CenterPoint Energy, Inc.
CENTERPOINT ENERGY INC (Form: 10-Q, Received: 08/04/2011 08:01:49)


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________

FORM 10-Q

(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
FOR THE TRANSITION PERIOD FROM                     TO                    

Commission file number 1-31447
                           
CenterPoint Energy, Inc.
(Exact name of registrant as specified in its charter)

Texas
74-0694415
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
1111 Louisiana
 
Houston, Texas 77002
(713) 207-1111
(Address and zip code of principal executive offices)
(Registrant’s telephone number, including area code )
                            

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ   No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
      Large accelerated filer  þ
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  o
   
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o   No  þ
 
As of July 15, 2011, CenterPoint Energy, Inc. had 425,856,294 shares of common stock outstanding, excluding 166 shares held as treasury stock.
 



 
 
 
CENTERPOINT ENERGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2011

TABLE OF CONTENTS

PART I.
 
FINANCIAL INFORMATION
   
         
Item 1.
   
1
         
       
   
Three and Six Months Ended June 30, 2010 and 2011 (unaudited)
 
1
         
       
   
December 31, 2010 and June 30, 2011 (unaudited)
 
2
         
       
   
Six Months Ended June 30, 2010 and 2011 (unaudited)
 
4
         
     
5
         
Item 2.
   
26
         
Item 3.
   
42
         
Item 4.
   
43
         
PART II.
 
OTHER INFORMATION
   
         
Item 1.
   
43
         
   Item 1A.
   
43
         
Item 2.
   
43
         
Item 5.
   
44
         
Item 6.
   
44


 
i

 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

From time to time we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied by these statements. You can generally identify our forward-looking statements by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “plan,” “potential,” “predict,” “projection,” “should,” “will” or other similar words.

We have based our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that assumptions, beliefs, expectations, intentions and projections about future events may and often do vary materially from actual results. Therefore, we cannot assure you that actual results will not differ materially from those expressed or implied by our forward-looking statements.

The following are some of the factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements:

 
the resolution of the true-up proceedings, including future actions by the Public Utility Commission of Texas (Texas Utility Commission) in response to the decisions by the Texas Supreme Court and the Texas Third Court of Appeals, and any further appeals thereof;

 
state and federal legislative and regulatory actions or developments relating to the environment, including those related to global climate change;

 
other state and federal legislative and regulatory actions or developments affecting various aspects of our business, including, among others, energy deregulation or re-regulation, pipeline integrity and safety, health care reform, financial reform and tax legislation;

 
timely and appropriate rate actions and increases, allowing recovery of costs and a reasonable return on investment;

 
the timing and outcome of any audits, disputes and other proceedings related to taxes;

 
problems with construction, implementation of necessary technology or other issues with respect to major capital projects that result in delays or in cost overruns that cannot be recouped in rates;

 
industrial, commercial and residential growth in our service territory and changes in market demand, including the effects of energy efficiency measures and demographic patterns;

 
the timing and extent of changes in commodity prices, particularly natural gas and natural gas liquids, and the effects of geographic and seasonal commodity price differentials;

 
the timing and extent of changes in the supply of natural gas, including supplies available for gathering by our field services business and transporting by our interstate pipelines;

 
weather variations and other natural phenomena;

 
the impact of unplanned facility outages;

 
timely and appropriate regulatory actions allowing securitization or other recovery of costs associated with any future hurricanes or natural disasters;

 
changes in interest rates or rates of inflation;

 
commercial bank and financial market conditions, our access to capital, the cost of such capital, and the results of our financing and refinancing efforts, including availability of funds in the debt capital markets;

 
actions by credit rating agencies;

 
ii

 
 
 
effectiveness of our risk management activities;

 
inability of various counterparties to meet their obligations to us;

 
non-payment for our services due to financial distress of our customers;

 
the ability of GenOn Energy, Inc. (GenOn) (formerly known as RRI Energy, Inc., Reliant Energy, Inc. and Reliant Resources, Inc.) and its subsidiaries to satisfy their obligations to us, including indemnity obligations, or obligations in connection with the contractual arrangements pursuant to which we are their guarantor;

 
the ability of retail electric providers (REPs), including REP subsidiaries of NRG Retail LLC and REP subsidiaries of TXU Energy Retail Company LLC, which are CenterPoint Houston’s two largest customers, to satisfy their obligations to us and our subsidiaries;

 
the outcome of litigation brought by or against us;

 
our ability to control costs;

 
the investment performance of our pension and postretirement benefit plans;

 
our potential business strategies, including restructurings, acquisitions or dispositions of assets or businesses, which we cannot assure you will be completed or will have the anticipated benefits to us;

 
acquisition and merger activities involving us or our competitors; and

 
other factors we discuss in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2010 and in Item 1A of Part II of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, each of which is incorporated herein by reference, and other reports we file from time to time with the Securities and Exchange Commission.

You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement.


 
iii

 
PART I. FINANCIAL INFORMATION

Item 1.      FINANCIAL STATEMENTS

 
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(In Millions, Except Per Share Amounts)
(Unaudited)

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2011
   
2010
   
2011
 
                         
Revenues
  $ 1,756     $ 1,837     $ 4,779     $ 4,424  
                                 
Expenses:
                               
Natural gas
    778       778       2,713       2,254  
Operation and maintenance
    410       446       824       885  
Depreciation and amortization
    217       223       417       424  
Taxes other than income taxes
    88       87       205       194  
Total
    1,493       1,534       4,159       3,757  
Operating Income
    263       303       620       667  
                                 
Other Income (Expense):
                               
Gain (loss) on marketable securities
    (22 )     18       16       50  
Gain (loss) on indexed debt securities
    32             5       (23 )
Interest and other finance charges
    (121 )     (111 )     (243 )     (227 )
Interest on transition and system restoration bonds
    (36 )     (32 )     (72 )     (65 )
Equity in earnings of unconsolidated affiliates
    7       8       12       14  
Other, net
    3       4       4       9  
Total
    (137 )     (113 )     (278 )     (242 )
                                 
Income Before Income Taxes
    126       190       342       425  
Income tax expense
    45       71       147       158  
Net Income
  $ 81     $ 119     $ 195     $ 267  
                                 
Basic Earnings Per Share
  $ 0.20     $ 0.28     $ 0.49     $ 0.63  
                                 
Diluted Earnings Per Share
  $ 0.20     $ 0.28     $ 0.49     $ 0.62  
                                 
Dividends Declared Per Share
  $ 0.195     $ 0.1975     $ 0.39     $ 0.395  
                                 
Weighted Average Shares Outstanding, Basic
    400       426       396       425  
                                 
Weighted Average Shares Outstanding, Diluted
    402       428       399       428  


See Notes to Interim Condensed Consolidated Financial Statements


 
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions)
(Unaudited)

ASSETS

   
December 31,
2010
   
June 30,
2011
 
Current Assets:
           
Cash and cash equivalents ($198 and $176 related to VIEs at December 31,
2010 and June 30, 2011, respectively)
  $ 199     $ 190  
Investment in marketable securities
    367       417  
Accounts receivable, net ($49 and $68 related to VIEs at December 31,
2010 and June 30, 2011, respectively)
    835       750  
Accrued unbilled revenues
    340       156  
Natural gas inventory
    164       144  
Materials and supplies
    211       165  
Non-trading derivative assets
    54       39  
Taxes receivable
    138        
Prepaid expenses and other current assets ($39  and $40 related to VIEs at December 31,
2010 and June 30, 2011, respectively)
    274       181  
Total current assets
    2,582       2,042  
                 
Property, Plant and Equipment:
               
Property, plant and equipment
    16,005       16,426  
Less accumulated depreciation and amortization
    4,273       4,445  
Property, plant and equipment, net
    11,732       11,981  
                 
Other Assets:
               
Goodwill
    1,696       1,696  
Regulatory assets ($2,597 and $2,460 related to VIEs at December 31,
2010 and June 30, 2011, respectively)
    3,446       3,315  
Non-trading derivative assets
    15       11  
Investment in unconsolidated affiliates
    468       474  
Other
    172       158  
Total other assets
    5,797       5,654  
                 
Total Assets
  $ 20,111     $ 19,677  


See Notes to Interim Condensed Consolidated Financial Statements


 
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS – (continued)
(In Millions)
(Unaudited)

LIABILITIES AND SHAREHOLDERS’ EQUITY

   
December 31,
2010
   
June 30,
2011
 
Current Liabilities:
           
