS.
The CPS Nuclear Decommissioning Master Trust Fund Agreement was established on the premise that CPS's investments are narrowly restricted, under the Texas Public Funds Investment Act, TEX. GOVT CODE Chapter 2256, to certain obligations guaranteed by governmental entities and other similar instruments? Private entities are not subject to these restrictions and, notwithstanding the other investment restrictions on decommissioning trusts imposed by the PUCT, the NRC, and the Federal Energy Regulation Commission (FERC) (for FERC-jurisdictional entities), private entities generally may be expected to achieve higher returns through inclusion of equity investments in their portfolios. In an attempt to detennine whether the same investment options are available for municipalities, the PUCT has requested an opinion of the Attorney General of the State of Texas to interpret Texas statutes as having a recognized exception apply for municipalities investing nuclear decommissioning funds with respect to funds collected from customers of transferor nuclear assets.
On October 12, 2004, the Attorney General issued an opinion consistent with this interpretation. Accordingly, CPS wvill make conforming amendments to the CPS Nuclear 2 With certain narrow exceptions, the Texas Public Funds Investment Act limits authorized investments of entities within its scope to specified categories of obligations, including obligations guaranteed by governmental entities, certificates of deposit and share certificates, collateralized repurchase agreements based on government or government-guaranteed obligations, high-grade commercial paper, and similar investments. TEX. GOV'T CODE
§ 2256.009, et seq. (Vernon 2004).
See http://wvww.oag.state.tx.uslopinions/op50abbott/ga-0257.htm 21
NOC-AE-0400 1753 Application Decommissioning Master Trust Fund Agreement. In addition, PUCT Substantive Rule 25.303, or related administrative orders issued by the PUCT, may require CPS to amend the CPS Nuclear Decommissioning Master Trust Fund Agreement. CPS does not anticipate any other amendments to the CPS Nuclear Decommissioning Master Trust Fund Agreement in connection with the proposed transfer of control. If any amendments are to be made to the CPS Nuclear Decommissioning Master Trust Fund Agreement, CPS will provide a written notice to the NRC of such changes.
As is amply demonstrated above, in accordance with 10 CFR 50.75, there is reasonable assurance that CPS will obtain the funds necessary to cover its share of the estimated decommissioning costs of STP at the end of licensed operation.
IX. ANTITRUST INFORMATION This Application post-dates the issuance of the STP operating licenses, and therefore no antitrust review is required or authorized. Based upon the Commission's decision in Kansas Gas and Electric Co., et al. (Wolf Creek Generating Station, Unit I), CLI-99-19, 49 NRC 441 (1999),
the AEA does not require or authorize antitrust reviews of post-operating license transfer applications.
X. RESTRICTED DATA AND CLASSIFIED NATIONAL SECURITY INFORMATION The proposed transfers do not contain any Restricted Data or other Classified National Security Information, nor do they result in any change in access to any Restricted Data or Classified National Security Information. STPNOC's existing restrictions on access to Restricted Data and Classified National Security Information are unaffected by the proposed transfers.
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NOC-AE-0400 1753 Application Xi. ENVIRONMENTAL CONSIDERATIONS The requested consent to transfers of control of the STP licenses is exempt from environmental review because it falls within the categorical exclusion contained in 10 CFR 51.22(c)(2 1), for which neither an Environmental Assessment nor an Environmental Impact Statement is required. Moreover, the proposed transfers wvill not directly affect the actual operation of STP in any substantive wvay. The proposed transfers do not involve an increase in the amounts, or a change in the types, of any radiological effluents that may be allowed to be released off-site, and they do not involve an increase in the amounts, or a change in the types, of non-radiological effluents that may be released off-site. Further, there is no increase in the individual or cumulative operational radiation exposure, and the proposed transfers have no environmental impact.
XII. PRICE-ANDERSON INDEMNITY AND NUCLEAR INSURANCE In accordance with 10 CFR 140.92, Art. IV.2, the Applicants request NRC consent to the assignments and transfers of TCC's interests in the Price-Anderson indemnity agreement for STP to Texas Genco and CPS in connection with its consent to the proposed transfers of licenses to these entities. The 2003 Annual Report (Fonn 1 0-K) of TGN (Attachment 4) and the CPS 2003-2004 Annual Report (Attachment 5) provide adequate assurance that Texas Genco and CPS will be able to pay theirpro i-ala share of the total retrospective premium of SI0 million per STP unit (S20 million total), pursuant to 10 CFR 140.21 (e). Prior to the transfers of licenses, Texas Genco and CPS will have obtained, and/or STPNOC will have obtained on their behalf, all required nuclear property damage insurance pursuant to 10 CFR 50.54(wv) and nuclear energy liability insurance pursuant to Section 170 of the AEA and 10 CFR Part 140.
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NOC-AE-0400 1753 Application X111. MISCELLANEOUS On behalf of the participants to the STP Participation Agreement, STPNOC interfaces with the Transmission Providers (defined below) under the terms of the South Texas Project Interconnection Agreement dated August 15, 2002, by and between Reliant Energy, Incorporated (now CenterPoint Houston), Central Power and Light Company (now AEP Texas Central Company), City of San Antonio, Texas, and City of Austin, Texas, (collectively, Transmission Providers). STPNOC will remain a party to, and retain all of its rights under, the Interconnection Agreement during and after the proposed direct transfer of control of TCC's ownership interest in STP. Accordingly, STPNOC's ability to ensure proper maintenance of the switchyard and other transmission assets in accordance with NRC requirements and guidelines will not be affected by the proposed direct transfer of control.
The proposed direct transfer of control of TCC's ownership interest in STP will not affect the ability of STP to obtain access to, and interconnect with, the ERCOT transmission grid in order to deliver the power generated by STP. The Transmission Providers will continue to provide STP with access to their related transmission facilities in accordance with the Interconnection Agreement. Currently offsite power is provided to STP by the participants to the STP Participation Agreement, which will not be changed. Accordingly, STP's ability to obtain offsite power will not be affected by the proposed direct transfer of control of TCC's ownership interest in STP.
XINV. EFFECTIVE DATES The actual date for any transfer of control of TCC's 25.2% interest in STP to Texas Genco and/or CPS will be dependent upon the actual date of satisfying the conditions for closing the sale by TCC in accordance with the terns and conditions of the Purchase and Sale 24
NOC-AE-0400 1753 Application Agrcemcnt, including receipt of any other required regulatory approvals and rulings. In particular, the actual date for the transfer of control of TCC's interest in STP to CPS beyond the 12% currently contemplated, should it occur, will be contingent upon a determination that the transfer of TCC's remaining 13.2% undivided interest to Texas Genco will not take place.
Likewise, the actual date for the transfer of control of TCC's interest in STP to Texas Genco beyond the 13.2% currently contemplated, should it occur, will be contingent upon a determination that the transfer of TCC's remaining 12% undivided interest to CPS will not take place. STPNOC wvill advise the NRC of any developments relevant to any such additional transfers.
The Applicants request that the NRC review this Application on a schedule that will pennit the issuance of NRC consent to the transfers of control as soon as possible, and arc prepared to work closely with the NRC Staff to help expedite the Application's review, but request approval by no later than March 15, 2005. Such consent should be immediately effective upon issuance and should pennit the transfers of control at anyt time within twelve months of the date of approval of this Application. STPNOC will inforn the NRC if there are any significant changes in the status of any other required approvals or any other developments that have an impact on the schedule.
XV. CONCLUSION Based upon the foregoing infonnation, the Applicants request that the NRC issue an Order consenting to the transfers of control of the Facility Operating Licenses, Nos. NPF-76 and NPF-80, for up to the entirety of TCC's 25.2% undivided owvnership interest in STP to either or both Texas Genco and CPS, as well as TCC's proportionate rights to participate in the governance of STPNOC to the extent NRC's consent is required. The Applicants further request 25
NOC-AE-04001753 Application that the NRC approve conforming administrative amendments to reflect the proposed transfers by deleting references to TCC from the STP licenses, and that the NRC issue such amendments, at such time as: (a) the transfers of proportionate shares, aggregating all, of the TCC interest in STP to Texas Genco and CPS are completed, or (b) the transfers of TCC's interest in STP ultimately result in either Texas Genco or CPS acquiring TCC's entire 25.2% interest in STP.
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NOC-AE-04001753 Application FIGURE 1 OWNERSHIP OF TEXAS GENCO, LP
NOC-AE-04001 753 Application ATTACHMENT 1 MARKED-UP PAGES FOR PROPOSED CONFORMING CHANGES TO UNIT 1 LICENSE
UNITEI) STATES NUCLEAR REGULATORY' CONIMISSION WASII INGTON, D.C. 20555-0001 TEXAS GENCO. LP CITY PUBLIC SERVICE BOARD OF SAN ANTONIO CITY OF AUSTIN, TEXAS STP NUCLEAR OPERATING COMPANY DOCKET NO. 50-498 SOUTH TEXAS PROJECT. UNIT 1 FACILITY OPERATING LICENSE License No. NPF-76
- 1. The Nuclear Regulatory Commission (the Commission or the NRC) has found that:
A. The application for a license filed by STP Nuclear Operating Company (STPNOC)*, acting on behalf of itself and for Texas Genco, LP, the City Public Service Board of San Antonio (CPS), Ei and City of Austin, Texas (COA) (the "Owners") complies with the standards and requirements of the Atomic Energy Act of 1954, as of 1954 as amended (the Act), and the Commission's regulations set forth in 10 CFR Chapter I, and all required notifications to other agencies or bodies have been duly made; B. Construction of the South Texas Project, Unit 1, (the facility) has been substantially completed in conformity with Construction Permit No. CPPR-128 and the application, as amended, the provisions of the Act, and the regulations of the Commission; C. The facility will operate in conformity with the application, as amended, the provisions of the Act, and the regulations of the Commission (except as exempted from compliance in Section 2.D. below);
D. There is reasonable assurance: (i) that the activities authorized by this operating license can be conducted without endangering the health and safety of the public, and (ii) that such activities will be conducted in compliance with the Commission's regulations set forth in 10 CFR Chapter I (except as exempted from compliance in Section 2.D. below);
- STPNOC is authorized to act for Texas Genco, LP, the City Public Service Board of San Antonio, rPTcxa -CcntraZCompany, and City of Austin, Texas and has exclusive responsibility and control over the physical construction, operation, and maintenance of the facility.
Amendment No. 9 3 , 14, 155
SOUTH TEXAS LICENSE E. STPNOC is technically qualified to engage in the activities authorized by this license in accordance with the Commission's regulations set forth in 10 CFR Chapter l; F. The Owners have satisfied the applicable provisions of 10 CFR Part 140, "Financial Protection Requirements and Indemnity Agreements," of the Commission's regulations; G. The issuance of this license will not be inimical to the common defense and security or to the health and safety of the public; H. After weighing the environmental, economic, technical and other benefits of the facility against environmental and other costs and considering available alternatives, the issuance of this Facility Operating License No. NPF-76, subject to the conditions for protection of the environment set forth in the Environmental Protection Plan attached as Appendix B, is in accordance with 10 CFR Part 51 of the Commission's regulations and all applicable requirements have been satisfied; and I. The receipt, possession, and use of source, byproduct and special nuclear material as authorized by this license will be in accordance with the Commission's regulations in 10 CFR Parts 30, 40 and 70.
- 2. Based on the foregoing findings, and approval by the Nuclear Regulatory Commission at a meeting on March 21, 1988, the License for Fuel Loading and Low Power Testing, License No. NPF-71 issued on August 21, 1987 is superseded by Facility Operating License NPF-76, hereby issued to STPNOC, Texas Genco, LP, City Public Service Board of San Antonio, a, Tca m n, and City of Austin, Texas (the licensees) to read as follows:
A. This license applies to the South Texas Project, Unit 1, a pressurized water reactor, and associated equipment (the facility owned by Texas Genco, LP, City Public Service Board of San Antonio, lEj and City of Austin, Texas and operated by STPNOC. The facility is located in Matagorda County, Texas, west of the Colorado River, 8 miles north-northwest of the town of Matagorda and about 89 miles southwest of Houston and is described in the licensees' Final Safety Analysis Report, as supplemented and amended, and in the licensees' Environmental Report, as supplemented and amended.
B. Subject to the conditions and requirements incorporated herein, the Commission hereby licenses:
Amendment No. 93, 142, 155
SOUTH TEXAS LICENSE (1) STPNOC pursuant to Section 103 of the Act and 10 CFR Part 50, to possess, use and operate the facility at the designated location in Matagorda County, Texas, in accordance with the procedures and limitations set forth in this license; (2) Texas Genco, LP, the City Public Service Board of San Antonio (CPS), g cand the City of Austin, Texas (COA), pursuant to the Act and 10 CFR Part 50, to possess the facility at the designated location in Matagorda County, Texas, in accordance with the procedures and limitations set forth in this license; (3) STPNOC, pursuant to the Act and 10 CFR Part 70, to receive, possess and use at any time special nuclear material as reactor fuel, in accordance with the limitations for storage and amounts required for reactor operation, as described in the Final Safety Analysis Report, as supplemented and amended; (4) STPNOC, pursuant to the Act and 10 CFR Parts 30, 40 and 70, to receive, possess, and use at any time any byproduct, source and special nuclear material as sealed neutron sources for reactor startup, sealed sources for reactor instrumentation and radiation monitoring equipment calibration, and as fission detectors in amounts as required; (5) STPNOC, pursuant to the Act and 10 CFR Parts 30, 40 and 70, to receive, possess, and use in amounts as required any byproduct, source or special nuclear material without restriction to chemical or physical form, for sample analysis or instrument calibration or associated with radioactive apparatus or components; and (6) STPNOC, pursuant to the Act and 10 CFR Parts 30, 40 and 70, to possess, but not separate, such byproduct and special nuclear materials as may be produced by the operation of the facility authorized herein.
C. This license shall be deemed to contain and is subject to the conditions specified in the Commission's regulations set forth in 10 CFR Chapter I and is subject to all applicable provisions of the Act and to the rules, regulations and orders of the Commission now or hereafter in effect; and is subject to the additional conditions specified or incorporated below:
(1) Maximum Power Level STPNOC is authorized to operate the facility at reactor core power levels not in excess of 3,853 megawatts thermal (100% power) in accordance with the conditions specified herein.
Amendment No. 138, 142, 155
SOUTH TEXAS LICENSE (2) Technical Specifications The Technical Specifications contained in Appendix A, as revised through Amendment No. , and the Environmental Protection Plan contained in Appendix B, are hereby incorporated in the license. STPNOC shall operate the facility in accordance with the Technical Specifications and the Environmental Protection Plan.
(3) Not Used (4) Initial Startup Test Proaram (Section 14. SER)*
Any changes to the Initial Test Program described in Section 14 of the Final Safety Analysis Report made in accordance with the provisions of 10 CFR 50.59 shall be reported in accordance with 50.59(b) within one month of such change.
(5) Safety Parameter Display System (Section 18. SSER No. 4)*
Before startup after the first refueling outage, HL&P[**] shall perform the necessary activities, provide acceptable responses, and implement all proposed corrective actions related to issues as described in Section 18.2 of SER Supplement 4.
(6) Suoplementarv Containment Purae Isolation (Section 11.5. SSER No. 4)
HL&P shall provide, prior to startup from the first refueling outage, control room indication of the normal and supplemental containment purge sample line isolation valve position.
- The parenthetical notation following the title of many license conditions denotes the section of the Safety Evaluation Report and/or its supplements wherein the license condition is discussed.
- The original licensee authorized to possess, use and operate the facility was HL&P.
Consequently, historical references to certain obligations of HL&P remain in the license conditions Amendment No. 9 3 142,155, 157
SOUTH TEXAS LICENSE (7) License Transfer Texas Genco, LP shall provide decommissioning funding assurance, to be held in decommissioning trusts for South Texas Project, Unit I (Unit 1) upon the direct transfer of the Unit 1 license to Texas Genco, LP, in an amount equal to or greater than the balance in the Unit 1 decommissioning trust immediately prior to the transfer. In addition, Texas Genco, LP shall ensure that all contractual arrangements referred to in the application for approval of the transfer of the Unit 1 license to Texas Genco, LP to obtain necessary decommissioning funds for Unit 1 through a non-bypassable charge are executed and will be maintained until the decommissioning trusts are fully funded, or shall ensure that other mechanisms that provide equivalent assurance of decommissioning funding in accordance with the Commission's regulations are maintained.
(8) License Transfer The master decommissioning trust agreement for Unit 1, at the time the direct transfer of Unit 1 to Texas Genco, LP is effected and thereafter, is subject to the following:
- a. The decommissioning trust agreement must be in a form acceptable to the NRC.
- b. With respect to the decommissioning trust funds, investments in the securities and other obligations of CenterPoint Energy, Inc., or its affiliates, successors, or assigns, shall be prohibited. Except for investments in funds tied to market indices or other non-nuclear sector mutual funds, investments in any entity owning one or more nuclear power plants are prohibited.
- c. The decommissioning trust agreement must provide that the trustee, investment advisor, or anyone else directing the investments made in the trusts shall adhere to the standards for such investments established by the Public Utility Commission of Texas (e.g., 16 Texas Administration Code § 25.301).
- d. The decommissioning trust agreement must provide that except for ordinary administrative expenses, no disbursements or payments from the trusts shall be made by the trustee unless the trustee has first given the NRC 30 days prior written notice of such disbursement or payment.
The decommissioning trust agreement shall further contain a provision that no disbursements or payments from the trusts shall be made if the trustee receives prior written notice of an objection from the Director, Office of Nuclear Reactor Regulation.
Amendment No. 142
SOUTH TEXAS LICENSE e. The decommissioning trust agreement must provide that the agreement cannot be modified in any material respect without 30 days prior written notification to the Director, Office of Nuclear Reactor Regulation.
(9) License Transfer Texas Genco, LP shall take all necessary steps to ensure that the decommissioning trust is maintained in accordance with the application for approval of the transfer of the Unit 1 license to Texas Genco, LP, the requirements of the Order approving the transfer, and the related safety evaluation.
(10) License Transfer Texas Genco, LP shall provide the Director, Office of Nuclear Reactor Regulation a copy of any application, at the time it is filed, to transfer (excluding grants of security interests or liens) from CenterPoint Energy, Inc., or its subsidiaries, to a proposed direct or indirect parent, or to any other affiliated company, facilities for the production of electric energy having a depreciated book value exceeding ten percent (10%) of such licensee's consolidated net utility plant, as recorded on Texas Genco, LP's book of accounts.
Amendment No. 93,1-2, 142
SOUTH TEXAS LICENSE I D. Exemptions The following exemptions are authorized by law and will not endanger life or property or the common defense and security, and certain special circumstances are present. With the granting of these exemptions, the facility will operate, to the extent authorized herein, in conformity with the application, as amended, the provisions of the Act, and the rules and regulations of the Commission.
(1) The facility requires a technical exemption from the requirements of 10 CFR Part 50, Appendix J, Section IlI.D.2(b)(ii). The justification for this exemption is contained in Section 6.2.6 of Supplement 3 to the Safety Evaluation Report. The staffs environmental assessment was published on July 2, 1987 (52 FR 25094). Therefore, pursuant to 10 CFR 50.12(a)(1), 10 CFR 50.12(a)(2)(ii) and (iii), the South Texas Project Unit 1 is hereby granted an exemption from the quoted requirement and instead, is required to perform the overall air lock leak test at pressure Pa prior to establishing containment integrity if air lock maintenance has been performed that could affect the air lock sealing capability.
(2) The facility requires a schedular exemption from the requirements of General Design Criterion 57, Appendix A to 10 CFR 50. The staff has described in detail in Supplement 4 to the Safety Evaluation Report the technical bases associated with this exemption. The staffs environmental assessment was published on June 18, 1987 (52 FR 23217). Therefore, pursuant to 10 CFR 50.12(a)(1) and 10 CFR 50.12(a)(2)(v) the South Texas Project Unit 1 is hereby granted an exemption from the requirements of GDC-57 applicable to the essential component cooling water (CCW) piping which is also used by the non-essential reactor containment building chilled water system in providing cooling to the Reactor Containment Fan Coolers (RCFC). This exemption will expire at the end of the first refueling outage.
(3) The facility was previously granted exemption from the criticality monitoring requirements of 10 CFR 70.24 (See Materials License No.
SNM-1972 dated December 29, 1986 and Section 9.1.2 of SSER No. 3).
The South Texas Project Unit 1 is hereby exempted from the criticality monitoring provisions of 10 CFR 70.24 as applied to fuel assemblies held under this license.
(4) The facility has been granted a schedular exemption from Section 50.71(e)(3)(i) of 10 CFR 50 to extend the date for submittal of the updated Final Safety Analysis Report to no later than one year after the date of issuance of a low power license for the South Texas Project, Unit
- 2. This exemption is effective until August 1990. The staffs environmental assessment was published on December 16, 1987 (52 FR 47805).
Amendment No. 142 l
SOUTH TEXAS LICENSE E. Fire Protection STPNOC shall implement and maintain in effect all provisions of the approved fire protection program as described in the Final Safety Analysis Report through Amendment No. 55 and the Fire Hazards Analysis Report through Amendment No. 7, and submittals dated April 29, May 7, 8 and 29, June 11, 25 and 26, 1987, and as approved in the SER (NUREG-0781) dated April 1986 and its Supplements, subject to the following provision:
STPNOC may make changes to the approved fire protection program without prior approval of the Commission, only if those changes would not adversely affect the ability to achieve and maintain safe shutdown in the event of a fire.
F. Physical Security STPNOC shall fully implement and maintain in effect all provisions of the physical security, guard training and qualification, and safeguards contingency plans previously approved by the Commission and all amendments and revisions to such plans made pursuant to the authority under 10 CFR 50.90 and 10 CFR 50.54(p).
The plans, which contain Safeguards Information protected under 10 CFR 73.21, are entitled: "South Texas Project Electric Generating Station Physical Security Plan," with revisions/amendments submitted through March 4, 1988; "South Texas Project Electric Generating Station Security Personnel Qualification and Training Plan" with revisions submitted through March 4,1988, and "South Texas Project Electric Generating Station Safeguards Contingency Plan," with revisions/amendments submitted through July 24, 1987.
G. Not Used H. Financial Protection The owners shall have and maintain financial protection of such type and in such amounts as the Commission shall require in accordance with Section 170 of the Atomic Energy Act of 1954, as amended, to cover public liability claims.
Amendment No. 142 I
SOUTH TEXAS LICENSE g9 I. Effective Date and Expiration This license is effective as of the date of issuance and shall expire at midnight on August 20, 2027.
FOR THE NUCLEAR REGULATORY COMMISSION original signed by Thomas E. Murley, Director Office of Nuclear Reactor Regulation
Enclosures:
- 1. Appendix A, Technical Specifications (NUREG-1305)
- 2. Appendix B, Environmental Protection Plan I
Date of Issuance: March 22, 1988 Amendment No. 42, 157
NOC-AE-04001753 Application ATTACHMENT 2 MARKED-UP PAGES FOR PROPOSED CONFORMING CHANGES TO UNIT 2 LICENSE
UNITED STATES NUCLEAR REGULATORY COMMISSION VASHINGTON, D.C. 20555-0001 TEXAS GENCO. LP CITY PUBLIC SERVICE BOARD OF SAN ANTONIO CITY OF AUSTIN. TEXAS STP NUCLEAR OPERATING COMPANY DOCKET NO. 50-499 SOUTH TEXAS PROJECT. UNIT 2 FACILITY OPERATING LICENSE License No. NPF-80
- 1. The Nuclear Regulatory Commission (the Commission or the NRC) has found that:
A. The application for a license filed by STP Nuclear Operating Company (STPNOC)*, acting on behalf of itself and for Texas Genco, LP, the City Public Service Board of San Antonio (CPS), -1io at k = and City of Austin, Texas (COA) (the "Owners") complies with the standards and requirements of the Atomic Energy Act of 1954, as amended (the Act), and the Commission's regulations set forth in 10 CFR Chapter I, and all required notifications to other agencies or bodies have been duly made; B. Construction of the South Texas Project, Unit 2, (the facility) has been substantially completed in conformity with Construction Permit No. CPPR-129 and the application, as amended, the provisions of the Act, and the regulations of the Commission; C. The facility will operate in conformity with the application, as amended, the provisions of the Act, and the regulations of the Commission (except as exempted from compliance in Section 2.D. below);
D. There is reasonable assurance: (i) that the activities authorized by this operating license can be conducted without endangering the health and safety of the public, and (ii) that such activities will be conducted in compliance with the Commission's regulations set forth in 10 CFR Chapter I (except as exempted from compliance in Section 2.D. below);
- STPNOC is authorized to act for Texas Genco, LP, the City Public Service Board of San Antonio, City of Austin, Texas and has exclusive responsibility and control over the physical construction, operation, and maintenance of the facility.
Amendment No. 80 4a9- 143
E. STPNOC is technically qualified to engage in the activities authorized by this license in accordance with the Commission's regulations set forth in 10 CFR
- Chapter l; F. The Owners have satisfied the applicable provisions of 10 CFR Part 140, "Financial Protection Requirements and Indemnity Agreements," of the Commission's regulations; G. The issuance of this license will not be inimical to the common defense and security or to the health and safety of the public; H. After weighing the environmental, economic, technical and other benefits of the facility against environmental and other costs and considering available alternatives, the issuance of this Facility Operating License No. NPF-80, subject to the conditions for protection of the environment set forth in the Environmental Protection Plan attached as Appendix B, is in accordance with 10 CFR Part 51 of the Commission's regulations and all applicable requirements have been satisfied; and I. The receipt, possession, and use of source, byproduct and special nuclear material as authorized by this license will be in accordance with the Commission's regulations in 10 CFR Parts 30, 40 and 70.
- 2. Based on the foregoing findings, and approval by the Nuclear Regulatory Commission at a meeting on March 28, 1989, the License for Fuel Loading and Low Power Testing, License No. NPF-78 issued on December, 16 1988 is superseded by Facility Operating License NPF-80, hereby issued to STPNOC, Texas Genco, LP, City Public Service Board of San Antonio, and City of Austin, Texas (the licensees) to read as follows:
A. This license applies to the South Texas Project, Unit 2, a pressurized water reactor, and associated equipment (the facility) owned by Texas Genco, LP, City Public Service Board of San Antonio, -- and City of Austin, Texas and operated by STPNOC. The facility is located in Matagorda County, Texas, west of the Colorado River, 8 miles north-northwest of the town of Matagorda and about 89 miles southwest of Houston and is described in the licensees' Final Safety Analysis Report, as supplemented and amended, and in the licensees' Environmental Report, as supplemented and amended.
B. Subject to the conditions and requirements incorporated herein, the Commission hereby licenses:
Amendment No. 80 -30, 143
(1) STPNOC pursuant to Section 103 of the Act and 10 CFR Part 50, to possess, use and operate the facility at the designated location in Matagorda County, Texas, in accordance with the procedures and limitations set forth in this license; (2) Texas Genco, LP, the City Public Service Board of San Antonio (CPS), g and the City of Austin, Texas (COA), pursuant to the Act and 10 CFR Part 50, to possess the facility at the designated location in Matagorda County, Texas, in accordance with the procedures and limitations set forth in this license; (3) STPNOC, pursuant to the Act and 10 CFR Part 70, to receive, possess and use at any time special.nuclear material as reactor fuel, in accordance with the limitations for storage and amounts required for reactor operation, as described in the Final Safety Analysis Report, as supplemented and amended; (4) STPNOC, pursuant to the Act and 10 CFR Parts 30, 40 and 70, to receive, possess, and use at any time any byproduct, source and special nuclear material as sealed neutron sources for reactor startup, sealed sources for reactor instrumentation and radiation monitoring equipment calibration, and as fission detectors in amounts as required; (5) STPNOC, pursuant to the Act and 10 CFR Parts 30, 40 and 70, to receive, possess, and use in amounts as required any byproduct, source or special nuclear material without restriction to chemical or physical form, for sample analysis or instrument calibration or associated with radioactive apparatus or components; and (6) STPNOC, pursuant to the Act and 10 CFR Parts 30, 40 and 70, to possess, but not separate, such byproduct and special nuclear materials as may be produced by the operation of the facility authorized herein.
C. This license shall be deemed to contain and is subject to the conditions specified in the Commission's regulations set forth in 10 CFR Chapter I and is subject to all applicable provisions of the Act and to the rules, regulations and orders of the Commission now or hereafter in effect; and is subject to the additional conditions specified or incorporated below:
(1) Maximum Power Level STPNOC is authorized to operate the facility at reactor core power levels not in excess of 3853 megawatts thermal (100% power) in accordance with the conditions specified herein.
Amendment No. 42-7 10,442, 143
(2) Technical Specifications The Technical Specifications contained in Appendix A, as revised through Amendment No. , and the Environmental Protection Plan contained in Appendix B, are hereby incorporated in the license. STPNOC shall operate the facility in accordance with the Technical Specifications and the Environmental Protection Plan.
(3) Not Used (4) Initial Startup Test Proaram (Section 14. SR)*
Any changes to the Initial Test Program described in Section 14 of the Final Safety Analysis Report made in accordance with the provisions of 10 CFR 50.59 shall be reported in accordance with 50.59(b) within one month of such change.
(5) License Transfer Texas Genco, LP shall provide decommissioning funding assurance, to be held in decommissioning trusts for the South Texas Project, Unit 2 (Unit 2) upon the direct transfer of the Unit 2 license to Texas Genco, LP, in an amount equal to or greater than the balance in the Unit 2 decommissioning trust immediately prior to the transfer. In addition, Texas Genco, LP shall ensure that all contractual arrangements referred to in the application for approval of the transfer of the Unit 2 license to Texas Genco, LP to obtain necessary decommissioning funds for Unit 2 through a non-bypassable charge are executed and will be maintained until the decommissioning trusts are fully funded, or shall ensure that other mechanisms that provide equivalent assurance of decommissioning funding in accordance with the Commission's regulations are maintained.
(6) License Transfer The master decommissioning trust agreement for Unit 2, at the time the direct transfer of Unit 2 to Texas Genco, LP is effected and thereafter, is subject to the following:
- The parenthetical notation following the title of many license conditions denotes the section of the Safety Evaluation Report and/or its supplements wherein the license condition is discussed.
Amendment No. 0 130, 143, 145
- a. The decommissioning trust agreement must be in a form acceptable to the NRC.
- b. With respect to the decommissioning trust funds, investments in the securities and other obligations of CenterPoint Energy, Inc., or its affiliates, successors, or assigns, shall be prohibited. Except for investments in funds tied to market indices or other non-nuclear sector mutual funds, investments in any entity owning one or more nuclear power plants are prohibited.
- c. The decommissioning trust agreement must provide that the trustee, investment advisor, or anyone else directing the investments made in the trusts shall adhere to the standards for such investments established by the Public Utility Commission of Texas (e.g., 16 Texas Administration Code § 25.301).
- d. The decommissioning trust agreement must provide that except for ordinary administrative expenses, no disbursements or payments from the trusts shall be made by the trustee unless the trustee has first given the NRC 30 days prior written notice of such disbursement or payment.
The decommissioning trust agreement shall further contain a provision that no disbursements or payments from the trusts shall be made if the trustee receives prior written notice of an objection from the Director, Office of Nuclear Reactor Regulation.
- e. The decommissioning trust agreement must provide that the agreement cannot be modified in any material respect without 30 days prior written notification to the Director, Office of Nuclear Reactor Regulation.
(7) License Transfer Texas Genco, LP shall take all necessary steps to ensure that the decommissioning trust is maintained in accordance with the application for approval of the transfer of the Unit 2 license to Texas Genco, LP, the requirements of the Order approving the transfer, and the related safety evaluation.
(8) License Transfer Texas Genco, LP shall provide the Director, Office of Nuclear Reactor Regulation a copy of any application, at the time it is filed, to transfer (excluding grants of security interests or liens) from CenterPoint Energy, Inc., or its subsidiaries, to a proposed direct or indirect parent, or to any other affiliated company, facilities for the production of electric energy having a depreciated book value exceeding ten percent (10%) of such licensee's consolidated net utility plant, as recorded on Texas Genco, LP's book of accounts.
Amendment No. 80 130
I D. Exemptions The following exemptions are authorized by law and will not endanger life or property or the common defense and security, and certain special circumstances are present. With the granting of these exemptions, the facility will operate, to the extent authorized herein, in conformity with the application, as amended, the provisions of the Act, and the rules and regulations of the Commission.
(1) The facility requires a technical exemption from the requirements of 10 CFR Part 50, Appendix J, Section IlI.D.2(b)(ii). The justification for this exemption is contained in Section 6.2.6 of Supplement 3 to the Safety Evaluation Report. The staffs environmental assessment was published on December 16, 1986 (53 FR 50605). Therefore, pursuant to 10 CFR 50.12(a)(1), 10 CFR 50.12(a)(2)(ii) and (iii), the South Texas Project Unit 2 is hereby granted an exemption from the quoted requirement and instead, is required to perform the overall air lock leak test at pressure Pa prior to establishing containment integrity if air lock maintenance has been performed that could affect the air lock sealing capability.
(2) The facility was previously granted exemption from the criticality monitoring requirements of 10 CFR 70.24 (See Materials License No.
SNM-1 983 dated August 30, 1988 and Section III.E. of the SER dated August 30, 1988). The South Texas Project Unit 2 is hereby exempted from the criticality monitoring provisions of 10 CFR 70.24 as applied to fuel assemblies held under this license.
(3) The facility requires a temporary exemption from the schedular requirements of the decommissioning planning rule, 10 CFR 50.33(k) and 10 CFR 50.75. The justification for this exemption is contained in Section 22.2 of Supplement 6 to the Safety Evaluation Report. The staffs environmental assessment was published on December 16, 1988 (53 FR 50604). Therefore, pursuant to 10 CFR 50.12(a)(1), 50.12(a)(2)(ii) and 50.12(a)(2)(v), the South Texas Project, Unit 2 is hereby granted a temporary exemption from the schedular requirements of 10 CFR 50.33(k) and 10 CFR 50.75 and is required to submit the decommissioning plan for both South Texas Project, Units 1 and 2 on or before July 26, 1990.
E. Fire Protection STPNOC shall implement and maintain in effect all provisions of the approved fire protection program as described in the Final Safety Analysis Report through Amendment No. 62 and the Fire Hazards Analysis Report through Amendment No. 7, and submittals dated April 29, May 7, 8 and 29, June 11, 25, and 26, 1987, and as approved in the SER (NUREG-0781) dated April 1986 and its Supplements, subject to the following provisions:
STPNOC may make changes to the approved fire protection program without prior approval of the Commission, only if those changes would not adversely affect the ability to achieve and maintain safe shutdown in the event of a fire.
Amendment No.80-448 130
Attachment 3 Page l of 2 F. Physical Security STPNOC shall fully implement and maintain in effect all provisions of the physical security, training and qualification, and safeguards contingency plans previously approved by the Commission and all amendments and revisions to such plans made pursuant to the authority under 10 CFR 50.90 and 10 CFR 50.54(p). The plans, which contain Safeguards Information protected under 10 CFR 73.21, are entitled: "South Texas Project Electric Generating Station Physical Security Plan," with revisions/amendments submitted through September 30, 1988; "South Texas Project Electric Generating Station Security Personnel Qualification and Training Plan" with revisions submitted through March 4,1988, and "South Texas Project Electric Generating Station Safeguards Contingency Plan," with revisions/amendments submitted through July 18, 1988.
G. Not Used H. Financial Protection The Owners shall have and maintain financial protection of such type and in such amounts as the Commission shall require in accordance with Section 170 of the Atomic Energy Act of 1954, as amended, to cover public liability claims.
I. Effective date and Expiration This license is effective as of the date of issuance and shall expire at midnight on December 15, 2028.
FOR THE NUCLEAR REGULATORY COMMISSION Original Signed By: James H. Sniezek/for Thomas E. Murley, Director Office of Nuclear Reactor Regulation
Enclosures:
- 1. Appendix A, Technical Specifications (NUREG-1 346)
- 2. Appendix B, Environmental Protection Plan Date of Issuance: March 28, 1989 Amendment No. 4SO, 145 l
NOC-AE-04001753 Application ATTACHMENT 3 NO SIGNIFICANT HAZARDS DETERMINATION
NOC-AE-04001753 Application Attachment 3 Page I of 2 NO SIGNIFICANT HAZARDS DETERMINATION Description of the Change The transfers of the 25.2% ownership interest in South Texas Project (STP), Units 1 and 2 by AEP Texas Central Company (TCC) to Texas Genco, LP (Texas Genco) and the City of San Antonio, Texas, acting by and through the City Public Service Board (CPS), involve minor conforming changes to the operating licenses for the STP units to reflect the fact that TCC will no longer have any ownership interest in STP and no longer hold any NRC licenses. Texas Genco and CPS will continue to be licensed to possess (own) but not operate the units, holding ownership interests of 44% and 40%, respectively. Consistent with the generic determination in 10 CFR 2.1315(a), these administrative license amendments involve no significant hazards consideration.
- 1. The conforming amendments do not involve a significant increase in the probability or consequences of an accident previously evaluated.
The amendments do not involve any change in the design, configuration, or operation of the nuclear plant. All Limiting Conditions for Operation, Limiting Safety System Settings, and Safety Limits specified in the Technical Specifications remain unchanged. Also, the Physical Security Plan and related plans, the Operator Training and Requalification Program, the Quality Assurance Program, and the Emergency Plan are not being materially changed by the proposed license transfers and amendments.
STP Nuclear Operating Company (STPNOC) will continue to be the licensed operator of the units. The technical qualifications of STPNOC to carry out its exclusive responsibilities under the operating licenses, as amended, will remain unchanged. Personnel engaged in operation, maintenance, engineering, assessment, training, and other related services are not changed. The STPNOC officers and executives currently responsible for the overall safe operation of the nuclear plants will continue in that same capacity.
Therefore, the proposed amendments do not involve an increase in the probability or consequences of an accident previously analyzed.
- 2. The conforming amendments do not create the possibility of a new or different kind of accident from any accident previously evaluated.
The amendments do not involve any change in the design, configuration, or operation of the nuclear plant. The current plant design and design bases will remain the same. The current plant safety analyses, therefore, remain complete and accurate in addressing the design basis events and in analyzing plant response and consequences.
NOC-AE-04001753 Application Attachment 3 Page 2 of 2 The Limiting Conditions for Operations, Limiting Safety System Settings, and Safety Limits specified in the Technical Specifications are not affected by the change. As such, the plant conditions for which the design basis accident analyses were performed remain valid.
The amendments do not introduce a new mode of plant operation or new accident precursors, do not involve any physical alterations to plant configurations, or make changes to system set points that could initiate a new or different kind of accident.
Therefore, the proposed amendments do not create the possibility of a new or different kind of accident from any accident previously evaluated.
- 3. The conforming amendments do not involve a significant reduction in a margin of safety.
The amendments do not involve a change in the design, configuration, or operation of the nuclear plants. The change does not affect either the way in which the plant structures, systems, and components perform their safety function, or their design and licensing bases.
Plant safety margins are established through Limiting Conditions for Operation, Limiting Safety System Settings, and Safety Limits specified in the Technical Specifications. Because there is no change to the physical design of the plant, there is no change to any of these margins.
Therefore, the proposed amendments do not involve a significant reduction in a margin of safety.
NOC-AE-04001753 Application ATTACHMENT 4 2003 ANNUAL REPORT (FORM 10-K) OF TEXAS GENCO HOLDINGS, INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) 01 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 or El TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-31449 Texas Genco Holdings, Inc.
(Exact name ofregistrantas specffed In its charter)
Texas 76.0695920 (State or otherjurisdiction of (IRS. Employer incorporation or organization) Identification Number) 1111 Louisiana (713)207-1111 Houston, Texas 77002 (Registrant s telephone number, (Address andzip code of includingarea code) principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered Common Stock, par value S.001 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 0 No 0 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. El Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes 0l No El The aggregate market value of the voting stock held by non-affiliates of the Company was S353,182,653 as of June 30, 2003, using the definition of beneficial ownership contained in Rule 13d-3 promulgated pursuant to the Securities Exchange Act of 1934 and excluding shares held by directors and executive officers. As of February 29, 2004, the Company had 80,000,000 shares of Common Stock outstanding. 0 Portions of the definitive proxy statement relating to the 2004 Annual Meeting of Shareholders of the Company, which will be filed with the Securities and Exchange Commission within 120 days of December 31, 2003, are incorporated by reference in Item 10, Item 11, Item 12, Item 13 and Item 14 of Part III of this Form 10-K.
TABLE OF CONTENTS Page PART I Item 1. Business........................................................................................................................................ I Item 2. Properties......................................................................................................................................
.25 Item 3. Legal Proceedings .................................................................. 25 Item 4. Submission of Matters to a Vote of Security Holders .................................................................. 25 PART II Item 5. Market for Common Stock and Related Stockholder Matters ...................................................... 26 Item 6. Selected Financial Data .................................................................. 26 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .................................................................. 28 Item 7A. Quantitative and Qualitative Disclosures About Market Risk .38 Item 8. Financial Statements and Supplementary Data of the Company .39 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .58 Item 9A. Controls and Procedures .58 PART III Item 10. Directors and Executive Officers .58 Item 11. Executive Compensation .58 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .58 Item 13. Certain Relationships and Related Transactions .................................................................. 58 Item 14. Principal Accountant Fees and Services .................................................................. 58 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K .59 i
CAUTIONARY STATEMENT REGARDING FORWA'ARD-LOOKING INFORMATION From time to time we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are not historical facts. These statements are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied by these statements. You can generally identify our forward-looking statements by the words "anticipate," "believe," "continue," "could," "estimate,"
"expect," "forecast," "goal," "intend," "may," "objective," "plan," "potential," "predict," "projection," "should,"
"will," or other similar words.
We have based our forward-looking statements on our management's beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that assumptions, beliefs, expectations, intentions and projections about future events may and often do vary materially from actual results. Therefore, we cannot assure you that actual results will not differ materially from those expressed or implied by our forward-looking statements.
Some of the factors that could cause actual results to differ from those expressed or implied by our forward-looking statements are described under "Risk Factors" beginning on page 18 in Item I of this report.
You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statements.
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PART I Item 1. Business.
OUR BUSINESS General We are a wholesale electric power generating company that owns 60 generating units at 11 electric power generation facilities located in Texas. We also own a 30.8% interest in the South Texas Project Electric Generating Station (South Texas Project), a nuclear generating station with two 1,250 megawatt (MW) nuclear generating units.
As of December 31, 2003, the aggregate net generating capacity of our portfolio of assets was 14,153 MW, of which 2,988 MW of gas-fired capacity was mothballed. We sell electric generation capacity, energy and ancillary services within the Electric Reliability Council of Texas, Inc. (ERCOT) market. The ERCOT market consists of the majority of the population centers in the State of Texas and facilitates reliable grid operations for approximately 85% of the demand for power in the state.
In June 1999, the Texas legislature enacted legislation (Texas electric restructuring law) which substantially amended the regulatory structure governing electric utilities in Texas in order to encourage retail electric competition. Under the Texas electric restructuring law, we ceased to be subject to traditional cost-based regulation.
Since January 1, 2002, we have been selling generation capacity, energy and ancillary services to wholesale purchasers at prices determined by the market. Accordingly, our historical financial information and operating data, such as demand and fuel data, covering periods prior to 2002 do not reflect what our financial position, results of operations and cash flows would have been had our generation facilities been operated during those periods under the current deregulated ERCOT market.
As a result of requirements under the Texas electric restructuring law and agreements with our parent company, CenterPoint Energy, Inc. (CenterPoint Energy), we were obligated to sell substantially all of our capacity and related ancillary services through 2003 pursuant to capacity auctions. In these auctions, we sell firm entitlements to capacity and ancillary services on a forward basis dispatched within specified operational constraints. In our capacity auctions held through February 2004, we sold entitlements to 85% and 24% of our available capacity for 2004 and 2005, respectively. For more information regarding our auctions, please read "Capacity Auctions and Opportunity Sales" below.
Texas Genco Holdings, Inc. (Texas Genco) is an indirect majority owned subsidiary of CenterPoint Energy. Our portfolio of generation facilities was formerly owned by the unincorporated electric utility division of Reliant Energy, Incorporated (Reliant Energy), the predecessor of CenterPoint Energy Houston Electric, LLC (CenterPoint Houston). CenterPoint Houston is an indirect wholly owned subsidiary of CenterPoint Energy. Reliant Energy conveyed these facilities to us in accordance with a business separation plan adopted in response to the Texas electric restructuring law. For convenience, we describe our business in this report as if we had owned and operated our generation facilities prior to the date they were conveyed to us. On January 6, 2003, CenterPoint Energy distributed approximately 19% of the 80 million outstanding shares of Texas Genco's common stock to CenterPoint Energy's common shareholders. CenterPoint Energy now indirectly owns approximately 81% of the outstanding shares of Texas Genco's common stock. For more information, please read "Background of the Distribution of Texas Genco Shares" below. CenterPoint Energy expects to monetize its 81% interest in Texas Genco in 2004, which could involve the sale of all or a portion of its equity interest in Texas Genco. Pursuant to its plan, CenterPoint Energy has engaged a financial advisor and has solicited indications of interest from a number of potential buyers.
CenterPoint Energy is a registered holding company under the Public Utility Holding Company Act of 1935, as amended (1935 Act). The 1935 Act directs the Securities and Exchange Commission (SEC) to regulate, among other things, transactions among affiliates, sales or acquisitions of assets, issuances of securities, distributions and permitted lines of business. In October 2003, the Federal Energy Regulatory Commission (FERC) granted exempt wholesale generator status to Texas Genco, LP, our wholly owned subsidiary that owns and operates our electric I
generating plants. As a result, we are exempt from substantially all provisions of the 1935 Act as long as we remain an exempt wholesale generator.
Texas Genco was incorporated in Texas in August 2001. Our executive offices are located at 1111 Louisiana, Houston, Texas 77002, and our telephone number is (713) 207-1111. The generating assets of Texas Genco are owned and operated by Texas Genco, LP, its indirect wholly owned subsidiary. In this report, the terms "we," "us" or similar terms mean Texas Genco and its subsidiaries, unless the context indicates otherwise, while references to Texas Genco mean only the parent company.
We make available free of charge on our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the SEC. Additionally, we make available free of charge on our Internet website:
- our Code of Ethics for our Chief Executive Officer and Senior Financial Officers;
- our Ethics and Compliance Code;
- our Corporate Governance Guidelines; and
- the charters of our audit and compensation committees.
Any shareholder who so requests may obtain a printed copy of any of these documents from us. Changes in or waivers of our Code of Ethics for our Chief Executive Officer and Senior Financial Officers and waivers of our Ethics and Compliance Code for directors or executive officers will be posted on our Internet website within five business days and maintained for at least twelve months or reported on Item 10 of our Forms 8-K. Our website address is wvvw.txgenco.com.
The ERCOT Market The ERCOT market consists of the State of Texas, other than a portion of the panhandle, a portion of the eastern part of the state bordering on Louisiana and the area in and around El Paso. The ERCOT market represents approximately 85% of the demand for power in Texas and is one of the nation's largest power markets. The ERCOT market includes an aggregate net generating capacity of approximately 78,000 MW. There are only limited direct current interconnections between the ERCOT market and other power markets in the United States.
The ERCOT market operates under the reliability standards set by the North American Electric Reliability Council. The Public Utility Commission of Texas (Texas Utility Commission) has primary jurisdiction over the ERCOT market to ensure the adequacy and reliability of electricity supply across the state's main interconnected power transmission grid. The ERCOT independent system operator (ERCOT ISO) is responsible for maintaining reliable operations of the bulk electric power supply system in the ERCOT market. Its responsibilities include ensuring that electricity production and delivery are accurately accounted for among the generation resources and wholesale buyers and sellers. Unlike independent systems operators in other regions of the country, the ERCOT market is not a centrally dispatched power pool and the ERCOT ISO does not procure energy on behalf of its members other than to maintain the reliable operations of the transmission system. Members are responsible for contracting sales and purchases of power bilaterally. The ERCOT ISO also serves as agent for procuring ancillary services for those who elect not to provide their own ancillary services.
