Preliminary "Merger" Information Statement - Amendment No. 2
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SCHEDULE 14C INFORMATION

 

Information Statement Pursuant To Section 14(c)

of the Securities Exchange Act of 1934

(Amendment No. 2)

 

Check the appropriate box:

 

x Preliminary Information Statement

 

¨ Confidential, for Use of the Commission Only (as permitted by Rule 14c-5(d)(2))

 

¨ Definitive Information Statement

 

TEXAS GENCO HOLDINGS, INC.

 

(Name of Registrant as Specified in Its Charter)

 

Payment of Filing Fee (Check the appropriate box):

 

¨ No fee required.

 

x Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.

 

  (1) Title of each class of securities to which transaction applies: Common stock, par value $.001 per share

 

  (2) Aggregate number of securities to which transaction applies: 15,235,760

 

  (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): $47.00, which represents the purchase price per share of the Registrant’s common stock to be paid in connection with the public company merger described in this information statement. In accordance with Section 14(g) of the Securities Exchange Act of 1934, as amended, the filing fee was determined by applying a fee of $126.70 per $1,000,000 of the aggregate value of the public company merger.

 

  (4) Proposed maximum aggregate value of transaction: $716,080,720

 

  (5) Total fee paid: $90,727.43

 

x Fee paid previously with preliminary materials: $90,727.43

 

¨ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

  (1) Amount Previously Paid:

 

  (2) Form, Schedule or Registration Statement No.:

 

  (3) Filing Party:

 

  (4) Date Filed:


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LOGO

 

Texas Genco Holdings, Inc.

1111 Louisiana Street

Houston, Texas 77002

(713) 207-1111

 

INFORMATION STATEMENT

 

Dear Shareholder:

 

We are mailing you this information statement to advise you that Texas Genco has entered into a transaction agreement, dated as of July 21, 2004, pursuant to which we have agreed to be acquired in a multistep transaction by GC Power Acquisition LLC, a newly formed entity owned in equal parts by investment funds affiliated with The Blackstone Group, Hellman & Friedman LLC, Kohlberg Kravis Roberts & Co. L.P. and Texas Pacific Group. The steps, which are described in more detail in this information statement, consist of the following:

 

  Genco LP Division. We currently conduct substantially all of our business operations through Texas Genco, LP, one of our indirect wholly owned subsidiaries which we refer to as Genco LP. Prior to the public company merger, Genco LP and a newly formed wholly owned subsidiary of ours will merge in a multiple survivor merger under Texas law. As a result of the merger, both subsidiaries will survive and all of our nuclear assets and liabilities, which relate primarily to our interest in the South Texas Project, and our available cash will remain with Genco LP, and all of our non-nuclear assets and liabilities, which relate primarily to our coal, lignite and gas-fired generation facilities, will be allocated to the other subsidiary. We refer to this transaction as the Genco LP division.

 

  Public Company Merger. Following the Genco LP division, we will merge with a subsidiary of CenterPoint Energy, Inc. and all of our publicly held shares of common stock, representing approximately 19% of our outstanding shares, (other than shares held by shareholders who validly perfect their dissenter’s rights under Texas law) will be converted into the right to receive $47.00 per share in cash without interest and less any applicable withholding taxes. We refer to this transaction as the public company merger. Immediately following the public company merger, we will be wholly owned by CenterPoint Energy. We currently expect the public company merger will occur during December 2004. On November 4, 2004, we declared a quarterly cash dividend of $0.25 per share of our common stock. The dividend is payable on December 20, 2004 to holders of record as of the close of business on November 26, 2004. The dividend will be paid to shareholders of record even if the public company merger occurs prior to the December 20, 2004 payment date.

 

  Non-Nuclear Asset Acquisition. Shortly after the public company merger, GC Power Acquisition will acquire our subsidiaries that then own our non-nuclear assets and liabilities for aggregate consideration to us of $2,813 million in cash. Approximately $716 million of these cash proceeds will be used to fund, or repay borrowings used to fund, the public company merger. In addition, $2,231 million in cash, consisting of the balance of the cash proceeds and other available cash, will be distributed up to CenterPoint Energy.

 

  Nuclear Asset Acquisition. Following approval by the Nuclear Regulatory Commission of any transfer of the license for the South Texas Project Electric Generating Station deemed to be created by the acquisition of our nuclear assets by GC Power Acquisition, GC Power Acquisition will acquire our company, which will then own only our nuclear assets and liabilities, through the merger of a subsidiary of GC Power Acquisition into us in exchange for aggregate consideration to CenterPoint Energy of $700 million in cash. Immediately following the nuclear asset acquisition, we will be wholly owned by GC Power Acquisition.


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The aggregate of $2,931 million to be received by CenterPoint Energy in these transactions represents a per share purchase price to CenterPoint Energy of approximately $45.25 for each of the 64,764,240 shares of our common stock it currently indirectly owns, which is less than the $47.00 per share in cash to be paid to our other shareholders. We have attached a copy of the transaction agreement as Appendix A to this information statement and encourage you to read it in its entirety.

 

A special committee of our board of directors, consisting of three independent directors, considered and evaluated the transaction agreement and the transactions it contemplates, including the public company merger. The special committee unanimously determined that the transaction agreement and the public company merger are fair to, advisable and in the best interests of our company and our shareholders, other than CenterPoint Energy, and unanimously recommended on behalf of our shareholders other than CenterPoint Energy that our board of directors approve the transaction agreement and the public company merger. Based on that recommendation, our board of directors unanimously determined that the transaction agreement and the transactions it contemplates, including the public company merger, are in the best interests of our company and our shareholders. Accordingly, our board of directors has approved the transaction agreement and the transactions it contemplates, including the public company merger.

 

Utility Holding, LLC, a wholly owned subsidiary of CenterPoint Energy and the record holder of 64,764,240 shares of our common stock representing approximately 81% of our outstanding shares, acting in its capacity as a shareholder of our company, has irrevocably approved the transaction agreement and the transactions it contemplates by written consent. No further vote of our shareholders is required for the approval of the transactions. No meeting of shareholders will be held to consider approval of the transactions or the transaction agreement, and no vote or consent of shareholders is being solicited.

 

Upon completion of the public company merger, we will be wholly owned by CenterPoint Energy. Our common stock will cease to be listed or traded on the New York Stock Exchange, and we will cease to file periodic reports with the Securities and Exchange Commission.

 

We encourage you to read the entire accompanying information statement carefully because it sets forth the details of the public company merger and the other transactions contemplated by the transaction agreement as well as other important information related to your rights as one of our shareholders.

 

Sincerely,

 

David G. Tees

President and Chief Executive Officer

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the transactions described in this information statement, passed upon the merits or fairness of the transactions or passed upon the adequacy or accuracy of the information contained in this document. Any representation to the contrary is a criminal offense.

 

We are not asking you for a proxy, and you are not requested to send us a proxy.

 

The date of this information statement is                     , 2004, and it is being mailed on or about                     , 2004 to our shareholders of record as of the close of business on October 21, 2004.

 

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Table of Contents

 

     Page

Letter to Shareholders

   i

Summary Term Sheet

   1

Parties to the Transaction Agreement

   1

Purpose and Structure

   2

Position of Our Special Committee and Board of Directors as to the Fairness of the Public Company Merger

   5

Fairness Opinion of RBC Capital Markets Corporation

   5

Position of the CenterPoint Energy Entities as to the Fairness of the Public Company Merger

   6

Financing of the Public Company Merger

   6

Interests of CenterPoint Energy, Directors and Executive Officers

   7

Material Transactions Between CenterPoint Energy and Us

   7

Material U.S. Federal Income Tax Consequences of the Public Company Merger

   7

Regulatory Approvals

   7

Conditions to the Closings

   8

Termination of the Transaction Agreement

   9

Fees and Expenses

   9

Role of Our Special Committee

   9

Dissenters’ Appraisal Rights

   9

Litigation Concerning the Transactions

   10

2004 Third Quarter Results

   10

Parties to the Transaction Agreement

   11

Special Factors

   14

Purpose and Structure

   14

Background of the Transactions

   15

Position of Our Special Committee and Board of Directors as to the Fairness of the Public Company Merger

   30

Fairness Opinion of RBC Capital Markets Corporation

   36

Position of the CenterPoint Energy Entities as to the Fairness of the Public Company Merger

   43

Opinion Received by the Board of Directors of CenterPoint Energy

   48

Our Financial Projections

   54

Report of Valuation Panel in CenterPoint Houston’s 2004 True-Up Proceeding

   56

Effects of the Transactions; Plans or Proposals After the Transactions

   58

The Transaction Agreement

   59

Other Agreements

   76

Regulatory Approvals

   77

Financing of the Transactions

   78

Fees and Expenses

   83

Material Transactions Between CenterPoint Energy and Us

   84

Our Directors and Executive Officers

   86

CenterPoint Energy’s Directors and Executive Officers

   88

Interests of CenterPoint Energy, Directors and Executive Officers

   89

 

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     Page

Litigation Concerning the Transactions

   93

Material U.S. Federal Income Tax Consequences of the Public Company Merger

   93

Texas Genco, CenterPoint Energy, Utility Holding and NN Houston Sub

   94

Texas Genco Shareholders

   94

Dissenters’ Appraisal Rights

   95

Market for Common Stock and Related Shareholder Matters

   97

Historical Consolidated Financial Data

   98

Historical Financial Data

   98

Summarized Financial Information

   99

Net Income Per Common Share

   99

Ratio of Earnings to Fixed Charges

   99

Book Value Per Share

   100

2004 Third Quarter Results

   100

Where You Can Find More Information

   100

Cautionary Statement Regarding Forward-Looking Statements

   101

Appendix A—Transaction Agreement

    

Appendix B—Articles 5.11, 5.12 and 5.13 of the Texas Business Corporation Act

    

Appendix C—Opinion of RBC Capital Markets Corporation

    

Appendix D—Opinion of Citigroup Global Markets Inc.

    

Appendix E—Annual Report on Form 10-K for the year ended December 31, 2003

    

Appendix F—Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004

    

Appendix G—Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004

    

 

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TEXAS GENCO HOLDINGS, INC.

1111 Louisiana

Houston, Texas 77002

(713) 207-1111

 

INFORMATION STATEMENT

Summary Term Sheet

 

This summary term sheet summarizes the material terms of the public company merger and the other transactions contemplated by the transaction agreement described in this information statement but does not contain all of the information that may be important to you. You should carefully read this entire information statement and the other documents to which we refer you for a more complete understanding of the matters being described in this summary term sheet. In addition, we have attached reports containing important business and financial information as appendices to this information statement. Please also refer to the section entitled “Where You Can Find More Information.”

 

Parties to the Transaction Agreement (see page 11)

 

Texas Genco Holdings, Inc.

 

We are a Texas corporation with our principal place of business in Houston, Texas. 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% undivided interest in the South Texas Project Electric Generating Station, which we refer to as the South Texas Project, a nuclear generating station with two 1,250 megawatt, or MW, nuclear generating units.

 

As of June 30, 2004, the aggregate net generating capacity of our portfolio of assets was 14,153 MW, of which 2,585 MW of gas-fired capacity was temporarily removed from service, or “mothballed,” as of that date. We sell electric generation capacity, energy and ancillary services within the Electric Reliability Council of Texas, Inc., or 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.

 

On September 3, 2004, we signed an agreement to purchase a portion of AEP Texas Central Company’s 25.2% interest in the South Texas Project for approximately $174 million. Once the purchase is complete, we will own an additional 13.2% interest in the South Texas Project for a total of 44%, or approximately 1,100 MW. This purchase agreement was entered into pursuant to our right of first refusal to purchase this interest triggered by AEP Texas Central Company’s previously announced agreement to sell this interest to a third party. In addition to AEP Texas Central Company’s ownership interest and our current 30.8% ownership, the 2,500 MW nuclear plant is currently 28%-owned by City Public Service of San Antonio and 16%-owned by Austin Energy. City Public Service of San Antonio is purchasing AEP Texas Central Company’s remaining 12% ownership interest under its right of first refusal. The sale is subject to certain regulatory approvals, including filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and action by the Nuclear Regulatory Commission, the Federal Energy Regulatory Commission, and the Securities and Exchange Commission. We anticipate that the transaction will close in early 2005. Our anticipated acquisition of an additional interest in the South Texas Project is a separate transaction independent from the transactions contemplated by the transaction agreement described in this information statement. Neither the public company merger, nor the other transactions contemplated by the transaction agreement, are conditioned on the completion of our anticipated acquisition of an additional interest in the South Texas Project.

 

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CenterPoint Energy, Inc.

 

CenterPoint Energy is a Texas corporation and a public utility holding company registered under the Public Utility Holding Company Act of 1935, which we refer to as the 1935 Act, whose indirect, wholly owned subsidiaries include:

 

  CenterPoint Energy Houston Electric, LLC, which we refer to as CenterPoint Houston, which provides electric transmission and distribution services to approximately 1.8 million metered customers in a 5,000-square-mile area of the Texas Gulf Coast that has a population of approximately 4.7 million people and includes Houston; and

 

  CenterPoint Energy Resources Corp., which we refer to as CERC, which owns gas distribution systems serving approximately three million customers in Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma and Texas. Through wholly owned subsidiaries, CERC also owns two interstate natural gas pipelines and gas gathering systems and provides various ancillary services.

 

CenterPoint Energy also owns approximately 81% of our outstanding common stock through its subsidiary, Utility Holding, LLC.

 

Utility Holding, LLC

 

Utility Holding is a Delaware limited liability company, a direct, wholly owned subsidiary of CenterPoint Energy and an intermediate holding company registered under the 1935 Act. Utility Holding owns approximately 81% of our outstanding common stock.

 

NN Houston Sub, Inc.

 

NN Houston Sub is a Texas corporation and a direct, wholly owned subsidiary of Utility Holding. NN Houston Sub was organized solely for the purpose of entering into the transaction agreement and completing the transactions it contemplates.

 

GC Power Acquisition LLC

 

GC Power Acquisition is a Delaware limited liability company owned in equal parts by investment funds affiliated with The Blackstone Group, Hellman & Friedman LLC, Kohlberg Kravis Roberts & Co. L.P. and Texas Pacific Group. GC Power Acquisition was formed for the purpose of entering into the transaction agreement and completing the transactions it contemplates. We anticipate that GC Power Acquisition LLC will change its name to Texas Genco Acquisition LLC prior to the public company merger.

 

HPC Merger Sub, Inc.

 

HPC Merger Sub is a Texas corporation and a wholly owned subsidiary of GC Power Acquisition. HPC Merger Sub was organized solely for the purpose of entering into the transaction agreement and completing the transactions it contemplates.

 

In this information statement, we sometimes refer to CenterPoint Energy, Utility Holding and NN Houston Sub collectively as the “CenterPoint Energy Entities” or each individually as a “CenterPoint Energy Entity.”

 

Purpose and Structure (see page 14)

 

CenterPoint Energy has publicly disclosed its intention to exit the generation sector of the electric power industry and to monetize its interest in us and use the proceeds to repay outstanding indebtedness. In January 2004, following an assessment of available strategic alternatives, CenterPoint Energy decided to pursue a

 

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transaction involving the sale of all of its 81% interest in us through an auction process, as described under “Special Factors—Background of the Transactions.” This process eventually resulted in the execution of the transaction agreement described in this information statement.

 

The purposes of the transaction agreement and the transactions contemplated thereby are to achieve CenterPoint Energy’s goal of monetizing its interest in us, to provide our shareholders other than CenterPoint Energy with cash consideration for their shares at a price that we and CenterPoint Energy believe to be fair, and to enable GC Power Acquisition ultimately to acquire a 100% interest in our business.

 

GC Power Acquisition has agreed to acquire us in a multistep transaction in accordance with the terms and conditions of the transaction agreement. The steps, which are described in more detail below, consist of the following:

 

  Genco LP Division. We currently conduct substantially all of our business operations through Texas Genco, LP, one of our indirect wholly owned subsidiaries which we refer to as Genco LP. Prior to the public company merger, Genco LP and a newly formed wholly owned subsidiary of ours, Texas Genco II, LP, which we refer to as Genco II LP, will merge in a multiple survivor merger under Texas law. As a result of the merger, both subsidiaries will survive and all of our nuclear assets and liabilities, which relate primarily to our interest in the South Texas Project, and our available cash will remain with Genco LP, and all of our non-nuclear assets and liabilities, which relate primarily to our coal, lignite and gas-fired generation facilities, will be allocated to Genco II LP. We refer to this transaction as the Genco LP division.

 

  Public Company Merger. Following the Genco LP division, we will merge with NN Houston Sub and all of our publicly held shares of common stock, representing approximately 19% of our outstanding shares, (other than shares held by shareholders who validly perfect their dissenter’s rights under Texas law) will be converted into the right to receive $47.00 per share in cash without interest and less any applicable withholding taxes. We refer to this transaction as the public company merger. Immediately following the public company merger, we will be indirectly wholly owned by CenterPoint Energy.

 

  Non-Nuclear Asset Acquisition. Shortly after the public company merger, GC Power Acquisition will acquire our subsidiaries that then own our non-nuclear assets and liabilities for aggregate consideration to us of $2,813 million in cash. Approximately $716 million of these cash proceeds will be used to fund, or repay borrowings used to fund, the public company merger. In addition, $2,231 million in cash, consisting of the balance of the cash proceeds and other available cash, will be distributed up to CenterPoint Energy. The $2,231 million distribution will represent a payment of cash consideration to CenterPoint Energy equal to approximately $34.44 per share of our common stock currently owned by CenterPoint Energy.

 

  Nuclear Asset Acquisition. Following approval by the Nuclear Regulatory Commission, or NRC, of any transfer of the license for the South Texas Project deemed to be created by the acquisition of our nuclear assets by GC Power Acquisition, GC Power Acquisition will acquire our company, which will then own only our nuclear assets and liabilities, through the merger of a subsidiary of GC Power Acquisition into us in exchange for aggregate consideration to CenterPoint Energy of $700 million in cash. The $700 million to be paid by GC Power will represent a payment of cash consideration to CenterPoint Energy equal to approximately $10.81 per share of our common stock currently owned by CenterPoint Energy. We do not expect to receive approval from the NRC significantly prior to April 30, 2005. Immediately following the nuclear asset acquisition, we will be wholly owned by GC Power Acquisition.

 

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The aggregate of $2,931 million in cash to be received by CenterPoint Energy as a result of the non-nuclear asset acquisition and the nuclear asset acquisition represents a per share purchase price to CenterPoint Energy of approximately $45.25 for each of the 64,764,240 shares of our common stock it currently indirectly owns, which is less than the $47.00 per share to be paid to our other shareholders, all of which our other shareholders will be entitled to receive shortly prior to the closing of the non-nuclear asset acquisition.

 

The following diagram outlines the Genco LP division, the public company merger, the non-nuclear asset acquisition and the nuclear asset acquisition described above:

 

 

LOGO

 

 

LOGO

 

Utility Holding, acting in its capacity as the holder of approximately 81% of our outstanding shares of common stock, has executed a written consent irrevocably approving the transaction agreement and the transactions it contemplates, including the public company merger. Because Utility Holding owns shares of our common stock representing greater than two-thirds of the votes required for approval of the transactions under Texas law, no further vote of our shareholders is required or contemplated. Neither the public company merger nor any of the other transactions contemplated by the transaction agreement are conditioned upon the approval of our unaffiliated shareholders. No meeting of shareholders will be held to consider approval of these transactions or the transaction agreement, and no vote or consent of our shareholders is being solicited.

 

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Position of Our Special Committee and Board of Directors as to the Fairness of the Public Company Merger (see page 30)

 

Our board of directors created a special committee consisting of three independent directors to evaluate the transaction agreement, the public company merger and the other transactions contemplated by the transaction agreement on behalf of our shareholders other than CenterPoint Energy. The special committee evaluated the relevant factors related to GC Power Acquisition’s proposal, including the opinion delivered by RBC Capital Markets Corporation as to the fairness, from a financial point of view, of the cash consideration to be received by our shareholders other than CenterPoint Energy. In this information statement, we use the term public shareholders to mean our shareholders other than CenterPoint Energy and the term unaffiliated shareholders to mean our shareholders other than CenterPoint Energy and affiliates of our company or CenterPoint Energy. The term public shareholder includes our shareholders who are also directors or officers of either CenterPoint Energy or our company even though those persons may be deemed to be our affiliates. In evaluating the fairness of the transaction agreement, the public company merger and the other transactions contemplated by the transaction agreement, neither the special committee nor our board of directors separately considered the interests of our public shareholders who are also directors or officers of either CenterPoint Energy or our company from the interests of our unaffiliated shareholders. We note, however, that officers or directors of either CenterPoint Energy or our company do not have an interest in GC Power Acquisition.

 

As a result of its evaluation, the special committee determined by unanimous vote that the transaction agreement with GC Power Acquisition and the transactions contemplated thereby, including the public company merger, are fair to, advisable and in the best interests of Texas Genco and our public shareholders, and resolved to recommend to our board of directors that the transaction agreement and the transactions contemplated thereby, including the public company merger, be approved by our board of directors, subject to the satisfactory completion of the transaction agreement and the special committee’s receipt of the executed fairness opinion from RBC, each of which occurred on July 21, 2004.

 

At a meeting of our board of directors on July 20, 2004 and based on the special committee’s unanimous recommendation, our board of directors unanimously:

 

  determined that the transaction agreement and the transactions contemplated by the transaction agreement, including the public company merger, are in the best interests of our company and our shareholders; and

 

  approved the transaction agreement and the transactions contemplated by the transaction agreement, including the public company merger.

 

Our board of directors believes that the public company merger is fair to our unaffiliated shareholders. In making this determination, our board of directors considered the determination and recommendation of the special committee and the opinion delivered to the special committee and our board of directors by RBC. In addition, each of Messrs. McClanahan, Whitlock and Rozzell considered the factors described under “Special Factors—Position of the CenterPoint Energy Entities as to the Fairness of the Public Company Merger” in their capacity as officers and/or directors of CenterPoint Energy in connection with the CenterPoint Energy Entities’ consideration of the fairness of the public company merger to our unaffiliated shareholders.

 

Fairness Opinion of RBC Capital Markets Corporation (see page 36)

 

On July 20, 2004, RBC Capital Markets Corporation delivered its oral opinion, which was subsequently confirmed in writing on July 21, 2004, to the special committee and our board of directors that, as of that date, and subject to the various assumptions, qualifications and limitations set forth therein, the cash consideration to be received by the holders of our common stock (other than CenterPoint Energy) in connection with the public company merger was fair, from a financial point of view, to such holders. As of the date of this information

 

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statement, the special committee and our board of directors do not intend to request an updated fairness opinion from RBC Capital Markets Corporation. As of the date of this information statement, our board of directors and the special committee continue to believe the public company merger is fair to our unaffiliated shareholders based on the factors described under “Special Factors—Position of Our Special Committee and Board of Directors as to the Fairness of the Public Company Merger.” As described under “Special Factors—Other Agreements—Power Purchase and Sale Agreement,” we have sold forward a substantial portion of our available base-load energy through 2008 on a firm, fixed price basis. As a result of these forward sales, we have substantially reduced the dependence of our future earnings and cash flows on fluctuating market prices for power and natural gas. Accordingly, our expectations regarding our future financial performance have not changed significantly since the time the transaction agreement was executed and are unlikely to change significantly as a result of changes in future market prices for power and natural gas.

 

Position of the CenterPoint Energy Entities as to the Fairness of the Public Company Merger (see page 43)

 

The CenterPoint Energy Entities believe that the public company merger is fair to our unaffiliated shareholders based on the material factors considered by the CenterPoint Energy Entities and described under “Special Factors—Position of the CenterPoint Energy Entities as to the Fairness of the Public Company Merger.” The CenterPoint Energy Entities have not, however, engaged a financial advisor to perform any valuation analysis for the purposes of assessing the fairness of the public company merger to our unaffiliated shareholders. Instead, the CenterPoint Energy Entities have independently considered the factors discussed under “Special Factors—Position of the CenterPoint Energy Entities as to the Fairness of the Public Company Merger” in making their determination.

 

Financing of the Public Company Merger (see page 78)

 

In connection with the public company merger, all of the 15,235,760 outstanding shares of our common stock held by our public shareholders (other than those who validly perfect their dissenters’ rights under Texas law) will be converted into the right to receive $47.00 per share in cash without interest and less any applicable withholding taxes, resulting in an aggregate payment of up to approximately $716 million. Pursuant to GC Power Acquisition’s debt financing letter, we have received a commitment from Goldman Sachs Credit Partners, L.P. to provide us with an overnight bridge loan of up to $717 million to finance the public company merger. The overnight bridge loan will mature within 72 hours of its funding. The non-nuclear asset acquisition is expected to close on the business day following the public company merger. We will use approximately $716 million of the $2,813 million of aggregate cash consideration we receive in the non-nuclear asset acquisition to fund or repay borrowings used to fund the public company merger. We would seek to obtain alternate financing if the overnight bridge loan facility is not available to us, but we do not currently have any alternative financing plans or arrangements. The approximately $716 million of aggregate cash consideration to be paid to our public shareholders (other than those who validly perfect their dissenters’ rights under Texas law) represents approximately 19.6% of the total consideration to be paid to our shareholders, including CenterPoint Energy, in connection with the public company merger, the non-nuclear asset acquisition and the nuclear asset acquisition. The $47.00 per share price represents the consideration to be paid to our public shareholders for the purchase of their entire interest in our company at the time of the public company merger. As described elsewhere in this information statement, CenterPoint Energy’s interest in our company is expected to be purchased in two steps following the closing of the public company merger for aggregate consideration equal to approximately $45.25 per share of our common stock currently owned by CenterPoint Energy. First, we will distribute $2,231 million in cash up to CenterPoint Energy following the closing of the non-nuclear asset acquisition (representing a payment equal to approximately $34.44 per share of our common stock currently owned by CenterPoint Energy). Second, following receipt of NRC approval, CenterPoint Energy will receive $700 million in cash from GC Power Acquisition upon the closing of the nuclear asset acquisition (representing a payment equal to approximately $10.81 per share of our common stock currently owned by CenterPoint Energy).

 

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Interests of CenterPoint Energy, Directors and Executive Officers (see page 89)

 

In considering the recommendation of our board of directors and the special committee, you should be aware that some of our directors and certain of our officers may have interests in the transactions, including the public company merger, that may be different from, or in addition to, your interests as a shareholder generally and may create potential conflicts of interests. These include:

 

  GC Power Acquisition’s agreement that the surviving corporation of the public company merger will indemnify each of our directors and officers with respect to claims arising from facts or events that occurred prior to the effective time of the public company merger, and that the surviving corporation will cause to be obtained “tail” insurance policies with respect to directors’ and officers’ liability for claims arising from facts or events that occurred prior to such time;

 

  the fact that some of our directors and officers are also directors and/or officers of CenterPoint Energy; and

 

  the retention agreement our President and Chief Executive Officer, David G. Tees, has with CenterPoint Energy and the fact that we expect to enter into a severance agreement with Mr. Tees, which agreements provide or will provide for benefits upon the occurrence of certain events following the transactions, including the failure of GC Power Acquisition to continue Mr. Tees’ employment. It is currently expected that Mr. Tees will not be employed by GC Power Acquisition following the nuclear asset acquisition.

 

The special committee, none of whose members are directors or officers of CenterPoint Energy, was aware of these differing interests and considered them, among other matters, in evaluating the transaction agreement and the public company merger and in recommending to our board of directors that the transaction agreement and the public company merger be approved by our board of directors. In addition, each of the members of our board of directors was aware of these interests and considered them, among other matters, in approving the transaction agreement and the transactions contemplated by the transaction agreement, including the public company merger. No member of the special committee will continue to serve as a member of our board of directors or in any other capacity at our company following the public company merger. None of our current directors is expected to be a director of Texas Genco or GC Power Acquisition following the nuclear asset acquisition.

 

Material Transactions Between CenterPoint Energy and Us (see page 84)

 

We are party to a variety of agreements with CenterPoint Energy and its affiliates. In connection with the transaction agreement, CenterPoint Energy has agreed to enter into, amend or in some cases extend certain commercial arrangements with us.

 

Material U.S. Federal Income Tax Consequences of the Public Company Merger (see page 93)

 

For U.S. federal income tax purposes, the public company merger will be treated as a taxable sale by our shareholders of their shares of our common stock in which they will recognize gain or loss equal to the difference between the amount of the cash consideration received in the public company merger and their adjusted tax basis in the shares of common stock surrendered in the public company merger.

 

Regulatory Approvals (see page 77)

 

On September 17, 2004, the Federal Trade Commission granted early termination of the waiting period applicable to the consummation of the transactions contemplated by the transaction agreement under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or HSR Act. On September 24, 2004, the Federal Energy Regulatory Commission, or FERC, granted exempt wholesale generator status to Genco II LP. There are no other material regulatory approvals to be obtained prior to completion of the public company merger.

 

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In addition, in order to complete the nuclear asset acquisition, we must receive all approvals of the NRC required in connection with any transfer of the license for the South Texas Project deemed to be created by the nuclear asset acquisition.

 

Conditions to the Closings (see page 70)

 

The obligations of Texas Genco and NN Houston Sub to consummate the public company merger are subject to satisfaction or waiver of the following conditions:

 

  the absence of any law or order that prohibits or makes illegal consummation of the public company merger, the non-nuclear asset acquisition or any of the other transactions related thereto;

 

  the expiration or termination of any waiting period applicable to the public company merger or the non-nuclear asset acquisition under applicable U.S. antitrust or trade regulation laws and regulations, including the HSR Act;

 

  we shall have sent to our shareholders an information statement that complies with the requirements under Rule 14c-2 of the Securities Exchange Act of 1934, or the Exchange Act, and any other requirements under such rule must be satisfied;

 

  the requirements related to the financing of the transactions must be satisfied, including:

 

  our access to immediately available funds under the overnight bridge loan facility on terms and conditions described under “Special Factors—Financing of the Transactions” or on terms and conditions which are, in the judgment of GC Power Acquisition, comparable or more favorable (to GC Power Acquisition) in the aggregate thereto;

 

  the receipt of proceeds by GC Power Acquisition from its financings in an amount equal to the consideration to be paid in the non-nuclear asset acquisition (or the funding of such amount into escrow) on terms and conditions described under “Special Factors—Financing of the Transactions” or on terms and conditions which are, in the judgment of GC Power Acquisition, comparable or more favorable (to GC Power Acquisition) in the aggregate thereto; and

 

  the closing of documentation related to (but not funding of) a $475 million delayed draw term facility among GC Power Acquisition and the financial institutions party thereto, which facility will be in full force and effect and will be on terms and conditions described under “Special Factors—Financing of the Transactions” or on terms and conditions which are, in the judgment of GC Power Acquisition, comparable or more favorable (to GC Power Acquisition) in the aggregate thereto;

 

  the receipt by CenterPoint Energy and Utility Holding of a certificate from GC Power Acquisition stating that, based on GC Power Acquisition’s receipt of a certificate from us and CenterPoint Energy regarding certain of GC Power Acquisition’s conditions to the closing of the non-nuclear asset acquisition, among other things, GC Power Acquisition is prepared to consummate the non-nuclear asset acquisition on the following business day (subject to the satisfaction of certain conditions);

 

  the representations and warranties of GC Power Acquisition set forth in the transaction agreement must be true and correct as of the date of the transaction agreement and as of the closing date of the public company merger (except for representations and warranties made as of a specified date, which need be true and correct only as of the specified date), which representations and warranties shall be deemed to be true and correct unless the failure or failures of all such representations and warranties to be true and correct (without giving effect to any qualification as to materiality or material adverse effect) would reasonably be expected, in the aggregate, to materially adversely affect the ability of GC Power Acquisition to consummate the transactions contemplated by the transaction agreement or directly or indirectly prevent or materially impair or delay the ability of GC Power Acquisition to perform its obligations thereunder;

 

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  GC Power Acquisition must have performed in all material respects all of its obligations required to be performed by it under the transaction agreement at or prior to the closing of the public company merger;

 

  the receipt by Genco LP and CenterPoint Energy of a certificate signed on behalf of GC Power Acquisition certifying as to the satisfaction of the matters set forth in the two preceding bullet points; and

 

  the certification of Genco II LP as an exempt wholesale generator by the FERC.

 

Neither we nor NN Houston Sub may waive any of the conditions described in the first three bullet points above without the consent of GC Power Acquisition. We do not currently intend to distribute a revised information statement to our shareholders in the event any of the foregoing conditions are waived unless the waiver is material to our shareholders in the context of the transactions.

 

The closing of the non-nuclear asset acquisition depends on the closing of the public company merger and the satisfaction or waiver of a number of other specified conditions.

 

The closing of the nuclear asset acquisition depends on the closing of the non-nuclear asset acquisition and the satisfaction or waiver of a number of other specified conditions. These conditions include the approval by the NRC of any transfer of the license for the South Texas Project deemed to be created by the nuclear asset acquisition.

 

Termination of the Transaction Agreement (see page 75)

 

The transaction agreement may be terminated at any time prior to the closing of the nuclear asset acquisition with respect to the transactions that have not yet then been closed by mutual written consent of CenterPoint Energy, GC Power Acquisition and us, or by CenterPoint Energy, GC Power Acquisition or us if (1) the closing of the nuclear asset acquisition has not occurred on or before April 30, 2005 (subject to extension for up to two consecutive 90-day periods under certain circumstances), or (2) under certain other circumstances involving action by a governmental authority or material breach of covenants or representations and warranties under the transaction agreement, in each case as more fully described under “Special Factors—The Transaction Agreement—Termination of the Transaction Agreement.” Any action by us to terminate the transaction agreement is subject to the limitations set forth under “—Role of Our Special Committee” below.

 

Fees and Expenses (see page 83)

 

For information on each party’s obligation to pay fees and expenses related to the transactions, please read “Special Factors—Fees and Expenses” on page 83.

 

Role of Our Special Committee (see page 76)

 

Before the effective time of the public company merger, the special committee of our board of directors must either concur in or direct any action by us to terminate or amend the transaction agreement or waive any condition to our obligation to close the public company merger or the non-nuclear asset acquisition.

 

Dissenters’ Appraisal Rights (see page 95)

 

If you are a holder of shares of our outstanding common stock as of the effective date of the public company merger, and you follow the procedures set forth in Articles 5.11, 5.12 and 5.13 of the Texas Business Corporation Act, you will be entitled to demand the purchase of your shares of our common stock for a purchase price equal to the “fair value” of your shares, as determined by a court. Under Texas law, fair value of shares for purposes of

 

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the exercise of dissenter’s rights is defined as the value of the shares as of the date Utility Holding’s written consent authorizing the public company merger was delivered to us, excluding any appreciation or depreciation in value of the shares in anticipation of the public company merger.

 

Failure to follow the procedures required by Articles 5.11, 5.12 and 5.13 of the Texas Business Corporation Act for perfecting dissenters’ rights may result in the loss of dissenters’ rights, in which event you will be entitled to receive the public company merger consideration in accordance with the transaction agreement. In view of the complexity of Articles 5.11, 5.12 and 5.13 of the Texas Business Corporation Act, if you are considering dissenting from the public company merger, we urge you to consult your own legal counsel. The relevant sections of the Texas Business Corporation Act are reproduced and attached as Appendix B to this information statement.

 

Litigation Concerning the Transactions

 

On July 23, 2004, two plaintiffs filed substantially identical lawsuits in Harris County, Texas state district courts. The suits, purportedly brought on behalf of holders of our common stock, name us and each of our directors as defendants. Both plaintiffs allege, among other things, self-dealing and breach of fiduciary duty by the defendants in entering into the transaction agreement. As part of their allegations of self-dealing, both plaintiffs claim that our board of directors is controlled by CenterPoint Energy, that the defendants improperly concealed our results of operations for the second quarter of 2004 until after the transaction agreement was announced, and that in order to aid CenterPoint Energy our board only searched for acquirers who would offer all-cash consideration. Among other relief, the plaintiffs seek to enjoin the transaction or, alternatively, to rescind the transaction to the extent already implemented. In August 2004, the cases were consolidated in state district court in Harris County, Texas. We intend to vigorously defend against the consolidated suits.

 

2004 Third Quarter Results

 

On October 28, 2004, we reported a net loss of $311 million, or $3.89 per share, for the third quarter of 2004, which includes an after-tax impairment charge of $426 million ($649 million pretax) related to the anticipated sale of our coal, lignite and gas-fired generation plants pursuant to the non-nuclear asset acquisition. As a result of the signing of the transaction agreement, and in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we ceased depreciation on our coal, lignite and gas-fired generation plants at the time these assets were considered “held for sale.” This resulted in a decrease in depreciation expense of $24 million after tax ($37 million pretax) for the third quarter of 2004. In accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” we also recorded a curtailment expense related to postretirement benefits of $11 million after tax ($17 million pretax), which is included in operations and maintenance expense. Excluding these sale-related impacts, net income for the third quarter of 2004 was $102 million, or $1.27 per share, compared to $82 million, or $1.03 per share, for the same period of 2003.

 

For the nine months ended September 30, 2004, we reported a net loss of $170 million, or $2.13 per share, including the sale-related impacts described above. Net income for the nine months ended September 30, 2003, was $204 million, or $2.55 per share, including a non-cash gain of $99 million ($1.24 per share) from the adoption of Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations.” Excluding the sale-related impacts, net income for the nine months ended September 30, 2004 was $243 million, or $3.03 per share, and income before the cumulative effect of an accounting change for the same period of 2003 was $105 million, or $1.31 per share. Excluding the pre-tax impacts related to the anticipated sale noted above, operating income for the third quarter of 2004 improved by $28 million from the prior year primarily due to higher wholesale electricity prices for baseload products and improved availability of our baseload generating units.

 

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Parties to the Transaction Agreement

 

Texas Genco Holdings, Inc.

1111 Louisiana

Houston, Texas 77002

(713) 207-1111

 

We are a Texas corporation with our principal place of business in Houston, Texas. 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% undivided interest in the South Texas Project, a nuclear generating station with two 1,250 MW nuclear generating units.

 

As of June 30, 2004, the aggregate net generating capacity of our portfolio of assets was 14,153 MW, of which 2,585 MW of gas-fired capacity was then mothballed. We sell electric generation capacity, energy and ancillary services within the 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.

 

On September 3, 2004, we signed an agreement to purchase a portion of AEP Texas Central Company’s 25.2% interest in the South Texas Project for approximately $174 million, plus certain adjustments for capital expenditures, and inventory and nuclear fuel balances at closing. AEP Texas Central is a subsidiary of American Electric Power Company, Inc. Once the purchase is complete, we will own an additional 13.2% of the nuclear plant for a total of 44%, or approximately 1,100 MW. This purchase agreement was entered into pursuant to our right of first refusal to purchase this interest triggered by AEP Texas Central Company’s previously announced agreement to sell this interest to a third party. In addition to AEP Texas Central Company’s ownership interest and our current 30.8% ownership, the 2,500 MW nuclear plant is currently 28%-owned by City Public Service of San Antonio and 16%-owned by Austin Energy. City Public Service of San Antonio is purchasing AEP Texas Central Company’s remaining 12% ownership interest under its right of first refusal. The sale is subject to certain regulatory approvals, including filing under the HSR Act, and action by the NRC, the FERC and the SEC. We anticipate that the transaction will close in early 2005. Our anticipated acquisition of an additional interest in the South Texas Project is a separate transaction independent from the transactions contemplated by the transaction agreement described in this information statement. Neither the public company merger, nor the other transactions contemplated by the transaction agreement, are conditioned on the completion of our anticipated acquisition of an additional interest in the South Texas Project.

 

In June 1999, the Texas legislature enacted legislation, which we refer to as the Texas electric restructuring law, which substantially changed 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.

 

We are 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, the predecessor of CenterPoint Houston. CenterPoint Houston is an indirect wholly owned subsidiary of CenterPoint Energy. Reliant Energy conveyed these facilities to us on August 31, 2002 in accordance with a business separation plan adopted in response to the Texas electric restructuring law. 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. On January 6, 2003, CenterPoint Energy distributed 15,235,760 of the 80 million outstanding shares of our common stock, or approximately 19.04% of our outstanding shares, to CenterPoint Energy’s common shareholders. CenterPoint Energy now indirectly owns 80.96% of the outstanding shares of our common stock.

 

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CenterPoint Energy is a registered public utility holding company under the 1935 Act. The 1935 Act directs the SEC to regulate, among other things, transactions among affiliates, sales or acquisitions of assets, issuances of securities, distributions and permitted lines of business by registered holding companies and their subsidiaries. In October 2003, the FERC granted exempt wholesale generator status to Genco LP, our wholly owned subsidiary that owns and operates our electric generating plants. As a result, we are exempt, and we will continue to be exempt, from substantially all provisions of the 1935 Act as long as our subsidiaries with generating assets remain exempt wholesale generators.

 

CenterPoint Energy, Inc.

1111 Louisiana

Houston, Texas 77002

(713) 207-1111

 

CenterPoint Energy is a Texas corporation whose indirect wholly owned subsidiaries include:

 

  CenterPoint Houston, which provides electric transmission and distribution services to approximately 1.8 million metered customers in a 5,000-square-mile area of the Texas Gulf Coast that has a population of approximately 4.7 million people and includes Houston; and

 

  CERC, which owns gas distribution systems serving approximately three million customers in Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma and Texas. Through wholly owned subsidiaries, CERC also owns two interstate natural gas pipelines and gas gathering systems and provides various ancillary services.

 

CenterPoint Energy also owns an approximately 81% ownership interest in us through its subsidiary, Utility Holding, LLC.

 

Utility Holding, LLC

1011 Centre Road, Suite 324

Wilmington, Delaware 19805

(302) 573-3813

 

Utility Holding is a Delaware limited liability company, a direct, wholly owned subsidiary of CenterPoint Energy and an intermediate holding company registered under the 1935 Act. Utility Holding is the record holder of 64,764,240 shares of our common stock, which represents approximately 81% of our outstanding shares of common stock.

 

NN Houston Sub, Inc.

1111 Louisiana

Houston, Texas 77002

(713) 207-1111

 

NN Houston Sub is a Texas corporation and a direct, wholly owned subsidiary of Utility Holding. NN Houston Sub was organized solely for the purpose of entering into the transaction agreement and completing the transactions it contemplates. It has not conducted, and will not conduct, any activities other than activities incidental to its formation and in connection with the transactions contemplated by the transaction agreement. Under the terms of the transaction agreement, NN Houston Sub will merge with and into us in the public company merger. We will survive the public company merger, and NN Houston Sub will cease to exist.

 

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GC Power Acquisition LLC

12301 Kurland Drive, 4th floor

Houston, Texas 77034

(713) 207-6546

 

GC Power Acquisition is a Delaware limited liability company owned in equal parts by investment funds affiliated with The Blackstone Group, Hellman & Friedman LLC, Kohlberg Kravis Roberts & Co. L.P. and Texas Pacific Group. GC Power Acquisition was formed solely for the purpose of entering into the transaction agreement and completing the transactions it contemplates. It has not conducted any activities other than activities incidental to its formation and in connection with the transactions contemplated by the transaction agreement.

 

HPC Merger Sub, Inc.

12301 Kurland Drive, 4th floor

Houston, Texas 77034

(713) 207-6546

 

HPC Merger Sub is a Texas corporation and a wholly owned subsidiary of GC Power Acquisition. HPC Merger Sub was organized solely for the purpose of entering into the transaction agreement and completing the transactions it contemplates. It has not conducted, and will not conduct, any activities other than activities incidental to its formation and in connection with the transactions contemplated by the transaction agreement. Under the terms of the transaction agreement, HPC Merger Sub will merge with and into us in the nuclear asset acquisition. We will survive the nuclear asset acquisition, and HPC Merger Sub will cease to exist.