Short-term borrowings
  $ 53     $ 109  
Current portion of VIE transition and system restoration bonds long-term
debt
    283       294  
Current portion of indexed debt
    126       128  
Current portion of other long-term debt
    19       46  
Indexed debt securities derivative
    232       255  
Accounts payable
    667       394  
Taxes accrued
    156       139  
Interest accrued
    171       174  
Non-trading derivative liabilities
    68       46  
Accumulated deferred income taxes, net
    407       454  
Other
    438       322  
Total current liabilities
    2,620       2,361  
                 
Other Liabilities:
               
Accumulated deferred income taxes, net
    2,934       3,148  
Non-trading derivative liabilities
    16       4  
Benefit obligations
    906       903  
Regulatory liabilities
    989       1,031  
Other
    447       407  
Total other liabilities
    5,292       5,493  
                 
Long-term Debt:
               
VIE transition and system restoration bonds
    2,522       2,371  
Other
    6,479       6,139  
Total long-term debt
    9,001       8,510  
                 
Commitments and Contingencies (Note 12)
               
                 
Shareholders’ Equity:
               
Common stock (424,746,177 shares and 425,834,139 shares outstanding
at December 31, 2010 and June 30, 2011, respectively)
    4       4  
Additional paid-in capital
    4,100       4,111  
Accumulated deficit
    (789 )     (690 )
Accumulated other comprehensive loss
    (117 )     (112 )
Total shareholders’ equity
    3,198       3,313  
                 
Total Liabilities and Shareholders’ Equity
  $ 20,111     $ 19,677  


See Notes to Interim Condensed Consolidated Financial Statements

 
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Millions)
(Unaudited)

   
Six Months Ended June 30,
 
   
2010
   
2011
 
Cash Flows from Operating Activities:
           
Net income
  $ 195     $ 267  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    417       424  
Amortization of deferred financing costs
    14       15  
Deferred income taxes
    (37 )     209  
Unrealized gain on marketable securities
    (16 )     (50 )
Unrealized loss (gain) on indexed debt securities
    (5 )     23  
Equity in earnings of unconsolidated affiliates, net of distributions
    6       1  
Changes in other assets and liabilities:
               
Accounts receivable and unbilled revenues, net
    355       217  
Inventory
    24       66  
Taxes receivable
          138  
Accounts payable
    (215 )     (220 )
Fuel cost over (under) recovery
    93       (19 )
Non-trading derivatives, net
    1       (2 )
Margin deposits, net
    (18 )     48  
Interest and taxes accrued
    (7 )     (14 )
Net regulatory assets and liabilities
    26       15  
Other current assets
    21       30  
Other current liabilities
    (32 )     (28 )
Other assets
    (9 )      
Other liabilities
    (3 )     6  
Other, net
    8       11  
Net cash provided by operating activities
    818       1,137  
                 
Cash Flows from Investing Activities:
               
Capital expenditures
    (727 )     (633 )
Decrease (increase) in restricted cash of transition and system restoration bonds companies
    1       (1 )
Investment in unconsolidated affiliates
    (22 )     (7 )
Cash received from U.S Department of Energy grant
    33       77  
Other, net
    (4 )     (8 )
Net cash used in investing activities
    (719 )     (572 )
                 
Cash Flows from Financing Activities:
               
Decrease in short-term borrowings, net
    (23 )     (14 )
Proceeds from commercial paper, net
          (113 )
Proceeds from long-term debt
          550  
Payments of long-term debt
    (448 )     (766 )
Cash paid for debt exchange
          (58 )
Debt issuance costs
    (2 )     (9 )
Payment of common stock dividends
    (154 )     (168 )
Proceeds from issuance of common stock, net
    370       4  
Other, net
    1        
Net cash used in financing activities
    (256 )     (574 )
                 
Net Decrease in Cash and Cash Equivalents
    (157 )     (9 )
Cash and Cash Equivalents at Beginning of Period
    740       199  
Cash and Cash Equivalents at End of Period
  $ 583     $ 190  
                 
Supplemental Disclosure of Cash Flow Information:
               
Cash Payments:
               
Interest, net of capitalized interest
  $ 292     $ 276  
Income taxes (refunds), net
    144       (206 )
Non-cash transactions:
               
Accounts payable related to capital expenditures
    99       84  

 
See Notes to Interim Condensed Consolidated Financial Statements

 
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1)       Background and Basis of Presentation

General. Included in this Quarterly Report on Form 10-Q (Form 10-Q) of CenterPoint Energy, Inc. are the condensed consolidated interim financial statements and notes (Interim Condensed Financial Statements) of CenterPoint Energy, Inc. and its subsidiaries (collectively, CenterPoint Energy). The Interim Condensed Financial Statements are unaudited, omit certain financial statement disclosures and should be read with the Annual Report on Form 10-K of CenterPoint Energy for the year ended December 31, 2010 (CenterPoint Energy Form 10-K).

Background. CenterPoint Energy, Inc. is a public utility holding company. CenterPoint Energy’s operating subsidiaries own and operate electric transmission and distribution facilities, natural gas distribution facilities, interstate pipelines and natural gas gathering, processing and treating facilities. As of June 30, 2011, CenterPoint Energy’s indirect wholly owned subsidiaries included:

 
CenterPoint Energy Houston Electric, LLC (CenterPoint Houston), which engages in the electric transmission and distribution business in the Texas Gulf Coast area that includes the city of Houston; and

 
CenterPoint Energy Resources Corp. (CERC Corp. and, together with its subsidiaries, CERC), which owns and operates natural gas distribution systems. Subsidiaries of CERC Corp. own interstate natural gas pipelines and gas gathering systems and provide various ancillary services. A wholly owned subsidiary of CERC Corp. offers variable and fixed-price physical natural gas supplies primarily to commercial and industrial customers and electric and gas utilities.

Basis of Presentation. The preparation of financial statements in conformity with generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

CenterPoint Energy’s Interim Condensed Financial Statements reflect all normal recurring adjustments that are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the respective periods. Amounts reported in CenterPoint Energy’s Condensed Statements of Consolidated Income are not necessarily indicative of amounts expected for a full-year period due to the effects of, among other things, (a) seasonal fluctuations in demand for energy and energy services, (b) changes in energy commodity prices, (c) timing of maintenance and other expenditures and (d) acquisitions and dispositions of businesses, assets and other interests.

For a description of CenterPoint Energy’s reportable business segments, see Note 14.

(2)       New Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued new accounting guidance to require additional fair value related disclosures. It also clarified existing fair value disclosure guidance about the level of disaggregation, inputs and valuation techniques. This new guidance was effective for the first reporting period beginning after December 15, 2009 except for certain disclosure requirements effective for the first reporting period beginning after December 15, 2010. CenterPoint Energy's adoption of this new guidance did not have a material impact on its financial position, results of operations or cash flows. See Note 6 for the required disclosures.

In May 2011, the FASB issued new accounting guidance to achieve common fair value measurements and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). Some of the provisions of the new accounting guidance include requiring (1) that only nonfinancial assets should be valued based on a determination of their best use, (2) disclosure of  quantitative information about unobservable inputs used in Level 3 fair value measurements and (3) disclosure of the level within the fair value hierarchy for each class of assets or liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed. This new guidance is effective for interim and annual periods beginning after December 15, 2011.
 
 
5

 
CenterPoint Energy expects that the adoption of this new guidance will not have a material impact on its financial position, results of operations or cash flows.

In June 2011, the FASB issued new accounting guidance on the presentation of comprehensive income. The new guidance is intended to improve the overall quality of financial reporting by increasing the prominence of items reported in other comprehensive income and aligning the presentation of other comprehensive income in financial statements prepared in accordance with U.S. GAAP with those prepared in accordance with IFRS. The new guidance requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. CenterPoint Energy expects that the adoption of this new guidance will not have a material impact on its financial position, results of operations or cash flows.

Management believes the impact of other recently issued standards, which are not yet effective, will not have a material impact on CenterPoint Energy’s consolidated financial position, results of operations or cash flows upon adoption.