The amount by which power generating capacity exceeded peak demand (reserve margin) in the ERCOT market has exceeded 30% since 2001, and the Texas Utility Commission and the ERCOT ISO have forecasted the reserve margin for 2004 to continue to exceed 30%. The commencement of commercial operation of new facilities in the ERCOT market will increase the competition within the wholesale power market, which could have a material adverse effect on our business, results of operations, financial condition and cash flows and the market value of our assets. The demand for power in the ERCOT market is seasonal, with higher demand occurring during the warmer months.
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Since January 1, 2002, any wholesale producer of electricity that qualifies as a "power generation company" under the Texas electric restructuring law and that can access the ERCOT electric grid is allowed to sell power in the ERCOT market at unregulated rates. Transmission capacity, which may be limited, is needed to effect power sales. In the ERCOT market, buyers and sellers enter into bilateral wholesale capacity, energy and ancillary services contracts or may participate in the centralized ancillary services market, which the ERCOT ISO administers. Also, companies whose power generation facilities were formerly part of integrated utilities, like us, are required to auction entitlements to 15% of their capacity. For additional information regarding these auctions, please read "Capacity Auctions and Opportunity Sales - State-mandated Auctions" below. Wholesale buyers and sellers may also engage in spot market transactions in the ERCOT market.
The transmission capacity available in the ERCOT market affects power sales. The power transfer from generators to meet demand across a transmission line is limited by the transfer capability of the line. Therefore, power sales or purchases from one location to another may be constrained by the power transfer capability between locations. A transmission path with significant power flow, the loss of which may cause system reliability problems, is identified as a commercially significant constraint. When scheduled power transfers across transmission facility elements exceed the transfer capability of such elements, the transmission facility is constrained and transmission congestion is declared by the ERCOT ISO. Transmission congestion is then resolved through the use of ancillary services and unit specific deployments to reduce the transfer across the constrained facility. With the addition of new loads, generators and transmission facilities and the re-rating of older facilities, the commercially significant constraints and transfer capabilities can change. Under current protocol, the commercially significant constraints and the transfer capabilities along these paths are reassessed every year. The single control area of the ERCOT market for 2004 is organized into five congestion zones. The reserve margins may vary by congestion zone. The ERCOT ISO has also instituted direct assignment of congestion cost to those parties causing the congestion. This has the potential to increase the power generator's exposure to the congestion costs associated with transferring power between zones. The Texas Utility Commission has initiated a rulemaking project that proposes to replace the existing zonal wholesale market design with a nodal market design that is based on locational marginal prices for power. One of the stated purposes of the proposed market restructuring is to reduce local (intra-zonal) transmission congestion costs. The market redesign project is expected to take effect in late 2006 at the earliest. We expect that implementation of any new market design will require modifications to our procedures and systems, and will have a potential impact on our staffing. We do not expect our competitive position in the ERCOT market will be adversely affected by the proposed market restructuring.
Capacity Auctions and Opportunity Sales State-mandatedAuctions As a power generation company that has been unbundled from an integrated electric utility, we are required by the Texas electric restructuring law to sell at auction firm entitlements to 15% of our installed generation capacity on a forward basis for varying terms of up to two years. We refer to the auctions held to satisfy this requirement as "state-mandated auctions." Our obligation to conduct state-mandated auctions will continue until January 1, 2007, unless before that date the Texas Utility Commission determines that loads equal to or exceeding 40% of the electric power consumed in 2000 before the onset of retail competition in Texas by residential and small commercial customers in CenterPoint Houston's service area are being served by retail electric providers not affiliated or formerly affiliated with CenterPoint Energy. Reliant Resources, Inc. (Reliant Resources) is deemed to be an affiliate of CenterPoint Energy for purposes of this test. Reliant Resources is currently not permitted under the Texas electric restructuring law to purchase capacity sold by us in the state-mandated auctions.
The capacity entitlements we are required to offer in the state-mandated auctions are determined by rules adopted by the Texas Utility Commission. Under these rules, we are required to sell entitlements to 15% of our installed generation capacity in blocks of 25 MW each. Texas Utility Commission rules require 50% of the 25 MW blocks we sell in these auctions to consist of one-month allocations, or "strips," 30% to consist of one-year strips, and 20% to consist of two-year strips. Purchasers of our capacity entitlements offered in the state-mandated auctions may resell them to third parties, other than Reliant Resources. We only auction entitlements to capacity dispatched within specified operational constraints to specific zonal delivery points and the entitlements do not convey any right to have power dispatched from a specific generating unit. This enables us to dispatch our commitments in the 3
most cost-effective manner available. This also exposes us to the potential risk that in the event one of our low-cost base-load facilities is shut down, we may be required to satisfy our commitments with the output of higher cost facilities or with replacement power purchased from third parties in the open market. Additionally, like other power generating companies within ERCOT, we are required to purchase power from certain qualifying facilities under the Public Utility Regulatory Policies Act of 1978 at avoided cost.
The types of capacity entitlements we offer in our state-mandated auctions include:
- base-load entitlements, representing our solid fuel, nuclear powered and certain gas-fired generation capacity, that provide energy at a relatively low fixed price and include limited ancillary service capabilities;
- intermediate entitlements, representing various gas-fired generation capacity, that provide energy indexed to natural gas prices and at a specified heat rate and include flexible ancillary service capabilities;
- cyclic entitlements, representing various other gas-fired generation capacity, that provide energy indexed to natural gas prices and at a specified heat rate and include flexible ancillary service capabilities; and
- peaking entitlements, representing various smaller gas-fired generation capacity, that provide energy indexed to natural gas prices and at a specified heat rate and include limited ancillary service capabilities.
Each of these categories of capacity entitlements is generally designed to have operating characteristics similar to the assumed underlying generating units. For example, base-load entitlements can be started once a month, whereas cyclic entitlements can be started up to 20 times a month.
Contractually-mandatedAuctions Through 2003, we were contractually obligated under an agreement with Reliant Resources to auction entitlements to substantially all of our capacity (less operating reserves) available after our state-mandated auctions.
We were permitted to reduce the amount of capacity sold in the contractually-mandated auctions by the amount of operating reserves required to back up our obligations under our capacity auctions. We typically reserve 1,250 MW of our capacity, including 750 MW of base-load capacity, as operating reserves, which can be sold as interruptible power on a system-contingent basis.
Through 2003, Reliant Resources had the contractual right, but not the obligation, to purchase 50% (but not less than 50%) of each type of capacity entitlement we auctioned in the contractually-mandated auctions at the prices established in the auctions. Upon determination of the prices for the capacity entitlements, Reliant Resources was obligated to purchase the capacity it elected to reserve from the auction process at the prices set during the auction for that entitlement. In addition to its reservation of capacity, and whether or not it had reserved capacity in the auction, Reliant Resources was entitled to bid for entitlements in each contractually-mandated auction.
Since Reliant Resources chose not to exercise its option to purchase the shares of Texas Genco's common stock owned by CenterPoint Energy in January 2004, we are no longer obligated to conduct any capacity auctions, other than as required by the Texas Utility Commission's rules. We may continue to sell our capacity in a manner similar to such contractually-mandated auctions as well as seek sales under bilateral contracts for a portion of our capacity in the future. As described below under "- Auction Results," we have made significant forward sales of our 2004 and 2005 capacity pursuant to our auctions.
Auction PricingMethodology Revenues derived from our capacity auctions come from two sources: capacity payments and energy payments.
Capacity payments are based on the final clearing prices, in dollars per kilowatt-month, determined during the auctions. We bill and collect for these capacity payments on a monthly basis just prior to the month of the entitlement. Energy payments consist of a variety of charges related to the fuel and ancillary services scheduled through our auctioned capacity entitlements. Energy payments for base-load products are tied to fixed prices specified in the auction products while energy payments for gas-based products are recovered through heat rates specified for gas auction products times an index based on the Houston Ship Channel Gas price. Additional charges, 4
referred to as "adders," are included in the energy payments to cover additional costs we incur when we are required to operate our facilities at less efficient operating ranges. We bill for these energy payments on a monthly basis in arrears.
Auction Results We sold 91% of our available capacity for 2003 through state-mandated auctions and contractually-mandated auctions. In our capacity auctions held through February 2004, we have sold 85% and 24% of our available capacity for 2004 and 2005, respectively. As a result, we have contracted for approximately SI billion of total revenue with respect to our 2004 capacity and approximately S533 million of total revenue with respect to our 2005 capacity. Our available capacity equals our total net generating capacity less capacity withheld as operating reserves and capacity that is subject to planned outages. Of the 2,988 MW of capacity that we have "mothballed", 2,062 MW were included in our available capacity only for the months of May through September 2003. Reliant Resources purchased 78% of our sold 2003 capacity and, through February 2004, had purchased 79% and 68% of our sold 2004 and 2005 capacity, respectively. We will hold additional auctions to sell our remaining available capacity for 2004 as well as capacity for subsequent years.
In 2003, the market-based prices established in our capacity auctions continued to strengthen. Higher gas prices throughout 2003 positively influenced the prices established in our recent capacity auctions. Generally, higher gas prices increase the capacity prices for our base-load entitlements since natural gas is the marginal fuel for facilities serving the ERCOT market during most hours.
Opportunity Sales In addition to our capacity auctions, from time to time we sell energy on a short-term basis from the generating capacity we use as operating reserves. Any significant unforeseen outage at our base-load or other facilities could adversely impact revenues generated by these sales. We seek to maximize our opportunity sales by seeking to optimize the dispatching of the various facilities in our generating portfolio. For example, we can meet the gas-fired auction products (intermediate, cyclic and peaking) with generation from our lower cost base-load operating reserves when they are available, since entitlements to our auction products convey no right to specific units. Thus, the availability of our base-load capacity has a significant impact on the level of these opportunity sales through the course of the year.
Our Generation Portfolio Overview We own 60 generating units at 11 electric power generation facilities located in Texas. We also own a 30.8%
interest in the South Texas Project, a nuclear generating plant consisting of two 1,250 MW generating units. As of December 31, 2003, the aggregate net generating capacity of our combined portfolio of generation assets was 14,153 MW, which represents over 18% of the total net generating capacity serving the ERCOT market.
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Summary of Our Generation Facilities (As of December 31, 2003)
Net Generating Number Capacity of Generation Facilities (in N1%V)(I) Units Dispatch Type Fuel W. A. Parish ................. 3,653 9 Base-load, Intermediate, Cyclic, Peaking Coal/Gas Limestone ................. 1,602 2 Base-load Lignite South Texas Project ........... 770(2) 2 Base-load Nuclear Cedar Bayou ................. 2,258 3 Intermediate Gas/Oil P. H. Robinson ................. 2,211(3) 4 Intermediate Gas San Jacinto ................. 162 2 Intermediate Gas T. H. Wharton ................. 1,254(4) 18 Intermediate, Cyclic, Peaking Gas/Oil S. R. Bertron ................. 844 6 Cyclic, Peaking Gas/Oil Greens Bayou ................. 760 7 Cyclic, Peaking Gas/Oil Webster ................. 387(4) 2 Cyclic, Peaking Gas Deepwater.......................... 174(4) 1 Cyclic Gas H. 0. Clarke ................. 78 6 Peaking Gas Total .................. f .2 14,153 (1) Net generating capacity equals gross maximum summer generating capability less the electric energy consumed at the facility.
(2) Represents our 30.8% interest in the South Texas Project.
(3) All four units at P.H. Robinson are expected to be mothballed through April 2005.
(4) Webster Unit 3 (374 MW), T.H. Wharton Unit 2 (229 MW) and Deepwater Unit 7 (174 MW) are expected to be mothballed through at least April 2004.
AMothballed Facilities As of December 31, 2003, approximately 2,988 MW of our gas-fired generation capacity was mothballed. We expect that 777 MW of this amount will remain mothballed through April 2004 and the other 2,211 MW will remain mothballed through April 2005. The decision to mothball these units was based on the lack of demand for these types of units in our July and September 2003 capacity auctions combined with high forecasted reserve margins in the ERCOT market.
Base-loadandIntermediate Facilities W.A. Parish. Our W.A. Parish facility is the largest coal and gas-fired power facility in the United States based on total MW of net generating capacity. The facility consists of a coal-fired plant and a gas-fired plant each located near Thompsons, Texas. The coal-fired plant includes four steam generating units for base-load service with an aggregate net generating capacity of 2,462 MW. Two of these units are 646 MW steam units that were placed in commercial service in December 1977 and December 1978, respectively. The other two units are 560 MW and 610 MW steam units that were placed in commercial service in June 1980 and December 1982, respectively.
The gas-fired plant includes five generating units with an aggregate net generating capacity of 1,191 MW. Two of these units are 174 MW steam units that were placed in commercial service in June 1958 and December 1958, respectively. These units were converted for daily cyclic operation and the life of the units was extended in 1990 and 1991. The third unit at this plant is a 278 MW steam unit that was placed in commercial service in March 1961.
These three units provide cyclic capacity. The fourth unit is a 552 MW steam unit for intermediate service that was placed in service in June 1968. This plant also has a 13 MW gas turbine generator unit available for peaking and emergency start-up purposes that was placed in service in July 1967.
Limestone. Our Limestone facility is a lignite-fired base-load facility located approximately 120 miles northwest of Houston. This plant includes two steam generating units with an aggregate net generating capacity of 1,602 MW.
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The first unit is an 836 MW steam unit that was placed in commercial service in December 1985. The second unit is a 766 MW steam unit that was placed in commercial operation in December 1986.
Cedar Bayou. Our Cedar Bayou facility is a gas and oil-fired intermediate facility located east of Baytown, Texas. This plant includes three generating units with an aggregate net generating capacity of 2,258 MW. The units are 750 MW, 748 MW and 760 MW steam units that were placed in service in December 1970, March 1972 and December 1974, respectively.
P.H. Robinson. Our P.H. Robinson facility is a gas-fired intermediate facility located east of San Leon, Texas.
This plant consists of four steam generating units with an aggregate net generating capacity of 2,211 MW. Two of the units are 461 MW units that were placed in service in June 1966 and April 1967, respectively. The third unit is a 552 MW unit that was placed in service in December 1968. The fourth unit is a 737 MW unit that was placed in service in December 1973. This plant is in mothball status through April 2005.
San Jacinto. Our San Jacinto facility is a 162 MW gas-fired intermediate facility located in LaPorte, Texas that produces both steam and power. This plant includes two cogeneration units and associated equipment. Both units began commercial operation in April 1995. Each unit consists of a gas turbine that drives an air-cooled generator with the exhaust from the gas turbine being sent to a heat recovery steam generator.
Cyclic and PeakingFacilities T.H. Wharton. Our T. H. Wharton facility is a gas and oil-fired intermediate, cyclic and peaking facility located in Houston. This plant consists of 18 steam and gas turbine units with an aggregate net generating capacity of 1,254 MW. This facility includes a 229 MW steam unit for cyclic service that was placed in commercial operation in June 1960 and a 13 MW small gas turbine unit for peaking service that was placed in commercial operation in July 1967.
In addition, six 57 MW gas turbines were placed in service at this facility in July 1972. An additional two 57 MW gas turbines and two 104 MW steam turbines were installed in August 1974 and were combined with the six gas turbines already in service to develop two combined cycle units for intermediate service. An additional six 58 MW gas turbines for peaking service were placed in service in November 1975. The 229 MW steam unit is in mothball status through April 2004.
S.R. Bertron. Our S.R. Bertron facility is a gas and oil-fired cyclic and peaking facility located in Deer Park, Texas. This plant consists of four steam electric generating units, one auxiliary boiler for cyclic operations, and two gas turbine generators with an aggregate net generating capacity of 844 MW. The first two units at this plant are 174 MW steam units for cyclic service that commenced commercial operation in April 1956 and March 1958, respectively. Both of these units underwent cyclic conversion and life extension in 1989 and 1990. The third and fourth units at this plant are 230 MW steam units that commenced commercial operation in April 1959 and March 1960, respectively. Both of these units are capable of swinging from an overnight minimum of 40 MW to their rated maximum capacity during peak load hours. This facility also has a 23 MW gas turbine generator and a 13 MW gas turbine generator. Both of these units provide peaking service and commenced commercial operation in July 1967.
Greens Bayou. Our Greens Bayou facility is a gas and oil-fired cyclic and peaking facility located northeast of Houston. This plant consists of one 406 MW steam turbine unit, three 54 MW gas turbine units and three 64 MW gas turbine units and has an aggregate net generating capacity of 760 MW. The 406 MW steam turbine unit provides cyclic service and was placed in commercial service in June 1973. The six gas turbine units provide peaking service and were placed in commercial service in December 1976.
Webster. Our Webster facility is a gas-fired cyclic and peaking facility located southeast of Houston between the towns of Webster and League City. This plant has two units with an aggregate net generating capacity of 387 MW. One of these units is a 374 MW steam unit for cyclic service that was placed in service in May 1965 and the other is a 13 MW gas turbine for peaking service that was placed in commercial operation in July 1967. The 374 MW steam unit is in mothball status through April 2004.
Deepwater. Our Deepwater facility is a gas-fired cyclic facility located in southeastern Harris County, Texas.
This facility consists of a 174 MW steam unit that commenced commercial operation in 1955 and underwent a life extension and conversion for cyclic operation in 1992. This unit is in mothball status through April 2004.
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H.O. Clarke. Our H.O. Clarke facility is a gas-fired peaking facility located in Houston that began operation in 1943. This plant currently consists of six simple-cycle air-cooled gas turbine generating units with an aggregate net generating capacity of 78 MW that were placed in service in June 1968.
South Texas Project General. The South Texas Project is one of the largest nuclear powered generating facilities in the United States based on total MW of net generating capacity. This facility is located near Bay City, Texas and consists of two 1,250 MW generating units, the first of which commenced operation in August 1988 and the second in June 1989. We own a 30.8% interest in the South Texas Project and bear a corresponding 30.8% share of the capital and operating costs associated with the project. The South Texas Project is owned as a tenancy in common among us and three other co-owners. Each co-owner retains its undivided ownership interest in the two nuclear-fueled generating units and the electrical output from those units. We and the other three co-owners organized STP Nuclear Operating Company (STPNOC) to operate and maintain the South Texas Project. STPNOC is managed by a board of directors composed of one director appointed by each of the co-owners, along with the chief executive officer of STPNOC.
The two South Texas Project generating units operate under licenses granted by the Nuclear Regulatory Commission (NRC) that expire in 2027 and 2028. These licenses could potentially be extended for additional twenty-year terms if the project satisfies NRC requirements.
Right of FirstRefusal. In early March 2004, one of the other co-owners of the South Texas Project announced it had entered into an agreement to sell its 25.2% ownership interest for approximately S332.6 million, subject to certain closing adjustments. As a result, under the terms of the ownership arrangements for the South Texas Project, we have the right of first refusal to purchase our proportionate share of the interest being sold on the same terms as the third party purchaser, but we must give notice of our election within ninety days.
Decommissioning Trusts. CenterPoint Houston has been authorized to collect S2.9 million per year from customers using its transmission and distribution services and is obligated to deposit the amount collected into external trusts created to fund our 30.8% share of the decommissioning costs for the South Texas Project. As of December 31, 2003, the fair market value of the investments in the external trusts established to fund our 30.8%
interest was $189 million.
In July 1999, an outside consultant estimated our 30.8% share of the decommissioning costs to be approximately S363 million in 1998 dollars. The consultant's calculation of decommissioning costs for financial planning purposes used the "DECON" methodology, one of the three alternatives acceptable to the NRC, and assumed deactivation of the project's two generating units upon the expiration of their 40-year operating licenses. The DECON methodology involves removal of all radioactive material from the site following permanent shutdown. The facility operator may then have unrestricted use of the site with no further requirement for a license. The consultant's calculation also assumed that the remainder of the plant systems and structures on site, not previously removed in support of license termination, are dismantled and the site restored.
The owners of the South Texas Project must provide a report on the status of decommissioning funding to the NRC every two years. The report compares external trust funding levels to minimum decommissioning amounts calculated in accordance with NRC requirements. We first determine our decommissioning cost estimate by escalating the NRC's estimated decommissioning cost of $105 million per unit, expressed in 1986 dollars, for the effects of inflation between 1986 and the recent year-end and then multiplying by 30.8% to reflect our share of each unit of the South Texas Project. We then use this estimate to determine the minimum required level of funding as of the most recent year-end. The calculation of the NRC minimum funding level reflects that funding of the external trusts occurs over the operating lives of the generating units. Therefore, the minimum funding level is generally less than the estimated decommissioning cost. The last report was submitted to the NRC in March 2003 and showed that, as of December 31, 2002, the aggregate NRC minimum funding level was $70.2 million. While the trusts' funding levels have historically exceeded minimum NRC funding requirements, we cannot assure you that the amounts held in trust will be adequate to cover the actual decommissioning costs of the South Texas Project. These costs may vary because of changes in the assumed date of decommissioning and changes in regulatory requirements, technology and costs of labor, materials and equipment.
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The investment of the funds in the external trusts is managed in accordance with applicable laws and regulations and by a committee composed of our representatives and representatives of CenterPoint Energy. Pursuant to the terms of an agreement between Reliant Energy and Reliant Resources and the applicable NRC regulations, the responsibility for the decommissioning trusts transferred to us at the time of Reliant Energy's corporate restructuring. In the event that funds from the trusts are inadequate to decommission the facilities, CenterPoint Houston will be required to collect through rates or other authorized charges all additional amounts required to fund our obligations relating to the decommissioning of the South Texas Project. Following the completion of the decommissioning, if surplus funds remain in the decommissioning trusts, the excess will be refunded to the rate payers of CenterPoint Houston or its successor.
TechnicalServices and Support Facilities We have a central support facility that we use to support our generation facilities that we refer to as our "EDC facility." This facility includes office space, a maintenance shop, a chemical lab, a warehouse facility and a fleet maintenance garage. Reliant Resources leases a portion of this facility from us.
Under a technical services agreement, Reliant Resources is obligated to provide engineering and technical support services and certain environmental, safety and industrial health services to support the operation and maintenance of our facilities. We have notified Reliant Resources that its obligation to provide these support services will be terminated effective May 31, 2004. Under the agreement, Reliant Resources is also obligated to provide systems, technical, programming and consulting support services and hardware maintenance, excluding plant-specific hardware, necessary to provide generation system planning, dispatch, and settlement and communication with the ERCOT ISO. A project is currently underway to identify manpower requirements, evaluate systems alternatives, define costs and develop time lines for replacement of those services considered necessary under the current overall technical services agreement with Reliant Resources. We paid Reliant Resources approximately S28.4 million for providing these services during 2003. The technical services agreement will terminate upon the sale of CenterPoint Energy's interest in Texas Genco.
Fuel Supplies We rely primarily on natural gas, coal, lignite and uranium to fuel our generation facilities. The fuel mix of our generating portfolio, based on actual fuel usage during 2003, was approximately 52% coal and lignite, 21% natural gas, and 27% nuclear for the year 2003. As of December 31, 2003, the fuel mix of our generating portfolio based on the capacity of our facilities including mothballed capacity was approximately 66% natural gas, 29% coal and lignite and 5% nuclear. Based on our current assumptions regarding the cost and availability of fuel, plant operation schedules, load growth, load management and the impact of environmental regulations, we do not expect the mix of fuel used by our generating portfolio will vary materially during 2004 from 2003. We substantially collect the underlying cost of fuel through energy payments. As a result of new air emissions standards imposed by federal and state law, we anticipate having additional costs for certain environmental equipment in 2004 and subsequent years.
Natural Gas We have long-term natural gas supply contracts with several suppliers. Substantially all of our long-term contracts contain pricing provisions based on fluctuating spot market prices. In 2003, we purchased approximately 50% of our natural gas requirements under these long-term contracts. We purchased the remaining 50% of our natural gas requirements in 2003 on the spot market. Based on current market conditions, we believe we will be able to replace the supplies of natural gas covered under our long-term contracts when they expire with gas purchased on the spot market or under new long-term or short-term contracts. Our natural gas consumption and cost information for 2003 was as follows:
2003 average daily consumption ........................................................ 311 Bbtu(l) 2003 peak daily consumption................................................................................... 942 Bbtu 2003 average cost of natural gas ........................................................ S5.59 per MMBtu(2) 9
(1) Billion British thermal units, or "Bbtu."
(2) Compared to $3.32 per million British thermal units, or "MMBtu," in 2002 and $4.28 per MMBtu in 2001.
We lease gas storage facilities capable of storing 6.3 billion cubic feet of natural gas, of which 4.2 billion cubic feet is working capacity. We use these storage facilities to assist us in:
- managing the volatility of the gas requirements of our generating facilities;
- meeting the gas requirements of our generating facilities during periods of inadequate gas supplies; and
- managing our gas-related costs.
Our natural gas requirements are generally more volatile than our other fuel requirements because we use natural gas to fuel our intermediate, cyclic and peaking facilities and other more economical fuels to fuel our base-load facilities. Since our intermediate and peaking facilities are dispatched to meet the variations of demand for electricity, our gas requirements are highly variable, on both an hour-to-hour and day-to-day basis. Although natural gas supplies have been sufficient in recent years to supply our generating portfolio, available supplies are subject to potential disruption due to weather conditions, transportation constraints and other events. As a result of these factors, supplies of natural gas may become unavailable from time to time or prices may increase rapidly in response to temporary supply constraints or other factors.
Coal andLignite In 2003, we purchased approximately 80% of the fuel requirements for our four coal-fired generating units at our W.A. Parish facility under two fixed-quantity long-term supply contracts scheduled to expire in 2010 and 2011. The price for coal under the first contract was tied to spot market prices in 2003. The price for coal under the second contract was at a level approximately three times greater than the spot market prices for coal as of December 31, 2003. The second contract does not contemplate future prices being tied to spot market prices. The terms of this contract result from the market conditions in effect during the 1970's when the contract was entered into, including shortages of natural gas supplies, increased demand for low sulfur coal as a result of new environmental regulations and uncertainty regarding the future availability of long-term sources of coal supply. We purchase our remaining coal requirements for our W.A. Parish facility under short-term contracts. We have long-term rail transportation contracts with Burlington Northern Santa Fe Railroad and the Union Pacific Railroad Company to transport coal to our W.A. Parish facility. Despite the higher coal prices under these long-term contracts, our fuel costs associated with producing energy from our coal-fired facilities are, based on recent natural gas prices, significantly lower than the fuel costs associated with producing energy from our gas-fired facilities.
We obtain the lignite used to fuel the two generating units of our Limestone facility from a surface mine adjacent to the facility. We own the mining equipment and facilities and a portion of the lignite reserves located at the mine.
Mining operations are conducted by the owner of the remaining lignite reserves. In the past, we have obtained our lignite requirements under a long-term contract on a cost-plus basis. Since July 2002, we have obtained our lignite requirements under an amended long-term contract with the owner/operator at a fixed price determined annually that is expected to result in a cost of generation at the Limestone facility equivalent to the cost of generating with low sulfur Western coal. We expect the lignite reserves will be sufficient to provide all of the lignite requirements of this facility through 2015.
We used a blend of lignite and Wyoming coal to fuel our Limestone facility in 2003 as a component of our oxides of nitrogen (NOx) control strategy. A fuel unloading and handling system was installed at the Limestone facility to accommodate the delivery of Wyoming coal. We expect that we will obtain Wyoming coal through spot and long-term market priced contracts. Our Limestone facility is connected with the Burlington Northern Santa Fe Railroad.
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Nuclear The South Texas Project satisfies its fuel supply requirements by acquiring uranium concentrates, converting uranium concentrates into uranium hexafluoride, enriching uranium hexafluoride, and fabricating nuclear fuel assemblies. We are party to a number of contracts covering a portion of the fuel requirements of the South Texas Project for uranium, conversion services, enrichment services and fuel fabrication. Other than a fuel fabrication agreement that extends for the life of the South Texas Project, these contracts have varying expiration dates, and most are short to medium term (less than seven years). We believe that sufficient capacity for nuclear fuel supplies and processing exists to permit normal operations of the South Texas Project's nuclear powered generating units.
Fuel Pipeline We own a 90-mile fuel pipeline that can transport either fuel oil or natural gas (86 miles oil or gas and 4 miles gas only). As part of our system, we own over six million barrels of oil storage capacity that can supply fuel oil to our Cedar Bayou, Greens Bayou, S.R. Bertron and T.H. Wharton plants. For natural gas supply, our pipeline is connected to six of our generation facilities and is interconnected with several of our suppliers. Our pipeline provides us with added flexibility in managing the fuel supply requirements of our generation facilities.
Joint OperatingAgreement with City of San Antonio We have a joint operating agreement with the City Public Service Board of San Antonio (CPS) to jointly dispatch our portfolio of generating units with CPS' portfolio of 4,823 MW of generating capacity as a joint operating system to meet our combined obligations. The combined system includes approximately 19,000 MW of generating capacity and provides us with added economies of scale and production cost savings. A large portion of the benefit of joint operations is due to San Antonio's significant amount of capacity at its coal-fired generation facilities. We share the fuel cost savings realized under the agreement with the City of San Antonio. We currently share the cost savings benefits equally with CPS. The current agreement with CPS expires in 2009. Both parties are permitted to sell their capacity outside of the joint operating system if it is economically prudent to do so, in which case the parties would lose the agreement's cost savings benefits with respect to those sales. The capacity of CPS' generating facilities covered by the joint operating agreement is not included in the capacity auctions described under "Capacity Auctions and Opportunity Sales" above.
Competition The ERCOT market is highly competitive. We have approximately 80 competitors that include generation companies affiliated with Texas-based utilities, independent power producers, municipal or co-operative generators and wholesale power marketers. These competitors compete with each other and us by buying and selling wholesale power in the ERCOT market, entering into bilateral contracts and/or selling to aggregated retail customers.
As of December 31, 2003, our facilities provided over 18% of the aggregate net generating capacity serving the ERCOT market. Our competition is based primarily on price but we also may compete based on product flexibility.
A number of our competitors are building efficient, combined cycle power plants that are generally not able to provide the operational flexibility, ancillary services and fuel risk mitigation that our large diversified portfolio of generating facilities can provide. In addition, we believe that there may be significant excess generating capacity constructed in the ERCOT market over the next several years. This overbuilding could result in lower prices for wholesale power in the ERCOT market. For more information regarding this trend and other competitive factors in the ERCOT market, please read "The ERCOT Market" above and "Risk Factors - Market Risks" below.
Customers Since January 1, 2002, we have sold power to wholesale purchasers, including retail electric providers, at unregulated rates through our capacity auctions. In addition to retail electric providers, our customers in the ERCOT market include municipal utilities, electric co-operatives, power trading organizations and other power generating companies. We are also a significant provider to the ancillary services market operated by the ERCOT ISO. Sales to subsidiaries of Reliant Resources represented approximately 71% of our total revenues in 2003. We have been II
granted a security interest in accounts receivable and/or securitization notes associated with the accounts receivable of certain subsidiaries of Reliant Resources to secure up to $250 million in purchase obligations.
Insurance General We carry insurance coverage consistent with companies engaged in similar commercial operations with similar properties. Our insurance coverage includes:
- general liability insurance, covering liabilities to third parties for bodily injury and property damage resulting from our operations;
- automobile liability insurance, for all owned, non-owned and hired vehicles, covering liabilities to third parties for bodily injury and property damage; and
- property insurance, subject to replacement cost of insured real and personal property, including coverage for boiler and machinery breakdowns, earthquake and flood damage, subject to certain sublimits.
We also maintain substantial excess liability insurance coverage above the established primary limits for general liability and automobile liability insurance. Limits and deductibles are comparable to those carried by other electric generation companies of similar size. However, our insurance policies are subject to certain limits and deductibles and do not include business interruption coverage. Adequate insurance coverage in the future may be more expensive or may not be available in the future on commercially reasonable terms. Also, the insurance proceeds received for any loss of or any damage to any of our generation facilities may not be sufficient to restore the loss or damage without negative impact on our financial condition, results of operations and cash flows.
Nuclear We and the other owners of the South Texas Project maintain nuclear property and nuclear liability insurance coverage as required by law and periodically review available limits and coverage for additional protection. The owners of the South Texas Project currently maintain $2.75 billion in property damage insurance coverage, which is above the legally required minimum, but is less than the total amount of insurance currently available for such losses.
Under the Price Anderson Act, the maximum liability to the public of owners of nuclear power plants was S10.6 billion as of December 31, 2003. Owners are required under the Price Anderson Act to insure their liability for nuclear incidents and protective evacuations. We and the other owners of the South Texas Project currently maintain the required nuclear liability insurance and participate in the industry retrospective rating plan under which the owners of the South Texas Project are subject to maximum retrospective assessments in the aggregate per incident of up to S100.6 million per reactor. The owners are jointly and severally liable at a rate not to exceed SlO million per incident per year. In addition, the security procedures at this facility have been enhanced to provide additional protection against terrorist attacks.
We cannot assure you that all potential losses or liabilities associated with the South Texas Project will be insurable, or that the amount of insurance will be sufficient to cover them. Any substantial losses not covered by insurance would have a material adverse effect on our financial condition, results of operations and cash flows.
Background of the Distribution of Texas Genco Shares Under the Texas electric restructuring law, transmission and distribution utilities whose generation assets were "unbundled" pursuant to the law, including CenterPoint Houston, are entitled to recover their "stranded costs" associated with those assets. The Texas electric restructuring law defines stranded costs as the positive excess of the regulatory net book value of the utility's unbundled generation assets over the market value of those assets, after taking specified factors into account. The law allows alternate methods for establishing a market value for 12
generation assets, including outright sale, full or partial stock market valuation and asset exchanges. Under Reliant Energy's business separation plan, Reliant Energy proposed that the fair market value of our generating assets would be determined using the partial stock market valuation method. CenterPoint Energy distributed 19% of Texas Genco's outstanding shares of common stock to its shareholders in order to establish a public market value for our shares that will be used in 2004 to calculate how much CenterPoint Houston will be able to recover as stranded costs and to comply with CenterPoint Energy's contractual obligations to Reliant Resources.
Beginning in January 2004, on a schedule established by the Texas Utility Commission, investor-owned utilities in Texas may file to commence true-up proceedings. CenterPoint Houston will make the filing to initiate its final true-up proceeding on March 31, 2004. One of the purposes of the true-up proceeding for CenterPoint Energy will be to quantify the amount of stranded costs associated with our generation assets. In the proceeding, the regulatory net book value of our generating assets will be compared to the market value based on the partial stock valuation method. The resulting difference, if positive, is stranded cost that will be recoverable by CenterPoint Houston either through a transition charge, which is a non-bypassable charge, or through a securitization of such cost. Texas Genco is not entitled to receive any payment or other benefits in connection with CenterPoint Houston's true-up proceeding. In the true-up proceeding, the market value of our assets will be based on the average daily closing price of Texas Genco's common stock on The New York Stock Exchange for the 30 consecutive trading days chosen by the Texas Utility Commission out of the last 120 days immediately preceding the true-up filing, plus a control premium, up to a maximum of 10%, to the extent included in the valuation determination made by the Texas Utility Commission.
REGULATION We are subject to regulation by various federal, state and local governmental agencies, including the regulations described below and under "The ERCOT Market," "Capacity Auctions and Opportunity Sales - State-mandated Auctions" and "Environmental Matters - Regulation" below.
Federal Energy Regulatory Commission In October 2003, the FERC granted exempt wholesale generator status to Texas Genco, LP, our wholly owned subsidiary that owns and operates our electric generating plants. As a result, we are exempt from substantially all provisions of the 1935 Act as long as we remain an exempt wholesale generator.
Nuclear Regulatory Commission We are subject to regulation by the NRC with respect to the operation of the South Texas Project. This regulation involves testing, evaluation and modification of all aspects of plant operation in light of NRC safety and environmental requirements. Continuous demonstrations to the NRC that plant operations meet applicable requirements are also required. The NRC has the ultimate authority to determine whether any nuclear powered generating unit may operate.
We and the other owners of the South Texas Project are required by NRC regulations to estimate from time to time the amounts required to decommission that nuclear generating facility and are required to maintain funds to satisfy that obligation when the plant ultimately is decommissioned. CenterPoint Houston currently collects through its electric rates amounts calculated to provide sufficient funds at the time of decommissioning to discharge these obligations. Funds collected are deposited into nuclear decommissioning trusts. The beneficial ownership of the decommissioning trusts is held by us, as a licensee of the facility. While current funding levels exceed NRC minimum requirements, no assurance can be given that the amounts held in trust will be adequate to cover the actual decommissioning costs of the South Texas Project. Such costs may vary because of changes in the assumed date of decommissioning and changes in regulatory requirements, technology and costs of labor, materials and waste burial.
In the event that funds from the trusts are inadequate to decommission the facilities, CenterPoint Houston will be required to collect through rates or other authorized charges additional amounts required to fund our obligations relating to the decommissioning of the South Texas Project. For additional information regarding the decommissioning trust, please read "Our Generation Portfolio - South Texas Project - Decommissioning Trusts" above.
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ENVIRONMENTAL MATTERS Regulation We are subject to a number of federal, state and local laws and regulations relating to the protection of the environment and the safety and health of company personnel and the public. These requirements relate to a broad range of our activities, including:
- the discharge of pollutants into the air, water and soil;
- the identification, generation, storage, handling, transportation, disposal, record keeping, labeling and reporting of, and the emergency response in connection with, hazardous and toxic materials and wastes, including asbestos, associated with our operations;
- noise emissions from our facilities; and
- safety and health standards, practices and procedures that apply to the workplace and the operation of our facilities.
In order to comply with these requirements, we may need to spend substantial amounts and devote other resources from time to time to:
- construct or acquire new equipment;
- acquire permits and/or marketable allowance or other emission credits for facility operations;
- modify or replace existing and proposed equipment; and
- clean up or decommission waste disposal areas, fuel storage and management facilities, and other locations and facilities, including generation facilities.
If we do not comply with environmental requirements that apply to our operations, regulatory agencies could seek to impose on us civil, administrative and/or criminal liabilities as well as seek to curtail our operations. Under some statutes, private parties could also seek to impose upon us civil fines or liabilities for property damage, personal injury and possibly other costs.
Under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), owners and operators of facilities from which there has been a release or threatened release of hazardous substances, together with those who have transported or arranged for the disposal of those substances, are liable for:
- the costs of responding to that release or threatened release; and
- the restoration of natural resources damaged by any such release.
Air Emissions As part of the 1990 amendments to the Federal Clean Air Act, requirements and schedules for compliance were developed for attainment of health-based standards. In furtherance of the Act's requirements, standards for NOx emissions, a product of the combustion process associated with power generation, have been finalized by the Texas Commission on Environmental Quality ("TCEQ"). These TCEQ standards, as well as provisions of the Texas electric restructuring law, require substantial reductions in NOx emissions from electric generating units. We are currently installing cost-effective controls at our generating plants to comply with these requirements. As of December 31, 2003, we have invested S664 million for NOx emissions controls and are planning to make additional expenditures of S131 million through 2007. Further revisions to these NOx standards may result from the TCEQ's future rules, expected by 2007, implementing more stringent federal eight-hour ozone standards.
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In 1998, the United States became a signatory to the United Nations Framework Convention on Climate Change (Kyoto Protocol). The Kyoto Protocol calls for developed nations to reduce their emissions of greenhouse gases.
Carbon dioxide, which is a major byproduct of the combustion of fossil fuel, is considered to be a greenhouse gas. In 2002, President Bush withdrew the United States' support for the Kyoto Protocol while endorsing voluntary greenhouse gas reduction measures. Congress has also explored a number of other alternatives for regulating domestic greenhouse gas emissions. If the country re-enters and the United States Senate ultimately ratifies the Kyoto Protocol and/or if the United States Congress adopts other measures for the control of greenhouse gases, any resulting limitations on power plant carbon dioxide emissions could have a material adverse impact on all fossil fuel-fired electric generating facilities, including those belonging to us.
In July 2002, the White House sent to the United States Congress a Bill proposing the Clear Skies Act, which is designed to achieve long-term reductions of multiple pollutants produced from fossil fuel-fired power plants. If enacted, the Clear Skies Act would target reductions averaging 70% for sulfur dioxide (SO(2)), NOx and mercury emissions and would create a gradually imposed market-based compliance program that would come into effect initially in 2008 with full compliance required by 2018. Fossil fuel-fired power plants owned by companies such as us would be affected by the adoption of this program, or other legislation currently pending in Congress addressing similar issues. To comply with such programs, we and other regulated entities could pursue a variety of strategies, including the installation of pollution controls, purchase of emission allowances, or the curtailment of operations. To date, Congress has not enacted the Clear Skies Act.
In response to Congressional inaction on the proposed Clear Skies Act, the Environmental Protection Agency (EPA) in December 2003 proposed the Interstate Air Quality Rule, which would require reductions in NOx and SO(2) similar to those found in the Clear Skies Act. However, in contrast to the Clear Skies Act, the Interstate Air Quality Rule affects emissions in 29 states in the eastern U.S., including Texas. As with the Clear Skies Act, emissions are reduced in two phases, and the reduction targets are similar, but are effective in 2010 and 2015 for both NOx and SO(2). EPA has announced an intent to finalize these rules in late 2004 or early 2005.
In December 2003, EPA proposed two alternatives for regulating emissions of mercury from coal-fired power plants in the U.S. A final rulemaking is scheduled to be adopted in December 2004. Under the first option, the EPA would set Maximum Achievable Control Technology (MACT) standards under Section 112 of the Clean Air Act, which would require mercury reductions on a facility-by-facility basis regardless of cost. The MACT standard requires reductions to be achieved by 2008, although it is possible that this compliance date will be delayed. The second option would regulate coal-fired power plants under Section 111 of the Clean Air Act. Under this option, similar mercury reductions would be achieved on a national scale through a cap-and-trade program, allowing reductions to be made at the most economical locations, and not requiring reductions on a facility-by-facility basis.
The MACT standard would require a reduction of about 30% from coal-fired facilities, which will require the installation of control equipment. The cap-and-trade rule would require deeper reductions, but may be more economical because it allows trading of emissions among facilities. The mercury cap-and-trade rule would be accomplished in two phases, in 2010 and 2015, with reduction levels set at approximately 50% and 70%,
respectively. The cost of complying with the final rules is not yet known but is likely to be material.
In addition to mercury control from coal-fired boilers, the MACT rule, if adopted, would require the control of nickel emissions from oil-fired facilities. At this point, the impact of this proposal is uncertain, but is not expected to significantly affect our operations.
The EPA has also issued MACT standards for sources other than boilers used for power generation. The MACT rule for combustion turbines was issued in August 2003 and there is no impact on our existing facilities. The MACT rulemaking for engines and industrial boilers was issued in February 2004. These rules are not expected to have a significant impact on Texas Genco's operations.
Water On February 16, 2004, the EPA signed final rules under Section 316(b) of the Clean W'ater Act relating to the design and operation of existing cooling water intake structures. The requirements to achieve compliance with this 15
rule are subject to various factors, including the results of anticipated litigation, but we currently do not expect any capital expenditures required for compliance to be material.
The EPA and State of Texas periodically modify water quality standards and, where necessary, initiate total maximum daily load allocations for water bodies not meeting those standards. Such actions could cause our facilities to incur significant costs to comply with revised discharge permit limitations.
Nuclear Waste Under the U.S. Nuclear Waste Policy Act of 1982, the federal government was to create a federal repository for spent nuclear fuel produced by nuclear plants like the South Texas Project. Also pursuant to that legislation a special assessment has been imposed on those nuclear plants to pay for the facility. Consistent with the Act, owners of nuclear facilities, including us and the other owners of the South Texas Project, entered into contracts setting out the obligations of the owners and U.S. Department of Energy (DOE). Since 1998, DOE has been in default on its obligations to begin moving spent nuclear fuel from reactors to the federal repository (which still is not completed).
On January 28, 2004, we and the other owners of the South Texas Project, along with owners of other nuclear plants, filed a breach of contract suit against DOE in order to protect against the running of a statute of limitations.
Asbestos As a result of their age, many of our facilities contain significant amounts of asbestos insulation, other asbestos-containing materials and lead-based paint. Existing state and federal rules require the proper management and disposal of these potentially toxic materials. We have developed a management plan that includes proper maintenance of existing non-friable asbestos installations, and removal and abatement of asbestos containing materials where necessary because of maintenance, repairs, replacement or damage to the asbestos itself. We have planned for the proper management, abatement and disposal of asbestos and lead-based paint at our facilities.
Our facilities are the subject of a number of lawsuits filed by a large number of individuals who claim injury due to exposure to asbestos while working at sites along the Texas Gulf Coast. Most of these claimants have been third party workers who participated in construction of various industrial facilities, including power plants, and some of the claimants have worked at locations owned by us. We anticipate that additional claims like those received may be asserted in the future, and we intend to continue our practice of vigorously contesting claims that we do not consider to have merit.
EMPLOYEES As of December 31, 2003, we employed 1,511 people. Of these employees, 1,030 were covered by a collective bargaining agreement with the International Brotherhood of Electrical Workers Local 66 that expired in September 2003. Our bargaining unit employees have continued to work without interruption and we have not had any work interruptions since 1976. We continue to have a good relationship with the bargaining unit and we are actively negotiating to obtain a new agreement in 2004.
EXECUTIVE OFFICERS (As of March 1, 2004)
Name AsPsiion David M. McClanahan ............................. 54 Chairman and Director David G. Tees ............................. 59 President, Chief Executive Officer and Director Scott E. Rozzell ............................. 54 Executive Vice President, General Counsel, Corporate Secretary and Director Gary L. Whitlock ............................. 54 Executive Vice President, Chief Financial Officer and Director James S. Brian ............................. 56 Senior Vice President and Chief Accounting Officer Joseph B. McGoldrick ............................. 50 Corporate Vice President, Strategic Planning 16
David Al. McClanahan is the Chairman of our board of directors. Mr. McClanahan has also served on the board of directors and as the President and Chief Executive Officer of CenterPoint Energy since September 2002. He served as the Vice Chairman of Reliant Energy from October 2000 to September 2002 and as President and Chief Operating Officer of Reliant Energy's Delivery Group since 1999. He also served as the President and Chief Operating Officer of Reliant Energy HL&P from 1997 to 1999. He has served in various other executive capacities with CenterPoint Energy since 1986. He previously served as Chairman of the Board of Directors of ERCOT and Chairman of the Board of the University of St. Thomas. He currently serves on the boards of the Edison Electric Institute and the American Gas Association.
David G. Tees is our President and Chief Executive Officer and a member of our board of directors. He served as Senior Vice President, Generation Operations of Reliant Energy from 1998 through August 2002. He also served as Vice President of Energy Production of Reliant Energy HL&P from 1986 through 1998. Mr. Tees has also served on the executive committee of the Edison Electric Institute Energy Supply Subcommittee and presently represents CenterPoint Energy as a Research Advisory Committee Member of the Electric Power Research Institute and is the Chairman of the Board of the STP Nuclear Operating Company.
Scott E. Rozzell is our Executive Vice President, General Counsel and Corporate Secretary and a member of our board of directors. Mr. Rozzell has also served as the Executive Vice President, General Counsel and Corporate Secretary of CenterPoint Energy since September 2002. He served as Executive Vice President and General Counsel of the Delivery Group of Reliant Energy from March 2001 to September 2002. Prior to joining Reliant Energy, Mr.
Rozzell was a senior partner in the law firm of Baker Botts L.L.P.
Gary L. Whitlock is our Executive Vice President and Chief Financial Officer and a member of our board of directors. Mr. Whitlock has also served as the Executive Vice President and Chief Financial Officer of CenterPoint Energy since September 2002. He served as Executive Vice President and Chief Financial Officer of the Delivery Group of Reliant Energy from July 2001 to September 2002. Mr. Whitlock served as the Vice President, Finance and Chief Financial Officer of Dow AgroSciences, a subsidiary of The Dow Chemical Company from 1998 to 2001.
James S. Brian is our Senior Vice President and Chief Accounting Officer. Mr. Brian has also served as the Senior Vice President and Chief Accounting Officer of CenterPoint Energy since August 2002. He served as Senior Vice President, Finance and Administration of the Delivery Group of Reliant Energy from 1999 to August 2002, and as Vice President and Chief Financial Officer of Reliant Energy HL&P from 1997 to 1999. He has served in various executive capacities with Reliant Energy since 1983.