 

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Special Factors

 

Purpose and Structure

 

CenterPoint Energy has publicly disclosed since 2002—prior to our existence as a separate publicly held company—its intention to exit the generation sector of the electric power industry and to monetize its 81% equity interest in our company. CenterPoint Energy has sought to monetize its interest in us in order to generate cash proceeds to be used to reduce its aggregate outstanding indebtedness. Prior to January 2004, CenterPoint Energy was prevented from pursuing a transaction because its equity interest in our company was subject to a purchase option held by Reliant Resources, Inc., a former affiliate of CenterPoint Energy that recently changed its name to Reliant Energy, Inc. and which we refer to as RRI. In January 2004, following RRI’s decision not to exercise its option to purchase CenterPoint Energy’s interest in us and an assessment of available strategic alternatives, CenterPoint Energy decided to pursue a transaction involving the sale of all of its 81% interest in us through an auction process. During the course of the auction process, potential bidders for CenterPoint Energy’s interest in us, including the investors in GC Power Acquisition, submitted proposals to acquire a 100% interest in our business. Our board of directors created a special committee to represent our public shareholders in connection with the consideration of any proposal by a potential purchaser of CenterPoint Energy’s interest to acquire the additional 19% ownership interest held by our public shareholders. The auction process eventually resulted in the execution of the transaction agreement described in this information statement. For additional information regarding the auction process, RRI’s option and the creation of the special committee of our board of directors, please read “—Background of the Transactions.”

 

The purposes of the transaction agreement and the transactions contemplated thereby are to achieve CenterPoint Energy’s goal of monetizing its 81% interest in us, to provide our public shareholders with cash consideration for their shares at a price that we and CenterPoint Energy believe to be fair, and to enable GC Power Acquisition ultimately to acquire a 100% interest in our business.

 

GC Power Acquisition has agreed to acquire us in a multistep transaction in accordance with the terms and conditions of the transaction agreement. The steps, which are described in more detail below, consist of the following:

 

  The allocation of our non-nuclear assets and liabilities to a separate wholly owned subsidiary. We refer to this allocation as the Genco LP division.

 

  The conversion of all of our publicly held shares (other than shares held by shareholders who validly perfect their dissenter’s rights under Texas law) into the right to receive $47.00 per share in cash, without interest and less any applicable withholding taxes, in connection with our merger with NN Houston Sub. We refer to this transaction as the public company merger.

 

  The acquisition of two of our subsidiaries that will own our non-nuclear assets and liabilities by two newly formed subsidiaries of GC Power Acquisition in exchange for aggregate consideration of $2,813 million in cash. We refer to this transaction as the non-nuclear asset acquisition. Approximately $716 million of these cash proceeds will be used to fund or repay indebtedness used to fund the public company merger. In addition, CenterPoint Energy has the right to have us distribute to it up to $2,231 million in cash, consisting of the balance of the cash proceeds and other available cash; we expect the full $2,231 million to be distributed up to CenterPoint Energy.

 

  The merger of HPC Merger Sub into us resulting in GC Power Acquisition’s purchase of us in exchange for a payment of $700 million in cash to Utility Holding. We refer to this transaction as the nuclear asset acquisition.

 

Genco LP Division

 

We currently conduct substantially all of our business operations through Genco LP, one of our indirect wholly owned subsidiaries. Prior to the public company merger, Genco LP will merge with a newly formed wholly owned

 

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subsidiary of ours, Texas Genco II, LP which we refer to as Genco II LP, in a merger under Texas law in which both Genco LP and Genco II LP will survive. As a result of the merger and in accordance with the transaction agreement and the definitive plan of merger related to this separation, all of our nuclear assets and liabilities, which relate primarily to our interest in the South Texas Project, and our available cash will remain with Genco LP, and all of our non- nuclear assets and liabilities, which relate primarily to our coal, lignite and gas-fired generation facilities, will be allocated to Genco II LP. We refer to this multisurvivor merger as the Genco LP division. The Genco LP division will be consummated and become effective prior to the public company merger.

 

Public Company Merger

 

Following the Genco LP division, the receipt of all required regulatory approvals and the satisfaction of the other conditions to the public company merger, we will merge with NN Houston Sub and all of our publicly held shares of common stock, representing approximately 19% of our outstanding shares, (other than shares held by shareholders who perfect their dissenter’s rights under Texas law) will be converted into the right to receive $47.00 per share in cash without interest and less any applicable withholding taxes. You must be a holder of shares of our common stock as of the effective date of the public company merger in order to have the right to receive the cash consideration for your shares described above. Immediately following the public company merger, we will be indirectly wholly owned by CenterPoint Energy. We currently expect the public company merger will occur during December 2004. On November 4, 2004, we declared a quarterly cash dividend of $0.25 per share of our common stock. The dividend is payable on December 20, 2004 to holders of record as of the close of business on November 26, 2004. The dividend will be paid to shareholders of record even if the public company merger occurs prior to the December 20, 2004 payment date.

 

Non-Nuclear Asset Acquisition

 

On the first business day after the closing of the public company merger or as soon as possible thereafter, and subject to the satisfaction of other conditions to the non-nuclear asset acquisition, GC Power Acquisition will acquire all of our non-nuclear assets and liabilities through a merger of a wholly owned subsidiary of GC Power Acquisition with and into Genco II LP. Simultaneously with that merger, GC Power Acquisition will acquire Texas Genco Services, LP, one of our current operating subsidiaries that owns certain assets unrelated to our wholesale generation business and which we refer to as Genco Services, through a merger of another wholly owned subsidiary of GC Power Acquisition with and into Genco Services. As a result of these mergers, which we refer to collectively as the non-nuclear asset acquisition, Genco II LP and Genco Services will become indirect wholly owned subsidiaries of GC Power Acquisition. In the non-nuclear asset acquisition, we will receive cash consideration of $2,813 million, of which up to $2,231 million is to be distributed up to CenterPoint Energy.

 

Nuclear Asset Acquisition

 

Following receipt of approval by the NRC and the satisfaction of other conditions to the nuclear asset acquisition, GC Power Acquisition will acquire indirect ownership of our nuclear assets and liabilities through the merger of another wholly owned subsidiary of GC Power Acquisition with and into us. As a result of this merger, we will be a wholly owned subsidiary of GC Power Acquisition. In the nuclear asset acquisition, Utility Holding will receive $700 million in cash, without interest, in consideration for its 100% ownership interest in us.

 

Background of the Transactions

 

The Restructuring of Reliant Energy in Response to the Texas Electric Restructuring Law

 

In June 1999, the Texas legislature enacted legislation, which we refer to as the Texas electric restructuring law, which substantially changed the regulatory structure governing electric utilities in Texas in order to encourage retail electric competition. The 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.

 

CenterPoint Energy is a public utility holding company that became the parent of Reliant Energy, Incorporated, which we refer to as Reliant Energy, and its subsidiaries on August 31, 2002 as part of a corporate

 

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restructuring of Reliant Energy implemented in response to the Texas electric restructuring law. In March 2001, the Public Utility Commission of Texas, which we refer to as the PUC, approved a business separation plan for 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 in accordance with this business separation plan in which it:

 

  conveyed all of its electric generating facilities to us;

 

  became a subsidiary of CenterPoint Energy; and

 

  converted into a limited liability company named CenterPoint Energy Houston Electric, LLC, which we refer to as CenterPoint Houston.

 

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 generation assets, including outright sale, full or partial stock market valuation and asset exchanges. Under Reliant Energy’s business separation plan, Reliant Energy agreed that the fair market value of our generating assets would be determined using the partial stock market valuation method.

 

During 2002, CenterPoint Energy considered conducting an initial public offering of our common stock. However, based on the advice of investment bankers, our poor financial results in 2002 and generally unfavorable capital market conditions in the power generation sector during 2002, an initial public offering was determined not to be feasible prior to the deadline for establishing a trading market for our shares of common stock under the Texas electric restructuring law and Reliant Energy’s business separation plan. In January 2003, CenterPoint Energy distributed 15,235,760 of the 80 million outstanding shares of our common stock, or approximately 19.04% of our outstanding shares, to its shareholders. CenterPoint Energy made the distribution to establish a public market value for shares of our common stock to be used in calculating how much CenterPoint Houston would be able to recover as stranded costs as contemplated by Reliant Energy’s business separation plan and the Texas electric restructuring law, and to comply with its contractual obligations to Reliant Resources, Inc., a former subsidiary of Reliant Energy that recently changed its name to Reliant Energy, Inc. and which we refer to as RRI. The closing market price of our common stock on January 7, 2003, the first trading day after CenterPoint Energy’s distribution of our shares, was $10.50 per share.

 

Among the objectives of Reliant Energy’s business separation plan was the separation of Reliant Energy’s operations into two unaffiliated publicly traded companies with one company, CenterPoint Energy, holding Reliant Energy’s regulated energy delivery businesses and the other company, RRI, holding its competitive merchant power and energy services operations. In May 2001, RRI conducted an underwritten initial public offering of 59.8 million shares of common stock, representing approximately 20% of its outstanding shares, at an initial public offering price of $30.00 per share, resulting in aggregate net proceeds of approximately $1.7 billion. In furtherance of Reliant Energy’s business separation plan, the remaining common stock of RRI was distributed to CenterPoint Energy’s shareholders on September 30, 2002.

 

As part of the business separation plan, RRI was granted an option exercisable in January 2004 to purchase all of the shares of our common stock owned by CenterPoint Energy following the 19% distribution. The per share exercise price under this option was based on the average daily closing price of our common stock on The New York Stock Exchange over the 30 consecutive trading days out of the 120 trading days ending January 9, 2004 which result in the highest average closing price, which equaled $31.67 per share. In addition, a control premium, up to a maximum of 10%, would have been added to the exercise price to the extent a control premium is included in the valuation determination made by the PUC relating to the market value of our common stock equity in CenterPoint Houston’s true-up proceeding. On January 23, 2004, RRI notified CenterPoint Energy that RRI would not exercise its option to purchase CenterPoint Energy’s 81% interest in us.

 

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CenterPoint Energy Pursues a Sale of its 81% Interest

 

Following the corporate restructuring of Reliant Energy, CenterPoint Energy publicly disclosed its intention to exit the generation sector of the electric power industry and to monetize its interest in us and use the proceeds to repay outstanding indebtedness. Consistent with this goal, CenterPoint Energy had previously stated that if RRI did not exercise its option to purchase CenterPoint Energy’s interest in us, CenterPoint Energy would consider strategic alternatives for its interest, including a possible sale. In the summer of 2003, CenterPoint Energy began to consider various strategic alternatives for its interest in us in the event RRI declined to exercise its option, and retained Citigroup Global Markets Inc., which we refer to as Citigroup, as its financial advisor. CenterPoint Energy considered a number of potential alternative transactions, including a sale of a portion of its interest in us to one or more third parties, one or more secondary offerings to the public of our shares held by CenterPoint Energy, sales of some or all of our generating assets to one or more third parties with a pro rata distribution of the proceeds to our shareholders, including CenterPoint Energy, and a significant leveraging of our balance sheet with new borrowings the proceeds of which would be distributed pro rata to our shareholders, including CenterPoint Energy. In January 2004, following the decision by RRI not to exercise its option at the exercise price described above, CenterPoint Energy made an assessment of available strategic alternatives regarding its interest in Texas Genco. Following this assessment, CenterPoint Energy decided to pursue a transaction involving the sale of all of its 81% interest based on its view that a sale of its entire interest in a single transaction presented the best opportunity for maximizing the amount of cash proceeds it would receive as a result of its monetization efforts.

 

Commencing in February 2004, at the request of CenterPoint Energy, Citigroup contacted a number of potential financial and strategic purchasers for CenterPoint Energy’s 81% interest in us. A total of 107 potential buyers, comprised of 58 financial entities and 49 strategic entities, were contacted. During February and March 2004, copies of a confidential information memorandum describing our business, operations and financial condition were provided to all of the 38 potential buyers that expressed interest and agreed to enter into a confidentiality agreement, including 24 financial entities and 14 strategic entities. Copies of the information memorandum were also subsequently provided to five other potential buyers during the course of the auction process, each of whom entered into a confidentiality agreement.

 

During the first week of April 2004, Citigroup, on behalf of CenterPoint Energy, invited potential buyers to submit written, non-binding indications of interest by April 15, 2004 for the potential acquisition for cash of CenterPoint Energy’s 81% interest in us. Citigroup, on behalf of CenterPoint Energy, also indicated that any proposal must identify any expected material or non-customary conditions or contingencies to closing, further corporate approvals and additional due diligence requirements, as CenterPoint Energy wanted to avoid any unnecessary regulatory delays or other factors that could jeopardize the ability of the parties to close the transaction on a timely basis.

 

On or about April 15, 2004, ten preliminary indications of interest were received, including:

 

  six bids for CenterPoint Energy’s 81% interest with prices ranging from $33.00 to $41.00 per share;

 

  three non-conforming bids for our interest in the South Texas Project; and

 

  one non-conforming bid for our base-load coal-fired and/or lignite-fired generation facilities.

 

Two of the conforming bids were submitted by strategic bidders and four of the conforming bids were submitted by groups primarily comprised of financial bidders. A number of bidders indicated the need to finance a substantial portion of the purchase price with debt incurred by us and expressed an interest in acquiring the outstanding common stock owned by our public shareholders as part of the transaction.

 

On April 27, 2004 at a regular meeting, CenterPoint Energy’s board of directors discussed the results of the preliminary indications of interest and other available alternatives for monetizing CenterPoint Energy’s interest in us. At the meeting, presentations were made by CenterPoint Energy management and representatives of Citigroup. In its presentation, Citigroup summarized the auction process that had been conducted to date and the

 

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preliminary indications of interest described above. Citigroup also discussed its preliminary valuation analysis regarding us that it prepared based on methodologies substantially similar to those employed by Citigroup in connection with the delivery of its opinion to the CenterPoint Energy board of directors on July 21, 2004, as described under “—Opinion Received by the Board of Directors of CenterPoint Energy,” provided, however, that Citigroup’s preliminary analysis was based on the February 2004 projections described under “—Our Financial Projections.” In addition, Citigroup discussed a number of strategic alternatives identified by CenterPoint Energy as a means to monetize its interest in us, factors to consider in deciding whether to continue to pursue the auction process, and the implications of our right of first refusal with respect to an additional interest in the South Texas Project as a result of AEP Texas Central Company’s announced agreement to sell its 25.2% interest in the South Texas Project to a third party. Following the discussions, the CenterPoint Energy board directed management to invite all conforming bidders and one of the bidders for our interest in the South Texas Project, who we refer to as “Bidder Orange,” to participate in the next phase of the potential sale process. CenterPoint Energy’s board of directors also determined that our board of directors should be informed of the possibility that future bids may seek to have us borrow funds and make a special dividend to all of our shareholders, or may seek to acquire 100% of our outstanding shares of common stock.

 

The Creation of a Special Committee of Our Board of Directors and the Negotiation of a Sale Transaction

 

Our board of directors met on May 5, 2004 and reviewed the status of the process described above. At this meeting, our board of directors created a special committee to represent our shareholders, other than CenterPoint Energy, in connection with any proposal by a potential purchaser of CenterPoint Energy’s 81% interest in us to acquire the additional 19% ownership interest held by our public shareholders, any determination of whether we should incur additional debt in connection with a purchase of all or a portion of our common stock, and related matters. Our board of directors also empowered and authorized the special committee to engage its own legal counsel and financial advisors to assist with its representation of our public shareholders. No limitations were placed on the authority of the special committee. The members of the special committee initially consisted of J. Evans Attwell, Donald R. Campbell, Robert J. Cruikshank and Patricia A. Hemingway Hall, none of whom are directors or officers of CenterPoint Energy. Each member of the special committee was paid $1,000 per special committee meeting, which is the same fee we pay to our directors for participating in meetings of any other committee of our board.

 

The special committee met on May 5, 2004, immediately following the meeting of our board of directors. This was the first of a total of 14 meetings that the special committee held over the course of the following two and a half months until the transaction agreement with GC Power Acquisition was executed. At this first meeting, the special committee elected Mr. Attwell to serve as chairman of the special committee. The special committee discussed law firms who might serve as legal counsel to the special committee, including Haynes and Boone, LLP. The special committee asked Mr. Campbell to prepare a list of financial advisors that could be hired to assist the special committee in its evaluation of a proposed transaction.

 

On May 19, 2004, the special committee met with representatives of Haynes and Boone and decided to retain Haynes and Boone as independent legal counsel to the special committee. At this meeting, the special committee also discussed the status of the auction process being conducted by Citigroup on behalf of CenterPoint Energy. The representatives of Haynes and Boone reviewed with the special committee the resolutions of our board of directors creating the special committee. Based on those resolutions, the special committee determined that it possessed all power necessary for it to review and evaluate a proposed transaction, consult with its own financial and legal advisors, and determine whether or not to recommend the approval of a transaction proposal to our full board of directors, and that it had sufficient authority to exercise independent judgment in representing the interests of our public shareholders.

 

On May 26, 2004, representatives of Haynes and Boone had a telephonic meeting with Mr. Scott E. Rozzell, Executive Vice President, General Counsel and Corporate Secretary of CenterPoint Energy and Texas Genco, to discuss the events leading up to the auction process, including RRI’s decision not to exercise its option to purchase CenterPoint Energy’s 81% ownership interest in us. Mr. Rozzell also provided an overview of the auction process and other related issues.

 

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During May and June 2004, the six bidders with conforming bids and Bidder Orange were offered the opportunity to conduct a due diligence review of our business. One of the six bidders declined the opportunity. Representatives of the five remaining bidders attended management presentations and were provided with access to information regarding our business, operations, financial condition and other related matters. Representatives of four bidder groups and Bidder Orange also participated in site visits at some of our generation facilities.

 

In the last week of May 2004, Citigroup, at the direction of CenterPoint Energy, sent an invitation letter, a form of stock purchase agreement and a financing proposal offered by affiliates of Citigroup to four of the remaining bidders and Bidder Orange. The letter invited potential bidders to submit written, definitive proposals by June 18, 2004 for the potential acquisition for cash of CenterPoint Energy’s 81% interest in us. The letter also instructed each potential bidder to identify its available financing sources, to provide comments regarding the form of stock purchase agreement and to identify a proposed timeline for all external approvals required before closing. The form of stock purchase agreement contemplated a one-step transaction consisting of a sale of CenterPoint Energy’s 81% interest in us to the purchaser for an all-cash purchase price. The instruction letter also advised buyers who had previously expressed an interest in acquiring 100% of our outstanding shares of common stock that any such proposal would require involvement of the special committee and that CenterPoint Energy would continue discussions with the special committee with respect to any such proposal. An invitation letter, form of stock purchase agreement and financing proposal were not sent to the fifth remaining bidder, referred to in the discussion below as “Bidder Purple,” because its transaction proposal contemplated a private placement of CenterPoint Energy’s holdings of our common stock to investors in the bidder group and, accordingly, would involve a more limited due diligence review and a form of purchase agreement different from the form circulated to the other bidders. Citigroup subsequently contacted representatives of Bidder Purple and extended an oral invitation to submit a written, definitive proposal by June 18, 2004.

 

On June 1, 2004, the special committee met with Haynes and Boone to discuss each committee member’s independence from CenterPoint Energy, following conversations between Mr. Attwell and representatives of Haynes and Boone regarding the applicable standards for independence. Ms. Hemingway Hall discussed the fact that she is an executive officer of a company that is a division of Health Care Service Corporation and that Mr. Milton Carroll, the chairman of CenterPoint Energy, serves as Chairman of the Board of Directors of Health Care Service Corporation. Based upon discussions with the special committee members, Ms. Hemingway Hall decided to resign from the special committee. The members of the special committee determined that there were no relationships that the remaining members had which would affect their independence in serving as a member of the special committee.

 

On June 3, 2004, Bidder Orange submitted a definitive bid for our interest in the South Texas Project.

 

On June 8, 2004 and June 9, 2004, the special committee met with two investment banking firms identified following a search for potential candidates which were not conflicted from serving as the special committee’s financial advisor, to discuss their credentials and suitability to act as financial advisor to the special committee.

 

On June 10, 2004, representatives of Haynes and Boone had a telephonic meeting with representatives of CenterPoint Energy’s legal counsel, Baker Botts L.L.P., to discuss the status of the auction process, the due diligence process and the current draft of the proposed stock purchase agreement.

 

On June 15, 2004, the special committee met to discuss the qualifications and independence of the investment banking firms and the financial terms of the engagement proposals from the investment banking firms.

 

On June 18, 2004, two second round bids were submitted. The investors in GC Power Acquisition LLC, which we refer to as GC Power Group, submitted a bid for CenterPoint Energy’s 81% interest in us or 100% of our outstanding common stock for a purchase price in either case of $41.00 per share. The GC Power Group bid also included an alternative proposal to acquire 100% of our outstanding common stock for a purchase price of

 

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$42.00 per share consisting of $38.00 in cash and $4.00 in subordinated debt. In its bid, GC Power Group also indicated an interest in discussing the implementation of certain forward power sales arrangements and a potential alternative transaction structure that would accelerate receipt of consideration to be paid to all of our shareholders. The GC Power Group bid contemplated that we would incur approximately $2.25 billion of indebtedness in connection with either an 81% or a 100% transaction and that, in the case of an 81% transaction, the proceeds from such indebtedness would be distributed to all of our shareholders by means of a special dividend. The GC Power Group bid also included a detailed markup of the form of stock purchase agreement previously provided for their proposed bid.

 

The other second round bid was submitted by an investor group, which we refer to collectively as “Bidder White,” consisting of three financial buyers and an independent power producer. The Bidder White proposal included bids for CenterPoint Energy’s 81% interest in us or 100% of our outstanding common stock, in each case with or without an election contemplated by section 338(h)(10) of the Internal Revenue Code of 1986, as amended. In its bid, Bidder White proposed to buy CenterPoint Energy’s 81% interest for a purchase price of $39.00 per share without a 338(h)(10) election or $45.50 per share with a 338(h)(10) election. Bidder White also proposed to buy 100% of our outstanding common stock for a purchase price of $40.00 per share without a 338(h)(10) election or $46.50 per share with a 338(h)(10) election. The effect of a 338(h)(10) election, which would require CenterPoint Energy’s consent, would be a substantial reduction in after-tax proceeds to CenterPoint Energy because CenterPoint Energy would be treated for tax purposes as if it had sold 100% of our assets, and would incur an asset level tax based on the gain from the deemed sale of 100% of our assets. A 338(h)(10) election would effectively require CenterPoint Energy to pay such tax with respect to 100% of our assets, even though CenterPoint Energy would receive only proceeds from the sale of its 81% stock interest, and accordingly CenterPoint Energy would pay the portion of such tax attributable to the 19% of our stock owned by our public shareholders. Bidder White also indicated that it might be willing to increase its purchase price by up to $0.50 per share if certain hedging arrangements were entered into and expressed a preference for a simultaneous sale of our interest in the South Texas Project to a third party buyer. The Bidder White bid contemplated that we would incur up to $3.15 billion of indebtedness in connection with either an 81% or a 100% transaction, a portion of the proceeds of which would be distributed to all of our shareholders by means of a special dividend in an 81% transaction. The Bidder White bid did not include a markup of the form of stock purchase agreement previously provided to Bidder White, but did include a memorandum providing a general summary of their comments regarding the form of stock purchase agreement.

 

On June 21, 2004, the special committee met to consider the engagement of RBC Capital Markets Corporation as its financial advisor. During that meeting, the special committee discussed the independence of RBC, the terms of the engagement letter with RBC, and the qualifications of RBC to serve as financial advisor to the special committee. After confirming the qualifications of RBC and determining that there were no material relationships that would affect RBC’s independence and ability to be objective in the evaluation of the various transactions being contemplated by CenterPoint Energy, the special committee by unanimous vote agreed to retain RBC as independent financial advisor to the special committee. The special committee selected RBC over the other potential financial advisor after considering, among other factors, RBC’s expertise in energy and utility transactions and the RBC representatives who would work on the matter, which included individuals in RBC’s Houston office.

 

On June 22, 2004, a third second round bid was submitted by Bidder Purple, an investor group consisting of hedge funds represented by two investment banks. In its bid, Bidder Purple proposed to purchase CenterPoint Energy’s 81% interest in us for a purchase price of $39.50 per share, consisting of a special distribution by us to all of our shareholders of at least $15.00 per share to be financed by at least $1.2 billion of new indebtedness to be incurred by us and cash in an amount of $24.50 per share to be paid by Bidder Purple. Bidder Purple also indicated a willingness to pursue two alternative transaction structures.

 

Under the first alternative transaction proposed by Bidder Purple, which we refer to as the “debt exchange and partial spin-off alternative”:

 

  we would make a special distribution to all of our shareholders of $15.00 per share to be financed by $1.2 billion of new indebtedness to be incurred by us;

 

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  the Bidder Purple investors would expend approximately $980 million of cash to purchase outstanding long-term debt securities of CenterPoint Energy;

 

  CenterPoint Energy would exchange approximately 39.9 million shares of our common stock owned by CenterPoint Energy for the purchased debt securities; and

 

  CenterPoint Energy would distribute the remaining 24.8 million shares of our common stock it owns to CenterPoint Energy’s shareholders in a transaction intended to qualify as a tax free distribution.

 

As a result, the Bidder Purple investors would own approximately 49.9% of our outstanding common stock and CenterPoint Energy would no longer have an equity interest in us. Our public shareholders would not participate in or receive any consideration under this transaction other than the special cash distribution. Instead, our public shareholders would retain their minority interest in us, and we would be subject to significant new indebtedness.

 

Under the second alternative transaction proposed by Bidder Purple, which we refer to as the “cash rich split-off alternative”:

 

  we would issue approximately 30.6 million shares of our common stock to the Bidder Purple investors for a purchase price of $39.50 per share, or approximately $1.2 billion in cash;

 

  we would borrow approximately $1.2 billion;

 

  we would then contribute approximately $2.4 billion of cash and certain gas pipeline, gas storage and oil storage assets with an estimated value of $150 million to a newly formed subsidiary; and

 

  CenterPoint Energy would exchange all of its 81% interest in us for 100% of the outstanding stock in the new subsidiary in a transaction intended to qualify as a tax free exchange.

 

As a result, the Bidder Purple investors would own approximately 67% of our outstanding common stock and CenterPoint Energy would no longer have an equity interest in us. Our public shareholders would not participate in or receive any consideration under this transaction. Instead, our public shareholders would retain their minority interest in us, and we would be subject to significant new indebtedness.

 

On June 22, 2004, CenterPoint Energy management and representatives of Citigroup and Baker Botts met to discuss the second round bids. At the meeting, Citigroup summarized the second round bids described above. Citigroup also discussed the preliminary valuation analysis regarding us and the strategic alternatives identified by CenterPoint Energy as a means to monetize its interest in us that it had discussed with CenterPoint Energy’s board of directors on April 27, 2004. In addition, Citigroup discussed factors to consider in deciding whether to continue to pursue the auction process, including its recommendation that CenterPoint Energy seek an additional round of bids and further information from the bidders regarding their second round bid proposals. Based on those discussions, CenterPoint Energy management directed Citigroup to contact each bidder group and request “best and final” bids to be submitted by June 28, 2004 and to engage in various follow-up discussions to clarify certain elements of the bid proposals.

 

On June 24, 2004, representatives of Haynes and Boone and RBC had a telephonic meeting with representatives of Baker Botts and Citigroup to discuss the auction process and CenterPoint Energy’s interest in a sale of its 81% ownership interest in us. The representatives of CenterPoint agreed to send, and did send, to the special committee and its advisors the first and second round bids that were received by Citigroup and subsequent bid proposals as they were submitted.

 

On June 28, 2004, GC Power Group and Bidder White each submitted revised bids in response to Citigroup’s request for “best and final” bids. In its revised bid, GC Power Group proposed to buy CenterPoint Energy’s 81% interest in us for a purchase price of $43.50 per share without a 338(h)(10) election or $44.50 per share with a 338(h)(10) election. Both the 81% and 100% alternatives included the incurrence by us of indebtedness, the proceeds of which would be distributed to all of our shareholders by means of a special

 

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dividend in an 81% transaction. GC Power Group also proposed an alternative structure for the acquisition of 100% of our outstanding common stock at a purchase price of $45.25 per share. That alternative structure, which is substantially similar to the structure of the transactions contemplated by the transaction agreement, was designed to substantially accelerate the speed and certainty of payment of 100% of the cash consideration to be payable to our public shareholders and a substantial portion of the cash consideration to be payable to CenterPoint Energy. The structure would provide 100% of the cash consideration payable to our public shareholders as a first step in a series of transactions, with that first step not conditioned on the receipt of NRC approval. GC Power Group’s alternate structure also contemplated the forward sale of a substantial portion of our base-load capacity through 2008 simultaneously with the execution of a definitive agreement.

 

In Bidder White’s revised bid, it proposed to buy CenterPoint Energy’s 81% interest for a purchase price of $40.00 per share without a 338(h)(10) election or $46.50 per share with a 338(h)(10) election. Bidder White also proposed to buy 100% of our outstanding common stock for a purchase price of $41.25 per share without a 338(h)(10) election or $47.75 per share with a 338(h)(10) election. Both the 81% and 100% alternatives included the incurrence by us of indebtedness, a portion of the proceeds of which would be distributed to all of our shareholders by means of a special dividend in an 81% transaction. Each purchase price included a $0.75 per share component that would be dependent upon our entering into certain hedging arrangements involving forward power sales acceptable to Bidder White. Bidder White again expressed a preference for a simultaneous sale of our interest in the South Texas Project to a third party buyer.

 

On June 29, 2004, Bidder Purple submitted a revised bid in which it proposed to purchase CenterPoint Energy’s 81% interest in us for a purchase price of $40.75 per share, consisting of a special distribution by us to all of our shareholders (including our public shareholders) of at least $18.75 per share to be financed by at least $1.5 billion of new indebtedness to be incurred by us and cash in an amount of $22.00 per share to be paid by Bidder Purple to CenterPoint Energy. Bidder Purple again indicated an interest in discussing the debt exchange and partial spin-off alternative and the cash rich split-off alternative, the proposed terms of which were modified to reflect the higher proposed value for our shares, the increase in amount of indebtedness we would incur, and, with respect to the debt exchange and partial spin-off alternative, the increase in the amount of the special distribution by us to our shareholders.

 

On June 29, 2004, the special committee held a telephonic meeting to discuss the status of the auction process. At that meeting, RBC provided an overview of the auction process and reviewed with the special committee a summary of the first and second round bids that had been received by Citigroup and reported on its discussions with Citigroup. RBC also indicated that they were reviewing the third and final round bids that had been received by Citigroup on June 28th and June 29th. The special committee directed RBC to continue their review of the third and final round bids and to provide additional information to the special committee on our valuation as compared to the current trading price. At the June 29th meeting, representatives of Haynes and Boone also summarized their conversations with CenterPoint Energy representatives regarding the auction process and reiterated that the special committee was not obligated to accept any proposal and could reject any and all proposals in the fulfillment of its fiduciary duties to our public shareholders.

 

On June 30, 2004, CenterPoint Energy’s board of directors held a telephonic special meeting to, among other things, update the board regarding developments in the auction process and discuss the current proposals. At the meeting, presentations were made by CenterPoint Energy management and representatives of Citigroup and Baker Botts regarding the terms of each bid and related matters. In its presentation, Citigroup summarized the auction process that had been conducted to date and the second round bids described above. Citigroup also discussed the preliminary valuation analysis regarding us that it had previously discussed with CenterPoint Energy’s board of directors on April 27, 2004. Following the discussions, the CenterPoint Energy board authorized management to continue to engage in negotiations with each of the remaining bidders.

 

During July 2004, CenterPoint Energy management and representatives of Citigroup and Baker Botts engaged in numerous discussions with the respective representatives of, and legal counsel for, GC Power Group,

 

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Bidder White and Bidder Purple regarding structural, financing, tax and regulatory issues, hedging arrangements and other matters relating to each bidder’s proposal, some of which conversations representatives of Haynes and Boone participated in. Representatives of RBC had multiple calls with representatives of Citigroup to discuss the status of the three bids, the due diligence process, GC Power Group’s and Bidder White’s proposed transaction agreements and Bidder Purple’s proposed transaction structures. During this time period, additional due diligence information was provided in response to further requests by GC Power Group, Bidder White and Bidder Purple.

 

On July 2, 2004, the special committee held a telephonic meeting to discuss the third and final round bids received by Citigroup from the three final bidders. At that meeting, RBC reviewed the terms of the third round bids with the special committee and discussed the preliminary valuation analysis regarding us that Citigroup had prepared and discussed with CenterPoint Energy’s board of directors on June 30, 2004, a copy of which Citigroup had provided to RBC. The special committee discussed the fact that the Bidder White proposal had a higher stated per share price of $47.75, including a $0.75 per share component that would be dependent upon our entering into certain hedging arrangements acceptable to Bidder White, for a 100% transaction with a 338(h)(10) election as compared to GC Power Group’s proposal of $45.25 per share for a 100% transaction with no 338(h)(10) election. The special committee also discussed the GC Power Group transaction structure, including the fact that our public shareholders could expect to receive payment of the consideration for their shares sooner than under Bidder White’s proposal. The special committee also discussed the tax detriment to CenterPoint Energy of any structure that included a 338(h)(10) election. The special committee directed RBC to request of the bidders certain clarifications regarding their bids for only CenterPoint Energy’s 81% ownership interest in us. Representatives of Haynes and Boone also discussed with the special committee the transaction documents and related issues associated with the various bidder proposals. The special committee also discussed the Bidder Purple bid, which offered, depending upon which of the three structures was considered, either no consideration to our public shareholders or lower consideration to our public shareholders than either the GC Power Group bid or the Bidder White bid.

 

On July 2, 2004, Baker Botts delivered a draft merger agreement to Bidder White’s legal counsel. The draft agreement was based on the form of stock purchase agreement previously provided to Bidder White and incorporated provisions requested by the special committee and Haynes and Boone and other comments, including a right of Texas Genco to terminate the agreement to accept a superior proposal and required approval by a majority of our shareholders not affiliated with CenterPoint Energy, which we refer to as a majority of the minority voting requirement, and also addressed certain matters discussed between representatives of Baker Botts and Bidder White’s legal counsel.

 

On July 3, 2004, GC Power Group’s legal counsel delivered a revised transaction agreement to CenterPoint Energy’s management and representatives of Citigroup and Baker Botts that was based on GC Power Group’s markup of the form of stock purchase agreement it provided as part of its June 18, 2004 bid and that reflected discussions between representatives of Baker Botts and GC Power Group’s legal counsel.

 

On July 6, 2004, Bidder White provided a revised bid proposal to representatives of Citigroup that included a revised draft of the merger agreement previously provided by Baker Botts. Under the terms of Bidder White’s revised bid, it proposed to purchase 100% of our outstanding common stock for a purchase price of $47.75 per share with a 338(h)(10) election. The purchase price again included a $0.75 per share component that would be dependent upon our entering into certain hedging arrangements acceptable to Bidder White. The revised proposal was structured to condition the closing of the entire transaction on the concurrent sale of our interest in the South Texas Project to a third party buyer who had already been selected by Bidder White. Accordingly, the entire transaction would be conditioned on NRC approval and compliance with the right of first refusal procedures relating to the sale of our interest in the South Texas Project, with attendant delay and risk of non-satisfaction of conditions to closing. The revised draft merger agreement from Bidder White included a limited thirty-day termination right to accept a superior proposal but did not include a majority of the minority voting requirement.

 

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From July 7 through July 9, 2004, CenterPoint Energy management, and representatives of Citigroup and Baker Botts engaged in a series of meetings with representatives of, and legal counsel for, GC Power Group in CenterPoint Energy’s offices in Houston to discuss various aspects of the GC Power Group proposal.

 

On July 8, 2004, representatives of Haynes and Boone participated in conference calls with Baker Botts and legal counsel to Bidder White regarding the proposed Bidder White merger agreement. On July 8, 2004, representatives of Haynes and Boone and RBC also participated in a conference call with our management and representatives of CenterPoint Energy and Citigroup to discuss the hedging arrangements proposed by GC Power Group and Bidder White. Representatives of Haynes and Boone again discussed with Baker Botts the special committee’s desire to include a right of Texas Genco to terminate the agreement to accept a superior proposal and a majority of the minority vote requirement in the transaction agreement with GC Power Group and the merger agreement with Bidder White.

 

On July 13, 2004, Mr. Attwell met with David McClanahan, President and Chief Executive Officer of CenterPoint Energy, to discuss the status of the three final bid proposals. Mr. McClanahan indicated that although Bidder White’s proposal had the higher stated price, its requirement of a 338(h)(10) tax election would require CenterPoint Energy to pay additional taxes, including amounts attributable to our public shareholders, and therefore GC Power Group’s proposal, which did not include a 338(h)(10) election, would yield higher after-tax proceeds to CenterPoint Energy. Mr. McClanahan also expressed concern about the lesser degree of certainty of the Bidder White proposal, the scope of its remaining due diligence, that its proposed structure contained more conditions to closing than GC Power Group’s structure and would likely require a longer period to close due to the fact that the entire transaction would be conditioned on obtaining NRC approval and require compliance with the right of first refusal procedures relating to the sale of our interest in the South Texas Project, whereas the GC Power Group structure was expected to permit our public shareholders to receive their consideration sooner and without NRC approval. Mr. McClanahan also expressed concern regarding the need for NRC approval related to Bidder Purple’s straight stock sale proposal and the potential tax risks associated with each of Bidder Purple’s proposed alternative transactions. Mr. McClanahan indicated that CenterPoint Energy was still considering all three bids and that CenterPoint Energy’s board of directors was scheduled to meet on July 16, 2004, and would consider the bids and determine whether to proceed with a sale of its 81% ownership interest in us.

 

During the third week of July 2004, GC Power Group and Bidder White continued their due diligence efforts, with both parties making a number of requests to CenterPoint Energy and its representatives for information with respect to our company, and CenterPoint Energy, its representatives or our company responding to requests CenterPoint Energy deemed appropriate (in a number of cases following discussion with the relevant bidder). During these efforts, representatives of Bidder White contacted the special committee and its advisors on several occasions to express concerns about CenterPoint Energy’s responsiveness to its due diligence requests. At the special committee’s direction, the special committee’s representatives discussed with CenterPoint Energy’s representatives the concerns expressed and the special committee’s desire that CenterPoint Energy and its advisors take appropriate steps to respond to any remaining requests from Bidder White. In connection with these discussions, Baker Botts provided Haynes and Boone with documents prepared by CenterPoint Energy cataloging the due diligence information that had been provided to Bidder White since its due diligence review began in June 2004. Representatives of CenterPoint Energy also informed representatives of the special committee that Bidder White had only recently retained an additional third party consultant to assist Bidder White with its due diligence efforts, that a number of the most recent diligence requests solicited information that had been provided previously during the process, and that they believed CenterPoint Energy had been responsive to all of the Bidder White diligence requests that could reasonably be accommodated. Representatives of CenterPoint Energy further explained that Bidder White’s outstanding requests were for information that had not been provided to other bidders. On July 19, 2004, a representative of Bidder White reported to Mr. Attwell that Bidder White had essentially completed its due diligence process, and during that night GC Power Group advised CenterPoint Energy that it had essentially completed its due diligence process.

 

On July 14, 2004, management of CenterPoint Energy met with representatives of GC Power Group and agreed to continue to negotiate the remaining open items relating to the proposed transaction. CenterPoint Energy

 

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management stated that it would request the special committee to consider the GC Power Group’s proposal and, depending on the special committee’s response to the terms of GC Power Group’s bid, would recommend the proposal to the CenterPoint Energy board of directors at the July 16, 2004 meeting.

 

On July 14, 2004, Bidder White delivered a letter to representatives of Citigroup providing additional information regarding its proposed hedging arrangements and proposing that our minority shareholders (but not CenterPoint Energy) would receive the entire $0.75 per share component of the proposed purchase price relating to the proposed hedging arrangements whether or not the hedging arrangements were successfully implemented.

 

On July 14, 2004, the special committee held a meeting with representatives of Haynes and Boone and RBC. Mr. Attwell reported to the other members of the special committee his conversations with Mr. McClanahan, including Mr. McClanahan’s expressed desire that the special committee communicate to CenterPoint Energy the special committee’s preference as between the available bids and structures and whether to pursue any transaction at all before the July 16, 2004 meeting of CenterPoint Energy’s board of directors. Representatives of Haynes and Boone reported to the special committee its discussions with Baker Botts regarding the status of the auction process. Haynes and Boone also indicated that Baker Botts had advised it that both GC Power Group and Bidder White had indicated they were not willing to proceed with a transaction conditioned on a majority of the minority voting requirement.

 

At the July 14, 2004 meeting, RBC reviewed with the special committee its presentation regarding different valuation analyses of Texas Genco and the third and final round bids. RBC discussed with the special committee stock market valuations of comparable companies, as well as valuations that had been applied to comparable companies in asset acquisition transactions. These valuations were prepared based on procedures and assumptions substantially similar to those employed by RBC in connection with the delivery of its opinion to the special committee and our board of directors on July 21, 2004 regarding the fairness of the public company merger consideration to our shareholders other than CenterPoint Energy, as described under “—Fairness Opinion of RBC Capital Markets Corporation.” RBC noted that it was difficult to identify comparable companies that were substantially similar to us and that none of the comparable companies or transactions was sufficiently similar to us or to the proposed transactions to provide a high degree of correlation. RBC further explained that comparing the selected companies and transactions to us and the proposed transactions involved complex considerations and judgments concerning differences in financial and operating characteristics and other factors that may have affected the values in the comparable companies and transactions. RBC discussed its analysis of the fairness, from a financial point of view, to our public shareholders of a possible transaction with GC Power Group or Bidder White. The members of the special committee questioned RBC about its analysis of the financial projections, valuation methodologies, comparable companies and transactions, conclusions and similar matters. The special committee discussed the Bidder Purple bid and the fact that the $40.75 per share value to CenterPoint Energy in the straight stock sale proposal was less than the per share value of the other two bids, and was aware of the fact that the alternate proposals by Bidder Purple offered no consideration to our public shareholders.

 

At the July 14, 2004 meeting, the special committee also discussed the hedging and financing arrangements proposed by GC Power Group and Bidder White. The special committee discussed the regulatory approvals required to consummate the proposed transactions, and the fact that the GC Power Group proposal did not require NRC approval to complete the public company merger and the distribution of the cash proceeds to our public shareholders. The special committee also discussed the recent increases in the trading price of our common stock. Representatives of Haynes and Boone reviewed with the special committee key provisions of the current drafts of the legal documents for the GC Power Group and Bidder White transactions.

 

On the morning of July 15, 2004, Mr. Attwell had a conversation with Mr. McClanahan and informed Mr. McClanahan that the special committee would like Citigroup and CenterPoint Energy to present their views of the final bids. Mr. Attwell also requested on behalf of the special committee that the management of Texas Genco inform the special committee as to their views of a sale of Texas Genco and its benefits to the shareholders other than CenterPoint Energy.

 

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On July 15, 2004, the special committee held a telephonic meeting with representatives of Haynes and Boone and RBC to discuss the bids and to determine what, if any, guidance it would provide to CenterPoint Energy’s board of directors before the meeting on July 16, 2004. After considerable discussion of the various bids, the special committee directed Mr. Attwell to contact Mr. McClanahan to discuss a number of issues including the price differential between Bidder White and GC Power Group, timing for payment of consideration to our public shareholders and the status of Bidder Purple.

 

After the special committee meeting on July 15, 2004, Mr. Attwell met with Mr. McClanahan to discuss the issues raised by the special committee at the earlier meeting. Mr. McClanahan confirmed to Mr. Attwell that CenterPoint Energy’s management was continuing to communicate with all three remaining bidders. Mr. McClanahan indicated that CenterPoint Energy’s management preferred the GC Power Group proposal because of the higher after-tax proceeds to CenterPoint Energy, the expected greater certainty of closing and the expected expedited receipt of consideration to all shareholders. Mr. McClanahan reiterated CenterPoint Energy’s concerns regarding the regulatory uncertainties related to Bidder Purple’s straight stock sale proposal and the potential tax risks associated with each of Bidder Purple’s proposed alternative transactions. Mr. Attwell expressed the special committee’s concern about the price differential between GC Power Group’s proposal and Bidder White’s proposal. Mr. Attwell indicated that the stated price in the Bidder White proposal was attractive and inquired as to the possibility that GC Power Group would increase its price to our public shareholders. Mr. Attwell also informed Mr. McClanahan of the special committee’s discussions regarding a termination right for a superior proposal, a majority of the minority voting requirement on any proposed transaction and a “clawback” provision allowing our public shareholders to participate in any additional consideration received by CenterPoint Energy in connection with a sale of our assets by CenterPoint Energy after the public company merger at a higher price if the non-nuclear asset transaction or the nuclear asset transaction did not close under GC Power Group’s structure (Baker Botts and Haynes and Boone had previously discussed practical and business difficulties raised by such a term). Finally, Mr. Attwell requested a presentation from Citigroup and CenterPoint Energy’s and Texas Genco’s management regarding the auction process and CenterPoint Energy’s preference for the GC Power Group proposal.