(3)       Employee Benefit Plans

CenterPoint Energy’s net periodic cost includes the following components relating to pension and postretirement benefits:

   
Three Months Ended June 30,
 
   
2010
   
2011
 
   
Pension
Benefits (1)
   
Postretirement
Benefits
   
Pension
Benefits (1)
   
Postretirement
Benefits
 
   
(in millions)
 
Service cost
  $ 8     $ 1     $ 9     $ 1  
Interest cost
    26       6       25       6  
Expected return on plan assets
    (28 )     (3 )     (29 )     (3 )
Amortization of prior service credit
    1       1       1       1  
Amortization of net loss
    14             14       1  
Amortization of transition obligation
          1             1  
Net periodic cost
  $ 21     $ 6     $ 20     $ 7  

   
Six Months Ended June 30,
 
   
2010
   
2011
 
   
Pension
Benefits (1)
   
Postretirement
Benefits
   
Pension
Benefits (1)
   
Postretirement
Benefits
 
   
(in millions)
 
Service cost
  $ 16     $ 1     $ 17     $ 1  
Interest cost
    51       12       50       12  
Expected return on plan assets
    (55 )     (5 )     (58 )     (5 )
Amortization of prior service credit
    2       2       2       2  
Amortization of net loss
    29             28       1  
Amortization of transition obligation
          3             3  
Net periodic cost
  $ 43     $ 13     $ 39     $ 14  
                    
 
(1)
Net periodic cost in these tables is before considering amounts subject to overhead allocations for capital expenditure projects or for amounts subject to deferral for regulatory purposes.  CenterPoint Houston’s actuarially determined pension expense for 2011 in excess of the 2007 base year amount is being deferred for rate making purposes. CenterPoint Houston deferred as a regulatory asset $6 million and $5 million, respectively, in pension expense during the three months ended June 30, 2010 and 2011, and $12 million and $11 million, respectively, in pension expense during the six months ended June 30, 2010 and 2011.

CenterPoint Energy expects to contribute approximately $75 million to its pension plans in 2011, of which approximately $2 million and $5 million, respectively, were contributed during the three and six months ended June 30, 2011. The contribution to CenterPoint Energy’s pension plans in the third quarter of 2011 is expected to be approximately $66 million.
 
 
CenterPoint Energy expects to contribute approximately $18 million to its postretirement benefits plan in 2011, of which approximately $5 million and $11 million, respectively, were contributed during the three and six months ended June 30, 2011.

(4)       Regulatory Matters

(a) Recovery of True-Up Balance

In March 2004, CenterPoint Houston filed its true-up application with the Public Utility Commission of Texas (Texas Utility Commission), requesting recovery of $3.7 billion, excluding interest, as allowed under the Texas Electric Choice Plan (Texas electric restructuring law). In December 2004, the Texas Utility Commission issued its final order (True-Up Order) allowing CenterPoint Houston to recover a true-up balance of approximately $2.3 billion, which included interest through August 31, 2004, and provided for adjustment of the amount to be recovered to include interest on the balance until recovery, along with the principal portion of additional excess mitigation credits (EMCs) returned to customers after August 31, 2004 and certain other adjustments.  To reflect the impact of the True-Up Order, in 2004 and 2005, CenterPoint Energy recorded a net after-tax extraordinary loss of $947 million.

Various parties, including CenterPoint Houston, appealed the True-Up Order.  These appeals were heard first by a district court in Travis County, Texas, then by the Texas Third Court of Appeals and finally by the Texas Supreme Court.  On March 18, 2011, the Texas Supreme Court issued a unanimous ruling on such appeals in which it affirmed in part and reversed in part the decision of the Texas Utility Commission and remanded the matter to the Texas Utility Commission for further proceedings. The impact of the Texas Supreme Court’s decision regarding the matters on appeal is summarized as follows:

 
The method used by the Texas Utility Commission to calculate the market value of CenterPoint Energy’s former generating assets was overturned. In its decision, the Texas Utility Commission had rejected the partial stock valuation method CenterPoint Houston utilized to establish the market value of the generating assets, and the Texas Utility Commission had fashioned its own valuation. The Texas Supreme Court ruled that the Texas Utility Commission had no authority to craft an alternative valuation methodology but instead should have valued the generating assets at the value established when CenterPoint Energy later sold its Texas Genco subsidiary. This portion of the decision requires that the valuation question be remanded to the Texas Utility Commission for a determination. CenterPoint Energy currently estimates that application of the sale of assets methodology would reduce stranded costs by an amount equal to approximately $252 million, less selling costs, plus the amount of debt assumed by the buyer of Texas Genco. This portion of the decision is unfavorable to CenterPoint Energy.

 
The Texas Utility Commission’s order denying recovery of approximately $440 million in capacity auction true-up amounts was reversed. This portion of the decision is favorable to CenterPoint Energy. These sums plus interest are eligible for recovery in the remand proceeding.

 
The Texas Utility Commission’s refusal to include approximately $378 million related to depreciation in the calculation of stranded costs was reversed. This portion of the decision is favorable to CenterPoint Energy. These sums plus interest are eligible for recovery in the remand proceeding.

 
The Texas Utility Commission’s order allowing recovery of EMCs that CenterPoint Energy had been ordered to pay its former affiliate was upheld. This portion of the decision is favorable to CenterPoint Energy. These sums have already been recovered and will not be addressed in the remand proceeding.

 
The Texas Utility Commission decisions allowing recovery of construction work in progress balances and interest on the capacity auction true-up amounts were upheld. These decisions are favorable to CenterPoint Energy. These sums have already been recovered and will not be addressed in the remand proceeding.

The Texas Supreme Court did not address the court of appeals’ decision allowing CenterPoint Houston to recover approximately $210 million representing the interest component of the EMCs. This decision, which was favorable to CenterPoint Energy, was not appealed to the Texas Supreme Court. These sums plus interest are eligible for recovery in the remand proceeding.
 
 
Among the issues to be taken up by the Texas Utility Commission on the remand from the Texas Supreme Court is the proper regulatory treatment of certain deferred tax amounts.  In the True-Up Order, the Texas Utility Commission reduced CenterPoint Houston’s true-up balance by approximately $146 million, which was included in the extraordinary loss discussed above, to reflect the present value of certain deferred tax amounts associated with its former electric generation assets. CenterPoint Energy believes that the Texas Utility Commission based its order on proposed regulations issued by the Internal Revenue Service (IRS) in March 2003 that would have allowed utilities owning assets that were deregulated before March 4, 2003 to make a retroactive election to pass the benefits of Accumulated Deferred Investment Tax Credits (ADITC) and Excess Deferred Federal Income Taxes (EDFIT) back to customers. However, the IRS subsequently withdrew those proposed normalization regulations and, in March 2008, adopted final regulations that would not permit utilities like CenterPoint Houston to pass the tax benefits back to customers without creating normalization violations. In addition, CenterPoint Energy received a Private Letter Ruling (PLR) from the IRS in August 2007, prior to adoption of the final regulations, that confirmed that the Texas Utility Commission’s order reducing CenterPoint Houston’s stranded cost recovery by $146 million for ADITC and EDFIT would cause normalization violations with respect to the ADITC and EDFIT. The Texas Utility Commission thereafter requested that this issue be remanded to that commission for further consideration, and that request was granted by the court of appeals.  CenterPoint Houston plans to seek to recover $146 million plus interest related to this issue in the remand proceedings.

If the Texas Utility Commission’s order relating to the ADITC reduction is not reversed or otherwise modified on remand so as to eliminate the normalization violation, the IRS could require CenterPoint Energy to pay an amount equal to CenterPoint Houston’s unamortized ADITC balance as of the date that the normalization violation is deemed to have occurred. In addition, the IRS could deny CenterPoint Houston the ability to elect accelerated tax depreciation benefits beginning in the taxable year that the normalization violation is deemed to have occurred. Such treatment, if required by the IRS, could have a material adverse impact on CenterPoint Energy’s results of operations, financial condition and cash flows.

After the Texas Supreme Court issued its decision, a number of parties filed motions for rehearing with the Texas Supreme Court requesting the court to reconsider its decision. In June 2011, the court denied the motions for rehearing and issued a corrected mandate remanding the case to the Texas Utility Commission for further proceedings. There is no statutory deadline by which the Texas Utility Commission must act now that the case has been remanded to it; but, in accordance with the rules of the Texas Utility Commission, interest on the unrecovered true-up balance will continue to accrue until such balance is securitized or is otherwise recovered in rates.

CenterPoint Houston expects to seek recovery of approximately $1.88 billion in the remand process before the Texas Utility Commission, which includes interest through October 31, 2011. CenterPoint Houston intends to file an application with the Texas Utility Commission for approval of a financing order authorizing the issuance of transition bonds by one or more new special purpose subsidiaries of CenterPoint Houston to securitize the recoverable amounts and certain qualified costs.  Interest on the final true up balance as approved by the Texas Utility Commission will continue to accrue at approximately 8% until the bonds are issued.  On July 15, 2011, certain intervenors and the staff of the Texas Utility Commission filed a request with the Texas Utility Commission to sever $1.38 billion of CenterPoint Houston’s remaining true-up balance and securitize that amount prior to completion of the pending review by the Texas Utility Commission of certain issues in the remand proceeding.  The issues identified by the intervenors as requiring review include the calculation of the ADFIT benefit and the tax normalization issue discussed above, the proper rate for interest to accrue on true-up balances and the recoverability of certain rate case expenses and transaction costs associated with the sale of Texas Genco.  In August 2011, the Texas Utility Commission denied this request.
 