Joseph B. McGoldrick is our Corporate Vice President, Strategic Planning. Mr. McGoldrick has also served as Corporate Vice President, Strategic Planning of CenterPoint Energy since September 2002. He served as Corporate Vice President, Strategic Planning of the Delivery Group of Reliant Energy from November 2001 to August 2002.
He served as Senior Vice President, Finance & Administration for Reliant Energy Retail from 2000 to 2001. He has served in various executive capacities with Reliant Energy since 1993.
RISK FACTORS Market Risks Our revenues and results of operationsare impacted by market risks that are beyond our control We sell electric generation capacity, energy and ancillary services in the ERCOT market. Under the Texas electric restructuring law, we and other power generators in Texas are not subject to traditional cost-based regulation and therefore may sell electric generation capacity, energy and ancillary services to wholesale purchasers at prices determined by the market. As a result, we are not guaranteed any rate of return on our capital investments through mandated rates, and our revenues and results of operations depend, in large part, upon prevailing market prices for electricity in the ERCOT market. Market prices for electricity, generation capacity, energy and ancillary services may fluctuate substantially. Our gross margins are primarily derived from the sale of capacity entitlements associated with our large, solid fuel base-load generating units, including our Limestone and W. A. Parish facilities and our interest in the South Texas Project. The gross margins generated from payments associated with the capacity of these units are directly impacted by natural gas prices. Since the fuel costs for our base-load units are largely 17
fixed under long-term contracts, they are generally not subject to significant daily and monthly fluctuations. Because natural gas is the marginal fuel for facilities serving the ERCOT market during most hours, gas prices have a significant influence on the price of electric power. As a result, the price customers are willing to pay for entitlements to our solid fuel-fired base-load capacity generally rises and falls with natural gas prices.
Market prices in the ERCOT market may also fluctuate substantially due to other factors. Such fluctuations may occur over relatively short periods of time. Volatility in market prices may result from:
- oversupply or undersupply of generation capacity;
- power transmission or fuel transportation constraints or inefficiencies;
- weather conditions;
- seasonality;
- availability and market prices for natural gas, crude oil and refined products, coal, lignite, enriched uranium and uranium fuels;
- changes in electricity usage;
- additional supplies of electricity from existing competitors or new market entrants as a result of the development of new generation facilities or additional transmission capacity;
- illiquidity in the ERCOT market;
- availability of competitively priced alternative energy sources;
- natural disasters, wars, embargoes, terrorist attacks and other catastrophic events; and
- federal and state energy and environmental regulation and legislation.
There is currently a surplus of generating capacity in the ERCOT market and we expect the market for wholesalepower to be highly competitive.
The reserve margin in the ERCOT market has exceeded 30% since 2001, and the Texas Utility Commission and the ERCOT ISO have forecasted the reserve margin for 2004 to continue to exceed 30%. The commencement of commercial operation of new facilities in the ERCOT market has increased and will continue to increase the competitiveness of the wholesale power market, which could have a material adverse effect on our business, results of operations, financial condition and cash flows and the market value of our assets.
Our competitors include generation companies affiliated with Texas-based utilities, independent power producers, municipal and co-operative generators and wholesale power marketers. The unbundling of vertically integrated utilities into separate generation, transmission and distribution and retail businesses pursuant to the Texas electric restructuring law could result in a significant number of additional competitors participating in the ERCOT market. Some of our competitors may have greater financial resources, lower cost structures, more effective risk management policies and procedures, greater ability to incur losses, greater potential for profitability from ancillary services, or greater flexibility in the timing of their sale of generating capacity and ancillary services than we do.
We are subject to operationaland market risks associatedwaith our capacito auctions.
We have sold entitlements to a significant portion of our available 2004 and 2005 generating capacity in our capacity auctions held to date. Although our obligation to conduct contractually-mandated auctions terminated in January 2004, we currently remain obligated to sell 15% of our installed generation capacity and related ancillary services pursuant to state-mandated auctions and we expect to conduct future capacity auctions with respect to all or a part of our remaining capacity from time to time. In these auctions, we sell firm entitlements on a forward basis to 18
capacity and ancillary services dispatched within specified operational constraints. Although we have reserved a portion of our aggregate net generation capacity from our capacity auctions for planned or forced outages at our facilities, unanticipated plant outages or other problems with our generation facilities could result in our firm capacity and ancillary services commitments exceeding our available generation capacity. As a result, an unexpected outage at one of our lower cost facilities could require us to run one of our higher cost plants or obtain replacement power from third parties in the open market in order to satisfy our obligations even though the energy payments for the dispatched power are based on the cost of our lower-cost facilities.
Operating Risks The operation of our power generationfacilities involves risks that could adversely affect our revenues, costs, results of operationsand cash flo's.
General. We are subject to various risks associated with operating our power generation facilities, any of which could adversely affect our revenues, costs, results of operations, financial condition and cash flows. These risks include:
a operating performance below expected levels of output or efficiency;
- breakdown or failure of equipment or processes;
- disruptions in the transmission of electricity;
- shortages of equipment, material or labor;
- labor disputes;
- fuel supply interruptions;
- limitations that may be imposed by regulatory requirements, including, among others, environmental standards;
- violations of permit limitations;
- operator error, and
- catastrophic events such as fires, hurricanes, explosions, floods, terrorist attacks or other similar occurrences.
A significant portion of our facilities was constructed many years ago. Older generation equipment, even if maintained in accordance with good engineering practices, may require significant capital expenditures to keep it operating at high efficiency and to meet regulatory requirements. This equipment is also likely to require periodic upgrading and improvement. Any unexpected failure to produce power, including failure caused by breakdown or forced outage, could result in reduced earnings.
The cost of repairing damage to our facilities due to storms, natural disasters, wars, terrorist acts and other catastrophic events may adversely impact our results of operations, financial condition and cash flows. The occurrence or risk of occurrence of future terrorist activity may impact our results of operations and financial condition in unpredictable ways. These actions could also result in adverse changes in the insurance markets and disruptions of power and fuel markets. In addition, our power generation facilities and fuel supply could be directly or indirectly harmed by future terrorist activity. The occurrence or risk of occurrence of future terrorist attacks or related acts of war could also adversely affect the United States economy. A lower level of economic activity could result in a decline in energy consumption, which could adversely affect our revenues and margins and limit our future growth prospects. Also, these risks could cause instability in the financial markets and adversely affect our ability to access capital.
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We employ experienced personnel to maintain and operate our facilities and carry insurance to mitigate the effects of some of the operating risks described above. Our insurance policies, however, are subject to certain limits and deductibles and do not include business interruption coverage. Should one or more of the events described above occur, revenues from our operations may be significantly reduced or our costs of operations may significantly increase.
In December 2003, one of the three auxiliary standby diesel generators for Unit 2 at the South Texas Project failed during a routine test. The NRC allowed continued operation of Unit 2 while repairs to the generator were made. Repairs are expected to be completed before the end of a scheduled refueling outage on the unit in the spring of 2004. Should Unit 2 experience an unplanned shutdown prior to its scheduled outage, there is a risk that the NRC would not permit restarting the unit until the diesel generator was fully repaired. Our share of the ultimate cost of repairs to the diesel generator is estimated to be approximately $5 million and is expected to be substantially covered by insurance.
Mf e rely on power transmissionfacilities that we do not own or control and are subject to transmission constraintswithin the ERCOT market. If thesefacilitiesfailto provide us with adequatetransmissioncapacity, we may not be able to deliver wholesale electricpower to our customers and wve may incur additionalcosts.
We depend on transmission and distribution facilities owned and operated by our affiliate, CenterPoint Houston, and on transmission and distribution systems owned by others to deliver the wholesale electric power we sell from our power generation facilities to our customers, who in turn deliver power to the end users. If transmission is disrupted, or if transmission capacity infrastructure is inadequate, our ability to sell and deliver wholesale electric energy may be adversely impacted.
The single control area of the ERCOT market for 2004 is organized into five congestion zones, referred to as the North, Northeast, South, West and Houston zones. These congestion zones are determined by physical constraints on the ERCOT transmission system that make it difficult or impossible at times to move power from a zone on one side of the constraint to the zone on the other side of the constraint. All but two of our facilities are located in the Houston congestion zone. Our Limestone facility is located in the North congestion zone and the South Texas Project is located in the South congestion zone. We sell a portion of the entitlements offered in our state-mandated auctions to customers located in congestion zones other than the Houston zone. Transmission congestion between these zones could impair our ability to schedule power for transmission across zonal boundaries, which are defined by the ERCOT ISO, thereby inhibiting our efforts to match our facility scheduled outputs with our customer scheduled requirements.
The ERCOT ISO has instituted rules that directly assign congestion costs to the parties causing the congestion.
Therefore, power generators participating in the ERCOT market could be liable for the congestion costs associated with transferring power between zones. We schedule our anticipated requirements based on our own forecasted needs, which rely in part on demand forecasts made by our customers. These forecasts may prove to be inaccurate.
We could be deemed responsible for congestion costs if we schedule delivery of power between congestion zones during times when the ERCOT ISO expects congestion to occur between the zones. If we are liable for congestion costs, our financial results could be adversely affected. For more information about the ERCOT market, please read "Our Business -The ERCOT Market" above.
Our results of operations,financial condition and cash flows could be adversely impacted by a disruption of ourfuel supplies.
We rely primarily on natural gas, coal, lignite and uranium to fuel our generation facilities. We purchase our fuel from a number of different suppliers under long-term contracts and on the spot market. We sell firm entitlements to capacity and ancillary services. Therefore, any disruption in the delivery of fuel could prevent us from operating our facilities to meet our auction commitments, which could adversely affect our results of operations, financial condition and cash flows.
Delivery of natural gas to each of our natural gas-fired facilities typically depends on the natural gas pipelines or distributors for that location. As a result, we are subject to the risk that a natural gas pipeline or distributor may 20
suffer disruptions or curtailments in our ability to deliver natural gas to it or that the amounts of natural gas we request are curtailed. These disruptions or curtailments could adversely affect our ability to operate our natural gas-fired generating facilities. We lease gas storage facilities capable of storing approximately 6.3 billion cubic feet of natural gas, of which 4.2 billion cubic feet is working capacity.
We purchase coal from a limited number of suppliers. Generally, we seek to maintain average coal reserves sufficient to operate our coal-fired facilities for 30 days. We also have long-term rail transportation contracts with two rail transportation companies to transport coal to our coal-fired facilities. Any extended disruption in our coal supply, including those caused by transportation disruptions, adverse weather conditions, labor relations or environmental regulations affecting our coal suppliers, could adversely affect our ability to operate our coal-fired facilities. We are also exposed to the risk that suppliers that have agreed to provide us with fuel could breach their obligations. Should these suppliers fail to perform, we may be forced to enter into alternative arrangements at then-current market prices. As a result, our results of operations, financial condition and cash flows could be adversely affected.
To date, we have sold a substantialportion of our auctioned capacity entitlements to subsidiariesof Reliant Resources. Accordingly, our results of operations,financial condition and cash flows could be adversely affected ifReliant Resources ceases to be a major customer orfails to meet its obligations.
By participating in our contractually-mandated auctions, subsidiaries of Reliant Resources have purchased entitlements to 79% of our sold 2004 capacity and 68% of our sold 2005 capacity. Reliant Resources has made these purchases either through the exercise of its contractual rights to purchase 50% of the entitlements we auctioned in our prior contractually-mandated auctions or through the submission of bids. In the event Reliant Resources ceases to be a major customer or fails to meet its obligations to us, our results of operations, financial condition and cash flows could be adversely affected. As of December 31, 2003, Reliant Resources' securities ratings are below investment grade. We have been granted a security interest in accounts receivable and/or securitization notes associated with the accounts receivable of certain subsidiaries of Reliant Resources to secure up to S250 million in purchase obligations.
We may incur substantialcosts and liabilitiesas a result of our ownership ofnuclearfacilities.
We own a 30.8% interest in the South Texas Project, a nuclear powered generation facility. As a result, we are subject to the risks associated with the ownership and operation of nuclear facilities. These risks include:
- liabilities associated with the potential harmful effects on the environment and human health resulting from the operation of nuclear facilities and the storage, handling and disposal of radioactive materials;
- limitations on the amounts and types of insurance commercially available to cover losses that might arise in connection with nuclear operations; and
- uncertainties with respect to the technological and financial aspects of decommissioning nuclear plants at the end of their licensed lives.
The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generation facilities. In the event of non-compliance, the NRC has the authority to impose fines, shut down a unit, or both, depending upon our assessment of the severity of the situation, until compliance is achieved. Revised safety requirements promulgated by the NRC could necessitate substantial capital expenditures at nuclear plants. In addition, although we have no reason to anticipate a serious nuclear incident at the South Texas Project, if an incident were to occur, it could have a material adverse effect on our results of operations, financial condition and cash flows.
Other Risks Our historicalfinancial results covering periods prior to 2002 represent our results as part of an integrated utility operating in a regulated market and are not representative of our results as a separate company operating in thte deregulated ERCOT mark-et. Consequently, our future financial condition and results of 21
operationsare likely to vary materiallyfrom thefinancialcondition and results of operationspresented in fihe historicalfinancialinformation included herein coveringperiodspriorto 2002.
We have limited experience operating as a stand-alone wholesale electric power generation company in a deregulated market. Our generation facilities were formerly owned by Reliant Energy, which conveyed these facilities to us in accordance with a business separation plan adopted in response to the Texas electric restructuring law.
The historical financial information covering periods prior to 2002 does not reflect what our financial position, results of operations and cash flows would have been had our generation facilities been operated under the current deregulated ERCOT market. Although our generation facilities had a significant operating history at the time they were conveyed to us, the historical financial information relating to the operation of these facilities during periods prior to 2002 reflects the sale of the power generated by the facilities as part of an integrated utility at regulated rates. We currently sell the power generated by these facilities at market-based prices, and our revenues currently depend, in large part, upon prevailing market prices for electricity in the ERCOT market. To date, our capacity auctions have been consummated at market-based prices that have resulted in returns substantially below the historical regulated return on our facilities.
The historical financial information we have included herein also does not reflect what our financial position, results of operations and cash flows would have been had we been a separate entity during the periods presented.
Our historical costs and expenses included in our financial statements reflect charges from Reliant Energy for centralized corporate services and operating infrastructure costs as well as allocated costs of capital. These allocations have been determined based on what we and Reliant Energy considered to be reasonable reflections of the utilization of services provided to us or for the benefits received by us. We may experience significant changes in our cost structure, capitalization and operations as a result of our separation from Reliant Energy, including increased costs associated with reduced economies of scale and with being a publicly traded company.
We may not have access to sufficient capitalin the amounts and at the times needed tofinance our business.
To date, our capital has been provided by internally generated cash flows and borrowings from the CenterPoint Energy money pool. As a result of our certification by the FERC as an "exempt wholesale generator" under the 1935 Act, we can no longer participate in this money pool. CenterPoint Energy has established a second money pool in which Texas Genco and certain other unregulated subsidiaries of CenterPoint Energy can participate. In December 2003, we entered into a S75 million revolving credit facility. It is anticipated that we will meet our cash needs with a combination of funds from operations and borrowings under our revolving credit facility. Except in an emergency situation (in which CenterPoint Energy could provide funding pursuant to applicable SEC rules), CenterPoint Energy would be required to obtain approval from the SEC to issue and sell securities for purposes of funding our operations or for CenterPoint Energy to guarantee our securities. There is no assurance that CenterPoint Energy will have sufficient funds to meet our cash needs.
CenterPoint Energy's S2.3 billion bank facility limits our incurrence of indebtedness for borrowed money to an aggregate principal amount not to exceed S250 million outstanding at any time and requires that proceeds from the sale of any material portion of our assets, proportionate to CenterPoint Energy's ownership interest in us and subject to certain other requirements, be used to prepay indebtedness under such credit facility. Our new credit facility also limits our incurrence of additional secured indebtedness for borrowed money to a maximum of S175 million aggregate principal amount. Although we are not contractually bound by the limitations in CenterPoint Energy's bank facility, it is expected that CenterPoint Energy would likely cause its representatives on our board of directors to direct our business so as not to breach the terms of its facility.
We can give no assurances that our current and future capital structure, operating performance, financial condition and cash flows will permit us to access the capital markets or to obtain other financing as needed to meet our working capital requirements and projected future capital expenditures on favorable terms. The amount of any debt issuance by us is expected to be affected by the market's perception of our creditworthiness, market conditions and factors affecting our industry. Our projected future capital expenditures are substantial. Our ability to secure third party credit lines or other debt financing may be adversely impacted by the factors described in this section, including the nature of our business, which may lead to volatility in our financial results and cash flows. Please read 22
"Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Future Sources and Uses of Cash," in Item 7 of this report.
We are an 81% owned subsidiary of CenterPoint Energy. As a result of this relationship, the financial condition of CenterPoint Energy could affect our access to capital, our credit standing and our financial condition.
Our operations are subject to extensive regulation, including environmental regulation. If uve fail to comply with applicable regulations or obtain or maintain any necessary governmentalpermit or approval, ve may be subject to civil, administrative and/or criminalpenalties that could adversely impact our results of operations, financialcondition and cashflows.
Our operations are subject to complex and stringent energy, environmental and other governmental laws and regulations. The acquisition, ownership and operation of power generation facilities require numerous permits, approvals and certificates from federal, state and local governmental agencies. These facilities are subject to regulation by the Texas Utility Commission regarding non-rate matters. Existing regulations may be revised or reinterpreted, new laws and regulations may be adopted or become applicable to us or any of our generation facilities or future changes in laws and regulations may have a detrimental effect on our business.
Operation of the South Texas Project is subject to regulation by the NRC. This regulation involves testing, evaluation and modification of all aspects of plant operation in light of NRC safety and environmental requirements.
Continuous demonstrations to the NRC that plant operations meet applicable requirements are also required. The NRC has the ultimate authority to determine whether any nuclear powered generating unit may operate.
Water for certain of our facilities is obtained from public water authorities. New or revised interpretations of existing agreements by those authorities or changes in price or availability of water may have a detrimental effect on our business.
Our business is subject to extensive environmental regulation by federal, state and local authorities. We are required to comply with numerous environmental laws and regulations and to obtain numerous governmental permits in operating our facilities. We may incur significant additional costs to comply with these requirements. If we fail to comply with these requirements or with any other regulatory requirements that apply to our operations, we could be subject to administrative, civil and/or criminal liability and fines, and regulatory agencies could take other actions seeking to curtail our operations. These liabilities or actions could adversely impact our results of operations, financial condition and cash flows.
Existing environmental regulations could be revised or reinterpreted, new laws and regulations could be adopted or become applicable to us or our facilities, and future changes in environmental laws and regulations could occur, including potential regulatory and enforcement developments related to air emissions. If any of these events occurs, our business, results of operations, financial condition and cash flows could be adversely affected.
We may not be able to obtain or maintain from time to time all required environmental regulatory approvals. If there is a delay in obtaining any required environmental regulatory approvals or if we fail to obtain and comply with them, we may not be able to operate our facilities or we may be required to incur additional costs. We are generally responsible for all on-site liabilities associated with the environmental condition of our power generation facilities, regardless of when the liabilities arose and whether the liabilities are known or unknown. These liabilities may be substantial.
Our insurancecoverage may not be sufficient. Insufficient insurance coverage and increasedinsurance costs could adversely impact our results ofoperations financialcondition and cash flows.
We have insurance covering certain of our facilities, including property damage insurance, commercial general liability insurance, boiler and machinery coverage and available replacement capacity in amounts that we consider appropriate. However, our insurance policies are subject to certain limits and deductibles and do not include business interruption coverage. We cannot assure you that insurance coverage will be available in the future at current costs or on commercially reasonable terms or that the insurance proceeds received for any loss of or any 23
damage to any of our generation facilities will be sufficient to restore the loss or damage without negative impact on our results of operations, financial condition and cash flows.
We and the other owners of the South Texas Project maintain nuclear property and nuclear liability insurance coverage as required by law and periodically review available limits and coverage for additional protection. The owners of the South Texas Project currently maintain $2.75 billion in property damage insurance coverage, which is above the legally required minimum, but is less than the total amount of insurance currently available for such losses. Under the federal Price Anderson Act, the maximum liability to the public of owners of nuclear power plants was $10.6 billion as of December 31, 2003. Owners are required under the Price Anderson Act to insure their liability for nuclear incidents and protective evacuations. We and the other owners of the South Texas Project currently maintain the required nuclear liability insurance and participate in the industry retrospective rating plan. In addition, the security procedures at this facility have recently been enhanced to provide additional protection against terrorist attacks. All potential losses or liabilities associated with the South Texas Project may not be insurable, and the amount of insurance may not be sufficient to cover them.
Our revenues and results of operationsare seasonal The demand for power in the ERCOT market is seasonal, with higher demand occurring during the warmer months. Accordingly, our customers are generally willing to pay higher prices for entitlements to our capacity during warmer months. As a result, our revenues and results of operations are subject to seasonality, with revenues being higher during the warmer months.
Risks Related to Our Relationships With CenterPoint Energy CenterPointEnergy's plan to monetize its interest in us may adversely impact our operations and financial condition, and the tradingprice of Texas Genco 's common stock.
CenterPoint Energy expects to monetize its 81% interest in Texas Genco in 2004 and has engaged a financial advisor to assist them in that pursuit. CenterPoint Energy plans to fully evaluate this option before seeking another alternative. CenterPoint Energy and Reliant Resources currently provide a variety of services to us pursuant to the agreements described under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Related Party Transactions - Our Relationships with CenterPoint Energy" and "- Technical Services Agreement with Reliant Resources" in Item 7 of this report. These services agreements will terminate upon the sale of CenterPoint Energy's interest in Texas Genco. In such an event, we may be required to replace the services currently provided under arrangements with less favorable terms. Also, under the terms of our $75 million 365-day revolving credit facility, if CenterPoint Energy ceases to own, directly or indirectly, at least a 50% voting and economic interest in our wholly owned subsidiary Texas Genco, LP, an event of default will occur and any borrowings thereunder may become immediately due and payable. In addition, depending on the nature of any monetization transaction, the trading price of Texas Genco's common stock could be adversely affected.
itWe will be controlled by CenterPointEnergy as long as it owns a majority of Texas Genco 's common stock, and our minority shareholders will be unable to affect the outcome of shareholder voting during that time.
As a result of the January 6, 2003 distribution, CenterPoint Energy indirectly owns approximately 81% of Texas Genco's outstanding common stock. As long as CenterPoint Energy owns a majority of our outstanding common stock, it will continue to be able to elect our entire board of directors, and our public shareholders, by themselves, will not be able to affect the outcome of any shareholder vote. In addition, CenterPoint Energy has stated that it is pursuing strategic alternatives for its ownership interest in us, including a possible sale, which could result in a third party becoming our majority shareholder. Our majority shareholder, subject to any fiduciary duty owed to our minority shareholders under Texas law, will be able to control all matters affecting us. In addition, our majority shareholder may enter into credit agreements, indentures or other contracts that limit the activities of its subsidiaries.
While we would not likely be contractually bound by these limitations, our majority shareholder would likely cause its representatives on our board to direct our business so as not to breach any of these agreements.
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We may have potential business conflicts of interest with CenterPointEnergy with respect to our past and ongoing relationships, and because of CenterPointEnergy's controllingownership interest, w'e may not be able to resolve these conflicts on termspossible in arm 's length transactions.
Conflicts of interest may arise between CenterPoint Energy and us in a number of areas relating to our past and ongoing relationships, including proceedings, actions and decisions of legislative bodies and administrative agencies, and our dividend policy. The agreements we have entered into with CenterPoint Energy may be amended in the future upon agreement of the parties. While we are controlled by CenterPoint Energy, CenterPoint Energy may be able to require us to amend these agreements. We may not be able to resolve any potential conflicts with CenterPoint Energy, and even if we do, the resolution may be less favorable than if we were dealing with an unaffiliated party.
Item 2. Properties.
Our central support facility includes office space, a maintenance shop, a chemical lab, a warehouse facility and a fleet maintenance garage. This facility includes a total of approximately 521,000 square feet of space, of which approximately 407,000 square feet is occupied by us and approximately 114,000 square feet is leased to Reliant Resources. We also lease approximately 7,100 square feet at CenterPoint Energy's principal office building.
In addition, we lease or own various real property and facilities relating to our generation assets and other vacant real property unrelated to our generation assets. We have described our principal generation and support facilities under "Our Generation Portfolio" in Item I of this report, which description is incorporated herein by reference. We believe we have satisfactory title to our facilities in accordance with standards generally accepted in the electric power industry, subject to exceptions that, in our opinion, would not have a material adverse effect on the use or value of the facilities.
All of our real and tangible properties, subject to certain exclusions, are currently subject to the lien of a First Mortgage Indenture (the Mortgage) dated December 23, 2003 between JPMorgan Chase Bank, as trustee, and our wholly owned subsidiary, Texas Genco, LP. As of December 31, 2003, we had issued S75 million aggregate principal amount of first mortgage bonds under the Mortgage as collateral to secure our obligations under our $75 million 364-day revolving credit facility.
Item 3. Legal Proceedings.
We are, from time to time, a party to litigation arising in the normal course of our business, most of which involves contract disputes or claims for personal injury and property damage incurred in connection with our operations. We are not currently involved in any litigation that we expect will have a material adverse effect on our financial condition, results of operations and cash flows. For a description of a number of lawsuits involving claims of asbestos exposure at properties owned by us, please read "Environmental Matters - Asbestos" in Item I of this report, which description is incorporated herein by reference.
During 2003, we and CenterPoint Energy were engaged in a dispute with Northwestern Resources Co. (NWR),
the supplier of fuel to the Limestone electric generation facility, over the terms and pricing at which NWR supplies fuel to that facility under a 1999 settlement agreement between the parties and under ancillary obligations. Both sides to the dispute initiated lawsuits, but in January 2004, we reached a settlement with NWR under which we agreed to dismiss those lawsuits and under which NWR would continue to provide certain quantities of lignite at specified prices during the period from 2004 to 2007, after which time the pricing would revert to pricing provided for under the 1999 settlement.
Item 4. Submission of Mfatters to a Vote ofSecurity Holders.
There were no matters submitted to the vote of our security holders during the fourth quarter of 2003.
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PART II Item 5. AMarketfor Common Stock and Related Stockholder Matters.
As of February 29, 2004, Texas Genco's common stock was held by approximately 51,362 shareholders of record. Texas Genco's common stock is listed on the New York Stock Exchange and is traded under the symbol
'TGN."
On January 6, 2003, CenterPoint Energy distributed approximately 19% of the 80 million outstanding shares of Texas Genco common stock to CenterPoint Energy's shareholders of record as of the close of business on December 20, 2002, the record date for the distribution. Our common stock began trading regular-way on the New York Stock Exchange on January 7, 2003. Accordingly, no high and low sales price information is available for any full quarterly period in 2002.
The following table sets forth the high and low sales prices of the common stock of Texas Genco on the New York Stock Exchange composite tape during the periods indicated, as reported by Bloomberg, and the cash dividends declared in these periods. Cash dividends paid aggregated S1.00 per share in 2003.
Dividend Market Price Declared HMAh Low Per Share 2003 First Quarter .$ 0.25 January 7 ..................................................... $ 10.50 March 10 ...................................................... S 18.58 Second Quarter .S 0.25 April 21 ..................................................... $ 16.20 June 19 ..................................................... S 23.99 Third Quarter .S 0.25 July 22.$ 21.56 September 2..................................................... S 25.70 Fourth Quarter .... $ 0.25 October 3.... S 23.40 December22 ..................................................... $ 32.71 The closing market price of our common stock on December 31, 2003 was S32.50 per share.
While we intend to pay regular quarterly cash dividends on our common stock, our board of directors will determine the amount of future dividends in light of:
- applicable legal requirements;
- our earnings and cash flows;
- our financial condition; and
- other factors our board of directors deems relevant.
CenterPoint Energy currently owns approximately 81% of Texas Genco's outstanding common stock which has been pledged to secure any obligations of CenterPoint Energy under its $2.3 billion credit facility executed in October 2003.
Item 6. Selected FinancialData.
The following tables present our selected financial data. The data set forth below should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our historical financial statements and the notes to those statements included in this report. Our selected financial data for each of 26
the five years in the period ended December 31, 2003 are derived from our financial statements. Our financial statements for periods prior to January 1, 2002 are presented on a carve-out basis and represent the historical financial position, results of operations and net cash flows of the historically regulated generation-related business of Reliant Energy. Therefore, the historical information included in our financial statements is not indicative of our future performance and does not reflect what our financial position and results of operations would have been had we operated as a separate, stand-alone wholesale electric power generation company in a deregulated market during the periods presented. Prior to January 1, 2002, our historical financial information reflects the sale of power generated by our facilities as part of an integrated utility at regulated rates. Since January 1, 2002, we have sold power at market-based prices in capacity auctions. In addition, our historical costs and expenses reflect charges from CenterPoint Energy for centralized corporate services and operating infrastructure costs as well as allocated costs of capital through August 31, 2002. We may experience significant changes in our cost structure, capitalization and operations as a result of our separation from CenterPoint Energy, including increased costs associated with reduced economies of scale, obtaining third-party financing and being a publicly traded company.
Year Ended December 31.
1999 2000 2001 2002 2003 (In millions)
Income Statement Data:
Revenues.......................... ............................................................................................... S 2.816 S 3.334 $ 3.411 $ 1.541 $ 2.002 Expenses:
Fuel costs ....................... ............................................................................................... 1,170 1,644 1,304 989 1,098 Purchased power............ 395 753 1,223 94 73 Operation and maintenance.......................................................................................... 384 393 402 391 411 Depreciation and amortization ..................................................................................... 393 151 154 157 159 Taxes other than income taxes ............................ I.......................................................... 79 63 63 43 39 Total................................................................. 2A21 3.04 3146 1.674 178 Operating Income (Loss)....................................... ........................................................... 395 330 265 (133) 222 Other Income ........................................................ 14 1 2 3 2 Interest Expense, net ............................................. I......................................................... 71 59 6 26 _2 Income (Loss) Before Income Taxes and Extraordinary Item.............................................. ........................................................... 338 272 202 (156) 222 Income Tax Expense (Benefit).............................. 113 100 (63) 7' Income (Loss) Before Extraordinary Item.............I.......................................................... 225 172 128 (93) 151 Extraordinary Item, net of tax(l)........................... ........................................................... (518)
Cumulative Effect of Accounting Change, net of laxI I ............................................................................................................................ --- - -- 9 Net Income (Loss)......................................... ................................................................... $L29) S 172 A 17,SJ) S25 Income (Loss) Before Cumulative Effect of Accounting Change..................................... .................................................................. S (3.66) S 2.15 S 1.60 S (1.16) S 1.89 Cumulative Effect of Accounting Change..... .................................................................. - - - - 124 Net In--m fT -cc){ fi6) S 7 1 1-60 J&=LI- ) S 3 U13
.11. - - -ass w w )v .....................................................................................................
(1) Represents a loss related to an accounting impairment of certain generating facilities.
(2) 2003 net income includes the cumulative effect of an accounting change resulting from the adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations" (S99 million after-tax gain, or S1.24 earnings per basic and diluted share). For additional information related to the cumulative effect of accounting change, please read Note 2j) to our consolidated financial statements.
(3) The earnings per share figures are computed by dividing the net income (loss) for each period by 80 million, the number of shares of Texas Genco common stock outstanding after the 80,000-for-one stock split declared by Texas Genco's Board of Directors, as effected on December 18, 2002.
Yenr Fnded December 31.
2001 2D02 200a (In millions)
Statement of Cash Flow Data:
Cash provided by (used in):
Operating Activities .................................................. $ 236 S (140) S 387 Investing Activities .................................................. (409) (258) (157)
Financing Activities .................................................. 173 398 (186) 27
December 31, 1999 2000 2001 2002 2003 (In millions)
Balance Sheet Data:
Property, Plant and Equipment, net ........................................................... S 3,698 S 3,782 S 4,020 S 4,096 S 4,126 Total Assets .4,029 4,147 4,438 4,508 4,640 Capitalization(l)................................................................................................... 2,331 2,323 2,624 - -
Shareholders' Equity(l)........................................................................................- - - 2,824 3,033 (I) Upon the restructuring of Reliant Energy pursuant to its business separation plan, effective August 31, 2002, our equity structure was changed to reflect the contribution of CenterPoint Energy's electric generating facilities to us.
Item 7. AManagement's Discussionand Analysis of FinancialCondition andResults of Operations.
Thefollowing discussion and analysis should be readin combination with our consolidatedfinancialstatements and notes containedin Item 8 herein.
OVERVIEW We are a wholesale electric power generating company that owns 60 generating units at 11 electric power generation facilities located in Texas. We also own a 30.8% interest in the South Texas Project Electric Generating Station (South Texas Project), a nuclear generating station with two 1,250 megawatt (MW) nuclear generating units.
As of December 31, 2003, the aggregate net generating capacity of our portfolio of assets was 14,153 megawatts (MW), of which 2,988 MW of gas-fired capacity was currently mothballed. We expect that 777 MW of this amount will remain mothballed through April 2004 and the other 2,211 MW will remain mothballed through April 2005.
The decision to mothball these units was based on the lack of demand for these types of units in our July and September 2003 capacity auctions combined with high forecasted reserve margins in the Electric Reliability Council of Texas (ERCOT) market. We sell electric generation capacity, energy and ancillary services in the ERCOT market, which is the largest power market in the State of Texas and encompasses the majority of the population centers in the State of Texas. ERCOT facilitates reliable grid operations for approximately 85% of the demand for power in the state.
Our Separation from CenterPoint Energy Legislation enacted by the Texas legislature in 1999 (Texas electric restructuring law) required the restructuring of electric utilities in Texas in order to separate their power generation, transmission and distribution, and retail electric provider businesses into separate units. In March 2001, the Public Utility Commission of Texas (Texas Utility Commission) approved a business separation plan for Reliant Energy, Incorporated (Reliant Energy) involving the separation of Reliant Energy's generation, transmission and distribution, and retail businesses into three separate companies. Effective August 31, 2002, Reliant Energy consummated a restructuring transaction (the Restructuring) in accordance with its business separation plan in which it, among other things:
- conveyed all of its electric generating facilities to us;
- became a subsidiary of CenterPoint Energy, Inc. (CenterPoint Energy); and
- converted into a limited liability company named CenterPoint Energy Houston Electric, LLC (CenterPoint Houston).
Although our portfolio of generating facilities was formerly owned by the unincorporated electric utility division of Reliant Energy, for convenience we describe our business as if we had owned and operated our generation facilities prior to the date they were conveyed to us. The book value of the net assets conveyed to us by Reliant Energy on August 31, 2002 was approximately $2.8 billion.
CenterPoint Energy is a registered public utility holding company under the Public Utility Holding Company Act of 1935, as amended (1935 Act). The 1935 Act and related rules and regulations impose a number of restrictions on the activities of CenterPoint Energy and its subsidiaries. In October 2003, the Federal Energy Regulatory 28
Commission (FERC) granted exempt wholesale generator (EWG) status to Texas Genco, LP, our wholly owned subsidiary that owns and operates our electric generating plants. As a result, we are exempt from substantially all provisions of the 1935 Act. We will remain exempt for so long as Texas Genco, LP remains an exempt wholesale generator. SEC approval would be required, however, for CenterPoint Energy to issue and sell securities for the purpose of funding our operations, or for CenterPoint Energy to guarantee our securities. Also, SEC policy precludes us from borrowing from CenterPoint Energy's utility subsidiaries.
On January 6, 2003, CenterPoint Energy distributed approximately 19% of the 80 million outstanding shares of Texas Genco's common stock to CenterPoint Energy's shareholders (the Distribution). As used herein, CenterPoint Energy also refers to the former Reliant Energy for dates prior to the Restructuring.
Our Power Generation Business Our energy costs consist primarily of fuel costs associated with consuming nuclear fuel, gas, oil, lignite and coal to generate electricity, as well as our power purchases from the wholesale marketplace. The recent deregulation of the ERCOT market has impacted our energy costs in several ways. As a result of requirements under the Texas electric restructuring law and the terms of our agreements with CenterPoint Energy, we have been obligated to sell through capacity auctions substantially all of our available capacity and related ancillary services through 2003.
Beginning in 2004, we can market the 85% of our capacity as we deem appropriate based upon market conditions, which may include a combination of auctions and bilateral contracts. In the auctions described above, we sell on a forward basis firm entitlements to capacity and ancillary services dispatched within specified operational constraints. Although we have reserved a portion of our aggregate net generation capacity from our capacity auctions for planned or forced outages at our facilities, unanticipated plant outages or other unforeseen problems with our generation facilities could result in our firm capacity and ancillary services commitments exceeding our available generation capacity. As a result, we could be required to obtain replacement power from third parties in the open market to satisfy our firm commitments that could involve the incurrence of significant additional costs.
Accordingly, high wholesale power prices for replacement power in the ERCOT market could increase our energy costs and affect earnings and net cash flow. In addition, an unexpected outage at one of our lower cost facilities could require us to run one of our higher cost plants in order to satisfy our obligations which could have a significant effect on our operating income.
In 2003, the market-based prices established in our capacity auctions continued to strengthen, but remained below historical regulated returns on our facilities. However, we have seen significant improvement in auction prices for our 2003, 2004 and 2005 capacity entitlements. Since the pricing of generation products is sensitive to natural gas prices, higher natural gas prices throughout 2003 have positively influenced the prices in our capacity auctions. Because we have a significant amount of low-cost base-load solid fuel and nuclear generating units, higher natural gas prices generally increase the margin of our base-load capacity entitlements since prospective purchasers face higher-cost gas-fired generation alternatives. With the higher market prices and our efforts to reduce our operating costs, we have experienced improved profitability during 2003 compared to 2002. However, we do not expect this improvement will reach the levels of our historical regulated returns in the near future due in part to the current surplus of generating capacity in the ERCOT market and changes to the economic conditions affecting our industry that have occurred since our base-load facilities were originally constructed, including the development of high efficiency gas-fired generating units.
High reserve margins are expected to continue in the ERCOT market. With an increasingly competitive wholesale energy market, the composition and level of our operation and maintenance expense is likely to change as we continually evaluate the value of various units based on their fuel source, heat rate and dispatch type.
We were unable to sell some of the 2003 capacity that we have offered in our state-mandated auctions. However, we believe that we have complied with the requirements under the applicable state-mandated auction rules, including re-offering the unsold capacity in subsequent auctions.
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EXECUTIVE SUMMIARY 2003 Highlights In 2003, we reported net income of $250 million as compared to a net loss of S93 million in 2002. Revenues significantly increased in 2003 as compared to 2002 due to higher capacity revenue for base-load products, the sales of surplus air emission allowances and higher energy revenues, which more than offset higher fuel and purchased power costs. Operation and maintenance expenses increased primarily due to higher costs associated with planned and several unplanned unit outages as well as higher pension and insurance expenses. These increases were partially offset by expenses incurred in the fourth quarter of 2002, which did not recur in 2003, the most significant of which was an early retirement program. Net income for 2003 includes a $99 million after-tax ($152 million pre-tax) non-cash gain ($1.24 per diluted share) from the adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143) as further discussed below under "- Consolidated Results of Operations."
2004 Outlook In our capacity auctions held through February 2004, we have sold capacity entitlements to approximately 85%
of our available 2004 base-load capacity and 24% of our available 2005 base-load capacity. As a result, we have contracted for approximately SI billion of total revenue with respect to our 2004 capacity and approximately S533 million of total revenue with respect to our 2005 capacity. We expect to conduct auctions to sell additional capacity entitlements with respect to our 2004 and 2005 capacity during March 2004. Sales of additional surplus air emission allowances are anticipated in 2004. Studies are underway to determine longer-term strategies, including selling capacity through contractual agreements as well as auctions and evaluating financial hedging policies. Financial performance in 2004 and beyond is highly dependent on continued strong wholesale electricity prices, as well as acceptable levels of planned and unplanned outages.
In December 2003, one of the three auxiliary standby diesel generators for Unit 2 at the South Texas Project failed during a routine test. The NRC allowed continued operation of Unit 2 while repairs to the generator were made. Repairs are expected to be completed before the end of a scheduled refueling outage on the unit in the spring of 2004. Should Unit 2 experience an unplanned shutdown prior to its scheduled outage, there is a risk that the NRC would not permit restarting the unit until the diesel generator was fully repaired. Our share of the ultimate cost of repairs to the diesel generator is estimated to be approximately $5 million and is expected to be substantially covered by insurance.
CERTAIN FACTORS AFFECTING FUTURE EARNINGS Our past earnings and results of operations are not necessarily indicative of our future earnings and results of operations. Any of the following factors could adversely affect our business prospects, financial condition, operating results and cash flows:
- state and federal legislative and regulatory actions or developments, including deregulation; re-regulation and restructuring of the ERCOT market; and changes in, or application of, environmental and other laws or regulations to which we are subject;
- the timing and extent of changes in commodity prices, particularly natural gas;
- the effects of competition, including the extent and timing of the entry of additional competitors in the ERCOT market;
- the results of our capacity auctions;
- weather variations and other natural phenomena;
- financial distress of our customers, including Reliant Resources;
- our access to capital and credit; and
- other factors discussed in this report under "Risk Factors" in Item 1 of this report.
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CONSOLIDATED RESULTS OF OPERATIONS The following discussion and analysis of our results of operations have been derived from our historical financial statements and the notes to those financial statements included herein, which we refer to collectively as "our financial statements." Our financial statements were developed using a number of assumptions to separate our operations from those of Reliant Energy, which until January 1, 2002, operated our generation assets together with its transmission and distribution facilities and retail operations as a vertically integrated utility company. Please read Note I to our financial statements for a discussion of these assumptions and the methodologies used to prepare our financial statements. The historical financial information for 2001 included in our financial statements may not be indicative of our future performance and does not reflect what our financial position and results of operations would have been had we operated as a separate, stand-alone wholesale electric power generation company in a deregulated market during the periods presented.
Prior to January 1, 2002, our revenues were calculated by unbundling the generation component of revenue from CenterPoint Energy's historical bundled rate for the generation and transmission, distribution and sale of energy and adding any additional generation-related revenues of CenterPoint Energy, such as wholesale activities that include ancillary services, trading and capacity sales.
Year Ended December 31.
2001 2002 2003 (in thousands)
Revenues:
Revenues ................................................................................ $ 3,410,945 a $_
Energy revenues ..................................................................... 1,093,714 1,221,348 Capacity and other revenues. ...................................... 447.261 781.020 Total ............................................................................... 3.410.945 1.540.975 2.002.368 Expenses:
Fuel costs................................................................................ 1,303,981 989,560 1,098,269 Purchased power .................................................................... 1,222,552 93,841 72,509 Operation and maintenance. ...................................... 401,677 391,465 411,940 Depreciation and amortization ............................................... 154,248 156,740 159,010 Taxes other than income taxes ............................................... 63,378 42.93 38.681 Total ............................................................................... 3,145,836 1674.53 1,780.409 Operating Income (Loss) ....................................................... 265,109 (133,561) 221,959 Other Income.......................................................................... 2,100 3,423 2,176 Interest Expense ..................................................................... (65,017) (25.637) (1.583)
Income (Loss) Before Income Taxes and Cumulative Effect of Accounting Change.......................... 202,192 (155,775) 222,552 Income Tax Benerit (Expense)............................................... (73.804) 62,832 (7128 )
Income (Loss) Before Cumulative Effect of Accounting Change.............................................................. 128,388 (92,943) 151,266 Cumulative Effect of Accounting Change, net of tax .......................................................................................... - - ~~98.91D Net Income (Loss)...................................................................
Basic and Diluted Earnings Per Share:
Income (Loss) Before Cumulative Effect of Accounting Change............................................................. $ 1.60 $ (1.16) $ 1.89 Cumulative Effect of Accounting Change, net of tax........................................................................................
Net Income (Loss).................................................................. R 1SnI Power Sales (in GW h)............................................................ ====4L3 b A) 2003 Compared to 2002. Our income before cumulative effect of accounting change increased S244 million in 2003 compared to 2002 primarily due to increased operating margins (S357 million) from higher capacity and energy revenues as a result of higher capacity auction prices driven by higher natural gas prices, partially offset by increased fuel costs due to higher natural gas prices and by lower sales volumes. We were able to partially mitigate the higher cost of natural gas by switching to fuel oil on some of our flexible natural gas units, as well as benefiting 31
from reductions in coal and lignite costs on our base-load units resulting from renegotiated supply agreements and increased utilization of spot purchases. Additionally, the sale of surplus air emission allowances, which is expected to recur in 2004, contributed to the increase in operating margins (S16 million). Partially offsetting the increase in operating margins was a higher level of operation and maintenance expense primarily related to higher pension and insurance expenses ($21 million) and planned and unplanned outages (S11 million). These increases in operation and maintenance expense were partially offset by expenses incurred in 2002, which did not recur in 2003, the most significant of which were in connection with an early retirement program and business separation costs ($28 million). Interest expense decreased S24 million in 2003 as compared to 2002 primarily due to the allocation of interest through the date of the Restructuring (August 31, 2002) based on the remaining electric utility debt not specifically identified with CenterPoint Energy's transmission and distribution utility upon deregulation, and the repayment of intercompany borrowings in 2003. Our effective tax rate for 2002 and 2003 was 40.3% and 32.0%,
respectively.
We reported a pre-tax loss for 2002 compared to pre-tax income for 2003. The 2002 pre-tax loss caused permanent differences that would normally decrease the effective rate to instead increase it. For 2003, our effective tax rate reflects reduced benefits from the amortization of investment tax credits.
In connection with the adoption of SFAS No. 143, we have identified retirement obligations for nuclear decommissioning at the South Texas Project and for lignite mine operations which supply the Limestone electric generation facility. The net difference between the amounts determined under SFAS No. 143 and the previous method of accounting for estimated mine reclamation costs was S37 million and has been recorded as a cumulative effect of accounting change. Upon adoption of SFAS No. 143, we reversed $115 million of previously recognized removal costs as a cumulative effect of accounting change. Net income for 2003 includes a $99 million after-tax (S152 million pre-tax) non-cash gain (S1.24 per diluted share) from the adoption of SFAS No. 143. For additional discussion of the adoption of SFAS No. 143, please read Note 2G) to our consolidated financial statements.
2002 Compared to 2001. Our net income decreased S221 million in 2002 compared to 2001 primarily due to decreased revenues resulting from the change from a regulated environment in 2001 to the deregulated ERCOT market ($1.9 billion). Our 2001 revenue was derived based on actual recoverable operating expenses plus an allowed regulatory rate of return based on the rate base while our 2002 revenue was derived from open market sales of capacity and energy at auction and spot market prices. Additionally, fuel and purchased power expenses decreased primarily due to lower natural gas prices and a reduction in overall demand for output from our facilities
($1.4 billion). Operation and maintenance expense decreased primarily due to an absence of major maintenance outages at certain of our plants (S36 million in 2001), which was partially offset by costs related to an early retirement program implemented in 2002 ($12 million), business separation expenses (S7 million) and computer systems necessary for operation in the deregulated market (S6 million). Taxes other than income taxes decreased primarily due to lower tax valuations of generation assets ($20 million). Interest expense decreased $39 million or 60% for the year ended December 31, 2002 from the comparable 2001 period. The decrease was due to the change from the allocation method based on capital structure used to calculate interest expense in 2001 to the allocation of interest in 2002 based on the remaining electric utility debt not specifically identified with CenterPoint Energy's transmission and distribution utility upon deregulation. In connection with the Restructuring and the conveyance of all of CenterPoint Energy's electric generating facilities to us in August 2002, we did not assume any of CenterPoint Energy's long-term debt. The effective tax rates for 2002 and 2001 were 40.3% and 36.5%, respectively. The increase in the effective rate for 2002 compared to 2001 was primarily the result of a reduced benefit from the amortization of investment tax credits, offset by a decrease in state income taxes. Our state tax liability changed from an income-based tax for 2001, to a capital-based tax for 2002, primarily as a result of the 2002 pre-tax loss, which resulted in the reporting of the state tax as a component of the pre-tax loss for 2002 compared to reporting the state tax expense as a component of income tax expense for 2001.