 

On July 16, 2004, a special meeting of CenterPoint Energy’s board of directors was held by telephone conference call to update the board regarding developments in the bidding process since June 30, 2004. At the meeting, presentations were made by CenterPoint Energy management, and representatives of Citigroup and Baker Botts regarding the terms of each bid, strategic alternatives for monetizing CenterPoint Energy’s 81% interest in us, and related matters. Representatives of Citigroup reviewed certain of the financial terms of the proposals including financial analyses relating to the $45.25 per share purchase price implied by the aggregate consideration to CenterPoint Energy under the GC Power Group proposal. CenterPoint Energy’s board of directors reviewed and discussed the terms of the proposed GC Power Group transaction and management’s determination that the bid presented the most compelling proposal.

 

On the morning of July 16, 2004, the special committee held a telephonic meeting and discussed with its legal and financial advisors the status of Bidder White’s outstanding diligence requests based on correspondence from Bidder White to Citigroup. The special committee decided to reconvene later that afternoon to receive a report from Citigroup and CenterPoint Energy’s and Texas Genco’s management regarding the auction process, CenterPoint Energy’s preference for the GC Power Group proposal and whether CenterPoint Energy’s board of directors had made a decision at the board of directors meeting scheduled for the morning of July 16, 2004.

 

On the afternoon of July 16, 2004, the special committee reconvened with their legal and financial advisors for the presentation by Citigroup and CenterPoint Energy. Representatives from Citigroup at the direction of CenterPoint Energy delivered a presentation to the special committee regarding the three final proposals. In response to the special committee’s concerns communicated to Mr. McClanahan, GC Power Group had increased its bid by $25 million and CenterPoint Energy had agreed that this amount would be allocated disproportionately to our public shareholders so that the per share price to our public shareholders would increase by $1.22 per share, from $45.25 to $46.47, and the per share price to CenterPoint Energy would increase by $.10 per share,

 

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from $45.25 to $45.35. Representatives from Citigroup also noted CenterPoint Energy’s belief in the existence of certain advantages of GC Power Group’s proposal as compared to Bidder White’s proposal, including the advantage that the public company merger was not conditioned on NRC approval and the related expectation that receipt of consideration would be accelerated by several months under the GC Power Group structure, and the fact that GC Power Group’s proposal should not require compliance with the right of first refusal procedures relating to the sale of our interest in the South Texas Project.

 

At the meeting with the special committee on July 16, 2004, CenterPoint Energy representatives indicated that CenterPoint Energy’s board of directors had endorsed the GC Power Group proposal at its earlier meeting but had not formally approved it. The special committee discussed with the representatives of Citigroup and CenterPoint Energy how GC Power Group’s timing advantage and more favorable closing conditions compared to Bidder White’s advantage in stated price and the potential value impact of the accelerated receipt of consideration expected from GC Power Group’s proposal. In discussing the potential timing advantage and related impact on net present value of Bidder White’s stated price, the CenterPoint Energy representatives noted that the Bidder White transaction was expected to take between three and six months longer to close than the GC Power Group transaction. The special committee noted to Citigroup and CenterPoint Energy that despite GC Power Group’s price increase and the GC Power Group contractual advantages, the special committee remained concerned about the difference in stated price between GC Power Group’s revised proposal and Bidder White’s proposal. The special committee discussed with Citigroup and CenterPoint Energy the scope of the auction process, the due diligence process, and that GC Power Group had rejected requests to include a termination right to accept a superior proposal or a majority of the minority vote requirement in its proposed transaction agreement.

 

After the representatives of Citigroup and CenterPoint Energy departed the meeting, the special committee discussed whether the additional $25 million proposed by GC Power Group could be allocated 100% to our public shareholders. The special committee also discussed the advantages and disadvantages of the GC Power Group proposal and the Bidder White proposal and the closing conditions to each proposal and likely timing of closing. The special committee also discussed that based on several factors, including the tax consequences and the lack of assurance on the contingent $.75 per share consideration to CenterPoint Energy under Bidder White’s proposal, and the expected timing advantages for closing and receipt of most of the consideration under GC Power Group’s structure, it believed that CenterPoint Energy would support GC Power Group’s proposal in preference to Bidder White’s proposal even if the language of the material adverse change closing condition and related terms of Bidder White’s proposal were improved to match the corresponding terms in GC Power Group’s proposal. Based on these considerations, the special committee determined to seek to increase the price GC Power Group would pay to the shareholders other than CenterPoint Energy, rather than to continue pursuing the Bidder White proposal or any revised bid or counteroffer from Bidder White or Bidder Purple.

 

The special committee then directed representatives of RBC to contact Citigroup to advise Citigroup that the special committee would be willing to support GC Power Group’s proposal if GC Power Group increased the price to our public shareholders to $48.00 per share. The representatives of RBC contacted representatives of Citigroup and CenterPoint Energy and informed them of the special committee’s position. Citigroup and CenterPoint Energy indicated that, based on their discussions with GC Power Group, they believed GC Power Group would not pay $48.00 per share to our public shareholders.

 

The special committee reconvened immediately following RBC’s telephone call with Citigroup and CenterPoint Energy to discuss the response, and the special committee directed Mr. Attwell to contact Mr. McClanahan to discuss the special committee’s $48.00 per share proposal.

 

Mr. Attwell had a telephone call with Mr. McClanahan, during which Mr. McClanahan indicated that CenterPoint Energy would agree to allocate 100% of the additional $25 million proposed by GC Power Group to our public shareholders, which would increase the price to the shareholders other than CenterPoint Energy to $46.90 per share. Mr. Attwell communicated this counter-proposal to the special committee, and the special committee directed Mr. Attwell to contact Mr. McClanahan and propose that GC Power Group pay a price of

 

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$47.00 per share to the shareholders other than CenterPoint Energy. The special committee then recessed the meeting and Mr. Attwell informed Mr. McClanahan of the $47.00 per share proposal.

 

In the early evening of July 16, 2004, Mr. McClanahan called Mr. Attwell and reported that GC Power Group had agreed to pay our public shareholders a per share price of $47.00 in the public company merger (with no termination right to accept a superior proposal and no majority of the minority voting requirement). Mr. McClanahan indicated that this was GC Power Group’s final offer and the offer was acceptable to CenterPoint Energy.

 

The special committee then reconvened during the evening of July 16, 2004, and Mr. Attwell informed the special committee of GC Power Group’s final offer. After extensive discussions and after considering all the relevant issues and the advice of RBC as to the fairness of the offer, from a financial point of view, to our public shareholders, the special committee unanimously determined to proceed with the GC Power Group’s final proposal.

 

Following the determination by the special committee, on the evening of July 16, 2004, CenterPoint Energy agreed to work in good faith on an exclusive basis with GC Power Group through July 21, 2004. From July 16 through July 20, 2004, the parties negotiated to finalize the various transaction documents. During that period, representatives of Baker Botts had discussions with representatives of Haynes and Boone to update them on the status of the negotiations and Haynes and Boone was furnished with copies of drafts of the transaction agreement.

 

On July 20, 2004, the special committee held a meeting with representatives of Haynes and Boone. Mr. Attwell reported to the other members of the special committee that a representative of Bidder White had called him on July 19 to report that Bidder White has essentially completed its due diligence process and that the representative did not indicate that Bidder White was willing to raise its bid price. The special committee then discussed with representatives of Haynes and Boone the current draft of the transaction agreement. The special committee discussed with representatives of Haynes and Boone the fact that the transaction agreement did not provide us with a right to terminate the agreement to accept a superior proposal and the special committee concluded that this type of provision is not essential based on the circumstances, including the purchase price of $47.00 per share, the fact that Citigroup, on behalf of CenterPoint Energy, had conducted an extensive auction process and that CenterPoint Energy had voting control of Texas Genco. The special committee also discussed the timing of the GC Power Group transaction and the expectation that NRC approval would not be required to consummate the public company merger.

 

The representatives of RBC then joined the special committee meeting and delivered their presentation regarding the fairness, from a financial point of view, of the GC Power Group transaction at a per share price of $47.00 to our public shareholders. RBC also discussed with the special committee our financial projections and the auction process that Citigroup had conducted on behalf of CenterPoint Energy. The special committee discussed with representatives of RBC and Haynes and Boone the forward power sale arrangements included in GC Power Group’s proposal and their effect on our public shareholders if the non-nuclear asset acquisition or the nuclear asset acquisition did not close. Under GC Power Group’s proposal, we would enter into a master power purchase and sale agreement with a member of the Goldman Sachs group simultaneously with the execution of a definitive transaction agreement with GC Power Group. Under the master power purchase and sale agreement, we would sell forward a substantial portion of our base-load generating capacity through 2008 on a firm, fixed price basis. Our obligations under this agreement would continue regardless of whether the public company merger, non-nuclear asset acquisition or nuclear asset acquisition closes. For additional information regarding this agreement, please read “—Other Agreements—Power Purchase and Sale Agreement.”

 

RBC then presented to the special committee its oral opinion, which was subsequently confirmed in writing on July 21, 2004, that the per share consideration to be received in the public company merger by our shareholders, other than CenterPoint Energy, was fair, from a financial point of view, to such shareholders. The

 

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special committee considered all the issues presented to it, including the advantages and disadvantages of GC Power Group’s proposal as compared to Bidder White’s proposal, and determined by unanimous vote to recommend the GC Power Group transaction to our board of directors as being fair to, advisable and in the best interest of our public shareholders, subject to satisfactory completion of final documents and the special committee’s receipt of the executed fairness opinion from RBC, both of which occurred on July 21, 2004.

 

On July 20, 2004, a special meeting of CenterPoint Energy’s board of directors was held by telephone conference call to consider the proposed transaction with GC Power Group. At the meeting, presentations were made by CenterPoint Energy management and representatives of Citigroup and Baker Botts regarding the terms of the proposed transaction and related matters. The CenterPoint Energy board reviewed and discussed the terms of the proposed transaction and management’s assessment of the transaction from financial, strategic, operating and regulatory standpoints. Representatives of Citigroup indicated that Citigroup was in a position to deliver an opinion to the CenterPoint Energy board of directors to the effect that, based on and subject to the considerations and limitations to be set forth in their written opinion, the aggregate consideration to be received by CenterPoint Energy in the non-nuclear asset acquisition and the nuclear asset acquisition as contemplated by the transaction agreement was fair, from a financial point of view, to CenterPoint Energy. After further discussions and noting that the special committee had unanimously recommended that we enter into the transaction agreement and the transactions it contemplates, CenterPoint Energy’s board of directors voted unanimously to approve the transaction agreement and the transactions it contemplates.

 

On July 20, 2004, a special meeting of our board of directors was held to consider the proposed transaction with GC Power Group and discuss the determinations of the special committee. Mr. Attwell provided a report on behalf of the special committee outlining the steps the special committee had taken and the proposals by Bidder White and Bidder Purple. Mr. Attwell noted that RBC was prepared to issue a fairness opinion regarding the GC Power Group transaction. He then discussed key provisions of the opinion, including its conclusion that, at a price of $47.00 per share, the proposed public company merger was fair, from a financial point of view, to our public shareholders. Mr. McClanahan then discussed the determination by CenterPoint Energy that the GC Power Group transaction was superior to the other bidder proposals both as to CenterPoint Energy and our public shareholders. Haynes and Boone then discussed, at Mr. Attwell’s request, whether a proposal should be made to GC Power Group that the transaction agreement be revised to provide that if the public company merger closing fell within 15 days before the record date for the payment of a regular dividend, the record date for the dividend would be accelerated and the dividend paid. Representatives of CenterPoint Energy responded that they did not expect that proposal would be agreeable to GC Power Group, noting that the agreed increase in purchase price and allocation of the entire increase to our public shareholders had been GC Power Group’s final offer and that the proposal would effectively represent a request for payment of additional purchase price. Following a separate discussion by the special committee and Haynes and Boone, during which the other members of our board of directors temporarily left the meeting (other than Ms. Hemingway Hall, who was participating in the meeting by telephone), which led the special committee to withdraw the request for the accelerated dividend, Mr. Attwell stated that the special committee had decided by unanimous vote to recommend the GC Power Group transaction as being fair to, advisable and in the best interest of our public shareholders, subject to satisfactory completion of final documents and the special committee’s receipt of the executed fairness opinion from RBC, both of which occurred on July 21, 2004. Our board of directors then voted unanimously to approve the transaction agreement and the transactions it contemplates.

 

On the morning of July 21, 2004, the transaction agreement and related documents were finalized, and shortly thereafter, RBC delivered its written fairness opinion to the special committee and our board of directors, and Citigroup delivered its fairness opinion to the board of directors of CenterPoint Energy. The transaction agreement, the power purchase agreement described under “—Other Agreements—Power Purchase and Sale Agreement” and related documents were executed, and a press release announcing the transaction was issued later that morning.

 

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Position of Our Special Committee and Board of Directors as to the Fairness of the Public Company Merger

 

Determination by the Special Committee

 

At a meeting of the special committee held on July 20, 2004, the special committee determined by unanimous vote that the transaction agreement with GC Power Acquisition and the transactions contemplated thereby, including the public company merger, are fair to, advisable and in the best interests of Texas Genco and our public shareholders, and resolved to recommend to our board of directors that the transaction agreement and the transactions contemplated thereby, including the public company merger, be approved by our board of directors, subject to satisfactory completion of the transaction agreement and the special committee’s receipt of the executed fairness opinion from RBC, each of which occurred on July 21, 2004.

 

In making its determination and recommendation, the special committee considered the following material factors, each of which it generally considered to weigh in favor of the substantive fairness of the public company merger to our unaffiliated shareholders:

 

  The auction process described under “—Background of the Transactions” was thorough and inclusive. The auction process provided an extensive market check in which a broad range of over 100 potential strategic and financial buyers were contacted, and no restrictions were placed on the parties contacted or upon the structure or type of transaction that could be considered, other than CenterPoint Energy’s expressed preference for a cash transaction. In addition, during the auction process extensive due diligence information regarding our business, operations and financial condition was provided to potential buyers in an effort to elicit the most favorable bids.

 

  The presentation of and opinion delivered by RBC that, as of July 21, 2004, the public company merger consideration to be received by our shareholders (other than CenterPoint Energy) was fair, from a financial point of view, to such holders. A summary of RBC’s presentation and material analyses is described under “—Fairness Opinion of RBC Capital Markets Corporation” and a copy of the written opinion of RBC dated July 21, 2004 is included as Appendix C to this information statement.

 

  The fact that our unaffiliated shareholders are entitled to receive $47.00 per share in the public company merger while CenterPoint Energy is only entitled to receive the equivalent of approximately $45.25 per share for its 81% interest in us (consisting of approximately $34.44 per share to be paid upon the closing of the non-nuclear asset acquisition and approximately $10.81 per share to be paid at a later date upon the closing of the nuclear asset acquisition).

 

  The relationship between the $47.00 price per share to be paid to our unaffiliated shareholders in the public company merger and the recent and historical market price of our common stock. The special committee deliberated over the $47.00 per share public company merger consideration to our unaffiliated shareholders as compared to the recent market price of our common stock. In RBC’s presentation to the special committee, RBC noted that the current price of our common stock had increased approximately 426.3% from the commencement of public trading in our common stock on December 18, 2002 through July 16, 2004, while selected comparable companies as a whole appreciated 68.3%, the S&P 500 Index appreciated 23.6% and the S&P Electric Utilities Index appreciated 25.3% during such period. RBC’s presentation also provided the average closing market price for our common stock over the preceding 30-day, 60-day, 90-day and one-year periods, which were $44.09, $41.14, $39.29 and $32.31, respectively. The closing market price for our common stock on July 20, 2004, the last day prior to the public announcement of the transactions contemplated by the transaction agreement, was $46.48 per share.

 

  The fact that natural gas prices at the time the transaction was being considered were at historically high levels, which increased electricity prices paid to all generating companies in our markets, including companies like us that use fuels other than natural gas, and thus caused our profitability to increase during the period the transaction was being considered.

 

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  The fact that the public company merger consideration is all cash, which provides certainty of value to our shareholders.

 

  The fact that in the final stages of the negotiations CenterPoint Energy agreed to the allocation of all of the approximately $26.6 million aggregate increase in purchase price agreed to by GC Power Group to our public shareholders.

 

  The consummation of the public company merger and the payment of the public company merger consideration to our unaffiliated shareholders is not expected to require NRC or PUC approval, which means that payment to our unaffiliated shareholders would likely occur several months earlier as compared to the transaction proposed by Bidder White.

 

  The GC Power Group proposal provided greater likelihood of payment to our unaffiliated shareholders as compared to the Bidder White proposal, because there were fewer and less stringent conditions to the closing of the public company merger. In analyzing the likelihood of closing, the special committee noted in particular the following:

 

  The limited scope of the material adverse effect condition to closing, because GC Power Group agreed to include certain exceptions in the definition of material adverse effect in the transaction agreement (thus making it more difficult for GC Power Group to assert that a material adverse effect has occurred).

 

  The fact that consummation of the public company merger is not expected to require NRC or PUC approval.

 

  The fact that the transaction proposed by Bidder White was conditioned on the sale of our interest in the South Texas Project to a third party buyer, and, as a result, a potential material adverse event relating to our interest in the South Texas Project would be more likely to prevent the closing of the proposed Bidder White transaction than the closing of the public company merger, since the transaction agreement does not contemplate the sale of our interest in the South Texas Project to a third party buyer.

 

  GC Power Group’s commitment in the transaction agreement to take all steps necessary to avoid or eliminate each and every impediment under the HSR Act.

 

  The nature of the financing commitments received by GC Power Group with respect to the proposed transactions, including the identity of the institutions providing such commitments, the limited conditions to the obligations of such institutions to fund such commitments, and the duration of such commitments.

 

  The transaction had the strong support of CenterPoint Energy, which beneficially owns approximately 81% of our outstanding voting stock.

 

  Our shareholders who do not support the public company merger have the ability to obtain “fair value” for their shares if they validly perfect and exercise their dissenters’ rights under Texas law. Please read “—Dissenters’ Appraisal Rights” for information on how to exercise your dissenters’ rights.

 

  Under the terms of the transaction agreement, before the effective time of the public company merger, the special committee must either concur in or direct the action by us to terminate or amend the transaction agreement or waive any condition to our obligation to close the public company merger or the non-nuclear asset acquisition.

 

The special committee also considered the following factors, each of which it generally viewed as weighing against the substantive fairness of the public company merger to our unaffiliated shareholders, but ultimately determined that the material factors discussed above outweighed these factors:

 

  Our unaffiliated shareholders will not receive our anticipated quarterly December dividend if the related record date is scheduled to occur after the consummation of the public company merger.

 

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  The possible conflicts of interest of CenterPoint Energy and its affiliates. Please read “—Interests of CenterPoint Energy, Directors and Executive Officers,” for a description of these possible conflicts of interest. The special committee considered in this regard that its composition, consisting of members of our board of directors with no financial interest in the public company merger that is different from the interests of our unaffiliated shareholders, permitted it to represent effectively the interests of our unaffiliated shareholders.

 

  The possibility of disruption to our operations following the announcement of the public company merger, and the resulting effect on us, including the market price of our common stock, if the public company merger does not close.

 

  The fact that we will cease to be a public company and our current shareholders will no longer participate in any of the potential growth, or be exposed to any of the potential risks, associated with our business.

 

In addition, the special committee acknowledged that CenterPoint Energy’s direct wholly owned subsidiary, Utility Holding, as the holder of approximately 81% of our outstanding voting stock, would execute a written consent irrevocably approving the public company merger, the non-nuclear asset acquisition and the nuclear asset acquisition at the time of execution of the transaction agreement and, consequently, our board of directors may not consider any other offers for a sale of our assets or common stock, including through a merger, reorganization, tender offer, share exchange, exchange offer or similar transaction. The special committee also considered that GC Power Group had refused to condition the public company merger upon the approval of at least a majority of our unaffiliated shareholders, despite requests for such a condition by representatives of the special committee. The special committee also considered that no unaffiliated representative had been retained to act solely on behalf of our unaffiliated shareholders, but rather that the special committee had been formed to represent our unaffiliated shareholders. After considering all of the facts and circumstances, the special committee ultimately determined that the public company merger was procedurally fair to our unaffiliated shareholders for the reasons discussed above, including the thorough and inclusive auction process, and the approval of the transactions by the special committee composed of disinterested directors, which acted to consider the interests of our unaffiliated shareholders and had the authority to reject any transaction.

 

The special committee also considered the fact that if the public company merger does not occur, we will still be subject to the hedging arrangements that were executed simultaneously with the transaction agreement, as described under “Other Agreements—Power Purchase and Sale Agreement.”

 

Determination by Our Board of Directors

 

At the meeting of our board of directors on July 20, 2004, following the special committee’s unanimous recommendation, our board of directors unanimously:

 

  determined that the transaction agreement and the transactions contemplated by the transaction agreement, including the public company merger, are in the best interests of our company and our shareholders; and

 

  approved the transaction agreement and the transactions contemplated by the transaction agreement, including the public company merger.

 

Our board of directors believes that the public company merger is fair to our unaffiliated shareholders. In evaluating the fairness of the transaction, the members of our board of directors who also served on the special committee considered the factors described under “—Determination by the Special Committee” and “—Other Considerations of the Special Committee and Our Board of Directors,” including the various valuation methodologies and financial analyses performed by RBC that were presented to the special committee as part of its consideration of our going concern value, which analyses were relied upon and adopted by the members of the special committee. The five members of our board of directors who did not serve on the special committee considered the determination and recommendation of the special committee and the opinion delivered to the

 

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special committee and our board of directors by RBC that, as of July 21, 2004, the public company merger consideration to be received by our shareholders (other than CenterPoint Energy) was fair, from a financial point of view, to such shareholders, as well as the other factors described below, in concluding that the public company merger is procedurally fair to our unaffiliated shareholders. Ms. Hemmingway Hall and Mr. Tees relied upon and adopted the determination and recommendation of the special committee in concluding that the public company merger is substantively fair to our unaffiliated shareholders. The other three members of our board of directors, Messrs. McClanahan, Whitlock and Rozzell, who are also officers and, in the case of Mr. McClanahan, a director of CenterPoint Energy and to whom we collectively refer as the “CenterPoint Energy representatives,” considered the factors described under “—Position of the CenterPoint Energy Entities as to the Fairness of the Public Company Merger,” including the various valuation methodologies and financial analyses performed by Citigroup that were presented to the board of directors of CenterPoint Energy in connection with the delivery of Citigroup’s written opinion described under “—Opinion Received by the Board of Directors of CenterPoint Energy,” which analyses they relied upon and adopted. The CenterPoint Energy representatives considered the determination and recommendation of the special committee and RBC’s opinion in making their determination as to the substantive fairness of the public company merger to our unaffiliated shareholders, but their conclusion that the public company merger is substantively fair to our unaffiliated shareholders was based on their own analysis and the adoption of Citigroup’s analysis.

 

Our board of directors believes that the public company merger is procedurally fair to our unaffiliated shareholders. In making its determination, our board of directors considered the following material factors, each of which it generally considered to weigh in favor of the procedural fairness of the public company merger to our unaffiliated shareholders:

 

  CenterPoint Energy’s public statements since before the January 2003 distribution of approximately 19% of our outstanding common stock to CenterPoint Energy’s shareholders that it intended to exit the generation sector of the electric power industry and to monetize its interest in us, with the result that the securities markets had been aware of CenterPoint Energy’s intent since prior to the commencement of trading in our common stock.

 

  The auction process described under “—Background of the Transactions” was thorough and inclusive. The auction process provided an extensive market check in which a broad range of over 100 potential strategic and financial buyers were contacted, and no restrictions were placed on the parties contacted or upon the structure or type of transaction that could be considered, other than CenterPoint Energy’s expressed preference for a cash transaction. In addition, during the auction process extensive due diligence information regarding our business, operations and financial condition was provided to potential buyers in an effort to elicit the most favorable bids.

 

  The active participation of our directors, officers and senior management in the process leading up to the execution of the transaction agreement on July 21, 2004, which included preparing a confidential information memorandum that was distributed to potential bidders, participating in management and due diligence meetings with prospective bidders, and analyzing bids and transaction structures proposed by prospective bidders and related regulatory requirements.

 

  The procedures and processes followed by our board of directors and the special committee in conducting the transaction, including the following:

 

  The special committee, comprised of three independent members of our board of directors, was formed to represent our shareholders, other than CenterPoint Energy, in connection with (a) any proposal to acquire 100% of our outstanding common stock, including the 19% owned by our public shareholders, (b) any determination of whether we should incur additional debt in connection with a purchase of all or a portion of our common stock, and (c) other related issues.

 

  The special committee was authorized to and did engage its own legal counsel and financial advisors to assist with its representation of our unaffiliated shareholders.

 

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  The special committee received advice from its own financial and legal advisors during the process.

 

  The transaction proposed by GC Power Group was presented to the special committee for its consideration, and the special committee possessed all power necessary for it to review and evaluate the proposed transaction, consult with its own financial and legal advisors, and determine whether or not to recommend approval of the proposal or any other proposal to our full board of directors.

 

  The fact that the special committee received the presentation of and the opinion delivered by RBC that, as of July 21, 2004, the public company merger consideration to be received by our shareholders (other than CenterPoint Energy) was fair, from a financial point of view, to such holders.

 

  The fact that the special committee unanimously determined that the transaction agreement and the transactions contemplated thereby, including the public company merger, were fair to, advisable and in the best interests of Texas Genco and our shareholders, other than CenterPoint Energy.

 

  The fact that the public company merger consideration and the other terms and conditions of the transaction agreement resulted from active and extensive arm’s-length negotiations between the GC Power Group and its advisors, on the one hand, and each of CenterPoint Energy, the special committee and their respective advisors, on the other hand.

 

  Under the terms of the transaction agreement, before the effective time of the public company merger, the special committee must either concur in or direct the action by us to terminate or amend the transaction agreement or waive any condition to our obligation to close the public company merger or the non-nuclear asset acquisition.

 

  Our shareholders who do not support the public company merger have the ability to obtain “fair value” for their shares if they validly perfect and exercise their dissenters’ rights under Texas law. Please read “—Dissenters’ Appraisal Rights” for information on how to exercise your dissenters’ rights.

 

In addition, our board of directors acknowledged that CenterPoint Energy’s direct wholly owned subsidiary, Utility Holding, as the holder of approximately 81% of our outstanding voting stock, would execute a written consent irrevocably approving the public company merger, the non-nuclear asset acquisition and the nuclear asset acquisition at the time of execution of the transaction agreement and, consequently, our board of directors may not consider any other offers for a sale of our assets or common stock, including through a merger, reorganization, tender offer, share exchange, exchange offer or similar transaction. Our board of directors also considered that GC Power Group had refused to condition the public company merger upon the approval of at least a majority of our unaffiliated shareholders, despite requests for such a condition by representatives of the special committee. Our board of directors also considered the fact that no unaffiliated representative had been retained to act solely on behalf of our unaffiliated shareholders, but rather that the special committee had been formed to represent our unaffiliated shareholders. After considering all of the facts and circumstances, our board of directors ultimately determined that the public company merger was procedurally fair to our unaffiliated shareholders for the reasons discussed above.

 

Other Considerations of the Special Committee and Our Board of Directors

 

The special committee and our board of directors did not analyze the fairness of the public company merger consideration in isolation from the considerations referred to above. The special committee and our board of directors did not attempt to distinguish between factors that support a determination that the public company merger is “fair” and factors that support a determination that the public company merger is in the “best interests” of our shareholders.

 

The special committee and our board of directors considered the current and historical trading prices of our common stock and the range of purchase prices offered by unaffiliated third-party bidders in the auction process as relevant in providing an indication of our going concern value. The members of the special committee also considered the various valuation methodologies and financial analyses performed by RBC that were presented to the special committee, including our historical stock price performance, comparable companies analysis,

 

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comparable asset acquisitions analysis and discounted cash flow analysis, as part of their consideration of our going concern value, and relied upon and adopted RBC’s analysis. In addition, each of the CenterPoint Energy representatives also considered, relied upon and adopted the various valuation methodologies and financial analyses performed by Citigroup that were presented to the CenterPoint Energy board of directors in connection with the delivery of Citigroup’s written opinion, dated July 21, 2004, to CenterPoint Energy (although the Citigroup opinion did not address the fairness of the consideration to be received by our public shareholders in the public company merger).

 

In consideration of the fairness of the public company merger to our unaffiliated shareholders, the special committee and our board of directors do not believe that our net book value was material or relevant to a determination of the fairness of the public company merger. The special committee and our board of directors do not believe that our net book value was material to their conclusions regarding the fairness of the transaction agreement and the transactions contemplated thereby, including the public company merger, because in their view our book value does not accurately reflect our value. Specifically, the special committee and our board of directors believes that our book value per share ($39.18 as of June 30, 2004, which is substantially below the $47.00 per share transaction price to our unaffiliated shareholders) is not indicative of our market value because book value is purely historical in nature and not forward-looking. In addition, although book value may be a relevant indicator of value with respect to certain regulated utilities, we currently sell generation capacity, power and ancillary services to wholesale purchasers at market based rates, and therefore we do not earn regulated returns on the basis of our costs or the book value of our assets. Accordingly, the special committee and our board of directors focused primarily on current period measurements of our operational and financial performance in determining the substantive fairness of the proposed transaction.

 

Likewise, the special committee and our board of directors did not consider our liquidation value material or relevant in determining the substantive fairness of the proposed transactions. Our special committee and board of directors consider our business to be a viable going concern, view the market price of our common stock as an indication of our value as a going concern, and do not consider our liquidation value as a relevant valuation methodology. The special committee and our board of directors believe that, as a viable going concern, our liquidation value would be significantly lower than our valuation as a going concern and would therefore not provide a useful valuation methodology in determining the substantive fairness of the proposed transactions. Therefore, the special committee and our board of directors have not conducted an appraisal of our assets to determine our liquidation value. In addition, because neither we nor any of the CenterPoint Energy Entities have purchased any of our common stock during the past two years, there were no such transactions for the special committee or our board of directors to consider in determining the substantive fairness of the proposed transactions.

 

The preceding discussion of the factors considered by the special committee and our board of directors is not intended to be exhaustive but does set forth the material factors the special committee and our board of directors considered. The special committee and our board of directors reached their conclusions regarding the fairness of the transaction agreement and the public company merger in light of the various factors described above that each member of the special committee and our board of directors believed were appropriate. In view of the wide variety of factors considered in connection with the evaluation of the public company merger and the complexity of these matters, the special committee and our board of directors found it impracticable, and did not attempt, to quantify, rank or otherwise assign relative weights to each of the specific factors they considered or determine that any factor was of particular importance in reaching their determinations that the transaction agreement and the public company merger, are in the best interests of the company and our unaffiliated shareholders. Rather, the special committee and our board of directors viewed their determinations as being based on the judgment of their respective members, in light of the totality of the information presented and considered, including the knowledge of such members of our business, financial condition and prospects and the advice of financial and legal advisors, except that, for the reasons noted above, our board of directors gave substantial weight to the determinations and recommendation of the special committee. In considering the factors discussed above, individual directors may have given different weights to different factors.

 

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Fairness Opinion of RBC Capital Markets Corporation

 

To assist the special committee with the evaluation of the public company merger and public company merger consideration, RBC was retained to render an opinion as to the fairness, from a financial point of view, of the public company merger consideration to be received by the holders of our common stock (other than CenterPoint Energy).

 

RBC was not engaged to, nor did it, evaluate our underlying business decision to enter into the transaction agreement, evaluate alternative transaction structures or other financial or strategic alternatives or solicit third party indications of interest with regard to our assets or common stock or otherwise participate in the transaction process. RBC was not asked to pass upon, and expressed no opinion with respect to any matters other than the fairness, from a financial point of view, of the public company merger consideration to be received by the holders of our common stock (other than CenterPoint Energy) pursuant to the transaction agreement.

 

On July 20, 2004, RBC delivered its oral opinion, which was subsequently confirmed in writing on July 21, 2004, to the special committee and our board of directors that, as of that date, and subject to the various assumptions, qualifications and limitations set forth therein, the public company merger consideration to be received by the holders of our common stock (other than CenterPoint Energy) was fair, from a financial point of view, to such holders.

 

RBC, as part of its investment banking services, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, corporate restructurings, underwritings, secondary distributions of listed and unlisted securities, private placements, and valuations for corporate and other purposes.

 

The full text of RBC’s written opinion is attached as Appendix C to this information statement and sets forth the assumptions made, general procedures followed, matters considered and limits on the review undertaken. RBC’s opinion is directed only to whether the public company merger consideration to be received by the holders of our common stock (other than CenterPoint Energy) is fair, from a financial point of view, to such holders. The summary of RBC’s written opinion below is qualified in its entirety by reference to the full text of the opinion. You are urged to read the opinion carefully and in its entirety.

 

In reading the discussion of the fairness opinion set forth below, you should be aware that:

 

  RBC provided its opinion for the information and assistance of the special committee and our board of directors in connection with the public company merger;

 

  RBC does not express any opinion or make any recommendation to our shareholders as to how to vote with respect to the public company merger.

 

In connection with rendering its opinion, RBC, among other things:

 

  reviewed the financial terms of the draft transaction agreement received by RBC on July 20, 2004 without disclosure schedules or exhibits;

 

  reviewed and analyzed certain publicly available financial and other data with respect to us and certain other relevant historical operating data relating to us made available to RBC from published sources and from our internal records;

 

  conducted discussions with members of our management with respect to our business prospects and financial outlook;

 

  received and reviewed financial forecasts prepared by our management in July 2004 as described under “—Our Financial Projections”;

 

  reviewed the reported prices and historical trading activity for our common stock; and

 

  performed other studies and analyses as RBC deemed appropriate.

 

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In arriving at its opinion, in addition to reviewing the matters listed above, RBC performed the following analyses:

 

  compared selected market valuation metrics of our company and other selected comparable publicly-traded companies with the metrics implied by the public company merger;

 

  compared selected financial metrics, to the extent publicly available, of selected comparable asset acquisitions with the public company merger; and

 

  prepared a discounted cash flow analysis using the financial forecasts prepared by our management.

 

For the purposes of its analysis and opinion, RBC assumed and relied upon, without assuming any responsibility for independent verification of, the accuracy and completeness of the financial, legal, tax, operating and other information provided to RBC by us, and the information supplied or otherwise made available to, discussed with, or reviewed by or for RBC (including, without limitation, our financial statements and the related notes thereto), and did not independently verify such information. With respect to the transaction process conducted on our behalf, RBC assumed and relied upon, without assuming any responsibility for independent verification of, the accuracy and completeness of the information supplied, summarized or otherwise made available to, discussed with, or reviewed by or for RBC, including as to the completeness of the process.

 

For purposes of rendering its opinion, RBC, with the consent of the special committee, assumed in all respects material to RBC’s analysis, that the representations and warranties of each party contained in the transaction agreement are true and correct, that each party will perform all of the covenants and agreements required to be performed by it under the transaction agreement, and that all conditions to the consummation of the public company merger will be satisfied without waiver thereof.

 

RBC did not assume any responsibility to perform, and did not perform, an independent evaluation or appraisal of any of our assets or liabilities, nor was RBC furnished with any such valuations or appraisals. RBC did not assume any obligation to conduct, and did not conduct, any physical inspection of our properties or facilities. Additionally, RBC was not asked to and did not consider the possible effects of any litigation or other legal claims. RBC’s opinion relates to us as a going concern and, accordingly, does not express an opinion regarding our liquidation value. RBC’s opinion is necessarily based on market, economic, financial, legal and other conditions as in effect on, and the information and transaction agreement made available to RBC as of, July 20, 2004. It should be understood that, although subsequent developments may affect RBC’s opinion, RBC has not updated, revised or reaffirmed its opinion and does not have any obligation to do so.

 

RBC’s analyses were based on, among other things, the updated financial projections prepared by our management in July 2004, which we discuss below in “—Our Financial Projections.” RBC assumed that the financial projections were reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of our future financial performance and that we will perform substantially in accordance with such forecast. RBC expressed no opinion as to any aspect of these financial projections.

 

In receiving RBC’s oral fairness opinion on July 20, 2004, and reviewing with RBC the written materials prepared by RBC in support of its opinion (a copy of which has been filed with the SEC, as an exhibit to the Schedule 13E-3 of which this information statement forms a part), the special committee was aware of and consented to the assumptions and other matters discussed above.

 

Summary of Analyses

 

The following is a brief summary of the material analyses performed by RBC and presented to the special committee in connection with rendering its fairness opinion. This summary is qualified in its entirety by reference to the full text of RBC’s opinion, which is attached as Appendix C to this information statement. You are urged to read the full text of the RBC opinion carefully and in its entirety for the assumptions made, procedures followed, other matters considered and limits of the review by RBC.

 

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RBC considered a number of analyses in assessing the fairness of the public company merger consideration, from a financial point of view, to our common shareholders (other than CenterPoint Energy). These analyses included:

 

  an analysis of selected market valuation metrics of selected comparable publicly traded companies;

 

  an analysis of selected financial metrics of selected comparable asset acquisitions; and

 

  a discounted cash flow analysis, using the financial projections prepared by our management in July 2004, as described under “—Our Financial Projections.”

 

Some of the financial analyses summarized below include summary data and information presented in tabular format. In order to understand fully the financial analyses, the summary data and tables must be read together with the full text of the analyses. Considering the summary data and tables alone could create a misleading or incomplete view of RBC’s financial analyses.

 

Historical Common Stock Performance. RBC conducted a historical analysis of the closing price of our common stock based on closing prices on the New York Stock Exchange and also examined prices of a peer group of publicly-traded companies (this peer group of companies is listed below under “—Comparable Company Analysis”).

 

RBC noted that in the period from the commencement of public trading in our common stock on December 18, 2002 until July 16, 2004, our average closing stock price was $27.02 and our average daily trading volume was 115,003 shares.

 

RBC noted that for the year ending July 16, 2004, our average closing stock price was $32.31 and our average daily trading volume was 91,790 shares.

 

RBC noted that for the ninety days ending July 16, 2004, our average closing stock price was $39.29 and our average daily trading volume was 81,533 shares.

 

RBC noted that for the sixty days ending July 16, 2004, our average closing stock price was $41.14 and our average daily trading volume was 97,392 shares.

 

RBC noted that for the thirty days ending July 16, 2004, our average closing stock price was $44.09 and our average daily trading volume was 110,481 shares.

 

RBC also pointed out that in the period from the commencement of public trading in our common stock on December 18, 2002 until July 16, 2004, our common stock outperformed the comparable companies analyzed in RBC’s Comparable Company Analysis as well as the S&P 500 Index and the S&P Electric Utilities Index. Specifically, our common stock appreciated 426.3% over this period, while the comparable companies as a whole appreciated 68.3%, the S&P 500 Index appreciated 23.6% and the S&P Electric Utilities Index appreciated 25.3%.

 

Comparable Company Analysis. RBC analyzed selected historical and projected operating information provided by our management, stock price performance data, and our valuation multiples, and compared this data to that of selected publicly traded companies, comprised of the Generation, Texas-Based Utilities, and Regulated with Generation companies, listed below. RBC used historical financial information and the projections for these companies derived from publicly available financial information, and, where available, these projections were adjusted to reflect a calendar year end. For us, RBC used the financial projections prepared by management in July 2004 as described under “—Our Financial Projections.” In conducting its analysis, RBC considered selected trading multiples of the following companies:

 

Generation

 

  The AES Corporation

 

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  Calpine Corporation

 

  Dynegy Inc.

 

  NRG Energy, Inc.

 

  Reliant Energy, Inc.

 

Texas-Based Utilities

 

  American Electric Power Company, Inc.

 

  CenterPoint Energy, Inc.

 

  Entergy Corporation

 

  TXU Corp.

 

Regulated with Generation

 

  Allegheny Energy, Inc.

 

  Constellation Energy Group Inc.

 

  Edison International

 

  FPL Group, Inc.

 

  PPL Corporation

 

To select the foregoing companies, RBC considered all publicly traded companies that operate in the electrical generation/supply business within the United States. Of those companies, RBC considered companies that belonged to the Generation, Texas-Based Utilities or Regulated with Generation categories because companies in such categories often have characteristics that are similar to ours.

 

The Generation group is comprised of independent power companies that operate power plants in the United States that are not part of a regulated utility rate base. There are a very limited number of companies that belong to this category. Of such companies, RBC selected those with a primary focus in power generation. RBC did not include companies in this category that had power generation only as a smaller portion of their business.

 

The members of the Texas-Based Utilities group were chosen because they operate in the same political environment and electrical market, and utilize the same transmission and distribution system as us. RBC noted, however, that these companies are regulated utilities, which is significantly different from our unregulated operating environment.

 

RBC considered utilities in the Regulated with Generation group because, like Texas Genco, they are participants in the competitive power generation market in the United States. From this category, RBC selected those companies that, like Texas Genco, have significant non-regulated generation assets or that have nuclear plants in their portfolio.

 

RBC noted to the Special Committee that none of the companies in any of the foregoing categories was directly comparable to Texas Genco but that the selected companies did provide a frame of reference for purposes of RBC’s analysis.

 

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RBC reviewed, among other things, the comparable companies’ multiples of enterprise value to earnings before interest, taxes, depreciation and amortization, or EBITDA, and price to earnings for the last twelve months, or LTM, as well as calendar year, or CY, 2004 estimated and 2005 estimated. RBC calculated a range of implied valuations for our common stock using the minimum, mean, median and maximum comparable company multiples and the financial projections prepared by our management in July 2004. The following table summarizes the analysis:

 

     Implied Equity Value per Share

     Min.

   Mean

   Median

   Max.

Comparable Company Analysis Multiple

                           

Enterprise Value / EBITDA

                           

LTM

   $ 43.59    $ 62.13    $ 60.71    $ 95.03

2004E

   $ 59.92    $ 69.14    $ 64.79    $ 83.44

2005E

   $ 63.45    $ 72.94    $ 73.30    $ 83.84

Price / Earnings

                           

LTM

   $ 29.10    $ 37.89    $ 39.29    $ 43.90

2004E

   $ 54.93    $ 58.06    $ 56.84    $ 63.62

2005E

   $ 52.84    $ 62.76    $ 60.67    $ 76.06

 

RBC advised the special committee that RBC had used the comparable company analysis as one basis for assessing fairness because it is a commonly-used valuation method. RBC further advised the special committee that, primarily for the reasons discussed below (and as discussed with the special committee on July 14, 2004), none of the companies in the selected public company groups was substantially comparable to us and therefore the usefulness of the results obtained by performing this analysis as a comparison to the price being paid to our unaffiliated shareholders was limited. RBC believed the companies in the selected public company groups were not substantially comparable to us because each of these companies had significantly higher leverage than we have, some operated generation assets that used different fuels than the generating assets we operate and consequently were affected differently by changes in fuel and electrical power prices, some operated generation assets which utilized different technology and some operated in regulated markets in which such companies’ rates and profit margins were set by factors different from those that determine our rates and profit margins. RBC also advised that some of the comparable companies had high trading prices relative to their earnings due to factors that did not apply to us, and cited, among other examples, participation in regulated markets and long-term contracts with customers which have investment grade credit ratings or better. All these factors may have impacted cash flow and earnings volatility of the comparable companies and materially affected the multiples of such companies in ways that are not applicable to us. Accordingly, while the mean and median implied equity values for our common stock derived from the comparable company analysis based on the comparable companies’ relatively high enterprise value to EBITDA ratios and price to earnings ratios are in some cases higher than the price being paid to our unaffiliated shareholders in the proposed transaction, RBC informed the special committee that, for the reasons described above, RBC placed limited weight on the implied equity value ranges produced in the comparable company analysis and instead relied to a greater extent on the implied equity value and equity value per share ranges derived from the comparable asset acquisition analysis and the discounted cash flow analysis.

 

Accordingly, a complete analysis of the results of the foregoing calculations cannot be limited to a quantitative review of such results and involves complex considerations and judgments regarding differences in financial and operating characteristics of the comparable companies and other factors that could affect our public valuation and that of the comparable companies.