The final resolution of the true-up proceedings and the ultimate amount and timing of recovery of the additional amounts authorized will depend upon the outcome of future actions by the Texas Utility Commission in response to rulings by the Texas Supreme Court and the court of appeals, and any future appeals thereof.  CenterPoint Energy expects to record the effects of the Texas Supreme Court’s decision once a final resolution of these matters is reached.

The Texas electric restructuring law allowed the amounts awarded to CenterPoint Houston in the Texas Utility Commission’s True-Up Order to be recovered either through securitization or through implementation of a competition transition charge (CTC) or both. Pursuant to a financing order issued by the Texas Utility Commission in March 2005, in December 2005, a new special purpose subsidiary of CenterPoint Houston issued $1.85 billion in transition bonds with interest rates ranging from 4.84% to 5.30% and final maturity dates ranging from February 2011 to August 2020. Through issuance of the transition bonds, CenterPoint Houston recovered approximately
 
 
8

 
$1.7 billion of the true-up balance determined in the True-Up Order plus interest through the date on which the bonds were issued.

In July 2005, CenterPoint Houston received an order from the Texas Utility Commission allowing it to implement a CTC designed to collect the remaining $596 million from the True-Up Order over 14 years plus interest at an annual rate of 11.075% (CTC Order). The CTC Order authorized CenterPoint Houston to impose a charge on REPs to recover the portion of the true-up balance not recovered through a financing order. The CTC Order also allowed CenterPoint Houston to collect approximately $24 million of rate case expenses over three years without a return through a separate tariff rider (Rider RCE). CenterPoint Houston implemented the CTC and Rider RCE effective September 13, 2005 and began recovering approximately $620 million. The return on the CTC portion of the true-up balance was included in CenterPoint Houston’s tariff-based revenues beginning September 13, 2005. Effective August 1, 2006, the interest rate on the unrecovered true-up balance was reduced from 11.075% to 8.06% pursuant to a revised rule adopted by the Texas Utility Commission in June 2006. Recovery of rate case expenses under Rider RCE was completed in September 2008.

During the 2007 legislative session, the Texas legislature amended statutes prescribing the types of true-up balances that can be securitized by utilities and authorized the issuance of transition bonds to recover the balance of the CTC. In February 2008, pursuant to the financing order, a new special purpose subsidiary of CenterPoint Houston issued approximately $488 million of transition bonds in two tranches with interest rates of 4.192% and 5.234% and final maturity dates of February 2020 and February 2023, respectively. Contemporaneously with the issuance of those bonds, the CTC was terminated and a transition charge was implemented.

As of June 30, 2011, CenterPoint Energy has not recognized an allowed equity return of $171 million on the portion of CenterPoint Houston’s true-up balance that had previously been securitized because such return will be recognized as it is recovered in rates. During both the three months ended June 30, 2010 and 2011, CenterPoint Houston recognized approximately $4 million of the allowed equity return not previously recognized.  During both the six months ended June 30, 2010 and 2011, CenterPoint Houston recognized approximately $7 million of the allowed equity return not previously recognized.

(b) Rate Proceedings

CenterPoint Houston

June 2010 Rate Proceeding. As required under the final order in its 2006 rate proceeding, in June 2010 CenterPoint Houston filed an application to change rates with the Texas Utility Commission and the cities in its service area.

Following hearings in the fall of 2010, the Texas Utility Commission issued its order on May 12, 2011.  In response to motions filed by several parties, including CenterPoint Houston, on June 23, 2011, the Texas Utility Commission issued an order on rehearing, which addressed certain errors and inconsistencies identified in its prior decision.  CenterPoint Houston expects revised rates based on the order on rehearing to be implemented in the third quarter of 2011.  The order on rehearing could be appealed to the Texas courts.

The order on rehearing provides for a base rate increase for CenterPoint Houston of approximately $14.7 million per year for delivery charges to the REPs and a decrease to charges to wholesale transmission customers of $12.3 million per year.  Further, the order adopts a mechanism to track amounts for uncertain tax positions and provide for ultimate recovery of those costs.

The order authorizes a return on equity for CenterPoint Houston of 10%, a cost of debt of 6.74%, a capital structure comprised of 55% debt and 45% common equity, and an overall rate of return of 8.21%.  The decision also implements CenterPoint Houston’s request to reconcile costs incurred for the advanced metering system (AMS) project and to shorten the period for collecting the AMS surcharge from twelve to six years for residential customers in order to reflect the funds received from the U.S. Department of Energy.

As a result of the Texas Utility Commission’s order, CenterPoint Houston anticipates that normalized annual operating income will be reduced by approximately $30 million.
 
 
Other.   In May 2009, CenterPoint Houston filed an application at the Texas Utility Commission seeking approval of certain estimated 2010 energy efficiency program costs, an energy efficiency performance bonus for 2008 programs, and carrying costs totaling approximately $10 million. The application sought to begin recovery of these costs through a surcharge effective July 1, 2010. In October 2009, the Texas Utility Commission issued its order approving recovery of the 2010 energy efficiency program costs and a partial performance bonus of approximately $8 million, plus carrying costs, but disallowed recovery of a performance bonus of $2 million on approximately $10 million in 2008 energy efficiency costs expended pursuant to the terms of a settlement agreement in a prior rate case.  CenterPoint Houston began collecting the approved amounts in July 2010. CenterPoint Houston appealed the denial of the full 2008 performance bonus to the 98th district court in Travis County, Texas. In October 2010, the district court upheld the Texas Utility Commission’s decision.  In February 2011, CenterPoint Houston appealed the district court’s judgment to the Texas Third Court of Appeals at Austin, Texas, where the case remains pending.

In April 2010, CenterPoint Houston filed an application with the Texas Utility Commission seeking approval of the recovery of $14.4 million related to estimated 2011 energy efficiency programs, an energy efficiency performance bonus for 2009 programs, and recovery of revenue losses related to the implementation of the 2009 energy efficiency program. The application sought to begin recovery of these costs through a surcharge beginning in January 2011.  In November 2010, the Texas Utility Commission issued its order approving recovery of approximately $11 million of the 2011 energy efficiency program costs and a performance bonus, but disallowed recovery of a performance bonus of $2 million on the 2009 energy efficiency costs expended pursuant to the terms of the settlement agreement referenced above. The Texas Utility Commission further concluded that it does not have statutory authority to permit recovery of the approximately $1.4 million in lost revenue associated with 2009 energy efficiency programs. CenterPoint Houston began collecting the approved amounts in January 2011, but has appealed the denial of the full 2009 performance bonus and lost revenue to the 201st district court in Travis County, Texas, where the case remains pending.

In April 2011, CenterPoint Houston filed an application with the Texas Utility Commission seeking approval of the recovery in 2012 of approximately $44.3 million consisting of: (1) estimated 2012 energy efficiency program costs of approximately $35.8 million; (2) an energy efficiency performance bonus based on CenterPoint Houston’s 2010 program achievements of approximately $5.8 million; (3) the amount of lost revenues due to verified and reported 2010 energy savings of approximately $2.2 million; and (4) approximately $0.5 million for under-recovery of 2010 program costs. In the preliminary order in this proceeding, the Texas Utility Commission has excluded approximately $2.1 million of the requested performance bonus for the 2010 programs and has concluded that it does not have the statutory authority to permit recovery of the requested $2.2 million of lost revenues associated with the 2010 programs.  A hearing to address the application is scheduled for August 2011. The proposed rate adjustments are expected to take effect with the commencement of CenterPoint Houston’s January 2012 billing month.