RELATED PARTY TRANSACTIONS Our Relationships with CenterPoint Energy Separation Agreement. In connection with the Distribution, we entered into a separation agreement with CenterPoint Energy. This agreement contains provisions governing our relationship with CenterPoint Energy following the Distribution and specifies the related ancillary agreements between us and CenterPoint Energy. In 32
addition, the separation agreement provides for cross-indemnities intended to place sole financial responsibility on us and our subsidiaries for all liabilities associated with the current and historical business and operations we conduct, regardless of the time those liabilities arose, and to place sole financial responsibility for liabilities associated with CenterPoint Energy's other businesses with CenterPoint Energy and its other subsidiaries. The separation agreement also contains indemnification provisions under which we and CenterPoint Energy each indemnify the other with respect to breaches by the indemnifying party of the separation agreement or any ancillary agreements.
Transition Services Agreement. We have entered into a transition services agreement with CenterPoint Energy under which CenterPoint Energy will provide us through the earlier of such time as all services under the agreement are terminated or CenterPoint Energy ceases to own a majority of Texas Genco's common stock, various corporate support services that include accounting, finance, investor relations, planning, legal, communications, governmental and regulatory affairs and human resources, as well as information technology services and other previously shared services such as corporate security, facilities management, accounts receivable, accounts payable and payroll, office support services and purchasing and logistics. These services consist generally of the same types of services as have been provided on an intercompany basis prior to the distribution. The charges we will pay for the services will be on a basis generally intended to allow CenterPoint Energy to recover the fully allocated direct and indirect costs of providing the services, plus all out-of-pocket costs and expenses, but without any profit to CenterPoint Energy, except to the extent routinely included in traditional utility cost of capital.
Tax Allocation Agreement. We are members of the CenterPoint Energy consolidated group for tax purposes, and we will continue to file a consolidated federal income tax return with CenterPoint Energy while CenterPoint Energy retains its 81% interest in us. Accordingly, we have entered into a tax allocation agreement with CenterPoint Energy to govern the allocation of U.S. income tax liabilities and to set forth agreements with respect to certain other tax matters. Generally, if there are tax adjustments related to us which relate to a tax return filed for a period when we were a member of the CenterPoint Energy consolidated group, we are responsible for any increased taxes and we will receive the benefit of any tax refunds.
Employee Benefit Plans. Our eligible employees currently participate in CenterPoint Energy's employee benefit plans and programs in accordance with the terms and conditions of such plans and programs, as may be amended or terminated by CenterPoint Energy at any time. Additionally, CenterPoint Energy expects that a separate pension plan will be established for us in 2005. If this occurs, we will receive an allocation of assets from the CenterPoint Energy pension plan pursuant to rules and regulations under the Employee Retirement Income Security Act of 1974 and record its pension obligations in accordance with SFAS No. 87, "Employer's Accounting for Pensions." It is anticipated that a plan established for us will be under-funded and that such under-funding could be significant.
Changes in interest rates and the market values of the securities held by the CenterPoint Energy pension plan during 2004 could materially, positively or negatively, change the funding status of a plan established for us.
Technical Services Agreement with Reliant Resources Under a technical services agreement, Reliant Resources is obligated to provide engineering and technical support services and environmental, safety and industrial health services to support the operation and maintenance of our facilities. We have notified Reliant Resources that its obligation to provide these services will be terminated effective May 31, 2004. Under the agreement, Reliant Resources is also obligated to provide systems, technical, programming and consulting support services and hardware maintenance (but excluding plant-specific hardware) necessary to provide dispatch planning, dispatch, and settlement and communication with the ERCOT independent system operator, as well as general information technology services for us. A project is currently underway to identify manpower requirements, evaluate systems alternatives, define costs and develop time lines for replacement of those services considered necessary under the current overall technical services agreement with Reliant Resources. The fees Reliant Resources charges for these services are designed to allow it to recover its fully allocated direct and indirect costs and to obtain reimbursement of all out-of-pocket expenses. Expenses associated with capital investment in systems and software that benefit both the operation of Reliant Resources' facilities and our facilities will be allocated on an installed MW basis.
The overall technical services agreement, while cancelable by us in whole or in part, will terminate in its entirety on the first to occur of:
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- CenterPoint Energy's sale of its 81% interest in us, or a sale by us of all or substantially all of our assets; or
- May 31, 2005, provided that we may extend the term of this agreement until December 31, 2005.
South Texas Project Decommissioning Trusts We are the beneficiary of decommissioning trusts that have been established to provide funding for decontamination and decommissioning of the South Texas Project in which we own a 30.8% interest. CenterPoint Houston collects, through rates or other authorized charges to its electric utility customers, amounts designated for funding the decommissioning trusts, and deposits these amounts into the decommissioning trusts. Upon decommissioning of the facility, in the event funds from the trusts are inadequate, CenterPoint Houston or its successor will be required to collect through rates or other authorized charges to customers as contemplated by the Texas Utilities Code additional amounts required to fund our obligations relating to the decommissioning of the facility. Following the completion of the decommissioning, if surplus funds remain in the decommissioning trusts, the excess will be refunded to the ratepayers of CenterPoint Houston or its successor.
Director Relationships Our Chairman, David M. McClanahan, is also a director and the chief executive officer of CenterPoint Energy.
In addition, two of our directors, Scott E. Rozzell and Gary L. Whitlock, are executive officers of CenterPoint Energy. As a result, these directors may need to recuse themselves and not participate in board meetings where actions are taken in connection with transactions or other relationships involving both companies.
LIQUIDITY AND CAPITAL RESOURCES Historical Cash Flows The net cash provided by/used in our operating, investing and financing activities for 2001, 2002 and 2003 is as follows (in millions):
Year Fnded December 31.
2001 2002 2003 Cash provided by (used in):
Operating activities............................................................................................ S 236 S (140) S 387 Investing activities............................................................................................. (409) (258) (157)
Financing activities............................................................................................ 173 398 (186)
Cash Provided by Operating Activities Net cash provided by operating activities in 2003 increased $527 million compared to 2002 primarily as a result of higher capacity auction prices, which were driven by higher gas prices. This increase was partially offset by higher income taxes paid of S71 million.
Net cash provided by operating activities in 2002 decreased $376 million compared to 2001. The decrease primarily resulted from lower revenues in the deregulated ERCOT market, increased accounts receivable from the sale of power in the 2002 deregulated electricity market and lower taxes paid of $69 million.
Cash Used in Investing Activities Net cash used in investing activities decreased $101 million during 2003 compared to 2002 primarily related to a reduction in NOx emissions control expenditures.
Net cash used in investing activities decreased S151 million during 2002 compared to 2001 primarily related to completion of a major portion of the NOx work on our solid fuel units at W.A. Parish in 2001 and the re-scheduling of the NOx installation on our gas units.
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Cash Provided by Financing Activities Cash provided by financing activities decreased $584 million during 2003 compared to 2002 primarily as a result of common stock dividends paid in 2003 and repayments of intercompany borrowings owed to CenterPoint Energy.
Cash provided by financing activities increased S225 million during 2002 compared to 2001 as a result of net transfers from CenterPoint Energy to support our various requirements for working capital and capital expenditures.
Future Sources and Uses of Cash We expect our liquidity and capital requirements will be affected by our:
- capital requirements related to environmental compliance and other maintenance projects;
- dividend policy;
- debt service requirements; and
- working capital requirements.
On December 31, 2003, we had temporary external investments of S45 million.
In December 2003, Texas Genco, LP, one of our subsidiaries, entered into a 364-day S75 million bank credit facility with a seven-bank syndicate. Proceeds from the revolving credit facility will be used to meet ongoing working capital requirements and for general corporate purposes. Borrowings under the facility may be made at the London interbank offered rate (LIBOR) plus 150 basis points. The facility is secured by a series of first mortgage bonds issued by our wholly owned subsidiary, Texas Genco LP, in an aggregate principal amount of $75 million under a First Mortgage Indenture (the Mortgage) dated December 23, 2003 between JPMorgan Chase Bank, as trustee, and Texas Genco, LP. All of our real and tangible properties, subject to certain exclusions, are currently subject to the lien of the Mortgage. Under the terms of the facility, if CenterPoint Energy ceases to own, directly or indirectly, at least a 50% voting and economic interest in Texas Genco, LP, an event of default will occur and any borrowings thereunder may become immediately due and payable. We believe that our cash flows from operations and our external borrowing capability will be sufficient to meet the operational needs of our business for the next twelve months. As of December 31, 2003, there were no borrowings outstanding under the revolving credit facility.
CenterPoint Energy's $2.3 billion bank facility limits our incurrence of indebtedness for borrowed money to an aggregate principal amount not to exceed $250 million outstanding at any time and requires that proceeds from the sale of any material portion of our assets, proportionate to CenterPoint Energy's ownership interest in us and subject to certain other requirements, be used to prepay indebtedness under such credit facility. Our new credit facility also limits our incurrence of additional secured indebtedness for borrowed money to a maximum of $175 million aggregate principal amount. Although we are not contractually bound by the limitations in CenterPoint Energy's bank facility, it is expected that CenterPoint Energy would likely cause its representatives on our board of directors to direct our business so as not to breach the terms of its facility.
CenterPoint Energy is a registered holding company under the 1935 Act. In October 2003, the FERC granted exempt wholesale generator status to Texas Genco, LP, our wholly owned subsidiary that owns and operates our electric generating plants. As a result, we are exempt from substantially all provisions of the 1935 Act as long as we remain an exempt wholesale generator.
Capital Requirements. The following table sets forth our capital expenditures requirements for 2003, and estimates of our capital requirements for 2004 through 2008 (in millions).
200 D .I2n 0 2006 2007 _on Environmental capital requirements ...................................... ................ S 107 S 42 S 33 S 43 S 14 S -
Other capital requirements.................................................................................. 4 in f RR62 Total capital requirements.... ..... ....................................................... $ 4 ,5 4 ,$I S14 SI2 62 35
ContractualObligations. The following table sets forth estimates of our contractual obligations as of December 31, 2003 to make future payments for 2004 through 2008 and thereafter (in millions):
2009 and Contractual Obliations Total 2004 2005 2006 2007 2008 thereafter Fuel commitments........................................................................................ S 1,474 S 309 S 251 $ 256 S 248 S 162 S 248 Operatingleasecommitments ................... 99 11 11 10 10 10 47 We have identified retirement obligations for nuclear decommissioning at the South Texas Project and the lignite mine operations which supply our Limestone electric generation facility. We have recorded liabilities as required by SFAS No. 143 of S188 million for the nuclear decommissioning and $6 million for the lignite mine as of December 31, 2003. CenterPoint Houston is required to fund S2.9 million a year to trusts established to fund our share of the decommissioning costs for the South Texas Project. Pursuant to the Texas electric restructuring law, costs associated with nuclear decommissioning that have not been recovered as of January 1, 2002, will continue to be subject to cost-of-service rate regulation and wvill be included in a charge to CenterPoint Houston's transmission and distribution customers. For additional information on asset retirement obligations and the nuclear decommissioning trusts, please read Notes 2(j) and 8(c) to our consolidated financial statements, respectively.
Revenues derived from our capacity auctions come from two sources: capacity payments and energy payments.
Energy payments consist of a variety of charges related to the fuel and ancillary services scheduled through our auctioned capacity entitlements. We bill for these energy payments on a monthly basis in arrears. We expect future collected energy payments will cover all of our future fuel commitments.
Cash Flows From Operations - Reliant Resources as a Significant Customer. To date, we have sold a substantial portion of our auctioned capacity entitlements to subsidiaries of Reliant Resources. Pursuant to a Master Power Purchase and Sale Agreement (as amended) with a subsidiary of Reliant Resources related to power sales in the ERCOT market, we have been granted a security interest in accounts receivable and/or notes associated with the accounts receivable of certain subsidiaries of Reliant Resources to secure up to S250 million in purchase obligations.
For more information regarding the impact that Reliant Resources' financial condition may have on our cash flows, please read "Risk Factors" in Item I of this report.
Intercompany Borrowings. As a result of our certification by the FERC as an "exempt wholesale generator" under the 1935 Act, CenterPoint Energy has established a second money pool in which we, CenterPoint Energy and certain other unregulated subsidiaries of CenterPoint Energy can participate. Except in an emergency situation (in which CenterPoint Energy could provide funding pursuant to applicable SEC rules), CenterPoint Energy would be required to obtain approval from the SEC to issue and sell securities for purposes of funding our operations or for CenterPoint Energy to guarantee any of our securities. There is no assurance that CenterPoint Energy will have sufficient funds to meet our cash needs.
Pension Plan. As discussed in Note 6(b) to the consolidated financial statements, we participate in CenterPoint Energy's qualified non-contributory pension plan covering substantially all employees. Pension expense for 2004 is estimated to be S12 million based on an expected return on plan assets of 9.0% and a discount rate of 6.25% as of December 31, 2003. Future changes in plan asset returns, assumed discount rates and various other factors related to the pension will impact our future pension expense and liabilities. We cannot predict with certainty what these factors will be in the future. Additionally, we expect that a separate pension plan will be established for us in 2005.
If this occurs, we will receive an allocation of assets from the CenterPoint Energy pension plan pursuant to rules and regulations under the Employee Retirement Income Security Act of 1974 and record our pension obligations in accordance with SFAS No. 87, "Employer's Accounting for Pensions". It is anticipated that a plan established for us will be under-funded and that such under-funding could be significant. Changes in interest rates and the market values of the securities held by the CenterPoint Energy pension plan during 2004 could materially, positively or negatively, change the funding status of a plan established for us.
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OFF-BALANCE SHEET FINANCING Other than operating leases, we have no off-balance sheet financing arrangements.
CRITICAL ACCOUNTING POLICIES A critical accounting policy is one that is both important to the presentation of our financial condition and results of operations and requires management to make difficult, subjective or complex accounting estimates.
An accounting estimate is an approximation made by management of a financial statement element, item or account in the financial statements. Accounting estimates in our historical consolidated financial statements measure the effects of past business transactions or events, or the present status of an asset or liability. The accounting estimates described below require us to make assumptions about matters that are highly uncertain at the time the estimate is made. Additionally, different estimates that we could have used or changes in an accounting estimate that are reasonable likely to occur could have a material impact on the presentation of our financial condition or results of operations. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments. These estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Our significant accounting policies are discussed in Note 2 to our consolidated financial statements. We believe the following accounting policies involve the application of critical accounting estimates. Accordingly, these accounting estimates have been reviewed and discussed with the audit committee of the board of directors.
Allocation Methodologies Used to Derive Our Financial Statements On a Carve-Out Basis In 2001, we employed various allocation methodologies to separate the results of operations and financial condition of the generation-related portion of CenterPoint Energy's business from CenterPoint Energy's historical financial statements in order to prepare our financial statements. For 2001, revenues were allocated based on actual costs plus an allowed regulatory rate of return based on regulated invested capital granted to CenterPoint Energy's electric utility by the Texas Utility Commission. The allowed regulatory rate of return was 9.844% for 2001.
Expenses, such as fuel, purchased power, operations and maintenance, and depreciation and amortization, and assets, such as property, plant and equipment, and inventory, were specifically identified by function and allocated accordingly for our operations. We used various allocations to disaggregate other common expenses, assets and liabilities between our operations and CenterPoint Energy's regulated transmission and distribution operations. We calculated interest expense based upon an allocation methodology that charged us with financing and equity costs from CenterPoint Energy in proportion to our share of total net assets prior to the effects of deregulation discussed below. These methodologies reflect the impact of deregulation on our assets and liabilities as of June 30, 1999; however, all existing regulatory assets which are expected to be recovered in the true-up proceeding by our affiliated transmission and distribution utility, CenterPoint Houston, after deregulation have been excluded from these financial statements.
Beginning January 1, 2002, CenterPoint Energy's generation business was segregated from its electric utility as a separate reporting business segment and began selling electricity in the ERCOT market at prices determined by the market. Accordingly, for 2002 and 2003, net income reflects the results of market prices for power. Included in operations for 2002 and 2003 are allocations from CenterPoint Energy for corporate services that included accounting, finance, investor relations, planning, legal, communications, governmental and regulatory affairs and human resources, as well as information technology services and other previously shared services such as corporate security, facilities management, accounts receivable, accounts payable and payroll, office support services and purchasing and logistics.
Management believes the estimates inherent in these allocation methodologies to be reasonable. Had we actually existed as a separate company, our results could have significantly differed from those presented herein. In addition, the historical financial information included in our financial statements is not indicative of our future performance and does not reflect what our financial position and results of operations would have been had we operated as a separate, stand-alone wholesale electric power generation company in a deregulated market during the periods presented.
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Impairment of Long-Lived Assets We review the carrying value of our long-lived assets, including identifiable intangibles, whenever events or changes in circumstances indicate that such carrying values may not be recoverable. Unforeseen events and changes in circumstances and market condition and material differences in the value of long-lived assets and intangibles due to changes in estimates of future cash flows, regulatory matters and operating costs could negatively affect the fair value of our assets and result in an impairment charge.
Fair value is the amount at which the asset could be bought or sold in a current transaction between willing parties and may be estimated using a number of techniques, including quoted market prices or valuations by third parties, present value techniques based on estimates of cash flows, or multiples of earnings or revenue performance measures. The fair value of the asset could be different using different estimates and assumptions in these valuation techniques. Changes in any of these assumptions could result in an impairment charge.
The fair value of our assets could be materially affected by a change in the estimated future cash flows for these assets. We estimate future cash flows using a probability-weighted approach based on the fair value of our common stock, operating projections and estimates of how long we will retain these assets.
NEW ACCOUNTING PRONOUNCEMENTS See Note 2() to the consolidated financial statements for a discussion of new accounting pronouncements that affect us.
Item 7A. Qualitativeand QuantitativeDisclosuresAbout Mark-et Risk Interest Rate Risk As discussed in Note 8(c) to our consolidated financial statements, CenterPoint Houston contributed $14.8 million in 2001 to trusts established to fund our share of the decommissioning costs for the South Texas Project. In 2002 and 2003, CenterPoint Houston contributed S2.9 million to these trusts. The securities held by the trusts for decommissioning costs had an estimated fair value of S189 million as of December 31, 2003, of which approximately 37% were debt securities that subject us to risk of loss of fair value with movements in market interest rates. If interest rates were to increase by 10% from their levels at December 31, 2003, the decrease in fair value of the debt securities would be approximately SI million.
Equity Market Value Risk As discussed above under "- Interest Rate Risk," CenterPoint Houston contributes to trusts established to fund our share of the decommissioning costs for the South Texas Project, which held debt and equity securities as of December 31, 2003. The equity securities expose us to losses in fair value. If the market prices of the individual equity securities were to decrease by 10% from their levels at December 31, 2003, the resulting loss in fair value of these securities would be approximately S12 million. Currently, the risk of an economic loss is mitigated as discussed above under "- Interest Rate Risk."
Commodity Price Risk Our gross margins are dependent upon the market price for power in the ERCOT market. Our gross margins are primarily derived from the sale of capacity entitlements associated with our large, solid fuel base- load generating units, including our Limestone and W.A. Parish facilities and our interest in the South Texas Project. The gross margins generated from payments associated with the capacity of these units are directly impacted by natural gas prices. Since the fuel costs for our base-load units are largely fixed under long-term contracts, they are generally not subject to significant daily and monthly fluctuations. However, the market price for power in the ERCOT market is directly affected by the price of natural gas. Because natural gas is the marginal fuel of facilities serving the ERCOT market during most hours, its price has a significant influence on the price of electric power. As a result, the price customers are willing to pay for entitlements to our solid fuel base-load capacity generally rises and falls with natural gas prices.
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Item 8. FinancialStatements and Supplementary Dataof the Company.
TEXAS GENCO HOLDINGS, INC.
STATEMENTS OF CONSOLIDATED OPERATIONS (Thousands of Dollars)
Year Ended December 31, 2001 2002 2003 Revenues:
Revenues .................................................................................. $ 3,410,945 $ - S -
Energy revenues ....................................................................... - 1,093,714 1,221,348 Capacity and other revenues. ...................................... - 447,261 781.02 Total.................................................................................. 3.410.945 1540.975 2002368 Expenses:
Fuel costs.................................................................................. 1,303,981 989,560 1,098,269 Purchased power....................................................................... 1,222,552 93,841 72,509 Operation and maintenance ...................................................... 401,677 391,465 411,940 Depreciation and amortization. ...................................... 154,248 156,740 159,010 Taxes other than income taxes. ...................................... 63.378 42930 38681 Total.................................................................................. 3.145.836 1.674.536 1.780.409 Operating Income (Loss).......................................................... 265,109 (133,561) 221,959 Other Income ............................................................................ 2,100 3,423 2,176 Interest Expense........................................................................ (65.017) (25.637) (1.583)
Income (Loss) Before Income Taxes and Cumulative Effect of Accounting Change ............................ 202,192 (155,775) 222,552 Income Tax Benefit (Expense)................................................. (7318,3) 62.832 (71.28)
Income (Loss) Before Cumulative Effect of Accounting Change ................................................................ 128,388 (92,943) 151,266 Cumulative Effect of Accounting Change, net of tax............................................................................................. - - 98.910 Net Income (Loss)..................................................................... SJ~ L==L28
$ 4).4) 250 176 Basic and Diluted Earnings Per Share:
Income (Loss) Before Cumulative Effect of Accounting Change............................................................... $ 1.60 $ (1.16) S 1.89 Cumulative Effect of Accounting Change, net of tax............... 1.24 Net Income (Loss).................................................................... S----im S 31 See Notes to the Company's Consolidated Financial Statements 39
TEXAS GENCO HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (Thousands of Dollars)
December 31, 2002 2003 ASSETS Current Assets:
Cash and cash equivalents........................................................................................... S 578 $ 44,558 Custom er accounts receivable..................................................................................... 68,604 78,122 Accounts receivable, other.......................................................................................... 4,544 3,716 Inventory..................................................................................................................... 156,167 169,692 Taxes receivable ......................................................................................................... 4,368 -
Prepaym ents and other current assets ......................................................................... 4.024 2.304 Total current assets .................................................................................................. 238.28 298.392 Property, Plant and Equipment, net ......................................................................... 4095.637 4125.595 Other Assets:
N uclear decom m issioning trust................................................................................... 162,576 189,182 Other ........................................................................................................................... 1.584 26.462 Total other assets...................................................................................................... 174.160 215.4 Total Assets........................................................................................................
LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities:
Accounts payable, affiliated companies, net............................................................... S 22,654 $ 7,802 Accounts payable, fuel................................................................................................ 76,399 68,747 Accounts payable, other.............................................................................................. 43,877 40,165 N otes payable, affiliated companies, net..................................................................... 86,184 -
Taxes and interest accrued.......................................................................................... 42,959 107,605 Deferred capacity auction revenue.............................................................................. 48,721 86,853 Other ........................................................................................................................... 15.91 17.579 Total current liabilities............................................................................................. 336.712 328L751 Other Liabilities:
Accumulated deferred income taxes, net .................................................................... 813,246 844,545 Unamortized investment tax credit............................................................................. 170,569 150,533 Nuclear decom m issioning reserve .............................................................................. 139,664 187,997 Benefit obligations...................................................................................................... 15,751 18,399 Accrued m ine reclam ation costs................................................................................. 39,765 6,000 Notes payable, affiliated companies, net..................................................................... 18,995 -
Other ........................................................................................................................... 149.337 70.245 Total other liabilities................................................................................................ 1,347L32 1,277.719 Commitments and Contingencies (Note 8)
Shareholders' Equity.................................................................................................. 2,824L043 3,033161 Total Liabilities and Shareholders' Equity..................................................... S-AM 4 . S-.6t39631 See Notes to the Company's Consolidated Financial Statements 40
TEXAS GENCO HOLDINGS, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWIS (Thousands of Dollars)
Year Ended December 31.
2001 2002 2003 Cash Flows from Operating Activities:
N et income (loss).................................................................................... S 128,388 S (92,943) S 250,176 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and am ortization............................................................. 154,248 156,740 159,010 Fuel-related amortization..................................................................... 16,740 25,113 23,385 Deferred income taxes ......................................................................... (29,194) (27,161) 8,693 Investm ent tax credit............................................................................ (13,106) (12,144) (10,876)
Cumulative effect of accounting change ...................................... (98,910)
Changes in other assets and liabilities:
Accounts receivable........................................................................... (19,554) (34,975) (8,690)
Inventory............................................................................................ (16,483) 24,082 (13,525)
Taxes receivable................................................................................. - (4,368) 4,368 Accounts payable............................................................................... (95,490) (75,659) (11,364)
Accounts payable, affiliate................................................................. 19,743 (25,772) (14,852)
Taxes and interest accrued................................................................. 60,608 (79,728) 64,646 Accrued reclam ation costs ................................................................. 8,505 11,334 5,907 Benefit obligations............................................................................. 2,453 (17,423) 2,648 Deferred revenue from capacity auctions...................................... - 48,721 38,132 Other current assets............................................................................ (491) (1,016) 1,720 Other current liabilities ...................................................................... (665) 1,257 1,661 Other long-term assets ....................................................................... (5,822) 15,757 678 Other long-term liabilities.................................................................. 26.209 (51.756)
Net cash provided by (used in) operating activities .......................................................................................... 236.08 (19A91) 386,91 Cash Flows from Investing Activities:
Capital expenditures and other................................................................ (4094 002) (257L63 ) (15696 )
N et cash used in investing activities ..................................................
Cash Flows from Financing Activities:
Payment of common stock dividends ..................................................... (80,000)
N et change in capitalization activity....................................................... 172,913 292,970 Increase (decrease) in short-term notes payables, affiliate................................................................................................. - 86,184 (86,184)
Increase (decrease) in long-term notes payable, affiliate................................................................................................. - 18,995 (18,995)
Debt issuance costs ................................................................................. -21 - (813)
Net cash provided by (used in) financing activities.......................................................................................... 172,913 398,149 (I 85998)
Net Increase in Cash and Cash Equivalents......................................... - 578 43,980 Cash and Cash Equivalents at Beginning of Period............................. s-= ====
578 Cash and Cash Equivalents at End of Period.......................................
Supplemental Disclosure of Cash Flow Information:
Cash Payments:
Interest .................................................................................................... S 64,267 S 4,270 $ 8,506 Incom e taxes (refunds)............................................................................ 60,963 (7,749) 63,623 See Notes to the Company's Consolidated Financial Statements 41
TEXAS GENCO HOLDINGS, INC.
STATEMENTS OF CONSOLIDATED CAPITALIZATION AND SHAREHOLDERS' EQUITY (Thousands of Dollars)
Total Capitalization Additional Retained Total and Capital Pald-In Earnings Shareholders' Shareholders' Stock CaDital (Deficit) Equity Capitalization Equitv Balance as of December 31, 2000 ........................ S- S -S - S - S 2,322,715 S 2,322,715 Net income(l) ...................................................... _ _ _ _ 128,388 128,388 Net transfers from parent...................................... - - - - 172.913 172.913 Balance as of December 31,2001 ........................ - - - - 2,624,016 2,624,016 Net loss(2)............................................................ - - (54,460) (54,460) (38,483) (92,943)
Net transfers from parent...................................... 1 2.878.502 - 2.878.503 (2.585.533) 292970 Balance as of December31, 2002 ........................ 1 2.78.502
_v . van- (54.460 21 76-v 2R.Af2WI - 2,824,043 Net income(2) ...................................................... - 250,176 250,176 250,176 Common stock dividends - S1.00 per share............................................................. - - (80,000) (80,000) (80,000)
Net transfers from parent...................................... - 38.942 - 38.94 38.942 Balance as of December31, 2003 ........................ S11 -2a2j2A LA 1 S _ _
(1) Net income included in Capitalization for 2001 reflects the net income derived from the allocation of revenue, operating expenses, other income, interest expense and income tax expense from the rate regulated electric utility of Reliant Energy, Incorporated, (Reliant Energy) the predecessor of CenterPoint Energy Houston Electric, LLC (CenterPoint Houston), which was comprised of transmission and distribution, generation and retail components. For further discussion related to the basis of presentation, See Note 1.
(2) Beginning January 1, 2002, Reliant Energy's electric generation business was segregated in an unincorporated division from its other electric utility operations as a separate reporting business segment. In June 1999, the Texas legislature enacted a law that substantially amended the regulatory structure governing electric utilities in Texas in order to encourage retail electric competition (the Texas electric restructuring law). Under the Texas electric restructuring law, the Company and other power generators in Texas ceased to be subject to traditional cost-based regulation on January 1, 2002. Since that date, the Company has been selling generation capacity, energy and ancillary services to wholesale purchasers at prices determined by the market. Accordingly, for 2002, net loss reflects revenue received from market-based power sales. Retained deficit at December 31, 2002 reflects the Company's net loss since August 31, 2002, the date of the restructuring as discussed in Note 1. The Company's net loss prior to the restructuring is reflected as a component of capitalization.
See Notes to the Company's Consolidated Financial Statements 42
TEXAS GENCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Background and Basis of Presentation Background. In June 1999, the Texas legislature enacted an electric restructuring law which substantially amended the regulatory structure governing electric utilities in Texas in order to encourage retail electric competition. In December 2001, the shareholders of Reliant Energy, Incorporated (Reliant Energy) approved a restructuring proposal that was submitted in response to the Texas electric restructuring law and pursuant to which Reliant Energy would, among other things, (1) convey its Texas electric generation assets to an affiliated company, (2) become an indirect, wholly owned subsidiary of a new public utility holding company, CenterPoint Energy, Inc.
(CenterPoint Energy), (3) be converted into a Texas limited liability company named CenterPoint Energy Houston Electric, LLC (CenterPoint Houston) and (4) distribute the capital stock of its operating subsidiaries to CenterPoint Energy. Texas Genco Holdings, Inc. (Texas Genco or the Company) represents the portfolio of generating facilities owned during the periods presented by these financial statements by the unincorporated electric utility division of Reliant Energy.
On August 24, 2001, Reliant Energy incorporated Texas Genco, a Texas corporation, as a wholly owned subsidiary. In February 2002, the Company issued 1,000 shares of its S1.00 par value common stock to Reliant Energy in exchange for S1,000. In February 2002, Reliant Energy made a capital contribution of S3,000 to the Company. During the period ended June 30, 2002, Reliant Energy made a capital contribution of S14,000 to the Company for payment of general and administrative expenses associated with maintaining its corporate structure.
The Company did not conduct any activities other than those mentioned above through August 31, 2002.
Effective August 31, 2002, Reliant Energy completed the restructuring described above. As a result, on that date Reliant Energy conveyed all of its electric generating facilities to the Company, which was accounted for as a business combination of entities under common control. The Company subsequently became an indirect wholly owned subsidiary of CenterPoint Energy. CenterPoint Energy is subject to regulation by the Securities and Exchange Commission as a "registered holding company" under the Public Utility Holding Company Act of 1935, as amended (1935 Act). As used herein, CenterPoint Energy also refers to the former Reliant Energy for dates prior to the restructuring. In October 2003, the Federal Energy Regulatory Commission (FERC) granted exempt wholesale generator status to Texas Genco, LP, the Company's wholly owned subsidiary that owns and operates its electric generating plants. As a result, the Company is exempt from substantially all provisions of the 1935 Act as long as it remains an exempt wholesale generator.
As of January 1, 2002, CenterPoint Energy's electric utility unbundled its businesses in order to separate its power generation, transmission and distribution, and retail electric businesses into separate units. Under the Texas electric restructuring law, as of January 1, 2002, the Company ceased to be subject to traditional cost-based regulation. Since that date, the Company has been selling generation capacity, energy and ancillary services to wholesale purchasers at prices determined by the market. To facilitate a competitive market, each power generation company affiliated with a transmission and distribution utility is required to sell at auction firm entitlements to 15%
of the output of its installed generating capacity on a forward basis for varying terms of up to two years (state-mandated auctions). The Company's first state-mandated auction was held in September 2001 for power delivered beginning January 1, 2002. This obligation continues until January 1, 2007 unless before that date the Public Utility Commission of Texas (Texas Utility Commission) determines that at least 40% of the quantity of electric power consumed in 2000 by residential and small commercial customers in CenterPoint Houston's service area is being served by retail electric providers not affiliated with CenterPoint Energy. Reliant Resources, Inc. (Reliant Resources) is deemed to be an affiliate of CenterPoint Energy for purposes of this test.
Basis ofPresentation. The consolidated financial statements include the operations of Texas Genco Holdings, Inc. and its subsidiaries, which manage and operate the Company's electric generation operations. The consolidated financial statements of the Company are presented on a carve-out basis, and present the historical financial position, results of operations and net cash flows of the historically regulated generation-related business of CenterPoint Energy, and are not indicative of the financial position, results of operations or net cash flows that would have 43
TEXAS GENCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) existed had the Company been an independent company operating in the Texas deregulated electricity market (ERCOT market) for the year ended December 31, 2001. Beginning January 1, 2002, CenterPoint Energy's generation business was segregated from CenterPoint Energy's electric utility as a separate reporting business segment and began selling electricity in the ERCOT market at prices determined by the market. Accordingly, for 2002 and 2003, net income (loss) reflects the results of market prices for power. Included in operations for 2002 and 2003 are allocations from CenterPoint Energy for corporate services that included accounting, finance, investor relations, planning, legal, communications, governmental and regulatory affairs and human resources, as well as information technology services and other previously shared services such as corporate security, facilities management, accounts receivable, accounts payable and payroll, office support services and purchasing and logistics.
Certain information in these consolidated financial statements as of December 31, 2002 and for each of the years in the two-year period ended December 31, 2002 relating to the results of operations and financial condition was derived from the historical financial statements of CenterPoint Energy which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Various allocation methodologies were employed during these periods to separate the results of operations and financial condition of the generation-related portion of CenterPoint Energy's business from CenterPoint Energy's historical financial statements. For 2001, revenues were allocated based on the allowed regulatory rate of return on regulated invested capital granted to CenterPoint Energy's electric utility by the Texas Utility Commission. The allowed regulatory rate of return was 9.844% for 2001. Expenses during 2001, such as fuel, purchased power, operations and maintenance and depreciation and amortization, and assets, such as property, plant and equipment and inventory, were specifically identified by function and allocated accordingly for the Company's operations. Various allocations were used to disaggregate other common expenses, assets and liabilities between the Company and CenterPoint Energy's regulated transmission and distribution operations as of December 31, 2001 and for the two-year period then ended.
Interest expense was calculated based upon an allocation methodology that charged the Company with financing and equity costs from CenterPoint Energy in proportion to its share of total net assets. Interest expense in 2002 through August 31, 2002 was allocated based upon the remaining electric utility debt not specifically identified with Reliant Energy's transmission and distribution utility upon deregulation. Effective with the restructuring of Reliant Energy, no long-term debt was assumed by the Company and interest is incurred on borrowings from CenterPoint Energy.
These methodologies reflect the impact of deregulation on the Company's assets and liabilities as of June 30, 1999; however, all existing regulatory assets which are expected to be recovered by the transmission and distribution utility after deregulation have been excluded from these consolidated financial statements.
Management believes these allocation methodologies to be reasonable. Had the Company actually existed as a separate company, its results could have significantly differed from those presented herein. In addition, future results of operations, financial position and net cash flows are expected to materially differ from the historical results presented.
On January 6, 2003, CenterPoint Energy distributed approximately 19% of the 80 million shares of Texas Genco's common stock that were then outstanding to CenterPoint Energy's shareholders. Earnings per share has been presented as if the 80 million shares were outstanding for all historical periods in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share."
(2) Summary of Significant Accounting Policies (a) Reclassificationsand Use of Estimates Certain amounts from the previous years have been reclassified to conform to the 2003 presentation of financial statements. These reclassifications do not affect net income.
The process of preparing financial statements in conformity with GAAP requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues and expenses. Also, such estimates relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts. In addition to these estimates, see Note I (Background and Basis of 44
TEXAS GENCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Presentation) for a discussion of the estimates used and methodologies employed to derive the Company's historical financial statements.
(b) Inventory Inventory consists principally of materials and supplies, coal and lignite, natural gas and fuel oil. Inventories used in the production of electricity are valued at the lower of average cost or market except for coal and lignite, which are valued under the last-in, first-out method. Below is a detail of inventory:
December 31.
2002 2003 (In thousands)
M aterials and supplies................................................................................................ $ 92,869 $ 92,409 Coal and lignite .......................................................................................................... 42,791 49,835 Natural gas.................................................................................................................. 16,733 21,340 Fuel oil ....................................................................................................................... 3.774 6.108 Total inventory.........................................................................................................
(c) Property PlantandEquipment Property, plant and equipment are recorded at historical cost. Repair and maintenance costs are charged to the appropriate expense accounts as incurred. Property, plant and equipment includes the following:
Estimated Useful Lives December 31.
(Years) 2002 2003 (In thousands)
Gas-fired generation facilities ...................................................... 30-60 S 2,274,317 S 2,277,591 Coal and lignite-fired generation facilities................................... 50 3,820,208 3,934,683 Nuclear generation facilities......................................................... 40 2,561,239 2,635,999 Nuclear fuel.................................................................................. 344,003 356,037 Other............................................................................................. 5-50 610.57 630.594 Total ........................................................................................... 9,610,340 9,834,904 Accumulated depreciation and amortization................................ (5.514.703) (5,709.309)
Property, plant and equipm ent, net............................................. S 0. S 42 Prior to the restructuring described in Note 1 (Background and Basis of Presentation), substantially all of the Company's physical assets used in the conduct of the business and operations of electric generation were subject to liens securing CenterPoint Energy's First Mortgage Bonds. In connection with the restructuring, these assets were released from the liens. All of the Company's real and tangible properties, subject to certain exclusions, are currently subject to the lien of a First Mortgage Indenture (the Mortgage) dated December 23, 2003 between JPMorgan Chase Bank, as trustee, and the Company's wholly owned subsidiary, Texas Genco, LP. As of December 31, 2003, Texas Genco, LP had issued S75 million aggregate principal amount of first mortgage bonds under the Mortgage to secure obligations under the Company's $75 million 364-day revolving credit facility. (See Note 3).
For further information regarding removal costs previously recorded as a component of accumulated depreciation, see Note 2(j).
(d) Depreciationand Amortization Depreciation is computed using the straight-line method based on economic lives. Depreciation and amortization expense for 2001, 2002 and 2003 was S154 million, S157 million and S159 million, respectively.
45
TEXAS GENCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(e) CapitalizedInterest Capitalized interest is reflected as a reduction to interest expense in the Statements of Consolidated Operations.
During the years ended December 31, 2001, 2002 and 2003, the Company capitalized interest of S4 million, S7 million and $9 million, respectively.
(/) Long-lived Assets and Intangibles The Company periodically evaluates long-lived assets when events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. The determination of whether an impairment has occurred is based on an estimate of undiscounted cash flows attributable to the assets, as compared to the carrying value of the assets. An impairment analysis of generating facilities requires estimates of possible future market prices, load growth, competition and many other factors over the lives of the facilities. A resulting impairment loss is highly dependent on these underlying assumptions. No impairment has been recorded in any of the three years in the period ended December 31, 2003.
(g) Revenue Recognition Prior to January 1, 2002, revenues were derived based on actual costs plus an allowed regulatory rate of return based on regulated invested capital. For the periods subsequent to January 1, 2002, the Company has been accounted for as a separate business segment of CenterPoint Energy selling electricity to wholesale purchasers in the ERCOT market. Accordingly, revenues represent actual results of CenterPoint Energy's generation business segment in 2002 operating in a deregulated market. Beginning January 1, 2002, the Company has two primary components of revenue: (1) capacity payments, which entitles the owner to power, and (2) energy payments, which are intended to cover the costs of fuel for the actual electricity produced. Capacity payments are billed and collected one month prior to actual energy deliveries and are recorded as deferred revenue until the month of actual energy delivery. At that point, the deferred revenue is reversed, and both capacity and energy payment revenues are recognized. Prior to 2002, all purchased power was part of the total load used to serve retail customers of the integrated utility.
Beginning in 2002, fuel costs and purchased power are costs incurred to support sales of energy in the state-mandated auctions and contractually-mandated auctions required by the Texas Utility Commission, and the corresponding revenues are recorded as energy revenues.
(a) Income Taxes The Company is included in the consolidated income tax returns of CenterPoint Energy. The Company calculates its income tax provision on a separate return basis under a tax sharing agreement with CenterPoint Energy. The Company uses the liability method of accounting for deferred income taxes and measures deferred income taxes for all significant income tax temporary differences. Investment tax credits were deferred and are being amortized over the estimated lives of the related property. Current federal and state income taxes payable are payable to or receivable from CenterPoint Energy.
(i) Statement of Consolidated Cash Flows For purposes of reporting cash flows, the Company considers cash equivalents to be short-term, highly liquid investments readily convertible to cash.
- 6) New Accounting Pronouncements Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires the fair value of an asset retirement obligation to be recognized as a liability is incurred and capitalized as part of the cost of the related tangible long-lived assets. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Retirement obligations associated with long-lived assets included within the scope of SFAS No. 143 are those for which a legal obligation exists under enacted laws, statutes and written or oral contracts, including obligations arising under the doctrine of promissory estoppel.
46
TEXAS GENCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company has identified retirement obligations for nuclear decommissioning at the South Texas Project Electric Generating Station (South Texas Project) and for lignite mine operations which supply the Limestone electric generation facility. Prior to adoption of SFAS No. 143, the Company had recorded liabilities for nuclear decommissioning and the reclamation of the lignite mine. Liabilities were recorded for estimated decommissioning obligations of $140 million and S40 million for reclamation of the lignite at December 31, 2002. Upon adoption of SFAS No. 143 on January 1, 2003, the Company reversed the $140 million previously accrued for the nuclear decommissioning of the South Texas Project and recorded a plant asset of S99 million offset by accumulated depreciation of $36 million as well as a retirement obligation of $187 million. The $16 million difference between amounts previously recorded and the amounts recorded upon adoption of SFAS No. 143 is being deferred as a liability as the recovery of nuclear decommissioning costs continues to be regulated by the Texas Utility Commission. Accordingly, any difference between assets and liabilities associated with nuclear decommissioning are recorded as a receivable or liability as such amount will be funded by or returned to customers of CenterPoint Houston or its successor. The Company also reversed the $40 million it had previously recorded for the mine reclamation and recorded a plant asset of $I million as well as a retirement obligation of $4 million. The S37 million difference between amounts previously recorded and the amounts recorded upon adoption of SFAS No. 143 was recorded as a cumulative effect of accounting change. The Company has also identified other asset retirement obligations that cannot be estimated because the assets associated with the retirement obligations have an indeterminate life.
The following represents the balances of the asset retirement obligation as of January 1, 2003 and the additions and accretion of the asset retirement obligation for the year ended December 31, 2003:
Balance, Balance, January 1, Liabilities Liabilities Cash Flow December 31, 2003 Incurred Settled Accretion Revisions 2003 (In millions)
Nuclear decommissioning ..................................... $ 187 - - $ I - S 188 Lignite mine ...................................... 4 = = 2 S c S-3 S194 The following represents the pro-forma effect on the Company's net income for the year ended December 31, 2002, as if the Company had adopted SFAS No. 143 as of January 1, 2002 (in millions, except per share amounts):
Year Ended December 31. 2002 Net loss as reported ............................................................ $ (93)
Pro-forma net loss ............................................................ (86)
Diluted earnings per share:
Net loss as reported.......................................................................................................... $ (1.16)
Pro-forma net loss ............................................................ (1.07)
The following represents the Company's asset retirement obligations on a pro-forma basis as if it had adopted SFAS No. 143 as of December 31, 2002:
As Reported Proforma (In millions)
Nuclear decommissioning ............................................................... $ 140 $ 187 Lignite mine .............................................................. .40 4 Total .................. S1l19 1 The Company has previously recognized removal costs as a component of depreciation expense. As of December 31, 2002, these removal costs of S115 million have been reclassified from accumulated depreciation to other long-term liabilities in the Consolidated Balance Sheet. Upon adoption of SFAS No. 143, the Company reversed $115 million of previously recognized removal costs as a cumulative effect of accounting change. The total cumulative effect recognized upon adoption of SFAS No. 143 was S99 million after-tax (S152 million pre-tax).
On December 23, 2003, the FASB issued SFAS No. 132 (Revised 2003), "Employer's Disclosures about Pensions and Other Postretirement Benefits" (SFAS No. 132). This standard increases the existing disclosure 47
TEXAS GENCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) requirements by requiring more details about pension plan assets, benefit obligations, cash flows, benefit costs and related information. Companies will be required to segregate plan assets by category, such as debt, equity and real estate, and to provide certain expected rates of return and other informational disclosures. SFAS No. 132 also requires companies to disclose various elements of pension and postretirement benefit costs in interim-period financial statements for quarters beginning after December 15, 2003. The Company has adopted the disclosure requirements of SFAS No. 132 in Note 6 to these consolidated financial statements.
In December 2003, Congress passed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) which will become effective in 2006. The Act contains incentives for the Company, if it continues to provide prescription drug benefits for its retirees, through the provision of a non-taxable reimbursement to the Company of specified costs. The Company has many different alternatives available under the Act, and, until clarifying regulations are issued with respect to the Act, the Company is unable to determine the financial impact.
On January 12, 2004, the FASB issued FASB Staff Position (FSP) FAS 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FAS 106-1)." In accordance with FSP FAS 106-1, the Company's postretirement benefits obligations and net periodic postretirement benefit cost in the financial statements and accompanying notes do not reflect the effects of the legislation. Specific authoritative guidance on the accounting for the legislation is pending and that guidance, when issued, may require the Company to change previously reported information.
(3) Short-Term Borrowings In December 2003, Texas Genco, LP, a subsidiary of the Company, entered into a 364-day $75 million bank credit facility with a seven-bank syndicate. As of December 31, 2003, there were no borrowings outstanding under the revolving credit facility. Proceeds from the revolving credit facility will be used to meet ongoing working capital requirements and for general corporate purposes. Borrowings under the facility may be made at the London interbank offered rate (LIBOR) plus 150 basis points. The facility is secured by a series of first mortgage bonds issued by Texas Genco LP, in an aggregate principal amount of S75 million under a First Mortgage Indenture (the Mortgage) dated December 23, 2003 between JPMorgan Chase Bank, as trustee, and Texas Genco, LP. All of the Company's real and tangible properties, subject to certain exclusions, are currently subject to the lien of the Mortgage. Under the terms of the facility, if CenterPoint Energy ceases to own, directly or indirectly, at least a 50%
voting and economic interest in Texas Genco, LP, an event of default will occur and any borrowings thereunder may become immediately due and payable. Texas Genco's revolving credit facility contains various business and financial covenants. Texas Genco is currently in compliance with the covenants under the credit agreement.
(4) Related Party Transactions and Major Customers As of December 31, 2002, the Company had $86 million in short-term borrowings and $19 million in long-term borrowings from CenterPoint Energy and its subsidiaries. Such borrowings were used for working capital purposes.
Interest expense associated with the borrowings for 2002 was S7 million. As of December 31, 2003, the Company had no short-term or long-term borrowings from CenterPoint Energy and its subsidiaries. As of December 31, 2002, the Weighted average interest rate on the borrowings was 6.2%. In addition, through August 31, 2002, S25 million of interest expense was allocated to the Company related to the remaining electric utility debt not specifically identified with CenterPoint Energy's transmission and distribution utility upon deregulation. Interest expense associated with the borrowings during 2003 was $7 million.
As of December 31, 2002, the Company had net accounts payable to affiliates of $23 million. As of December 31, 2003, the Company had net accounts payable to affiliates of $8 million.
During 2002 and 2003, the sales and services by the Company to Reliant Resources and its subsidiaries totaled SI billion and S1.4 billion, respectively. During 2002 and 2003, sales and services by the Company to CenterPoint Energy and its affiliates totaled $53 million and $-0-, respectively.
During 2002 and 2003, the sales and services by the Company to a major customer other than Reliant Resources totaled $226 million and $205 million, respectively.
48
TEXAS GENCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During 2002 and 2003, purchases of natural gas by the Company from CenterPoint Energy and its affiliates were
$41 million and S29 million, respectively.