 

Comparable Asset Acquisitions Analysis. RBC reviewed and analyzed selected comparable asset acquisition transactions based on recent acquisitions of power generation assets fueled by gas, coal, nuclear fuel or a combination thereof (portfolio). The acquisitions selected in the RBC analysis were (listed by Acquiror/Target/Seller):

 

Portfolio

 

  Carlyle, Riverstone Global Energy & Power Fund, Sempra Energy Partners/10 Power Plants/American Electric Power Co.

 

  PSEG Fossil LLC/Bridgeport & New Haven Power Plants/Wisconsin Energy Corp.

 

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Coal

 

  Brownsville Public Utilities Board/7.8% Interest in Oklaunion Power Station/American Electric Power Co.

 

  UGI Corp./4.9% Interest in Conemaugh Generating Station/Allegheny Energy Inc.

 

  Red Hawk Energy LLC/39.5% Interest in Mt. Poso Cogeneration Facility/NRG Energy Inc.

 

  Sempra Energy/Bremond Plant/Texas-New Mexico Power Co.

 

  Dominion Resources Inc./State Line Power Plant/Mirant Corp.

 

Gas

 

  KGen Partners LLC/Gas-Fired Power Plants/Duke Energy Corp.

 

  Centrica Plc/Bastrop Energy Partners L.P./FPL Energy LLC

 

  Entergy Corp./Perryville Power Plant/Perryville Energy Partners LLC

 

Nuclear

 

  Cameco South Texas Project LP/25.2% Interest in STP/American Electric Power Co.

 

  Constellation Energy Group Inc./R.E. Ginna Nuclear Power Plant/Energy East Corp.

 

  Dominion Resources Inc./Kewaunee Power Plant/WPS Resources Corp. (59%), Alliant Energy Corp. (41%)

 

  Exelon Corp./50.0% Interest in AmerGen Energy Co. LLC/British Energy Plc

 

  FPL Group Inc./88.2% Interest in Seabrook Nuclear Generating Station/Consortium

 

  Entergy Corp./Vermont Yankee Nuclear Plant/Vermont Yankee Nuclear Power Corp.

 

RBC reviewed, among other things, the comparable acquisitions’ financial metric of U.S. dollar per kilowatt implied by the enterprise values and net generating capacity of the assets acquired. RBC calculated a range of implied valuations for our common stock using the minimum, mean, median and maximum comparable acquisitions’ financial metric of U.S. dollar per kilowatt and our net generating capacity as of March 31, 2004, made available to RBC from published sources. The following table summarizes the analysis:

 

     Implied Equity Value per Share

     Min.

   Mean

   Median

   Max.

Fuel Type

                           

Coal

   $ 17.96    $ 27.10    $ 25.99    $ 40.24

Gas

   $ 7.04    $ 15.53    $ 18.67    $ 20.88

Nuclear

   $ 2.13    $ 4.75    $ 4.16    $ 7.80
    

  

  

  

Implied Total by Fuel Type

   $ 27.13    $ 47.38    $ 48.82    $ 68.92
                             

Portfolio

   $ 30.07    $ 30.39    $ 30.39    $ 30.71

 

Discounted Cash Flow Analysis. RBC performed a discounted cash flow analysis in which it analyzed the present (as of June 30, 2004) value of our projected after-tax cash flows through December 31, 2008, which were based on the updated financial projections prepared by our management in July 2004 as described under “—Our Financial Projections,” at a range of discount rates and terminal EBITDA multiples. In performing this analysis, RBC:

 

  defined unlevered free cash flows as EBITDA less cash taxes on earnings before interest and taxes, or EBIT, capital expenditures and changes in working capital;

 

  based projected unlevered free cash flows on the financial projections prepared by our management in July 2004;

 

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  calculated terminal values by applying a terminal EBITDA multiple to our projected 2008 EBITDA; and

 

  determined a range of appropriate weighted average costs of capital or discount rates.

 

In making these calculations, RBC applied a range of terminal EBITDA multiples from 6.0x to 8.5x and a range of discount rates from 8.0% to 15.0%. This analysis yielded the following per share equity values for our common stock:

 

     Equity Value per Share

Weighted Average Cost
of Capital


   Terminal EBITDA Multiple

   6.0x

   6.5x

   7.0x

   7.5x

   8.0x

   8.5x

8.0%

   $ 50.38    $ 53.28    $ 56.17    $ 59.07    $ 61.96    $ 64.86

9.0%

   $ 48.80    $ 51.59    $ 54.38    $ 57.17    $ 59.96    $ 62.75

10.0%

   $ 47.29    $ 49.98    $ 52.67    $ 55.36    $ 58.05    $ 60.74

11.0%

   $ 45.84    $ 48.43    $ 51.02    $ 53.62    $ 56.21    $ 58.81

12.0%

   $ 44.45    $ 46.95    $ 49.45    $ 51.96    $ 54.46    $ 56.96

13.0%

   $ 43.12    $ 45.53    $ 47.95    $ 50.36    $ 52.78    $ 55.19

14.0%

   $ 41.84    $ 44.17    $ 46.50    $ 48.84    $ 51.17    $ 53.50

15.0%

   $ 40.62    $ 42.87    $ 45.12    $ 47.37    $ 49.62    $ 51.88

 

While discounted cash flow analysis is a widely used valuation methodology, it necessarily relies on numerous assumptions, including projected financial information, terminal values and discount rates. Thus, it is not necessarily indicative of our actual, present or future value or results, which may be significantly more or less favorable than suggested by such analysis.

 

The merger and acquisition transaction environment varies over time because of macroeconomic factors such as interest rate and equity market fluctuations and microeconomic factors such as industry results and growth expectations. RBC noted that no company or transaction reviewed was identical to the proposed transactions and that, accordingly, these analyses involve complex considerations and judgments concerning differences in financial and operating characteristics and other factors that may have affected the values in the comparable companies and transactions.

 

The preparation of a fairness opinion is a complex process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances and, therefore, is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analysis or the summary set forth above, without considering the analysis as a whole, could create an incomplete view of the processes underlying the opinion of RBC. In arriving at its fairness determination, RBC considered the results of all these constituent analyses and did not attribute any particular weight to any particular factor or analysis considered by it; rather, RBC made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all such analyses. Certain of RBC’s analyses are based upon projections of future results and are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by such analyses. The foregoing summary does not purport to be a complete description of the analyses performed by RBC. Additionally, analyses relating to the value of businesses or securities are not appraisals. Accordingly, such analyses and estimates are inherently subject to substantial uncertainty.

 

As described above, RBC’s opinion to the special committee was among many factors taken into consideration by the special committee in making its determination to approve the transaction agreement. The decision to recommend to our board of directors the approval of the terms of the transaction agreement, including the $47.00 per share public company merger consideration to be received by the holders of our common stock (other than CenterPoint Energy), was solely that of the special committee. The opinion of RBC was provided to the special committee and the board of directors in connection with, and for the purpose of, its evaluation of the public company merger and does not constitute a recommendation to any person, including the holders of our common stock, as to how such person should vote or act on any matter related to the transaction agreement or the public company merger.

 

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RBC has received a fee of $1.0 million in connection with its engagement and in connection with the delivery of its opinion to the special committee. RBC will also be reimbursed for its reasonable and customary expenses in connection therewith. No portion of RBC’s fee or expense reimbursement was contingent upon the successful completion of the public company merger, any other related transaction, or the conclusions reached in the RBC opinion. No limitations were imposed by the special committee on RBC with respect to the investigations made or procedures followed by it in rendering its opinion. We also agreed to indemnify RBC and related persons against liabilities, including liabilities under federal securities laws that arise out of the engagement of RBC, and expenses in connection with its engagement.

 

Position of the CenterPoint Energy Entities as to the Fairness of the Public Company Merger

 

SEC rules require the CenterPoint Energy Entities to provide certain information regarding their position as to the fairness of the public company merger to our other shareholders. The CenterPoint Energy Entities have provided us with the information set forth in this section of the information statement.

 

The CenterPoint Energy Entities believe that the public company merger is fair to our unaffiliated shareholders. However, no CenterPoint Energy Entity has engaged a financial advisor to perform any valuation analysis for the purposes of assessing the fairness to our unaffiliated shareholders of the transactions described in this information statement. Instead, the CenterPoint Energy Entities have independently considered the factors discussed below.

 

Each of Messrs. McClanahan, Whitlock and Rozzell, to whom we collectively refer as the “CenterPoint Energy representatives,” is a member of our board of directors. In addition, each of Messrs. McClanahan, Whitlock and Rozzell is an executive officer of CenterPoint Energy, and Mr. McClanahan is also a member of CenterPoint Energy’s board of directors. None of the CenterPoint Energy representatives was a member of the special committee of our board of directors, but they attended the meeting of our board of directors held on July 20, 2004 at which our board received a presentation from the chairman of the special committee and voted to approve the transaction agreement and the transactions contemplated thereby, including the public company merger. The matters discussed during this meeting are described above under “—Background of the Transactions” and “—Position of Our Special Committee and Board of Directors as to the Fairness of the Public Company Merger.”

 

The CenterPoint Energy Entities and the CenterPoint Energy representatives were aware that the special committee of our board of directors had retained its own legal and financial advisors to assist in evaluating the various strategic alternatives CenterPoint Energy was pursuing. Certain of the CenterPoint Energy representatives provided requested assistance to those advisors. CenterPoint Energy, Citigroup and certain of the CenterPoint Energy representatives, as a group, also participated in numerous meetings with potential bidders to provide due diligence information. These meetings, which occurred during May, June and July 2004 and included a number of bidders in addition to the GC Power Group, are described under “—Background of the Transactions.” CenterPoint Energy and the CenterPoint Energy representatives’ participation in these meetings and their understanding of the extensive process in seeking bidders for CenterPoint Energy’s 81% interest in us are the basis for reliance by the CenterPoint Energy Entities on that process as one factor for their fairness determination discussed below.

 

The CenterPoint Energy Entities believe that the public company merger is substantively fair to our unaffiliated shareholders. In making their determination, the CenterPoint Energy Entities considered the following material factors, each of which they generally considered to weigh in favor of the substantive fairness of the public company merger to our unaffiliated shareholders:

 

  The CenterPoint Energy Entities’s understanding of our business and the industry in which we operate, our assets, financial condition and results of operations, and our competitive position within our industry.

 

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  The auction process described under “—Background of the Transactions” was thorough and inclusive. The auction process provided an extensive market check in which a broad range of over 100 potential strategic and financial buyers were contacted, and no restrictions were placed on the parties contacted or upon the structure or type of transaction that could be considered, other than CenterPoint Energy’s expressed preference for a cash transaction. In addition, during the auction process extensive due diligence information regarding our business, operations and financial condition was provided to potential buyers in an effort to elicit the most favorable bids.

 

  The fact that our unaffiliated shareholders are entitled to receive $47.00 per share in the public company merger while CenterPoint Energy is only entitled to receive approximately $45.25 per share for its 81% interest in us (consisting of approximately $34.44 per share to be paid upon the closing of the non-nuclear asset acquisition and approximately $10.81 per share to be paid at a later date upon the closing of the nuclear asset acquisition).

 

  The $47.00 per share public company merger consideration was $15.33 higher than the $31.67 exercise price of the RRI option described under “—Background of the Transactions—The Restructuring of Reliant Energy in Response to the Texas Electric Restructuring Law,” which RRI had declined to exercise in January 2004.

 

  The relationship between the $47.00 price per share to be paid to our unaffiliated shareholders in the public company merger and the recent and historical market price of our common stock. In Citigroup’s presentation to the board of directors of CenterPoint Energy on July 20, 2004, Citigroup noted that the price of our common stock had increased approximately 366% from January 6, 2003 through July 19, 2004, while selected merchant generators as a whole appreciated 166%, the S&P 500 Index appreciated 19% and the price of CenterPoint Energy’s common stock appreciated 41% during such period. Citigroup’s presentation also provided the average market prices for our common stock over the preceding one-month, three-month, six-month and one-year periods, which were $45.52, $41.13, $38.30 and $32.70 per share, respectively. The closing market price for our common stock on July 20, 2004, the last day prior to the public announcement of the transactions contemplated by the transaction agreement, was $46.48 per share.

 

  The fact that the public company merger consideration is all cash, which provides certainty of value to our shareholders.

 

  The fact that in the final stages of the negotiations CenterPoint Energy agreed to the allocation of all of the approximately $26.6 million aggregate increase in purchase price agreed to by GC Power Group to our public shareholders.

 

  The fact that Citigroup delivered its written opinion, dated July 21, 2004, to the board of directors of CenterPoint Energy that, as of that date and based on and subject to the considerations and limitations set forth in the opinion, the aggregate consideration to be received by CenterPoint Energy in the non-nuclear asset acquisition and the nuclear asset acquisition, which is equivalent to approximately $45.25 per share, was fair, from a financial point of view, to CenterPoint Energy (although the Citigroup opinion did not address the fairness of the consideration to be received by our public shareholders in the public company merger).

 

 

The fact that on August 6, 2004, as described under “—Report of Valuation Panel in CenterPoint Houston’s 2004 True-Up Proceeding,” a valuation panel established by the independent financial expert appointed by the PUC in connection with CenterPoint Houston’s 2004 true-up proceeding issued a report to the PUC stating that, based on the analyses and factors described in its report, as of March 31, 2004, Texas Genco had a fair range of total common stock equity values between $38.27 per share and $46.58 per share, with a mid-point of $42.425 per share. In addition, during an open hearing before the PUC in August 2004 the valuation panel stated that, under its analysis, the value of our common stock increased by approximately $3.00 per share between March 31, 2004 and July 21, 2004 due to specified factors (i.e., implying a range of $41.27 to $49.58 per share, with a mid-point of $45.425 per share), and

 

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the actual average per share price to be paid to CenterPoint Energy and our unaffiliated shareholders under the terms of the transaction agreement (i.e., approximately $45.59 per share, which is $1.41 per share less than the $47.00 per share price to be paid to our unaffiliated shareholders) is higher than what the valuation panel would have paid based on its own analysis.

 

  The consummation of the public company merger and the payment of the public company merger consideration to our unaffiliated shareholders is not expected to require NRC or PUC approval, which means that payment to our unaffiliated shareholders will likely occur several months earlier as compared to the transactions proposed by Bidder White. In respect of the nuclear asset acquisition, we note that we do not expect to receive approval from the NRC significantly prior to April 30, 2005.

 

  The GC Power Group proposal provided greater likelihood of payment to our unaffiliated shareholders as compared to the Bidder White proposal, because there were fewer and less stringent conditions to the closing of the public company merger. CenterPoint Energy notes in particular:

 

  The limited scope of the material adverse effect condition to closing, because GC Power Group agreed to include certain exceptions in the definition of material adverse effect in the transaction agreement (thus making it more difficult for GC Power Group to assert that a material adverse effect has occurred).

 

  The fact that consummation of the public company merger is not expected to require NRC or PUC approval.

 

  The fact that the transaction proposed by Bidder White was conditioned on the sale of our interest in the South Texas Project to a third party buyer, and, as a result, (a) a potential material adverse event relating to our interest in the South Texas Project would be more likely to prevent the closing of the proposed Bidder White transaction than the closing of the public company merger, since the transaction agreement does not contemplate the sale of our interest in the South Texas Project to a third party buyer, and (b) the Bidder White transaction would be subject to any potential delay associated with compliance with the right of first refusal procedures relating to the sale of our interest in the South Texas Project.

 

  GC Power Group’s commitment in the transaction agreement to take all steps necessary to avoid or eliminate each and every impediment under the HSR Act.

 

  The nature of the financing commitments received by GC Power Group with respect to the proposed transactions, including the identity of the institutions providing such commitments, the limited conditions to the obligations of such institutions to fund such commitments, and the duration of such commitments.

 

The CenterPoint Energy Entities believe that the public company merger is procedurally fair to our unaffiliated shareholders. In making their determination, the CenterPoint Energy Entities considered the following material factors, each of which they generally considered to weigh in favor of the procedural fairness of the public company merger to our unaffiliated shareholders:

 

  CenterPoint Energy’s public statements since before the January 2003 distribution of approximately 19% of our outstanding common stock to CenterPoint Energy’s shareholders that it intended to exit the generation sector of the electric power industry and to monetize its interest in us, with the result that the securities markets had been aware of CenterPoint Energy’s intent since prior to the commencement of trading in our common stock.

 

  The auction process described under “—Background of the Transactions” was thorough and inclusive. The auction process provided an extensive market check in which a broad range of over one hundred potential strategic or financial buyers were contacted, and no restrictions were placed on the parties contacted or upon the structure or type of transaction that could be considered other than CenterPoint Energy’s expressed preference for a cash transaction. In addition, during the auction process extensive due diligence information regarding our business, operations and financial condition was provided to potential buyers in an effort to elicit the most favorable bids.

 

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  The active participation of our directors, officers and senior management in the process leading up to the execution of the transaction agreement on July 21, 2004, which included preparing a confidential information memorandum that was distributed to potential bidders, participating in management and due diligence meetings with prospective bidders, and analyzing bids and transaction structures proposed by prospective bidders and related regulatory requirements.

 

  The procedures and processes followed by our board of directors and the special committee in conducting the transaction, including the following:

 

  The special committee, comprised of three independent members of our board of directors, was formed to represent our shareholders, other than CenterPoint Energy, in connection with (a) any proposal to acquire 100% of our outstanding common stock, including the 19% owned by our public shareholders, (b) any determination of whether we should incur additional debt in connection with a purchase of all or a portion of our common stock, and (c) other related issues.

 

  The special committee was authorized to and did engage its own legal counsel and financial advisors to assist with its representation of our public shareholders.

 

  The special committee received advice from its own financial and legal advisors during the process.

 

  The transaction proposed by GC Power Group was presented to the special committee for its consideration, and the special committee possessed all power necessary for it to review and evaluate the proposed transaction, consult with its own financial and legal advisors, and determine whether or not to recommend approval of the proposal or any other proposal to our full board of directors.

 

  The fact that the special committee received the presentation of and opinion delivered by RBC that, as of July 21, 2004, the public company merger consideration to be received by our shareholders (other than CenterPoint Energy) was fair, from a financial point of view, to such holders.

 

  The fact that the special committee unanimously determined that the transaction agreement and the transactions contemplated thereby, including the public company merger, were fair to, advisable and in the best interests of Texas Genco and our shareholders, other than CenterPoint Energy.

 

  The fact that the public company merger consideration and the other terms and conditions of the transaction agreement resulted from active and extensive arm’s-length negotiations between the GC Power Group and its advisors, on the one hand, and each of CenterPoint Energy, the special committee and their respective advisors, on the other hand.

 

  Under the terms of the transaction agreement, before the effective time of the public company merger, the special committee must either concur in or direct the action by us to terminate or amend the transaction agreement or waive any condition to our obligation to close the public company merger or the non-nuclear asset acquisition.

 

  Our shareholders who do not support the public company merger have the ability to obtain “fair value” for their shares if they validly perfect and exercise their dissenters’ rights under Texas law. Please read “—Dissenters’ Appraisal Rights” for information on how to exercise your dissenters’ rights.

 

The CenterPoint Energy Entities also considered the following factors, each of which they generally viewed as weighing against the substantive fairness of the public company merger to our unaffiliated shareholders, but ultimately determined that the material factors discussed above outweighed these factors:

 

  Our unaffiliated shareholders will not receive our anticipated quarterly December dividend if the related record date is scheduled to occur after the consummation of the public company merger.

 

  The possible conflicts of interest of CenterPoint Energy and its affiliates. Please read “—Interests of CenterPoint Energy, Directors and Executive Officers,” for a description of these possible conflicts of interest.

 

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  The possibility of disruption to our operations following the announcement of the public company merger, and the resulting effect on us, including the market price of our common stock, if the public company merger does not close.

 

  The special committee did not retain an unaffiliated representative to act solely on behalf of our unaffiliated shareholders for the purpose of negotiating the transaction agreement.

 

In addition, the CenterPoint Energy Entities considered that CenterPoint Energy’s direct wholly owned subsidiary, Utility Holding, as the holder of approximately 81% of our outstanding voting stock, executed a written consent irrevocably approving the public company merger, the non-nuclear asset acquisition and the nuclear asset acquisition at the time of execution of the transaction agreement and, consequently, our board of directors may not consider any other offers for a sale of our assets or common stock, including through a merger, reorganization, tender offer, share exchange, exchange offer or similar transaction. The CenterPoint Entities also considered that GC Power Group had refused to condition the public company merger upon the approval of at least a majority of our unaffiliated shareholders, despite requests for such a condition by representatives of the special committee. The CenterPoint Energy Entities also considered the fact that no unaffiliated representative had been retained to act solely on behalf of our unaffiliated shareholders, but rather that the special committee had been formed to represent our unaffiliated shareholders. After considering all of the facts and circumstances, the CenterPoint Energy Entities believe that the public company merger is procedurally fair to our unaffiliated shareholders for the reasons discussed above.

 

Based on all of the above factors, the CenterPoint Energy Entities believe that the public company merger is fair to our unaffiliated shareholders. The CenterPoint Energy Entities believe that it is not possible, however, to assign specific relative weight to the foregoing factors in reaching the opinion as to the fairness of the public company merger. In making this determination, the CenterPoint Energy Entities took into account the fact that:

 

  our current shareholders will no longer participate in any of the potential growth, or be exposed to any of the potential risks, associated with our business; and

 

  if the public company merger does not occur, we will still be subject to the hedging arrangements that were executed simultaneously with the transaction agreement, as described under “Other Agreements—Power Purchase and Sale Agreement.”

 

In consideration of the fairness of the public company merger to our unaffiliated shareholders, the CenterPoint Energy Entities did not independently consider our going concern value; they did, however, consider and adopt the various valuation methodologies and financial analyses performed by Citigroup that were presented to the board of directors of CenterPoint Energy in connection with the delivery of Citigroup’s written opinion, dated July 21, 2004, that, as of that date and based on and subject to the considerations and limitations set forth in the opinion, the aggregate consideration to be received by CenterPoint Energy in the non-nuclear asset acquisition and the nuclear asset acquisition was fair, from a financial point of view, to CenterPoint Energy (although the Citigroup opinion did not address the fairness of the consideration to be received by our public shareholders in the public company merger). In the view of the CenterPoint Energy Entities, the values reflected in Citigroup’s discounted cash flow analysis and selected public companies analysis inherently reflect the value attributable to our business as a going concern. Based on the CenterPoint Energy Entities’s understanding of our business and industry, the CenterPoint Energy Entities also believe that the current and historic trading prices of our common stock are an appropriate indication of our going concern value. In addition, the CenterPoint Energy Entities believe that the range of purchase prices offered by unaffiliated third-party bidders for our company during the auction process described under “—Background of the Transactions” are appropriate indications of our going concern value.

 

In consideration of the fairness of the public company merger to our unaffiliated shareholders, the CenterPoint Energy Entities do not believe that our net book value is material or relevant to a determination of the fairness of the public company merger. The CenterPoint Energy Entities do not believe that our net book value is material to their conclusion regarding the fairness of the transaction agreement and the transactions

 

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contemplated thereby, including the public company merger, because in their view our book value does not accurately reflect our value. Specifically, the CenterPoint Energy Entities believe that our book value per share ($39.18 as of June 30, 2004, which is substantially below the $47.00 per share transaction price to our unaffiliated shareholders) is not indicative of our market value because book value is purely historical in nature and not forward-looking. In addition, although book value may be a relevant indicator of value with respect to certain regulated utilities, we currently sell generation capacity, power and ancillary services to wholesale purchasers at market based rates, and therefore we do not earn regulated returns on the basis of our costs or the book value of our assets.

 

Likewise, the CenterPoint Energy Entities do not consider our liquidation value to be material or relevant to a determination of the fairness of the public company merger. The CenterPoint Energy Entities consider our business to be a viable going concern, view the market price of our common stock as an indication of our value as a going concern, and do not consider our liquidation value as a relevant valuation methodology. The CenterPoint Energy Entities believe that, because we are a viable going concern, our liquidation value would be significantly lower than our valuation as a going concern and would therefore not provide a useful valuation methodology in determining the fairness of the proposed transactions. In addition, because neither we nor any of the CenterPoint Energy Entities have purchased any of our common stock during the past two years, there were no such transactions for the CenterPoint Energy Entities to consider in determining the substantive fairness of the proposed transactions.

 

Opinion Received by the Board of Directors of CenterPoint Energy

 

CenterPoint Energy retained Citigroup to act as CenterPoint Energy’s financial advisor in connection with the sale of its 81% interest in Texas Genco. CenterPoint Energy selected Citigroup based on Citigroup’s experience and reputation. Citigroup is an internationally recognized investment banking firm and is regularly engaged in the valuation of businesses and securities in connection with mergers and acquisitions, restructurings, leveraged buyouts, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements, and valuations for corporate and other purposes.

 

As more fully described under “—The Transaction Agreement,” the transaction agreement provides for the non-nuclear asset acquisition and the nuclear asset acquisition to occur after completion of the public company merger. In the non-nuclear asset acquisition, Texas Genco will receive cash consideration of $2,813 million, of which up to $2,231 million, which we refer to as the non-nuclear amount, will be distributed up to CenterPoint Energy. In the nuclear asset acquisition, Utility Holding will receive $700 million in cash, without interest, which we refer to as the nuclear amount, in consideration for its 100% ownership interest in Texas Genco. In this section, we refer to the sum of the non-nuclear amount plus the nuclear amount as the aggregate consideration.

 

In connection with CenterPoint Energy’s evaluation of the non-nuclear asset acquisition and the nuclear asset acquisition, Citigroup delivered to the board of directors of CenterPoint Energy a written opinion, dated July 21, 2004, to the effect that, as of that date and based on and subject to the considerations and limitations set forth in the opinion, Citigroup’s work in connection with the transaction and such other factors as Citigroup deemed relevant, the aggregate consideration to be received by CenterPoint Energy in the non-nuclear asset acquisition and the nuclear asset acquisition as contemplated by the transaction agreement was fair, from a financial point of view, to CenterPoint Energy.

 

The full text of Citigroup’s written opinion is attached as Appendix D to this information statement and sets forth the assumptions made, general procedures followed, matters considered and limits on the review undertaken. The summary of Citigroup’s opinion below is qualified in its entirety by reference to the full text of the opinion.

 

You should be aware that Citigroup’s opinion:

 

  was provided to CenterPoint Energy’s board of directors in connection with its evaluation of the non-nuclear asset acquisition and the nuclear asset acquisition;

 

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  was limited to the fairness, from a financial point of view, to CenterPoint Energy, as of the date of the opinion, of the aggregate consideration to be received by CenterPoint Energy in the non-nuclear asset acquisition and the nuclear asset acquisition as contemplated by the transaction agreement;

 

  does not cover any other aspect or implication of the transactions contemplated by the transaction agreement, any related documents or arrangements or any other transactions contemplated by the transaction agreement;

 

  does not address the fairness of the consideration to be received by Texas Genco’s public shareholders in the public company merger. Citigroup was not requested to perform analyses or make presentations with respect to the fairness to Texas Genco’s public shareholders of the consideration to be received by such shareholders in the public company merger. The fairness, from a financial point of view, to Texas Genco’s public shareholders of the consideration to be received in the public company merger is addressed in the opinion rendered by RBC Capital Markets Corporation described under “—Fairness Opinion of RBC Capital Markets Corporation”;

 

  was addressed only to CenterPoint Energy’s board of directors and states that Citigroup’s advisory services and opinion were provided only for the information of the CenterPoint Energy board of directors in its evaluation of the proposed transactions and may not be relied upon by any other party or used for any other purpose; and

 

  does not, nor does Citigroup’s related analyses, constitute a recommendation with respect to any of the transactions contemplated by the transaction agreement.

 

In arriving at its opinion, Citigroup, reviewed the transaction agreement, and held discussions with certain senior officers, directors and other representatives and advisors of CenterPoint Energy and Texas Genco, respectively, and certain senior officers and other representatives and advisors of GC Power Acquisition, concerning the business, operations and prospects of Texas Genco. Citigroup examined certain publicly available business and financial information relating to Texas Genco, as well as certain financial projections and other information and data relating to Texas Genco which were provided to or otherwise reviewed by or discussed with Citigroup by the respective managements of CenterPoint Energy and Texas Genco. Citigroup reviewed the financial terms of the transactions contemplated by the transaction agreement in relation to, among other things:

 

  current and historical market prices and trading volumes of Texas Genco common stock;

 

  the historical and projected earnings and other operating data of Texas Genco; and

 

  the capitalization and financial condition of Texas Genco.

 

Citigroup considered, to the extent publicly available, the financial terms of certain other transactions that Citigroup considered relevant in evaluating the transactions contemplated by the transaction agreement and analyzed certain financial, stock market and other publicly available information relating to the businesses of other companies whose operations Citigroup considered relevant in evaluating those of Texas Genco. In connection with its engagement and at the direction of CenterPoint Energy, Citigroup was requested to approach, and Citigroup held discussions with, third parties to solicit indications of interest in the possible acquisition of CenterPoint Energy’s 81% interest in us. In addition to the foregoing, Citigroup conducted such other analyses and examinations and considered such other information and financial, economic and market criteria as Citigroup deemed appropriate in arriving at its opinion.

 

In rendering its opinion, Citigroup assumed and relied, without independent verification, upon the accuracy and completeness of all financial and other information and data publicly available or provided to or otherwise reviewed by or discussed with it. With respect to financial projections and other information and data relating to Texas Genco provided to or otherwise reviewed by or discussed with it, Citigroup was advised by the respective managements of CenterPoint Energy and Texas Genco that such projections and other information and data were reasonably prepared on bases reflecting the best currently available estimates and judgments of the managements of CenterPoint Energy and Texas Genco as to the future financial performance of Texas Genco.

 

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Citigroup assumed, with the consent of the CenterPoint Energy board of directors, that:

 

  the transactions contemplated by the transaction agreement, including the payment to us of $2,813 million in cash at the closing of the non-nuclear asset acquisition and the payment to Utility Holding of $700 million in cash at the closing of the nuclear asset acquisition, will be consummated in accordance with its terms, without waiver, modification or amendment of any material term, condition or agreement and that, in the course of obtaining the necessary regulatory or third party approvals, consents and releases for such transactions, no delay, limitation, restriction or condition will be imposed that would have an adverse effect on such transactions, CenterPoint Energy or Texas Genco;

 

  no holders of Texas Genco common stock will exercise dissent or appraisal rights in connection with the transactions; and

 

  CenterPoint Energy will receive, in connection with the non-nuclear asset acquisition, a cash distribution of not less than the non-nuclear amount ($2,231 million).

 

Citigroup did not make, and was not provided with, an independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of Texas Genco, nor did Citigroup make any physical inspection of the properties or assets of Texas Genco. Citigroup’s opinion does not address the relative merits of the transactions contemplated by the transaction agreement as compared to any alternative business strategies that might exist for CenterPoint Energy or Texas Genco or the effect of any other transaction in which CenterPoint Energy or Texas Genco might engage. In addition, Citigroup’s opinion does not take into account the potential impact of (a) any post-closing liabilities or obligations pursuant to the transaction agreement or (b) the transactions contemplated by the transaction agreement on CenterPoint Energy’s stranded cost assets. Citigroup’s opinion is necessarily based upon information available to it, and financial, stock market and other conditions and circumstances existing, as of the date of the opinion.

 

Summary of Analyses

 

In connection with rendering its opinion, Citigroup made a presentation to the CenterPoint Energy board of directors on July 20, 2004 with respect to the material financial analyses performed by Citigroup in evaluating the fairness, from a financial point of view, to CenterPoint Energy of the aggregate consideration to be received by CenterPoint Energy in the non-nuclear asset acquisition and the nuclear asset acquisition as contemplated by the transaction agreement. The following is a brief summary of that presentation. The summary includes information presented in tabular format. In order to understand fully Citigroup’s financial analyses, these tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. The following quantitative information, to the extent it is based on market data, is, except as otherwise indicated, based on market data as it existed at or prior to July 19, 2004, and is not necessarily indicative of current or future market conditions.

 

Historical Common Stock Price Analysis. Citigroup reviewed the recent market price performance of Texas Genco common stock and compared the performance with that of CenterPoint Energy common stock, the S&P 500 index and an index comprised of the following power generation companies selected by Citigroup:

 

  Reliant Energy, Inc.

 

  The AES Corporation

 

  Calpine Corporation

 

Citigroup noted the appreciation in Texas Genco common stock over the period beginning January 6, 2003 (the first date on which Texas Genco common stock was traded regular way on The New York Stock Exchange following the distribution by CenterPoint Energy of approximately 19% of the outstanding shares of Texas Genco common stock to CenterPoint Energy’s shareholders) and ending July 19, 2004 was approximately 366%, as compared to the appreciation in the index of selected power generation companies, CenterPoint Energy common stock and the S&P 500 index of 166%, 41% and 19%, respectively, for the same period.

 

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Citigroup also noted that the historical average market price of Texas Genco common stock for the twelve-, six-, three- and one-month periods ended July 19, 2004 was $32.70, $38.30, $41.13 and $45.52 per share, respectively.

 

Discounted Cash Flow Analysis. Citigroup performed a discounted cash flow analysis in order to calculate the estimated present value of Texas Genco’s unlevered after-tax free cash flows for the period 2004 to 2008. Estimated financial data used in this analysis was based upon consolidated financial projections provided by management of Texas Genco in July 2004, as discussed under “—Our Financial Projections.” Unlevered after-tax free cash flow was calculated as net income, plus after-tax net interest expense and depreciation and amortization, less increases in deferred taxes, investment in non-cash working capital, capital expenditures and other non-cash items. Citigroup calculated estimated terminal values as of December 31, 2008 by applying a range of terminal multiples of 5.0x to 6.0x to Texas Genco’s estimated 2008 earnings before interest expense, taxes, depreciation and amortization (EBITDA). Citigroup selected these multiples based upon its judgment of an appropriate range for an unregulated power generation company with a substantial portion of its baseload generating capacity fueled by sources other than natural gas and operating entirely in the ERCOT market, which is a market where power prices are closely linked to natural gas prices. The present value of unlevered after-tax cash flows and terminal values were calculated using discount rates ranging from 9.5% to 10.5%. This analysis resulted in an implied reference range for CenterPoint Energy’s approximate 81% common equity stake in Texas Genco of $2,613 million to $3,023 million (or approximately $40.34 to $46.68 per share), as compared to the aggregate consideration of $2,931 million (or approximately $45.25 per share).

 

Selected Public Companies Analysis. Using publicly available information, Citigroup reviewed the market values and trading multiples of selected publicly traded companies in three general categories: independent power producers, which are referred to below as IPPs, exploration and production companies, which are referred to below as E&P Companies, and oil refining companies. The selected companies considered by Citigroup were:

 

IPPs

 

  The AES Corporation

 

  Reliant Energy, Inc.

 

  Calpine Corporation

 

E&P Companies

 

  Anadarko Petroleum Corporation

 

  Apache Corporation

 

  Burlington Resources Inc.

 

  Forest Oil Corporation

 

Oil Refining Companies

 

  Valero Energy Corporation

 

  Sunoco, Inc.

 

  Premcor Inc.

 

  Tesoro Petroleum Corporation

 

The projected financial information for the selected companies used by Citigroup for this analysis was based upon information published by each company in its respective Form 10-Q for the period ended March 31, 2004 and

 

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Form 10-K for the period ended December 31, 2003, as well as information published by certain investment banking firms, the Institutional Brokers Estimate System, which we refer to as IBES, and First Call Corporation. IBES and First Call Corporation compile summaries of financial forecasts published by various investment banking firms and securities analysts. The projected financial information for Texas Genco used by Citigroup for this analysis was based upon consolidated financial projections provided by management of Texas Genco in July 2004.

 

For each of the selected companies, Citigroup derived and compared, among other things:

 

  the ratio of closing price per common share of each company as of July 19, 2004 to its estimated earnings per common share for each of calendar years 2004 and 2005;

 

  in the case of the IPPs, the ratio of each company’s aggregate equity market value to its equity book value at March 31, 2004;

 

  in the case of the E&P Companies and the oil refining companies, the ratio of closing price per common share of each company as of July 19, 2004 to its estimated after-tax cash flow per fully-diluted common share for each of calendar years 2004 and 2005;

 

  in the case of the IPPs and the oil refining companies, the ratio of each company’s firm value to latest twelve months’ EBITDA as of March 31, 2004;

 

  in the case of the E&P Companies, the ratio of each company’s firm value to its estimated earnings before interest expense, taxes, depletion, depreciation, amortization and exploration expense (EBITDAX) for each of calendar years 2004 and 2005; and

 

  in the case of the oil refining companies, the ratio of each company’s firm value to its estimated EBITDA for each of calendar years 2004 and 2005.

 

Aggregate equity market values and firm values for each company were calculated as of July 19, 2004. Aggregate equity market values were calculated as the product of fully-diluted shares of common stock and the closing stock price for each company at July 19, 2004. Firm value was calculated as the sum of aggregate equity market value, non-convertible indebtedness, non-convertible preferred stock, out of the money convertible securities and minority interest, less investments in unconsolidated affiliates and cash.

 

Observing that the capital structure of each of the selected companies included debt, whereas Texas Genco had no debt on its balance sheet, Citigroup determined to use multiples of firm values to estimated 2004 and 2005 EBITDA as a means of deriving implied reference ranges for CenterPoint Energy’s 81% equity stake in Texas Genco. Citigroup multiplied ranges of multiples of 4.5x to 5.0x and 4.8x to 5.3x to Texas Genco’s estimated EBITDA for 2004 and 2005, respectively. Citigroup noted that none of the selected companies were directly comparable to Texas Genco but, as Citigroup observed that recent fluctuations in our operating cash flows are highly correlated with changes in natural gas prices, Citigroup weighed the multiples of EBITDA derived from the E&P Companies with material natural gas production more heavily in performing its selected companies analysis. Citigroup selected these multiples based upon its judgment of an appropriate range for an unregulated power generation company with a substantial portion of its baseload generating capacity fueled by sources other than natural gas and operating entirely in the ERCOT market, which is a market where power prices are closely linked to natural gas prices. This analysis resulted in an implied reference range for CenterPoint Energy’s approximate 81% common equity stake in Texas Genco of $2,655 million to $2,882 million (or approximately $41.00 to $44.50 per share), as compared to the aggregate consideration of $2,931 million (or approximately $45.25 per share).

 

Plant-by-Plant Analysis. Using publicly available information, Citigroup reviewed, among other things, the implied ratio of transaction values to total kilowatts of electric generating capacity for selected transactions involving the purchase and sale of power generation assets. Because Texas Genco’s portfolio of electric power

 

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plants includes nuclear and various fossil fuel fired power generation assets, Citigroup reviewed information for such transactions in three select categories:

 

  coal fired power generation (Citigroup reviewed 18 of the transactions announced in this category since 1999);

 

  oil/gas fired generation (Citigroup reviewed 32 of the transactions announced in this category since 2003); and

 

  nuclear generation (Citigroup reviewed 24 of the transactions announced in this category since 1998).

 

In particular, Citigroup reviewed the implied dollars per kilowatt to be paid in the following recent transactions (each announced in 2004) involving sales of power generation assets within the ERCOT market:

 

  American Electric Power Company’s announced sale of its Texas Central portfolio of 10 power plants to Carlyle Riverstone Global Energy & Power Fund and Sempra Partners, which included, among various oil/gas fired power generation and other assets, the Coleto Creek coal fired generating plant;

 

  American Electric Power Company’s announced sale of its 25.2% stake in the South Texas Project (a nuclear generating asset in which Texas Genco also holds an ownership stake) to Cameco Corporation; and

 

  American Electric Power Company’s announced sale of its 7.8% stake in the Oklaunion Power Station (a coal fired generating plant) to Golden Spread Electric Cooperative.

 

Citigroup applied selected ranges of dollars per kilowatt to the total kilowatts of net generating capacity for each of our electric generating stations in each case, based on Citigroup’s judgment of an appropriate dollars per kilowatt multiple for power generation assets of that type in the ERCOT market. Citigroup also noted its judgment that given market dynamics in ERCOT, baseload plants in ERCOT fired by sources other than natural gas currently generate significantly greater market value than similar-sized plants fueled by natural gas. Citigroup calculated the sum of values derived for each plant using this methodology to derive an implied total value of Texas Genco’s power generating portfolio. Citigroup also applied a selected range of dollars per kilowatt to Texas Genco’s aggregate net generating capacity to derive an implied total value of Texas Genco’s power generating portfolio. This analysis resulted in an implied reference range for CenterPoint Energy’s approximate 81% common equity stake in Texas Genco of $2,247 million to $2,533 million (or approximately $34.69 to $39.11 per share), as compared to the aggregate consideration of $2,931 million (or approximately $45.25 per share).

 

General

 

The preceding discussion is a summary of the material financial analyses furnished by Citigroup to the CenterPoint Energy board of directors, but it does not purport to be a complete description of the analyses performed by Citigroup or of its presentation to the CenterPoint Energy board of directors. The preparation of financial analyses and fairness opinions is a complex process involving subjective judgments and is not necessarily susceptible to partial analysis or summary description. Citigroup made no attempt to assign specific weights to particular analyses or factors considered, but rather made qualitative judgments as to the significance and relevance of all the analyses and factors considered and determined to give its opinion as described above. Accordingly, Citigroup believes that its analyses, and the summary set forth above, must be considered as a whole, and that selecting portions of the analyses and of the factors considered by Citigroup, without considering all of the analyses and factors, could create a misleading or incomplete view of the processes underlying the analyses conducted by Citigroup and its opinion. With regard to the selected public companies and plant-by-plant analyses summarized above, Citigroup selected comparable public companies and precedent transactions on the basis of various factors, including size and similarity to the lines of business of Texas Genco; however, no company utilized in these analyses is identical to Texas Genco and no precedent transaction is identical to those contemplated by the transaction agreement. As a result, these analyses are not purely mathematical, but also take into account differences in financial and operating characteristics of the subject companies and other factors.

 

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In its analyses, Citigroup made numerous assumptions with respect to Texas Genco, CenterPoint Energy, industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of CenterPoint Energy and Texas Genco. Any estimates contained in Citigroup’s analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by these analyses. Estimates of values of companies do not purport to be appraisals or necessarily to reflect the prices at which companies may actually be sold. Because these estimates are inherently subject to uncertainty, none of CenterPoint Energy, Texas Genco, their respective boards of directors, Citigroup or any other person assumes responsibility if future results or actual values differ materially from the estimates.

 

CenterPoint Energy has agreed to pay Citigroup a negotiated fee of approximately $13.7 million for its financial advisory services in connection with the sale of CenterPoint Energy’s 81% interest in Texas Genco. A significant portion of that fee, or approximately $12.2 million, is contingent upon completion of the transactions contemplated by the transaction agreement. The other portion of Citigroup’s fee has already been paid by CenterPoint Energy by means of an initial upfront payment and a second payment made in connection with Citigroup’s delivery of its opinion. CenterPoint Energy also has agreed to reimburse Citigroup for its reasonable out-of-pocket expenses, including the fees and expenses of legal counsel, and to indemnify Citigroup and related parties against certain liabilities, including liabilities under the federal securities laws, arising out of its engagement.

 

Citigroup and its affiliates in the past have provided, and currently provide, services to Texas Genco, CenterPoint Energy and affiliates of GC Power Acquisition unrelated to the transactions contemplated by the transaction agreement, including financing and financial advisory services, for which services Citigroup and its affiliates have received and expect to receive compensation. During the past two years, CenterPoint Energy and its affiliates (including us) have paid Citigroup and its affiliates aggregate fees of approximately $37 million for these services. In addition, Citigroup and/or one of its affiliates engaged in the commercial lending business may be a participant in any financing obtained by GC Power Acquisition in connection with the transactions contemplated by the transaction agreement (including acting as an arranger and agent for, and lender under, credit facilities, and as a manager for an offering of debt securities), for which services such entities would receive compensation. In the ordinary course of their business, Citigroup and its affiliates may actively trade or hold securities of Texas Genco or CenterPoint Energy for their own account or for the accounts of their customers and, accordingly, may at any time hold a long or short position in such securities.

 

Our Financial Projections

 

In connection with the auction process described under “—Background of the Transactions,” GC Power Group and other potential bidders were provided selected non-public financial projections that we prepared in February 2004 as well as other confidential information regarding our business, assets and operations. The February 2004 projections were based on forward NYMEX gas prices as of January 30, 2004 and did not contemplate the now anticipated acquisition of an additional interest in the South Texas Project pursuant to the May 2004 exercise of our right of first refusal following notice from one of the co-owners of the South Texas Project in March 2004 of their intent to sell their 25.2% interest in the South Texas Project. See “Parties to the Transaction Agreement—Texas Genco Holdings, Inc.”