Gas Operations

Texas. In March 2008, the natural gas distribution business of CERC (Gas Operations) filed a request to change its rates with the Railroad Commission of Texas (Railroad Commission) and the 47 cities in its Texas Coast service territory, an area consisting of approximately 230,000 customers in cities and communities on the outskirts of Houston. In 2008, the Railroad Commission approved the implementation of rates increasing annual revenues by approximately $3.5 million.  The approved rates were contested by a coalition of nine cities in an appeal to the 353rd district court in Travis County, Texas. In January 2010, that court reversed the Railroad Commission’s order in part and remanded the matter to the Railroad Commission.  In its final judgment, the court ruled that the Railroad Commission lacked authority to impose the approved cost of service adjustment mechanism in both those nine cities and in those areas in which the Railroad Commission has original jurisdiction.  The Railroad Commission and Gas Operations have appealed the court’s ruling on the cost of service adjustment mechanism to the Texas Third Court of Appeals at Austin, Texas. Oral arguments were held in February 2011. CenterPoint Energy does not expect the outcome of this matter to have a material adverse impact on its financial condition, results of operations or cash flows. The cost of service adjustment was initially effective for three successive years ending in calendar year 2010, but would automatically renew for successive three-year periods unless Gas Operations or the regulatory authority having original jurisdiction gave written notice to discontinue the adjustment mechanism by February 1, 2011. Certain cities that agreed to the initial implementation notified Gas Operations by February 1, 2011 of their desire to discontinue the adjustment mechanism. In July 2011, Gas Operations requested that the Railroad Commission waive the notice date of February 1, 2011 in order to allow Gas Operations to discontinue the cost of service adjustment mechanism for the remaining areas.
 
 
In July 2009, Gas Operations filed a request to change its rates with the Railroad Commission and the 29 cities in its Houston service territory, consisting of approximately 940,000 customers in and around Houston. The request sought to establish uniform rates, charges and terms and conditions of service for the cities and environs of the Houston service territory. As finally submitted to the Railroad Commission and the cities, the proposed new rates would have resulted in an overall increase in annual revenue of $20.4 million, excluding carrying costs of approximately $2 million on its gas inventory, and would be subject to an annual cost of service adjustment. In January 2010, Gas Operations withdrew its request for an annual cost of service adjustment mechanism due to the uncertainty caused by the court’s ruling in the above-mentioned Texas Coast appeal. In February 2010, the Railroad Commission issued its decision authorizing a revenue increase of $5.1 million annually, reflecting reduced depreciation rates as well as adjustments to pension and other employee benefits, accumulated deferred income taxes and other items. The Railroad Commission also approved a surcharge of $0.9 million per year to recover costs associated with damage caused by Hurricane Ike over three years.  These rates went into effect in March 2010. Gas Operations and other parties are seeking judicial review of the Railroad Commission’s decision in the 261st District Court in Travis County, Texas.

In December 2010, Gas Operations filed a request to change its rates with the Railroad Commission and the 66 cities in its South Texas service territory, consisting of approximately 137,000 customers. As finally submitted to the Railroad Commission and the cities, the proposed new rates would have resulted in an overall increase in annual revenue of approximately $6.1 million.  The parties reached a settlement resulting in increased revenues of $4.6 million, which was approved by the Railroad Commission in April 2011.   The new rates were implemented effective May 2011.

Other. Gas Operations has various periodic rate adjustment mechanisms available for use in certain of the  jurisdictions in which it operates. In March 2011, Gas Operations made its Annual Billing Determinant Adjustment filing with the Arkansas Public Service Commission (APSC) requesting an annual increase in base rates of $5.9 million to collect the amounts accrued in 2010 for recovery of declines in revenues as a result of lower volumes and number of customers.  The increase became effective in June 2011.
 
In June 2011, the APSC approved Gas Operations’ requested Energy Efficiency Cost Recovery rider, which enables recovery of the cost of Gas Operations’ energy efficiency programs, lost contributions to fixed costs and an incentive based on the results of the energy efficiency programs.  The order also extended the use of the existing decoupling mechanism until December 31, 2013.

(5)       Derivative Instruments

CenterPoint Energy is exposed to various market risks. These risks arise from transactions entered into in the normal course of business.  CenterPoint Energy utilizes derivative instruments such as physical forward contracts, swaps and options to mitigate the impact of changes in commodity prices and weather on its operating results and cash flows. Such derivatives are recognized in CenterPoint Energy’s Condensed Consolidated Balance Sheets at their fair value unless CenterPoint Energy elects the normal purchase and sales exemption for qualified physical transactions. A derivative may be designated as a normal purchase or sale if the intent is to physically receive or deliver the product for use or sale in the normal course of business.

CenterPoint Energy has a Risk Oversight Committee composed of corporate and business segment officers that oversees all commodity price, weather and credit risk activities, including CenterPoint Energy’s marketing, risk management services and hedging activities. The committee’s duties are to establish CenterPoint Energy’s commodity risk policies, allocate board-approved commercial risk limits, approve the use of new products and commodities, monitor positions and ensure compliance with CenterPoint Energy’s risk management policies and procedures and limits established by CenterPoint Energy’s board of directors.

CenterPoint Energy’s policies prohibit the use of leveraged financial instruments. A leveraged financial instrument, for this purpose, is a transaction involving a derivative whose financial impact will be based on an amount other than the notional amount or volume of the instrument.
 
(a)  
Non-Trading Activities

Derivative Instruments. CenterPoint Energy enters into certain derivative instruments to manage physical commodity price risks and does not engage in proprietary or speculative commodity trading.  These financial instruments do not qualify or are not designated as cash flow or fair value hedges.

During the three months ended June 30, 2010, CenterPoint Energy recorded decreased natural gas revenues from unrealized net losses of $13 million and decreased natural gas expense from unrealized net gains of $5 million, resulting in a net unrealized loss of $8 million.  During the three months ended June 30, 2011, CenterPoint Energy recorded decreased natural gas revenues from unrealized net losses of $2 million and decreased natural gas expense from unrealized net gains of $6 million, resulting in a net unrealized gain of $4 million.  During the six months ended June 30, 2010, CenterPoint Energy recorded increased natural gas revenues from unrealized net gains of $17 million and increased natural gas expense from unrealized net losses of $22 million, resulting in a net unrealized loss of $5 million.  During the six months ended June 30, 2011, CenterPoint Energy recorded decreased natural gas revenues from unrealized net losses of $19 million and decreased natural gas expense from unrealized net gains of $21 million, resulting in a net unrealized gain of $2 million.

Weather Hedges. CenterPoint Energy has weather normalization or other rate mechanisms that mitigate the impact of weather on its gas operations in Arkansas, Louisiana, Oklahoma and a portion of Texas. The remaining Gas Operations jurisdictions do not have such mechanisms. As a result, fluctuations from normal weather may have a significant positive or negative effect on Gas Operations’ results in the remaining jurisdictions and in CenterPoint Houston’s service territory.

CenterPoint Energy enters into heating-degree day swaps to mitigate the effect of fluctuations from normal weather on its results of operations and cash flows for the winter heating season.  The swaps are based on ten-year normal weather. During the three and six months ended June 30, 2010, CenterPoint Energy recognized gains of $2 million and losses of $5 million, respectively, related to these swaps. During the three and six months ended June 30, 2011, CenterPoint Energy recognized losses of $1 million and $6 million, respectively, related to these swaps.  The losses were substantially offset by increased revenues due to colder than normal weather. Weather hedge losses are included in revenues in the Condensed Statements of Consolidated Income.

(b) Derivative Fair Values and Income Statement Impacts

The following tables present information about CenterPoint Energy’s derivative instruments and hedging activities. The first two tables provide a balance sheet overview of CenterPoint Energy’s Derivative Assets and Liabilities as of December 31, 2010 and June 30, 2011, while the last table provides a breakdown of the related income statement impacts for the three and six months ended June 30, 2010 and 2011.

Fair Value of Derivative Instruments
 
       
December 31, 2010
 
Total derivatives not designated
as hedging instruments
 
Balance Sheet
Location
 
Derivative
Assets
Fair Value (2) (3)
   
Derivative
Liabilities
Fair Value (2) (3)
 
       
(in millions)
 
Natural gas contracts (1)
 
Current Assets
  $ 55     $ 1  
Natural gas contracts   (1)
 
Other Assets
    15        
Natural gas contracts (1)
 
Current Liabilities
    10       143  
Natural gas contracts (1)
 
Other Liabilities
          35  
Indexed debt securities derivative
 
Current Liabilities
          232  
Total                                                                          
  $ 80     $ 411  
                    
 
(1)
Natural gas contracts are subject to master netting arrangements and are presented on a net basis in the Condensed Consolidated Balance Sheets. This netting causes derivative assets (liabilities) to be ultimately presented net in a liability (asset) account within the Condensed Consolidated Balance Sheets.

 
(2)
The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 626 billion cubic feet (Bcf) or a net 72 Bcf long position.  Of the net long position, basis swaps constitute 63 Bcf and volumes associated with price stabilization activities of the Natural Gas Distribution business segment comprise 26 Bcf.
 
 
 
(3)
The net of total non-trading derivative assets and liabilities is a $15 million liability as shown on CenterPoint Energy’s Condensed Consolidated Balance Sheets, and is comprised of the natural gas contracts derivative assets and liabilities separately shown above offset by collateral netting of $84 million.