CenterPoint Energy provides some corporate services to the Company. The costs of services have been directly charged to the Company using methods that management believes are reasonable. These methods include negotiated usage rates, dedicated asset assignment, and proportionate corporate formulas based on assets, operating expenses and employees. These charges are not necessarily indicative of what would have been incurred had the Company not been an affiliate. Amounts charged to the Company for these services were S47 million for 2002 and $32 million in 2003 and are included primarily in operation and maintenance expenses.
SeparationAgreement. In connection with the distribution by CenterPoint Energy to its shareholders of 19% of the Company's outstanding common stock, the Company entered into a separation agreement with CenterPoint Energy. This agreement contains provisions governing the Company's relationship with CenterPoint Energy following the distribution and specifies the related ancillary agreements between the Company and CenterPoint Energy. In addition, the separation agreement provides for cross-indemnities intended to place sole financial responsibility on the Company and its subsidiaries for all liabilities associated with the current and historical business and operations the Company conducts, regardless of the time those liabilities arose, and to place sole financial responsibility for liabilities associated with CenterPoint Energy's other businesses with CenterPoint Energy and its other subsidiaries. The separation agreement also contains indemnification provisions under which the Company and CenterPoint Energy each indemnify the other with respect to breaches by the indemnifying party of the separation agreement or any ancillary agreements.
Tar Allocation Agreement. The Company is a member of the CenterPoint Energy consolidated group for tax purposes, and the Company will continue to file a consolidated federal income tax return with CenterPoint Energy while CenterPoint Energy retains its 81% interest in the Company. Accordingly, the Company has entered into a tax allocation agreement with CenterPoint Energy to govern the allocation of U.S. income tax liabilities and to set forth agreements with respect to certain other tax matters. Generally, if there are tax adjustments related to the Company which relate to a tax return filed for a period when the Company was a member of the CenterPoint Energy consolidated group, the Company is responsible for any increased taxes and the Company will receive the benefit of any tax refunds.
(5) Jointly Owned Electric Utility Plant The Company owns a 30.8% interest in the South Texas Project, which consists of two 1,250 MW nuclear generating units, and bears a corresponding 30.8% share of capital and operating costs associated with the project.
The South Texas Project is owned as a tenancy in common among the Company and three other co- owners, with each owner retaining its undivided ownership interest in the two nuclear-fueled generating units and the electrical output from those units. The Company is severally liable, but not jointly liable, for the expenses and liabilities of the South Texas Project. CenterPoint Energy and the other three co-owners organized STP Nuclear Operating Company (STPNOC) to operate and maintain the South Texas Project. STPNOC is managed by a board of directors comprised of one director appointed by each of the four owners, along with the chief executive officer of STPNOC. The Company's share of direct expenses of the South Texas Project is included in the corresponding operating expense categories in the accompanying financial statements. As of December 31, 2002 and 2003, Texas Genco's total utility plant for the South Texas Project was $385 million and S431 million, respectively, (net of S2.2 billion accumulated depreciation which includes an impairment loss recorded in 1999 of S745 million). As of December 31, 2002 and 2003, Texas Genco's investment in nuclear fuel was S42 million (net of S302 million amortization) and $40 million (net of S316 million amortization), respectively.
(6) Employee Benefit Plans (a) Incentive Compensation Plans During 2003, the Company established a long-term incentive compensation plan (LICP) that provides cash-based performance units to key employees of the Company. The Company's compensation cost related to this plan was less than $1 million for 2003.
49
TEXAS GENCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(b) Pension Substantially all of the Company's employees participate in CenterPoint Energy's qualified non-contributory pension plan. The benefit accrual is in the form of a cash balance of a specified percentage of annual pay plus accrued interest. CenterPoint Energy's funding policy is to review amounts annually in accordance with applicable regulations in order to achieve adequate funding of projected benefit obligations. Pension expense is allocated to the Company based on covered employees. Assets of the plan are not segregated or restricted by CenterPoint Energy's participating subsidiaries and accrued obligations for the Company employees would be the obligation of the retirement plan if the Company were to withdraw. Pension benefit was $1 million for the year ended December 31, 2001. The Company recognized pension expense of $15 million (including S9 million of non-recurring early retirement expenses) and $17 million for the years ended December 31, 2002 and 2003, respectively.
In addition to the plan, the Company participates in CenterPoint Energy's non-qualified pension plan, which allows participants to retain the benefits to which they would have been entitled under the non-contributory pension plan except for federally mandated limits on these benefits or on the level of salary on which these benefits may be calculated. The expense associated with the non-qualified pension plan was less than Sl million in 2001, 2002 and 2003.
(c) Savings Plan The Company participates in CenterPoint Energy's qualified savings plan, which includes a cash or deferred arrangement under Section 401(k) of the Internal Revenue Code of 1986, as amended. Under the plan, participating employees may contribute a portion of their compensation, on a pre-tax or after-tax basis, generally up to a maximum of 16% of compensation. CenterPoint Energy matches 75% of the first 6% of each employee's compensation contributed. CenterPoint Energy may contribute an additional discretionary match of up to 50% of the first 6% of each employee's compensation contributed. These matching contributions are fully vested at all times. A substantial portion of the matching contribution is initially invested in CenterPoint Energy common stock.
CenterPoint Energy allocates to the Company the savings plan benefit expense related to the Company's employees.
Savings plan benefit expense was $6 million, S9 million and S7 million for the years ended December 31, 2001, 2002 and 2003, respectively.
(d) PostretirementBenefits The Company's employees participate in CenterPoint Energy's plan which provides certain healthcare and life insurance benefits for retired employees on a contributory and non-contributory basis. Employees become eligible for these benefits if they have met certain age and service requirements at retirement, as defined in the plans. Under plan amendments effective in early 1999, healthcare benefits for future retirees were changed to limit employer contributions for medical coverage. Such benefit costs are accrued over the active service period of employees. The Company funds all of its obligations on a pay-as-you-go basis.
On January 12, 2004, the FASB issued FAS 106-1. In accordance with FSP FAS 106-1, the Company's postretirement benefits obligations and net periodic postretirement benefit cost in the financial statements and accompanying notes do not reflect the effects of the legislation. Specific authoritative guidance on the accounting for the legislation is pending and that guidance, when issued, may require the Company to change previously reported information.
50
TEXAS GENCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The net postretirement benefit cost includes the following components:
Year Ended December 31.
2001 2002 2003 (In millions)
Service cost - benefits earned during the period...................................................... $ S $ 1 $ 1 Interest cost on projected benefit obligation............................................................... 6 3 3 Expected return on plan assets ................................................................................... (4) (1) (2)
Net amortization......................................................................................................... 4 1 2 Benefit enhancem ent.................................................................................................. - 3 -
Net postretirem ent benefit cost................................................................................... $2 1-7 $ 4 The Company used the following assumptions to determine net postretirement benefit costs:
Year Ended December 31.
2001 2002 2003 Discount rate.............................................................................................................. 7.25%
7.50% 6.75%
Expected return on plan assets ......................................................... 10.0% 9.5% 9.0%
In determining net periodic benefit costs, the Company uses fair value, as of the beginning of the year, as its basis for determining expected return on plan assets.
The following table displays the change in the benefit obligation, the fair value of plan assets and amounts included in the Company's Consolidated Balance Sheets as of December 31, 2002 and 2003 for the Company's postretirement benefit plans:
December 31.
2002, 2003 (In millions)
Change in Benefit Obligation Accumulated benefit obligation, beginning of year .............................................................. S 89 S 41 Service cost ........................................................................................................................... 1 1 Interest cost ........................................................................................................................... 3 3 Benefits paid.......................................................................................................................... - (2)
Participant contributions........................................................................................................ - I Plan amendments................................................................................................................... 3 (1)
Transfer to affiliate................................................................................................................ (52) -
Actuarial (gain) loss.............................................................................................................. -- a) I Accumulated benefit obligation, end of year......................................................................... -1 SA4 Change in Plan Assets Plan assets, beginning of year ............................................................................................... S 37 $ 15 Benefits paid.......................................................................................................................... - (2)
Employer contributions......................................................................................................... 1 1 Participant contributions........................................................................................................ - 1 Transfer to affiliate................................................................................................................ (22) -
Actual investment return ....................................................................................................... (1))
Plan assets, end of year......................................................................................................... . 15 CS-I1 Reconciliation of Funded Status Funded status......................................................................................................................... S (26) S (26)
Unrecognized transition obligation ....................................................................................... 8 7 Unrecognized prior service cost............................................................................................ 13 11 Unrecognized actuarial loss................................................................................................... -25)
Net amount recognized at end of year................................................................................... SO -- SOW (5)
Amounts Recognized in Balance Sheets Benefit obligations ................................................................................................................ S-40) SLW1)
Net amount recognized at end of year................................................................................... S"1) S=W) 51
TEXAS GENCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31.
2002 2003 (In millions)
Actuarial Assumptions Discount rate ................................................ 6.75% 6.25%
Expected long-term rate of return on assets ............................................ 9.0% 8.5%
Healthcare cost trend rate assumed for the next year ................. ............. 11.25% 10.50%
Rate to which the cost trend rate is assumed to decline (ultimate trend rate)............................................................................... 5.5% 5.5%
Year that the rate reaches the ultimate trend rate .................................... 2011 2011 Measurement date used to determine plan obligations and December 31, December 31, assets..................................................................................................... 2002 2003 Assumed healthcare cost trend rates have a significant effect on the reported amounts for the Company's postretirement benefit plans. However, the effects of a 1% change in the assumed healthcare cost trend rate would change obligations and the total of service and interest costs by less than SI million.
The following table displays the weighted average asset allocations as of December 31, 2002 and 2003 for the Company's postretirement benefit plan:
December 31.
2002 2003 Domestic equity securities......................................................................................................... 35% 41%
International equity securities.................................................................................................... 8 9 Debt securities........................................................................................................................... 54 48 Cash ................................................................ . .. 2 Total.........................................................................................................................................
.QQ% J %
In managing the investments associated with the postretirement benefit plan, the Company's objective is to preserve and enhance the value of plan assets while maintaining an acceptable level of volatility. These objectives are expected to be achieved through an investment strategy, which manages liquidity requirements while maintaining a long-term horizon in making investment decisions and efficient and effective management of plan assets.
As part of the investment strategy discussed above, the Company has adopted and maintains the following asset allocation targets for its postretirement benefit plan:
Domestic equity securities....................................................................................................................... 27-37%
International equity securities.................................................................................................................. 5-15%
Debt securities......................................................................................................................................... 53-63%
Cash.0-2%
The expected rate of return assumption was developed by reviewing the targeted asset allocations and historical index performance of the applicable asset classes over a 15-year period, adjusted for investment fees and diversification effects.
The Company expects to contribute SI million to its postretirement benefits plan in 2004.
(e) PostemploymentBenefits The Company participates in CenterPoint Energy's plan which provides postemployment benefits for former or inactive employees, their beneficiaries and covered dependents, after employment but before retirement (primarily healthcare and life insurance benefits for participants in the long-term disability plan). Postemployment benefits costs were less than SI million for 2001 and 2002 and totaled SI million for 2003.
52
TEXAS GENCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
QJ Other Non-QualifiedPlans The Company participates in CenterPoint Energy's non-qualified deferred compensation plans that provide benefits payable to directors, officers and certain key employees or their designated beneficiaries at specified future dates, upon termination, retirement or death. Benefit payments are made from the general assets of the Company.
During 2001, 2002 and 2003, benefit expense relating to these programs was less than SI million each year.
Included in "Benefit Obligations" in the accompanying Consolidated Balance Sheets at both December 31, 2002 and 2003 was S4 million of liabilities relating to the deferred compensation plans.
(g) OtherEmployee Aatters As of December 31, 2003, the Company employed 1,5 11 people. Of these employees, 1,030 were covered by a collective bargaining agreement with the International Brotherhood of Electrical Workers Local 66 that expired in September 2003. The Company's bargaining unit employees have continued to work without interruption and the Company has not had any work interruptions since 1976. The Company continues to have a good relationship with the bargaining unit and is actively negotiating to obtain a new agreement in 2004.
(7) Income Taxes The Company's current and deferred components of income tax expense (benefit) were as follows:
Year Ended December 31, 2001 2002 2003 (In millions)
Current Federal...................................................................................................................... S 91 S (24) $ 73 State.......................................................................................................................... 2-Total current.......................................................................................................... I11 (24) 73 Deferred Federal...................................................................................................................... (42) (39) (2)
State..........................................................................................................................
Income tax expense (benefit)...................................................................................... S-74 SJ=3) $-71 A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:
Year Ended December 31.
2001 2002 2003 (In millions)
Income (loss) before income taxes................................................................... S 202 $ (156) S 223 Federal statutory rate...................................................................................... 35% 35% 35%
Income tax expense (benefit) at statutory rate.................................................. 71 (55) 78 Increase (decrease) in tax resulting from:
State income taxes, net of federal income tax benefit .................................... 16 Amortization of investm ent tax credit............................................................ (13) (8) (7)
Excess deferred taxes ..................................................................................... (4)
Other, net........................................................................................................
Total ............................................................................................................ -4 -(8) (7)
Incom e tax expense (benefit)............................................................................ S=(3) $1 l Effective Rate................................................................................................... -4o% %
The Company's tax effects of temporary differences between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases were as follows:
53
TEXAS GENCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31.
2002 2003 (In millions)
Deferred tax assets:
Non-current:
Employee benefits.......................................................................................................... S 4 S 11 Environmental reserves.................................................................................................. 14 2 Other...............................................................................................................................4 4 Total non-current deferred tax assets............................................................................ 22 17 Deferred tax liabilities:
Non-current:
Depreciation................................................................................................................... 829 853 Other...............................................................................................................................6 9 Total non-current deferred tax liabilities...................................................................... 835 862 Accumulated deferred income taxes, net ......... .- M ISJ85 The Company is included in the consolidated income tax returns of CenterPoint Energy. CenterPoint Energy's consolidated federal income tax returns have been audited and settled through the 1996 tax year. The 1997 through 2000 consolidated federal income tax returns are currently under audit.
(8) Commitments and Contingencies (a) Fuel and Purchased Poier Commitments Fuel commitments include several long-term coal, lignite and natural gas contracts, which have various quantity requirements and durations that are not classified as non-trading derivatives assets and liabilities in the Company's Consolidated Balance Sheets as of December 31, 2003 as these contracts meet the SFAS No. 133 exception to be classified as normal purchases contracts or do not meet the definition of a derivative. Minimum payment obligations related to coal and transportation agreements and lignite mining and lease agreements that extend through 2012 are approximately S309 million in 2004, $251 million in 2005, S256 million in 2006, S248 million in 2007 and S162 million in 2008. Purchase commitments related to purchased power are not material to the Company's operations.
As of December 31, 2003, the pricing provisions in some of these contracts were above market.
(b) Lease Commitments The following table sets forth information concerning the Company's obligations under non-cancelable long-term operating leases at December 31, 2003, which primarily consist of rental agreements for building space, data processing equipment and vehicles, including major work equipment (in millions).
2004.$ 11 2005.... 11 2006.10 2007.10 2008.10 2009 and beyond. 47 Total...................................................................................................................................................
Total lease expense for all operating leases was $10 million, $11 million and $11 million during 2001, 2002 and 2003, respectively.
(c) Environmental,Legal and Other Clean Air Standards. The Texas electric restructuring law and regulations adopted by the Texas Comrnmission on Environmental Quality (TCEQ) in 2001 require substantial reductions in emission of oxides of nitrogen (NOx) from electric generating units. The Company is currently installing cost-effective controls at its generating plants to comply with these requirements. Through December 31, 2003, the Company has invested S664 million for NOx emission control, and plans to make expenditures of up to approximately S131 million through 2007. Further 54
TEXAS GENCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) revisions to these NOx standards may result from the TCEQ's future rules, expected by 2007, implementing more stringent federal eight-hour ozone standards.
Asbestos. The Company has been named, along with numerous others, as a defendant in several lawsuits filed by a large number of individuals who claim injury due to exposure to asbestos while working at sites along the Texas Gulf Coast. Most of these claimants have been workers who participated in construction of various industrial facilities, including power plants, and some of the claimants have worked at locations owned by the Company. The Company anticipates that additional claims like those received may be asserted in the future and intends to continue vigorously contesting claims which it does not consider to have merit.
Nuclear Insurance. The Company and the other owners of the South Texas Project maintain nuclear property and nuclear liability insurance coverage as required by law and periodically review available limits and coverage for additional protection. The owners of the South Texas Project currently maintain S2.75 billion in property damage insurance coverage, which is above the legally required minimum, but is less than the total amount of insurance currently available for such losses.
Under the Price Anderson Act, the maximum liability to the public of owners of nuclear power plants was $ 10.6 billion as of December 31, 2003. Owners are required under the Price Anderson Act to insure their liability for nuclear incidents and protective evacuations. The Company and the other owners currently maintain the required nuclear liability insurance and participate in the industry retrospective rating plan under which the owners of the South Texas Project are subject to maximum retrospective assessments in the aggregate per incident of up to S100.6 million per reactor. The owners are jointly and severally liable at a rate not to exceed $10 million per incident per year. In addition, the security procedures at this facility have been enhanced to provide additional protection against terrorist attacks.
There can be no assurance that all potential losses or liabilities associated with the South Texas Project will be insurable, or that the amount of insurance will be sufficient to cover them. Any substantial losses not covered by insurance would have a material effect on the Company's financial condition, results of operations and cash flows.
Nuclear Decommissioning. CenterPoint Houston contributed $14.8 million in 2001 to trusts established to fund the Company's share of the decommissioning costs for the South Texas Project. CenterPoint Houston contributed S2.9 million in 2002 and 2003 to these trusts. There are various investment restrictions imposed upon the Company by the Texas Utility Commission and the United States Nuclear Regulatory Commission (NRC) relating to the Company's nuclear decommissioning trusts. The Company and CenterPoint Energy have each appointed two members to the Nuclear Decommissioning Trust Investment Committee which establishes the investment policy of the trusts and oversees the investment of the trusts' assets. The securities held by the trusts for decommissioning costs had an estimated fair value of$189 million as of December 31, 2003, of which approximately 37% were fixed-rate debt securities and the remaining 63% were equity securities. In July 1999, an outside consultant estimated the Company's portion of decommissioning costs to be approximately $363 million. While the funding levels currently exceed minimum NRC requirements, no assurance can be given that the amounts held in trust will be adequate to cover the actual decommissioning costs of the South Texas Project. Such costs may vary because of changes in the assumed date of decommissioning and changes in regulatory requirements, technology and costs of labor, materials and equipment. Pursuant to the Texas electric restructuring law, costs associated with nuclear decommissioning that have not been recovered as of January 1, 2002, will continue to be subject to cost-of-service rate regulation and will be included in a charge to transmission and distribution customers.
Joint OperatingAgreement with City of San Antonio. The Company has a joint operating agreement with the City Public Service Board of San Antonio to share savings from the joint dispatching of each party's generating assets. Dispatching the two generating systems jointly results in savings of fuel and related expenses due to a more efficient utilization of each party's lowest cost resources. The two parties currently share equally the savings resulting from joint dispatch. The agreement terminates in 2009.
55
TEXAS GENCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(9) Unaudited Quarterly Data Summarized quarterly financial data is as follows:
Year Ended December 31. 2002 First Second Third Fourth Ouarter Ouarter Quarter Ouarter (In millions, except per share data)
Revenues ........................................................................................... S 326 $ 414 $ 526 S 275 Operating incom e (loss) .................................................................... (52) (29) 7 (59)
Net income (loss) .............................................................................. (35) (18) 3 (43)
Basic and diluted earnings per share ................................................. $ (0.43) $ (0.23) S 0.04 S (0.54)
YearEnded December31. 2003 First Second Third Fourth Ouarter Ouarter Ouarter Ouarter (in millions, except per share data)
Revenues ........................................................................................... S 359 S 578 $ 657 S 408 Operating income (loss) .................................................................... (17) 50 125 64 Income (loss) before cumulative effect of accounting change........................................................................... (11) 33 82 47 Cumulative effect of accounting change, net of tax.................................................................................................... 99 N et income ........................................................................................ 88 33 82 47 Basic and diluted earnings per share:
Income (loss) before cumulative effect of accounting change........................................................................ $ (0.14) S 0.42 S 1.03 S 0.58 Cumulative effect of accounting change, net of tax................................................................................................. 1.24 -- -
Net income ...................................................................................... S$ 1.10 S 24 (10) Subsequent Event On February 5, 2004, the Company's board of directors declared a quarterly cash dividend of S0.25 per share of common stock payable on March 19, 2004 to shareholders of record as of the close of business on February 26, 2004.
56
INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Texas Genco Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Texas Genco Holdings, Inc., (the Company),
as of December 31, 2002 and 2003, and the related statements of consolidated operations, cash flows and capitalization and shareholders' equity for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2002 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2() to the consolidated financial statements, on January 1, 2003, the Company recorded asset retirement obligations to conform to Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations."
DELOITTE & TOUCHE LLP Houston, Texas March 12, 2004 57
Item 9. Changes in and Disagreementts ith Accountants on Accounting andFinancialDisclosure.
None.
Item 9A. Controlsand Procedures.
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.
Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2003 to provide assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.
There has been no change in our internal controls over financial reporting that occurred during the three months ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART III Item 10. Directorsand Executive Officers.
The information called for by Item 10, to the extent not set forth in "Executive Officers" in Item 1 of this Form 10-K, is or will be set forth in the definitive proxy statement relating to Texas Genco's 2004 annual meeting of shareholders pursuant to SEC Regulation 14A. Such definitive proxy statement relates to a meeting of shareholders involving the election of directors and the portions thereof called for by Item 10 are incorporated herein by reference pursuant to Instruction G to Form 10-K.
Item II. Executive Compensation.
The information called for by Item 11 is or will be set forth in the definitive proxy statement relating to Texas Genco's 2004 annual meeting of shareholders pursuant to SEC Regulation 14A. Such definitive proxy statement relates to a meeting of shareholders involving the election of directors and the portions thereof called for by Item 11 are incorporated herein by reference pursuant to Instruction G to Form 10-K.
Item 12. Securitg Ownership of CertainBeneficial Owners and Aanagement andRelated Stockh;SolderAMatters.
The information called for by Item 12 is or will be set forth in the definitive proxy statement relating to Texas Genco's 2004 annual meeting of shareholders pursuant to SEC Regulation 14A. Such definitive proxy statement relates to a meeting of shareholders involving the election of directors and the portions thereof called for by Item 12 are incorporated herein by reference pursuant to Instruction G to Form 10-K.
Item 13. Certain Relationships and Related Transactions.
The information called for by Item 13 is or will be set forth in the definitive proxy statement relating to Texas Genco's 2004 annual meeting of shareholders pursuant to SEC Regulation 14A. Such definitive proxy statement relates to a meeting of shareholders involving the election of directors and the portions thereof called for by Item 13 are incorporated herein by reference pursuant to Instruction G to Form 10-K.
Item 14. PrincipalAccountantFees and Services.
The information called for by Item 14 is or will be set forth in the definitive proxy statement relating to Texas Genco's 2004 annual meeting of shareholders pursuant to SEC Regulation 14A. Such definitive proxy statement relates to a meeting of shareholders involving the election of directors and the portions thereof called for by Item 14 are incorporated herein by reference pursuant to Instruction G to Form 10-K.
58
PART IV Item 15. Exhibits, FinancialStatement Schedules and Reports on Form 8-K.
(a)(1) FinancialStatements.
Statements of Consolidated Operations for the Three Years Ended December 31, 2003 ................... ............................................... 39 Consolidated Balance Sheets at December 31, 2002 and 2003 ...................................... 40 Statements of Consolidated Cash Flows for the Three Years Ended December 31, 2003 ................... ............................................... 41 Statements of Consolidated Capitalization and Shareholders' Equity for the Three Years Ended December 31, 2003 ................................................ 42 Notes to Consolidated Financial Statements .................................................................. 43 Independent Auditors' Report .................................................................. 57 (a)(2) FinancialStatement Schedulesfor the Three Years EndedDecember 31, 2003 The following schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements:
1, II, III, IV and V.
(a)(3) Exhibits See Index of Exhibits on page 66.
(b) Reports on Form 8-K On October 21, 2003, we filed a Current Report on Form 8-K dated October 21, 2003 in which we furnished information under Item 12 of that form relating to our third quarter 2003 earnings.
On December 12, 2003, we filed a Current Report on Form 8-K dated December 11, 2003 in which we announced that on December 9, 2003, one of three standby diesel generators at Unit 2 of the South Texas Project nuclear facility experienced a failure during a routine monthly surveillance test.
On January 29, 2004, we filed a Current Report on Form 8-K dated January 23, 2004 in which we announced that Reliant Resources, Inc. had notified CenterPoint Energy that it would not exercise its option to purchase CenterPoint Energy's 81% interest in Texas Genco Holdings, Inc.
On February 12, 2004, we filed a Current Report on Form 8-K dated February 12, 2004 in which we furnished information under Item 12 of that form relating to our fourth quarter and full year 2003 earnings.
On March 3, 2004, we filed a Current Report on Form 8-K dated March 3, 2004 to furnish under Item 9 of that form a slide presentation we expect will be presented to various members of the financial and investment community from time to time.
59
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, the State of Texas, on the 12th day of March, 2004.
TEXAS GENCO HOLDINGS, INC.
(Registrant)
By: Isl DAVID G. TEES David G. Tees Presidentand ChiefExecutive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 12, 2004.
Sihnature Title
/sf DAVID G. TEES President, Chief Executive Officer and Director (David G. Tees) (Principal Executive Officer)
Is! GARY L. WHITLOCK Executive Vice President, Chief Financial Officer and (Gary L. Whitlock) Director (Principal Financial Officer)
Isf JAMES S. BRIAN Senior Vice President and Chief Accounting Officer (James S. Brian) (Principal Accounting Officer)
Isl J. EVANS ATTWELL Director (J. Evans Attwell)
Is/ DONALD R. CAMPBELL Director (Donald R. Campbell)
/sf ROBERT J. CRU1IKSHANK Director (Robert J. Cruikshank)
Is/ PATRICIA A. HEMINGWAY HATT.L Director (Patricia A. Hemingway Hall)
/s/ DAVID M. MCCLANAHAN Director (David M. McClanahan)
/s/ SCOTT E. ROZ7FLL Director (Scott E. Rozzell) 60
TEXAS GENCO HOLDINGS, INC.
EXHIBITS TO THE ANNUAL REPORT ON FORM 10-K For Fiscal Year Ended December 31, 2003 INDEX OF EXHIBITS Exhibits not incorporated by reference to a prior filing are designated by a cross (Q); all exhibits not so designated are incorporated herein by reference to a prior filing as indicated.
SEC File or Exhibit Registration Exhibit Number Description Report or Reclstration Statement Number Reference 3.1 - Amended and Restated Articles of Texas Genco Holdings, Inc.'s 1-31449 3.1 Incorporation ("Texas Genco") Form I 0-K for the year ended December 31, 2002 3.2 - Amended and Restated Bylaws Texas Genco's Form I0-K for the 1-31449 3.2 year ended December 31, 2002 4.1 - Specimen Stock Certificate Texas Genco's registration 1-31449 4.1 statement on Form 10 10.1 - Separation Agreement between Texas Genco's Form I0-K for the 1-31449 10.1 CenterPoint Energy, Inc. year ended December 31, 2002
("CenterPoint Energy") and Texas Genco effective as of August 31, 2002 10.2 - Texas Genco Option Agreement CenterPoint Energy Houston 1-3187 10.4 Electric, LLC's (formerly Reliant Energy, Incorporated)
("REI") quarterly report on Form 10-Q for the quarter ended March 31,2001 10.3 - Transition Services Agreement Texas Genco's Form I0-K for the 1-31449 10.3 between CenterPoint Energy and year ended December 31, 2002 Texas Genco effective as of August 31, 2002 10.4 - Technical Services Agreement CenterPoint Houston's quarterly 001-31449 10.3 report on Form I 0-Q for the quarter ended March 31, 2001 10.5 - Tax Allocation Agreement between Texas Genco's Form I 0-K for the 1-31449 10.5 CenterPoint Energy and Texas year ended December 31, 2002 Genco effective as of August 31, 2002 10.6(a) - Executive Benefit Plan of Houston Industries 1-7629 1O(a)(l),
CenterPoint and First and Second Incorporated's ("HI") Form I 0-Q (a)(2) and Amendments thereto effective as for the quarter ended March 31, (a)(3) of June 1, 1982, July 1, 1984 1987 and May 7, 1986, respectively 10.6(b) - Third Amendment to Exhibit RErs Form I 0-K for the year 1-3187 I O(a)(2) 10.6(a) dated September 17, 1999 ended December 31, 2000 10.7(a) - Executive Life Insurance Plan of Hrs Form I0-K for the year 1-7629 lo(q)
CenterPoint effective as of ended December 31, 1993 January 1, 1994 10.7(b) - First Amendment to Exhibit Hrs Form 10-Q for the quarter 1-7629 10 10.7(a) effective as of January ended June 30, 1995 1, 1994 10.7(c) - Second Amendment to Exhibit RErs Form I 0-K for the year 1-3187 10(s)(3) 10.7(a) effective as of August ended December 31, 1997 6, 1997 10.8(a) - Long-Term Incentive Compensation Hrs Form Io-Q for the quarter 1-7629 1O(c)
Plan of CenterPoint effective as ended June 30, 1989 of January 1, 1989 10.8(b) - First Amendment to Exhibit Hrs Form 10-K for the year 1-7629 1O(f)(2) 10.8(a) effective as of January ended December 31, 1989 1, 1990 10.8(c) - Second Amendment to Exhibit Hrs Form I 0-K for the year 1-7629 1O(u)(3) 10.8(a) effective as of December ended December 31, 1992 22, 1992 10.8(d) - Third Amendment to Exhibit RErs Form I0-K for the year 1-3187 1O(m)(4) 10.8(a) effective as of August ended December 31, 1997 6,1997 61
SEC File or Exhibit Registration Exhibit Number Description Report or Rezistration Statement Number Reference 10.9 - Retention Agreement effective RErs Form 10-IK forthe year 1-3187 10(jj)
October 15,2001 between REI and ended December 31, 2001 David G. Tees 10.10(a) - Deferred Compensation Plan of Hrs Form 10-K for the year 1-7629 10(d)(3)
CenterPoint effective as of ended December 31, 1990 January 1, 1991 10.0O(b) - First Amendment to Exhibit Hrs Form 10-K for the year 1-7629 100X2) 10.10(a) effective as of January ended December 31, 1991 1, 1991 10.10(c) - Second Amendment to Exhibit HI's Form 10-Q for the quarter 1-7629 10(g) 10.10(a) effective as of March ended March 31, 1992 30, 1992 10.0O(d) - Third Amendment to Exhibit Hrs Form 10-K for the year 1-7629 10()(4) 10.10(a) effective as of June 2, ended December 31, 1993 1993 10.10(e) - Fourth Amendment to Exhibit Hrs Form 10-K for the year 1-7629 10(j)(5) 10.10(a) effective as of ended December 31, 1993 December 1, 1993 10.10(f) - Fifth Amendment to Exhibit Hrs Form 10-K for the year 1-7629 10G)(6) 10.10(a) effective as of ended December 31, 1994 September 7, 1994 10.10(g) - Sixth Amendment to Exhibit Hrs Form 10-Q for the quarter 1-7629 10(b) 10.10(a) effective as of August ended June 30, 1995 1, 1995 10.10(h) - Seventh Amendment to Exhibit Hrs Form 10-Q for the quarter 1-7629 10(d) 10.10(a) effective as of ended June 30, 1996 December 1, 1995 10.10(i) - Eighth Amendment to Exhibit Hrs Form I 0-Q for the quarter 1-7629 10(d) 10.10(a) effective as of January ended June 30, 1997 1, 1997 10.10) - Ninth Amendment to Exhibit RErs Form 10-K for the year 1-3187 10(1)(10) 10.10(a) effective in part ended December31, 1997 August 6, 1997, in part October 1, 1997 and in part January 1, 1998 10.0O(k) - Tenth Amendment to Exhibit RErs Form 10-K for the year 1-3187 10.10(a) effective as of ended December 31, 1997 September 3, 1997 10.11 - Assignment and Assumption Texas Genco's registration 1-31449 10.11 Agreement for the Technical statement on Form 10 Services Agreement entered into as of August 31, 2002, by and between Texas Genco, LP and REI 10.12 - Undertaking to Comply with Texas Genco's registration 1-31449 10.12 Certain Provisions of Option statement on Form 10 Agreement entered into as of August 31, 2002 by Texas Genco 10.13 - Amendment No. I to Texas Genco Texas Genco's Form 10-K for the 1-31449 10.13 Option Agreement dated February year ended December 31, 2002 21,2003 10.14 - S75,000,000 revolving credit CenterPoint Energy Inc.'s 1-31447 IO(ppXI) facility dated as of December ("CNP') Form 10-K for the year 23, 2003 among Texas Genco, LP ended December 31, 2003 and the banks named therein 10.15 - First mortgage indenture, dated CNP's Form 10-K for the year 1-31447 10pp)(2) as of December 23, 2003 among ended December 31, 2003 Texas Genco, LP and JPMorgan Chase Bank, as trustee 10.16 - First supplemental indenture to CNP's Form 10-K for the year 1-31447 1O(pp)(3)
Exhibit 10.15 dated as of ended December 31, 2003 December 23, 2003 10.17 - Pledge Agreement, dated as of CNP's Form 10-Q for the quarter 1-31447 10.9 October 7,2003, executed in ended September 30,2003 connection with Credit Agreement, dated as of October 7, 2003, among CenterPoint Energy and the banks named therein 10.18 - CenterPoint Energy 1985 Deferred CNPIs Form I 0-Q for the quarter 1-31447 10.1 Compensation Plan, as amended ended September 30, 2003 and restated effective January 62
SEC File or Exhibit Registration Exhibit Number Description Report or ReeIstration Statement Number Reference 1,2003 10.19 - CenterPoint Energy Deferred CNP's Form 1o-Q for the quarter 1-31447 10.2 Compensation Plan, as amended ended September 30,2003 and restated effective January 1,2003 10.20 - CenterPoint Energy Short Term CNP's Form I0-Q for the quarter 1-31447 10.3 Incentive Plan, as amended and ended September 30, 2003 restated effective January 1, 2003 10.21 - CenterPoint Energy Executive CNP's Form I 0-Q for the quarter 1-31447 10.4 Benefits Plan, as amended and ended September 30,2003 restated effective January 1, 2003 10.22 - CenterPoint Energy Executive CNP's Form I0-Q for the quarter 1-31447 10.5 Life Insurance Plan, as amended ended September 30, 2003 and restated effective June 18, 2003 10.23 - Texas Genco Holdings, Inc. Texas Genco's Form I0-Q for the 1-31449 10.7 Performance Unit Plan effective quarter ended September 30, 2003 January 1,2003 21.1 - Subsidiaries of Texas Genco Texas Genco's registration 1-31449 21.1 statement on Form 10 t31.1 - Rule 13a-14(a)Il5d-14(a)
Certification of David G.Tees t31.2 - Rule 13a-14(a)115d-14(a)
Certification of Gary L Whitlock t32.1 - Section 1350 Certification of David G. Tees t32.2 - Section 1350 Certification of Gary L Whitlock 63
NOC-AE-04001753 Application ATTACHMENT 5 CITY PUBLIC SERVICE OF SAN ANTONIO 2003-2004 ANNUAL REPORT
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a didn IIneed em cAa!mp`I6'n's'-','T6",Q p--r'o've'cli sifyice COSI efore winning the dril In thelr'ter IrKI, fehf-& s a 1A S 01 6fial Ahr h 0101?I6DU6.1 &.-
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7;, rogr 4 wsi t 'itclly FIc SeMcd'(CPS XPO rfolmsforth gbocLoljl;e'dtiilgi$;-
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list *'W6674t& if6ro
?y'=M gpyprQA ing gad '614 crervLceT- t opera ions,our;, ani I ioy s rengtqNltows'p to 6' en on re iic-E and recre arya WITI re iab aM 104 .3. summer p I .,pk crpdaljQ'PprsuNqas It mpleimen
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ocusdslblc'cl talin tWma
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.> *-V.lWhther Ilisy rr ,.l;itlld Infjst boreaks., .talih itcrla or thIdeQpoit fhrps~hcot
- -ng, oreet teams rely .Eha strong rod~er of powerfull pilyayrs to help them win eve nt n-. , s,-
-itOlign65t matchuips. They hone this strength through dedicated practice, and enhance It -,,,
iei-f . ~~with wise; careful acquisitions of new talent. Uke the Spurs. CPS ar hteves excellence w~ith a . fi
}<t p t.^. ock-sofid foundation of wel-run facilites and weU-managed finances. and consit~ently ;-.
gt ? seeks to expand that strength through new facirites that enhance our reflability and invest-
-e<,i ~,;f ,'.4, ment activites that are secure, yet give us the highest returns. *..;
- -S{^;.-Stt ie-w GreaterSartAntonioconttnuedtogrowln2003.andCPSworkedtomeetthechai-i :. ta&i1-~
r fenge,s,with new infrastructure. Most notably. CPS assumed control of all electrical acilities ai ~*f t ?a
. ;K .the U.S. hny s Fort Sam Houston and ai Carnp fBnlis, an Army trainng hdsallation north-k 4 5 twX
' " " ': west of San Antonio. We also began planning a new high-voltage transmission fine to serve . j ti
- .. :. the growing area to the west and northwest of San Antonio, working estensively with cus '-> -*>m .
tomers along proposed routes to determine tiebest possible route. To monitor the tlowv ^ ;i @
f . ~~energy throughout CP'S ever-growing network of gas and electric lines. CPS broke ground . - -Y¢
& o~~~n a new. date-od-the-art Energy Management Center in easgtern San Antonio. And CP'S. ; ;!
tji00Rws:* reaeto accommodate the energy needsofa major new corporate ctizen. Toyota. whtictt i Vt.
,, : . is building a new pickup truck assembly plant that will employ 2.000 wh~en it opens In 2008. . MS;, - ,
~~~~~C'8-:9matched
-' its t PSphysical strength with fiscal strength, maintaining its reputafion for t
. f prnudent financial planning that has eamed it a AM rating from Fitch Ratings, aAat . -
r 4
- '--. P SThEN rating from Moody s Investors Servcetnc an e AArating from Stand ios 5'
Ratings Services for tts senlor tienr'46 .. ~W. t In tI e 2003-t04 Itical yen -#;'jiid uosta by restnicturing out fewr Ing Interest rates on cs rnw i ea ts y CPS provted fusottal W r 1 ects with the sale of $250 million in variable rte demand oblgalons.- We a cnpief6 two separate bond refunding transactions totaling s4i4i m~lon CPS wi reallzealmot 550 million In savings from these renld\n g We continued to expand our alterathve energy portFolio OusWindlnclln progran C' A' breezed atong. supplying 160 MW of clean renewable eleiety fiorn th%0 66seil Sky Wir Fami In West Texas. CPS also teamed up wlth the Instute ot Texan Cultures (ITC),a cul at center focusing on the contributions ol numerous ethnic groups to theione Star Staie unvelt the CPS-ITC Solar Power Station on the Institute a grounds",near Hemns~a kT demonstration station a 200 photovoltalc cells generate 10 kilowatts of power enoughi to threesaverage homes under peak conditlons . . " ' '
CPS also joined forces wIth Southwest Research Institute, the U.S. Departrnent o I CA Defense and others to kick off two experimental fuel cel projects at Brooks City-Fase 'a, V research park that once was Brooks Air Force Base. One emisslon-free hydrogen fuel cel I- was Installed at the Challenger Learning Center, an aerospace education facility while thi others were located in Brooks City-Base s housing area South Tocm first application o1 fuel cells for residential use. - ,
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"AA F LEXEX' On the court, games can bo won or lost In the tirilnbf .n' iy5, Th tu'r il".
Spurs mus nimster fiextrlliy, rpsponding quickly to chlangn gitt c ntudime Thanks to a wide variety of players with unique sets of skills, CPS, lie the Spurs can lackleo, any challenge with speed and agility. CPS knows the Importance of flexiblhty and quickly to respond to challenges and to find Innovative soluontl In February 2003, extreme winter weather in the Northeast sent demand for natural -iL.;
gas skyward, causing prices to reach record highs nationwide In responsedCPS u , l gas at the most favorable prices available from multiple suppliers. BeloreJuly 2002 CPSs 1
had only one source for gas, but the construction of neiv pipeiins and other tactiities now '
enables CPS to buy gas Irom more than 30 suppliers. CPS also used sored ijurha C'4 at lower prices to help lessen the finandal Impact on customers. Manwhi our conservatp.j.
ion experts continued to educate customers on ways to save energy and lower their bills: r In August. 102-degree weather pushed electrical peak demand to a new'record of .-
4,117 MW, butwellwithinCPS generating capacity of 5,116 MW. CPS alsownsabietoiuily 7 '
meet customer electrital demand despite a six-month outage of nIt 1 at the South Texas Project (STP) nuclear power plant near Bay City. With the guidance and oversight of the Nuclear Regulatory Commission, the STP statt worked expeditiously to repalr several welds; on the bottom ot the reactor that allowed the seepage of a tiny amount oi reator coolant fluid. . , - -
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CPS alio demonstrated flexibility in is choc of6es rrniig rpowt") .^
4, ~~ ~ ~
io Its cars and trucks. Our diversified nuclear, naturalgs
~
iXvijN ~ '4.
dca-ie and % n-pow-h-rf
- ered generation helped reduce the effects of higher gacsC0tS on our customers eiectrii cw i .', ;
- -. hills CPS also expandedVi<Ee~the portbon of hs 'C
,. motor pool using i *
<9t:lower-emnission Y fuels like i,, X C ethanol and boiodiesel. With 37 percent Of its cars and trucks running cleaner and greener ,,
CPS leads Texas in Ns use of altomativefy fueled vehidles
..S1Wihhh
- the company, CPS laundted powerhul newi technology to bring useu hor-...
r, ritintoemrployees tingertipL CPSnet, the redesigned corporate intranet;makeskteasler
~4't:, , i 4 "
jt ^> ' i 't (?* 2thar aever for employees to get the Information they need todo their jobs well.Designed 943tK.-
i:,^ - and built In-houso at a traction of the typical cost, CPSnei was honored wFA a 2003 *iBest of t >tssTexas7 award by the Texas Publik Relations Assoclatoll 1s-,' .~1
A Q'j- 5TRATEGY
.Ervery sinning teeiia neads a odd genie plan. The Spurs cobadiing staff must-'
~~~,~ craft strategies to match the current conditions on the court witout forgetting abouthVe .
~- still to be played. Sirnilarly CPS always keeps an eye on the future~laying'te
Ž~ P WI
. ~~quarters groudwork now for continuing success for years to come .
~ tn 2003. CPS announced RtsStrategic Energy Plan. a decade-long road map-
~~~ ~designed to meet the energy needs of the ever-growing Greater San Antonio area. ~. ~ '
Highlights of the plan Include acquiring epproximately 150O MW of additional wind-generated ,..,i
%74Installing
- - new gas-fired generating peaking units; and cntutg sae-of the-art, coal-
- ~~~~~~.* ~fired plant with the latest environmental safeguards of approxmtl 5 W* ~v 4
$i~,~As part of the public Input process on the Strategcic Energy Plan locbal elected offi-~
$1~~ci~als, business leaders and the community at large recognized CPS for its continued leader-Glet.-
shilpon environimental stewardship. CPS coal-fired tadiitles currently rank'as someof the '.-'
-. - lowest-etnilling facilities In the nation. Yet, In response to public Input, CPS rBoard of
- \l.~, ~~>.~ :--Trustees announced an aggressive plan to further reduce emissionis from eisngpat -
This commitment Includes environmental retrofits such as baghouses and scrubber g
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-,wE .NA i 14 well ii ; e vR' IA-E . cont Furthermore, the Board committed to adding rflewabid eneirgy Capacity aL s tr 10 percent of San Antanto's peak cleciticai dmariauib l by teyer U15, oon, ,
'e;, ,m , pati.d t tolray capadcity wtdclh eLtuals aboit 4 perceat oft peak electrical demand.
r t5',TheBoard also commnhted CPS to working with a committee oaInterested citizens and ener-gy' eficIiency experts to develop a mori aggressive conservation program that Is appropriate ; , -
t,for $ ftconmunily aneeds -
f i ~. A,>, ,ZNiorthwest of San Antonio, CPS worked with the Lower Colorado River Authority to
- 94. ' g ';', select a route tor a new transmission One that will supply additional power to one oathe
. astest-growing areas In the state nad further Improve reliability at the Texas electric grid. [ U aThe Cagnol-to-Kendaii345-kilovolt transmission line project remains under development,. .,f r,9 X"X. -as CPS works with the community to determIne the least-intrusive, most-approprate route. , 9 , ,
-, ?'.', ,.'-3 forthe new line.
' < v , r CPS also Invoived employees in charting the company s future wth formatiort ot the .d r" 'rJuit.rTr.VdVolunteerstrom throughout the company'wortdngwihCPS topexecuives' '
- 4 ;,'i, C+iand .- ;,
Board of Trustees. are currently consulting with employees to determine the neressary 'f.. -
1 "y steps to successfuliy propel CPS Into the next docade and beyond As part of the' - or;, :'
X Tents6Vision 2020 plan. employees are participatlng n detining the utilny s core values .
,'-'nd a. purpose and Identityng a bIg, audadous goal for the company. ::: ;, 4.9 e '
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While other trarvhises insy rely an one or two ttashy siierara, l pt e
'conzistently ttrimpt by dawing upon tMe talerta and coordnniol n Of tltr enUi¢,.
f And Just as the Spurs organization workis together to create a winner CPS learns up with the citizens of Greater San Antonio In an effort to improve community fire.i . .,>
CPS employee volunteers made a difference throughout Sar Antonio in the 2003.04l e-,_iscai year' rnaddition to summer tan, holiday toy and winter coat drives forihe underprivi-egedtClS ernnioyees weatherized 500 older. inner-city homes - many of them occupied byIV tifie eldery nd iami es wth simat children - during its spring and summer CooMVolunteers <
igel','rogram Ourf empioyses further demonstrated their dedication to thea communityas a 1 I
Wp 5g
- i Pa~pacesetter organization. pledging more than $700,000 In the faii 2003 5acompanV~wide campalgn. . ;f a'*CPSialso'enrruraged customers to adopt environmentally friendly technology with No Ct,**Rr . To-r mo-' .r p':
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'TIE th' 2003 En
-tin that used th than n IZVCW6 Z Smart Energy program, Inphri6eishipwitki'mofe Identify homes with'ari'6friclent, Mio'ny-homebuyers at way to an easy ectrIc and natur gas ervice,
-"al Inaddition to 011t,evi'-IviulWgihh Phoenix id th Pcwtt Introduced Greato S&n Artwk,'et tjflar6h
-"-4zfuT *11'Ji'vM pitherove'" tianch PoWerffj Credits J1.7.-An Web ski. "alsola Pals ara featured on the CPS IKidi I., Power W.'ib education and tnformationvAthahea"'d6ie&ftLi6.,'-t-,',:.
C.;
U -'7 -1e 'are'the siti Strength, flexibifity, strategy and t6iiitw6ik-"th4" talk 7' lit iIso'_q"u'a' ii-ih Q for a successful 2003-04 fiscal year. And theyj
'winnlpg team for many seasons to come. Z'
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CPS&.Om" xq'Mw gm Awwi-
- CPS 306,845 gas
. st.rs we suad In BextaandConWcourLe COMPARISON OF RESIDENTIAL ELECTRIC AND GAS BILLS FOR THE 20LARGEST U.S. cITEs IM ., $10709 ;
'.Og
- K s~~;wI; $117$174 in' fl y rf ;
- *S$125.52 I~~~~~~~ *-....:.:
-wl~r-, , 2_I <LA21L$_8 134;25_'"'7'$ 1 Ir_ 7 7 7 $138m32' --
$142.07' UFR-
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. .- $146.65- <
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- Ct. *. X -... sX,~ ' *~*.. '
- ,sa,8n-~- 'i;.n^.& $1S49 71 -
R="-s..,,1,.*.i
.. 2. 2004 2Fo01
- Deb-.q, neta &O ehfS' - J Niko_ !n lb N~~asue-5* ,i;- 1-. Vdts iaboodda_
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fi ar opeito Y5'evneiw 4 2001 2000 For Year Ended JanuaryJl, 3 .2004 . 2003 .- 2002 . _2001 ' ,,,. 2000.