 

In mid July 2004, we prepared and provided updated financial projections to our board of directors, including the special committee, RBC, CenterPoint Energy and Citigroup in order to assist our board of directors, including the special committee, and CenterPoint Energy in evaluating the competing transaction proposals and in determining whether to agree to a sale transaction. The updated projections were not provided to GC Power Group or any other bidder because it was impracticable to do so at the time they were prepared. In addition, we did not believe it necessary to provide our updated projections to bidders since GC Power Group, Bidder White and Bidder Purple had each been provided with extensive information regarding our business, assets and operations during the course of the due diligence process described under “—Background of the Transactions,”

 

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we had previously explained to each bidder the impact changes in natural gas prices could have on our financial results and each bidder had access to the key publicly available factual matters affecting our projections described in the immediately following bullet point list. Accordingly, in our view they each had sufficient current information to develop their own financial models regarding our business and to produce their own updated financial projections based on any other assumptions or information they deemed relevant. The July 2004 projections:

 

  were based on publicly available forward NYMEX gas prices as of July 6, 2004;

 

  assumed that we completed the purchase of an additional 13.2% interest in the South Texas Project for $175 million in the first quarter of 2005 pursuant to the exercise of our right of first refusal announced publicly in May 2004 and incremental capacity expansions planned at the South Texas Project; and

 

  updated the February 2004 projections for actual capacity auction revenues through June 30, 2004 and other results of operations through May 31, 2004, which reflected lower than anticipated forced outage rates at our baseload facilities during such periods, which information had been provided to GC Power Group and Bidder White.

 

Our projected net income for 2004 increased in the July 2004 projections, as compared to the February 2004 projections, due to the following factors that arose during the first six months of 2004 but were not anticipated at the time the February 2004 projections were prepared:

 

  sales of surplus NOx emissions allowances;

 

  lower than anticipated forced outage rates at our baseload facilities; and

 

  reduced property tax estimates.

 

Our projected revenue for 2004 decreased in the July 2004 projections, as compared to the February 2004 projections, because of a reduction in estimated 2004 energy payment revenues due to a reduction in anticipated demand for our gas-fired generating facilities.

 

Our projected net income for 2005 through 2008 increased in the July 2004 projections, as compared to the February 2004 projections, due to:

 

  the forward gas prices described above;

 

  the assumed acquisition of an additional 13.2% interest in the South Texas Project in the first quarter of 2005 and incremental capacity expansions planned at the South Texas Project; and

 

  reduced property tax estimates.

 

We do not as a matter of course make public any projections as to future revenue, earnings or other results. The projections set forth below have been prepared by us and are included in this information statement only because this information was, in the case of the February 2004 projections, provided to our board of directors, RBC, CenterPoint Energy, Citigroup, GC Power Group and other potential bidders in connection with their evaluation of a potential transaction and, in the case of the July 2004 projections, provided to our board of directors, RBC, CenterPoint Energy and Citigroup.

 

The accompanying prospective financial information was not prepared with a view toward public disclosure or with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information. This information is not fact and should not be relied upon as being necessarily indicative of future results, and we caution you not to place undue reliance on the prospective financial information.

 

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Neither our independent auditors nor any other independent accountants have compiled, examined, or performed any procedures with respect to the prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability. Our auditors assume no responsibility for, and disclaim any association with, the accuracy, reasonableness or achievability of the prospective financial information.

 

This prospective financial information is subjective in many respects and is therefore susceptible to various interpretations. This prospective financial information is based on a variety of assumptions relating to our business industry, operating performance, general business and economic conditions, and other matters, which are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. These assumptions involve judgments with respect to, among other things, future economic and competitive conditions and future business conditions. Therefore, actual results ultimately may be either higher or lower than those set forth below. The inclusion of this information should not be regarded as an indication that GC Power Group or anyone else who received this information considered, or now considers, it to be a reliable prediction of future events, and this information should not be relied on as such. Neither we, nor GC Power Group nor any other person is under any obligation to, or has any intent to, update these projections at any future time.

 

The transactions contemplated by the transaction agreement, including our forward power sales pursuant to the power purchase and sale agreement described under “—Other Agreements—Power Purchase and Sale Agreement,” were not considered in the preparation of the projections. We caution you not to place undue reliance on this information.

 

Financial Projections Prepared in February 2004 ($ in millions)

 

     2004

   2005

   2006

   2007

   2008

Revenue

   $ 2,053.4    $ 2,123.6    $ 1,875.0    $ 2,071.0    $ 2,140.0

Operating Income

     455.9      343.4      256.8      272.7      267.0

EBIT

     462.4      354.3      268.7      286.4      284.2

Net Income

     308.4      238.2      182.6      194.1      192.6

Net Cash From Operations

     482.2      310.1      260.6      330.8      338.9

Capital Expenditures

     93.9      129.5      149.1      102.2      62.0

 

Updated Financial Projections Prepared in July 2004 ($ in millions)

 

     2004

   2005

   2006

   2007

   2008

Revenue

   $ 2,000.2    $ 2,174.7    $ 2,163.7    $ 2,087.6    $ 1,977.3

Operating Income

     476.5      527.1      580.9      492.1      387.6

EBIT

     481.6      532.3      592.6      510.2      412.0

Net Income

     320.6      353.9      393.1      339.5      275.7

Net Cash From Operations

     542.2      422.0      569.9      521.0      457.5

Capital Expenditures

     107.0      316.3      170.5      118.4      73.1

 

Report of Valuation Panel in CenterPoint Houston’s 2004 True-Up Proceeding

 

On March 31, 2004, CenterPoint Houston and certain affiliates filed with the PUC the final true-up application required by the Texas electric restructuring law. The Texas electric restructuring law authorizes public utilities to recover in 2004 a true-up balance composed of stranded power plant costs, the cost of environmental controls and certain other costs associated with transition from a regulated to a competitive environment. CenterPoint Houston’s application included a request to recover approximately $2.4 billion of stranded power plant costs. The amount of stranded power plant costs was based on the market valuation for our generation assets of $36.26 per outstanding share of our common stock, or approximately $2.9 billion in the aggregate, established as of March 31, 2004 under a partial stock market valuation method provided for in the

 

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Texas electric restructuring law and Reliant Energy’s business separation plan. The amounts CenterPoint Houston requested to recover, including the stranded power plant costs, were challenged by the PUC staff as well as various third parties.

 

In June 2004, the PUC retained an investment bank to serve as an independent financial expert pursuant to the Texas electric restructuring law to determine whether the share value established under the partial stock market valuation method is fairly representative of the value of our common stock equity or whether a control premium exists for CenterPoint Energy’s 81% interest in us, and, if so, the value of the amount of any control premium. On August 6, 2004, a valuation panel, consisting of three representatives from the independent financial expert, issued a report to the PUC stating that, based on the evidence provided and the analyses and factors described in its report, as of March 31, 2004, Texas Genco had a fair range of total common stock equity values between $38.27 per share and $46.58 per share, with a mid-point of $42.425 per share. In its report, the valuation panel indicated that it had performed a variety of financial and comparative analyses, including:

 

  discounted cash flow analyses;

 

  an examination of selected precedent generation asset transactions;

 

  a comparison of our financial, operating and stock market data to corresponding data of certain selected publicly traded companies in the non-regulated power generation industry; and

 

  a consideration of the terms of the transactions contemplated under the transaction agreement.

 

In its report, the valuation panel indicated that in conducting its discounted cash flow analyses it had relied on the February 2004 financial projections described under “—Our Financial Projections” and on a revised set of projections it prepared to adjust for changes in forward natural gas price curves as of March 31, 2004 and the implied resultant changes in power prices. The valuation panel also stated that under its discounted cash flow analysis it determined the discounted present value of our projected unlevered after-tax cash flows generated over a five-year period and then added a terminal value based on a range of EBITDA multiples, and it discounted our projected unlevered after-tax cash flows and terminal value using a range of discount rates representing estimates of our weighted average cost of capital. The report states that in conducting its precedent asset transaction analysis, the valuation panel divided the selected generation asset transactions into different categories based on the fuel type and technology of the generation assets. The valuation panel stated that it calculated the purchase price in the selected transactions as a multiple of net capacity ($/kW) and then determined the range of valuation for our generation assets by applying the multiple ranges derived from the precedent transactions. The report also states that in conducting the public market comparables analysis, the valuation panel reviewed the ratio of firm value to forecasted fiscal 2004 and 2005 EBITDA as of March 31, 2004. In considering the terms of the transactions contemplated under the transaction agreement, the report states that the valuation panel considered adjustments to the value implied by the transactions to take into account changes in circumstances between the March 31, 2004 valuation date and July 21, 2004, such as an upward movement in the forward price curves for natural gas and the implied resultant changes in power prices, and the effect of our exercise of our right of first refusal to acquire an additional 13.2% interest in the South Texas Project.

 

During an open hearing before the PUC on August 19, 2004 in which the PUC questioned the valuation panel regarding its report, the valuation panel stated that it had conducted extensive due diligence regarding us and performed sensitivity analysis regarding the financial projections prepared by our management. During the hearing, the valuation panel also stated that, under its analysis, the value of our common stock increased by approximately $3.00 per share between March 31, 2004 and July 21, 2004 due to the movement in natural gas prices and our exercise of the right of first refusal for an additional 13.2% interest in the South Texas Project, and that the actual average per share price to be paid under the terms of the transaction agreement was higher than what the valuation panel would have paid based on its own analysis.

 

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CenterPoint Energy believes that the PUC has substantially completed its deliberations on CenterPoint Houston’s true-up application and expects the PUC will issue its formal written decision during the fourth quarter of 2004.

 

Effects of the Transactions; Plans or Proposals After the Transactions

 

Public Company Merger

 

After the Genco LP division, the receipt of all required regulatory approvals and the satisfaction of the other conditions to the public company merger, we will merge with NN Houston Sub and all of the approximately 19% of our issued and outstanding shares of common stock owned by our public shareholders will be converted into the right to receive $47.00 per share in cash, without interest and less any applicable withholding taxes, subject to the right of dissenting shareholders to request appraisal of their shares as provided under Texas law. You must be a holder of shares of our common stock as of the effective date of the public company merger in order to have the right to receive the cash consideration for your shares described above. We will be the surviving corporation of the public company merger.

 

As a result of the public company merger:

 

  each share of our common stock issued and outstanding immediately before the effective time of the public company merger will be converted into the right to receive $47.00 in cash, without interest and less any applicable withholding taxes, other than shares of common stock:

 

  owned by CenterPoint Energy or any of its subsidiaries, including us and Utility Holding; or

 

  held by shareholders who perfect their appraisal rights under Texas law; and

 

  Utility Holding will own all of the outstanding shares of our common stock.

 

The directors of NN Houston Sub immediately prior to the public company merger will be the initial directors of the surviving corporation following the public company merger. Our officers immediately prior to the public company merger will be the initial officers of the surviving corporation following the public company merger. Our articles of incorporation and bylaws prior to the public company merger will be the articles of incorporation and bylaws of the surviving corporation following the public company merger.

 

When the public company merger is completed, we will be a privately held corporation, wholly owned by Utility Holding. There will be no public market for our common stock, and shares of our common stock will be delisted from the New York Stock Exchange and deregistered under the Exchange Act. The deregistration of our common stock will make certain provisions of the Exchange Act, including the periodic reporting obligations, the short-swing profit recovery provisions of Section 16(b), the requirement of furnishing a proxy or information statement in connection with shareholders’ meetings, and the new corporate governance requirements under the Sarbanes-Oxley Act of 2002, no longer applicable to us. However, we expect GC Power Acquisition to issue debt securities in connection with the transactions contemplated by the transaction agreement. Under the terms of that debt, GC Power Acquisition may become a voluntary filer under the Exchange Act. As a voluntary filer, GC Power Acquisition would become subject to certain corporate governance requirements under the Sarbanes-Oxley Act of 2002.

 

Upon completion of the public company merger, our current public shareholders will cease to have ownership interests in us or rights as our shareholders and therefore will not have the opportunity to share in any of our future earnings and growth or bear the risk of any losses generated by our operations or any decrease in our value after the public company merger. Similarly, because CenterPoint Energy has agreed to a fixed amount of consideration in the transactions, it will also not have the opportunity to share in any of our future earnings and growth or bear the risk of any losses generated by our operations or any decrease in our value after the public company merger, unless the nuclear asset acquisition does not close, in which event we will continue to be an indirect, wholly owned subsidiary of CenterPoint Energy.

 

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Non-Nuclear Asset Acquisition

 

On the first business day after the closing of the public company merger or as soon as possible thereafter, and subject to the satisfaction of other conditions to the non-nuclear asset acquisition, two wholly owned subsidiaries of GC Power Acquisition will merge with and into Genco II LP and Genco Services. As a result of these mergers, Genco II LP and Genco Services will become indirect wholly owned subsidiaries of GC Power Acquisition. In the non-nuclear asset acquisition, we will receive $2,789 million in cash, without interest, in exchange for our ownership interests in Genco II LP and $24 million in cash, without interest, in exchange for our ownership interests in Genco Services, for an aggregate of $2,813 million. After the closing of the non-nuclear asset acquisition, all of our business operations will be conducted by Genco LP, which will hold only cash and our assets and liabilities relating to our interest in the South Texas Project. After the closing of the non-nuclear asset acquisition, we will distribute up to an aggregate of $2,231 million in cash to Utility Holding.

 

Nuclear Asset Acquisition

 

Following receipt of approval by the NRC and the satisfaction of other conditions to the nuclear asset acquisition, HPC Merger Sub, a wholly owned subsidiary of GC Power Acquisition, will merge with and into us. As a result of this merger, we will become an indirect wholly owned subsidiary of GC Power Acquisition. In the nuclear asset acquisition, Utility Holding will receive $700 million in cash, without interest, in consideration for its 100% ownership interest in us.

 

The Transaction Agreement

 

The following description is a summary of the material terms and conditions of the transaction agreement. The provisions of the transaction agreement are complicated and not easily summarized. This summary may not contain all of the information about the transaction agreement that is important to you. This summary is qualified in its entirety by the actual provisions of the transaction agreement, a copy of which is attached to this information statement as Appendix A. We encourage you to read the transaction agreement in its entirety.

 

Closing of the Transactions

 

Public Company Merger. The closing of the public company merger will take place on the first business day (that is a day that is followed by three consecutive days that are all business days) following the date on which all of the conditions to the closing of the public company merger described below under “—Conditions to the Closing of the Public Company Merger” have been satisfied or waived, or at such other date or time as the parties may agree. The public company merger will be consummated and become effective at the time specified in the articles of merger for the public company merger to be filed with the Secretary of State of the State of Texas, which is expected to be on the closing date of the public company merger.

 

Non-Nuclear Asset Acquisition. The closing of the non-nuclear asset acquisition will take place on the first business day after the closing of the public company merger or as soon as possible thereafter on the terms and subject to the conditions to the closing of the non-nuclear asset acquisition described below under “—Conditions to the Closing of the Non-Nuclear Asset Acquisition.” The non-nuclear asset acquisition will be consummated and become effective at the time specified in the articles of merger for those transactions to be filed with the Secretary of State of the State of Texas, which is expected to be on the closing date of the non-nuclear asset acquisition.

 

Nuclear Asset Acquisition. The closing of the nuclear asset acquisition will take place on the fifth business day following the date on which all of the conditions to each party’s obligations with respect to the nuclear asset acquisition described below under “—Conditions to the Closing of the Nuclear Asset Acquisition,” including receipt of necessary regulatory approvals from the NRC have been satisfied or waived, or at such other date or time as CenterPoint Energy and GC Power Acquisition may agree. The nuclear asset acquisition will be

 

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consummated and become effective at the time specified in the articles of merger to be filed with the Secretary of State of the State of Texas, which is expected to be on the closing date of the nuclear asset acquisition.

 

Mechanics of the Public Company Merger

 

Treatment of Common Stock Owned by Public Shareholders of Texas Genco. At the effective time of the public company merger, each share of our common stock issued and outstanding immediately prior to that effective time (other than shares owned by CenterPoint Energy or any of its subsidiaries and shares held by shareholders who validly perfect dissenters’ rights under Texas law) will, by virtue of the public company merger and without any action on the part of the shareholders, be converted into the right to receive $47.00 in cash payable without interest and less any applicable withholding taxes, which we refer to as the public company merger consideration. You must be a holder of shares of our common stock as of the effective date of the public company merger in order to have the right to receive the cash consideration for your shares described above.

 

Exchange and Payment Procedures. Prior to the effective time of the public company merger, CenterPoint Energy will appoint a bank or trust company reasonably acceptable to GC Power Acquisition and to us to act as the paying agent for the public company merger. At or promptly after the effective time of the public company merger, the surviving corporation will deposit with the paying agent an amount of cash required for payment of the public company merger consideration to our public shareholders in the public company merger upon surrender of the certificates formerly evidencing shares of our common stock.

 

As soon as reasonably practical after the effective time of the public company merger, the paying agent will mail to each holder of record of a certificate or certificates that immediately prior to the effective time of the public company merger represented outstanding shares of our common stock:

 

  a form of letter of transmittal, which will specify that delivery will be effected, and risk of loss and title to the shareholder’s certificates will pass, only upon proper delivery of the certificates to the paying agent and which will be in customary form and have such other provisions as CenterPoint Energy, GC Power Acquisition and we may reasonably specify; and

 

  instructions for use in effecting the surrender of a share certificate or certificates in exchange for the public company merger consideration.

 

You should not forward your stock certificates to the paying agent without a letter of transmittal.

 

Upon surrender of a certificate for cancellation to the paying agent, together with a duly completed and validly executed letter of transmittal and any other documents the paying agent reasonably may require, the holder of such certificate will be entitled to receive the public company merger consideration in respect of shares formerly represented by such certificate and the surrendered certificate will be canceled. The public company merger consideration delivered upon the proper surrender of a certificate will be deemed to have been delivered at the effective time of the public company merger in full satisfaction of all rights pertaining to the shares of common stock formerly represented by the certificate.

 

If your shares of common stock are held in book-entry form through our Direct Registration System, as soon as reasonably practical after the effective time of the public company merger, you will receive notice from the paying agent and a check for the cash consideration for those shares.

 

If your shares of common stock are held in “street name” by your broker, you will receive instructions from your broker as to how to effect the surrender of your “street name” shares and receive cash for those shares.

 

At the close of business on the date on which the effectiveness of the public company merger occurs, our share transfer books will be closed and there will be no further registration of transfers of shares of our common stock that were outstanding immediately prior to the public company merger effective time. If, after the close of

 

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business on the date on which the public company merger effective time occurs, certificates are presented to the surviving corporation or the paying agent for transfer or any other reason, they will be canceled and exchanged for the public company merger consideration.

 

None of the parties to the transaction agreement, the surviving corporation or the paying agent will be liable to any person in respect of any cash or property delivered to a public official pursuant to applicable abandoned property, escheat or similar law. Any portion of the public company merger consideration deposited with the paying agent that remains undistributed to the holders of certificates for twelve months after the public company merger effective time (or immediately prior to such earlier date on which any cash or property in respect of such certificate would otherwise escheat to or become the property of any governmental authority) will be delivered to the surviving corporation, upon demand. Any holders of certificates formerly representing shares of our common stock who have not theretofore surrendered their certificates will thereafter look only to the surviving corporation and only as general creditors thereof for payment of the public company merger consideration, if any, to which such shareholders may be entitled.

 

If your stock certificate has been lost, stolen, defaced or destroyed, then you will only be entitled to receive the public company merger consideration upon executing and delivering an affidavit that your certificate was lost, stolen, defaced or destroyed and, if the surviving corporation requires, you will have to post a bond in a reasonable amount determined by the surviving corporation indemnifying against any claim that may be made with respect to such lost, stolen, defaced or destroyed certificate.

 

The surviving corporation or paying agent will be entitled to deduct and withhold any applicable taxes from the public company merger consideration otherwise payable to a holder of shares of our common stock.

 

Articles of Incorporation and Bylaws. Our articles of incorporation and bylaws immediately prior to the public company merger will be the articles of incorporation and bylaws, respectively, of the surviving corporation following the public company merger effective time.

 

Directors and Officers. The directors of NN Houston Sub immediately prior to the public company merger effective time will be the initial directors of the surviving corporation following the public company merger effective time. Our officers immediately prior to the public company merger effective time will be the officers of the surviving corporation immediately after the public company merger effective time.

 

The Non-Nuclear Asset Acquisition and the Nuclear Asset Acquisition

 

In the non-nuclear asset acquisition, we will receive $2,789 million in cash, without interest, in consideration for our ownership interests in Genco II LP and $24 million in cash, without interest, in consideration for our ownership interests in Genco Services. After the closing of the non-nuclear asset acquisition, we will distribute up to an aggregate of $2,231 million in cash to Utility Holding. In the nuclear asset acquisition, Utility Holding will receive $700 million in cash, without interest, in consideration for its 100% ownership interest in us. The aggregate of up to $2,931 million in cash to be received by Utility Holding as a result of the non-nuclear asset acquisition and the nuclear asset acquisition represents a per share purchase price of approximately $45.25 for each of the 64,764,240 shares of our common stock that Utility Holding currently owns.

 

Between the non-nuclear asset acquisition and the nuclear asset acquisition, the members of our senior management team will continue to serve in their current capacities at Texas Genco and to manage the nuclear assets and liabilities. At or prior to the nuclear asset acquisition closing, all of our and our subsidiaries’ directors will deliver to us written resignations and all of our and our subsidiaries’ officers will deliver to us written resignations or CenterPoint will cause those officers to be removed from their positions as officers, in each case effective on the closing date of the nuclear asset acquisition.

 

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Representations and Warranties in the Transaction Agreement

 

Each of the parties to the transaction agreement made certain customary representations and warranties related to their due organization, good standing, and authorization to enter into the transaction agreement, consents of governmental entities required as a result of the transactions contemplated by the transaction agreement, brokers’ fees and the absence of any violation of or conflict with such party’s organizational documents, applicable law or material contracts of such party as a result of entering into the transaction agreement and consummating the transactions contemplated by the transaction agreement, among others. In addition, each party made certain representations and warranties particular to such party to certain other parties to the agreement. The representations and warranties are, in some cases, subject to specified exceptions and qualifications. You should read the transaction agreement in its entirety to understand the nature of these representations and warranties and risks that they represent to completion of the public company merger.

 

Representations and Warranties of CenterPoint Energy. In addition to the customary representations noted above, CenterPoint Energy also made representations and warranties that relate to, among other things:

 

  Utility Holding’s ownership of our shares free and clear, with certain exceptions, of liens;

 

  affiliate transactions;

 

  the transactions relating to the previous separation of Texas Genco from CenterPoint Energy; and

 

  the tax-exempt status under the Internal Revenue Code of certain pollution control bonds issued by governmental authorities on behalf of CenterPoint Energy and CenterPoint Houston.

 

Representations and Warranties of Texas Genco. In addition to the customary representations noted above, we also made representations and warranties that relate to, among other things:

 

  our and our subsidiaries’ capitalization;

 

  the absence of “poison pills” and “anti-takeover” plans;

 

  the ownership of shares of our common stock;

 

  our filings with the SEC, the NRC, the PUC and other governmental authorities since December 11, 2002;

 

  our financial statements and the financial statements of the South Texas Project;

 

  our disclosure controls and procedures;

 

  the absence of undisclosed liabilities;

 

  the absence of certain changes and events since December 31, 2003;

 

  the absence of litigation;

 

  our compliance with laws and possession of all approvals, authorizations, certificates, licenses, consents and permits of governmental authorities necessary for us to own, lease and operate our properties and to carry on our business;

 

  employment and labor matters, including matters related to employee benefit plans;

 

  title, ownership and related matters with respect to our owned and leased real property;

 

  taxes, environmental matters, insurance, intellectual property;

 

  material contracts;

 

  our election not be governed by certain restrictions on business combinations under the Texas Business Corporations Act;

 

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  regulatory matters, including matters related to:

 

  the 1935 Act, the Atomic Energy Act of 1954, the Texas utility law and ERCOT protocols;

 

  the South Texas Project’s compliance with applicable health, safety, regulatory and other legal requirements;

 

  Genco LP’s status as an exempt wholesale generator as defined in Section 32 of the 1935 Act, the absence of proceedings to revoke or modify such status and the absence of facts that are reasonably likely to cause Genco LP to lose such status;

 

  qualified and non-qualified decommissioning funds;

 

  agreements and transactions with affiliates;

 

  swaps, caps, floors, collars, futures contracts, forward contracts, options and other derivative financial instruments or contracts;

 

  our receipt of the fairness opinion from RBC Capital Markets Corporation;

 

  the approval and recommendation by our board of directors, upon the unanimous recommendation of a special committee thereof, of the transaction agreement and the transactions contemplated by the transaction agreement; and

 

  ownership of assets by us or our subsidiaries other than Genco LP, Genco Services and, after the Genco LP division, Genco II LP.

 

Representations and Warranties of GC Power Acquisition. In addition to the customary representations noted above, GC Power Acquisition also made representations and warranties that relate to, among other things:

 

  delivery to us of the debt financing letter and equity letter (as described below under “—Financing of the Transactions”);

 

  the absence of litigation;

 

  its independent review and analysis of our business, operations, assets, liabilities, results of operations, financial condition, technology and prospects, and its access to our personnel, properties, premises and records;

 

  the absence of any ownership or control of, or construction-in-progress with respect to, generating assets located in or capable of delivering electricity to the ERCOT market; and

 

  its ownership of our securities.

 

Our representations and warranties and the representations and warranties of GC Power Acquisition will expire at the effective time of the public company merger, except that the representations and warranties that relate to our nuclear assets and liabilities will expire at the closing of the nuclear asset acquisition. The representations and warranties of CenterPoint Energy (other than with regard to required consents and the absence of conflicts) will survive indefinitely.

 

Conduct of Our Business Pending the Closing of the Nuclear Asset Acquisition

 

We have agreed that prior to the closing of the nuclear asset acquisition, unless otherwise contemplated by the transaction agreement or required by applicable law, or unless GC Power Acquisition gives its prior written consent (which cannot be unreasonably withheld or delayed), we and our subsidiaries will:

 

  conduct our businesses only in the ordinary course of business, in a manner consistent with past practice, in compliance with all applicable laws and in accordance with good utility practices; and

 

  preserve substantially intact our business organization, preserve our assets and properties in good repair and condition and preserve our present relationships with governmental authorities, customers, suppliers and other persons with whom we have business relations.

 

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We also have agreed that during that time period, unless otherwise contemplated by the transaction agreement or unless GC Power Acquisition gives its prior written consent (which cannot be unreasonably withheld or delayed), we and our subsidiaries will not:

 

  amend or otherwise change our or any of our subsidiaries’ articles of incorporation, bylaws or similar organization documents;

 

  except as required under a contract in force as of the date of the transaction agreement, issue, deliver, lease, sell and leaseback, pledge, license, transfer, mortgage, encumber, dispose of or otherwise subject to any lien any of our or our subsidiaries’ securities or any of our or our subsidiaries’ property or assets whether tangible or intangible other than assets sold, leased, pledged, licensed, transferred, disposed of or encumbered in the ordinary course of business and in a manner consistent with past practice;

 

  declare, set aside, make or pay any dividend or other distribution, payable in cash, stock or other equity interests, property or otherwise with respect to any security of ours or our subsidiaries, other than:

 

  prior to the public company merger, regular quarterly cash dividends on our common stock not in excess of $0.25 per share per quarter, in each case with usual declaration, record and payment dates and otherwise in accordance with our past dividend policy;

 

  following the closing of the non-nuclear asset acquisition and the repayment of all principal and interest under the overnight bridge loan described below under “—Financing of the Transactions,” distributions by us of up to $2,231 million; and

 

  dividends by a direct or indirect wholly owned subsidiary of ours to its parent to the extent required to fund the dividends described in the two immediately preceding bullet points;

 

  reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire, directly or indirectly any of our or our subsidiaries’ securities;

 

  repurchase, repay or incur any indebtedness or issue any securities in respect of indebtedness or assume, guarantee or endorse or otherwise become responsible for the obligations or indebtedness of any person, other than:

 

  repayments in the ordinary course of business and in a manner consistent with past practice under our existing $75 million revolving credit agreement;

 

  borrowings of up to $75 million under our existing $75 million revolving credit agreement;

 

  borrowings under the overnight bridge loan facility discussed below under “—Financing of the Transactions”; and

 

  borrowings under any new or amended credit agreement not containing prepayment penalties and on customary terms:

 

  to fund the purchase price for an additional interest in the South Texas Project pursuant to the pending exercise of our right of first refusal with respect to up to an additional 25.2% interest in the South Texas Project;

 

  to fund dividends or distributions allowed under the terms of the transaction agreement; and

 

  of up to $75 million to fund working capital requirements to meet operating cash needs (less any amount borrowed for working capital purposes under our existing $75 million revolving credit agreement);

 

  make payments under certain identified affiliated company contracts, other than any such payments prior to the non-nuclear asset acquisition closing date, in excess of $3 million per month, forgive any liabilities, debts or obligations under such contracts, take any action outside the ordinary course of business consistent with past practice pursuant to any of those contracts or engage in or enter into additional affiliated company contracts;

 

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  amend in any material respect, terminate, cancel or renew certain contracts;

 

  acquire any assets (other than in the ordinary course of business), business or any corporation, partnership, limited liability company, association or business organization or division thereof (other than acquisitions prior to the closing of the non-nuclear asset acquisition with an aggregate consideration of not more than $5 million) other than fuel, supplies, maintenance materials and other inventory items in the ordinary course of business consistent with past practice;

 

  subject to certain exceptions, authorize or make any capital expenditures except such expenditures made prior to the closing of the non-nuclear asset acquisition and not in excess of $5 million individually or $25 million in the aggregate except as contemplated by the transaction agreement;

 

  amend, terminate, cancel or renew the agreements described under “—Other Agreements —Power Purchase and Sale Agreement” and “—Other Agreements—Back-to-Back Power Purchase Arrangements”;

 

  except as required by applicable law, reactivate or enter into any “reliability must run” contract with respect to any generating plant that was shut down or “mothballed” as of the date of the transaction agreement;

 

  except to the extent required by applicable law or the terms of any employee benefit plan existing as of the date of the transaction agreement, increase or otherwise amend the compensation or fringe benefits of any present or former director, officer or employee of us or our subsidiaries (except for increases in salary or hourly wage rates, in the ordinary course of business consistent with past practice); grant any retention, severance or termination payment to any of those individuals or enter into or amend any employment, consulting or severance contract with any of those individuals; loan or advance any money or property to those individuals; establish, enter into, adopt, amend or terminate any employee benefit plan or collective bargaining agreements; or hire any new employees;

 

  fail to maintain our or our subsidiaries’ books and records in accordance with GAAP in any material respect or, except as may be required as a result of a change in law or in GAAP, change material tax, pension, regulatory or financial accounting policies, procedures, practices or principles used by us or our subsidiaries;

 

  make, change or rescind any material tax election; fail to duly and timely file all material tax returns and other documents required to be filed with any governmental authority, subject to timely extensions permitted by applicable law; extend the statute of limitations with respect to any tax; or, except in the ordinary course of business, settle or compromise any material federal, state, local or foreign tax liability;

 

  waive, release, assign, settle or compromise any pending or threatened legal proceeding or action which is material, which relates to the transactions contemplated by the transaction agreement or which is brought by any of our or our subsidiaries’ shareholders in that capacity;

 

  adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of us or any of our subsidiaries;

 

  pay, discharge or satisfy any material claims, liabilities or obligations (whether absolute, accrued, asserted or unasserted, contingent or otherwise), other than any payment, discharge or satisfaction when due or otherwise in the ordinary course of business and consistent with past practice of liabilities reflected or reserved against on our balance sheet or incurred in the ordinary course of business after March 31, 2004 and consistent with past practice;

 

  make any loans, advances or capital contributions (including any “keep well” or other contracts to maintain any financial statement condition of another person) to, or investments in, any person, other than loans, advances and capital contributions to our wholly owned subsidiaries in existence on the date of the transaction agreement (but excluding loans by Genco LP or Genco Services);

 

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  other than in the ordinary course of business and in a manner consistent with past practice or as required by applicable law, modify in any material respect our trading policies or any similar policy, other than modifications which are more restrictive to us, or enter into any contract or transaction related to any derivative product or any similar transaction (other than as permitted by the trading policies);

 

  enter into, amend, terminate, cancel or renew any contract or other transaction other than in the ordinary course of business and in a manner consistent with past practice, as required by applicable law, or otherwise that individually or in the aggregate with all other contracts or transactions, would conflict with, violate or otherwise not be permitted under our trading policies or any similar purchasing policy;

 

  fail to maintain in full force and effect insurance policies covering us, our subsidiaries and our respective properties, assets and businesses in a form and amount consistent with good utility practice and to promptly and diligently prosecute claims under such policies;

 

  except to the extent required by applicable law, take any action that would reasonably be expected to result in any of our representations and warranties that is qualified by materiality or material adverse effect becoming untrue or that is not so qualified becoming untrue in any material respect, or result in any condition to the public company merger not being satisfied;

 

  fail to take any action that would reasonably be expected, directly or indirectly, to prevent or materially impair or delay the consummation of the transactions; or

 

  take, offer, propose to take or enter into or amend any contract to take, offer or propose any of the actions described above.

 

Additional Agreements

 

Access to Information. Until the closing of the nuclear asset acquisition and subject to certain limitations, we have agreed to, and to cause our subsidiaries and our and their respective officers, directors, employees, accountants, auditors, counsel, financial advisors and other agents and representatives to:

 

  give GC Power Acquisition and its representatives and potential financing sources reasonable access to our and our subsidiaries’ officers, employees, agents, properties (including the South Texas Project), offices, plants and other facilities and to our and our subsidiaries’ books, personnel, contracts and records;

 

  permit GC Power Acquisition to make such copies and inspections thereof as GC Power Acquisition may reasonably request; and

 

  furnish GC Power Acquisition with such financial, trading, marketing and operating data and other information concerning the business, properties (including the South Texas Project), contracts, assets, liabilities, personnel and other aspects of us or any of our subsidiaries as GC Power Acquisition and its representatives and potential financing sources may from time to time reasonably request.

 

GC Power Acquisition has agreed to hold this information in confidence, pursuant to the terms of the letter agreements between the members of GC Power Acquisition and CenterPoint Energy, until the nuclear asset acquisition closing date with respect to the nuclear assets and liabilities and until the non-nuclear asset acquisition closing date with respect to the non-nuclear assets and liabilities.

 

Consents and Cooperation. We, GC Power Acquisition, CenterPoint Energy and Utility Holding have agreed to cooperate, and to use commercially reasonable efforts, to take all actions and to do, or cause to be done, and to assist and cooperate with the other party in doing, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by the transaction agreement as promptly as practicable, including but not limited to making all filings and obtaining all approvals and third party consents necessary to consummate the transactions. Those efforts will not require CenterPoint Energy, Utility Holding, NN Merger Sub, GC Power Acquisition or us or our subsidiaries to make any payment to obtain any approval or consent, other than nominal

 

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transfer fees or filing fees and/or the costs and expenses of third parties pursuant to the terms of any contract. We, CenterPoint Energy and our respective subsidiaries are not permitted to consent to any action or make or offer to make any substantive commitment or undertaking or incur any liability or obligation with respect to us or our subsidiaries without the consent of GC Power Acquisition, which will not be unreasonably withheld. CenterPoint Energy and GC Power Acquisition will file with the United States Federal Trade Commission and the United States Department of Justice the notification and report form required for the transactions and agree to cooperate with respect to such filings, as well as resolution of any impediments to the consummation of the transactions and obtaining necessary consents. We, GC Power Acquisition, CenterPoint Energy and Utility Holding have agreed to keep the other party apprised of the status of matters relating to the completion of the transactions contemplated by the transaction agreement. In addition, we have agreed to use our reasonable best efforts to obtain from the IRS a ruling regarding the taxability of certain events related to the transactions.

 

Public Announcements. Prior to the closing of the nuclear asset acquisition, the parties to the transaction agreement generally have agreed not to issue any report, statement or press release or otherwise make any public statements with respect to the transaction agreement unless reasonably believed to be required by law or in connection with a party’s obligations as a publicly held, exchange-listed company, in which case the parties will use their commercially reasonable efforts to mutually agree on the language of the statement.

 

Tax Matters. CenterPoint Energy, Utility Holding and GC Power Acquisition have agreed upon certain tax matters, including matters that relate to tax elections, tax indemnifications, computation of tax liabilities, tax returns, notification and control over certain tax contests, transfer taxes, refunds and overpayments, resolution of tax-related disputes and post-closing actions that affect liability for taxes.

 

Debt Financing. We, CenterPoint Energy and Utility Holding have agreed to provide, and to cause each of our respective subsidiaries and representatives to provide, all cooperation GC Power Acquisition reasonably requests that is necessary in connection with the arrangement of the debt financing for the transactions, including (subject to certain exceptions):

 

  participation in meetings, drafting sessions, due diligence sessions, management presentation sessions, “road shows” and sessions with rating agencies;

 

  preparation by us of business projections, financial statements, offering memoranda, private placement memoranda, prospectuses and similar documents; and

 

  execution and delivery by us and our subsidiaries of underwriting or placements agreements, pledge and security documents, other definitive financing documents, including indemnity agreements, or other requested certificates or documents, including a certificate of the chief financial officers of us or any of our subsidiaries with respect to solvency matters, comfort letters of accountants, consents of accountants for use of their reports in any materials relating to the financing to be used in connection with the transactions contemplated by the transaction agreement, legal opinions, engineering reports, environmental reports, surveys and title insurance as may be reasonably requested by GC Power Acquisition.

 

We have agreed to use our commercially reasonable efforts to provide, or to cause our subsidiaries and their respective representatives to provide, certain information and documentation related to our real property constituting a power generating site and to our Energy Development Center facility, including title insurance policies, surveys, current estoppel certificates and other evidence of title.

 

GC Power Acquisition has agreed to use commercially reasonable efforts to arrange the debt financing on the terms and conditions described in the debt financing letter provided to GC Power Acquisition by Goldman Sachs Credit Partners L.P., including using commercially reasonable efforts to negotiate definitive agreements for the debt financing and to satisfy all conditions applicable to GC Power Acquisition in the definitive agreements that are within its control.

 

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CenterPoint Energy and we have agreed to use commercially reasonable efforts to obtain any waivers, amendments, modifications or supplements necessary in connection with the transactions contemplated by the transaction agreement to our existing credit agreement and CenterPoint Energy’s existing $2.3 billion bank facility.

 

Employees; Employee Benefits. We have agreed on certain matters that relate to employees and employee benefits. GC Power Acquisition also has agreed on certain matters that relate to employees and employee benefits, including honoring our existing severance and benefit plans. In addition, GC Power Acquisition, CenterPoint Energy and Utility Holding have agreed that certain mirror retirement, savings and benefit restoration plans, along with certain severance agreements and plans for employees who will continue to work for us following the non-nuclear asset acquisition, may be entered into. In addition, GC Power Acquisition has agreed to comply with our collective bargaining agreements.

 

Insurance. CenterPoint Energy has agreed to certain matters that relate to insurance, including not taking action (and causing its subsidiaries not to take action) that would adversely affect the applicability of, or limit or restrict the coverage available under, certain insurance policies and agreements, as they apply to our assets and liabilities. CenterPoint Energy has also agreed, in certain circumstances, to cooperate with and facilitate us and our subsidiaries in making claims under that insurance coverage.

 

No Solicitation of Transactions. We, CenterPoint Energy and Utility Holding have agreed not to, and to cause our and their respective representations not to, directly or indirectly, initiate, solicit, encourage or otherwise facilitate (including by way of furnishing non-public information) any inquiries or the making or implementation of any proposal or offer (including any proposal from or offer to our shareholders) with respect to (each, an “alternative proposal”):

 

  a merger, reorganization, share exchange, tender offer, exchange offer, consolidation, business combination, recapitalization, liquidation, dissolution, joint venture or similar transaction involving us or any of our subsidiaries; or

 

  any purchase or sale of more than 10% of the assets of us and our subsidiaries taken as a whole, or any of our or our subsidiaries securities.

 

We, CenterPoint Energy and Utility Holding have further agreed and have agreed to cause our and their respective representatives, not to:

 

  have any discussion with or provide any confidential information or data to any person relating to an alternative proposal;

 

  engage in any negotiations concerning an alternative proposal; or

 

  otherwise facilitate any effort or attempt to make or implement an alternative proposal or accept an alternative proposal.

 

If we receive an alternative proposal, we, CenterPoint Energy and Utility Holding are required to notify GC Power Acquisition of it promptly (and in any event by 5:00 p.m., New York City time, on the next business day). We have agreed that neither our board of directors nor any committee thereof will approve or recommend an alternative proposal. CenterPoint Energy has agreed not to sell, transfer, pledge, hypothecate, encumber, assign or dispose of any membership interests in Utility Holding (or any beneficial ownership thereof) or its beneficial ownership interest in shares of our common stock or offer to make such a sale, transfer or other disposition to any person. Utility Holding has also agreed not to sell, transfer or otherwise dispose of shares of our common stock.

 

Tax-Exempt Financing. CenterPoint Energy and GC Power Acquisition have agreed to certain matters regarding the future use of pollution control facilities we own that were financed or refinanced with outstanding tax exempt pollution control bonds issued by governmental authorities on behalf of CenterPoint Energy and

 

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CenterPoint Houston and future cooperation with respect to efforts by CenterPoint Energy or CenterPoint Houston to refinance the bonds.

 

NRC Approval. We and GC Power Acquisition have agreed to prepare jointly and file one or more applications with the NRC for approval of any transfer of the nuclear license deemed to be created by the nuclear asset acquisition. We, CenterPoint Energy, Utility Holding and GC Power Acquisition have agreed to cooperate with one another to facilitate the review of the application and to provide information reasonably requested during the review.

 

Directors’ and Officers’ Indemnification and Insurance. The governing documents of the surviving corporation of the public company merger will contain provisions regarding the limitation of liability and indemnification of officers and directors as are currently included in our governing documents, and will provide indemnification to our directors and officers with respect to claims arising from facts or events that occurred prior to the effective time of the public company merger to the fullest extent permitted by and in accordance with the Texas Business Corporation Act and other applicable law from time to time. GC Power Acquisition will not amend, repeal or otherwise modify those provisions for a period of six years following the public company merger in any manner that would adversely affect those indemnification rights.

 

In addition, GC Power Acquisition agreed that the surviving corporation of the public company merger would cause to be obtained “tail” insurance policies with a claims period of at least six years from the effective time of the public company merger with respect to directors’ and officers’ liability insurance in amount and scope at least as favorable as our existing policies for claims arising from facts or events that occurred prior to the effective time of the public company merger, subject to limitations on the cost that may be incurred for that insurance.

 

Section 16 Matters. Prior to the closing of the public company merger, we and CenterPoint Energy will take all such steps required to cause to be exempt under Rule 16b-3 promulgated under the Exchange Act any dispositions of our common stock (including derivative securities with respect to our common stock) that are treated as dispositions to us under that rule and result from the public company merger by each individual who is subject to the reporting requirements of Section 16(a) of the Exchange Act with respect to us or CenterPoint Energy.

 

Intercompany Accounts and Agreements. We, CenterPoint Energy and Utility Holding have agreed upon certain matters that relate to intercompany accounts and agreements, including that any intercompany accounts and all amounts due under intercompany leases and other agreements between any of us or any of our subsidiaries and CenterPoint Energy or Utility Holding and their affiliates (other than us and our subsidiaries) will be paid or otherwise settled in cash and terminated at the applicable closing, except as contemplated by the transaction agreement. For a description of some of these arrangements, please refer to “—Material Transactions Between CenterPoint Energy and Us.”

 

Transition Services and Other Intercompany Arrangements. The parties have agreed that a subsidiary of CenterPoint Energy and GC Power Acquisition will enter into a transition services agreement on the closing date of the non-nuclear asset acquisition. For more information, please read “—Other Agreements—Transition Services Agreement.” In addition, on or prior to the closing date of the public company merger, we, CenterPoint Energy, GC Power Acquisition and Genco LP will execute an amendment to our existing separation agreement as described under “—Other Agreements—Amendment and Assignment and Assumption Agreement to the Separation Agreement.”