Fair Value of Derivative Instruments
 
       
June 30, 2011
 
Total derivatives not designated
as hedging instruments
 
Balance Sheet
Location
 
Derivative
Assets
Fair Value (2) (3)
   
Derivative
Liabilities
Fair Value (2) (3)
 
       
(in millions)
 
Natural gas contracts (1)
 
Current Assets
  $ 42     $ 3  
Natural gas contracts   (1)
 
Other Assets
    11        
Natural gas contracts (1)
 
Current Liabilities
    8       93  
Natural gas contracts (1)
 
Other Liabilities
    1       7  
Indexed debt securities derivative
 
Current Liabilities
          255  
Total                                                                          
  $ 62     $ 358  
                    
 
(1)
Natural gas contracts are subject to master netting arrangements and are presented on a net basis in the Condensed Consolidated Balance Sheets. This netting causes derivative assets (liabilities) to be ultimately presented net in a liability (asset) account within the Condensed Consolidated Balance Sheets.

 
(2)
The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 593 Bcf or a net 110 Bcf long position.  Of the net long position, basis swaps constitute 65 Bcf and volumes associated with price stabilization activities of the Natural Gas Distribution business segment comprise 14 Bcf.

 
(3)
The net of total non-trading derivative assets and liabilities is a less than $1 million asset as shown on CenterPoint Energy’s Condensed Consolidated Balance Sheets, and is comprised of the natural gas contracts derivative assets and liabilities separately shown above offset by collateral netting of $41 million.

For CenterPoint Energy’s price stabilization activities of the Natural Gas Distribution business segment, the settled costs of derivatives are ultimately recovered through purchased gas adjustments. Accordingly, the net unrealized gains and losses associated with these contracts are recorded as net regulatory assets. Realized and unrealized gains and losses on other derivatives are recognized in the Condensed Statements of Consolidated Income as revenue for retail sales derivative contracts and as natural gas expense for financial natural gas derivatives and non-retail related physical natural gas derivatives. Unrealized gains and losses on indexed debt securities are recorded as Other Income (Expense) in the Condensed Statements of Consolidated Income.

Income Statement Impact of Derivative Activity
 
       
Three Months Ended June 30,
 
Total derivatives not designated
as hedging instruments
 
Income Statement Location
 
2010
   
2011
 
       
(in millions)
 
Natural gas contracts
 
Gains (Losses) in Revenue
  $ 5     $ 9  
Natural gas contracts (1)
 
Gains (Losses) in Expense: Natural Gas
    (31 )     (12 )
Indexed debt securities derivative
 
Gains (Losses) in Other Income (Expense)
    32        
Total
  $ 6     $ (3 )
                    
 
(1)
The Gains (Losses) in Expense: Natural Gas includes $(25) million and $(17) million of costs in 2010 and 2011, respectively, associated with price stabilization activities of the Natural Gas Distribution business segment that will be ultimately recovered through purchased gas adjustments.

Income Statement Impact of Derivative Activity
 
       
Six Months Ended June 30,
 
Total derivatives not designated
as hedging instruments
 
Income Statement Location
 
2010
   
2011
 
       
(in millions)
 
Natural gas contracts
 
Gains (Losses) in Revenue
  $ 49     $ 14  
Natural gas contracts (1)
 
Gains (Losses) in Expense: Natural Gas
    (92 )     (49 )
Indexed debt securities derivative
 
Gains (Losses) in Other Income (Expense)
    5       (23 )
Total
  $ (38 )   $ (58 )
 
 
                    
 
(1)
The Gains (Losses) in Expense: Natural Gas includes $(50) million and $(62) million of costs in 2010 and 2011, respectively, associated with price stabilization activities of the Natural Gas Distribution business segment that will be ultimately recovered through purchased gas adjustments.

(c) Credit Risk Contingent Features

CenterPoint Energy enters into financial derivative contracts containing material adverse change provisions.  These provisions could require CenterPoint Energy to post additional collateral if the Standard & Poor’s Ratings Services or Moody’s Investors Service, Inc. credit ratings of CenterPoint Energy, Inc. or its subsidiaries are downgraded.  The total fair value of the derivative instruments that contain credit risk contingent features that are in a net liability position at December 31, 2010 and June 30, 2011 was $107 million and $57 million, respectively.  The aggregate fair value of assets that are already posted as collateral was $31 million and $13 million, respectively, at December 31, 2010 and June 30, 2011.  If all derivative contracts (in a net liability position) containing credit risk contingent features were triggered at December 31, 2010 and June 30, 2011, $76 million and $43 million, respectively, of additional assets would be required to be posted as collateral.

(6)       Fair Value Measurements

Assets and liabilities are recorded at fair value in the Condensed Consolidated Balance Sheets and are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined below and directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, are as follows:

Level 1: Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets carried at Level 1 fair value generally are exchange-traded derivatives and equity securities.

Level 2: Inputs, other than quoted prices included in Level 1, are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability. Fair value assets and liabilities that are generally included in this category are derivatives with fair values based on inputs from actively quoted markets.  A market approach is utilized to value CenterPoint Energy’s Level 2 assets or liabilities.

Level 3: Inputs are unobservable for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Unobservable inputs reflect CenterPoint Energy’s judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. CenterPoint Energy develops these inputs based on the best information available, including CenterPoint Energy’s own data. A market approach is utilized to value CenterPoint Energy’s Level 3 assets or liabilities.

CenterPoint Energy determines the appropriate level for each financial asset and liability on a quarterly basis and recognizes any transfers at the end of the reporting period.  For the quarter ended June 30, 2011, there were no significant transfers between levels.
 
 
The following tables present information about CenterPoint Energy’s assets and liabilities (including derivatives that are presented net) measured at fair value on a recurring basis as of December 31, 2010 and June 30, 2011, and indicate the fair value hierarchy of the valuation techniques utilized by CenterPoint Energy to determine such fair value.

   
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
   
Significant Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Netting
Adjustments (1)
   
Balance
as of
December 31,
2010
 
   
(in millions)
 
Assets
                             
Corporate equities
  $ 368     $     $     $     $ 368  
Investments, including money
market funds
    54                         54  
Natural gas derivatives
          73       7       (11 )     69  
Total assets
  $ 422     $ 73     $ 7     $ (11 )   $ 491  
Liabilities
                                       
Indexed debt securities
derivative
  $     $ 232     $     $     $ 232  
Natural gas derivatives
    8       167       4       (95 )     84  
Total liabilities
  $ 8     $ 399     $ 4     $ (95 )   $ 316  
                    
 
(1)
Amounts represent the impact of legally enforceable master netting agreements that allow CenterPoint Energy to settle positive and negative positions and also include cash collateral of $84 million posted with the same counterparties.

   
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
   
Significant Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Netting
Adjustments (1)
   
Balance
as of
June 30,
2011
 
   
(in millions)
 
Assets
                             
Corporate equities
  $ 418     $     $     $     $ 418  
Investments, including money
market funds
    56                         56  
Natural gas derivatives
    3       51       8       (12 )     50  
Total assets
  $ 477     $ 51     $ 8     $ (12 )   $ 524  
Liabilities
                                       
Indexed debt securities
derivative
  $     $ 255     $     $     $ 255  
Natural gas derivatives
    5       95       3       (53 )     50  
Total liabilities
  $ 5     $ 350     $ 3     $ (53 )   $ 305  
                    
 
(1)
Amounts represent the impact of legally enforceable master netting agreements that allow CenterPoint Energy to settle positive and negative positions and also include cash collateral of $41 million posted with the same counterparties.
 
 
The following tables present additional information about assets or liabilities, including derivatives that are measured at fair value on a recurring basis for which CenterPoint Energy has utilized Level 3 inputs to determine fair value:
 
   
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
 
   
Derivative assets and liabilities, net
 
   
Three Months Ended June 30,
 
   
2010
   
2011
 
   
(in millions)
 
Beginning balance
  $ 4     $ 6  
Total unrealized gains (losses):
               
Included in earnings
          1  
Total settlements, gross (1) :
               
Included in earnings
    1       (2 )
Ending balance
  $ 5     $ 5  
The amount of total gains for the period included in earnings
attributable to the change in unrealized gains or losses relating to
assets still held at the reporting date
  $ 1     $ 1  
                  
 
(1)
During both the three months ended June 30, 2010 and 2011, CenterPoint Energy did not have Level 3 purchases or sales.