ForYearEnded January 31. ' " "QJ'" 2004 2003- ' 2002 OPERATINGREVENUE"' (inthu*sandi) i r 4 'r,, "
.iV.,. FINANCIAL
SUMMARY
.t 't . -. * ' -
'-"n'-"S 1.57051 S'i $1S345,462 $1,252,771 S 1.405,501 S 1,079,969 Residential ............ S.', 591 593' 5- -f5I2I64, S -' g479,471 .' 516203 $ ¶ 428451 Operating & imntenarndespcn"0 se 955,155 ",783.7-2 696.119 769.002 520,915
- CoercialandIndustitl .'. 550,872- -' 430 873.-,1 '353,0 I -'398583h
- r-._ PaynienttoCityofSanAntnniol *4!i%'M -dt,\,-1 1'-t, Stret*i. ....... ....-........ 14,1036s " 12.703 '41
^: .perr finanr~asslat ets)J.:.s',!:, 206057 '4' 172,235 '. .s135 185,006 145,474 *. Pic authorities ..................... 70,966"'.' .. 5 94,8,1,
.,i58' -'4 Saeseatreasle ......... ,.20.076..
. ;. ' 17s878 i12581 'gl4.539. 3 -' 1 i-, ' 15,548' "
,.i~f, on-sytenm sales.... '27,681 12.12.333 y%4 t .;itss835Vf 54.677't<""28 491 7CAPsTAL ASSEtS itg,.-
4,134.207 Urtedreveue .......... 9.292 -- 40708' $r: 0'"'o'&j'-.t Capital asseta, net rBatne Sheet) .; rl4,621,564 . _ 4,585,309 4,454.164 4,365,709
'4"" '""Deproclaion~depletionexperise. , 228,941 .217,037 189.065 217,191 165.249 Other . . ._.................... . .- 03 9.901 7,612 Total .. S.,29,44r .32.78 t s s '.a 1028259 - -
124414 933.629 4". 4 tlM-ewcn tIona&n riotremovaltcosts:...' 269462 341.977 275,987 249,655 410,801 Gas: " i"- * ., ,t?
. rU"FUNDING FOR NEW CONSTRUCI0N U- a Residential. ....... S 12 4'$818 848t 5 s 12238
- r 0597s4 Cosnesteusal. 82,98 '.' " '55176 V 64341 75888 -r:'139,42
'"tV,, NETREMtOVALCOSTS'. -S- > ',-'-wsg; ..- ;~'-
5,557 66.008 206,573 Pubficauthorities .......... . .. 13,979 9.123 "4Y12I--;'14704 .9i~s'665s
'Bodprcetdst. '.b,;'i,.-;.. S173137 10687 'C 76,549 . 0 Unhifftdravenue ....................
ornrnerdspawepoc i,~ '0' 1600
- 3. 123,600 Other .... J!2I. 1 "" I' t83 ', 4 ..ih l't'4','P l5.
'tl2I Repairandreplacementaocount r" .' 5t266 R. 262.962 64,405 2.177 151,085 Tolal .. 204.366 s 16870' $ 172 587 S 214.556 s .107.020
- Overhleadaonversbtoflii .. ' '.. 1,374 - 5713 8,939 8.891 . 7,420 1
Contributed Capital .r : ;, ,685'2 3: 49,015 73,486 95,230 45,723 SALES' ' ' "
Electric (,rti .) , . . ll-vFf'<7 Residential ......................... 7,380,491-'
. 247 705349 .. 718045 9 191
' OTHERFINANCIALDATA',--`s ' -
Corwnr.rclal andsdustta8 ....... e ,465,824 7,732:905 42 7:454,7104 7.284.582 436,928,944
-a...STP riiwlear docommnlsstitrlowvn ,-.9 - St "IgFrq.......... . 99.457,. 97 053 ' 102i.
Imam66s 'f103.428 i-'100.534 tmaslertrust hundasseltst - ' -- 211 11 9 163,291 145,878 119.840 95.493 465,206 330,984 Pbitautho i .............. ,100,52l 1829.766 . 954.333 ,2,087 L- estrand replacme ntat c 567698,,', 413,717 548303 Sates forrsa ..................... 32ss-i p' 443,519 352s21 " 348,717`_, 3271
'T - &ssetsv.. .'h . 7 "4' 6823,236
'. 6.Total 8e578.941 6.521,348 8,255,245 2Z416.100 5,005,769 2,048,534 one-sstem sales.... 752,01' 18,261,631
'1...'..........
17.41,146 3l8 17,244,440-?., 17.645,148l ,.'
_U 186427.96 S i1 ?Fund net assebts .. t:' .'.~.. 3.4'.-.:2t829,378 Z751,050 2664,571 Total ..........................
Gas lhousards olflf OM 4.-- y-f44rr-.'
.1% Resideniald. 11,215 .-.. 12088..r4*1540'..t1mui-.4i0 Convnerdalarslustrial. - 10,151 ", 1038-4 10184'tt sP;..10574' ; ;I.4a! .-
Bonds B;P;v '....... 2622470 2499,525 259,860 2,668,820 *' 2,730,575 Pulc authodrities. .......... .1801 1786 1 78 5 2,033 -. 'Ž ,20516
- 4_,t4 mConrnerdalpiper. "'""c. -; 4' 350 000. - ' 350,000 350,D00 252.800 *134,800 Total . .23,167 , 24258 .* - 237S7' ;_--. 25,416 , 21.27i X t'fDWelgthted-AveritgC Interest Rlate< . '"i !"'4-"' t . .
ELECTRIC GENERATlON .--
'4-1/4,rj5t*
-W-, i Comemorci paper.- .. ' 101%
% 517%
1.t%
5.32%
1.38%
5.33%
3.96%-
' 5.24%
3.69%
Generation.17176881 Fn ergypurchases er Naive klod: generation Sother power ....
1,937,902 19,1114, 1841000 2200 66 18610673 A8.1*0
- 522,040 54.983 8214,197 ,
80,894 ' '
1892009I--- 17.471,831 17,457,003 14 835 t
- Seniorren bonds P, . 230,250 211t831 212,274 208,S67 - 208,925 ToW powevavalsable .................. 20,587,784 20,175,695.---20533+057* , 22,47828 20.35222
£4.\.fiJunriorlienbondsstj 2.111'>- - 0 0 0 Capac.yMW(Gas) .2,831 . 2931. "'-'.2942,.2 ' 2,94"292-'"b2.43
- , Commercalpaper .125' 5,327 8,191 8,182 4.7090 Capacit, MW (Coa).1,425 1,425- '.1385 I Ag,- .1,3852" 385
.- r- Ob',"et~tServeCoverage- SenlorUenBornd..'s ;,, ""54x. 2.51x 2.84- 3.05x 2 68x CapacityAMW(Nudeae) .' . 700 ,700 . 70 -" -Ci700 (f"4?7X Ratng- Bonds andCormmeriaPap; - ' Capaity. MW(Wt.160 .. .......... . ;0S160 160 25
4' .4. ftc-Sernortlenbonds1 -:, "". AA+. Mt+ AAM AA+
Mat . ELECTRIC PEAK DEMANO l....A7 . 4,117 3937 ' I360 ' 40 A>l.
. 1/4Commerdalpaper. p4 ' ,; F-I-Ais>" F-It F-It F-I+ . .- F1I+ DI5TRIBUTIONGASPURCHASES PMMCF) 22,948 26.084 ' 7 23,559 '-*25.905 ""' A*68 Moodra-SelorfDen bonds,,, A c'a Aa 1 Aal - Aal NUMBEROFCUSTOMERSi' 4: '. -' .'
t.5?t 5+'Junfortlenbc4rtds,;fl ',;;. .t tD Aa2,JVMIGI
- X;.
P-I Elect ...592.195$... 60231s6j1 '
60t,313 S...108.'
- Commerctalpapetr P.1 . P-I P-. Gas.'. .......................... 3...
306,845 310.318. '308,68'5"' 305611 '$1I 30387 M+ M APA' - M Staard & Poo. Sen'or lien bonds . ; t RESIDENllAL AVERAGES ; ' 4';"' ,..',i )1,.,tA' -'-. " '
A'5S.+ '?
-- 9' ,-';'J".
-;unlor u Conierctalpaper fenbonds AAIA-t+
At+ A-I+ A-It+ A-It A-1I Electrc: '.'i .;,','1;:,,.-4b Revesue percusomer ............... S 1,128.76 S978.49'. 9303 .026 s.j74 kWhpercustoer . .14,082 13,849 ' 1388st -. ,14,280 -. .NI13.24!
- '-, f'.S RELIABILITYINDICES7,.i- s .. : -'--"'t.
Revenue per kWh . .......... , .020 7,07* "'6-'.s.t'. -'720e'- 6.68 i -SystemnAverag~etntertuptbons;4t , d,- GRE-,. - ,',. ,', 'l- , ,,,.
1i . ',,>..,Y~¢e;>
DurationIndex(SAIDI)
Ine-x (nhours)' : .0746
- 0. 0.582 0.650 1.124: 0.728 Rrvenuepr cuslo................ S 3995.05 S 295.85e ' 330.97 , . 43o49;$213
' 'fPstemAveragetoterruptio) 1.21>j0.94;, MCF per cust*9er. ......... .39 . 39 3 . 42 3 ;404 449 i'_-'35! I 1.527 1.162 Rev perMCF .................. S 10.05 $ 700 6 9 t
- 'r! %5,F-V~aFrerquencylndesr(SAtFt) .... r j;4s .t .........
.2t9 '....... 0.94t6 1.005S is,!A;2Xt 0M4.C,&d
- r tr - ieuWN t; NUBER O EMPLOYEES .4,103 +4,276" ' 4195 ' -.
3, 9 S4& - ' 3.811
.r42is-"- '-4 44 - , '41-,,c,>- ,
RnkAa.tnnanp.n -*de1 . ,.e .nd*.re >, .,, .# . ..
Z~ ~ ~
rresx 4 ...44row t4,. -st'f..
>i4 r4. .
- N"/., "j(1,,> ,._'4C ,',' ;'C-' . ..rA.;<A;
- s .prpr, . we:
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,2I§EPRfT Or?'MANAGEMENT;>i tn ' ;,
- Ttqt a4
- Ti2 dibalIbalcrte adtd f~ranctal statemc-nts butl has dlel.
}4 *~mn ib1t ~tie pr?~daratQn lrtManagcment
^The audited linanclal statements included iri this report were prepared by
- ManagementIn contrmiiy with generally accepted accounting principles and the
- statementsare presented fairly in all material respects. Management has also pre-pared the financial Information presented elsewhere in the annual report and has Sensured thaitit Isconsistent with informatori In the audited financial statements.
fi Cftv Pub Ilc ~rvide maintains Ilternal accounting and administrative controls designed
- to provide'reasonable assorance that the financial intoirmation Is relevant, reliable and 4,1 f5; .
iccurate and that assets a appoipriately iccounled for and adequately safeguard-edw As part of this process, Management has an intemal audit function which assists
. In evaluatingj the adequacy and effeclvneess of the control structure. .City Public Service f Tstsies is ~responsible for rviewinig and approving the audited financial
- t.f} Bo if
' statements and Managerment's Discussior and Analysis and, primarily through its of San Antonio,Te x
!viAudit Comm1ttee *ensures that Management fulfills its responsibilities for financial rtireporting *., .J .
- ar.y, r.'ly, M .af'n ,.
.Baslc financial iStateme~nt ^ ; .;.
L AtId~t bonjitittes meets regularly with Management; and with the Internal and Years Ended January 31, 2004 aind 20 .nd i',external auditors, to discuss intemal control and reporting Issues and to satisfy Itself
- ,)that each party Is properly discharging its responsibilities. The Audit Committee fOVth Independent Auditors' Repot There o ,n) . -
reviews the audited financial statements and the extemal auditors report and consid- *: ,, . . 2 ,., .
ers for review and approval by the Board the engagement or reappointment of the
'extempal auditors Atidited Financial Stateinetits - Ta coni Ciof
-TS e>tmaifauditors KPMG LLP Robert J Williams, CPA; and Garza, Preis & Co.,
LC. have audited the financial statemenis in accordance with generally accepted Management s Discussion and Analysis r. .; X .fl.
cauditng standards They consideied the company s control structure and performed such tests and other procedures as they deem'ed necessary to express an opinion on Independent Abilors Report ......
.".the fairness of the audited financial statermients. The external auditors were given full and free access to the accounting records through CPS Management. Balance Sheets ..................
Statements of Revenues, Expenses and Changes in Fund Net Assets.
AMiItonB Le;. V Gary Schaub
'v General Manager andCEO.< -v -. ,. ; Secretary-Treasurer Statements of Cash Flows .................- ..
Senior Vice President eApril620,04 - Financial .and Corporate Sevices Notes to Basic Financial Statements ...
S'V;-' ~ ~ *1 .5..'.s;8fe -t, M,, ;,' ;
-.,c.,.
- . ', ; V'
- ,~~~~* * ... ;. X,.A',-
C~xsMANAGEMENrS DiBCUSSION AND ANALYSIS .fiX :.i i.L,,;
-- ' The fonowing Management Discussion and Anatysis (MD&A) serves as an introduction to the financial statements of City tGASS 14, CPS has Included these component units In its financial stalemrents for exiernal reporting purposes, These 1
'"-;.. --Public Service (CPS) InishItended to bean objective and easily understandable analysis of significant financial and assets are legasiy segregated from CPS and are accounted lotseparately.: In 2004 and 2003 fund net assets Include d -a;.op.ratngiactMlies and eventi or the fiscal year ending January 31 2004 (2004). n also provides an overview of CPS $152.8 million and $122.7 million, respectively. for the employee health and welfare plans. There are no fund net~s.
i ,
- gererai firancal i. condillon and resuts ot operatons for the fiscal year ending January 312003(2003). This MD&A Is In assets associated with the Decommissioning Master Trusl'since the decormimissining liability equals the Trust assets, accordance with the Govemnental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements In 2002. fund netassets Include $131.7rmillion forthe emplojeelhealth andwellareplans In addition CPS income:
- ard AManageenf 's Discusslon and Analysis-for Stlae and Local Govemments which CPS implemented In fiscal before contributed capital as a rest dof Incrusioiof the heath andwelfate plansis reported on the Statementsof 't year ending January 312002 (2002). This MD&A should Weread In conjunction with the financial statements and Revenues. Expenses and Changes in Fund Net Assets was $30.0 million higher for 2004 due primrtily tosa greater accompanying footnotes that foliow the MD&A. 7;", : . change In fair value on the plan Investments from the prior yeir. For 2003 arid 2002, income before contibuted cap '
.7 lal was $8.9 million lower and $7.4 million lower, respectively, as Investrnent earnings tram the plans were less then a Basic Finanial Statements - , > the claims paid. s . .1, The Balance Sheets present infonration on CPS assets and liabilities as ot the end ot each fiscal year. Assets are sep- In 2004, CPS adopted the provisions of GASS Technical Bulietin No. 2003-01, Disclosure Requfrements fbr.
'Arated Into current and non-current and reported based In the order of liquidity. Current assets include unrestricted cash Derivatives Not Presented at Fair Value on the Statement of Net Assrts . The adoption of this guidance did not affect -
"' ! snd Irivistmnents; receivables inventories, prepaymenis and other current deferred costs. Non-current assets include CPS' financial position or results of operations. However i did result In reporting prsientation iaiiges thai were' .- '
e24 .': sash, cash equivalents, Investments and interest receivable which have been restricted by state law, ordinances or con- incorporatedintothefootnotedisclosuresforriskmanagement. .*,.. - .j,;.- .-
V-1sfAttradts. Other tioncurrert assets, deferred costs and capital assets are also Included In this category. Uabilitles are also segregated Into cunrent erid non-cunrrent: Current liabilities Include the current maturities Otrevenue bonds, accounts Summary of Balance Sheet Informationr , . -i, . ji '
- r payable.-and other current payabtes and accrued liabilities. Nor-current liabilities Include long-termn net debt, the South 2004 MM . 20
- sG' j t Texas Nuclear Project (STP) decommissioning liability,'deferred revenue and other labilities. The Balance Sheets report
.; :- net assets as the difference between the total assets and total liabilities. The lund net assets are classitied as l~'fund Cti adelrrs 1 ,. 2.201 672, . I., M592t. $ 2....7 those invested in capital assets net of related debt; those legally restricted; and those unrestricted and available for CAPlJ1'"" Iha 4,62156 - . 4050205
- 544164
.__44 - iW,'
b operatio"S;5.i;-- ^'*;
The Statements of Revenues, Expenses and Changes InFund Net Assets present the revenue and expenses tor each tbci*.616 217890 ' i'. ' 55e.;-P,:;;?. -,^* t~t<Z_4,
- crnr ' l 2er.96.~.......... 236.194,: .... ... i2a1z5*;:;-r*t fiscal year.' Operating resuits are reported separately from non-operating activities, which primarily retate to financing * . ia...n,69*. 5a754821 '3!8-I.5s30 . 26l.lS~l' '^<' / 'i.. ,.
r*Pandinvesting.
.M Contibuted captal I also reported separately as a component of the change in fund net assets. This TdjWmi. 3.9036613 - 3527891 ' 2;8_~576775 -~l>L;t;o-~
dstatement Identifies for'each fiscal year the amount of revenue generated from sales to cover operating expenses.
,a; Operaing expenseisanr presented by majir cost categories. Revenues remaining are available to pay debt service; to 6.S,,ho4618ppld.b.nIddd,6t6d6 1.722.770 4' teso0t44 'h . 825eC..,e5,;fif U.>i
- pay city payment; to finance system additions;and to pay for contingencies. .. 2. c*W 527554., 72.60deb '27 -6 .-
P.dd,522.7.~ 322401-7. 201538 P. N A 2.751:050 '.. 26451i't y
.- The Stalements o Cash Fiows present the cash actvty for each fiscal year segregated Into operating activities, capital R1*,ri1d 7.9076 A .
7F rend
- ,S. a
- related financing atMties, rnoncaptal financing activities, and Investing actMlies. This statement is prepared using
. . - -<the direct method wvhich reports cash receipts and payments and a reconciliation of operating income to net cash provid- Summary of Revenues, Expenses and Changes In Fund etasst nomto lt~
by operating activlties. The changes In cash balances during the fiscal years are an Indicator of CPS liquidity and a,:i;ed
,. finarodaco ndi~on..v- ,.. ."'fs"r~.j.. ;.- e1 t 81264 1836.81 AL .
1022 c
'-4 05 0120264 28L.... ,_
IiOeit,v'845,4
... e. .
U11141g no.9eA4 tSIo1.4" $2=t~32 "SM# r:: 1 =l46v It~W 64 8 4%5f ? .
.- i=nancial Hlghlghts and SIgn1ficant Accounting Policies f .s , 66AN6? 42069 227r: - 17.?% 64...J..... 0s. 4 TWO R- 1670.511 1,34046, 22105 Wo. ;167% 2 1. j- i....
. Contributions to constnict capital assets flow through the Statements of Revenues. Expenses and Changes In Fund Net
' l Assets and ar4 shown as part of the'uLility's equity that Is Invested In capital and other assets. The amount reported for DJ220. Al 217.603 soe4 ss% 166866~ . - 28836 046%.
'r. Jr ,contributed capital was $47.2 million foi 2004 as compared wilh $53.4 million for 2003. Included In contributed capital 24.402 2,8 6.64 112240)
.1401%5. ..... . 26.536. - 4.1060 .*
82072 727.070 203.67 260% 6 0S73Pr 56936H..
for 2004 is $3.5 million related to the acquisition of electric facilities at Fort Sam Houston. a major Army post, and Camp 06god.h4 n 3 1423 150442 (110 64%.it?)'163511.. 13.731) .o.
0 0
.d.d"Wd.W4 .d
- :- 3Bullisa U.S.Armytraii~ing installation whichoccurredduring2004. About$25.7millionofthecontnbutedcapitaI
- -, < amount for this year came from liigation settlements, mainly the Joint Operating Agreement with Texas Genco, LP.I a Ta Ep 10391376 1,312.414 .22e31 073% .90944s79% .7*216.472-.
1.
subsidiary of CenterPoint Energy. The remainder was contributed by customers for utility extensions and services. hra4brcontCwaj 11,1# 2046 tICI L e.6 , 52401t OiZ311) '.' 4
.91 5
,_4;>.5 ,:. .5~r....:, ,*.
Ca*ftb46c J1L9
- 3.431 l i,240ii .117.7% 7166 11660 1'2s jIncluded in contributed capital for 2003 S$4 4milron of contributed captal associated with the acquisition of the electric
- and natural gas facilities at Brooks City Base, formeriy Brooks Air Force Base. About 531.1 mitlion of the contributed Ch." ,hse FP,, NW '. !or,
' ' . . 01 Ch-" A--" igF1 P.VY 78.326 5.47 t11o1 O.4%'*. : io920V 2s6lr' 20.s4 g0P.":
- fcapital amount for 2003 was obtained trom litigation settlements.
C-.mi Effd 1 OCwg h.
1 h The excess of assets 'overilabilitis oi the utility system Is reported as fund net assets. At January 31, 2004. this totaled A-.r&V P."P6, 8 0 0.0% ..... f2+/-.1394' C..P hmFiW NO A4..f AR.
- .sz29 billion as compared with $2.751 billion as of January31, 2003, and $2665 billion or January 31, 2002. CPS Chr"A A-lreiPoky r5 76.226 .479 161031 .64% , *' 24f4it ' (081021 0s21
.eports He assets and iiabiiities accumulated for the employee heanh and welfare plans and for the Decommissioning Fr. Nd A.I, 0.-" .2!mitiit41t0 2 664 571 v604479 322% 2406128 '1248471 l' 10.0 FP.004AW.0.44004 .I252.!.3 i6t7205. tf 7 ;% 1264070 - 0 4479 . 22%
o-.';- iraster M Trust under GASS Statement No. 14, The Financial Reporting Entity. In compliance with the provisions of DC%;7)
..*,.-.,; . Q
. 'MANAGEMEN1 4U.. S'DISCUSSION AND ANALYSIS. --'/ s'4 4'ttq..'~,- ...- '; -'*'- ,.t fl44t.;.; Au: t .w.:< ". t '
4i
- 1t-t i, -. The followting Management Discussion and Analysis (MD&A) serves as an introduction to the financial statements of City GASB 14, CPS has included these omponent units in its finandial statements for external reporting purposes TThese
,' Pubili Service (CPS) Risintended to be an ooJective ind easily understandable analysis of significant financial and assets are legally segregated from CPS and are accounted for separately. In 2004 and 200'3, furnd net isieti ncluide also provides an overview of CPS $152.8 million and $122.7 million, respectively, for the employee health and wetfare plais. There are ino fund nieti.-
- operating activities and events for the fiscal year ending January 31t2004 (2004). It F4 general financial condition and results of operations for the fiscal year ending January 31, 2003 (2003). This MD&A is In assets associated with the Decommissioning Master Trust since ihe decommissioning ilabiit;yequais the Truist assets e; accordance wth the Governmental Accounting Standards Board (GAS8) Statement No. 34, Basic Financial Statemnents In 2002, fund net assets include 5131.7 million for the employee heath andwelfareplans, In addition, CiS incomea*
,-?-'?!-- -sand "rk~hanAnalyss -anagements forState and Local Govermmentswwhich CPS implemented infiscal before contributed capital as a result of nctusion of the health andrwefare pns as reported ontthe Stateienis of1' year ending January 31 ;2002 (2002j This MD&A should be read inconjunction with the financial statements and Revenues, Expenses and Changes In Fund Net Assets was $30.0 mililon higheii o 2004 ue prlimarily 1o a greatet -i o $$ t iaccompanying footnotes that folow the MD&A .sl- change In fair value on the plan Investments from the prior year. For 2X00and 2002, Income before ontiributed capi-tal was $8.9 millon lower and $7.4 million lower, respectively, es Investment earnings from the plans were less thin 1' asi F-Inancial Stt~ements 4-.;
> the claims paid. . , .' J;, .Wt4.'.4f4;§' .
c,The Balince Sheets present Infomnation on CPS assets and liabilities as of the end of each fiscal year. Assets are sep- In 2004, CPS adopotd the provisions of GASB Technical Bufetin No. 200301, Disciosure Requtenments for-. -- '
- >i araied Into current and rion-current and reported based Inthe order of liquidity. Current assets Include unrestricted cash Der'vsatves Not Presented at Fair Value on the Statement of Ne Assets..T adoptiont of ths guidance did iot aflct'*
and investmentls recelvabbs Inventories prepayments and other current deterred costs. Non-current assets Include CPS financial position or results of operations. However, it did resuH In reporting presentationchiangesthat were-. 4;
'2.t cish'cish equivalents Investments and interest receivable which have been restricted by state law, ordinances or con- incorporaled nto the footnote disclosures ior ris mc aagementn ,,*, ' S"{St --
4
. 4" Z tracts Other noncurrent assets, deferredcosts and capital assets are also Included in this category. Uabilitles are also t B alace
-X-segregated Into current and non-cunrrnt. Current liabifilbes Include the current maturities of revenue bonds, accounts Summary of Balance Sheet Informnaton I o
- - ¢,payable and other curnent payables arid accrued liabilities. Non-current liabilities include long-term net debt, the South 204-. 20432 20 '
-"', Texas Nucieir Projec (STPj decommissioning liabiity deferred revenue and other liablilties. The Balance Sheets report
- ,-. fund netssets'as the difference between the total assets and total iabilities. The fund net assets are cassified as it 150363 '-,5 2.067,162-CO.Odtewa. ! * .2tre? *-
those Invested in capital assets, net of relted debt;those legallyrestriced; and those unrestricted and available for Ca4;1d.pa421.s74m4 , 4 55sot5 4454164's , j; 117d 602.708232236 -, 6670041..9t . ., - .. - I w4' and expenses for each C.-*
- BAW~~~o 7, 4 .
- .The Statenenl of Revenues, Expenses and Changes I Fund Net Assets present the revenue U UWtiloo 2'. . **
ctk k4r 23505 ,' .: 2725401%. ., r .- ,
financing fiscal year..Operating results are reported separately from non-operating activities which primarily relate to
- andh Ivesting
- Contributed capital Is also reported separately as a component of the change In fund net assets. This -TW ui4l.- S co3.36 .- 27551050 3507m 4. .
Urw~d r8,dP00 5 2e2s.376, s 2751050...s5 2064571, :.f,,^ ~nj
% The Statementi of Cash Flows present the cash activity for each fiscal year segregated Into operating activities, capital . -. - ;I.fi. iA.-
- ,n
>.. ,..; -s and related financing activities, non-capital financing activities, and Investing aciMitles. This statement Is prepared using Summary of Revenues, Expenses and Changes In Fund Net Assets lnformatlon-'7..
the dfirec method which reports cash receipts end payments and a reconciliation of operating Income to net cash provid-
- -edby operating adMtbsr The changes In cash balances during the fiscal years are an Indicator of CPS liquidity and 4 n* D; AWr4 .44.,' iS-n 4
- ' financia cr diion4.l "- ', .dy-
"v5, p, .11.50114 , 1o1.451n 202321 l 5s0046 j ,. 510694T 864%
'.9;.t Financial Highlghts and Signiicant Accounting Policies 8400.
5 rrr4 s6or7 413. 227726 01%; 517 $ Si 5 25 . -(7956) .I13%S <.4i
.0 t.5!S4is 2 225 49 167S ,i26ri 1.2S2.71 2 74S : i-T~w 5.
3r. l 4 In Fund Net 5 Contributions to construct capital assets f1ow through the Statements of Revenues, Expenses and Changes
- . Assets and aie shown as part of the utility's eqIuiy that Is Invested In capital and other assets. The amount reported for capilat MMon 2.545 217.037 .W4 . 5S'I i* on; 2 031 -
- contributed capital was $47.2 rnillion for 2004 as compared with $53.4 million for 2003. Included In contributed D- 1 as 24.402 3t.647 .(12245) .31.4% .V'- 0' 2i0.0784 ,
-for 2004 Is $3.5 million reiated to the acquisitlon of electric fadlities at Fort Sam Houston, a major Anmy post, and Camp 930.753 727075 203.678 260% 0t7147
'4 . St.920 I O#.tt...Mn,.dm d.8lI.hd 14.223 159.420 (10.117) -44%, ::I 11611 .
- 1
. 317) -23S
".0 W4 17 iBullisaiU.S. Amy training Installation, which occurred during 2004. About $257 million of the contributed capital IMJ I02C yd12o6r4Ao 20007 17223.t 33
_3207 .6 4r 11 .-.- 4100 2 4%'. 't Sarmount forrthistyear camefromiftigation settlements, mainlythe Joint OperatingAgreementwithTexasGenco LP., a T7rAErr40 1539376 13110414 2 17.3S .* 1216.4r0 o;7??%00044 Vi 4
-^;- *subsidiary of CentorPoint EnergyjGThe remilnder was contributed by customers for utility extensions and services. Wfta4. 6)13. d 11105 21048 5 -S ; 3630A. (3351) 4 5 +x.
.147101 31 All5 24i .1S7% 5 2 li:cluded hI contributed captal for 2003 is $4.4 million of contributed capital associated with the acquisition of the electric co-1ftdqi
- the contributed and natural gas facilities at Brooks City-Base formerly Brooks Air Force Base. About $31.1 million of .. .b Ch. h Fr dti4 ad gFAY004 7W 7ti320 B6.470 1.131 *94% .0.27 122.91 .
capital amount ior 2003 wai obtained from litigation settlements. C0h0609h C.i.At. E.fd l sha. .f Aecou* P." 7 0 a e 0.0%; 125074 1> . 0 _ .100%. o0741 . V'
.The excess of aissets over iiabilitcse of the utility system is reported as fund net assets. At January 3 t 2004, this totaled 0e" h, F. N4M40AvAs._ .- . - t
-3 2.'829 biillionas compared with $2.751 billion as of January31, 2003, and $2665 billion for January 31, 2002. CPS Cl'. Aoiog4 1h 9 4 i 75.T20 88.470 MM131 -44%
- 47t .610,7) 32! 241100- 240471 ,'i5-1 s-reports the assets and labilities accumulated for the employee heath and welfare plans and for the Decommissioning F.W NOAGo.1. oo' n 2 751O00 26iif4 1 9t4479 4
- 7* t,._
7,.4ledtAa...EM4 1202929 02755040 1 70i320 8% :. 12664571 ,5 t47 , 3%;
Masier Trust uider CASB Statement No- 14, The Financial Reporting Entity. In compliance with the provisions of .. . .. . , .~~~~~~~~~~~~~~~'*,", 4.,_......_ .v - e._ .....
1:, -:7-,;,-;,r-_. , - 4 f-',
, .I. ---I-
- 1; , , I ;. 1, 1 '
f*perations f r 'l Cs.; ; -fy,
- Electric and gas operating revenue of $15.0 bi itonfor 2004 rose S202.3 millon or 15.5 percent fror the prior year pr- Total operating expenses of St.184 billion in 2004 Increased 20.7 percent. An major categories ofoxpenses"'
- .'
raiy due to higher electric and gas ueli ecoverfes. Representing abouti 8Z7 percent of CPS totai revenue, electric ml.-' increased from last year. Electric fuel and purchased powerfcosis of $401.5 mill on Increased by $124.5 milton M..' operating revenue of S1.299 bllion Increased 14.7 percent from last year. Revenue from electric fuel recoveries system 44.9 percent The average unit prce per MWh increased substintialiy romilast year due P!rari gas prices and reduced nuclear generation. -The lower nuclear greraiin refnected the STP Unit 2 forced outage . ' -
'9ta *-was up S145.5 million due to the higher fuel costs. Revenue from electrc base rate sales rose 2.5 percent from last
- 9_i year.;Totalieleiticsalesof16.3 blionkWhwere 4.9percenthigher, reflectinganincreaseinoff-systemsalesfrom early In the fiscal year to repair excessive turbine vibration. and the Unnit plaremueditigoutag e Ir the sprrig.-..-
0.173'miriio MWh'in 2003 toiWh 0.752 mionon in 2004;:The number of electric customers totaled 602.313 as of and subsequent forced outage during the summer asociated wih tthebottom mount tnimettation tubes seep- . Sf
. Jantarj2004. an Incieas of t10,02t from January 2003. Effective February 2003. the customer count methodology age. Both units were operating near ful power the second half of 2004, bt (eflec lower
- crnbined year-to-date -'r
' "'was changed fiominumber of bilis to number'of active contracts. The prior year customer count was restated to reflect generation. The reduction In nuclear generation was replaced by moro expenstve gas and a greater i'amount of coalW.-,
,,',. . ,<adcttve 'contracts.- CPS afsoirecorded an all-time record high peak demand on August 8, 2003 of 4,117 rW. Regulatory generation and purchased power. Total generation and other power requirements were 2.7 percent greater than last recoverdis dded 550.t inlmDon to total electric revenue and were up significantly from fast year. These recoveries repre- year. t,,,' ' ,. . r x ;
.1'L- s'ent the pass-through of CPS' chirges for utility commissbon assessments for statewide transmission costs and for 5.r Electric Reliability Council Of Texas'(ERCOT)-retaled fees:' Unbilled electric operating revenues added $9.3 minion to Distribution gas costs totaled $132.3 millonr an Increase of $408 militon In 2004.I.The iverage unii disinbution g;4 a,
- '. etectiic'revenue. - ' '- cost rose from last year. Natural gas market prices increased during late Fbruary 2003 tomorefi than S20 per MCF , '"
rellecting the nation-wide cold speil and the onset of war In the Middle East.' CPS employed Its hedging tactics and -i
-Gas system operating tevenue In 2004 totaled $204.4 mition a 21.1 percent Increase from the previous fiscal year. and also used lower-cost gas brought out of storage to reduce the effect of the spie In gas prices to lls customners.'
, .. ';'accounted for13.0 percent of total revenue; The increase was due entirely to greater revenue from gas cost recoveries Prices declined during the summer and fall months but were still much higher than list yeiar o a year-to-date j; ' - .
' .resltingfronthe higher average unit cost of gas" Gas unbilled operating revenue reduced total gas revenue by basis. The volume of disiribution gas purchases decreased 1Q9percent.
- R ' '.
M 8.585milion . Based uporn active contracts, gas customersiat January 2004 totaled 308,845, an Increase of 501 from the STP nuclear plant non-fuel operating and maintenance expenses hickidinig dec6msisstonling; Increased 1.0 per-: s,.v $ .j. X
. '. ueviousyear. Gas salei Of 23.2 mDiton MCF were down 4.5 percent from last year, reflecting the milder winter weather cent, totaling $100.8 miltion In 2004. Higher production mainiitehnarice costs thIii yeai Included activitiei related to the %
Unit 1 planned refueling outage In March and April 2003,i and Rssubsequent forcd ouage throughoutthererialn-; {.,
i For 2003. electrc and gas operating revenue totaled $1.301 billion an increase of 8.4 percent from the prior year. der of the spring and summer months. In April, a small seepage was dscovered Intwo oitdhe 58 botom mounted
- ' Electrk: system operating revenue totaled $1.133 billon and was up 10.2 percent from 2002. Most of the Increase was Instrumentation tubes from a routine Inspection during refueling of Unit i The thbes were Inspected arid repaired 'a"' -:
<,'1 trj higher revenue from electric fuel recoverkes and the inclusion of unbilied revenue, which began to be recorded in du5vfei and the unit was returned to service In early August Approximateiy $87 Willon wai spent on the forced outage 't
.- 2003 Electric salesi'o 17.4 billon kWh In 2003 were' 1.0 percent higher than the previous year. Regulatory recoveries s' a. ,i and another $5.7 midion was related to its planned refueing ouiage. ther smaler Increaseiswere seen in varioui
- 'i totaled $21.5 mililontor 2003.-Gai system operatinIgreve n 2003 totaled $168.7 mifRon and decreased 2.2 percent r administrative and general costs. These increases were partally offset by a diecrease int non-csh decommIssioning~i:
- - 'from 2002 due ~iainyI ioreduced revenue from gas cost recoveries. Gas sales of 24.3 milton MCF rose 2.1 percent expense.- - : . ,.W
. from 2 O2., . r , ,: :. ..
CPS non-fuel operaftng and maintenance expensesofd274.9 nilion in 2004 were essentially the same as the prior ;
i- i Net nor-operating Income of $88.7 milion In 2004 Increased by 51.7 percent. The change In fair value recorded on the year.. Labor-related costs and employee benefits were somewhat higher than list year. Higher expenses fo7relec- . - 2
'. .-^ -employee health and welfare investments increased by $39.9 million from last year and accounted for all of the favorable trie distribution operating and electric transmission maintenance activities were also Incurred: These increases were t variance hnnet non operating income. -These aisets can be Invested Ina wider array of securities than CPS intemal I.*
offset by lower costs for various services, materials and equipmnent especially h the areas of modular remodeling
,> 't.- funds. This Increase was partially ottset by reduced Investment yields on CPS operational funds, which reflected the communication and signal items for the Systems Control and Data Acquisition system wiielessand voice systemsi'.'J I current market conditions in 2004; Lower Investment Income and changes Infair value were also recorded for the STP Decommissionlrig Trust Investments.
and computer service contracts. - i 1 : t Regulatory assessments expense of $45.9 milion Increased by $2386 million in 2004;due mainly to greater- . -
In 2003; net non-operating Income of $44.0 million decreased $8.0 millton from the prior year primarily due to lower
'. ERCOT-related costs that were primarily for managing increasing congestion on tfhestiteifde gid Spatlfc- .
investment yields from CPSs operational unds. ..
charges that contributed to the variance were 'utof Merit Energy charges Out ofiMerit Ripiacemnet Capactys-Xpr n.- Total Revenue (Dollars In Millions) -
- -'..t-< * 'Ztc charges and Reliability Must Run service charges. Transmission cost of service rnt biilngs assessed bythe Publieai S, EPATMF, 1 tERATIFlO Nor143PFTINC'.
Utflity Commission (PUC) of Texas were $t.4 million higher than last year.:. ;. '
Depreciation expense of $228.9 milion in20'4 was $11.9 milion grealer than last year reflecting the new plant.,
- a-additions during the year subject to depreciation. Some true-upi and adjustments werealso recorded af the end'of7 i-X the fiscal year for the Gugert and Salado Street faclities remedlation and for other asset classes depreciationn charges. .tl;'.
- '.,> I FY2003 Ff 2002
~~~~~~"~~~ ~ >tsr&2~~~T~'4~2-?;~y
, 'A'
T., !-Ar itt Total Operating Expenses from the previous year but were partially offset by lower costs for distribution gas and STP nuclear expenses,.
uie.*. .
excluding decommissioning. Electric fuel and purchased power cosis of 5277.0 milfion increased by 13 2 percent-taM ,*-
due lo higher generation requirements and a greater average 'unitfuel cost per MWh.2 Distirbutior g&iscosts totaiedi
,r:IuCe s.;i*
I $91.8 million, a decrease of $13.8 milion from 2002 due lo atowe averageunui gai cost., STP non-hu'el opweflng<.
... ,
- S'10a1 and maintenance expenses. Including decoirnrntsloning increased 8.8 percent. tolaing 99.i milon Increses In .
non-cash decommissioning and employee benelits costs continbuted to the vadance whkhw lower production maintenance costs, as 2002 Included refueflngs outiges for both units versus ihe ingre plapnnedrA z;_;,.
refueling outage for Unit 2 in 2003. CPS non-fuel operating and mniilenanc expenses ot $273.2 million rose .
$35.8 mifion from 2002. These increased expenses included higher labor aiLd related costis ,whlch inlidudesipayroll -;. <
taxes and employee benefits: greater costs for sales promotions, outdde services and propertyinsurance; and costs for various planned power plant overhauls. Regulatory asssssments epense od $22.3 milton Increased by <-.".'
$5.3 milton or 31.3 percent from 2002 due to greaier nettransmission charges incurred by the iUC. Depreciation '-.4 expense In 2003 totaled $217.0 million. an increaseof $28.0 million or14.8tpercentlthicdl retietedftheapjploni . . Al91 ot updated and slightly higher depredation rates Implemented in 2003 .
Interest and debt-related costs In 2003 totaled S159.4 mition and were $3.7 mnilion bilwer than in2002 Ler r s enue bond and TECP Interest costs in 2003 were partially othset by ihe debt defeasance odstsrelaielo the cashs<' .
defeasance transaction. Payments and services to the City toiaied $1722 milion in 2003 and were 2.4 percenl j s greater than the prior year, reflecting the higher gross revenue subject to City Payment t 3 \t A7' YusM . ' i-u14 '-.,'.:n t ,:!FY.2....
Income before contributed capital for 2003 totaled $33.0 millIon, a decreaseoii 9.0pereenl trbm 2002 The a- ;
-v C-_tx~t ~ VIrE.s1r's W h 1
I a P4 -- >-(11.. I - 5 I 0r. f- F4 0611 decrease Innon-operaing Income, and higher CPS non-fuel operating arid mainienance costs ddeclM '4@9 -
t : .~~~p itl, 61At U& i'.,,'Si-~r KUI a LK=P._ tr- .. expense contributed to the variance. After recording S53.4 miflbortIn ionirifbuied capital whi icludes $4.4 million- .
related to the Brooks City-Base acquisition, the overall change Infurid net aisets tiotaled $88.5 rniiion in2003 Thi '
.~'.r s ntereat end debt-related cstioi $149.2 riiiion were $10.2 milion lower than last year. This year inclhded lower compares to the change In fund net assets of $109.4 million for2002. before Including the cumuiative efiect ot ,,
Senlor Uien Blondnd Tax-Exempt Commercial Paper (TECP) Interest costs. The prior year also included debt. change in accounting poltcy related to the incdusion of the employee heaith aid Weltare plans into thI 2002 fnancalj'. -
.i_..defeasance coss related to a cash deteasance transaction. In August 2002 CPS legally deleased $144.2 million in s.atemens. .
crtain outstanding revenue bonds with'availablefiundiand costs of $7.1 million were Incurred related to the trans-
' , action.- Thb variance was partially offset by the current year s Interest expense on the Junior Uen Variable Rate Total assets at January 31 2004 were $6.823 bilon, an Increase of $244.3 million trorn January31, 2003-CPS* -_
A Dernnd Obligationi (VRDO), which began to be recorded InMay 2003. The Allowance for Funds Used During Repair and ReplacementAccount balance increased $153 4 milfion, 'as there were greater revenue depositsrom -^ 4fJ i' 9- Construction decreased this year, due to the reduction in gross construction expenditures and lower capitalized operations this year enda lower amount used for constructionversus thi prIoryear.Al5s ninneasesins
'. interest rates reflecting the current Inierest rate mariket equivalents and Investments and Interest receivable of the employee health and welfare plans and the STP decon-li .
missioning master trust accounted for $30.5 minlbon and $27.8 millon:respictiveti oithe Inciease h total asaets -. A-t -
u; ¶'Payments'and services to the City of San Antonio (Cfty) In 2004 totaled $208.1 millon and were 19.( percent Net capital assets increased $38.3 militon from the prior year. Prepayments and other current assets rose by' - AtA
- ir"o greaer than 2003 reflecting the higher gross revenue subject to City Payment This was the frst fiscal year where $8.7 million and Included a prepayment for capital spare parts related to the long-term service agreements for the
. the City Payment exceeded $200 millonul. '..: ' Arthur von Rosenberg power plant. These Increases were partially offsel by decreaies in othei unrestricted iash,* -. i cash equivalents and Investments of $7.0 million. - . ... . :. ! .. r' < ; '
- - Income before contributed capital totated $31.1 million, a decrease of 5.8 percent. Higher STP non-fuel operating Total assets at January 31, 2003 of $8.579 bilbon Increased $57.6 miltion from Januiry 31, 2ei2
' arid mainnance expenses and greater deprecdation expense were contributing factors. Last year s adjustment for
$58 4 millIon In unbilled revenue receivable and an Increase of $11.9 milion Infuel stock contributed to the varl.'-.f
- . i'tunbilerd revenwu also contnbuted to the varianee as list year was the base year for applwing the calculation. This ance. The higher fuel stock In 2003 was due primarily lo a greaier coal inventory and natural gaslheidinstorage!. p,;
, year a unbilled revenue reilects only the net change from last year. This was partially offset by higher net non-oper- which began that year. Net capial assets and the cash, cash equivalents and investmentis ofthe STP decommis. 'i S
_.i.-': ating income' primarily trom the Investments ol the employee health and wellare plans and somewhat greater rev- stoning trust also Increased from 2002. These Increases were partially offset by decreases In 2003 n other cash enue from electric sales.'.:.- *; ' cash equivalents and Investments of approximately $193.0 million from 2002.- A,;<: ejir-'
- Y.,.;'; After recording $47.2 millionin contrlbuted capital. which indudes $3.5 milton related to the Fort Sam Houston and CPS' total debt service and other Interest requirements of $238.0 miltion In 2004i were 9 perceni -Phigher than the A acultina the overanl change In fund net assets totaled $78.3 million for the year ended January 9,1, pullis previous year. Debt service requirements Ihis period Included lower Interest costs on revenue bonds and TECP. t _*-
- i
- .2004 as compared to $886.5million for the prior year. Also, last year Included an additional $7.1 mifion for the costs for cash deleisince of debt :There was no debtt "
defeasance transaction this year. These decreases were offset by higher scheduled revenue bond princIppal payS--; '
..- In 2003 operatirng expenses totaled $980.8 milion, an increase of 10.8 percent from 2002. Electric fuel costs. CPS ments. .. .. -. - A A.
non-uel operating and maintenance expenses, regulatory assessments and deprecation expense an Increased L
~TA
.. ^ ,- . ' ' ' ' ',
- t@)t,, < ~ ; ,2.'