 

Power Purchase Agreement. On or prior to the closing date of the non-nuclear asset acquisition, Genco LP and Genco II LP will enter into a power purchase agreement as described under “—Other Agreements—Back-to-Back Power Purchase Arrangements.”

 

Decommissioning Undertakings. Following the closing of the nuclear asset acquisition, GC Power Acquisition has agreed to cause its subsidiary that owns our interest in the South Texas Project to maintain the

 

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nuclear decommissioning trust in compliance in all material respects with all applicable laws and regulations, including regulations and rulings of the Internal Revenue Service, the NRC and the PUC. CenterPoint Energy has agreed to cause CenterPoint Houston to:

 

  maintain in its tariffed rates for the delivery of electricity the non-bypassable nuclear decommissioning funding charge as established in CenterPoint Houston’s most recent rate order, with such changes to the charge as may be authorized or ordered by the PUC from time to time; and

 

  deposit the decommissioning revenues collected by CenterPoint Houston through the decommissioning charges into the nuclear decommissioning trust for the South Texas Project.

 

CenterPoint Energy and GC Power Acquisition have also agreed to cooperate with each other in certain other matters related to these and other decommissioning undertakings.

 

True-Up Proceeds. GC Power Acquisition has acknowledged that it has no claim or entitlement to any recovery or other amount resulting from any final order issued by the PUC in the stranded cost true-up proceeding relating to CenterPoint Houston now pending before the PUC or to any proceeds from any securitization bonds that may be issued by a subsidiary of CenterPoint Energy to recover amounts CenterPoint Energy and its subsidiaries may be entitled to recover as a result of that proceeding. In the event that GC Power Acquisition or any subsidiary receives any stranded cost recovery, amount or proceeds referred to in the prior sentence, GC Power Acquisition will (or will cause its subsidiary to) immediately pay such recovery, amount or proceeds over to CenterPoint Energy.

 

Environmental Reporting of Nitrous Oxide Emission Reductions. GC Power Acquisition has agreed that for the next three years it will furnish to CenterPoint Energy a statement detailing its capital expenditures for purposes of reduction of emissions of nitrous oxide during the prior year, unless CenterPoint Energy notifies it that CenterPoint Energy is not required to furnish such information to the PUC.

 

Leases. Prior to the Genco LP division, CenterPoint Energy will (or will cause its applicable subsidiary to) enter into one or more lease agreements with Genco LP or its designated affiliate on terms contemplated in the transaction agreement and otherwise on terms and conditions reasonably acceptable to GC Power Acquisition.

 

Conditions to the Closing of the Public Company Merger

 

Our obligations and the obligations of NN Houston Sub to consummate the public company merger are subject to the satisfaction or waiver of the following conditions:

 

  the absence of any law or order that prohibits or makes illegal consummation of the public company merger, the non-nuclear asset acquisition or any of the other transactions related thereto;

 

  the expiration or termination of any waiting period applicable to the public company merger or the non-nuclear asset acquisition under applicable U.S. antitrust or trade regulation laws and regulations, including the Hart-Scott-Rodino Antitrust Improvements Act of 1976;

 

  requirements under Rule 14c-2 of the Exchange Act must be satisfied;

 

  the requirements related to the financing of the transactions must be satisfied, including:

 

  our access to immediately available funds under the overnight bridge loan facility on terms and conditions described below under “—Financing of the Transactions” or on terms and conditions which are, in the judgment of GC Power Acquisition, comparable or more favorable (to GC Power Acquisition) in the aggregate thereto;

 

 

the receipt of proceeds by GC Power Acquisition from its financings in an amount equal to the consideration to be paid in the non-nuclear asset acquisition (or the funding of such amount into escrow as contemplated by the debt financing letter) on terms and conditions described below under

 

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“—Financing of the Transactions” or on terms and conditions which are, in the judgment of GC Power Acquisition, comparable or more favorable (to GC Power Acquisition) in the aggregate thereto; and

 

  the closing of documentation related to (but not funding of) a $475 million delayed draw term facility among GC Power Acquisition and the financial institutions party thereto, which facility will be in full force and effect and will be on terms and conditions described below under “—Financing of the Transactions” or on terms and conditions which are, in the judgment of GC Power Acquisition, comparable or more favorable (to GC Power Acquisition) in the aggregate thereto;

 

  the receipt by CenterPoint Energy and Utility Holding of a certificate from GC Power Acquisition stating that, based on GC Power Acquisition’s receipt of a certificate from us and CenterPoint Energy regarding certain of GC Power Acquisition’s conditions to the closing of the non-nuclear asset acquisition, among others things, GC Power Acquisition is prepared to consummate the non-nuclear asset acquisition on the following business day (subject to the satisfaction of certain conditions);

 

  the representations and warranties of GC Power Acquisition set forth in the transaction agreement must be true and correct as of the date of the transaction agreement and as of the closing date of the public company merger (except for representations and warranties made as of a specified date, which need be true and correct only as of the specified date), which representations and warranties will be deemed to be true and correct unless the failure or failures of all such representations and warranties to be true and correct (without giving effect to any qualification as to materiality or material adverse effect) would reasonably be expected, in the aggregate, to materially adversely affect the ability of GC Power Acquisition to consummate the transactions contemplated by the transaction agreement or directly or indirectly prevent or materially impair or delay the ability of GC Power Acquisition to perform its obligations thereunder;

 

  GC Power Acquisition must have performed in all material respects all of its obligations required to be performed by it under the transaction agreement at or prior to the closing of the public company merger;

 

  the receipt by Genco LP and CenterPoint Energy of a certificate signed on behalf of GC Power Acquisition certifying as to the satisfaction of the matters set forth in the two preceding bullet points; and

 

  the certification of Genco II LP as an exempt wholesale generator by the Federal Energy Regulatory Commission.

 

Neither we nor NN Houston Sub may waive any of the conditions described in the first three bullet points above without the consent of GC Power Acquisition. We do not currently intend to distribute a revised information statement to our shareholders in the event any of the foregoing conditions are waived unless the waiver is material to our shareholders in the context of the transactions.

 

Conditions to the Closing of the Non-Nuclear Asset Acquisition

 

The obligations of each party to consummate the non-nuclear asset acquisition are subject to the satisfaction or waiver of the following conditions on or prior to the closing date of the non-nuclear asset acquisition:

 

  the absence of any law or order that prohibits or makes illegal consummation of the non-nuclear asset acquisition or any of the other transactions related thereto;

 

  the expiration or termination of any waiting period applicable to the non-nuclear asset acquisition under applicable U.S. antitrust or trade regulation laws and regulations, including the Hart-Scott-Rodino Antitrust Improvements Act of 1976; and

 

  the public company merger must have been consummated.

 

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CenterPoint Energy’s and our obligations to consummate the non-nuclear asset acquisition are subject to the satisfaction or waiver of the following additional conditions on or prior to the closing date of the public company merger:

 

  the representations and warranties of GC Power Acquisition set forth in the transaction agreement must be true and correct as of the date of the transaction agreement and as of the closing date of the public company merger (except for representations and warranties made as of a specified date, which need be true and correct only as of the specified date), which representations and warranties will be deemed to be true and correct unless the failure or failures of all such representations and warranties to be true and correct (without giving effect to any qualification as to materiality or material adverse effect) would reasonably be expected, in the aggregate, to materially adversely affect the ability of GC Power Acquisition to consummate the transactions contemplated by the transaction agreement or directly or indirectly prevent or materially impair or delay the ability of GC Power Acquisition to perform its obligations thereunder;

 

  GC Power Acquisition must have performed in all material respects all of its obligations required to be performed by it under the transaction agreement at or prior to the closing of the public company merger; and

 

  the receipt by Genco LP and CenterPoint Energy of a certificate signed on behalf of GC Power Acquisition certifying as to the satisfaction of the matters set forth in the two preceding bullet points.

 

CenterPoint Energy’s and our obligations to consummate the non-nuclear asset acquisition are subject to the satisfaction or waiver of the following additional conditions on or prior to the closing date of the non-nuclear asset acquisition:

 

  the cancellation and return of all first mortgage bonds issued by Genco LP related to the power purchase agreement described under “—Other Agreements—Power Purchase and Sale Agreement.”

 

GC Power Acquisition’s obligations to consummate the non-nuclear asset acquisition are subject to the satisfaction or waiver of the following additional conditions on or prior to the closing date of the public company merger:

 

  the representations and warranties of CenterPoint Energy, Utility Holding and us set forth in the transaction agreement must be true and correct as of the date of the transaction agreement and as of the closing date of the public company merger (except for representations and warranties made as of a specified date, which need be true and correct only as of the specified date), which representations and warranties will be deemed to be true and correct unless the failure or failures of all such representations and warranties to be true and correct (without giving effect to any qualification as to materiality or material adverse effect) would reasonably be expected, in the aggregate, subject to certain exceptions, to be materially adverse to the business, assets, properties, liabilities, conditions (financial or otherwise) or results of operations of us or our subsidiaries taken as a whole or to directly or indirectly prevent or materially impair or delay, directly or indirectly, CenterPoint Energy’s, Utility Holding’s or our performance of their respective obligations under the transaction agreement;

 

  the representations and warranties of CenterPoint Energy and Utility Holding as to ownership of our securities and of us as to our and our subsidiaries’ capitalization must be true and correct in all material respects as of the date of the transaction agreement and as of the closing date of the public company merger (except for representations and warranties made as of a specified date, which need be true and correct only as of the specified date);

 

  CenterPoint Energy, Utility Holding and we must have performed in all material respects all of our respective obligations required to be performed by us under the transaction agreement at or prior to the closing of the public company merger, including, without limitation, the consummation of the Genco LP division;

 

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  the absence of any state of facts, change, development, event, effect, condition or occurrence that, individually or in the aggregate has been or would reasonably be expected to be materially adverse to the business, assets, properties, liabilities, conditions (financial or otherwise) or results of operations of us or our subsidiaries taken as a whole or to prevent or materially impair or delay, directly or indirectly, CenterPoint Energy’s, Utility Holding’s or our performance of their respective obligations under the transaction agreement;

 

  GC Power Acquisition must have received a certificate signed on behalf of CenterPoint Energy, Utility Holding and us certifying as to the satisfaction of the matters set forth in the four preceding bullet points;

 

  the requirements related to the financing of the transactions must be satisfied, including:

 

  our access to immediately available funds under the overnight bridge loan facility on terms and conditions described below under “—Financing of the Transactions” or on terms and conditions which are, in the judgment of GC Power Acquisition, comparable or more favorable (to GC Power Acquisition) in the aggregate thereto;

 

  the receipt of proceeds by GC Power Acquisition from its financings in an amount equal to the consideration to be paid in the non-nuclear asset acquisition (or the funding of such amount into escrow as contemplated by the debt financing letter) on terms and conditions described below under “—Financing of the Transactions” or on terms and conditions which are, in the judgment of GC Power Acquisition, comparable or more favorable (to GC Power Acquisition) in the aggregate thereto;

 

  the closing of documentation related to (but not funding of) a $475 million delayed draw term facility by GC Power Acquisition and the financial institutions party thereto, which facility will be in full force and effect and will be on terms and conditions described below under “—Financing of the Transactions” or on terms and conditions which are, in the judgment of GC Power Acquisition, comparable or more favorable (to GC Power Acquisition) in the aggregate thereto; and

 

  a subsidiary of CenterPoint Energy and GC Power Acquisition must have entered into a transition services agreement as described under “—Other Agreements—Transition Services Agreement” and such agreement must not have been revoked, terminated or amended;

 

  CenterPoint Energy, Texas Genco, Genco LP and GC Power Acquisition must have entered into an amendment to the currently existing separation agreement between us and CenterPoint Energy as described under “—Other Agreements—Amendment and Assignment and Assumption Agreement to the Separation Agreement” and such agreement must not have been revoked, terminated or amended;

 

  Genco II LP must have been certified as an exempt wholesale generator by the Federal Energy Regulatory Commission; and

 

  Genco II LP and Genco Services must hold all permits necessary to operate our non-nuclear assets and liabilities except where the failure to hold such permits would not reasonably be expected to have a material adverse effect.

 

GC Power Acquisition’s obligations to consummate the non-nuclear asset acquisition are subject to the satisfaction or waiver of the following additional conditions on or prior to the closing date of the non-nuclear asset acquisition:

 

  CenterPoint Energy, Utility Holding and Texas Genco must have performed in all material respects all of their respective obligations required to be performed by them under the transaction agreement in order to consummate the non-nuclear asset acquisition and all of their respective obligations required to be performed by them under the transaction agreement from the closing of the public company merger through and prior to the closing of the non-nuclear asset acquisition;

 

  GC Power Acquisition must have received a certificate, dated the non-nuclear asset acquisition closing date, signed on behalf of CenterPoint Energy, Utility Holding and Texas Genco certifying to the satisfaction of the matters set forth in the immediately preceding bullet point; and

 

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  so long as GC Power Acquisition has satisfied the condition described above relating to the first mortgage bonds issued by Genco LP related to the power purchase agreement, (1) the indenture (as defined in that agreement) must have been satisfied and discharged or (2) (A) Genco II LP must have been released and discharged from all obligations and covenants under that indenture and on and under all securities then outstanding under that indenture and (B) all assets of Genco II LP must have been released from all liens under that indenture.

 

Conditions to the Closing of the Nuclear Asset Acquisition

 

The obligations of CenterPoint Energy and GC Power Acquisition to consummate the nuclear asset acquisition are subject to the satisfaction or waiver of the following conditions on or prior to the closing date of the nuclear asset acquisition:

 

  the absence of any law or order that prohibits or makes illegal consummation of the nuclear asset acquisition or any of the other transactions related thereto;

 

  the expiration or termination of any waiting period applicable to the nuclear asset acquisition under applicable U.S. antitrust or trade regulation laws and regulations, including the Hart-Scott-Rodino Antitrust Improvements Act of 1976;

 

  the NRC must have approved any transfer of the nuclear license deemed to be created by the nuclear asset acquisition; and

 

  the non-nuclear asset acquisition must have been consummated.

 

GC Power Acquisition’s obligations to consummate the nuclear asset acquisition are subject to the satisfaction or waiver of the following additional conditions on or prior to the closing date of the nuclear asset acquisition:

 

  the representations and warranties of CenterPoint Energy, Utility Holding and us in the transaction agreement relating to us and our subsidiaries (excluding the non-nuclear assets and liabilities transferred in the non-nuclear asset acquisition) must be true and correct as of the date of the transaction agreement and as of the closing date of the nuclear asset acquisition (except for representations and warranties made as of a specified date, which need be true and correct only as of the specified date), which representations and warranties will be deemed to be true and correct unless the failure or failures of all such representations and warranties to be true and correct (without giving effect to any qualification as to materiality or material adverse effect) would reasonably be expected, in the aggregate, subject to certain exceptions, to be materially adverse to the business, assets, properties, liabilities, conditions (financial or otherwise) or results of operations of us or our subsidiaries taken as a whole (including for these purposes the non-nuclear assets and liabilities as in effect as of the date of the transaction agreement) or to directly or indirectly prevent or materially impair or delay, directly or indirectly, CenterPoint Energy’s, Utility Holding’s or our performance of their respective obligations under the transaction agreement;

 

  the representations and warranties of CenterPoint Energy and Utility Holding as to ownership of our securities are true and correct as of the closing date of the nuclear asset acquisition as though such representations and warranties were made on and as of such dates.

 

  from the closing date for the non-nuclear asset acquisition through the closing date of the nuclear asset acquisition, CenterPoint Energy, Utility Holding and we must have performed in all material respects all obligations relating to us and our subsidiaries (excluding the non-nuclear assets and liabilities transferred in the non-nuclear asset acquisition) required to be performed by them under the transaction agreement at or prior to the closing of the nuclear asset acquisition;

 

 

the absence of any state of facts, change, development, event, effect, condition or occurrence with respect to us or our subsidiaries (excluding the non-nuclear assets and liabilities transferred in the non-

 

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nuclear asset acquisition) that, individually or in the aggregate, has had or would reasonably be expected to be materially adverse to the business, assets, properties, liabilities, conditions (financial or otherwise) or results of operations of us or our subsidiaries taken as a whole (including for these purposes the non-nuclear assets and liabilities as in effect as of the date of the transaction agreement) or to directly or indirectly prevent or materially impair or delay, directly or indirectly, CenterPoint Energy’s, Utility Holding’s or our performance of their respective obligations under the transaction agreement; and

 

GC Power Acquisition must have received a certificate signed on behalf of CenterPoint Energy, Utility Holding and us certifying as to the satisfaction of the matters set forth in the four preceding bullet points.

 

Termination of the Transaction Agreement

 

The transaction agreement may be terminated at any time prior to the closing of the nuclear asset acquisition as follows:

 

  by the mutual written consent of CenterPoint Energy, GC Power Acquisition and us;

 

  by CenterPoint Energy, GC Power Acquisition or us if:

 

  the closing of the nuclear asset acquisition has not occurred on or before April 30, 2005; provided, however, that any party may extend this termination date for up to two consecutive 90-day periods if (1) the waiting periods under applicable U.S. antitrust or trade regulations or laws have not expired or been terminated or (2) the NRC approval has not been obtained or is being contested and, in each case, all other conditions to the applicable closing are satisfied or capable of being satisfied, and CenterPoint Energy, Utility Holding and Texas Genco, on the one hand, or GC Power Acquisition, on the other hand, are still attempting to obtain such necessary consents and approvals or are contesting the refusal of a governmental or regulatory entity to give such consents or approvals or the entry of a judgment, injunction, order or decree in court or through applicable governmental proceedings; provided, further, however, that the right to terminate the transaction agreement is not available to any party whose failure to comply with the transaction agreement has been the cause of or resulted in the failure of the public company merger or the nuclear asset acquisition to have occurred on or before the applicable termination date;

 

  a governmental authority has issued an order or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the transaction agreement and such order has become final and non-appealable; or

 

  a governmental authority of competent jurisdiction has denied or otherwise failed to grant a required governmental approval and such failure or denial has become final and non-appealable, a result of which the applicable closing conditions to the public company merger, the non-nuclear asset acquisition or the nuclear asset acquisition have become incapable of being satisfied; or

 

  by GC Power Acquisition if:

 

  there has been a material breach of any of the covenants or agreements or any of the representations or warranties set forth in the transaction agreement on the part of CenterPoint Energy, Utility Holding or Texas Genco, which breach, individually or in the aggregate with all other breaches, would give rise to the failure of certain closing conditions, and the breach has not been cured within 30 days of receipt of written notice of the breach or by its nature or timing such breach cannot be cured by the applicable closing date; or

 

  the non-nuclear asset acquisition has not occurred within three calendar days after the closing of the public company merger; and

 

 

by CenterPoint Energy or us if there has been a material breach of any of the covenants or agreements or any of the representations or warranties set forth in the transaction agreement on the part of GC Power Acquisition, which breach, individually or in the aggregate with all other breaches, would give rise to

 

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the failure of certain closing conditions, and the breach has not been cured within 30 days of receipt of written notice of the breach or by its nature or timing such breach cannot be cured by the applicable closing date.

 

Any action by us to terminate the transaction agreement is subject to the limitations set forth under “—Role of Our Special Committee” below.

 

Effect of Termination

 

If the transaction agreement is terminated, it will become void and have no effect, other than the confidentiality provisions and certain miscellaneous provisions, including those relating to the payment of fees and expenses. No party is required to pay a fee to any other party if the transaction is terminated. Termination will not, however, relieve any party from liability or damages resulting from any breach by that party of the transaction agreement.

 

Amendment and Waiver

 

The transaction agreement may be amended, modified or supplemented at any time by an instrument in writing signed by all the parties. For any waiver of a provision of the transaction agreement to be effective, the waiver must be in writing and signed by the party against whom the waiver is sought to be enforced. Any action by us to amend the transaction agreement or waive any condition to our obligation to close the public company merger or the non-nuclear asset acquisition is subject to the limitations set forth under “—Role of our Special Committee” below.

 

Role of Our Special Committee

 

Before the effective time of the public company merger, the special committee of our board of directors must either concur in or direct any action by us to terminate or amend this agreement or waive any condition to our obligation to close the public company merger or the non-nuclear asset acquisition.

 

Other Agreements

 

Transition Services Agreement

 

At the time of the closing of the non-nuclear asset acquisition, a subsidiary of CenterPoint Energy and GC Power Acquisition will enter into a transition services agreement that is expected to continue for 180 days except with respect to certain executive management services, which will continue until the closing of the nuclear asset acquisition or the termination of the transaction agreement with respect to the nuclear asset acquisition. Pursuant to the transition services agreement, CenterPoint Energy will provide specified business support services, including accounting, corporate finance, human resources, information technology and other formerly shared services, to GC Power Acquisition.

 

Power Purchase and Sale Agreement

 

In connection with the transaction, we have entered into a master power purchase and sale agreement with a member of the Goldman Sachs group. Under that agreement, we have sold forward a substantial portion of our available base-load energy through 2008 on a firm, fixed price basis. The pricing for this energy was based on current market prices for firm energy in the ERCOT market for a transaction of this size at the time of execution of the agreement. This agreement also contains covenants restricting various actions by us, including issuing indebtedness and incurring liens, as well as various requirements for the posting of collateral. Our obligations under the agreement will continue regardless of whether the non-nuclear asset acquisition closes. If the non-nuclear asset acquisition closes, our rights and obligations under this agreement will be transferred along with our non-nuclear assets.

 

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Back-to-Back Power Purchase Arrangements

 

At the time of the closing of the non-nuclear asset acquisition, Texas Genco will enter into a power purchase and sale agreement with Genco II LP, the principal surviving entity of the non-nuclear asset acquisition, which will be wholly owned at that time by GC Power Acquisition. At such time, our principal remaining asset will be our interest in the South Texas Project nuclear facility. Under that agreement, we will sell forward through the earlier of December 31, 2008 or the closing of the nuclear asset acquisition the portion of our share of the energy from the South Texas Project nuclear facility equal to the forward energy sales commitments in the South ERCOT zone transferred to Genco II LP in the non-nuclear asset acquisition, which will be a substantial portion of our total share of the energy from the South Texas Project nuclear facility but less in 2008 than in the prior years. This energy will be sold on a unit-contingent basis, meaning that we will be excused (subject to the contingent payment for economic costs described below) from our obligations to deliver this energy to the extent the energy is unavailable as a result of a derating or forced outage at the South Texas Project nuclear facility or certain other specified causes.

 

During the period from the closing of the non-nuclear asset acquisition until the closing of the nuclear asset acquisition or the termination of the transaction agreement prior to that closing, the pricing for this energy is at the weighted-average price achieved by Genco II LP on its firm forward sales in the South ERCOT zone pursuant to forward energy sales commitments transferred to Genco II LP in the non-nuclear asset acquisition, subject to payment by us to Genco II LP, in the event the nuclear asset acquisition does not close, of 50% of the economic cost (i.e. liquidated damages payable to third parties or cost of cover) incurred by Genco II LP during that period as a result of energy from the South Texas Project nuclear facility being unavailable to meet the contract quantity. After that period, the pricing for this energy is at 90% of such weighted-average price, with no contingent payment for economic costs.

 

Service Agreement Arrangements

 

At the time of the closing of the non-nuclear asset acquisition, we will enter into a services agreement with Genco II LP, which will then be an indirect, wholly owned subsidiary of GC Power Acquisition. Under that agreement, Genco II LP will provide energy dispatch and coordination services to us, administer our PUC-mandated capacity auctions, market our excess capacity and energy to third parties, and assist us generally in managing our trading business. For those services, we will pay Genco II LP a monthly fee at cost.

 

Amendment and Assignment and Assumption Agreement to the Separation Agreement

 

At the time of the closing of the non-nuclear asset acquisition, we, CenterPoint Energy, Genco LP and GC Power Acquisition will enter into an agreement pursuant to which the separation agreement we entered into with CenterPoint Energy in August 2002 in connection with our separation from CenterPoint Energy will be amended and our rights and obligations under that agreement relating to our assets and liabilities to be acquired by GC Power Acquisition in the non-nuclear asset acquisition will be assigned to GC Power Acquisition. Under the amended separation agreement, we will not be liable for, and CenterPoint Energy will assume and indemnify us against, liabilities that we originally assumed in the separation to the extent, and only to the extent, that such liabilities are covered by certain insurance policies or other similar agreements held by CenterPoint Energy. Also under the amended separation agreement, we will assign to CenterPoint Energy our right, title and interest in and to the intellectual property that CenterPoint Energy owns or partly owns and CenterPoint uses primarily, and CenterPoint Energy will assign to us its right, title and interest in and to the intellectual property that we own or partly own and we use primarily, and each party will grant the other cross-licenses to any of that intellectual property that was used by the other on the separation date. The agreement will also eliminate specified provisions in the separation agreement, including those related to restrictions on our future issuance of common stock, PUC findings, audit rights, capacity auctions and nuclear decommissioning trust.

 

Regulatory Approvals

 

Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the rules promulgated under that act by the United States Federal Trade Commission, the transactions may not be consummated until notifications

 

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have been given and information has been furnished to the Antitrust Division of the Department of Justice and the FTC, and specified waiting period requirements have been satisfied. We and GC Power Acquisition each filed pre-merger notification and report forms with the Antitrust Division and the FTC on August 30, 2004. On September 17, 2004, the FTC granted early termination of the waiting period under the HSR Act. At any time before or after the consummation of the public company merger, and notwithstanding the satisfaction of the Hart-Scott-Rodino requirements, the Antitrust Division or the FTC or any state could take action under the federal or state antitrust laws to seek to enjoin consummation of the transactions. Private parties may also seek to take legal action under the antitrust laws.

 

We and GC Power Acquisition are seeking Nuclear Regulatory Commission approval under the Atomic Energy Act of any transfer of the South Texas Project facility’s license deemed to be created by the nuclear asset acquisition and, if necessary, any conforming amendment of that license to reflect that transfer. The STP Nuclear Operating Company has filed an application on behalf of us and GC Power Acquisition with the NRC seeking approval of any such transfer and we and GC Power Acquisition have agreed to cooperate with each other to facilitate the NRC’s review of that application. The receipt of the required NRC approval of any transfer of the nuclear license deemed to be created by the nuclear asset acquisition is a condition to the parties’ respective obligations to close the nuclear asset acquisition. We do not expect to receive approval from the NRC significantly prior to April 30, 2005. In accordance with terms of our license, we have notified the NRC that we plan to transfer all of our non-nuclear assets and liabilities prior to the transfer of our nuclear assets. Although we do not believe that NRC approval of the transfer of the non-nuclear assets and liabilities is required, it is possible that the NRC will require us to provide additional information regarding our financial qualifications during the period from the sale of our non-nuclear assets and liabilities until the transfer of our nuclear assets and liabilities to GC Power Acquisition.

 

In the transaction agreement, we have agreed to obtain a certification from the Federal Energy Regulatory Commission that Genco II LP is an exempt wholesale generator as defined in Section 32 of the 1935 Act. As an exempt wholesale generator, Genco II LP would be exempt from substantially all provisions of the 1935 Act. The receipt of exempt wholesale generator certification for Genco II LP is a condition to the parties’ respective obligations to close the public company merger and is a condition to GC Power Acquisition’s obligation to close the non-nuclear asset acquisition. On September 24, 2004, the FERC granted exempt wholesale generator status to Genco II LP.

 

Under the rules of the PUC, CenterPoint Energy must provide the PUC with notice of the non-nuclear asset acquisition and the nuclear asset acquisition within 30 days of the closing of those respective steps of the transactions.

 

Neither we, nor GC Power Acquisition is aware of any other license or regulatory permit that is material to the businesses of us or GC Power Acquisition and that is likely to be adversely affected by consummation of the transactions or of any approval or other action by any state, federal or foreign government or governmental agency, other than routine re-licensing procedures, that would be required before the consummation of the transactions.

 

Financing of the Transactions

 

The Public Company Merger

 

In connection with the public company merger, all of the 15,235,760 outstanding shares of our common stock held by our public shareholders (other than those who validly perfect their dissenters’ rights under Texas law) will be converted into the right to receive $47.00 per share in cash (without interest and less any applicable withholding taxes), resulting in an aggregate payment of up to approximately $716 million. Pursuant to GC Power Acquisition’s debt financing letter, we have received a commitment from Goldman Sachs Credit Partners, L.P. to provide us with an overnight bridge loan of up to $717 million to finance the public company merger. The overnight bridge loan will mature within 72 hours of its funding. The non-nuclear asset acquisition is expected to

 

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close on the business day following the public company merger. We will use approximately $716 million of the $2,813 million of aggregate cash consideration we receive in the non-nuclear asset acquisition to fund or repay borrowings used to fund the public company merger. A portion of the consideration for the non-nuclear asset acquisition will be paid directly to the lenders under the overnight bridge loan facility to the extent necessary to repay in full any amounts outstanding under that facility. We would seek to obtain alternate financing if the overnight bridge loan facility is not available to us, but we do not currently have any alternative financing plans or arrangements. The approximately $716 million of aggregate cash consideration to be paid to our public shareholders (other than those who validly perfect their dissenters’ rights under Texas law) represents approximately 19.6% of the total consideration to be paid to our shareholders, including CenterPoint Energy, in connection with the public company merger, the non-nuclear asset acquisition and the nuclear asset acquisition.

 

Borrowings under the overnight bridge loan facility will bear interest at one-day LIBOR plus 1.00%. The overnight bridge loan facility will be unsecured and guaranteed by all of our existing and subsequently acquired or organized domestic subsidiaries. The overnight bridge loan facility will include events of default as are usual and customary for a financing of its kind, including, without limitation, the following:

 

  failure to make payments when due;

 

  defaults under certain other agreements or instruments of indebtedness;

 

  breaches of representations and warranties; and

 

  bankruptcy.

 

We will pay all reasonable, documented out-of-pocket costs and expenses in connection with the overnight bridge loan facility.

 

The closing of the public company merger is conditioned on our access to the overnight bridge loan facility, which is itself conditioned on, in addition to customary corporate and documentation conditions, the closing and funding into escrow of the debt financing for the non-nuclear asset acquisition and the closing of documentation related to (but not the funding of) a $475 million delayed draw term loan facility to fund the nuclear asset acquisition, which we refer to as the delayed draw term facility, among GC Power Acquisition and the financial institutions party thereto, on terms and conditions described below or on terms and conditions which are, in the judgment of GC Power Acquisition, comparable or more favorable (to GC Power Acquisition) in the aggregate thereto.

 

The Non-Nuclear Asset Acquisition

 

GC Power Acquisition will pay us $2,813 million as consideration for the non-nuclear asset acquisition. A portion of that amount will be paid directly to the lenders under the overnight bridge loan facility to the extent necessary to repay in full any amounts outstanding under that facility.

 

The consideration for the non-nuclear asset acquisition and GC Power Acquisition’s related fees, costs and expenses will come from a combination of equity contributions by the members of GC Power Acquisition and borrowings and issuances of debt securities by GC Power Acquisition. The members of GC Power Acquisition have committed to contribute up to $913 million in equity to GC Power Acquisition to fund the non-nuclear asset acquisition. We understand from GC Power Acquisition that it currently expects to draw upon approximately $753 million of those committed amounts to fund the non-nuclear acquisition. The remaining proceeds necessary to finance the non-nuclear asset acquisition (including all related fees, costs and expenses) are expected to be obtained by GC Power Acquisition through borrowings under a senior secured term loan facility, which we refer to as the term facility, provided by a syndicate of lenders led by Goldman Sachs Credit Partners L.P., and Morgan Stanley Senior Funding, Inc., whom we refer to collectively as the joint lead arrangers, and Deutsche Bank Securities Inc., Deutsche Bank AG Cayman Islands Branch, Citigroup North America, Inc. and Citigroup Global Markets Inc., whom we refer to collectively, including the joint lead arrangers, as the arrangers, and an

 

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issuance of senior secured notes, which we refer to as the notes. GC Power Acquisition has obtained commitments from Goldman Sachs Credit Partners L.P. to provide the term facility in an aggregate principal amount of up to $775 million and to provide an aggregate principal amount of up to $1,250 million in bridge loans, which we refer to as the bridge loans, in the event that GC Power Acquisition is unable to issue the anticipated aggregate principal amount of the notes. We understand that GC Power Acquisition currently expects to receive an aggregate principal amount of $2,275 million from borrowings under the term facility and the issuance of the notes.

 

In addition, GC Power Acquisition obtained commitments for:

 

  the delayed draw term facility, to be used to finance a portion of the cash consideration for the nuclear asset acquisition;

 

  a revolving credit facility, which we refer to as the revolving credit facility, to be used for on-going working capital requirements and for general corporate purposes, including to finance a portion of the cash consideration for the nuclear asset acquisition;

 

  a base letter of credit facility, which we refer to as the base letter of credit facility, to provide letters of credit to support GC Power Acquisition’s and its affiliates’ commodity hedging obligations; and

 

  a special letter of credit facility, which we refer to as the special letter of credit facility, to provide letters of credit to initially support GC Power Acquisition’s and its affiliates’ commodity hedging obligations in respect of the power purchase and sale agreement with a member of the Goldman Sachs group.

 

We refer to the term facility, the delayed draw term facility, the revolving credit facility and the letter of credit facilities collectively as the senior facilities. Each of these commitments, including the commitment to provide the bridge loans, expires on September 30, 2005, and is subject to various closing conditions customary for debt financing letters issued in connection with an acquisition of this type.

 

Because the funding into escrow of the borrowings under the term facility and the issuance of the notes (or the borrowings of the bridge loans in lieu thereof) is a condition to the closing of the public company merger and the non-nuclear asset acquisition, each condition to funding is effectively a condition to our obligation to effect the public company merger and our and GC Power Acquisition’s obligation to effect the non-nuclear asset acquisition, respectively. There are numerous conditions to these financings, certain of which are set forth in the subsequent paragraph, and there can be no assurance that these conditions will be satisfied or waived or that such financings will be made available.

 

The funding of the loans under the term facility and issuance of the notes (or funding of the bridge loans in lieu thereof) into escrow on the closing date of the public company merger will be subject to the satisfaction or waiver of certain conditions precedent, including the following:

 

  GC Power Acquisition must have issued equity in an amount equal to approximately 80% of the aggregate equity commitments of the four sponsor firms and the proceeds from that issuance, together with borrowings under the term facility and the issuance of the notes (or borrowings of the bridge loans in lieu thereof), must be sufficient to pay us the consideration for the non-nuclear asset acquisition, including all related fees, costs and expenses;

 

  the public company merger must have been completed or must be completed concurrently with such funding;

 

  all preexisting indebtedness of GC Power Acquisition and its subsidiaries must be repaid, retired or redeemed in full;

 

 

the pro forma ratio of consolidated indebtedness of GC Power Acquisition on the closing date of the public company merger (after giving effect to all of the transactions contemplated by the transaction agreement) to the consolidated EBITDA (or earnings before interest, taxes, depreciation or

 

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amortization) of GC Power Acquisition for the trailing four quarter period ending within 45 days prior to the closing date of the public company merger (after giving effect to all of the transactions contemplated by the transaction agreement) is not greater than 4.5 to 1.0; and

 

  the administrative agent with respect to the senior facilities must have been granted perfected first priority security interests in the collateral, the indenture trustee under the notes (or administrative agent under the bridge loans) must have been granted a perfected second priority security interest in the collateral and each must have received assurances that title insurance policies for its benefit have been obtained.

 

Equity Investment. GC Power Acquisition’s four sponsor firms have provided it with a commitment letter pursuant to which each sponsor firm has agreed, subject to the satisfaction or waiver of the applicable conditions in the transaction agreement, to contribute or cause to be contributed to GC Power Acquisition up to $228.25 million, for a total of up to $913 million, for purposes of funding the non-nuclear asset acquisition. We understand from GC Power Acquisition that it currently expects to draw upon approximately $753 million of those committed amounts to fund the non-nuclear asset acquisition.

 

The Nuclear Asset Acquisition

 

GC Power Acquisition will pay $700 million in cash consideration for the nuclear asset acquisition. It is expected that this amount will come from a combination of equity contributions by the members of GC Power Acquisition and borrowings by GC Power Acquisition. The members of GC Power Acquisition have committed to contribute up to $167 million in equity to GC Power Acquisition. We understand from GC Power Acquisition that it currently expects to draw upon approximately $146 million of those committed amounts to fund the nuclear asset acquisition. The remaining proceeds necessary to finance the nuclear asset acquisition are expected to be obtained by GC Power Acquisition, through an aggregate principal amount of up to $475 million in borrowings under the delayed draw term facility from a syndicate of lenders led by the arrangers, with the remainder funded from cash on hand and/or borrowings under the revolving credit facility. In connection with the execution of the transaction agreement, GC Power Acquisition obtained commitments from Goldman Sachs Credit Partners L.P. to provide the entire amount of the delayed draw term facility. This commitment expires on September 30, 2005, and is subject to the closing conditions set forth in the subsequent paragraph. Immediately prior to the closing of the nuclear asset acquisition, GC Power Acquisition will contribute the net proceeds of these debt and equity financings to HPC Merger Sub.

 

The funding of loans under the delayed draw term facility will be subject to certain conditions precedent, including the following:

 

  GC Power Acquisition must have issued equity in an amount that is equal to approximately 20% of the aggregate equity commitments of the four sponsor firms and the proceeds from that issuance, together with borrowings under the delayed draw term facility and from cash on hand and/or borrowings under the revolving credit facility, must be sufficient to pay us the consideration for the nuclear asset acquisition, including any related fees and expenses;

 

  the nuclear asset acquisition will have been completed or must be completed concurrently with that funding;

 

  there not existing any default or event of default under the loan documentation relating to the senior facilities or the documentation related to the notes and/or bridge loan or under any other material indebtedness of GC Power Acquisition or its subsidiaries; and

 

  all governmental, shareholder and third-party approvals and consents necessary to consummate the nuclear asset acquisition and the funding of the delayed draw term facility must have been obtained.

 

Equity Investment. Under the commitment letter described above, GC Power Acquisition’s four sponsor firms have agreed, subject to the satisfaction or waiver of the applicable conditions to the nuclear asset

 

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acquisition in the transaction agreement, to contribute or cause to be contributed to GC Power Acquisition, for purposes of funding the nuclear asset acquisition, up to $41.75 million each, for a total of up to $167 million, which together with any amounts provided by the sponsor firms in connection with the non-nuclear asset acquisition, will total up to $1,080 million. We understand from GC Power Acquisition that it currently expects to draw upon approximately $146 million of the committed amounts to fund the nuclear asset acquisition, which, together with the approximate $753 million in equity it expects to draw upon in the non-nuclear acquisition, would total approximately $899 million in equity funding for both transactions.

 

Senior Facilities

 

The following is a summary of what we expect will be the material terms and other provisions of GC Power Acquisition’s senior facilities.

 

Maturity and Amortization. The term facility and, if funded, the delay draw term facility will each mature in seven years from the date of the closing of the public company merger and each will amortize in consecutive equal quarterly installments in an aggregate amount equal to 1% of the original principal amount of the facility, with the balance due in full at maturity. The revolving credit facility and the base letter of credit facility will expire in five years from the date of the closing of the public company merger. The special letter of credit facility will expire upon the earlier of (a) five years from the date of the closing of the public company merger and (b) the expiration of the power purchase and sale agreement with a member of the Goldman Sachs group, unless such power purchase and sale agreement is replaced with other commodity hedging arrangements prior to its expiration. GC Power Acquisition may borrow, repay and reborrow the total amount of the revolving credit facility until its maturity.

 

Interest Rates and Fees. Loans under the senior facilities will bear interest, at GC Power Acquisition’s option at either a reserve adjusted Eurodollar rate or an alternate base rate, plus, in each case, an applicable margin determined by reference to the credit rating assigned to the relevant facility on the closing date of the public company merger. After the closing date, the applicable margin for the revolving credit facility will be determined by reference to achievements of certain performance targets. GC Power Acquisition will pay commitment fees equal to (a) 0.5% on the undrawn portion of the revolving credit facility and the base letter of credit facility and (b) 1.25% on the undrawn portion of the delayed draw term facility. The commitment fees shall be paid quarterly in arrears. GC Power Acquisition will pay fees on letters of credit that are issued under the revolving credit facility, the base letter of credit facility and the special letter of credit facility in amount equal to the applicable margin for loans bearing interest at the reserve adjusted Eurodollar rate under the relevant facility multiplied by the stated face amount of letters of credit, and an additional amount, to be agreed upon, to the fronting bank.

 

Guarantees and Collateral. We expect the borrowings under the senior facilities will be guaranteed by each of GC Power Acquisition’s existing and subsequently acquired or organized domestic subsidiaries.

 

We expect that the obligations of GC Power Acquisition and each of its subsidiary guarantors under the senior facilities will be secured by a first priority, perfected lien on, and a pledge of, the following:

 

  100% of the capital stock of each domestic subsidiary of GC Power Acquisition and all intercompany debt (unless otherwise agreed by the administrative agent under the senior facilities); and

 

  all assets of GC Power Acquisition and its subsidiary guarantors (except as otherwise agreed or to the extent that the grant of such security interests in such assets is prohibited by the terms of existing contractual agreements).

 

Rank. The security interests securing the senior facilities shall rank first in priority ahead of the security interests securing the notes (or the bridge loans, if borrowed in lieu thereof).

 

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Covenants. We expect the credit agreement for the senior facilities will contain customary affirmative and negative covenants, including restrictions on the ability of GC Power Acquisition and its subsidiaries, subject to customary and other exceptions, to:

 

  incur liens;

 

  incur additional debt;

 

  make certain restricted junior payments (including payments of dividends, redemptions and voluntary prepayments of certain debt), provided, that GC Power Acquisition will be permitted to make distributions to its members for their tax payments on terms to be agreed;

 

  make investments and guarantees; and

 

  engage in mergers and acquisitions, asset sales, sale/leaseback transactions and transactions with affiliates.

 

In addition, the credit agreement will contain financial covenants related to minimum interest coverage, maximum capital expenditures and maximum leverage.

 

Optional Prepayments. We expect that GC Power Acquisition will be able, at its option, to prepay borrowings under the senior facilities or reduce commitments without penalty or premium, subject to the reimbursement of lenders’ redeployment costs in the case of prepayments of reserve adjusted Eurodollar rate loans other than on the last date of a relevant interest period.

 

Events of Default and Remedies. We expect the senior facilities will have customary events of default and remedies.

 

Notes and Bridge Loans

 

We expect the notes to contain terms and provisions, including a covenant package, customary for high yield debt securities issued in connection with acquisitions of the type described herein and for companies in industries similar to GC Power Acquisition. If GC Power Acquisition is unable to issue the anticipated aggregate principal amount of the notes, then GC Power Acquisition may borrow under the bridge loans. We expect the notes (or the bridge loans, if borrowed in lieu thereof) will be guaranteed by each of GC Power Acquisition’s existing and subsequently acquired or organized domestic subsidiaries and that the obligations of GC Power Acquisition and each of its subsidiary guarantors under the notes (or the bridge loans, if borrowed in lieu thereof) will be secured by a second priority, perfected lien on, and a pledge of, the same collateral securing the senior facilities, other than the capital stock of the subsidiaries of GC Power and any intercompany debt. The security interests securing the notes (or the bridge loans, if issued in lieu thereof) shall rank second in priority to the security interests securing the senior facilities and pari passu with the security interests securing certain hedging arrangements entered into by GC Power Acquisition.

 

Fees and Expenses

 

Pursuant to the transaction agreement, all costs and expenses incurred in connection with or in anticipation of the transaction agreement and the transactions it contemplates will be paid by the party incurring those expenses, except in certain limited circumstances, including the following:

 

  GC Power Acquisition will pay all out-of-pocket costs and expenses reasonably incurred by CenterPoint Energy, Utility Holding or us in connection with those parties’ cooperation with GC Power Acquisition in its arrangement of debt financing, unless the transaction agreement is terminated under specified circumstances;

 

 

GC Power Acquisition, on the one hand, and CenterPoint Energy and Utility Holding, on the other hand, will share equally the costs of all NRC staff fees payable in connection with the parties’ NRC

 

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application and the costs incurred by South Texas Project Nuclear Operating Company in filing and prosecuting the NRC application. In the event that the parties agree on the use of common counsel relating to that application, they will share equally the fees and expenses of that counsel; and

 

  GC Power Acquisition will reimburse CenterPoint Energy for all documented out-of-pocket expenses CenterPoint Energy reasonably incurs in connection with its provision of information for, and otherwise supporting filings with, the PUC in connection with the nuclear decommissioning funding charge described under “—The Transaction Agreement—Additional Agreements—Decommissioning Undertakings.”