   
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
 
   
Derivative assets and liabilities, net
 
   
Six Months Ended June 30,
 
   
2010
   
2011
 
   
(in millions)
 
Beginning balance
  $ (6 )   $ 3  
Total unrealized gains (losses):
               
Included in earnings
    2       4  
Included in regulatory assets
    (1 )      
Total settlements, gross (1) :
               
Included in earnings
    1       (2 )
Included in regulatory assets
    9        
Ending balance
  $ 5     $ 5  
The amount of total gains for the period included in earnings
attributable to the change in unrealized gains or losses relating to
assets still held at the reporting date
  $ 3     $ 3  
                  
 
(1)
During both the six months ended June 30, 2010 and 2011, CenterPoint Energy did not have Level 3 purchases or sales.
 
 
Estimated Fair Value of Financial Instruments

The fair values of cash and cash equivalents, investments in debt and equity securities classified as “available-for-sale” and “trading” and short-term borrowings are estimated to be approximately equivalent to carrying amounts and have been excluded from the table below. The fair values of non-trading derivative assets and liabilities and CenterPoint Energy’s 2.00% Zero-Premium Exchangeable Subordinated Notes due 2029 indexed debt securities derivative are stated at fair value and are excluded from the table below.  The fair value of each debt instrument is determined by multiplying the principal amount of each debt instrument by the market price.

   
December 31, 2010
   
June 30, 2011
 
   
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
   
(in millions)
 
Financial liabilities:
                       
Long-term debt
  $ 9,303     $ 10,071     $ 8,850     $ 9,671  

(7)       Goodwill

Goodwill by reportable business segment as of both December 31, 2010 and June 30, 2011 is as follows (in millions):

Natural Gas Distribution
  $ 746  
Interstate Pipelines
    579  
Competitive Natural Gas Sales and Services
    335  
Field Services
    25  
Other Operations
    11  
Total
  $ 1,696  

(8)       Comprehensive Income

The following table summarizes the components of total comprehensive income (net of tax):

   
For the Three Months Ended
June 30,
   
For the Six Months Ended
June 30,
 
   
2010
   
2011
   
2010
   
2011
 
   
(in millions)
 
Net income
  $ 81     $ 119     $ 195     $ 267  
Other comprehensive income:
                               
Adjustment related to pension and other postretirement
plans (net of tax of $1, $1, $3 and $3)
    2       3       5       5  
Total
    2       3       5       5  
Comprehensive income
  $ 83     $ 122     $ 200     $ 272  

The following table summarizes the components of accumulated other comprehensive loss:

   
December 31,
2010
   
June 30,
2011
 
   
(in millions)
 
Adjustment related to pension and postretirement plans
  $ (114 )   $ (109 )
Net deferred loss from cash flow hedges
    (3 )     (3 )
Total accumulated other comprehensive loss
  $ (117 )   $ (112 )

(9)       Capital Stock

CenterPoint Energy has 1,020,000,000 authorized shares of capital stock, comprised of 1,000,000,000 shares of $0.01 par value common stock and 20,000,000 shares of $0.01 par value preferred stock. At December 31, 2010, 424,746,343 shares of CenterPoint Energy common stock were issued and 424,746,177 shares were outstanding. At June 30, 2011, 425,834,305 shares of CenterPoint Energy common stock were issued and 425,834,139 shares were outstanding. Outstanding common shares exclude 166 treasury shares at both December 31, 2010 and June 30, 2011.
 
 
(10)     Short-term Borrowings and Long-term Debt

(a) Short-term Borrowings

Receivables Facility.  Availability under CERC’s receivables facility, which terminates on September, 14 2011,  ranges from $160 million to $375 million, reflecting seasonal changes in receivables balances.  As of December 31, 2010 and June 30, 2011, the facility size was $160 million and $300 million, respectively. As of both December 31, 2010 and June 30, 2011, there were no advances under the receivables facility.

Inventory Financing . In October 2009, Gas Operations entered into asset management agreements associated with its utility distribution service in Arkansas, north Louisiana and Oklahoma that extend through March 31, 2012. Pursuant to the provisions of the agreements, Gas Operations sells natural gas and agrees to repurchase an equivalent amount of natural gas during the winter heating seasons at the same cost, plus a financing charge. These transactions are accounted for as a financing and they had an associated principal obligation of $53 million and $39 million as of December 31, 2010 and June 30, 2011, respectively.

(b) Long-term Debt

Revolving Credit Facilities. As of both December 31, 2010 and June 30, 2011, there were no outstanding borrowings under CenterPoint Energy’s, CenterPoint Houston’s or CERC Corp.’s revolving credit facilities.

As of December 31, 2010 and June 30, 2011, CenterPoint Energy had approximately $20 million and $17 million, respectively, of outstanding letters of credit under its $1.2 billion credit facility. As of both December 31, 2010 and June 30, 2011, CenterPoint Houston had approximately $4 million of outstanding letters of credit under its $289 million credit facility. There was no commercial paper outstanding that would have been backstopped by CenterPoint Energy’s $1.2 billion credit facility as of December 31, 2010 or June 30, 2011.  As of December 31, 2010 and June 30, 2011, CERC Corp. had commercial paper outstanding of $183 million and $70 million, respectively, which was backstopped by its credit facility. CenterPoint Energy, CenterPoint Houston and CERC Corp. were in compliance with all debt covenants as of June 30, 2011. As a result of the June 29, 2012 expiration date of each of the revolving credit facilities, commercial paper borrowings backstopped by such facilities have been classified as long-term debt as of December 31, 2010 and short-term borrowings as of June 30, 2011.

CenterPoint Energy’s $1.2 billion credit facility has a first drawn cost of the London Interbank Offered Rate (LIBOR) plus 55 basis points based on CenterPoint Energy’s current credit ratings. The facility contains a debt (excluding transition and system restoration bonds) to earnings before interest, taxes, depreciation and amortization (EBITDA) covenant (as those terms are defined in the facility).  In February 2010, CenterPoint Energy amended its credit facility to modify the covenant to allow for a temporary increase of the permitted ratio from 5 times to 5.5 times if CenterPoint Houston experiences damage from a natural disaster in its service territory and CenterPoint Energy certifies to the administrative agent that CenterPoint Houston has incurred system restoration costs reasonably likely to exceed $100 million in a calendar year, all or part of which CenterPoint Houston intends to seek to recover through securitization financing. Such temporary increase in the financial ratio covenant would be in effect from the date CenterPoint Energy delivers its certification until the earliest to occur of (i) the completion of the securitization financing, (ii) the first anniversary of CenterPoint Energy’s certification or (iii) the revocation of such certification.

CenterPoint Houston’s $289 million credit facility contains a debt (excluding transition and system restoration bonds) to total capitalization covenant, limiting debt to 65% of its total capitalization. The facility’s first drawn cost is LIBOR plus 45 basis points based on CenterPoint Houston’s current credit ratings.

CERC Corp.’s $915 million credit facility’s first drawn cost is LIBOR plus 45 basis points based on CERC Corp.’s current credit ratings. The facility contains a debt to total capitalization covenant, limiting debt to 65% of its total capitalization.

Under CenterPoint Energy’s $1.2 billion credit facility, CenterPoint Houston’s $289 million credit facility and CERC Corp.’s $915 million credit facility, an additional utilization fee of 5 basis points applies to borrowings any time more than 50% of the facility is utilized. The spread to LIBOR and the utilization fee fluctuate based on the borrower’s credit rating.
 
 
CERC Corp. Senior Notes.   In January 2011, CERC Corp. issued $250 million aggregate principal amount of senior notes due 2021 with an interest rate of 4.50% and $300 million aggregate principal amount of senior notes due 2041 with an interest rate of 5.85%.  The proceeds from the issuance of the notes were used for the repayment of $550 million of CERC Corp.’s 7.75% senior notes at their maturity in February 2011. Accordingly, the $550 million senior notes due in February 2011 are reflected as long-term debt as of December 31, 2010.

CERC Corp. Exchange Offer. Also in January 2011, CERC Corp. issued an additional $343 million aggregate principal amount of 4.50% senior notes due 2021 and provided cash consideration of $114 million in exchange for $397 million aggregate principal amount of its 7.875% senior notes due 2013.  The premium of $58 million paid on exchanged notes has been deferred and will be amortized to interest expense over the life of the 4.50% senior notes due 2021.

(11)     Income Taxes

During the three and six months ended June 30, 2010, the effective tax rate was 36% and 43%, respectively. During both the three and six months ended June 30, 2011, the effective tax rate was 37%. The most significant item affecting the comparability of the effective tax rate for the six months ended June 30, 2010 and 2011 is a non-cash, $21 million increase in the 2010 income tax expense as a result of a change in tax law upon the enactment in March 2010 of the Patient Protection and Affordable Care Act and the related Health Care and Education Reconciliation Act of 2010.