.. J L j4-S Financing and Debt Covenants Cornpilance>,.
miiton rose 2 0 percent from the previous year. for CPS in 2003 debte service and other inte'rest requirements of S226.8 The continuing low interest rate environment I 2004 crested several refunding end iinanchgopportuntes
- it¢.
and TECP were ofiset by higher scheduled revenue bond maturities and the Junior iden Obigationiwera issuedto provimdefunds
~.
a'. !,ijS' Lower interest costs on' revenue bonds In May 2003. CPS Issued S250.0 million in VRDOi: These reflect the Vai-rP,, -
.. S costs from the casih defeasance transadctio rate of 1.2 percent. Theatichanges weekylto capital projects. CPS obtained an Initial Interest allowing them to ba with icaled short notIce I the -.- ;'
put options able-rate bond market. These bonds also contain 11i1 9 ntllion was directed to reunburseif7r 4 .
funding; ipproximately rates should Increase unlavorably to CPS. Of the rund future ;
millon frorn last year. Greater plant addi- erendltures and S138.1 milion wai targeted to
' Net capita aisei a of $4622 billion at January 3. 2004 increased $36.3 PS Repair andReplacementAccountfor prior cipital and the gas system. Construction work-in- a Issuance. -;
were tecorded in the areas of electric iransmission and distribution capital projects, induding a simall amountltopayfor costs
- WWionM and closed to finished plant this year. Net capital completed
. >progress decreased S82.1'mifflon; as rnore jobi were $13i.1 millon from 2002 and Included greater plant additions refunding bond transactions In June and July 200L. The first, a forward Ta CPS also completed two separate revenue per-2; ;. 4issets of $4 585 bilion atJanuarj31 2003 Increased mSilionof New Series 2003 Bondtsatitruefinlerest cost o13.08 construction work-in-progress. deliverytransaction, waslorthe sae of $350.5 ltrnsdction '.':;--
';3 ' In electric tranimIsislon and distriboltionrand higher cent to curent refund 375.5 milfion ot certain higher-rate. outstandingNeW Serlii 1994.-Ablnd'iThis the sec-' -
for new construction and net removal costs totaled The settlement date occuerrd In Noveirnb 2003.lIn PFor the year ended January'31. 2004,iotal expendtures resuited In gross cash flow savings of S32.9 milton. alttrue Intereist ost 3 6percent. This C. j' and capital expenditures Included: 1) Initial work on the Installation of the ond transaction. CPS sold $93.9 milion of New Series 2003A Bonds 5 i'Bondi---lh -,*-+
';.- 5269.$ million.. Major constructlon projects 2) underground and overhead electric dis- in certain outstaiding New Seinet 1994.Asend f-,. gas-fired generating peaking unfts, which
-four were purchased last year; advance reftunding transaction refunded $96.0 million
) growth: 3) gas system improvements miion. ': ' '
tbtrlion' system Initiatives for rellablllty; service improvements and customer and resuited gross cash flow savings ofS159 substations and lines construction wihin the service area; and gas mains servicei and exlensirons; 4) traiasmission Actual expenditures lor new miflion of New Series 2002 Revenue and Rlefunding Bondato the new Primary Control Center. In August 2002. CPS sold $578.7 Int :
'3-ii,8 and 5) facility Improvements inchluing initial
~, work on Series Bonds and to reimburse prior constru.tior expendiures were wfnded from the flolowing sources: S163.3 million rom tax-exempt $445.1 mittion in certain outstanding New cost o 4.26 percent Aiso In .* "5'
. constructon arid net'remnoval costs in 204 capital; amount of 5150.0 million. The New Series 2002 bonds were sold at a Inue Interest proceedi $51.3 mlon Itromihe Repair and ReplacementAccount; $43.7 miltiontrom corntribued milon in certain outstanding New Series 1997 Bondswht available
,-> 5#<R VRDO funding deotl August 2002, CPS legaly defeased $144.2 from revenue bond proceeds; and SI :4 millbon from the Overhead Conversion Fund. This to the cash doteasance.'Theicombined gros future cash
. .98 illion and Replacement Account In May 2003 by the VRDO proceeds for prior funds. Costsof 57.1 mtiion were recorded related ; 2
- , reflects the reimbursement to the Repair -s ,,c savings from the two transactions totaled $36.1 million.. '
- ^ t-othisconstructloc ';:;. ,
mon-;, on.
s~ie-,/-* Y, t -4, 2093A Bondsmen dan which Includes thi New Series 2003 expenditures for new construction end net removal costs totaled With respect to eit New Series Bonds outstanding, pledged to the paymrnt ofprincipi and Inter re
'i- .,For the year ended January 31.2003, toat ot the tour gas-fired tioned above, the net revenues of CPS electric and gas systems are and capital expenditures inetuded: 1) the purchase and the prinicpafand Interest thereon C> .
, .l 342. m0iori.' Majroconstrinjclo projects for rellability service est thereon. All New Series Bonds are classified as Senior Uien Obligations and overhead electric distributon sysem Initatives systere.'Thi VROOs are classified asi'Junlo'iLien Obnlgations' 4-
,-'u;,.generating peaking units; 2) underground 135 alumInum railcars each shalt have a first lien upon the net revenues of the of four sets of approximately by and arepajyablefrom the net . ..- .
- -; limprovementsand customer growth; 3) the purchase corn- The borrowings from the Junior Uen Obligations are ecqually'and ratably secured steel tars
- 4) completIon of the BIS project; and 5) facility improvements. Including work and interior to the pledge ofnet !evenues securingthe'..
- 'i which replaced older Service Center
- -: revenues of the systems, such pledge being subordinate pledge the net revenues securing the payment .n pleted on the Northstde Customer superior to the lien on and do
~~- Senior Uen Obligations, but prior and bilion;'*i 2.
outstanding of Senior Uen Obligationi was 52.372
- . .. ri October capacty of 100 MW was otficially taken out of service of the Commercial Paper Notes. The total amount
- \
` jPS 0"-f. Mission Foad power plant wih a generating January 31 2004, 2003 and 2002. iThe totil ainount outstantdiing of '.,
generating capacty was reduced accordingly $2.500 billion atd 2.590 billon, respectively a outstanding'
'2003 CPS total 31, 2004. There were no Junior iion Obligations t, toa ge.:.- -*a>tincap;ci proceeds remaining I the VROOtConstructon Fund and Junior Lien Obligations was 5250.0 mItion at January - 4 < -- -
At January31 2004 CPS had $133 million In VRDO fransaction Inthe Bond Construction Fund which are atJanuary31. 2003 and 2002.
years revenue bond i
_S56 million of bond proceeds from lasi financing for various purposes. The 'program Is carrent CPS maintains Its TECP Program to provide tax-exempt i
for the upcoming year. miiton. as rimended by thi ordinance in-.,,. ,-.
available to fund eligible projects and construction In an amount not to exceed s$50.0 authorized to have Notes outstanding up to anr . j1 as amended end restated permits CPS to borrow June 1997. The current revolving credit agreement, amounti'due under the TECP Program. 4 Depreclation informatIon for the purpose of paying
,. .nstummary of Capital Assets, Net of aggregate amount not to exceed $350.0 milton the net revenuei of- '2t%
the credit agreement. The TECP Issecured by Anwit PefrilMag Yi3, awi-t' AytS-tt. Poiretage To date there have been no borrowings under and inferior to the'piedge securing payment of existing rv 2902 Q C l the systems. Such pledge of net revenues Is subordinate t
. 'C_,' transactions in ,
to be issued In the futures There were no TECP c "
Senior Uen and Junior Uen Obligations and any 31. 2004, 2003 and 2D02.`',' f';: X, j;2..
2-008% million at January 2004. The balance of TECP outstanding was $350.0 28S 040% S 87488 S 39
$t 67.527 S (17.45S) .2.21%
(26 '3al -38% 789,012 e s r. 743 11 is - -371,657 s 2 8rra t e
"*' conptancewitthietemindprovisionsoftheNewSeries' is.mt.rmvwrI'*ei liy*,s., .'~i 11,818 o00% 1.50e8855 150.767 .3437-AsotJanuary31, 2004.2003and2002, CPSwasin (Junior Uen) and TECPIord ininannsse ^')_ ;
Bonds (Senior Uien) Variable Rate Demand Obligations 1ever.l 1' -:,50,
.4er504 38.553 295%
1295258
,, 1.333.545 114s57 6.58%
SW nslbniddtb:l'l' I 44835 4r0% 2581001 3.5t7 1.18% a
'-T
- r. Ot
~ ,4.,,,,--2874.87 172 30t.ISt 2.7882 13284 t0874 3 8% 28,22s 9;697 178 359%
2.02% Reter to the footnotes to the financial statements for more Information on CPS d'ebt covenants
- i('
,,.M,> .'
j.9.- (539) -6o0% 6.802 I,9 ... 841 7.528 24.31%
13.010) -7.e2% 305e88
- 5 88 38,488 135955 7338%
- i .- rN2bcie §3 ... 8208_71 2482% 190.717
. 28,; ..' ..
cc0,ce2reca.., S 485.4164 S 1345, 264%
S 455,309
- 1. 3_ 0.79%
61 rcedD rcmna. $*.i2t i_..i4 - ;
-S... - .@-. *!.e. 1. i4 CO.,.'!.
- 7 ' .... <j i, ' A
.'"eis. li - 'd in early May 2003; In conjunctlon with the issue of the VRDOs, the three major rating egencles, Fitch Ratings,
- >ltxxi a Investor SeM'ces lnnc 'nd Standard & Poor a Ratings Services (SAP), reaffinre CPS excetent deb ret-Ingi. Subsequent to flscal year-end SbP again afirmed CPS' high ratings. A moderate debt burden, strong debt
- ,service coverage, c6mpetilve rates, strong liqudity, strong financial profile and successful management ot a diverse ~
S.~,,sS 2 Annd~ r 3M C.-. tlj-J. t.- 12MR lan p'-if aioa were some at the factorsthat SS P recognizedI its evaluaton of CPS. Sinilar high ratings have been s 1%flOL ^ 4.0 i-lsstkdfor CPS~ivartableriate debLt.' -;'-, ,-. . * ,l,. ., -'1/4 Sa kaTX rre Rrobert J yWII St'.'
S ^.
&Md reouOcititti .< LJ tc; & ,"' Summrary ofCPS .BondandCommercialPaperRatings Se nA TX 7824-64ss
- ,' - RaflngsalJanuary3lt2004 dIoepeadent Audntion' Report - v
- ,V 's. -,-.'~' ~SeniorLienDebt LenDebt tJunior TECP City P"lic Spire U4 ofP S Aasee,bv Tooi: :, "I.
. ,a .A MA+F1+ F-is
.,- Moody'invesitorsservice i,'rt inc: ' '.Aat Aa2IVGIM I P-1 W. lie asodhed ets olixalg bodne .bds oritf City PuNk SrmimBlwad U3sAmuck T, rt
- 'r3/4- $Standard&PootsnaingqsServlce -, MAA+ M/A-l+ A-I . tCeryPublicScvlc). asan croptolsil ortsar fly orSosArdoe Tcxa~- _of Peney 31,20 Zteal ,,iltfl .^
A tv.,. Se ' I+.~( sndthe t.e sAt.neo utfr .. CtproooO. sod filigeq is toe oWtob d so h i. bsI pIh eon *-Z
,Fs IS.o} ;
rhne.o.&LoTocttnodal 'tae-eweaese IIt entpirilbutoyd City iPublic&'nces ouessepwid.ne-Debt service coverage for the Senlior en Bonds In accordance with the ordinances, was 2.54x for 2004 and 2.51x rstopdhutity iL.to eutes.So opinol. on ths fteilndltecrcs. k ed so e siolo We fid .1ss sth de h .^Ai ,.
finsst1 sloemsi, d Mly Peehhtk'kvs E pywct P-.o Plea In 20(34uo th3dr, .Wc1al for 2003. Irterest rates on bonds and comrmercial paperdeocined in2004 due to the financing strategies and trans- entnoice d the CRtyPohh Sonic. DIcilwiy loone. G.p Ilifs l.ntenios sod flnaupSlo ths Hoot a'ctins and favorile market conditloni CPS' fund net issets lo total debt and fund net assets ratio was 48.8 per- (L'Iiptnya Ikua e. Wtrr P1. is b fO 2. tI1 teCtiin liteikietlsil tu>tlet thCity Publi, cent at Januaiy 31, 2004, as compared to'49t1 percent at January 31. 203, and 47.5 percent at January 31, 2002. Servicerfpbtet Petotu Pb- . ioIldod In 11-mre I se t D th sh,(tonsr-- owemte. A. eel' CPS operathig margin was 21.3 percent for 2004 24.6 percent for 2003 and 28.3 percent for 2002. oiosy 31. a t " Wt sse sa set dst.sletwly. ci/te EerplrVeye hhentts M211. s-d Wore lt Pt .ripes 21 sond 5. r-I w i tthe b c.. -Itel NeJ WIs"tases o ftly Plitic Snt.. o
?I- rfins.s dAwsorn ... ...risteJl by othermdkO5.moIhri th 5c lecwd. n thdeir haeittl wote beees ftsxniedbtIs Adu -piloe tos dieCtoyPublicSeks flmcli asirtmenos aoItLr ieubite
>'<Requtests for Intfortmationt ;tr;> sosoi rad d scisiss bhldedJ fv the fly tbbid SmtL etp-eo Pom PNIeM i-e i sa theCity Publir 5ervie emptoyre ttl: hh rd Welrre PKM.blsd Is ift Irev lteld a r"rdimn C""
For more InformatiaonaboutC05contact Robert 1 McCultough Director of Corporate Communications, at (210) 353 2344 or at PO Box 1771, San AntonbiTexas 78296-1771. Wereda-eel t dle bIs bowd sieh uodtidng toed redsVees1Y rsce Io U IIbe lUA S*ror di o .r Amsietricf'iue ulsoitts splo dint de ifha o petoernib thesrdk lit etoo reeesl- "armkvsalsli
.tgthe ft r.lino.it senornm anrreed mi eiot mrllse'tmt. As uoic itnl es-oig. so a cc; al.k. elas epelleg etc oloe sd disn to the rn fdi xoi.esasstsAdit;An dot at.lodw-W' Msw,"fthe -,orofl# pntoip. steed sott rldolel.ec-e by sotseete". - wlti - e 1soeto thc tertil rioasuclA staeew ps.oz Wr We bic s Aiour _dib rmddiewpeons of saber-ramoee prsvldc*ecueoablc nolt rueuntopiobs.
In serepinin. bale on s1e fil sd Ihe I tIeS pdorlt eedierilte lbln bl cokreo ncerd I. to ahete o r preretaiidy. In oilttviari1t renws 6dofrilos rilthiretsy Publc Sonc'Wso aboody 31.2004 '_ -.
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.s..; . {. s . , . ri i . . eroneotitslotnvlr. ". sddee therastlsOtW didcso saedine de lie od eotosospisinkemom It. S aAl" %4V,.
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LaP n'-tftrG ZtA;'r i, t; i.r :.3/4. , * . -
"V~s ';IJv'P+3i -A+4 N?-\;i1'sd, * , ' ;t ir t ' 'Si' :t. "-
L us'ti 7&, i 2 memo.~
,..,. . . .oec lg t 4 , 4 jJ 0 4'
- , .* A
.!,. ~~ ~ ~
, -r ;i ' , r. ,-;,.. Y>t.J~
January31,'
- .
- -January 31, 2004 -,
2003
-2004 P. thosads (n
antthousands) Uabilities CurrenltLiabilities: ' ' , r..
Current maturities of revenue bonds (Note 6) .. , $ 121245" . ,S 11 S;Cashandcaslequtaents(oteland2) .. - . S 51,532 $ 239.703 1 Accounts payable and accrued labilitles (Note 3) . ,. 162002,,
- * .- Investmens(totelnd2
- 238,813 57.614 Employee health and welfare payables (Notes I and 10) ;' 4 722 '*-
1,357 2
. ilerestreWabe ,................1.864 Total Current Liabilties ....................... ;287,969
. Custoer accounts receable liss allwance for doubtful accounts 1-f $~z18 026 In2004andS12,9571n2033rinctudes unbilled revenue r * -
162.592 151,913 Non-Current Liabilities:
cSt.2 I on for2004 and 5s&4 or2003) (Note 3 Wtt 25.403 2 0 Long-term debt, net (Notes 5.6 and n7 .............. .. 2,796,460 . 26
<w.;fiSrO~eireeva.'s .:ii. ; '*wes s4i *s *wi .t' * *@@e@@ .......
South Texas Nuclear Project decommissIonIng (notes 1, 6 and t1) 211 118 '- f Inventories atavarage costs-* Customer deposits (Note 6) ....... . ,; :..... - 1i.935
- .. . .*.....,.............. 77,008 77,341 r'Materials ad supplies Deferred lease revenue(Notes 1, 6 and 14) ......... . 611,015
.... .. ......... 34,571 38.415
- Fo.s..uels
'...- Other non-current iiabilities and deferred credits (Notes I nd 6) .6 *- - 363
, ' ............. 35652 26*9B
'Prpayenandoter Total Non-current Uabiiities ..... :;..891-; 3.5......................3.53
............. 627C43r 62t 44 3,8 Total Uabilitles ......... .. .
. .... i.i.5. r 3,993,860 '
- '- Non-Current Assets, . .. . ..
Fund Net Assets (Notet)). t1 s
r ReStrtcted-* Invested Incapitalasses, net of related debt ............................!:,1 1 722,770 .^.1,i8
- 1.
- Debt ser.Ace -Note I and 2) Restricted '* rl, . .
sh casequvaen:. ...... 13 21
., Debtservice ................ 3..........
1( s '"Capltalprojects -(NoteIand2J: .. , 61i.,98.
Bond ordinance ........... .- ..
.W Cashd caheuvlen ................ 1 .152,765
... 18,253 17,568 Employee health and weitare ...... ............
fnsmen'..................
Unrestricted ...................... .... '.. 335 839. .
,. i s i ................. 658 337 ,829 - 2,7 0 Total Fund Net Assets ..................
6oIndordinanWe-
- - e lan1d2), ( '
s 58B35
- CashandcashequIvalentsi.-....... , S 68 236 S 65
. .... 612,556 393,321 Total LIabilities and Fund Net Assets ..................
Investments...
Interestrecevable ............................. 5.433 2.785:
e J Emplyee heaflth end welfare Note 1and 2) S" aee0E7pff"V noed.to VW.bawi &,Wici taftotsm
........... ................. 16,528 11,662 shnd cish equivalens
....................... 140,348 114,510
..................... ............. 611 769
.,i,, Iterest
> South Texas Nuclear Project decommissioning master trust.
i ,^ . 1 .. f- 1.a!>-t r.
- '0. Cash andcash equvalenits ............... 1 8,830
,. "~' Investments. .... ............. 208,847 172,637
!8e>r>>tr
~
receivable Li-! I.!.......................... .,.,,220.82
"-. Interest Inen~treeheble? !5 2,270 1,824
- ' i .. f ; ,e, r'..., s,._
Projet Warmt (Vote tand 2)
........ ......... 402 152 ~,, >..:,;,, ,; .?; *,:'.,
- i. ,Cash and cash equtvalents
, Investments .................. 6,680 7,180
- , ,.' Interest receivable; . .;
- .. , .. . 89 88
... 535,972 555,762 '., ', , '£ ,'
i '.s. .q .Prepald rent -iaseback (Note t and 14) ........ :. .
nontcurenassets and deterred costs (Note 1).25,578 26.306 1
Other O. .'.'.
assets, net (Note 1.4. 11 arid 15) ............................ , 4,621,54 4,585,309
- *F
- 'Capital 5,957897
'Total Non-current Assels.8 6,195,801
- ,-*i,
- 9; .. ;;^>{.-.,,.................,-,,,.-..,. 4; 'i 4j~Mw ~ t;
. .................................. 6,823,236 S 6 578941
- .TotalAs s , .
, ; ,~~~.', ,,, ,..,.- ,
it,~~~~b ie tes.: Expenses' ;A.dS
_:.i. , ,
Statements of Revenues, Expenses and Changes In Fund Net Assets Statements of Cash Flows (N t'
~~.'47i rYears
- Ended Janusn f 31, C;- YearsEndedJanuary t 31l,
..... .:,ousands)
,t. ,--. i. D03 2000-03 CashFlows from OperatingActivities: (Notel) tJ -. -. ;
. Oertng O'i i) Revenue (Notes1and)5)e Cash received from customers .. .......... 14923.0... l.224813 r '....... ........... 1,2,448 $ 1.13Z788 Cash payments to suppierr forgoods andservieea. t.;
.. i 60,121) 'i i(564,839)
Gas'. ..... 20-6 682o Cashpaymentstoemployeeatoraservice ... . ; . 158829'. '(150t937) 01,493 Net Cash ProvIded by Operating Actties 57s4te rS;499039i Tota .' ...... 1,03,I. CashFws fromCapaal andFelatedFinandrig Atdtviies , ^- 499039 Cashpaldforaddhtons to utlityplantand :" r i
~
"~Fe casedp 0*werand dist..........n..... 533.805 368,592 net removal costs(Noaes Iandt4 .........-
Cash paid fornuciear fuel purchases (Notes I and 4) :
- .
- ... 60.792t' v (32942)
- 10940); j' (21,537).
a,-~~~~~041i J! 4 - 1. -rir -1;,. , .:i; " i ;. -
.';;.t. :'..
.'Y.
321,211 . ........e.tig.nd...mlnaca 311.885 Contributionshaidotconstruction(Notes I and 4) 40274 t r *49015i q os Operating
~ ~Em enseAoes1,ri Expdngx eehaftandelfaA(Ntesandt)
',8-'9
".'*29.885 24,304 9¢;,,, Proceeds from issuance of revemne bonds (Note 6) - ; . , 284,454 97.270
- . assessments ,.............................................
, 1 22.294 Premium received from revenue bonds Issued Note 67. :; , 48645 r643 T 56603.
' . ...................... 2.u, 2 17,037 Principal payments on revenue bonds and 2 - '
368647 cashdeteasanceofdebt(Note 6 .. ;....'...0657),'5" (22t,980) 2 sa0,759 InterestpaidfNotes6 and 77 ..- ; (1..37891). . .... 14.788).
Debt Issue and cash deleasance costs paid (Notes 6and 7 . f'(88831 . "i-Net Cash (Used) by Capital and Related FlnandngActivtties ";'(21890ii - (50,5t30)
, an.ome .... . . .O..peratin. '-:;*-;* 319,712 3'20.734 Cash Flows from Non-capital Financing Activiies-:
t 'rz - i1- Regtitory'assssmentse.--..... . . . . . . . . . . . . . . . . . . . . . .. f*..........451 Cash payments to the City of San Antonho ..... .. 05080) (169,937) .
Net Cash (Used) by Non-capital FinancngActvities .. '.. .... (20 5080h (t169937)i
.......... 23,990 29.338 Cash Flow fromn Investing Activities: (Nobte'2) -
-DcrlsligInivestnierit kii~arne and change i fair value .. ,214 Purchases of Investments .. ...... :8 ' .. ".'.. (754,724) 21.458 ProceedslrormsatesandmaturitiesotInvestments .. , 3: 576641,. rfi,.903 028' 5 Erne health and welfare Iiveslment h1cme e and change; I fair value 3.4...
329US3 (6.825) NetcashIncreasehiSouthTexaaPreoeddecommlsi;ones V- l.' '.,.
'" 'Intrsepe (oeand 7(137,891) (I 41.786) master trist assets .27 (..................
442)1 :690)
~ - Arortzslon f dbt ~aculstiotIssuance, discount and Net cash Increase hI assets held for employee health and wetlare j.;-. ' "; 7,813 4-;, ; 4.057
' - rci t sNote )... ' ..................- (14.405) 17.353) rnterest and other ncome ....... .. 28803 . 336 construction (Note ').3,073 ....................... Net Cash (Used) Provided by Investing Activities ................... 168 . 1768032
. c fng 6,776 Net Increase (decrease) hi Cash and Cash Equivalents . -15,426) .: .r (250728) . (
inghv st c en irom a d rar jeh tirvaue.............................. .....
i'l?-f, -r isio 'Drcom ......
CKostato . t sr-.>- d 6Nate .........
tb 67.a................. 0 (7.057) Cashand Cash Equivatents at Beginning ofPerlod(Note 7J;........... 319204 - 334.630-
, 16yntrthitryi1.. -ofS an An .. :, .. .. ......... ... .20l-M....... 72.235) Cash and Cash Equivalent at End of Pertod .................
- X,;~d£.........................
I 68478 68,4J7r S 39204 319 20*,4 r ... .. . . ......... ... ...... ....... 3t13 er ailrin ieres and ; 31,15...........................
191 33,048 Reconrlillion of OperatingsIncomeilNet Cash Provided Onet Ac as '"i *e 4 2 53.431 Cash lows from Operating Activities: . < ,j ' 'r"' '
haenunNei aes78,326 86.479 Operating Income ............ ; i.-, h S 320734
<319,718 :.
Non cashI emsIncluded*
0 Depredation and amortization expense Note 4) . ........ ; 228941'"P ' 2i 7037 FruidNetAssetsrBgiQ.;,;;.'1 ~bt: ..
ldb ....................
- . ,.' ................... ......... 2,751,05 2. 64.571 Nuclear fuel amortization (Nate 4) ................. .. .. ;13 950 " 14009 tC sib
- ^ .,<.. 0* ihdl~sic 51,050 Allowance lor doubltut accounts ................ ...... .. 5069 595
- ,.'N
- ;(0571i
':,>-1#timnsotr'~ir~n~t~ Changes Ih current assets and labilities: : -
- 4 ot ret;,.s~ii-V istateients (Increase) decrease in customer accounts receivabl, net" ; ............
"' 'See' hriattomn .*-,,.sZS's - 2 to te*t baslc inanceil (Increase) decrease in other receivables ..... ; .: Z302 (8851 i ,~~~~~~~~~~~~~~.;zi'iomietr otbtdCpt 3
1 '..-r'6'0***'3
..................;411$
p-t~-Jotitsrcpltlsetrs-.j (Increase) decrease hi materials and supplies .... ... 333 (3257):
i .S- :-!0 (Increase) decrease hi fossi fus ..................... -4 1 89) e ri 7 J
,3
.... (Increase) decrease hI prepayiments and other. ; (8' 16S6j 2311s rt ses:.
j'^t' :CaseinFn 2' Increase (decrease) In accounts payable and accrued labiities ( 914) - 13995, Changes hInoncurfentand other assets and liabisties": V 'f..
(Increase) decrease hi other non-current assets and detenred cos" j, .
A 574"' "v 561 Increase (decrease) hI cuslomer service deposits payable (61 : , .)'. (4 683)
Increase(decrease)InSoulTexassNuclear Project - .' . s ir " i . ..
decommissioning labtrity ....................... .27' 2 37i3 Increase (decrease) in employee health and welfare liabiity ;524 . "'.,Ap 252.
Increase (decrease) innori-current and other liabilities. . ; ..: . .- 2 808)
NetCashProvidedbyOperating Activties ......................... S 5754110 S.- 499'039" Se acc~~anprg noi to bast fiaica httcnwt orebca '-: -e i 7't*;
.- t-T'.,_ ,-, 3yv.,
m ; , , 9 ,~~r .. - ,r~hr..o W Resricted lunds are generaty for uses other than current operation They re designated by lw, ordinance or Use of Estimate. - The preparation of financial staterentsin conlormitywith accountngpriciplesgenerally contract to acquire or construct nron-current assets., Funds consist primarily of unspent bond issue or commercial accepted In the United Stlates of America requires management to make estimates and assumptions that sited the paper proceeds, debt service requlred for the New Series Bonds, and funds lor future construction or contingencies. reported amounts of assets and liabilties and disclosure of contingent assets and liabilities at the date oof the ifan p,'*' This category a also Includes customer assistance programs where proceeds are received from outside parties. The cdal statements and the reported amounts of revenues and expenses durin the reportart peidod. Actual tIsulls
- SDec eommisTlonrrr nir asterTrutasstsnpend CPS y' employee health and welfae plans assets are also coriald- could diller from those estimates . - . . .. 2; ,R'
- 2. Cash, Cash Equivalents and Investme ......
iThe CPS Board f Trustees authortzed that Repair and Replacement Account funds be designated for converting
- ', overhead electric facilities lo undewground.l One percrent of the prior tiscal year s electric revenue from aties served tPS cash deposits at January 31, 2004 and 2003 were entirely insured by federal depository insurance or collater-;
'pby CPS I appaopited i or this Drograrp This I; Included ,withthe assets rest ited by bond ordinance. alized by banks lor the account of CPS. For deposits that were collateralized; the securities were US Goyrinment or GoveinmentAgency or U.S. Government guaranteood obgatioeishldin book itry lonr by the feoderalpesereq O.i:ther Non-Current Assets atnd eerred osts in June 2000, CPS entered into a leasehleaseback transaction M.
i'* '-!. .with Unicorn Corporation (UnIcor)nThe longterm portion of propaid rent related to this transaction was recorded ank inCPS name. -..
as a delerred costhIn 2001 'in addition $123 million, less expenses of $350 thousand, was paid to the City of San CFS allowable Investments as defined by CPS Board Resolution and Policy Bond Ordinances, Tax-Exeript .t
',. Antonio, I-nacordane with the' New Seres Bond Ordiniance (see Note 5), lot its 14 percent share of the net benefit Commercial Paper (TECP) Ordinanco and State law Include U.S.Governmeni or GovernmentAgencyor U.S. -;E.'
- k. .,.,- iroru the transaction This is recorded ass? prepald item and Is being amortized over the lie of the lease. See note Government guaranteed obligations; collateralized mortgage obligations Issued by the U.S.; ulay securedrcerbticates 2 ) 1^4,.:,n for mor -g.. *noralot-~.
-- -. >i.-l of deposit issued by a state, national bank, or savings bank domicild in the State oJ Texas, diret repurchase agreements; reverse repurchase agreements; defined bankers acceptances and commercial paper, no-load rponey
. oncurrent assets include unamortized debt issuance expenses, which are amortized over the shoiter of the life of N market mutual lunds; and other types of specific secured or guaranteed Inyestments. , -
- i the reunding or reutided bonds Other assets Include the Iorg-term receivabie from the San Antonio Water System f-orthe sale ofwaterrights li fiscal year2000. -. CPS Investments in the STP Decommissioning Master Trust ate held by an Independent trustee. Trust iluveatents are limited to U.S. Government or Government Agency or U.S: Governrnt guaranteed obligations by CPS Board
- her-current deferred costs also Include a Department of Energy (DOE) special assessment lee for decommission-Resolution and Policy, Trust Agreement and State law. These Investments are subtect to market risk and theirmar
.-Ing of U.S. nuctear fuel enrichment facilues. CPS recorded this in fiscal year 1994 to be amortized over a 15-year ket value will vary as interest rates fluctuate. This could allect the value a whic) these securties are recorded K 25roriodto nuclear fuel expenae.: *;. -
.Fit -
Investments in the employee health and weltare plans are held by an Independent trustee.' These Investments are F
- i, Other Non-urren;j
.-. abilitles and Deferred Credits - The long-term portion of the deferred revenue associated limited to those autworized by the plansi Administrative Committees se Trust Ag'r9ements and State law. 'Theseo i; wil >^1 ^& le i e o te .K15 Spruce ptant was iecorded as a delenred uredit and is being amortized over the Wieof the ti investrnents ere subject to market risk and their market value will vary as Interest rates fluituatoits coull affect!.9
- Seenoei~fomote leas Informa on. the vau at which hse securitie are re=ded. T hesinvestentpolicies lollow the prudnlm'anconcept.L'. "
<;ts ROther iabilities and deferred crodits Include the STP decomnmissioning liability, customer servce deposits, advance payments from customers for construction and the DOE special assessments. See Other Non-Current Assets and
- Deterred Costs;t The long-term portion of the payable to the Greater Kelly Development Authority lor the purchase
< ~ doflectric and gas properties I fiscaS. year 2000 has also been recorded with other liabilities. 44 i Statements of Cash Flows For purposes ot reporting cash flows. CPS considers all highly liquid debt Instru-1ii: maents purcS3ased rwlh a maturity of approit atel three months or less to be cash equivalents.
he following r non-cash transactions In 2004 and 2003 not reported on the Statements ol Cash Flows: 3
........;- There was a non-cash capital and related fIancing activity In 2004 related to the acquisition of utility 1nfrastructure faci lties from the military through FL Sam Houston and Camp Bullis. As of January 2004.
CPS reported contributed capital of $3.5 million for this acquisition. Other non-cash contributed capital 7 .motale
,\ si A S3-4million.,-:71 .t - ;- ;-
. .; There was a non-cash capital and related financing activity in 2003 related to the acquisition of utility infrastructure lacilities from the military through Brooks City-Base under the Brooks Development Agency. ; - 1,..,.] ..- ..- ;-\j v -'~s ,AS4s As of January*00, CPS reported contributed capital of $4.4 milion for tis acquisition. ~~~~~. .kP. ;". . .i^--.,',7
',.,. .' '..k In 2004, there were two separate non-cash capital and related financing activities. In July 2003, a deposit was made to anresrgw of $104 millon directly Irom bond proceedstorefund $96minlion n revenue bond In November 2003 a deposit was made to an escrow of $386 million directly Iromit bond pro-lo refnd rceeds $375 prilTion hi revenue bonds.
In2003 there was also a nonicash capital and related linancing activity related to the depostto an escrow ol S4g9 million diectly from bond proceeds to refund $445 million In revenue btonds * ' ', -' '.' '4l'-;;.'
r;
.:~' .~ . ,'{ ,,' ';,;tlt m ;
- Restricted funds are generaly for uses other than cut rent operations. They are designated by law, ordinance or Use of Estimates - The preparation ol financial statements in conformity with accounting principles generally , i econtract t acquiro or constuct non-eurrent assets Funds consist primarily of unspent bond Issue or commercial accepted In the United States of America requires management to make estimates and a tions that afect the
,1; paper proceedsi debt saervce reaquired for the New Serios Bonds, and funds lor future construction or contingencies. reported amounts ofaset s and liabilities and discos~ure of contingent assets and liabilities at the date of ,the finan- ;
li~v4. r, This category also includes customer assistance programs where proceeds are received from outside parties. The cial statements and the reported amounts of revenues and expenses dulpg the reportri period Actual results '
< S ecmisinigMstrTrs ast en C ? emplyee health and weitare plans assets are also conaid- could dilfer Irom those estimates r , - ;
,-1':Xeredrestrlclad. " A -'
- 2. Cash, Cash Equlvalerts and Investmentsf, -n
,,<;t vC'mTha CPS Board of Trustees authorized thai nepair and Replacemenl Account funds be designated ior converting overhead electrkc facilities to underground' One percent of the prior fiscal year s electric revenue Iromn citis served CPS cash deposits at January 31, 2004 and 2003 were entirely insured by federal depository insurance 91collater s
,:; by CPS ls appropiaed or thisrograrr. This Is Included With the assets restricted by bond ordinance. alized by banks for the account ot CPS. For deposits that were collateralized; the securities were US Goiyernmont or Goveinment Agency or U.S. Government guaranteed obligations held In book entry torjr by the ,Foderal Jeserye
.;>thr NorlCurrent Assets and Deferred Costs In June 2000, CPS entered Ito a leaseheaseback transaction 3an inCPS narne.- -!j ? 1 ^
w'- UnicorM Corporatlon (Ureco)
' with ,Thelong-term portion ot prepaid rent related to tls transaction was recorded as a delrrod eost in 200t' rInaddition[ S1Z3 mnillon, tess expenses of $350 thousand, was paid to the City of San CPS allowable investments as defined by CPS Board Resolution and Policy Bond Ordinances, Tax-Exe rtpt t Antonio, in accordance withpte New Sertee Bond Ordinance (sea Note 5), for Its 14 percent share of the net benefit Commercial Paper (TECP) Ordinance and State law IncdudrU.S. Government or Government Agetcyor U.S. '
front the transaction.This is recorded as a prepaa d Itm and Is being arortized over the tile of the lease. See note Governmnent guaranteed obligations; collateralized mortgage obligations Issued by the U.Si; lutjsecured certiicates or more Inora-o of deposit issued by astate, national bank, or savings bank domiciled in the State of Iexas, direct repurchasqe '~
agreements; reverse repurchase agreements: defined bankers ac per no-l rpoey Non-current assets Include unamortized debt Issuance expenses, which are amortized over the shorter of the hifeof market mutual funds; and other types of specilic secured or guaranteed Investments." .,; f - "'
thq refunding or refunded bonds.: Other assets Include the long-term receivable Irom the San Antonio Water System
.<<- h.-' for the sale ol water rights hI iscal year 2000.t -:- CPS Investments I the STP Deconnissioning Master Trust are held by an Independent trustee Trust Irnvestments are limied to U.S. Government or Govemment Agency or U.S. Government guaranxteed obligations by CPS Board,
, ,, Non-current doerred costs also indude a Department of Energy (DOE) special assessment lea for decommission- Resolution and Policy, Trust Agreement and State law. These Investments are rubject to market risk and their nar' t 9 tringof U.S. nuclear fuel enrichment facities. CPS recorded this in fiscal year 1994 to be amortized over a 15-year ket value wiPvary as Interet rates fluctuate. This coutd attect te .value at, whic these ecrite s are recorded '.,
feriod lo nuclear fucl expnse..
Investinents Inthe employee health and welfare plans are held by an Independent trustee These nvestments are,:
j 'Other Non-Current Uablitles and Deferred Credits -The long-term portion of the deferred revenue associated limited to those autlorized by the plans Admninistrative Corritiattees, the Trust Agreements and State lawt'Thses
,i the lease o lthe J.K. Spruce Plant was recordd as a deferred credit and is being amortized over the bte ofthe hIvestments are subject to market risk and their market value wit vary as inrerest rates fiuctuate This could affect""
., Iee Se note 14 lo m rt the value at which these securities are recorded. These investment policies follow the 'prudent man' concept.
3&4,a' Other liabilities and deferred credits include the STR decommissioning liability, customer saervice deposits, advance payments trom customers for construction and thq DOE specal assessments. Sea Other Current Assets and o Deteried Coils ,'The long-term portirn of the payable to the Greater Kelly Development Authority for the purchase fe gas properties in fia year 2000 has also been recorded with other liabilities.
Statementc of Cash Flows-For purposes of reporting cash flows, CPS considers all highly liquid debt instu-
} man\a Aq with a rnatu~nty of approximgately three months or less to be cash equivalents.
Thefollowing reptesent non-cash transcltions In 2004 and 2003 not reported on the Statements of Cash Flows: - .. . ,', )t
/ ,Therewas anon-cash capital and related financing activity in 2004 related to the acquisition of utility intrastructure facilities Irom the military through FL Sam Houston and Camp Builis. As of January 2004.
- r CPS reported contributed capital of $3.5 million for this acquisition. Other non-cash contributed capdal ,
- , ,, ' . f " >~);4- -'S ,4't.4piS.J..i";Jy r..
Zr-y-t;S toale $3. ritillio.X,'x., --; -r
-There was a non-cash capital and related financing activity hi 2003 related to the acquisition of utility infrastructure facilities from the military through Brooks City-Base under the Brooks Development Agency. .. 4i , '-
As o Januay 2003, CPS rep tted contributed cepital of $4.4 million for this acquisition.
- . , In20D,0there were two separate non-cash capital and related financhig activities. InJuly 2003, a deposit
, made to an escrow of $104 million directly Irom bond proceeds to refund $96 million In revenue S was , ;, , ,., .. ,.-.~, . - W . _. t- $g s - :^ -C........, ,-' >* tti
,b., v , onds;, In NoYember 2003 a deposit was made toan escow oi $386 miiion directly Iron bond pro-coeds to reiund $375 trallion inrevenue bonds.
In 2003, there was also a non-cash capital and related financing activity related to the deposit to an escrow of $41° million directly from bond proceeds to refund $445 million In revenue bonds.
r.. . ',
'" - - ' 4!, j c, .i, .Equfv tet,',
'.,f" . .':,-fff .; $-'~t,.~h; S+i Cash 'i ^-
lns n~iy e,, ,\;,.' ;,. W 204.00
- cjtodil risk based upon the to i ; ' ' ' January3;; 2, Deposits with inial istitutions are classited into three ategonte J. l..
CashrwndCashEqulvalents; (in thousands)
I Deposits insured by the FDIC or collateralized with securitior4es held" by C-PS~~ or C 4j^Jd %- t CPS unrestricted and restricted 'FS ' $ 51,947 S 298,712
', 1 8,830 STP Deconmiss onins Uestr;Trusl restricd Employee health and welfare . rosttod'-'. . - .662 16,528 1
'," - 68,476 319,204 2 Deposit scollateralized De*st *P ,-:t~CP held bv. the "< 'iN-_-b.-
, . by securities bank sagnd CPS . name., :;
name.r-,
1' ',-t.S '. ToataCasharidCashEqfuivelenitsf E . .
deposits collateralized by securities held by M
,\,;ri*.u ~'4.. Investments: A, § ii.* E7- ', i+ S;r s,_z.
924,789 773,960 3 Deposits uncoltateratized which Include pledging linancial Ins tiution orby Its trust depaient or agent but r-ot 4 CPS name unrestricte 208,848 181,467
' .: STP Decommissioning Master Tust-restricted'
.- Empoyee health and wearerstried 1
156,876 290,513 126,172 1,081599 Accordingly depositsol CPS are categoried by custodiapsiak as flUo6w: 4,
- i+'eF,-, :t;-gi^F,i
'<e' TotalCashEquaivalesdIe stments
.Carrying
- Caleory 4 fZ' g .-- Z. -' iLes; mlnestnients with orhIal maturities of ss thaa - fn thousands . '
Balance 11.- 1 -- 2
-9;*;r; -;,;t¢<.sK-X'-: tCPS unrestricted and vtj<.V rintydysinruad In cah equhvabent:,;t*
~ intrestricted:-
dy Icldd ncah48,487
'; , , 448 2927 298,277 Deposits withFinancial Institutions January31,2004 Amounts S 33121 $11,720 $-11,720 a :'STP DecormDssioning Master Trust restricted 1 8,830 January31.2003 S 318 1 S7939 .7 $S 93.3
.9U . ,& .4
-restricte 16528 11,662
-. , ;...Employee health nd wetfare TtlCash E `1". 6012318Tota7Eqivalents -i-:;>t
^ 't - - -..- S .
S';ta t Cash. Cash Equivalents and Investments S 1 293 973 $ 1.082,034 Investments are ctassitled into three categories ol custodial rlsk based upon the lolowing:-.t.. i Ca an Cash equivalents --' 51,532 $ 2393703 *-cat r Descrraon nvstensw4;- -- '-^- a :238,813 . 57.614
,it ; '4
,r.... .'.Totat Unrestricted ,- 290,345 297,317 1 Includes investments that wreInsured or registred, or for wvich the securities are he&
M~t7estricitedR-Lss ': .
ri' r, ,, by CPS or CPS agent In CPSpname., i.
59,009 2 includes uninsured and unregistered Investmnsts tur whkh the securities ere held bv 415
- "-'; '.S Cashandcash equivalents p.-'... *..
counterpartys trust department oe.genfin S aie Includes uninsured and unregistered investments Ir which the securities are iel by I n9 s. .. *r637es 418,069 nv smn 637.904 477,078 3
,-ToW CP by tstrustdep or agent but not In a.i.>Q
- nam -
Master Tust rstriated: .
' 4 ,!.. 4 .STPDecommrsskoning 2;1. - . 1 8.830 Cashndcasheqivalents
> et 4.5-nvstnets;hssj>4v4 t;i~~t'208,847 '172,637 181467 Accordingly, the investments of CPS are categorized belov to give an indication of the custodial level of p,.j,; r 1
> 24tt
- - TotatSIPDecomnrnissioning Master Trust 208848 assurned at January 31. 2004 and 2003. .
r'-';t 'ttEtp.j;5 ntoyyehehallh and welfare: .^'..'-s;
, 18,528 11,662 January 31, 2004-.. i i'f C >
f r' gica~1sh6ndcashequivaltsV
.: : .......................... 140,348 114,510 na thousands) Cateqorv% r
- ~>,,. ; l, ^2rlnisritnt~,i~iz->;-
126a172 1 3 Aounots Ai -
STotalEmployeeHealth 156a876 TotalInvestments ByCatseory e: '*ritotrilCash, Cash Equivieents anldInvestrnents SI1293.973 $1.082 034 ;: , .,-
- tv'ils ¢, *' CPS Investentrs:
U.S.Treasury &Government .. -. ;,'{ s 8 I Cash and Cash Equivaents $924,789 ;924789 v S 135 S 117 AgencySecurities
,, , Petty CashFundsorlHand -. .
paying agent debtservace 13 0 . .. ,..
'8ond South Texas Nuclear Project ,-
peposits with Finncial Institutions Decornuissionirg MasterThist .Trus: *
- "r.Unrestricted -. CPS deposlts
- : 2,910 165 U.S. Treasury & Government ;
- AgencySecurities $208.848 . S208848 7 S i2> jout; oi; Restrid s CPS deposits 5 -
t~ :; - ;*. Capitalpqecs0 Employee Health andWellars: . -t.'* ...
402 152
. ; ? ProtectWarm', ?
Corporate Bods $ 19,817 , . 4...;l 198l7i' -S 402 153 88,841
-- ' Total RestrictedDeposts .
Common Stock 88,841 ;'
318 Total Deposits with Financial Institutions U.S. Treasury & Govemnment ri
'.-Invesmrits with Original Maturities of Less Than Ninety Days: Agency S ecuriies 22,729 22,7.^
-- .,48.487 239,421 8961
- -CPS unrestricted GlCbalBornds 8 961 .. :
' r58,856 0 I -
-Cp5estnc0ted Tota Health and Welfare
- -, - STP Deconmmlsitoqirg Master Trust - restrtcted 1 8.830 Investments Categorized $140 348: -140,348`*4:1 16,528 11662 -. ' --.
- .- -r rEmployee healthand wefare*restrncted Investments not Categorized
- :., . ,.,
, : Cash Equivalents § . 03769 318Total Money Market Mutual Fund Total Cash and Cash Equivalents $ 68.476 $ 319,204 Total Employee Heatih end Wellare FundJ. . 1 * '
IS558786 S
{r;-.4. ,. -. ;;>;i *-t.'-' " ' '
rV
- 4. Capital Assets .. ' : ... i.'
nu 3103 .2"00,3 Capital asset activity for the years ende Jaur3, 204adJnar 1 03wa sflo
- 02-01o2003 lic~st~n~l~'Oceos'6.31 26014' n thrus) . ,.'
ItS
'- 1
' :Cateorv 3
Carrysg Anounts Fair Value Non-DepieclatioAssets: 4'(.I: .. ~ - ' ; "'
,To~talnveslrnenlsyCategory Land $ '4928," $ 26' . >0 P*O1pi96.
Consiuclbon-in-improess 33. ' 230 420 (31265071'~i 0 '248.885
= ' ' . $7739960 Se S774,248 Tota Non. erselaIiiAssets 019 230699 (312,50? . 0' "319380' Alglocy Dvptveei&IA Assets: , ".'
Elocloripisit 6.511.,565..,2.7 . 5.0L"5634. 63,80
- . co* wntmesioiin Masle( Trual ^ :-................... rteJ1,.,.......
as plant 452.52 . .1 13~/~ 3.~76
'.-,>'...i U.S. TessurynGevrnment .iir '.;
468.029 64 "9373~.-1.4~~084 h,.:-,, ecunties S,. - '.' ; 4'gjJ $181,467 $181,467 $1816467 G~al ph"i e'"l 87 Ubiilypropeitylaasa , 875 .e NuciluMr kW090 291,43093037 i';.jf . ElplOyes H"IuhandVenalres:' r
S 19,951 Telal Oeprecialili Assets 6,57374207 695974067 C c-' W Bonds": , $19,951 S 19.951
- , i-*' eCu7; *.. 66,976 56,976 Aocumui~iid Depreclabonk andAmio stiol.
Depileioni
- U.S.Treasuy&Governrment;. S., .* r . -; Ir (20061 1716 j, ',t92~.'~ (2,1611,85511 30.030. Electio
- cy Securliies~" 4 " -; 300l30; 30.030 Gas (15, q. (10.038) .', i..eO~'. 4 ,.Ie....l~
- .GlobalBcts . i8 -r'i) . 553 '" 1 7553 7553 Gengeal (10423) (31 6611 J.- .';~ 1.27) 1867 it 10. 0330
<R.-::,,:
'iSE-D~~~Wv.9 oi11a~rdevare's25, 1144510 ;510 11 NuclearluI 1252.943).' 13 9501"01' . 268 Total (2,555,236) 1242,8911 0 ', 1241 2243)
, 4.nvstrlzs
.- .:). rtCsteleorixed; ,tSb'} ;. w: e MutneyMaletMitualFud 11,662 tt,662
$126172 $126 172 68 30 33570 ' S' 0 $ (2 6851S54621 S04 Totali.ployelHealthland VollaOruelS CitplWAassts Not reportod Inthe two preceding fables, Money Market Mutual Fund investments are not categorized as they do
. .' SAs k..
Ca PM M-M .. dN 06 r.ais.a flEO 608 ac s 12172,84.60410, 3.7 odcoeo gis ,
0&.~d,3 8316gM2 M02l-0SoMW.~ 1.8orae OggIWI.pe, W04 n3wll9. 01-3i8200
.X.- pegjrgaUon of Receivables and payables ~a8 AS.0 ... ,~t4 68iWas0g a489 5M384.0* g.OMy 850 fro 8~ 88160.4888 0M012059 Dio.