 

In addition, GC Power Acquisition is obligated to pay specified fees and expenses pursuant to the terms of the debt financing letter.

 

We expect that, upon the closing of the public company merger, we will be obligated to pay the following fees and expenses for that merger:

 

Description


   Amount

Advisory fees and expenses

   $ 1,010,000

Filing fees

     90,000

Legal fees and expenses

     1,400,000

Accounting fees and expenses

     100,000

Printing and mailing costs

     175,000

Miscellaneous expenses

     200,000
    

Total

   $ 2,975,000
    

 

Material Transactions Between CenterPoint Energy and Us

 

CenterPoint Energy and its affiliates derived revenues from sales of natural gas to us totaling $9 million in 2003 and $16 million in the six months ended June 30, 2004.

 

In connection with the distribution of a portion of our common stock to CenterPoint Energy’s shareholders, CenterPoint Energy and we entered into a separation agreement. This agreement contains provisions governing our relationship with CenterPoint Energy following the distribution and specifies the related ancillary agreements between CenterPoint Energy and us. In 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 indemnify each other with respect to breaches by the indemnifying party of the separation agreement or any ancillary agreements. Prior to the closing date of the public company merger, we, CenterPoint Energy, GC Power Acquisition and Genco LP will execute an amendment to the existing separation agreement as described under “—Other Agreements—Amendment and Assignment and Assumption Agreement to the Separation Agreement.”

 

CenterPoint Energy and we also have entered into a transition services agreement under which CenterPoint Energy provides us, through the earlier of such time as all services under the agreement are terminated or CenterPoint Energy ceases to own a majority of our 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 services such as corporate security, facilities management, accounts receivable, accounts payable and payroll, office support services and purchasing and logistics as were provided prior to CenterPoint Energy’s distribution of approximately 19% of

 

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our common stock to its shareholders. These services consist generally of the same types of services as were provided on an intercompany basis prior to the distribution of a portion of our common stock to CenterPoint Energy’s shareholders. The charges we pay for these services are 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. These charges are not necessarily indicative of those that would have been incurred had we not been an affiliate of CenterPoint Energy. Pursuant to a separate lease agreement, CenterPoint Energy has agreed to lease office space in its principal office building in Houston to us for an interim period. Amounts charged to us for these services were $32 million for 2003 and $12 million for the six months ended June 30, 2004. Prior to the Genco LP division, the lease agreement will terminate and CenterPoint Energy will (or will cause its applicable subsidiary to) enter into one or more lease agreements with Genco LP or its designated affiliate on terms contemplated in the transaction agreement and otherwise on terms and conditions reasonably acceptable to GC Power Acquisition. On the closing date of the non-nuclear asset acquisition, the existing transition services agreement will terminate and be replaced by a new transition services agreement described under “—Other Agreements—Transition Services Agreement.”

 

We are a member of CenterPoint Energy’s 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. CenterPoint Energy will be responsible for preparing and filing any U.S. income tax returns required to be filed for any company or group of companies of the CenterPoint Energy consolidated group, including all tax returns for us for so long as we are a member of CenterPoint Energy’s consolidated group. CenterPoint Energy will also be responsible for paying the taxes related to the returns it is responsible for filing. We will be responsible for paying CenterPoint Energy our allocable share of such taxes. CenterPoint Energy will determine all tax elections for tax periods during which we are a member of CenterPoint Energy’s consolidated group. 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 will be responsible for any increased taxes and will receive the benefit of any tax refunds. Upon completion of the nuclear asset acquisition, we will cease to be a member of CenterPoint Energy’s consolidated group.

 

From time to time, we have borrowed money from CenterPoint Energy or its subsidiaries. As of December 31, 2003 and June 30, 2004, we had no short-term or long-term working capital borrowings from CenterPoint Energy and its subsidiaries. Interest expense associated with borrowings during 2003 was $7 million. The largest principal amount of such borrowings outstanding during 2003 was $272 million, and the weighted average interest rate on the borrowings during 2003 was 6.2%. In addition, we had net accounts payable to CenterPoint Energy and affiliates of $8 million as of December 31, 2003. As of June 30, 2004, we had short-term notes receivable from affiliates of $1 million, which represented funds invested in CenterPoint Energy’s money pool for unregulated subsidiaries. Under the transaction agreement, on the closing date of the non-nuclear asset acquisition, all intercompany agreements and accounts between Texas Genco and its subsidiaries, on the one hand, and CenterPoint Energy and its other affiliates, on the other hand, will be paid or settled in cash, including participation in that money pool by Genco II LP and Genco Services. Notwithstanding the foregoing, intercompany accounts under the existing transition services agreement and certain other agreements will be paid in the ordinary course, and following the non-nuclear asset acquisition we and our remaining subsidiaries may continue to borrow funds from the money pool. Our participation in the money pool will terminate on the closing date of the nuclear asset acquisition, and all intercompany agreements and accounts between us and our subsidiaries, on the one hand, and CenterPoint Energy and its other affiliates, on the other hand, including those relating to the money pool will be paid or otherwise settled in cash as of that date, provided that amounts due under the transition services agreement entered into at the non-nuclear asset acquisition will be paid in the ordinary course in accordance with that agreement.

 

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Our Directors and Executive Officers

 

The following persons are our directors and executive officers as of the date of this information statement. None of these persons has been convicted in a criminal proceeding during the past five years (excluding traffic violations and similar misdemeanors), nor has any of these persons been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining that person from future violations of, or prohibiting activities subject to, federal or state securities laws or a finding of any violation of federal or state securities laws. Each of our directors and executive officers is a citizen of the United States of America and has his or her principal business address at c/o Texas Genco Holdings, Inc., 1111 Louisiana, Houston, Texas 77002 (Telephone: (713) 207-1111).

 

Name


   Age

  

Position


J. Evans Attwell

   73    Director

Donald R. Campbell

   64    Director

Robert J. Cruikshank

   73    Director

Patricia A. Hemingway Hall

   51    Director

David M. McClanahan

   55    Chairman and Director

David G. Tees

   60    President, Chief Executive Officer and Director

Scott E. Rozzell

   55   

Executive Vice President, General Counsel, Corporate Secretary and Director

Gary L. Whitlock

   55    Executive Vice President, Chief Financial Officer and Director

James S. Brian

   57    Senior Vice President and Chief Accounting Officer

 

J. Evans Attwell is the former managing partner of Vinson & Elkins L.L.P. in Houston, Texas and is currently of counsel to that firm, a position he has held since 1996. Mr. Attwell has been a director of Texas Genco since March 2003.

 

Donald R. Campbell has been primarily engaged in managing his personal investments in Houston, Texas since 2000. He served as Vice Chairman and principal financial officer of Pinnacle Global Group, Inc. (Pinnacle), now known as Sanders Morris Harris Group Inc. (SMHG), a NASDAQ listed regional investment banking firm from January 1999 until his retirement in 2000. He served as a director of Pinnacle/SMHG from September 1998 to May 2004. He served as President and Chief Operating Officer of TEI, Inc. (TEI), the predecessor issuer to Pinnacle, from December 1991 to September 2000, a director of TEI from September 1990 to September 2000, and its Chief Executive Officer from April 1994 to September 2000.

 

Robert J. Cruikshank is primarily engaged in managing his personal investments in Houston, Texas. Prior to his retirement in 1993, he was a Senior Partner in the accounting firm of Deloitte & Touche LLP. He also serves as a director of Kaiser Aluminum Corporation, MAXXAM Inc., Encysive Pharmaceuticals, Inc. and Weingarten Realty Investors and as an advisory director of Compass Bank—Houston. He served as a director of CenterPoint Energy and its predecessors from 1993 until his retirement from the board of CenterPoint Energy at its annual meeting in 2003. Mr. Cruikshank has been a director of Texas Genco since March 2003.

 

Patricia A. Hemingway Hall is President of BlueCross BlueShield of Texas, a division of Health Care Service Corporation. She has served in various executive officer capacities with Health Care Service Corporation and its subsidiaries since 1993. Ms. Hemingway Hall has been a director of Texas Genco since March 2003.

 

David M. McClanahan has been the Chairman of Texas Genco’s Board of Directors since January 2003 and was the sole director of Texas Genco from its formation in August 2001 to December 2002. 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 from 1999 to September 2002. He also served as the President and Chief Operating Officer of Reliant Energy HL&P from 1997 to 1999 and in

 

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various other executive capacities with Reliant Energy since 1986. He currently serves on the boards of the Edison Electric Institute and the American Gas Association.

 

David G. Tees is Texas Genco’s President and Chief Executive Officer. He has been a director of Texas Genco since December 2002. Mr. Tees 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 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 Texas Genco’s Executive Vice President, General Counsel and Corporate Secretary. He has been a director of Texas Genco since March 2003. 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., where he practiced law for over 25 years.

 

Gary L. Whitlock is Texas Genco’s Executive Vice President and Chief Financial Officer. He has been a director of Texas Genco since March 2003. 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.

 

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CenterPoint Energy’s Directors and Executive Officers

 

The following persons are the directors and executive officers of CenterPoint Energy as of the date of this information statement. None of these persons has been convicted in a criminal proceeding during the past five years (excluding traffic violations and similar misdemeanors), nor has any of these persons been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining that person from future violations of, or prohibiting activities subject to, federal or state securities laws or a finding of any violation of federal or state securities laws. Each of CenterPoint Energy’s directors and executive officers is a citizen of the United States of America and has his or her principal business address at c/o CenterPoint Energy, Inc., 1111 Louisiana, Houston, Texas 77002 (Telephone: (713) 207-1111). Please see “—Our Directors and Executive Officers” above for biographical information regarding Messrs. McClanahan, Tees, Whitlock, Rozzell and Brian.

 

Name


   Age

  

Position


Milton Carroll

   54    Chairman and Director

John T. Cater

   69    Director

Derrill Cody

   66    Director

O. Holcombe Crosswell

   63    Director

Thomas F. Madison

   68    Director

David M. McClanahan

   55    President and Chief Executive Officer and Director

Robert T. O’Connell

   66    Director

Michael E. Shannon

   67    Director

Scott E. Rozzell

   55    Executive Vice President, General Counsel and Corporate Secretary

Stephen C. Schaeffer

   56   

Executive Vice President and Group President, Gas Distribution and Sales

Gary L. Whitlock

   55    Executive Vice President and Chief Financial Officer

James S. Brian

   57   

Senior Vice President and Chief Accounting Officer

Byron R. Kelley

   57   

Senior Vice President and Group President–Pipelines and Field Services

Thomas R. Standish

   54   

Senior Vice President and Group President–Houston Electric and Information Technology

David G. Tees

   60    President and Chief Executive Officer, Texas Genco

 

Milton Carroll has been a director of CenterPoint Energy since 1992 and its Chairman since September 2002. Mr. Carroll is Chairman of Instrument Products, Inc., an oil-tool manufacturing company he founded in Houston, Texas in 1977. He also serves as Chairman of Healthcare Service Corporation and a director of Devon Energy Corporation, EGL, Inc. and Texas Eastern Products Pipeline Company, LLC, the general partner of TEPPCO Partners, LP.

 

John T. Cater has been a director of CenterPoint Energy since 1983. Mr. Cater is primarily engaged in managing his personal investments in Houston, Texas. Prior to his retirement in 2000, he was Chairman of Compass Bank-Houston. He previously served as President of Compass Bank-Houston, as Chairman and CEO of River Oaks Trust Company, and as President, Chief Operating Officer and a director of MCorp, a Texas bank holding company.

 

Derrill Cody has been a director of CenterPoint Energy since May 2003. Mr. Cody is presently of counsel to the law firm of McKinney & Stringer, P.C. in Oklahoma City, Oklahoma. Mr. Cody also serves as a director of Texas Eastern Products Pipeline Company, LLC, the general partner of TEPPCO Partners, LP. Mr. Cody previously served as a director of Barrett Resources Corporation from 1995 to 2001, Executive Vice President of Texas Eastern Corporation and as Chief Executive Officer of Texas Eastern Gas Pipeline Company from 1987 to 1990.

 

O. Holcombe Crosswell has been a director of CenterPoint Energy since 1997. Mr. Crosswell has served as President of Griggs Corporation, a real estate and investment company in Houston, Texas since 1970.

 

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Thomas F. Madison has been a director of CenterPoint Energy since January 2003. He has served as President and Chief Executive Officer of MLM Partners, a small business consulting and investments company in Minneapolis, since 1993. He previously served as President of US West Communications-Markets until December 1992. He later served as Vice Chairman of Minnesota Mutual Life Insurance Company until September 1994, Chairman of Communication Holdings, Inc. until March 1999, and as an advisory director of CenterPoint Energy Minnegasco, a gas distribution unit of CenterPoint Energy. He is a director of Valmont Industries, Inc., Banner Health System, Delaware Group of Funds, Digital River, Inc., and Rimage Corporation.

 

Robert T. O’Connell has been a director of CenterPoint Energy since June 2004. He is a business consultant focusing on financial, strategic and business development matters. Residing in Boston, Massachusetts, he has been a board member of Commonwealth Corporation and a member of the Boston Finance Commission, two Massachusetts public service entities, since 2003. From 1997 to 2003, he served as a director of RWD Technologies, Inc. and as its Senior Vice President of Strategic Business Planning from August 1997 to July 2000 and its Chief Financial Officer and Senior Vice President of Strategic Business Planning from August 2000 to June 2001. Mr. O’Connell served as Senior Vice President and Chief Staff Officer of EMC Corporation from 1995 to 1997. Between 1965 and 1994, Mr. O’Connell held several positions in General Motors Corporation, including Chief Financial Officer of General Motors Corporation from 1988 to 1992 and Chairman of General Motors Acceptance Corporation from 1992 to 1994.

 

Michael E. Shannon has been a director of CenterPoint Energy since January 2003. He has been President of MEShannon & Associates, Inc., a private firm specializing in corporate financial advisory services and investments, since 2000. He served as Chairman of the Board and Chief Financial and Administrative Officer of Ecolab, Inc. (a specialty chemical company) from 1996 until his retirement in January 2000. Prior to that, he held senior management positions with Ecolab, Inc., Republic Steel and Gulf Oil Corp. Mr. Shannon is a director of Apogee Enterprises, Inc., The Clorox Company, and NACCO Industries, Inc.

 

Stephen C. Schaeffer has served as Executive Vice President and Group President-Gas Distribution and Sales since October 2002, having previously served as Executive Vice President-Government and Regulatory Affairs of CenterPoint Energy. Prior to this position, Mr. Schaeffer served as Senior Vice President-Regulatory of Reliant Energy beginning in 1999. From 1997 to 1998, he served as Executive Vice President-Retail Energy Regulation of Reliant Energy’s Retail Energy Group. He has served in various executive capacities with CenterPoint Energy since 1989.

 

Byron R. Kelley has served as Senior Vice President and Group President-Pipelines and Field Services since June 2004, having previously served as President and Chief Operating Officer Pipelines and Gathering since June 2003. Prior to joining CenterPoint Energy he served as President of El Paso International, a subsidiary of El Paso Corporation, from January 2001 to August 2002 and as Executive Vice President of Development, Operations and Engineering from March 1999 through December 2000. He currently serves on the Board of Directors of the Interstate Natural Gas Association of America.

 

Thomas R. Standish has served as Senior Vice President and Group President-Houston Electric and Information Technology since June 2004, having previously served as President and Chief Operating Officer of CenterPoint Houston since August 2002. He served as President and Chief Operating Officer for both electricity and natural gas for Reliant Energy’s Houston area from 1999 until August 2002, and as Senior Vice President of Distribution Customer Service for Reliant Energy HL&P from 1997 to 1999. Mr. Standish has served in various executive capacities with CenterPoint Energy since 1993. He currently serves on the Board of Directors of ERCOT.

 

Interests of CenterPoint Energy, Directors and Executive Officers

 

You should be aware that CenterPoint Energy, some of its directors and executive officers, Utility Holding and some of our directors and executive officers may have interests in the transactions, including the public company merger, that may be different from or in addition to your interests as a shareholder generally and may create potential conflicts of interest.

 

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Stock Ownership

 

The following table shows ownership of our common stock and of CenterPoint Energy common stock as of August 1, 2004 by CenterPoint Energy, our directors, our executive officers, our executive officers and directors as a group, CenterPoint Energy’s directors, CenterPoint Energy’s executive officers and CenterPoint Energy’s executive officers and directors as a group. Our directors and executive officers, individually and as a group, and CenterPoint Energy’s directors and executive officers, individually and as a group, beneficially owned less than 1% of our outstanding common stock and less than 1% of CenterPoint Energy’s common stock as of that date. CenterPoint Energy, through its wholly owned subsidiary Utility Holding, held 64,764,240 shares of our common stock, representing approximately 80.96% of our outstanding common stock, as of August 1, 2004.

 

Beneficial ownership is determined in accordance with Rule 13d-3 under the Exchange Act, and, except as otherwise indicated, the respective holders have sole voting and investment powers over such shares. The address of our directors and executive officers is c/o Texas Genco Holdings, Inc., 1111 Louisiana, Houston, Texas 77002 (Telephone: (713) 207-1111). The address of CenterPoint Energy’s directors and executive officers is c/o CenterPoint Energy, Inc., 1111 Louisiana, Houston, Texas 77002 (Telephone: (713) 207-1111).

 

Texas Genco Officers and Directors

 

Name


   Number of
Shares of Texas
Genco
Common Stock


    Number of
Shares of
CenterPoint
Energy
Common Stock


 

J. Evans Attwell

   1,340 (1)(2)   21,800 (1)(2)

James S. Brian

   1,539 (4)   133,486 (5)

Donald R. Campbell

   -0-     -0-  

Robert J. Cruikshank

   350     7,000 (3)

Patricia A. Hemingway Hall

   -0-     -0-  

David M. McClanahan

   3,111 (4)   646,872 (5)

Scott E. Rozzell

   504 (4)   251,740 (5)

David G. Tees

   1,105 (1)(4)   102,456 (1)(5)

Gary L. Whitlock

   718 (4)   114,116 (5)

All of the above officers and directors as a group (9 persons)

   8,667 (4)   1,277,470 (5)

(1) Includes shares held by spouse.
(2) Includes shares held in family foundation.
(3) Includes shares held jointly with spouse.
(4) Includes shares of our common stock held under CenterPoint Energy’s savings plan, as to which the participants do not have voting power but retain dispositive power.
(5) Includes shares covered by CenterPoint Energy stock options that are exercisable within 60 days as follows: Mr. Brian, 90,158 shares; Mr. McClanahan, 524,948 shares; Mr. Rozzell, 206,688 shares; Mr. Tees, 75,081 shares; Mr. Whitlock, 91,119 shares; and the group, 987,994 shares. Also includes shares of CenterPoint Energy common stock held under CenterPoint Energy’s savings plan, for which the participant has sole voting power (subject to such power being exercised by the plan’s trustee in the same proportion as directed shares in the savings plan are voted in the event the participant does not exercise voting power).

 

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CenterPoint Energy Officers and Directors

 

Name


   Number of Shares of
Texas Genco
Common Stock


   

Number of Shares
of CenterPoint
Energy

Common Stock


 

James S. Brian

   1,539 (1)   133,486 (2)

Milton Carroll

   750     26,000  

John T. Cater

   250     11,000  

Derrill Cody

   -0-     11,000  

O. Holcombe Crosswell

   579     12,595  

Byron R. Kelley

   -0-     12,691 (2)

Thomas F. Madison

   -0-     3,500  

David M. McClanahan

   3,111 (1)   646,872 (2)

Robert T. O’Connell

   -0-     2,000  

Scott E. Rozzell

   504 (1)   251,740 (2)

Stephen C. Schaeffer

   3,298 (1)   311,675 (2)

Michael E. Shannon

   -0-     3,000  

Thomas R. Standish

   630 (1)   158,631 (2)

Gary L. Whitlock

   718 (1)   114,116 (2)

All of the above officers and directors and other executive officers as a group (15 persons)

   12,484 (1)   1,800,762 (2)

(1) Includes shares of our common stock held under CenterPoint Energy’s savings plan, as to which the participants do not have voting power but retain dispositive power.
(2) Includes shares covered by CenterPoint Energy stock options that are exercisable within 60 days as follows: Mr. Brian, 90,158 shares; Mr. Kelley, 10,482 shares; Mr. McClanahan, 524,948 shares; Mr. Rozzell, 206,688 shares; Mr. Schaeffer, 212,317 shares; Mr. Standish, 115,393 shares; Mr. Whitlock, 91,119 shares; and the group, 1,326,186 shares, Also includes shares of CenterPoint Energy common stock held under CenterPoint Energy’s savings plan, for which the participant has sole voting power (subject to such power being exercised by the plan’s trustee in the same proportion as directed shares in the savings plan are voted in the event the participant does not exercise voting power).

 

There have been no transactions in shares of Texas Genco common stock during the past 60 days by CenterPoint Energy, or any of its subsidiaries, including us, or any of their, or our, respective officers of directors.

 

Following completion of the nuclear asset acquisition, neither CenterPoint Energy nor Utility Holding will own any equity interest in our company and therefore neither will have any interest in the net book value or net earnings of our company. As a result of the execution of the transaction agreement described in this information statement, CenterPoint Energy will present our results of operations in its consolidated financial statements as discontinued operations beginning in the third quarter of 2004 in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” CenterPoint Energy’s sale of its interest in us is expected to result in an after-tax loss of $253 million to CenterPoint Energy in the third quarter of 2004. In addition, as a result of CenterPoint Energy’s accounting for its interest in us as discontinued operations, any of our future earnings prior to the closing of the nuclear asset acquisition will be offset by an increase in the loss to CenterPoint Energy. CenterPoint Energy expects to report an additional after-tax loss of $93 million offsetting it’s 81% interest in our third quarter 2004 earnings.

 

Other Interests of Our Directors and Officers

 

Indemnification. In the transaction agreement, GC Power Acquisition agreed that the governing documents of the surviving corporation of the public company merger will contain provisions regarding the limitation of liability and indemnification of officers and directors as are currently included in our governing documents, and

 

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that the surviving corporation would cause to be obtained directors’ and officers’ insurance coverage, in each case, for the benefit of our officers and directors with respect to claims arising from facts or events that occurred prior to the effective time of the public company merger, as more fully described above under “—The Transaction Agreement—Additional Agreements—Directors’ and Officers’ Indemnification and Insurance.”

 

CenterPoint Energy Retention Agreement. Mr. Tees has a retention agreement with CenterPoint Energy, dated October 15, 2001, that provides for benefits upon the occurrence of certain events in connection with our sale, including the termination of Mr. Tees’s employment prior to December 31, 2005. The retention agreement provides for a supplemental retirement benefit to be determined by a set formula under the CenterPoint Energy retirement plan at the time of Mr. Tees’s termination of employment, provided that such benefit would be offset by any transition pension benefit or other similar benefit provided pursuant to the CenterPoint Energy retirement plan or provided by GC Power Acquisition. Retirement benefits based on compensation above the qualified plan limit or in excess of the qualified plan limit on annual benefits under the Internal Revenue Code are provided through the CenterPoint Energy benefit restoration plan.

 

Mr. Tees is covered under the CenterPoint Energy executive life insurance plan, which provides endorsement split-dollar life insurance in the form of a death benefit for covered officers, with coverage continuing after the officer’s termination of service at age 65 or later. Mr. Tees has single-life coverage equal to two times current salary. Mr. Tees’ retention agreement provides that he will be treated as a retired participant (as if he had attained age 65) as of the date of his termination of employment with CenterPoint Energy or its subsidiaries for purposes of this plan. In accordance with the Internal Revenue Code, Mr. Tees must recognize imputed income, which is currently based upon the policy holder’s one-year term rates. The plan also provides for a paid tax gross-up to Mr. Tees to cover his after-tax cost of this imputed income. Upon his death, Mr. Tees’s beneficiaries will receive the specified death benefit, and we will receive any balance of the insurance proceeds payable in excess of such death benefit.

 

Texas Genco Severance Agreement. The transaction agreement provides that we (or Genco II LP) may enter into a severance agreement with Mr. Tees to provide certain severance benefits for Mr. Tees in the event of a “Covered Termination” of employment within two years after the closing of the nuclear asset acquisition. A Covered Termination will occur if Mr. Tees’s employment is terminated for reasons other than death, disability (entitling him to long-term disability plan benefits), involuntary termination due to Cause (as defined), or Mr. Tees’s resignation, unless his resignation is due to:

 

  a failure to maintain Mr. Tees in his position or a substantially equivalent position;

 

  a significant adverse change in Mr. Tees authorities, powers, functions, responsibilities or duties;

 

  a reduction in Mr. Tees’ annual base salary;

 

  a significant reduction in Mr. Tees’ qualified retirement benefits, nonqualified benefits and welfare benefits (with certain exceptions);

 

  a reduction in Mr. Tees’ overall compensation opportunities for a short-term incentive plan bonus or under our performance unit plan;

 

  a change in the location of Mr. Tees’ principal place of employment by more than 50 miles; or

 

  a failure to provide directors and officers liability insurance covering Mr. Tees.

 

If there is a Covered Termination of his employment, Mr. Tees will be entitled to:

 

  a lump-sum cash payment equal to two times his annual base salary plus target short-term incentive plan bonus;

 

  a lump-sum cash payment equal to his target short-term incentive plan bonus prorated for the year during which his Covered Termination occurs;

 

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  a lump-sum cash payment for earned but unused vacation;

 

  continuation of welfare benefits for two years, or if Mr. Tees is not age 65 as of his Covered Termination date, until he is age 65 and for his spouse until she is age 65 (or a lump sum cash payment in lieu thereof);

 

  two years of age and service credit added for retirement plan benefit purposes; and

 

  outplacement services up to $10,000.

 

In addition, the agreement will provide for the reimbursement of legal fees incurred related to enforcement of the agreement and a tax gross-up payment to cover any excise taxes, interest and penalties that may be assessed on Mr. Tees as a result of the severance payment.

 

Litigation Concerning the Transactions

 

On July 23, 2004, two plaintiffs filed substantially identical lawsuits in Harris County, Texas state district courts. The suits, purportedly brought on behalf of holders of our common stock, name us and each of our directors as defendants. Both plaintiffs allege, among other things, self-dealing and breach of fiduciary duty by the defendants in entering into the transaction agreement. As part of their allegations of self-dealing, both plaintiffs claim that our board of directors is controlled by CenterPoint Energy, that the defendants improperly concealed our results of operations for the second quarter of 2004 until after the transaction agreement was announced, and that in order to aid CenterPoint Energy our board only searched for acquirers who would offer all-cash consideration. Among other relief, the plaintiffs seek to enjoin the transaction or, alternatively, to rescind the transaction to the extent already implemented. In August 2004, the cases were consolidated in state district court in Harris County, Texas. We intend to vigorously defend against the consolidated suits.

 

Material U.S. Federal Income Tax Consequences of the Public Company Merger

 

The following is a summary of the material U.S. federal income tax consequences of the public company merger to our shareholders with respect to their exchange of shares of common stock for cash pursuant to the public company merger. This summary does not purport to be a description of all tax consequences that may be relevant to our shareholders. This summary is based on current provisions of the Internal Revenue Code of 1986, as amended, or the Code, existing regulations promulgated under the Code, and current administrative rulings and court decisions, all of which are subject to change, possibly retroactively. It is assumed that the shares of our common stock are held as capital assets. This summary does not address the consequences of the public company merger under state, local or foreign law, nor does it address all aspects of federal income taxation that may be important to some or all of our shareholders in light of their individual circumstances. It also does not address tax issues that may be significant to shareholders subject to special rules, such as financial institutions, broker-dealers or traders in securities; persons who are not citizens or residents of the United States or that are foreign corporations, partnerships, estates or trusts; a non-U.S. shareholder holding 5% or more of the shares of our common stock; mutual funds; insurance companies; tax-exempt entities; holders who acquired their shares through stock option or stock purchase programs or otherwise as compensation; holders who are subject to alternative minimum tax; or holders who hold their shares as part of a hedge, straddle or other risk-reduction transaction.

 

Shareholders are encouraged to consult their own tax advisors to determine the particular tax consequences to them (including the application and effect of any federal, state, local and foreign income and other tax laws) of the public company merger.

 

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Texas Genco, CenterPoint Energy, Utility Holding and NN Houston Sub

 

The public company merger will not have any material U.S. federal income tax consequences for us, CenterPoint Energy, Utility Holding or NN Houston Sub. CenterPoint Energy expects to incur federal income tax arising from gain recognized in the non-nuclear asset acquisition, which acquisition will be treated as an asset sale for federal income tax purposes. In addition, CenterPoint Energy expects to incur federal income tax arising from gain recognized in the nuclear asset acquisition, which acquisition will be treated as a stock sale for federal income tax purposes.

 

Texas Genco Shareholders

 

General

 

The receipt by a U.S. shareholder of cash in the public company merger in exchange for shares of our common stock (including by reason of the exercise of appraisal rights) will be a taxable transaction for U.S. federal income tax purposes and may also be a taxable transaction under applicable state, local or foreign tax laws. In general, a U.S. shareholder will recognize gain or loss for U.S. federal income tax purposes equal to the difference between the amount received in exchange for the shares of our common stock and the shareholder’s adjusted tax basis in the shares.

 

Assuming that the shares constitute capital assets in the hands of the shareholder, such gain or loss will be capital gain or loss. If, at the time of the public company merger, the shares of our common stock then exchanged have been held for more than one year by the shareholder, such gain or loss will be long-term capital gain or loss. However, with respect to the exercise of appraisal rights, amounts, if any, that are interest (or are deemed to be interest) for federal income tax purposes will be taxed as ordinary income.

 

Under current law, long-term capital gains of individuals are generally taxed at lower rates than items of ordinary income and short-term capital gains. Capital losses are deductible only to the extent of capital gains plus $3,000 of ordinary income in the case of taxpayers other than corporations. Capital losses that are not currently deductible may be carried forward to other years, subject to certain limitations.

 

Non-U.S. Shareholders

 

Non-U.S. shareholders will generally not be subject to U.S. federal income tax on the receipt of cash in exchange for shares of our common stock pursuant to the public company merger, unless such non-U.S. shareholder’s gain is effectively connected with a U.S. trade or business or, in the case of gain recognized by an individual non-U.S. shareholder, such individual is present in the United States for 183 days or more during the taxable year and certain other conditions are satisfied.

 

Backup Withholding

 

Shareholders may be subject to the applicable “backup withholding” rate under U.S. tax law when they receive payments of cash pursuant to the public company merger. Backup withholding is not an additional tax but merely an advance payment, which will be allowed as a refund or credit against the shareholder’s federal income tax liability if the shareholder furnishes the requested information to the Internal Revenue Service in a timely manner.

 

Certain persons generally are entitled to an exemption from backup withholding, including corporations and financial institutions. Penalties apply for failure to furnish correct information and for failure to include the reportable payments in income. We advise each shareholder to consult with his or her tax advisor as to the shareholder’s qualification for an exemption from withholding and the procedure for obtaining such exemption.

 

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To avoid the imposition of backup withholding, U.S. shareholders and non-U.S. shareholders should follow the instructions set forth below.

 

U.S. Shareholders

 

In order to avoid “backup withholding” on payments of cash pursuant to the public company merger (including any cash paid pursuant to the exercise of appraisal rights), a U.S. shareholder surrendering shares of our common stock in the public company merger must, unless an exemption applies, provide the paying agent with the shareholder’s correct taxpayer identification number (TIN) on a Substitute Form W-9 and certify under penalty of perjury that the TIN is correct and that the shareholder is not subject to backup withholding.

 

If a U.S. shareholder does not provide the shareholder’s correct TIN or fails to provide the certifications described above, the Internal Revenue Service may impose a penalty on the shareholder, and payment of cash to the shareholder pursuant to the public company merger may be subject to backup withholding at the applicable rate. All U.S. shareholders surrendering shares of our common stock pursuant to the public company merger should complete and sign the Substitute Form W-9 that is included as part of the letter of transmittal that accompanies this Information Statement.

 

Non-U.S. Shareholders

 

In order to avoid backup withholding, non-U.S. shareholders other than corporations should properly complete and provide to the paying agent a Substitute Form W-8BEN. You can obtain a Substitute Form W-8BEN by contacting the paying agent at the address that is shown on the letter of transmittal. Foreign corporations should follow the instructions above with respect to the completion of Substitute Form W-9.

 

For purposes of this Information Statement, “U.S. shareholder” and “non-U.S. shareholder” have the following meanings:

 

  “U.S. Shareholder” means: (a) a citizen or resident of the United States, including an alien individual (such as a citizen of another country) who is a lawful permanent resident of the United States or meets the “substantial presence test” under Section 7701(b) of the Code (for example, because the alien individual is present in the United States for 183 days or more in the current calendar year); (b) a corporation or partnership created or organized in the United States or under the laws of the United States or any political subdivision thereof; or (c) an estate or trust that is not a foreign estate or trust under Section 7701(a)(31) of the Code.

 

  “Non-U.S. Shareholder” means any shareholder that is not a U.S. shareholder, except for non-U.S. shareholders, if any, who are subject to United States federal income tax on payments received pursuant to the public company merger because such payments are effectively connected with their conduct of a U.S. trade or business. Any such shareholder receiving payments that are effectively connected with the conduct of a U.S. trade or business should contact an independent tax advisor with respect to the backup withholding and other U.S. tax consequences or receiving payments pursuant to the public company merger.

 

Dissenters’ Appraisal Rights

 

If you are a holder of shares of our outstanding common stock as of the effective date of the public company merger, you may exercise dissenters’ rights in connection with the public company merger by properly complying with the requirements of Articles 5.11, 5.12 and 5.13 of the Texas Business Corporation Act. By exercising dissenter’s rights, you would have the “fair value” of your shares of our common stock determined by a court and paid to you in cash. The following is a general summary of your dissenters’ rights and is qualified in its entirety by reference to Articles 5.11, 5.12 and 5.13 of the Texas Business Corporation Act. The full text of these articles is set forth in Annex B. You should read Annex B in its entirety for more complete information concerning your right to dissent from the public company merger.

 

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If you are a holder of shares of our outstanding common stock as of the effective date of the public company merger, and you follow the procedures set forth in Articles 5.11, 5.12 and 5.13 of the Texas Business Corporation Act, you will be entitled to demand the purchase of your shares of our common stock for a purchase price equal to the fair value of your shares. Under Texas law, fair value of shares for purposes of the exercise of dissenters’ rights is defined as the value of the shares as of the date Utility Holding’s written consent authorizing the public company merger was delivered to us, excluding any appreciation or depreciation in value of the shares in anticipation of the public company merger.

 

Within 10 days after the effectiveness of the public company merger, we must mail to all of our shareholders written notice of the effectiveness of the public company merger and of your right to dissent from that transaction within 20 days after the date of our mailing of the notice to you. The notice will be accompanied by a copy of Article 5.12 of the Texas Business Corporation Act and any articles or documents the surviving corporation has filed with the Secretary of State of the State of Texas to effect the public company merger. You may then, within 20 days after the date of our mailing of the notice to you, make a written demand on us for the payment of the fair value of your shares. Your demand must state the number and class of shares of our common stock you own and your estimate of the fair value of your common stock. If you fail to make such a demand within the 20-day period, you will lose the right to dissent and will be bound by the terms of the public company merger. In order to preserve dissenters’ rights, within 20 days of making a demand for payment, you also must submit your stock certificates to us for the appropriate notation of the demand. We, at our option, may terminate your rights under Article 5.12 of the Texas Business Corporation Act if you fail to submit your stock certificates within 20 days after demanding payment unless a court of competent jurisdiction directs otherwise upon a showing to the court that there is good and sufficient cause.

 

Within 20 days of our receipt of your proper demand for payment, we must deliver or mail to you written notice that either:

 

  we accept the amount you claimed and agree to pay the amount of your demand within 90 days after the effectiveness of the public company merger upon receipt of your duly endorsed stock certificates; or

 

  contains our estimate of the fair value of your shares and includes an offer to pay the amount of our estimate within 90 days after the effectiveness of the public company merger, provided that we receive notice from you within 60 days after the effective date of the public company merger that you agree to accept our estimate and upon receipt of your duly endorsed stock certificates.

 

If you and we agree on the value of your shares within 60 days after effectiveness of the public company merger, we will pay you the amount of the agreed value upon receipt of your duly endorsed stock certificates within 90 days of the effectiveness of the public company merger. Upon our payment of the agreed value, you will no longer have any interest in us or in those shares.

 

If you and we do not agree on the value of your shares within 60 days after the effectiveness of the public company merger, then either you or we may, within 60 days after the expiration of that 60-day period, file a petition in a court of competent jurisdiction in the county in which our principal office is located, seeking a determination of the fair value of your shares. Please consult your own legal counsel regarding the proper court for such filing. We will file with the court a list of all shareholders who have demanded payment for their shares with whom an agreement as to value has not been reached within 10 days following receipt of the petition filed by a dissenting shareholder or upon our filing of such a claim. The clerk of the court will give notice of the hearing of any such claim to us and to all of the dissenting shareholders on the list we have provided. We and all dissenting shareholders notified in this manner will be bound by the final judgment of the court as to the value of the shares.

 

In considering such a petition, the court will determine which of the dissenting shareholders have complied with the provisions of the Texas Business Corporation Act and are entitled to the payment of the fair value of their shares and will appoint one or more qualified appraisers to determine the fair value of the shares who are

 

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directed to make such determination “upon such investigation as to them may seem proper.” The appraisers will also allow the dissenting shareholders and the corporation to submit to them evidence as to the fair value of the shares. Upon receipt of the appraisers’ report, the court will determine the fair value of the shares of the dissenting shareholders and will direct the payment to the dissenting shareholders of the amount of the fair value of their shares, with interest from the date 91 days after the effectiveness of the public company merger to the date of the judgment, by us, upon receipt of the dissenting shareholder’s stock certificates. Upon payment of the judgment, the dissenting shareholders will no longer have any interest in us or in those shares.

 

You may withdraw your demand at any time before receiving payment for the shares or before a petition has been filed seeking determination of the fair value of the shares. You may not withdraw your demand after payment has been made or, unless we consent to the withdrawal, where a petition has been filed.

 

If you have properly demanded payment for your shares, you will not have any rights as a shareholder except the right to receive payment for such shares and the right to claim that the public company merger and the related transactions were fraudulent.

 

Failure to follow the steps required by Articles 5.11, 5.12 and 5.13 of the Texas Business Corporation Act for perfecting dissenters’ rights may result in the loss of dissenters’ rights, in which event you will be entitled to receive the consideration with respect to the holder’s dissenting shares in accordance with the transaction agreement. In view of the complexity of Articles 5.11, 5.12 and 5.13 of the Texas Business Corporation Act, if you are considering dissenting from the public company merger, we urge you to consult your own legal counsel.

 

Market for Common Stock and Related Shareholder Matters

 

As of October 21, 2004, we had 80,000,000 shares of common stock issued and outstanding that were held of record by approximately 49,296 shareholders. Our common stock is listed on The New York Stock Exchange and is traded under the symbol “TGN.”

 

On January 6, 2003, CenterPoint Energy distributed 15,235,760 of the 80,000,000 outstanding shares of our common stock, or approximately 19.04% of our outstanding shares, 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 when issued on December 18, 2002 and 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.

 

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The following table sets forth the high and low sales prices of our common stock on The New York Stock Exchange composite tape during the periods indicated, as reported by Bloomberg, and the cash dividends declared in these periods.

 

     Market Price

  

Dividend
Declared
Per Share


 
     High

   Low

  

2003

                      

First Quarter

   $ 18.58    $ 10.50    $ 0.25  

Second Quarter

   $ 23.99    $ 16.20    $ 0.25  

Third Quarter

   $ 25.70    $ 21.56    $ 0.25  

Fourth Quarter

   $ 32.71    $ 23.40    $ 0.25  

2004

                      

First Quarter

   $ 38.34    $ 31.50    $ 0.25  

Second Quarter

   $ 46.80    $ 34.12    $ 0.25  

Third Quarter

   $ 47.17    $ 44.67    $ 0.25  

Fourth Quarter (through                 , 2004)

   $      $      $ 0.25 (1)

(1) On November 4, 2004, we declared a quarterly cash dividend of $0.25 per share of our common stock. The dividend is payable on December 20, 2004, to holders of record as of the close of business on November 26, 2004. The dividend will be paid to shareholders of record even if the public company merger occurs prior to the December 20, 2004 payment date.

 

The closing market price of our common stock on July 20, 2004, the last day prior to the public announcement of the transactions contemplated by the transaction agreement, was $46.48 per share. The closing market price of our common stock on                 , 2004 was $         per share.

 

While we intend to continue to pay regular quarterly cash dividends on our common stock until the closing of the public company merger, our board of directors will determine the amount of future dividends in light of:

 

  applicable legal requirements, including restrictions under the transaction agreement;

 

  our earnings and cash flows;

 

  our financial condition; and

 

  other factors our board of directors deems relevant.

 

Pursuant to the transaction agreement we have agreed to restrict our dividend payments, to regular quarterly cash dividends with respect to the common stock, not in excess of $0.25 per share per quarter.

 

CenterPoint Energy has pledged the approximately 81% of our outstanding common stock that it owns to secure any of its obligations under its $2.3 billion bank facility executed in October 2003.

 

Historical Consolidated Financial Data

 

Historical Financial Data

 

Our audited financial statements are included in our annual report on Form 10-K for the year ended December 31, 2003, a copy of which is included in this information statement as Appendix E. In addition, our unaudited consolidated financial statements as of and for the three months ended March 31 and June 30, 2004 are included in our quarterly reports on Form 10-Q for those respective periods, copies of which are included in this information statement as Appendices F and G.

 

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Summarized Financial Information

 

    

Year ended

December 31,


  

Six months ended

June 30,


     2002

    2003

   2003

   2004

Income Statement Data

                            

Revenues

   $ 1,540,975     $ 2,002,368    $ 937,098    $ 991,847

Operating income

     (133,561 )     221,959      32,928      209,619

Income (loss) before cumulative effect of accounting change

     (92,943 )     151,266      22,411      141,008

Net income (loss)

     (92,943 )     250,176      121,321      141,008

Balance Sheet Data

                            

Current assets

   $ 238,285     $ 298,392    $ 358,972      462,836

Noncurrent assets

     4,269,797       4,341,239      4,335,176      4,316,004

Current liabilities

     336,712       328,751      482,272      342,610

Noncurrent liabilities

     1,347,327       1,277,719      1,306,511      1,302,061

Shareholders’ Equity

     2,824,043       3,033,161      2,905,365      3,134,169

 

Net Income Per Common Share

 

The following table sets forth our net income per common share (basic and diluted) for the periods indicated:

 

     Year ended
December 31,


   Six months ended
June 30,


     2002

    2003

   2003

   2004

Income (loss) before cumulative effect of accounting change

   $ (1.16 )   $ 1.89    $ 0.28    $ 1.76

Cumulative effect of accounting change, net of tax

     —         1.24      1.24      —  
    


 

  

  

Net income (loss) per common share (basic and diluted)

   $ (1.16 )   $ 3.13    $ 1.52    $ 1.76
    


 

  

  

 

Ratio of Earnings to Fixed Charges

 

The following table sets forth our ratio of earnings to fixed charges for the periods indicated. For purposes of calculating the ratio of earnings available to cover fixed charges:

 

  earnings consist of income (loss) before income taxes plus fixed charges and amortization of capitalized interest, less capitalized interest; and

 

  fixed charges consist of interest expensed and capitalized, plus the assumed interest component of rent expense.

 

Year ended
December 31,


   Six months
ended June 30,(1)


2002


   2003

   2003

   2004

   —(2)

   15.56    3.83    26.02

(1) We believe that the ratios for the six month periods are not necessarily indicative of the ratios for the twelve month periods due to the seasonal nature of our business.
(2) Our earnings for the year ended December 31, 2002 were inadequate to cover fixed charges by approximately $129 million.

