Attempting to shed its former identity as Reliant Energy Inc., CenterPoint Energy Inc. unveiled its first earnings statement as a new holding company, reporting third quarter earnings down 12% compared with the same period a year ago. However, CenterPoint management said going forward, things look better, and they increased year-over-year earnings guidance Ito a range of $1.30 to $1.35, up from a previous forecast of $1.17 to $1.22 per diluted share.

The increase, said management, takes into consideration its strong performance to date, expectation of low seasonal demand for power and a “somewhat stronger seasonal demand for natural gas” in the final quarter of this year. In 2003, CenterPoint said it expects to continue its positive growth, but warned that “higher borrowing costs and pension-related increases” will most likely negatively impact overall earnings. “Although the company is not prepared to provide more specific guidance, CenterPoint Energy currently expects that its 2003 diluted earnings per share will be below our previous 2002 guidance,” it said in a statement.

On Oct. 11, Standard & Poor’s Ratings Services (S&P) reduced CenterPoint’s corporate credit rating one notch, to “BBB” from “BBB+,” which retained its investment-grade status. S&P remains concerned about CenterPoint’s ability to raise third-party capital to replace maturing debt — the company managed to barely meet a deadline to successfully negotiate new, one-year credit facilities for $4.7 billion with a syndicate of 30 banks before its former facilities expired.

The $4.7 billion agreement is composed of two separate credit facilities. The first is a $3.85 billion, 364-day bank credit facility at CenterPoint. Pricing under the facility is based on a pricing grid tied to the company’s credit rating. Interest rates for the term loans at the company’s current ratings would be the rate plus 400 basis points, an increase of 100 basis points over the prior facility agreement. The facility will be reduced by $600 million in February 2003, and by another $600 million in June 2003.

The second facility, for the company’s electric transmission and distribution subsidiary, CenterPoint Energy Houston Electric, is an $850 million, 364-day bank credit facility. Interest rates for a term loan under that facility is the grid rates plus 300 basis points for $400 million and 350 basis points for the next $450 million, an increase of 50 and 100 basis points, respectively. Loans under the facility are secured by general mortgage bonds. The facility includes a $450 million mandatory reduction in April 2003. Proceeds from certain capital market transactions must be used to pay down the credit facilities. As part of these agreements, the company will pay a 1% fee upon closing, an additional 1% on Nov. 15, 2002; $50 million at the end of February 2003; and $25 million at the end of June 2003.

The agreement requires CenterPoint to raise $400 million of third-party capital to replace maturing debt. If the company does not succeed in raising that additional capital, the maturity date of both credit facilities will accelerate to November 15, 2002. Despite the downgrade, management said it was confident that it could maintain its credit rating and make its required payments. It also said S&P’s action would have no material impact on interest rates and fees associated with its new bank credit facilities.

For the third quarter, CenterPoint said earnings dropped from quarterly earnings a year earlier because of accounting changes and the costs of fully implementing the Texas electric restructuring law. Income before the charges was $161 million, or 54 cents a share, compared with $183 million, or 63 cents for 2001’s third quarter. Continuing operations also excluded the earnings of former subsidiary Reliant Resources Inc., which spun off to CenterPoint shareholders on Sept. 30.

The income decrease, said CenterPoint, reflected “fundamental changes in the company’s electric operations,” the result of Texas’ electric restructuring laws, where CenterPoint’s customer base is strongest. CenterPoint’s other business segments reported operating improvements, including the natural gas distribution and pipeline and gathering operations. Third quarter results also were impacted by a higher interest expense than the third quarter of 2001, and a year ago, the company recognized $12 million of goodwill amortization.

Retail electric sales are no longer included in the company’s operations; they will be reported by Reliant Resources. Under its new structure, CenterPoint will report two business segments, electric generation and electric transmission and distribution. Previously reported generation operations in Texas are now reported within electric generation. The transmission and distribution segment includes regulated operations, as well as the impact of generation-related stranded costs recoverable by the regulated utility. Because of the deregulation in Texas, CenterPoint said, “there are no meaningful comparisons for these segments against prior periods.”

CenterPoint’s electric transmission and distribution segment reported earnings before interest and taxes (EBIT) of $407 million for the quarter, which included $167 million for the regulated business and non-cash EBIT of $240 million associated with generation-related regulatory assets, or Excess Cost Over Market (ECOM).

The electric transmission and distribution business recovers the cost of its service through an energy delivery charge. This business benefited from growth in residential demand in the third quarter of 2002 compared to the same period of last year, partially offset by an anticipated decline in deliveries to industrial customers resulting from a move to self-generation. CenterPoint said metered customers, totaling 1.77 million at the end of the third quarter of 2002, grew at an annualized rate of 2%. Under the Texas restructuring law, a regulated utility may recover as part of its stranded investment any difference between market prices received by its affiliated power generation company and the market prices used in the Texas Public Utility Commission’s ECOM model. This difference, which is recorded as a regulatory asset, produced $240 million of non-cash EBIT in the third quarter of 2002.

The electric generation segment is comprised of more than 14,000 MW of electric generation located entirely in the state of Texas. With the restructuring of the company into CenterPoint Energy, these assets were transferred to a separate subsidiary called Texas Genco. This segment reported EBIT of $7 million for the third quarter of 2002. The company expects to distribute to its shareholders approximately 19% of the common stock of Texas Genco in a taxable distribution in late 2002 or early 2003.

Within its natural gas distribution segment, CenterPoint reported a loss before interest and taxes of less than $1 million for the third quarter, compared with a loss before interest and taxes of $20 million a year earlier. The amount of goodwill amortization expense recognized in the third quarter of 2001 was approximately $8 million for this segment. The company said a “significant reduction” in bad debt expenses for the quarter, compared with the bad debts for the same period of 2001 improved the operating results.

EBIT for the pipelines and gathering segment continued to produce “consistent and stable margins,” said CenterPoint, and increased to $43 million for the third quarter, compared with $34 million for the same period of 2001. Goodwill amortization expense recognized in the third quarter of 2001 was approximately $4 million.

In its other operations, CenterPoint reported a loss before interest and taxes of $8 million. compared to a loss of $26 million for the same period of 2001. This changes, said the company, were attributed to a $5 million net gain in the quarter, compared to a $9 million net loss in the same period of 2001 related to the company’s indexed debt securities and investment in AOL Time Warner.

When the new company distributed its investment in Reliant Resources to CenterPoint Energy shareholders, it wrote down its $5 billion investment to the fair value at the time of $847 million. This write-down will be reported as a non-cash charge in discontinued operations, said CenterPoint. The company also reduced additional paid-in-capital for the $847 million fair value to record the distribution as a return of capital. Reliant Resources’ historical results will be reported as discontinued operations.

Following the earnings announcement, analysts with CreditSights said the new company is still “truncated and debt-laden” from the move to separate its Reliant Resources arm. Noting the refinancing that will be needed next month, CreditSights analysts said, “this is a company that is hanging on and hoping to get to the promised land of 2004, when the Texas [Public Utilities Commission] should allow it to true up its stranded assets and charge the ratepayers for its follies.”

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