6.o4d,928 CP8 tapiwla8066 doalurd 3.883 112o50.4 M*3b.80 ue
'S'eceivS.,b>s, -". . :. ;,. i Conalhichon-Imp494.00. beQ' .o M .717e8, 279si. 948i e 39)Mod1 113.9
'e et ciustomer accounts receivable as of Jarquary 31, 2004 included $61.2 million for unblied revenue receivables included $12A mt-
- F - and $101 4million for billed utilty services Miscellaneous receivables as of January 31. 2004 lloq for the receivable related to the Joint Operating Agreement with Texas Genco. LP., $1.0 million for regulatory are no receivables expected to 454.876 $ ,40 '58,7591$'~~ 468,024925
. -' related rrqceivables. and S 120 milion for other miscellaneous receivables. There "and PIM roprkutyeso 18.759 0 .'9j '0'0l5S take longer than one year to collesQ,--, 5 utlanhity inscso Nclear 26oogo9s02J 21,5374 113 93l'7~5062
..... Ill34 1139.9391 l'7'S 574398 19 receivables and TotalNn-OpreciakiiAS sets i - ' At January 31,20C3; net customer accoutnts receivable Included $58.4 million for unbilled revenue million for 93-5 million lor billed utlity rervices. Miscellaneous receivables as of January 31. 2003 Included $10.8 Accumu.latd Deiemlin. e: etin aclA.o" 417.1246) "537 0P '>3533 61 1586
.';the receivable related to the Joint Operating Agreement with Texas Genco, LP.. $4.5 million for regulatory related Electio t(1.48.46718 .-
Gas. (111142,3897 I .8705 ' 82 2 l 5,3
-> receivables and $12.4 million for other mjiciellaneous receivables. Gneneralpin1417.876 128,850 -85 354G .482 lublitypropertytosed 182045 0, 294 Nuclearlow (268.932 (1,0q -
standard operating
- AtJanuary31, 2004, accounts payable and accrued liabilities included $56.0 million rolated to million to T lotali (2.3934678) (2179046) 0 Y' (33363 n supplirI and vendor payables including fuels payable. $29.3 million to employee related payables, $22.6
-the current portiort o[ Jease deterred revenue and $24.1 million to other miscellaneous payables and accrued ilabill-D.prulaIl.Aae.IsiNa 4,9,5 150i1821 139 939 (~39.4 4171
.irMitJanuary31, 2003 accounts payable and accrued liabilities Included $103.3 milion related to standard operating
$27.0 million to employee related payables. $22.6 million to CaPltwAssels,Not $4 45-4164 $12972 $_ 0I$ 113)3 ,'4.585 309
'n supplier and vendor payables, Including fuels payable.
'e.>~the cutrentpot of lease deferred revanue and S19A million to other miscellaneous payables and accrued iiabiii-MO*6.Md0*.Pi - 4.4166 o0.a.1M61 61206oan .10.*ebaaedd83.4...t Q.I,
- -6;'tirssi,<v.-v ,¢;6 ;r
{,
othersn the f7 -. .. V-'
As of January 31, 2004,the TECP Ordinance contain e no nd and Comtercial Paper Ordinances Requirements 5,..
of:,,, t.. . -
To secure the payment of TECP principal and Interest, a pledge Is nadee alter August 8, 1992 contain,
..fi,"'IAs ol January 31, 200t the bond ordinances tfoNew Series Bonds issued on and (a) proceeds from (1) the sale of bonds and additional poles Ised for such puposes.;
ot amngotes, the following povsn. *. ... ' t-r~~~l,l@L and (2)the asatof TIECP . "r' -. P.;-1
- 7.f.;'.', ' ..
arid appropriated to be used in the following priority: (b)TECP proceeda will be used for authorked purposes;,and, '2 it2 '; ., Revenue depositedinCPS:GenferalAcrowlt shatl be pledged payrmet on New Series Bond requreoments and -'.-,, s-,i,',
(Systems). (b) for payments of the (c) the not revenues o the Systems, ster (a) for taintenance nadoperating expenses o0the electric end gas systems Junior Lien OUigations. pledged to the payment on TECn f , np Iz4gNeiw Series Bonds; (c) tf the payment df any oblgations Inferior in lin tq the New Series Bonds which nay be
- It aued. id) for an amount equal to Six percent of the gross revenuetheof City the Systems to be deposted I the Repair Nheoviw Serias Uonds, the Junior Uen' .*t'x4 not to exceed 14 percent of the gross rev- As of January 31, 2004, CPS was Incompliance with the terms of nd Replacement Aci oint. (a) for cash piiyrments anrd benefits to -, V C> rst-o,4-' > ;
Account to the Repair and Replacement Obligations and the TECP ordinances.
. 'pnue of the Systems, and (I) any remaining net revenues In the General tie City from the net revenues of 6. Revenue Bonds and Other Long-Term Uiablilies.
lMThe maximurm am-unj 4i cas to be transiered or credited to the General Fund of Bonds.:The bonds war Issued IniMt revenues of the Systems less the value In May 2003, CPS Issued $250.0 million of variable rate Junior Urn Revenue the Systems during any fiscal year shall rot exceed 14 percent of the gross million was Issued I s
's"u of gas and electric services of the Systems used by the City for municipal purposes and the amounts expended dur- ly in a weekly Interest mode at par value. Of the proceeds, approximately $100 of gross revenues of Ute Systems to the Junior ien Reivnue Bonds or Ing the fiscal year for additions to the street lighting system. The percentage Repair and Replacement account for prior capital inprovements4 The mode for be determined (within the 14 percent rate or tern rate with an hterrt ratleo' r,' be paid over or credd t the General Fund of the City each fiscai year shatl any portion thereof may be converted to a different mode, or toauiauction iejiievenue l:
limitation) by the governiPg body ofthe City.t period of different duration, at the direction of the City. Following such aconversion, the Junior portion thereof, w4ll bear Interest at the corresponding daily ute, weekly rate, auction late, commercial' ,
Bonds or of and interest on the New Series Bonds, The net reyenues of the Systems are pledged to the payment of principal . ; ,
papr rate, term rate or fixed rate.
r as Senior Ueon Obligations.' Al New Series Bonds and the interest thereon shalt have a first ben
' , which are ctassified toIssue $350 Sniliion of New
. a.uporthe noet revenues of the Systems . . -. In June 2003, CPS entered Into a Forward Delivery Bond Purchase Agreement of $37.6 million were Issued to ^
Series 2003 Relunding Bonds in November 2003. The bonda sold at a premium The Junior Lien Obligations (VarIable Rate Demand Obligations) are special obligations of the City payable solely resulted In ash low savings of, refund $375.5 million of 1994-A New Series Bonds. The refunding transaction percani p1the paramount of..
and equally arnd jatably secured by a Junior lien on and pledge ol the net revenues of the Systems, subject $329 milion, which equated to a present value savings of $24.0 milion, or 39
. , , from a.'
and subordinateto 1iens and pledges securing thie outstanding Senior Uen Obligations and any additional Senior refunded bonds. This transaction resulted In a lose for accounting purposes o S10.6 million, iwvtch has been superior to the pledge and lien securing the cwrenoty outstanding the shorter of the lie of the refunded or rehunding d. }
Lien Obligatons herealter Issed nd deterred and will be amortized over 1 s:- < -* >Commercral Jeper ObligaliorsI all as fully set lortl in the Ordinance. Refunding Uonds.iThe bonds were sold at InJuly 2003, CPS Issued $93.9 mrillion of New Series 2003A Revenue the sale of electric energy, gas or other servic- and were Issued to advance refund 524.4 million of 1994 NewSerios Bonds andi
'f The City agrees that It will at alt times maintain rates and charges for a premium of $11.0 Willion consumers which shall be reasonable in cash Iflo savings9f S5.9 mnillionr aas urraished provided and .uppled by the Systems to the City and all other $71.6 million of 1995 New Series Bonds. The relunding transactiorniasud e tnd revenues sufficient to pay; par amrount of refunded bonds..'
and nondiScrinhnato a ich will od which equated to a present value savings of $5.8 million, or 6.09 percent of the defred sardwUlIbe; This transaction resulted in a loss for accounling purposes of $7.9 million. which has been a -. "' -- fa.r g a.!,;
ri~s $',trp>'( 9 lt masitanafnce andsop~rating epenses, depredation, replacement and bettlerment amortized over the shorter o lthe Ile of the refunded or refunding bonds.
t tsB be requed by Chapr 1t2, as d T Government Coda.
Negally deteased with cash In August 2002, $144.2 million par value of 1997 Revenue and Refunding Bonds were less the p of al Pary Bonds, as defined in aheNw Series Bond Ordinances, as and for the actual defeasance, t ir<-x the Ihot onan dprincipal The not accounting loss of S7.1 million reported included 5149.7 million paid S; when theJsame shalt become due and f the fratLashnrffnt end maitenrice Ofthe value of Die det. plus unamortized reacquisition and bond issue costs not of float jorwart agreement proceeds p
- ,.+t. d~ lu~Idxac*unts cueatedtfor the payment and Security of the Parity WBons.
$1.6 mnillionm -
$445.1 million In certi
' (cothe nt..et on and prt o the Pio Un e Bonds. incl"udng the Junior Uen O- tions and In September 2002. CPS Issued $576.7 million of Revenue and Relunding Bonds to refund miljon Thea bonds we z ;. any Additional Junior ULenObligations hereafter issued (all as defined in the New Series Bond outstanding New Series Bonds and to reimburse prior construction expenditures of $150;0 j
due, and for the establstmentandmaintenancef sold atacombined net premium of $56.8 million. . * ::; i , .
-rdlinanCeJ)asitd w hente samenihallbecome I the fundrs and accounts created for the payment and securnty of the Junior Lien Obigatiron end any' Series Bonds and advance refund The refunding bonds were Issued to current refund $48.7 million of 1992 New "E ; Junior Lien 0L6Iions Bonds. The refunding transaction resulted i cash flow savings of $24 1 milli
$396.3 million of other Now Series the par amounj of refunded bonds.,
(d) to the extent th same are reasonably antiipated to be paid with available revenues (as which equated to a present value savings of $18.1 million, or 4.06 percent of 7 " i-~-. -
has been deterred and wil4 be
-- J- - Sdefined in the ordinanceauthorcizing the CommercialPaper). the interest on and principal of tl This transaction resulted In a loss for accounting purposes of $34.4 milion, which 1,. 7
- (asdrined w orddn and the C redn Agreement (as defined inbsd ordinance),
and amortized over the shorer of the lile of the refunded or refundig bonds.
oo ion the Systems as en when the same sl become due .4,.-.A
.. '. la
. 4. *;i-r t ' 9-' .%-.i~s t-',_, ; -. t..,J1, ......................... J:
< j;.e ioftra,
. : 1- , ,
{g ~~~~~. - k,,,, ' -.
- 4..vnrt r-~ K t i ;'4"', .
, ;--te'} ,;t . r..Si,1 Long Term DebtActivity -=' --,. -S;;3 January l 2004:; 27( ' M;rits ;+ 4'c -<,
nd~4-isy.4 .44 .bt Z- ,.3,- , -.R~nal .:u'sJ ~nr..,.. ¢~itf5Xi>,;,
- .< - .) '1/2 "
- - ,,Weighted-Average Yield on UraxaxJ Originll. *PNrxial Intrest e Oulslendvg S \Addit ~K'
.- Dcreases C i-..- tlr~t, Vt.,'+.4i'7.'
- ; ?2kon 011-i4~outstanding Bonds January 31, Amount Paynenl -Halve ()february1I2003 a; DiagYeara Mtities . at January31,2004 2004
- 0. 2003 - RevrbnueandRefundingBonds;. ---.-- :f',Fe-2; -!--->,r ;.*.l'~,?jht£i P t .0.
i e. -- r- I .- i ' t .nlwusands) 1992Tax-exempt 700.805 2017T , 6.048 . 6 s-.'6.'e 00r:',.t0S S
' ,V ';a-
'.rt>. mtl-New Series i.., t' > '!! I994ATax-exempt 684,700 2014 j.254500d' ,,505150 trr'.l'"MJ0/j38a5i
':, 4996/ $2,234,160 S 2,357.9. 994CTax-etempt 56.000 2006 - l;5.008,*: '42,710',l+., '.0
-fr Bonds 19922003,2005-2021 :- -;
1595TSA-exrmpt 125,000 201 , 5.00: . 90.200 -'-- """0T , 75400 I. ,,
,,..gc 6'0~';.sTaxablletJorwSerie5rs';tlX:.,,.. ,9; ,,. -*
38,310 1etX - 6 66 .....................
141,540 1997 Tax-exempt 350,000 :2020 5.73i.'169715,} ..0,,-1 'e b-ist .. ,0jrds*9a2DW.'2D00aot l99lTax-exempt 311,170 2014 6.6 - .515,09 . 2 "tO .'W '035 Qp.
.,,, -ir,,_L., '
4
-', : ~'. ; - - 109% 2,372,470 2,499,525 1998 Tax-exempt 785,515 2021 - 4.9f . A 650,400% --- 31.370-
- -TaxExempt
';- Variable Rate Series r'; . ' 19988 Taxable 99,615 2020 ',6343 ',., 93O650, .':o'-- -18 35 f 003, Bns0;2029-2033 7, :
zt250,0Z00 2,62Z470 2,499.525 0 2000ATax-exempt 20008 Taxable 170,770 50,425 2017 2021 6.374 5.
7.403 'ii 5-
-;23.B75' 41,690 .' O4't',395
.4.410 4., .
4 onds outstanding brevenue -.
-8,esO ;
121.245 100,015 200lTax-axernpt t15,280 2011 3.843M :t 11 280 3/4"40"-.
eaturitiesoof 4,055t " !?438,090Y'>A 2002Tax-exempt 4360090 2017 4; 1; ,
- '-.aTOtalrevenue bonds outstanding, -, -. 2020 4.751 .-.
- 140,615 , .... '..- Oi4 2002 Tax-exempt 140,615 0 4.3,' .. , .'Mtotcurre aturlties "t<,- ,. -.- .-. . $2501,225 S2,399,510 2003 Tax-exempt- Junior Lain 250,000 2033 Variablev .' .2 - 250000;:2' 2003ATax-exempt 93,935 2014 ; 3875 L ' 0'-,; 9jO40 '
2003 Tax-exempt 350,490 2013 3.081 - 0 - 3 4 _ _
... , .. ;2,499,525 .t,,,994,425-"-07)48 Less:Bondcirrentmaltuities 100015 233 Less:Bonddiamount premurn) ., t6Z490)Th" 48645)A-'; (7 .I179) 'a-are.
,PrtnapaJ nadInterest amounts dua lor each o the next live years and thereahlr to matunty Less: Bond raacq4issiioi . 159,744 43,157 ; 44,180._
Revenue Bonds. Net 2302 258 .¶678 683. 54,479, Tax-exemptCommercial Paper . . 350,000 0 "- 0"O'O
- Princip . Interest Total Long-lern Deb, Net .: 2.652 256 $ 6786b3 $83 5344793 i S
'$,121,245- $ 127,214 $ 248,459
2008. 127,255 121,264 248,519
- *' A
~ A- <.-. 20 "' 135 155' 114,642 249,797 Long-Term Debt Activityt
- . .' y4,:.:-'
" . 2008 - '_h!142,155 107,662 2493817 January31, 2003 *r; k ' -
f ŽC&-, .- -
-<*t
'. " 2009 A, , 148570 100,422 248,992 .. Final - iBalac-r lp - is4t vSt 2010-2014t .' 862,080 377,503 1,239,583 787,410 (I thous- Orflw Prnnpal Interest Ousta g - d k Decrees 'C
' r". ;-"'616,925 . 170,485 Amounrt Payment Rates (9. February 1, 2002 DiOihgYear DuringYear Jan
- F2015-2019".
-2020-2024 ' 219.085 . 26,413 245,498 Ravereu and Retundkig Bnls: - .r;tor ¢- '1- v;-y
- ..-- .50,000 12,375 62,375 1992Tax-exemrpt S700605 2017 6048 $ 121,615 , $ S . :0&r52,755 ,'...
--a. -' ';-2025.2029 0'.<<60,420,'i
-; 2030-2033 '- ' ' 2000 4.950 2W,950 1994ATax-exempt 684,700 2014 5.008 55,570Q..- ,
l.' ';iTotalsi $2.622.470 S 1,162.930 $ 3,785.400 1994C Tax-exemupt 56.000 2006 5008- I-470<N-.O -'0 1995Tax-exempt 125,000 2018 56006 109,300 > 0
- 19,100-i 19971Tax-exempt - 350.000 2020 5.738 332.570 - 0"'- -162A55 '
'- .'(#X%..
1997 Tax-exenpt 311,170 204 5.509 . 244,305.- s , 0-.-,it2921S 6.-.
1998ATax-exempt 785,515 2021 4.918 743.150 . .t.t.'0 9275, Rate The above tabe includes Senior Lion and Junior Lien [onds. Interest on the Junior Uien Bonds (Variable t996aTaxable 99,615 2020 6.343 .i 95,390 '-'-: - '- F, v" J740 S1 for all years. This was the rate in effect for the Variable 170.770 2017 5.374 170.770 y- -'O .'1 895 -a
, Z Dernand Obligations) i assurned to be 0.99% annually
- - 2000A Teax-exempt 49 200 to mature rorm2029-2033. 50425 2021 7.403 . . w... --o-.' 'saio ,
Rate Demand Obligations as of Jan!uary3 2004 These bonds are scheduled 2000BTaxable 115,280 2011 3.843 l115.280M 4
' °9"'" "- -
2001 Tax-exempt 2002Tax-exrnipt . 436.090 2017 4055 0 430090'
- r.,0, 'A 2002 Tax-exempt 140,615 2020 4.751 0 ' 140,615 ,- -
- Z^a96%"':q '576,O5Q5 6,01040 At ^ r' . 200-Less: Bond current maturWs 77,c25 22,190. 4 -'. O 0 Less: Bond discount (premium) 542) , I10 (15603) ";.14 65) 45 72'40862 >
Less: Bond recauietion ost Ftevenue loods Not",784' 5 4'l641.033 4'7 Tax-exemrpt Commercial Paper Long-teimDebt.Net 52,726,6818 S' s544,4 $63i 033
~~~~~li T;n z2.z - r44<&t.¶;(! *.. i..<,
r
- .,,.^.-,r , ~,S ~ t
.IIA ,'-
'1/4-i - 4
- . '.j i
,'T a -li.. I " 'l" '.'.'
-. - 4r . , z
~~'~'Y;:'.': Lng ermLiabilitiles & Deterred Credits *: : 7. Commercial Paper . :;. . .;. ,-t: .t..*,
g )-a u - -ay31,20 In 1988, the City Council of San Antonio, Texas (City Councl) pdopted an ordinance authorizing the Issuaice °! up
-v' *.rdalncjv '. . alance Amounts to $300 million in TECP. This ordinance, as amended in June1997, provides for urxding ltoassist in ,Ue 1ineancing o
- . -. HOutatardrila hAdditions Decreases Outstanding Due within eligible projects, In an aggregate amount notto exceed $150 miilion., Eligible projet Include acquisitionr
_uel csp
. ;3-s'-. ebur~y1;2003 During Year Durlng Year Ja uary31,2004 OneYear ObligatiotS ws t pre seh curerd tal Improvements to the utlity systems, and retinancing or relunading any t pouth Texas Project Nucbar* ... a scheduled Inaximurr by and payable from a lien on aid/or a pledge net revenpe aothe System8. Ibe Th prgra.
/Diomrlsi . ,.-+.' ', 183.291 S"]F$l27.827 S 0 S 211.118 . S 0
. 10,217 13,808 19,935 0 maturities wit not extend beyond November 1.2028. ,., Xm 2 Cusomer De-osits 923,586 Term eaiseRevenue ¶Deterred) , " 650,135 $ :0 22.560 633,575 2250 863012 . 36.428 , 2 The TECP has been classidied as long-term In accordance with the refinancing terms under a revoi'vng credit agre, mIent with a consortium of banks, whici support the commrercial paper.r Under the termPs o ile ,greernent, C .
SouthTex~as Protect Operation.:.-'i ,. f :kf may borrow up to an aggregate amount not to exceed $350 million for the purpose of paying pricipal ue under th
'Pesns end Emplobye Benelit . 1:. 129 4.260 158 14.231 0 TECP. Th credit agreement has a term of twe years, currentJy extendad until Noyeiber 1 2005. emm~ay ,
- SouhTexasProeclt 4Nt7 earFuelAssessmcrt 1871 0 596 t275 0 .. ,
renewed for additional periods.
Proiect Wrm , - 7,756 627 417 7.966 0 Notes Payablew "' J6669 . 0 477 6.192 460 To date, there have been no borrowings under the credit agreementJhetECP is secured bythe n!et teenues of!.
,.Customer Advances '; , '- ,19.92 '20268 t6,503 23.157 0 4,654 13.072 0 the Systems. Such pledge of net revenues Is subordinate and inlerior to the pledge securing payment of existing #
insurancsues "- ::-- 12.419 ' 5,307
- DeerrsdCredis
- -- ""'," .. 220 'r '
24.392 23280 ,332
.0 New Series Bonds and Junior Uen Obligations, and any to be I edIn the futur tur".'<7
'4' 7- . 595 3 0 598 0 67.823 460 A summary ol TECP is as follows: J . 7 , -
h"'
rn ,^ 1Tss 54,857 46,055 January31, ralOlartoagjlrmUabilelis&DaleredcredfJs S922063 S 92 82.sl3 S 93sl S23020
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L , &20014 ">'- 2003 ': '.r^'-t
- TECP Outstadling (In Miousands) - '-i >- $3V.50,0 t $3500,00 .-
TECPnewmoneyissues (in tlousands) - ;- i 0
- Weightedaverage interest rate ofwtstandhg TECP approx-ia 'U 101 1 Average lie of outstanding TECP (approximate number of days) . -' 66 - 80 D':*'.::
nt Long-Term iUabilitles & Deterred Credits 8. Benefit Plans . . .. . 'J ; - , , $ S
.:;January31.2003 The City Public Service Pension Plan is a self-administered, single-rpioyer, defined-benefit contributory pension.
-.. . ~~~ ...
4
.. ~Balance'Btn plan (Plan) covering substantially all employeea who have comipleted on year ofservice ' Normal retiremnent is agi
- n. .thousan4: -;.' ! Outstanding Additions Decreases Outstanding Duetwthn
-t . ;, Februaryl,2002DunlngYear Du"wiYearJan uary31,2003 OneYear 65; however, early retirement Is available with 25 years o benefit service and to those erployees ,who are ages 55 or older with at least IO years of benefit serovce. . -C:e '
South Texas Project Nuclear '
' .' $145,878 6 1,Dcrnimtg 37.413 S 0 518X3291 S 0 uslomoe DeposIts 28,269 38.860 43.543 23.586 0 Retirement benebits are based on length of service and cosnptnsation eand benelits are reduced for tetiremellt ',
.on Tern) Lease levenue m LDalerred) : 678,695 0 22,560 656.135 22 560 belore age 55 with 25 years or moreot benefit service, or age 62 witI tess than 25 yearaof service.'-he Pln Is i -. ' 652,842 8 7 66,103 863012 22660 sponsored by arid may be amended by CPS. Plan net assets, having a market value of $887.0 million at Decembe 31, 2003. and $711.9 millon at December 31, 2002 are held In a separate trust tihat is audited annualy and wich '
.South TexasProdet Operation. statements Include historical trend information. For turther information, contadi Compensation and Employee`'
I3 PewnsandirNEmployeeOenellts . 8.071 4,372 2.314 10.129 . 0 0 579 1.871 0 Benehlasat CPS. . . I.
tSwtb Texas Proect Nuclear fuel Assessment . : 2,450 ProjectWarm " A; i:-. , . . 371 617 232 7,756 , 0 6,669 408 The current policy of CPS is to establish funding levels, considering annual actuarlal evaluations and recommenda Notes Payable -- , . , . 7608 0 939 CuslomerAdvance; i .- . - 2115 14.712 16.435 19.392 0 tions of the AdiNNssraive/nvestment Conimttee, using boti employee and employer conbrbuions. Generally par
- nls5uraitce* esenes,;,,. .sv . - , " 13.632 3,073 4.286 12,419 0 bcipatlng employees contribute 5 percentlof their total compensauon ande norrpallyeullyestedt CPS '.contribu-DeterrdCredl t" a 2
.-.. 23,164 22,946 22 0 0 lion after completing 7 years of credIted service or at age 40. 5 ' *t.
- Oti-re
- I". . 1,746 238 1.38.9 595 . 0
.' 'TOtalOtiwrfatlies61,995 46,176 49,120 59051 408 Employee contributions commence with the ellective date of participation, and continue unt4Paiupig normnal or,7 reralOurngTerrnbalties&DelemrdCredits $ 914,837 $122,449 $115,223 S 922,063 $22968 early retirement age or termination of employmenb The balance of Plan contributions is the responsibility of CPS
- U ;.7- , ts.$
giving consideration to actuarIal information, budget controls, legal requiremetns, cmnplancen nrdutsby and/or -;
community norms. . .. .. ,
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CPS adopted two flestoration Plans effective January 1, 1998 to supplement benelits paid Iro the Plan due tos
.7.4 :,,4(4 federal tax restrictions on benefit amounts. The benefits due under the Restorabioar Plans hive been paid by CS
.7 '.
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. i.le total empkoyer and employee penslon funding, which includes amortization of past service costs using the unit aCs annual pension cost and net pension obligation forthe fiscalperiods ended January312004 January 31, ;
' *- edit cost ectuarial method, Is summarized as lotows'- * ! 2003. and January31, 2002 were as tollow3 . . t s ;
1311 04 113lr2003 hthon&_As) 2M4o an'*s2'**'j"' Onttousands) ,., tt Annualrequredontrirution(ARC) - . Z S 7.76ti-l'$,921- S; 60'A: ,
. ' -+Employeecontnbutiona' Em . - 9,032 S 8,733
'2 Ai4 CPS contributions
_I,4 959 5,213 Interestonnetpensionobligamon(NPO)-.:-," *;.;0 s *7'8"' - .
-" ' ... Total conurlbuttons 13996 $
Adjustment to APR - ; 5 0^ - -
Annual Pension Cost (APC) 7651 -; 4921J;.~y.
6 CPS contributions Inrelation to ARC 765td., *4.92t
- . .75i ;!
-$180292 tnrease(decrease)hNPO * . 0'--" - 0,,.4- -,(99) R . ,
i; Nelpgenson obflgardon-begimnirg olyear," 1.1- 8 - ojjsz; 99 ;<! p;.-
Netpensionobligation-endof year, S- O :-* S . 0-i -.. - Percentage of APC contributed The acluari aytdeiarmned contribution requirements for 2004 and 2003 were computed using an assumed rate of Employees who retired prior to 1983 are receiving annuity payments frorm n Insirance carrie as well as reeceng'--
.i, ,retum'of
' 8.5 percentn For 2004 2003 and 2002 the past-service costs were amortized over a targeted 10 years: some benefits directly from CPS. Ci'S costs for 2004 and 2003 were S240 thousand and $281 thousand respec-No changes h acuadal cost methodi or actuarial assumptions were made In 2004 or 2003, which would affect the
- cmpwrbfity of results with the prr year, .:i -- tively, and were recorded when paid. . - . t** 5
-X'ItA compa~rab-iity: of yearr..,,.i; ,,,,:;:.
rA--.t . .
- %; contrbutons to the Plan amounted to 4.3 percent ot covered payrot in2004, 2.9 percent In 2003 and 0.6 per- 9. Other Postemployment Benefits '. . ,. A,, -,
n's-'t, c-.r. I7 2W CPS provides certain health care and tife Insurance benefits for retired employees Most former CPS employees ar-fiA acheduet funding progresolws. . .. eligible for these benefits upon retirement from CPS. Assets of the plns are held as part f CIS4Group Health
.... ~ .,'Plan (Calendar) Year Actuarial and Life Insurance Plans. Funding of the plans Is from both partldpaft and emplyer conbributions deterlned by I
- igr Valuation Date (Unaudited) annual actuarial and frhouse calculations. Retired employees contribte to the heath din h 9aryhg amounts on--r%;nrlons). 01101/2003 011 1202 01112001*- depending upon an equity formula that considers age and years of servIce The ptajnbe'arended by CPS i
- - I*.Actuarlaivalueofassels .;.. . $ 783.0 S 758.2 $ 713.6 The annual cost of retiree health care and lile Insurance benefits funded by CaS i recognlied ain expense of '
CPS as employer contributions are made to the programs. Th7selreier cosis appri6xinalid S4:4 miillion foIr2004:
v .. 2 Acturiaflaccrueddlability(AAL) $ 748.7 S 691.8 $ 643.5 3 (Overfunded)UtJnfundedAAL(UAAL) (2) (1) S (343) S (66.4) $ (70.1) and S3.6 mi lion for 2003. CPS reimbursed certain retirees and their spouses enrolled Ii Medicare Part Ei n pa
-*.:.-I - 1W.6% 46Fundedrato1)i2) 109.6%i. 110.9% centage ofthe monthlypremium. Costs totaled $256 thousandhfo 2004'ind $211 thousahd for 2003-.: '¢-;,,s"*-:
S Coveredpayrotl. .. S 186.7 $ 180.3 5 165.3.
Retired employees and covered dependents contributed $1.9 millontfor their health care and lila Insurance benefits Sf
""k" .Jt c 6 UMLasapercentagteoft A - * .:
In 2004 and St.3 miltion In 2003. In 2004. there were approximately 2261 retIrees and coVeied dependents eigible-i>*.;' . .. pa% (3)45) '- .ovred .(184%). (36.8%) (42.4%).
for health care and tileinsurance benets, as compared to ipproximately 2201 In 200i3.F;.VYi, -}-x <rr-'f . *t;.4 In view of the potential economic significance of these beneths, CPS has reviewed the pesent value of the poslem-
.i Atuarial valation methods us'ed for the January t 2003. 2002. and 2001 inctude: (a) the five-year smoothed mar- ployment benefit obligations for current retirees. The January 1 valuations are $74.4 mthion in 2003 and s854 ml-.-
.ket for asset valuation, (b) the projedted unit craedit for actuarial accrued Hlability and (c) the level dollar open for lion In 2002 for health and $19.8 millon In 2003 and $17.3 miflon In 2002 for lileInsurance benefits tThe actuial -;
aortkizaon of penston aervice costs. The remaiing amortization periods for January 1, 2003, 2002, and 2001 are analysis of the present value of postemployment benefit obligations for other partfipanta fully e'igible for benefis' 10 16 years;. 890 years; and 9.89 years respectively and are calculated using the level dollar open amortization are estimated to be $45.9 million for heakth. $5.6 million for life Insuirance and S3.0 milionlor disabtilfy benefifa CPS began partial accrual and funding of projected future benefits In 1992. Furndin totaled $4.3 million in 2004 :'
$4.8 million in 2003 and $6.5 million In 2002. - ; ._. . S
- Significant actuarial assumptions used for the January 1 2003, 2002 and 2001 actuarial valuations Include (a) a
. - alen of return on;the hivesiment of present and future assets of 8.5 percent per year compounded annually (b) pro- For the health plan, the actuarIal cost method used l the Projected Unit Credit Actuarial Cost Method For the le %
.eaded salary Increases averaging 5.0 percent and (c) post-retirement cost-off-vng Increases of 2.0 percent. The Insurance and disability plans, CPS uses a present value method to determine the cosit of benefits .'
~ .- projected salary Increases Include an Inflation rate of 4.0 percent.
Significant actuarial assumptions used In the calculations for the January 1, 2003 and 2002 actuiarl valutaions4r Include (a) a rate of return on the Investment of present and future assets of 8.5 percent per year fr ihe health lif' and the disability plans. (b1 projected salary Increases for the plans ranging hrom 4.5 percent too' 12.0 perrent ' -'
depending on age for base and other salaries. and (c) medical cost increases prolected at 100 percent or20034 decreasing to 6.0 percent In 2011 and thereafter. . ' .
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The lair value ot option contracts is determined using New York Mercantile Exchange INYMEX settenit Omnosing prices as ot January 30, 2004. For lutures contracts, Ute fair value is calculated by deriving the dgtference betwyeer f ^ ,CPS IS exposed to Vanous risks at loss Including retated to tons. tholl or destruction of assets, errors and ahose t.hecloing futures prices on January 30. 2004 and the futures purchase prices at the time the positions Were estat
.¢ gorrissions, andrnatural rsasersPPS purchases commercial liability and property insurance coverage to provide -Ished, less applicable commissions. As of January 31, 2004, the outstanding hedge nstrurnents, tota cost Ls;:,`
o protection in eyent ofliarge and/or catastrophic losses. CPS performs actuarial studies peuodicaily to deteine its
¢HnN $144.544 with a positive lair value f $S2244,550.In January 3 i 2003, total cost jor outstanding hedge irustie.
'H itnsrartcretentions.,n astuarlal study was last pertormed in 2004. ments was $256,348 with a positive lair value ofSl,231,747. In the event purchased options are allowed,to expire the related premiums paid to acquire those options wil be tot, When a short positror Is establbshed; tnd options:
In addition, CPS is exposed to risks of oss due to death of, lniuries to. or illnesses of, Its employees. At January are sold, premiums are received and an obligation to honor the terms of theoption contract, if exercised, Iscr ale i 31 2004 nd 2003, CPS has accumulated approximately $152.8 million and $122.7 million, respectively, Inthe The decision whether to exercise the options or let them expir rests with the purchng party. Futures contracts c- ernplyeo healt and wellare plans external trusts for these risks. The trust accounts and related daims biitres represent a firm obligation to buy, or sell, the underlying asseth It held to expiration; the contract holder fnust take.
.eare inuded in CPS'linancial saerents, CPS ias recorded S27.7 miUnion of expense related to these risk pro- delivery ot, or deliver, the underlying asset, at the established contract price Credit risk ts mitigated by clearinq all
~,,~,*'...grams tor theyear ndedJanuary ~,2004and 6.8 mlion to year ended January 3t,2003. hedge-related trades on the NYMEX .. * !. . .
,(' 7Based upon thaguidance of GASB Statement No 10,Accounting and FinancialReportng torRisk Fiancingand CPS has adopted GASB Technical Bulletin No. 2003-1, Disclosri Iequi~rsrmnts tar 4eqvabves Not /feported al
. 'related insurance issues, the following Information Is provided regarding the changes in the reserves for property, Fair Wue on the Statement atNetAssets Accordingly, the followin Is provIded regarding CPS out Mnformttion
' andemployee and public liability claims for the years ended January 31, 2004 and 2003: standing Final Instruments as ol January 31, 2004 and January31,2*
Fuel Derivative Transactions asOf January31, 2004 A4 ~ . Employee Employee Propery Public H
- i. ' -. . .. j . < , usant ; . -Reserves U1abliy Claims Welfare Claims Type oaTransaction Duration ., MMatu - .
r -- Bslance.l/3t/2 $ 8,624 5 5,008 3.641 (110) (28.594) Short Cal March2004throughFebrua 20 5,310 A . ...'&? Payments . *-; - '(52)'
Ilncurred Clari ,- - 36 29,425
- Oher Claimajustra n`1tLs' ': (3,019) 1,932 0 Long Put March 2004 through Feb(uary 2005
.'rBalance -1131AA3.. , . S 5.553 S 6,866 S 4,172
~ amns ~ ~(95) 0 '
(1.000)
'0 (35.415) 35,939 Long NG Futures March2004 thruhr
, flncurreClai' 6 377 1'371 0 7,237 $ 4696
, 'Jr5f04. S -5835 - S Fuel Derivative Transactions as of J~anuary 06
-: Tye of Transaction Duration i 'J. ; .- , F c--'
Th employee health and welfare plan assets are segregated rorm CPS' assets. They are separately managed by Z
- a
- omnitter whose members are appointed by the CPS General Manager and CEO. These plans have separate
- r ~~.:wig,. . ,. .
t;.,sj*-- -t, Long Call June 2003 through October 20030 financial statements tor calendar years 2003 end 2002. These separately audited financial statements are available f.
f*tison pquest by ontacting Cornpensatin and Empboyeo Benefits at CPS. l,0 Short Put September203throughOctober23 The 1999 Texas utility deregulation legislation, Senate Bill 7, contained provisions moditying the Texas Public Funds Investment Act to allow municipal utilties the ability to purchase and sell energy relted financial Instruments in order to hedge or mitigate the elfect oa market price fluctuations ol natural gas. luel oil and electric energy.
S*8.s.-'r i'S4, 1^-+;,-s -r,-',. :.' i, 11. South Texas Project .,
.2, In 2003, the CityPublir Service Board of Trustees realtinned the Energy Price Risk Management Policy, which sets r '-P-;?9 forth the guidelines tor the purchase and sale eo certairtidnanclat instruments and ceitain physicat products. rollectively CPS Isone of tour participants in the STP, which consists of two 1,250-megawatt nuclear goneraing urats lIi ;
> . -,'; fdefined as hedge Instruments Currenly, these hedge Instrument transactions are used to minimize the risk of market Matagorda County, Texas. The other participants in the STP are Texas Genco, L.P.-- orrmerly kitown as ,ouston energy price volatility as it relates to the underlying transactions that relate to the physical purchase ot natural gas. Lighting & Power, and Reliant Energy, Inc.; American Electric Power- Central Power and Light Company; and the The primary goats for the Energy Risk Management Policy, which Is overseen by the iledging Strategy Committee, la City of Austin. In-service dates for STP were August 1988 for Unit 1 and June 1P89 for tnit 2,. CPS 28 perceit -
-o-to t mitigate the potenial tor loss or reduce the uncertainty in expenses, pricing and revenue as a result of unforeseen ownership In the STP represents 700 megawatts of planl capacity. A January 31, 204 and 2003, CPS investrne 9 irnarketchanges that pertain to luel expenses and revenues. The hedge hIstruments are reported at cost on Ute Inthe STP utility plant was approximately $1.7 billion, net of accumulated depreciation. Elffective November 17..i1
- 5: .*, ;Balance Sheets. Gains and losses related to the hedge instruments transactions are netted to fuel expense in the 1997. the ParticipationAgreement among the owners of STP was arnended and restated and the STP Nuciear',
period reali:ed. Far January 31, 2004 and January31, 2003. the commodity options and/or hedge instruments. Operating Company (STP OPCO), a Texas non-profit non member corporation created by the participants, assun
~valued at mtark oemarket nelttoaun unrealized gain ol $2,100,006 and $965,398, respectively. responsibility as the licensed operator of STR The participants share costs In proportiorito ownership inlerests,.>
Including all liabilities and expenses of STP OPCO ...
-S >.. .. ....
"It,
4 -A The Decommissioninig Trust also has sep fiate nIeancialstatements for cralendaryear 2003 These separately audit-: ,r.
method. Under the
- .:, CPS amoizes its share, of udear fue florthe .SITPto luel expense on a unit-ol-production ed liancial statements can be obtained by contacUng the Vice President°f FnarLilSetrylces atC PS,,
r
'-' Nuclear Waste paolicy Act of 19t32, ,the edeatal goyernment as umed responsibility for the permanent disposal of of the.
rS ,44' spent nuclear fuel. ~CPS is charge;d a fee for disposal of spent nuclear fuel, which Is based upon CPS share 12. Lignite MIning Lease and Assignment Agreement',
lotrsaleto CPS customers. Thiscrharge isincuded In luel expense monthly.
i;"'r~ E^'S1r generation thatIs available December 28, 1998 egardig .
'A...- -. ,S - 4 .'¶ . t . CPS has an agreement with the Aluminum Company of Ajperica (ALqCA) dated payens t Nuclear Insurance .,,1Tie,Price-Anderson Act Is a comprehensive statutory arrangement for providing limitations CIB lignite reserves In Bastrop andLeeCounties Iexas.ALCOAbeganmakigadvanceroyalty on Iability and govermental ndemniues with respect to nuclear accidents or events. The maximum amount that CPS under the agreement In January 1999. The base term of the agreement runsthfoug,2013 ALCOA hasthe *1 ,
each licensee may be assesasd lollowing a nuclear Incident at any insured facility Is $100.6 million, subject to option to exercise six additional five-year extensions o the agreemenL,,Thus ifALCOAexercses all six extensions and for each licensed reactor, payable at $10 mit- the agreement will remait In effect until 2043. The agreement provides or royalty payments 16CPS based on the !
t' adjustment for inlation, for the number of operating nuclear units commerncd.'
, lion per year per reactor for each nuclear incident. CPS and each of the other participants of STP are subject to amount of lignite mined by ALCOA, subject to certain minimum amounts per year once mining has Interests in STR For purposes of The current estimate of the amount of the lgnite to be mined byALCOAunderthe agreementis 180 million ons, -rI.
such assessments, which will be bome on the basis of their respective ownership these assessments STP has Itwo Ccensed rects. fThe participants have purchased the maximum iirnits of over a 30-year period, alhough ALCOA may mine more orless than this amount ,CPS will amortize the basis of -',,"- ",
$1.0 sionlIn., -,:3
-nudear liability nsurance, as required by law,, and have executed Indemnification agreements with the Nuclear the lignite reserves, approximately $18.8 million, as royalty payments are received. CPS received
,l,'t'A Regulatory Coirnmission {NRC), inaccordance with the linancial protection requirements ol the Price-Andeiron Act. advance royalty payments In2003 and 2004. In2004, CPS received $Z6 million In property possession fees..
Alcoa began mine construction In calendar 2003 and now estimates gnining wil begin b Industry as a whole, r .,, sater;Woiker Nuclear Uabbtlypolicy with a ,.aximum limitof $800 million for the nuclear
> 'tpoyides ctrection from nuclear related ciaitrl.2.; ,: -- ,-- r,... 13. Jolnt Operatons Agreemenft - ' N . ' '*' '>
property damage insurance In a mibi- A 1997 Joint Operations Agreement (JOA) resulted from the litigation settlement with Texas tenco, LP.,ormery r-F` NRC regulations require licensees of nuclear power plants to obtain on-site
'mum amount of S1.06 billion NRC regUlationS also require that the proceeds from this insuranc be used first to known as Houston LUghting & Power Company and Reliant Energy Inc. over Is management of STP )rulng t ensure that the licensed reactor Is in a sale and stable condition so as to prevent any significant risk to the public construction and early operating periods. The JOA Is an arrangement to jointly dspatch CpS : aid Texas Genco,,,r9ft
- -.ii-,.J~-Ytbeaith or safety, and then to completeany decontamination operatons that may be ordered by the NRC. Any funds LP. ageneratlig plants to take advantage of the most efficient plants and favorable luel prices, o each uwy Uphil, '-
remaining would then be available for covering direct loses to property. June 2002, CPS received, In monthly cash payments, 90 percent of the savings realized fron the jointly-operated systems. As of June 2002, when Texas Genco, LP. met the JOA $200 millio! cumulative savings obligation,; s.
Insurance, which Is above the legally monthly cash payments to CPS were reduced to 50 percent of the savings realized from the jointly operated q.,; -sy ,
- . -^. tThe owners °f STP curreitly maintain $2.75 billion of nudeat property available for such losses. Tie $2.75 billion of n e irequire4 amount of S1.08 bilon, but Is lesis than the total amount tems. As ofJanuary 31,20041,CPS ttluueiepyet onsvns;aie a 258 5 i '
s npuclear property rinwr~anceconsi~s t million I prinary property damage Insuance and $2.25 btion of O91$50 being paid by all members of excess proprty damage Insuance, both subject to a retrospective assessment 14. Lease/Le~asebatck ,-C,, - ,,
losses as a result of an acciden at any f,:,' Y Nuclear Electrc inurance Lmited(NEIL).'. ln 1e event that property
-Speplannwred bj Ni-lLexceed tVi accumulated fund available to NEIL, a retrospective assessment could On June 220C0, CPS entered Into a financial transacUon with anralliate of Unicor Invdvhg CPSf J;K Spriue Z 4 'p
! ccurThe ,maximum aggregate assessment under current policies lor both primary and excess property damage Unit No.1 coal-fired electric generation unit The transaction Included a headlase for afrm of approximate*
Insurance Is l25 during any one-policy year,.. ,
milion 65 years in combination with a leaseback of the facility by CPS for approximately 33 years. CPS retainslee simple> i title to and operating control of the facility and retains all revenues generated from sales of electrIcity produced from W,4-the facility. CPS received the appraised lair value of the unit, $725.0 million, which will be amorized over 381' r
-, j'-'0 - Nuclear Decommlsislonring CPS, together with the oiier owners of the STP, fles with the NRC a certificate of t l,, nencat assurance for the deconmissioninig ol the nuclear power plant. The certificate assures that CPS wil meet months. The transaction expenses and leasebach costs ofS637.0 million were recorded as prepaid Items In 2001 .
The STP owners agreed In the linan- ;.. . :. ,;Ž."'
, the ninimnum decommissioning funding requirements mandated by Vie NRC. and are being amortized over 381 motihs.
would be reviewed and updated periodically. In 9 cia assurance plan that their estimate of decommissioning costs '.
conducted a review of decommissioning cots. The results estimated CPS share of decomnmis- The utility has the option to cancel the headlease alter the leaseback expires bymaielng apaymentto Unicom a,>.
1j995, the owners owners conducted an additional review of aIltiate. CPS entered Into a collateralized payment undertaking agreement that wilt generate funds suficent lo sioning coats at approximately $270 million In 1994 dollars. In 1999, the now approxirately $311 mil- fund the Canetlation option payment CPS net benefits were approxmately 5880 rnigion.,The City was paid, '!
decommissioning and results showed that CPS share ol decommissioning costs are ' ,V ~
lion in t1998dollars. i. . . - ; $12.3 million In accordance with tie New Series Bond Ordinance, or Its 14 percent share of tils net beneftitThls paynent was recorded as aprepayment In 2001 and Is bng amortized ovYr 381 tha. Asaresult net pro- ... a i IIn 1931, CPS started accuirulating the decomnmissioning funds In an external trust, In accordance with the NRC ceeds romn the transaction o approximately S75.7 miion wil be reported over the 32-year leaseback term, -s" -'i.'
are Included in CPS financial statements as a In 2004 and 2003, the net amount recorded as Income by CPS was $2.8 ngililon and $ mition1 tespecIvely, s8 oregulation The Decommiuissioning Trust assets and related labilities of funds in the external
, 4 component uit AtJanuary31, 2004, CPS has accumulated approximately $211.1 million the NRC, CPS trust balance exceeded 15. Commitments and ContingencIes . 'C;8..;-;...
trust.Based Ol Ithe annual calculation of friamicial assurance required by and $09.1 rullion at December
' -, U'the calculated financial assurance aniounts of S70.4 million at December 31, 2003 ", to allged personal and property -'
In the normal course of business, CPS Is involved in legal proceedings reiated damages, breach of contract, condemnation appeals and discrimination cases. haddibonCPS power generation, 2.,$
acvities aid oier utility operations are subject to extensive state and lederal environmental regulation; n the- 'Z,,
funding level Into the trust of $15.9 mil-Based upon the 1998 and 1994 decommissioning cost studies, Vie annual bion or 2004 and 2003, was expensed by CPS. opinion of management of CPS, the outcome of such proceedings will not have a material adverse elledc on ile.l,;,- " .-
financial position or results of operations of CPS. , , , ;.
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- 31. 2004. This amount t ;g2X Purchase and construction commitments amounted to approximately 51.5 billion at January various Incdudes app7oximnately $40.3 million that Is expected to be paid for natural gas purchases to be made under
~cntrct curetlyIneffctthrough awe 200; the actual amount to be paid will depend upon CPS actual require-through
-ments during te contract period and the price ot gas. 'Aso Included is $79.5 nilion for coal purchases December 2014. and $3.0 million for treated cooing 22482 milli or coal tranrspoltaion through comber 2005, based upon the minimum firm commia t under the" contracts.
. PO ha~salso committed to purchase $199.5 million in wind power; $22.5 milion for generation plant maintenance 4' services, and for system construction and maintenance.
$673.3 mil-Additional purchase commitments at January 31.2004, which ae related to STP, include approximately lion for raw aniurm, associated fabrication and convetsion services. This amount represents services that wilt be'
.- needed lor refueling through the year industry.
f lhe PUG promulgated neq rules In 1996 designed to comply with legislative changes affecting the utility
- Thi- Tr ssmlilonPricing2 andt Access FRule mandates that elecric utilties charge customers lor wholesale open CPS cost for cal-
- ,.,.[ 1.transmission access according to a formula based on Uheamount ol load served by each utility.
endar years 2002 and 2003 were approximately $11.6 million and $16.1 million, respectively. The estimated cost for calendar year 200, Is approximately $13.0 million. :
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