 

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Book Value Per Share

 

As of December 31, 2003 and June 30, 2004, our book value per share was approximately $37.91 and $39.18, respectively. Book value per share is not a term defined by accounting principles generally accepted in the United States of America. Book value per share is calculated by dividing total shareholders’ equity by the number of shares of common stock outstanding as of the date of determination.

 

2004 Third Quarter Results

 

On October 28, 2004, we reported a net loss of $311 million, or $3.89 per share, for the third quarter of 2004, which includes an after-tax impairment charge of $426 million ($649 million pretax) related to the anticipated sale of our coal, lignite and gas-fired generation plants pursuant to the non-nuclear asset acquisition. As a result of the signing of the transaction agreement, and in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we ceased depreciation on our coal, lignite and gas-fired generation plants at the time these assets were considered “held for sale.” This resulted in a decrease in depreciation expense of $24 million after tax ($37 million pretax) for the third quarter of 2004. In accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” we also recorded a curtailment expense related to postretirement benefits of $11 million after tax ($17 million pretax), which is included in operations and maintenance expense. Excluding these sale-related impacts, net income for the third quarter of 2004 was $102 million, or $1.27 per share, compared to $82 million, or $1.03 per share, for the same period of 2003.

 

For the nine months ended September 30, 2004, we reported a net loss of $170 million, or $2.13 per share, including the sale-related impacts described above. Net income for the nine months ended September 30, 2003, was $204 million, or $2.55 per share, including a non-cash gain of $99 million ($1.24 per share) from the adoption of Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations.” Excluding the sale-related impacts, net income for the nine months ended September 30, 2004 was $243 million, or $3.03 per share, and income before the cumulative effect of an accounting change for the same period of 2003 was $105 million, or $1.31 per share.

 

Excluding the pre-tax impacts related to the anticipated sale noted above, operating income for the third quarter of 2004 improved by $28 million from the prior year primarily due to higher wholesale electricity prices for baseload products and improved availability of our baseload generating units.

 

Where You Can Find More Information

 

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any document we file with the SEC at the SEC’s public reference room located at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain further information regarding the operation of the SEC’s public reference room by calling the SEC at 1-800-SEC-0330. Our filings are also available to the public on the SEC’s Internet site located at http://www.sec.gov and on our Internet site located at http://www.txgenco.com. You can obtain information about us at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.

 

We have filed a Schedule 13E-3 with the SEC with respect to the public company merger. As permitted by the SEC, this information statement omits certain information contained in the Schedule 13E-3. The Schedule 13E-3, together with any amendments and exhibits filed with or incorporated by reference in the Schedule 13E-3 (including written reports by RBC Capital Markets Corporation to the special committee in connection with the public company merger) is available for inspection or copying as set forth above.

 

The SEC allows us to “incorporate by reference” information in other documents that we file with the SEC into this information statement. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be

 

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part of this information statement. We incorporate by reference into this information statement each document we file under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this information statement and before the effective date of the public company merger.

 

You should rely only on the information contained in this information statement or incorporated by reference as described above. We have not authorized anyone to provide you with information that is different. This information statement is dated                     , 2004. You should not assume that the information contained in this information statement is accurate as of any date other than that date. Documents attached as appendices to this information statement or any documents filed by us with the SEC are available from us without charge, excluding all exhibits unless we have specifically incorporated by reference an exhibit in this information statement. Shareholders may obtain documents attached as appendices to this information statement or any documents filed by us with the SEC by requesting them in writing or by telephone from the appropriate party at the following address:

 

Texas Genco Holdings, Inc.

Attn: Investor Relations

1111 Louisiana Street

Houston, Texas 77002

(713) 207-6500

 

If you would like to request documents from us, please do so by                     , 2004 in order to ensure timely receipt before the effective date of the written consent approving the public company merger. You should be sure to include your complete name and address in your request. If you request any documents, we will mail them to you by first class mail, or another equally prompt means, within one business day after we receive your request.

 

Cautionary Statement Regarding Forward-Looking Statements

 

From time to time we make forward-looking statements concerning our expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are not historical facts. 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,” 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 1 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2003.

 

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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Appendix A

 


 

TRANSACTION AGREEMENT

 

among

 

CENTERPOINT ENERGY, INC.,

 

UTILITY HOLDING, LLC,

 

NN HOUSTON SUB, INC.,

 

TEXAS GENCO HOLDINGS, INC.,

 

HPC MERGER SUB, INC.

 

and

 

GC POWER ACQUISITION LLC

 


 

Dated as of July 21, 2004

 


 



Table of Contents

Table of Contents

 

          Page

ARTICLE I PUBLIC COMPANY MERGER

   A-2

Section 1.1

  

The Public Company Merger

   A-2

Section 1.2

  

Time and Place of Public Company Merger Closing

   A-2

Section 1.3

  

Effective Time of the Public Company Merger

   A-3

Section 1.4

  

Directors and Officers

   A-3

Section 1.5

  

Articles of Incorporation and Bylaws

   A-3

Section 1.6

  

Effect of Public Company Merger on Capital Stock

   A-3

Section 1.7

  

Exchange of Certificates

   A-4

ARTICLE II OTHER TRANSACTIONS

   A-5

Section 2.1

  

Genco LP Division

   A-5

Section 2.2

  

Merger Agreements

   A-6

Section 2.3

  

Non-STP Acquisition

   A-6

Section 2.4

  

Time and Place of Non-STP Acquisition Closing

   A-7

Section 2.5

  

STP Acquisition

   A-7

Section 2.6

  

Time and Place of STP Acquisition Closing

   A-7

Section 2.7

  

FIRPTA Certificate

   A-8

Section 2.8

  

Director and Officer Resignations

   A-8

ARTICLE III REPRESENTATIONS AND WARRANTIES OF CENTERPOINT

   A-8

Section 3.1

  

Organization; Etc.

   A-8

Section 3.2

  

Authority Relative to this Agreement

   A-8

Section 3.3

  

Ownership of Shares

   A-9

Section 3.4

  

Consents and Approvals; No Violations

   A-9

Section 3.5

  

Affiliate Transactions

   A-9

Section 3.6

  

Separation Transactions

   A-10

Section 3.7

  

Brokers; Finders and Fees

   A-10

ARTICLE IV REPRESENTATIONS AND WARRANTIES OF GENCO HOLDINGS

   A-10

Section 4.1

  

Organization; Etc

   A-10

Section 4.2

  

Authority Relative to this Agreement

   A-11

Section 4.3

  

Capitalization

   A-11

Section 4.4

  

Ownership of Shares, Company Securities

   A-13

Section 4.5

  

Consents and Approvals; No Violations

   A-13

Section 4.6

  

Reports and Financial Statements

   A-13

Section 4.7

  

Absence of Undisclosed Liabilities

   A-14

Section 4.8

  

Absence of Certain Changes

   A-14

Section 4.9

  

Litigation

   A-15

Section 4.10

  

Compliance with Law

   A-15

Section 4.11

  

Employee Benefit Plans

   A-15

Section 4.12

  

Labor and Employment Matters

   A-17

Section 4.13

  

Taxes

   A-17

Section 4.14

  

Title, Ownership and Related Matters

   A-18

Section 4.15

  

Environmental

   A-20

Section 4.16

  

Brokers; Finders and Fees

   A-21

Section 4.17

  

Texas Business Combination Law

   A-21

Section 4.18

  

Intellectual Property

   A-21

Section 4.19

  

Contracts

   A-22

Section 4.20

  

Insurance

   A-23

 

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          Page

Section 4.21

  

Regulatory Matters

   A-23

Section 4.22

  

Affiliate Transactions

   A-25

Section 4.23

  

Derivative Products

   A-26

Section 4.24

  

Fairness Opinion

   A-26

Section 4.25

  

Board Recommendation

   A-26

Section 4.26

  

Ownership of Assets

   A-26

ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER

   A-26

Section 5.1

  

Organization; Etc.

   A-26

Section 5.2

  

Authority Relative to this Agreement

   A-27

Section 5.3

  

Consents and Approvals; No Violations

   A-27

Section 5.4

  

Debt Financing

   A-27

Section 5.5

  

Litigation

   A-27

Section 5.6

  

Investigation by Buyer

   A-28

Section 5.7

  

Brokers; Finders and Fees

   A-28

Section 5.8

  

Buyer’s ERCOT Generation

   A-29

Section 5.9

  

Ownership of Genco Holding Stock

   A-29

ARTICLE VI COVENANTS OF THE PARTIES

   A-29

Section 6.1

  

Covenants of Genco Holdings

   A-29

Section 6.2

  

Access to Information

   A-31

Section 6.3

  

Consents; Cooperation

   A-32

Section 6.4

  

Commercially Reasonable Efforts

   A-34

Section 6.5

  

Public Announcements

   A-35

Section 6.6

  

Tax Matters

   A-35

Section 6.7

  

Debt Financing

   A-39

Section 6.8

  

Employees; Employee Benefits

   A-41

Section 6.9

  

Insurance

   A-47

Section 6.10

  

No Solicitation of Transactions

   A-49

Section 6.11

  

Tax Exempt Financing

   A-50

Section 6.12

  

NRC Approval

   A-53

Section 6.13

  

Preparation of Information Statement; SEC Filings

   A-54

Section 6.14

  

Directors’ and Officers’ Indemnification and Insurance

   A-55

Section 6.15

  

Section 16 Matters

   A-55

Section 6.16

  

Intercompany Accounts and Agreements

   A-55

Section 6.17

  

Transition Services and Other Intercompany Arrangements

   A-56

Section 6.18

  

Power Purchase Agreement

   A-56

Section 6.19

  

Decommissioning Undertakings

   A-57

Section 6.20

  

True-up Proceeds

   A-57

Section 6.21

  

Environmental Reporting Regarding NOx Emission Reductions

   A-57

Section 6.22

  

Leases

   A-58

ARTICLE VII CONDITIONS TO CONSUMMATION OF THE PUBLIC COMPANY MERGER

   A-58

Section 7.1

  

Conditions to Genco Holdings and Merger Sub’s Obligations to Consummate the Public Company Merger

   A-58

ARTICLE VIII CONDITIONS TO CONSUMMATION OF THE NON-STP ACQUISITION

   A-59

Section 8.1

  

Conditions to Buyer, Genco Holdings and CenterPoint’s Obligations to Consummate the Non-STP Acquisition

   A-59

Section 8.2

  

Further Conditions to Genco Holdings and CenterPoint’s Obligations

   A-59

Section 8.3

  

Further Conditions to Buyer’s Obligations

   A-59

 

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          Page

Section 8.4

  

Additional Conditions to Genco Holdings and CenterPoint’s Obligations

   A-60

Section 8.5

  

Additional Conditions to Buyer’s Obligations

   A-60

ARTICLE IX CONDITIONS TO CONSUMMATION OF THE STP ACQUISITION

   A-61

Section 9.1

  

Conditions to CenterPoint and Buyer’s Obligations to Consummate the STP Acquisition

   A-61

Section 9.2

  

Further Conditions to Buyer’s Obligations

   A-61

ARTICLE X TERMINATION AND ABANDONMENT

   A-62

Section 10.1

  

Termination

   A-62

Section 10.2

  

Procedure for and Effect of Termination

   A-63

ARTICLE XI MISCELLANEOUS PROVISIONS

   A-64

Section 11.1

  

Representations and Warranties

   A-64

Section 11.2

  

Amendment and Modification

   A-64

Section 11.3

  

Entire Agreement; Assignment

   A-64

Section 11.4

  

Severability

   A-64

Section 11.5

  

Notices

   A-64

Section 11.6

  

Governing Law

   A-65

Section 11.7

  

Descriptive Headings

   A-66

Section 11.8

  

Counterparts

   A-66

Section 11.9

  

Fees and Expenses

   A-66

Section 11.10

  

Interpretation

   A-66

Section 11.11

  

Third-Party Beneficiaries

   A-67

Section 11.12

  

No Waivers

   A-67

Section 11.13

  

Specific Performance

   A-67

Section 11.14

  

Acknowledgments

   A-67

Section 11.15

  

Parent Undertaking

   A-68

Section 11.16

  

Special Committee

   A-68

Exhibits and Schedules1

    

Exhibit A—Form of Parent Written Consent

    

Exhibit B—Form of Merger Agreement for the Genco LP Division

    

Exhibit C—Form of Merger Agreement for the Genco II LP Acquisition

    

Exhibit D—Form of Merger Agreement for the Genco Services Acquisition

    

Exhibit E—Form of Transition Services Agreement

    

Schedule 2.3—Non-STP Purchase Price Allocation

    

Schedule 6.17(b)—Separation Amendments

    

Schedule 6.18—Power Purchase Arrangements

    

1 Exhibits and schedules to the Transaction Agreement have been omitted.

 

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TRANSACTION AGREEMENT

 

TRANSACTION AGREEMENT, dated as of July 21, 2004 (this “Agreement”), by and among CenterPoint Energy, Inc., a Texas corporation (“CenterPoint”), Utility Holding, LLC, a Delaware limited liability company and wholly-owned subsidiary of CenterPoint (“Utility Holding” and, together with CenterPoint, sometimes collectively referred to as “Parents” and, individually, a “Parent”), NN Houston Sub, Inc., a Texas corporation and a direct wholly-owned subsidiary of Utility Holding (“Merger Sub”), Texas Genco Holdings, Inc., a Texas corporation (“Genco Holdings”), GC Power Acquisition LLC, a Delaware limited liability company (“Buyer”), and HPC Merger Sub, Inc., a Texas corporation and a wholly-owned subsidiary of Buyer (“STP Merger Sub”). Parents, Merger Sub, Genco Holdings, Buyer and STP Merger Sub are hereinafter collectively referred to as the “parties” and each individually as a “party.”

 

WHEREAS, Utility Holding owns 64,764,240 shares (the “Shares”) of common stock, par value $.001 per share (“Common Stock”), of Genco Holdings; and

 

WHEREAS, the Shares represent approximately 80.96% of the total outstanding shares of Common Stock of Genco Holdings; and

 

WHEREAS, Genco Holdings, through its direct and indirect subsidiaries identified in Section 4.3(a) of the Companies Disclosure Letter (as defined below) (Genco Holdings and such direct and indirect subsidiaries and any direct or indirect subsidiaries of Genco Holdings formed after the date hereof are collectively referred to herein as the “Companies,” and, individually, each as a “Company”), (a) owns 11 electric power generation facilities, and a 30.8% (subject to potential increase pursuant to the exercise of a right of first refusal) interest in South Texas Project Nuclear Electric Generating Station (the “South Texas Project” or “STP”), all of which are located in Texas, and (b) sells wholesale electric generation capacity, energy and ancillary services in the Electric Reliability Council of Texas, Inc. market (the “ERCOT Market”) (such business referred to herein as the “Genco Business”); and

 

WHEREAS, the respective Boards of Directors of CenterPoint, Genco Holdings and Merger Sub, and the sole manager of Utility Holding, have approved, and deem it advisable to consummate, the merger of Merger Sub with and into Genco Holdings (the “Public Company Merger”), with Genco Holdings surviving as the Surviving Corporation (as defined below), on terms and subject to the conditions set forth in this Agreement; and

 

WHEREAS, concurrently with the execution and delivery of this Agreement and as a condition to Buyer’s willingness to enter into this Agreement, Utility Holding will deliver its written consent in the form attached hereto as Exhibit A (the “Parent Written Consent”), pursuant to which Utility Holding will approve this Agreement and the transactions contemplated hereby (including the Public Company Merger); and

 

WHEREAS, concurrently with the execution and delivery of this Agreement and as a condition to Buyer’s willingness to enter into this Agreement, Texas Genco, LP, a Texas limited partnership and an indirect wholly-owned subsidiary of Genco Holdings (“Genco LP”), has entered into a Master Power Purchase and Sale Agreement between Genco LP and J. Aron & Company, dated the date hereof (the “Power Purchase Agreement”); and

 

WHEREAS, concurrently with the execution and delivery of this Agreement and as a condition to Parents’ and Genco Holdings’ willingness to enter into this Agreement, Buyer has entered into a commitment letter (the “Debt Financing Letter”) with financing sources with respect to the debt financing (the “Debt Financing”) for the transactions contemplated hereby other than the Public Company Merger, which financing will include (a) a $775.0 million senior first prior secured term loan facility, (b) a $475.0 million delayed draw term loan facility (the “Delayed Draw Term Facility”), (c) a $200.0 million senior first priority secured revolving credit facility, (d) a $200.0 million senior first priority secured letter of credit facility, (e) a $425.0 million senior first priority secured letter of credit facility, and (f) the issuance of $1,250.0 million of senior second priority secured notes or, alternatively, $1,250.0 million under senior second priority secured increasing rate bridge loans; and

 

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WHEREAS, Annex E to the Debt Financing Letter (the “Public Company Merger Debt Term Sheet”) provides for debt financing to Genco Holdings for the Public Company Merger, which financing will consist of a $717.0 million overnight bridge loan (the “Overnight Bridge Loan”); and

 

WHEREAS, prior to the Public Company Merger Closing Date (as defined below), upon the terms and subject to the conditions set forth in this Agreement, a Texas limited partnership to be formed by Genco Holdings as a wholly-owned indirect subsidiary of Genco Holdings (“Genco II LP”), will merge with Genco LP, and as a result of that merger be allocated all of the Non-STP Assets and Liabilities (as defined below) other than those held by Texas Genco Services, LP, a Texas limited partnership wholly-owned by Genco Holdings (“Genco Services”) (such transaction, the “Genco LP Division”); and

 

WHEREAS, on the first business day following consummation of the Public Company Merger or as soon as possible thereafter, upon the terms and subject to the conditions set forth in this Agreement, (1) a Texas limited partnership to be formed by Buyer as a wholly-owned indirect subsidiary of Buyer (“Newco”), will merge with and into Genco II LP (such merger, the “Genco II LP Acquisition”), with Genco II LP being the surviving entity in the Genco II LP Acquisition as an indirect wholly-owned subsidiary of Buyer, and (2) a Texas limited partnership to be formed by Buyer as a wholly-owned indirect subsidiary of Buyer (“Newco2”) will merge with and into Genco Services (such merger, the “Genco Services Acquisition”), with Genco Services being the surviving entity in the Genco Services Acquisition as an indirect wholly-owned subsidiary of Buyer (the Genco II LP Acquisition and the Genco Services Acquisition, collectively, the “Non-STP Acquisition”); and

 

WHEREAS, following consummation of the Public Company Merger and the Non-STP Acquisition, upon the terms and subject to the conditions set forth in this Agreement, STP Merger Sub will merge with and into Genco Holdings (the “STP Acquisition”), with Genco Holdings being the surviving corporation in the STP Acquisition as a direct wholly-owned subsidiary of Buyer; and

 

WHEREAS, Buyer is owned by Blackstone Capital Partners IV L.P., Hellman & Friedman Capital Partners IV, L.P., KKR Millennium Fund, L.P., TPG Partners IV, L.P. and their respective affiliates (collectively, the “Investors”);

 

NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and agreements contained in this Agreement, and intending to be legally bound, the parties agree as follows:

 

ARTICLE I

 

PUBLIC COMPANY MERGER

 

Section 1.1    The Public Company Merger. On the terms and subject to the conditions of this Agreement and in accordance with the Texas Business Corporation Act (“TBCA”), at the Public Company Merger Effective Time (as defined in Section 1.3), Merger Sub shall be merged with and into Genco Holdings. As a result of the Public Company Merger, the separate corporate existence of Merger Sub shall cease and Genco Holdings shall survive the Public Company Merger (sometimes hereinafter referred to as the “Surviving Corporation”). From and after the Public Company Merger Effective Time, the Public Company Merger shall have the effects provided in Article 5.06A of the TBCA. All rights, titles and interests to all properties owned by Genco Holdings and Merger Sub shall be allocated to and vested in the Surviving Corporation without reversion or impairment, without further act or deed, and without any transfer or assignment having occurred, but subject to any existing Liens thereon. All liabilities and obligations of Genco Holdings and Merger Sub shall become liabilities and obligations of the Surviving Corporation.

 

Section 1.2    Time and Place of Public Company Merger Closing. Unless this Agreement shall have been terminated and the transactions herein contemplated shall have been abandoned pursuant to Section 10.1 and subject to the satisfaction or waiver of the conditions set forth in Article VII, the closing of the Public Company

 

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Merger (the “Public Company Merger Closing”) will take place at the offices of Baker Botts L.L.P., One Shell Plaza, 910 Louisiana Street, Houston, Texas 77002-4995 at 9:00 a.m. (local time) on the first business day (that is a day that is followed by three consecutive days that are all business days) following the date on which all of the conditions set forth in Article VII (other than those that by their nature are intended to be satisfied at the Public Company Merger Closing) have been satisfied or waived, or at such other date, place or time as the parties may agree. The date on which the Public Company Merger Closing occurs and the transactions contemplated by the Public Company Merger become effective is referred to as the “Public Company Merger Closing Date.”

 

Section 1.3    Effective Time of the Public Company Merger. On the Public Company Merger Closing Date, the parties shall cause the Public Company Merger to be consummated by filing the articles of merger (the “Articles of Merger”) with the Secretary of State of the State of Texas (the “Texas Secretary of State”) in such form as is required by, and executed in accordance with, the relevant provisions of the TBCA and shall make any other filings or recordings required under the TBCA (the date and time of the issuance of a certificate of merger by the Texas Secretary of State pursuant to Article 5.05 of the TBCA (or such later time as is specified in the Articles of Merger) on the Public Company Merger Closing Date, being the “Public Company Merger Effective Time”).

 

Section 1.4    Directors and Officers. The directors of Merger Sub immediately prior to the Public Company Merger Effective Time shall be the initial directors of the Surviving Corporation following the Public Company Merger, and the officers of Genco Holdings immediately prior to the Public Company Merger Effective Time shall be the initial officers of the Surviving Corporation following the Public Company Merger, in each case until their respective successors are duly elected or appointed or until their earlier death, resignation or removal in accordance with the articles of incorporation and bylaws of the Surviving Corporation.

 

Section 1.5    Articles of Incorporation and Bylaws. Following the Public Company Merger Effective Time, the articles of incorporation of Genco Holdings shall be the articles of incorporation of the Surviving Corporation until thereafter changed or amended in accordance with the provisions thereof and applicable Law. Following the Public Company Merger Effective Time, the bylaws of Genco Holdings shall be the bylaws of the Surviving Corporation until thereafter changed or amended in accordance with the provisions thereof and applicable Law.

 

Section 1.6    Effect of Public Company Merger on Capital Stock. As of the Public Company Merger Effective Time, by virtue of the Public Company Merger and without any action on the part of Genco Holdings, Merger Sub or any holder of any shares of capital stock of Genco Holdings or any shares of capital stock of Merger Sub:

 

(a)  Common Stock of Merger Sub. Each share of common stock of Merger Sub issued and outstanding immediately prior to the Public Company Merger Effective Time shall be converted into one validly issued, fully paid and non-assessable share of common stock, par value $.001 per share, of the Surviving Corporation (such shares, the “Surviving Corporation Shares”).

 

(b)  Cancellation of Certain Common Stock. Each share of Common Stock that is owned by CenterPoint or any of its subsidiaries (including Utility Holding, Genco Holdings or Merger Sub), in each case immediately prior to the Public Company Merger Effective Time shall automatically be cancelled and retired and shall cease to exist, and no cash or other consideration shall be delivered or deliverable in exchange therefor.

 

(c)  Conversion of Common Stock. Subject to the provisions of this Section 1.6, each share of Common Stock, other than Dissent Shares and shares cancelled pursuant to Section 1.6(b), issued and outstanding immediately prior to the Public Company Merger Effective Time shall, by virtue of the Public Company Merger and without any action on the part of the holder thereof, be converted into the right to receive $47.00 in cash payable without interest (the “Public Company Merger Consideration”) deliverable, in each case, to the holder of such share, upon surrender, in the manner provided in Section 1.7, of a certificate formerly evidencing such share (a “Certificate”).

 

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(d)  Dissenters’ Rights. Notwithstanding anything in this Agreement to the contrary, shares of Common Stock that are issued and outstanding immediately prior to the Public Company Merger Effective Time and that are held by any person who is entitled to dissent from and properly dissents from this Agreement pursuant to, and who complies in all respects with, Articles 5.11, 5.12 and 5.13 of the TBCA (the “Dissenters’ Statute”), in each case to the extent applicable (“Dissent Shares”), shall not be converted into a right to receive the Public Company Merger Consideration as provided in Section 1.6(c), but rather the holders of Dissent Shares shall be entitled to the right to receive payment of the fair value of such Dissent Shares in accordance with the Dissenters’ Statute upon surrender of the certificate or certificates duly endorsed representing such Dissent Shares; provided, however, that if any such holder shall fail to perfect or otherwise shall effectively waive, withdraw or lose the right to receive payment of the fair value under the Dissenters’ Statute, then the right of such holder to be paid the fair value of such holder’s Dissent Shares shall cease and such Dissent Shares shall be deemed to have been converted as of the Public Company Merger Effective Time into the right to receive the Public Company Merger Consideration as provided in Section 1.6(c). Genco Holdings shall give prompt notice to Buyer (and, until the STP Acquisition Closing (as defined in Section 2.6), CenterPoint) of any objections or demands received by Genco Holdings for payment of the fair value of Common Stock pursuant to the Dissenters’ Statute, and Buyer (and, until the STP Acquisition Closing, CenterPoint) shall have the right to direct all negotiations and proceedings with respect to such objections or demands. Genco Holdings shall not, without the prior written consent of Buyer (and until the STP Acquisition Closing, CenterPoint), make any payment with respect to, or settle or offer to settle, any such objections or demands, or agree to do any of the foregoing.

 

Section 1.7    Exchange of Certificates.

 

(a)  Deposit with Payment Agent. Prior to the Public Company Merger Effective Time, CenterPoint shall appoint a bank or trust company reasonably acceptable to Buyer and Genco Holdings to act as agent (the “Paying Agent”) for the delivery of the Public Company Merger Consideration upon surrender of the Certificates in accordance with this Article I. At or promptly after the Public Company Merger Effective Time, the Surviving Corporation shall deposit with the Paying Agent an amount of cash required for the payment of the Public Company Merger Consideration upon surrender of Certificates in accordance with this Article I. Such funds shall be invested by the Paying Agent as directed by the Surviving Corporation, provided that such investments shall be in obligations of or guaranteed by the United States of America or any agency or instrumentality thereof, in commercial paper obligations rated A-1 or P-1 or better by Moody’s Investors Services, Inc. or Standard & Poor’s Corporation, respectively, or in certificates of deposit, bank repurchase agreements or banker’s acceptances of commercial banks with capital exceeding $500,000,000. Any net profit resulting from, or interest or income produced by, such investments will be payable to the Surviving Corporation.

 

(b)  Exchange and Payment Procedures. As soon as reasonably practicable after the Public Company Merger Effective Time, the Paying Agent shall mail to each holder of record of a Certificate (i) a form of letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates held by such person shall pass, only upon proper delivery of the Certificates to the Paying Agent and shall be in customary form and have such other provisions as the parties may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for the Public Company Merger Consideration. Upon surrender of a Certificate for cancellation to the Paying Agent or to such other agent or agents as may be appointed by the Surviving Corporation, together with such letter of transmittal, duly completed and validly executed, and such other documents as may reasonably be required by the Paying Agent, the holder of such Certificate shall be entitled to receive in exchange therefor the Public Company Merger Consideration in respect of the shares formerly represented by such Certificate pursuant to Section 1.6(c), and the Certificate so surrendered shall forthwith be cancelled. In the event of a transfer of ownership of Common Stock that is not registered in the share transfer books of Genco Holdings, the Public Company Merger Consideration may be paid and delivered in exchange therefor to a person other than the person in whose name the Certificate so surrendered is registered if such Certificate shall be properly endorsed or otherwise be in proper form for transfer and the person requesting such Public Company Merger Consideration shall pay any transfer or other Taxes required by reason of the payment to a person other than the registered holder of such Certificate or establish to the

 

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reasonable satisfaction of the Surviving Corporation that such Tax has been paid or is not applicable. No interest shall be paid or shall accrue on the Public Company Merger Consideration payable upon surrender of any Certificate.

 

(c)  No Further Ownership Rights in Common Stock. Until surrendered as contemplated by Section 1.7(b), each Certificate shall be deemed at any time after the Public Company Merger Effective Time to represent only the right to receive upon such surrender the Public Company Merger Consideration as contemplated by this Article I. The Public Company Merger Consideration delivered upon the surrender of a Certificate in accordance with the terms of this Article I shall be deemed to have been delivered at the Public Company Merger Effective Time in full satisfaction of all rights pertaining to the shares of Common Stock formerly represented by such Certificate. At the close of business on the date on which the Public Company Merger Effective Time occurs, the share transfer books of Genco Holdings shall be closed, and there shall be no further registration of transfers on the share transfer books of the Surviving Corporation of the shares of Common Stock that were outstanding immediately prior to the Public Company Merger Effective Time. If, after the close of business on the date on which the Public Company Merger Effective Time occurs, Certificates are presented to the Surviving Corporation or the Paying Agent for transfer or any other reason, they shall be cancelled and exchanged as provided in this Article I.

 

(d)  No Liability. None of the parties to this Agreement, the Surviving Corporation and the Paying Agent shall be liable to any person in respect of any cash or property delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law. Any portion of the Public Company Merger Consideration deposited with the Paying Agent pursuant to this Article I which remains undistributed to the holders of the Certificates for twelve months after the Public Company Merger Effective Time (or immediately prior to such earlier date on which any cash or property in respect of such Certificate would otherwise escheat to or become the property of any Governmental Authority) shall be delivered to the Surviving Corporation, upon demand. Any holders of Certificates who have not theretofore complied with this Article I shall thereafter look only to the Surviving Corporation and only as general creditors thereof for payment of their claim, if any, to which such holders may be entitled.

 

(e)  Lost Certificates. If any Certificate shall have been lost, stolen, defaced or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen, defaced or destroyed and, if required by the Surviving Corporation, the posting by such person of a bond in such reasonable amount as the Surviving Corporation may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Paying Agent shall pay in respect of such lost, stolen, defaced or destroyed Certificate the Public Company Merger Consideration.

 

(f)  Withholding Rights. The Surviving Corporation or the Paying Agent shall be entitled to deduct and withhold any applicable Taxes from the consideration otherwise payable pursuant to this Agreement to any holder of shares of Common Stock.

 

ARTICLE II

 

OTHER TRANSACTIONS

 

Section 2.1    Genco LP Division. Prior to the Public Company Merger Closing Date, CenterPoint and Genco Holdings shall cause the Genco LP Division to be consummated, as follows: Genco LP and Genco II LP shall execute and deliver a merger agreement substantially in the form attached hereto as Exhibit B and consummate the Genco LP Division on the terms and conditions set forth therein pursuant to a multiple survivor merger of Genco LP and Genco II LP pursuant to which (i) except for the STP Assets and Liabilities (as defined below), all of Genco LP’s right, title and interest in and to any and all properties, assets, rights, claims, Contracts and Permits and all debts, liabilities and obligations shall be allocated to Genco II LP (the “Genco LP Non-STP Assets and Liabilities”), (ii) all of the properties, assets, rights, claims, Contracts and Permits set forth in Section 2.1(a) of the Companies Disclosure Letter (as defined herein) shall be allocated to Genco LP (the “STP Assets”) and (iii) all of the debts, liabilities and obligations set forth in Section 2.1(b) of the Companies Disclosure Letter shall be allocated to Genco LP (the “STP Liabilities” and collectively with the STP Assets, the

 

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STP Assets and Liabilities”). CenterPoint and Genco Holdings agree that after the date of this Agreement Buyer shall have the right to review the items set forth on Sections 2.1(a) and 2.1(b) of the Companies Disclosure Letter and the parties agree that to the extent the parties in good faith determine that any such items are more properly characterized as Non-STP Assets and Liabilities, as applicable, such items shall be removed from such Sections. The Genco LP Non-STP Assets and Liabilities together with the assets, rights, claims, Contracts, Permits, debts, liabilities and obligations of Genco Services immediately prior to the effective time of the Genco Services Acquisition are referred to collectively as the “Non-STP Assets and Liabilities”.

 

Section 2.2    Merger Agreements.

 

(a)  On or prior to the Public Company Merger Date, Genco II LP and Newco shall execute and deliver a merger agreement substantially in the form of Exhibit C (the “Genco II Merger Agreement”).

 

(b)  On or prior to the Public Company Merger Date, Genco Services and Newco2 shall execute and deliver a merger agreement substantially in the form of Exhibit D (the “Genco Services Merger Agreement”).

 

Section 2.3    Non-STP Acquisition. On the first business day after the Public Company Merger Closing Date or as soon as possible thereafter (the “Non-STP Acquisition Closing Date”), on the terms and subject to the conditions set forth in Article VIII, at the Non-STP Acquisition Closing (as defined below), Buyer shall cause Newco and Newco2, and CenterPoint and Genco Holdings shall cause Genco II LP and Genco Services, as applicable, to consummate the Non-STP Acquisition, as follows:

 

(a)  Genco II LP and Newco shall consummate the Genco II LP Acquisition on the terms and conditions set forth in the Genco II Merger Agreement, with Genco II LP being the surviving entity in the Genco II LP Acquisition as an indirectly wholly owned subsidiary of Buyer.

 

(b)  Genco Services and Newco2 shall consummate the Genco Services Acquisition on the terms and conditions set forth in the Genco Services Merger Agreement, with Genco Services being the surviving entity in the Genco Services Acquisition as an indirectly wholly owned subsidiary of Buyer.

 

(c)  In the Non-STP Acquisition, (i) Buyer shall cause to be paid in the Genco II LP Acquisition to the partners of Genco II LP total consideration of $2,789 million in cash without interest (the “Genco II LP Consideration”) by wire transfer of immediately available funds and (ii) Buyer shall cause to be paid in the Genco Services Acquisition to the partners of Genco Services total consideration of $24 million in cash without interest (together with the Genco II LP Consideration, the “Non-STP Consideration”), in each case to the accounts specified by Genco Holdings to Buyer in writing at least two business days prior to the Non-STP Acquisition Closing Date. To the extent Genco Holdings has received proceeds under the Overnight Bridge Loan prior to the Non-STP Acquisition Closing, a portion of the Non-STP Consideration shall be paid directly by Buyer to the lenders thereof to repay such borrowings and interest thereon in full.

 

(d)  The parties have agreed in Schedule 2.3 hereto to the proposed allocation of the Non-STP Consideration among the Non-STP Assets and Liabilities as of the date hereof in accordance with section 1060 of the Code and the regulations promulgated thereunder (the “1060 Allocation”). Such 1060 Allocation shall be amended by agreement of the parties on the Non-STP Acquisition Closing Date to reflect any changes required by Section 1060 of the Code and the regulations promulgated thereunder (such 1060 Allocation as amended, the “Final 1060 Allocation”). The Final 1060 Allocation shall be used by CenterPoint and Buyer in preparing Internal Revenue Service Form 8594, Asset Acquisition Statement (which Form 8594 shall be completed, executed and delivered by such parties as soon as practicable after the Non-STP Acquisition Closing Date but in no event later than 15 days prior to the date such form is required to be filed). CenterPoint and Buyer each shall file, or cause to be filed, Form 8594 prepared in accordance with this Section 2.3(d) with the U.S. federal income Tax Returns for the taxable period which includes the Non-STP Acquisition Closing Date. The Final 1060 Allocation shall be binding upon the parties hereto and upon each of their successors and assigns, and the parties hereto shall report for tax purposes the transactions contemplated by this Agreement in accordance with such allocations.

 

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Section 2.4    Time and Place of Non-STP Acquisition Closing. Unless this Agreement shall have been terminated and the transactions herein contemplated shall have been abandoned pursuant to Section 10.1 and subject to the satisfaction or waiver of the conditions set forth in Article VIII, the closing of the Non-STP Acquisition (the “Non-STP Acquisition Closing”) will take place at the offices of Baker Botts L.L.P., One Shell Plaza, 910 Louisiana Street, Houston, Texas 77002-4995 at 9:00 a.m. (local time) on the Non-STP Acquisition Closing Date, or at such other date, place or time as CenterPoint and the Buyer may agree.

 

Section 2.5    STP Acquisition. On the terms and subject to the conditions set forth in Article IX, and in accordance with the TBCA, at the STP Acquisition Closing (as defined below), the parties hereto shall cause the STP Acquisition to be consummated as follows:

 

(a)  STP Merger Sub shall be merged with and into Genco Holdings. As a result of the STP Acquisition, the separate corporate existence of STP Merger Sub shall cease and Genco Holdings shall survive the merger (sometimes hereinafter referred to as the “STP Survivor”). From and after the STP Acquisition Effective Time (as defined below), the STP Acquisition shall have the effects provided in Article 5.06A of the TBCA. All rights, titles and interests to all properties owned by Genco Holdings and STP Merger Sub shall be allocated to and vested in STP Survivor without reversion or impairment, without further act or deed, and without any transfer or assignment having occurred, but subject to any existing Liens thereon. All liabilities and obligations of Genco Holdings and STP Merger Sub shall become liabilities and obligations of STP Survivor.

 

(b)  As soon as practicable after the STP Acquisition Closing, the parties shall cause the STP Acquisition to be consummated by filing articles of merger (the “STP Articles of Merger”) with the Texas Secretary of State in such form as is required by, and executed in accordance with, the relevant provisions of the TBCA and shall make all other filings or recordings required under the TBCA (the date and time of the issuance of a certificate of merger by the Texas Secretary of State pursuant to Article 5.05 of the TBCA (or such later time as is specified in the STP Articles of Merger) on the STP Acquisition Closing Date, being the “STP Acquisition Effective Time”).

 

(c)  Following the STP Acquisition Effective Time, the articles of incorporation of Genco Holdings shall be the articles of incorporation of the STP Survivor until thereafter changed or amended in accordance with the provisions thereof and applicable Law. Following the STP Acquisition Effective Time, the bylaws of Genco Holdings shall be the bylaws of the STP Survivor until thereafter changed or amended in accordance with the provisions thereof and applicable Law.

 

(d)  As of the STP Acquisition Effective Time, by virtue of the STP Acquisition and without any action on the part of Genco Holdings, STP Merger Sub or any holder of any shares of capital stock of Genco Holdings or any shares of capital stock of STP Merger Sub:

 

(i)  Each share of common stock of STP Merger Sub issued and outstanding immediately prior to the STP Acquisition Effective Time shall be converted into one validly issued, fully paid and non-assessable share of common stock, par value $.001 per share, of the STP Survivor.

 

(ii)  The shares of capital stock in Genco Holdings issued and outstanding immediately prior to the STP Acquisition Effective Time shall, by virtue of the STP Acquisition and without any action on the part of the holder thereof, be converted into the right to receive total aggregate merger consideration of $700 million in cash without interest (the “STP Consideration”) by wire transfer of immediately available funds to an account specified by Utility Holding to Buyer in writing at least two business days prior to the STP Acquisition Closing Date.

 

Section 2.6    Time and Place of STP Acquisition Closing. Unless this Agreement shall have been terminated and the transactions herein contemplated shall have been abandoned pursuant to Section 10.1 and subject to the satisfaction or waiver of the conditions set forth in Article IX, the closing of the STP Acquisition (the “STP Acquisition Closing”) will take place at the offices of Baker Botts L.L.P., One Shell Plaza, 910 Louisiana Street, Houston, Texas 77002-4995 at 9:00 a.m. (local time) on the fifth business day following the date on which all of

 

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the conditions to each party’s obligations set forth in Article IX (other than those that by their nature are intended to be satisfied at the STP Acquisition Closing) have been satisfied or waived, or at such other date, place or time as CenterPoint and Buyer may agree. The date on which the STP Acquisition Closing occurs, which shall be the date of the STP Acquisition Effective Time, is referred to as the “STP Acquisition Closing Date.

 

Section 2.7    FIRPTA Certificate. At each of the STP Acquisition Closing and the Non-STP Acquisition Closing, Parents shall deliver (or in the case of the Non-STP Acquisition, shall cause Genco Holdings to deliver) a duly executed and acknowledged certificate, in form and substance reasonably acceptable to Buyer and in accordance with the Code and Treasury Regulations, certifying Parents’ non-foreign status as provided under Treasury regulation Section 1.1445-2(b)(2).

 

Section 2.8    Director and Officer Resignations. At or prior to the STP Acquisition Closing, all the directors of Genco Holdings and its subsidiaries shall deliver to Genco Holdings written resignations and all of the officers of Genco Holdings and its subsidiaries shall deliver to Genco Holdings written resignation, or CenterPoint shall cause such officers to be removed, in each case, from their positions as directors or officers of Genco Holdings and its subsidiaries, effective as of the STP Acquisition Closing.

 

ARTICLE III

 

REPRESENTATIONS AND WARRANTIES OF CENTERPOINT

 

CenterPoint represents and warrants to Buyer as follows:

 

Section 3.1    Organization; Etc. Each of the Parents and Merger Sub (a) is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, (b) has all requisite corporate or limited liability company power and authority, as applicable, to execute and deliver this Agreement and all other agreements and instruments executed in connection herewith or delivered pursuant hereto (including the Parent Written Consent), to perform its obligations hereunder and to consummate the transactions contemplated by this Agreement and (c) is duly qualified or licensed to do business, and is in good standing in each jurisdiction in which the nature of its business or the ownership, operation or leasing of its properties makes such qualification or licensing necessary, except where the failure to be so qualified or licensed would not reasonably be expected to, individually or in the aggregate, have a Companies Material Adverse Effect.

 

Section 3.2    Authority Relative to this Agreement. The execution, delivery and performance of this Agreement and all other agreements and instruments executed in connection herewith or delivered pursuant hereto (including the Parent Written Consent) by the Parents and Merger Sub and the consummation of the transactions contemplated by this Agreement and all other agreements and instruments executed in connection herewith or delivered pursuant hereto have been duly and validly authorized by all requisite corporate or limited liability company action, as applicable, on the part of each of the Parents and Merger Sub and no other corporate or similar actions or proceedings on the part of either Parent is necessary to authorize the execution, delivery and performance of this Agreement and all other agreements and instruments executed in connection herewith or delivered pursuant hereto by each of the Parents and Merger Sub or for the Parents or Merger Sub to consummate the transactions so contemplated. This Agreement and all other agreements and instruments executed in connection herewith or delivered pursuant hereto (including the Parent Written Consent) have been, or will be, duly and validly executed and delivered by each of the Parents and Merger Sub and, with respect to this Agreement and any other such agreement, assuming it has been duly authorized, executed and delivered by any other party (other than Parents, Merger Sub and any of their affiliates other than Genco Holdings and its controlled affiliates), constitutes, or will constitute when executed, a valid and binding agreement of such Parent and Merger Sub, enforceable against such Parent and Merger Sub in accordance with its terms, except that (a) enforcement may be subject to any bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other laws, now or hereafter in effect, relating to or limiting creditors’ rights generally, and (b) enforcement of this Agreement, including, among other things, the remedy of specific performance and injunctive and other

 

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forms of equitable relief, may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. Merger Sub was formed solely for the purpose of engaging in the transactions contemplated hereby and has not engaged in any business or conducted any operations other than in connection with the transaction contemplated hereby.

 

Section 3.3    Ownership of Shares

 

(a)  Except as set forth in Section 3.3(a) of the disclosure letter delivered by Parents to Buyer concurrently with the execution hereof (the “Parents Disclosure Letter”), (i) all the Shares are owned beneficially and of record by Utility Holding free and clear of all Liens and (ii) all of the membership interests of Utility Holding are owned beneficially and of record by CenterPoint free and clear of all Liens. The Shares represent approximately 80.96% of the issued and outstanding Common Stock on a primary and fully diluted basis.

 

(b)  Except as set forth in Section 3.3(b) of the Parents Disclosure Letter, after giving effect to the Public Company Merger, Utility Holding will own 100% of the outstanding capital stock of the Surviving Corporation, free and clear of all Liens. After giving effect to the merger contemplated by the STP Acquisition in Section 2.5(a), Buyer will own 100% of the outstanding capital stock of the STP Survivor, free and clear of all Liens, other than Liens granted by Buyer. After giving effect to the merger contemplated by the Non-STP Acquisition in Section 2.3, Buyer will own 100% of the interests in Genco II LP and 100% of the interests in Genco Services, in each case, free and clear of all Liens, other than Liens granted by Buyer.

 

Section 3.4    Consents and Approvals; No Violations. Except for the Requir