The change in tax law, which becomes effective for tax years beginning after December 31, 2012, eliminates the tax deductibility of the portion of retiree health care costs that are reimbursed by Medicare Part D subsidies. Based upon the actuarially determined net present value of lost future retiree health care deductions related to the subsidies, CenterPoint Energy reduced its deferred tax asset by approximately $32 million as of March 31, 2010.  The portion of the reduction that CenterPoint Energy believes will be recovered through the regulatory process, or approximately $11 million, was recorded as an adjustment to regulatory assets.  The remaining $21 million of the reduction in CenterPoint Energy’s deferred tax asset was reflected as a charge to income tax expense.

The following table summarizes CenterPoint Energy’s unrecognized tax benefits at December 31, 2010 and June 30, 2011:

   
December 31,
2010
   
June 30,
2011
 
   
(in millions)
 
Unrecognized tax benefits
  $ 252     $ 314  
Portion of unrecognized tax benefits that, if recognized,
would reduce the effective income tax rate
    17       19  
Interest accrued on unrecognized tax benefits
    12       16  

It is reasonably possible that the total amount of unrecognized tax benefits could decrease by as much as $284 million or increase by as much as $17 million over the next 12 months primarily as a result of the anticipated resolution of the tax normalization issue described in Note 4(a) and CenterPoint Energy’s administrative appeal relating to the IRS’s disallowance of CenterPoint Energy’s casualty loss deduction associated with the damage caused by Hurricane Ike.  Additionally, the tax normalization issue and the casualty loss deduction are temporary differences and, therefore, any increase or decrease in the balance of unrecognized tax benefits related thereto would not affect the effective tax rate.

In January 2011, the IRS commenced its examination of CenterPoint Energy’s 2008 and 2009 consolidated federal income tax returns.

(12)     Commitments and Contingencies

(a) Natural Gas Supply Commitments

Natural gas supply commitments include natural gas contracts related to CenterPoint Energy’s Natural Gas Distribution and Competitive Natural Gas Sales and Services business segments, which have various quantity requirements and durations, that are not classified as non-trading derivative assets and liabilities in CenterPoint
 
 
19

 
Energy’s Condensed Consolidated Balance Sheets as of December 31, 2010 and June 30, 2011 as these contracts meet the exception to be classified as “normal purchases contracts” or do not meet the definition of a derivative. Natural gas supply commitments also include natural gas transportation contracts that do not meet the definition of a derivative. As of June 30, 2011, minimum payment obligations for natural gas supply commitments are approximately $193 million for the remaining six months in 2011, $439 million in 2012, $437 million in 2013, $314 million in 2014, $198 million in 2015 and $412 million after 2015.

(b) Capital Commitments

Long-Term Gas Gathering and Treating Agreements

Magnolia Gathering System.   In September 2009, CenterPoint Energy Field Services, LLC (CEFS) entered into long-term agreements with an indirect wholly-owned subsidiary of Encana Corporation (Encana) and an indirect wholly-owned subsidiary of Royal Dutch Shell plc (Shell) to provide gathering and treating services for their natural gas production from certain Haynesville Shale and Bossier Shale formations in Louisiana.  Pursuant to these agreements, CEFS acquired jointly-owned gathering facilities (the Magnolia Gathering System) from Encana and Shell in northwest Louisiana.  Each of the agreements includes acreage dedication and volume commitments for which CEFS has exclusive rights to gather Shell’s and Encana’s natural gas production.

During the fourth quarter of 2010, CEFS substantially completed the construction and initial expansion of the Magnolia Gathering System in order to permit the system to gather and treat up to 700 million cubic feet (MMcf) per day of natural gas, with only well connects remaining.  CEFS spent approximately $320 million on the original project scope, including the purchase of the original facilities and is in the second year of the 10-year, 700 MMcf per day volume commitment made by Shell and Encana which commenced in September 2009.

Pursuant to an expansion election made by Encana and Shell in March 2010, CEFS expanded the Magnolia Gathering System to increase its gathering and treating capacity by an additional 200 MMcf per day, increasing the aggregate capacity of the system to 900 MMcf per day. The expansion was completed and placed into service in February 2011 at a total cost of approximately $52 million. The 200 MMcf per day incremental volume commitment made by Shell and Encana began contemporaneously with the completion of the expansion.

Under the long-term agreements, Encana or Shell may elect to require CEFS to expand the capacity of the Magnolia Gathering System by up to an additional 800 MMcf per day, bringing the total system capacity to 1.7 Bcf per day.  CEFS estimates that the cost to expand the capacity of the Magnolia Gathering System by an additional 800 MMcf per day would be as much as $240 million.  Encana and Shell would provide incremental volume commitments in connection with an election to expand the system’s capacity.

Olympia Gathering System.   In April 2010, CEFS entered into additional long-term agreements with Encana and Shell to provide gathering and treating services for their natural gas production from certain Haynesville Shale and Bossier Shale formations in Texas and Louisiana. Pursuant to these agreements, CEFS acquired jointly-owned gathering facilities (the Olympia Gathering System) from Encana and Shell in northwest Louisiana.

Under the terms of the agreements, CEFS is expanding the Olympia Gathering System in order to permit the system to gather and treat up to 600 MMcf per day of natural gas. As of June 30, 2011, CEFS had spent approximately $375 million on the 600 MMcf per day project, including the purchase of the original facilities, and expects to incur up to an additional $50 million to complete the remaining contractual milestones and well connects for this expansion.  CEFS is in the second year of the 10-year, 600 MMcf per day volume commitment made by Shell and Encana which commenced in April 2010.

Under the long-term agreements, Encana and Shell may elect to require CEFS to expand the capacity of the Olympia Gathering System by up to an additional 520 MMcf per day, bringing the total system capacity to 1.1 Bcf per day.  CEFS estimates that the cost to expand the capacity of the Olympia Gathering System by an additional 520 MMcf per day would be as much as $200 million. Encana and Shell would provide incremental volume commitments in connection with an election to expand the system’s capacity.
 
 
(c) Legal, Environmental and Other Regulatory Matters

Legal Matters

Gas Market Manipulation Cases .  CenterPoint Energy, CenterPoint Houston or their predecessor, Reliant Energy, Incorporated (Reliant Energy), and certain of their former subsidiaries are named as defendants in certain lawsuits described below. Under a master separation agreement between CenterPoint Energy and a former subsidiary, RRI Energy, Inc. (RRI), CenterPoint Energy and its subsidiaries are entitled to be indemnified by RRI and its successors for any losses, including attorneys’ fees and other costs, arising out of these lawsuits.  In May 2009, RRI sold its Texas retail business to NRG Retail LLC, a subsidiary of NRG Energy, Inc. and changed its name to RRI Energy, Inc. In December 2010, Mirant Corporation merged with and became a wholly owned subsidiary of RRI Energy, Inc., and RRI Energy, Inc. changed its name to GenOn Energy, Inc. (GenOn). Neither the sale of the retail business nor the merger with Mirant Corporation alters RRI’s (now GenOn’s) contractual obligations to indemnify CenterPoint Energy and its subsidiaries, including CenterPoint Houston, for certain liabilities, including their indemnification obligations regarding the gas market manipulation litigation, nor does it affect the terms of existing guaranty arrangements for certain GenOn gas transportation contracts discussed below.

A large number of lawsuits were filed against numerous gas market participants in a number of federal and western state courts in connection with the operation of the natural gas markets in 2000-2002. CenterPoint Energy’s former affiliate, RRI, was a participant in gas trading in the California and Western markets. These lawsuits, many of which have been filed as class actions, allege violations of state and federal antitrust laws. Plaintiffs in these lawsuits are seeking a variety of forms of relief, including, among others, recovery of compensatory damages (in some cases in excess of $1 billion), a trebling of compensatory damages, full consideration damages and attorneys’ fees. CenterPoint Energy and/or Reliant Energy were named in approximately 30 of these lawsuits, which were instituted between 2003 and 2009. CenterPoint Energy and its affiliates have been released or dismissed from all but two of such cases. CenterPoint Energy Services, Inc. (CES), a subsidiary of CERC Corp., is a defendant in a case now pending in federal court in Nevada alleging a conspiracy to inflate Wisconsin natural gas prices in 2000-2002.  In July 2011, the court issued an order dismissing the plaintiffs' claims against the other defendants in the case, each of whom had demonstrated FERC jurisdictional sales for resale during the relevant period, based on federal preemption.  Additionally, CenterPoint Energy was a defendant in a lawsuit filed in state court in Nevada that was dismissed in 2007, but in March 2010 the plaintiffs appealed the dismissal to the Nevada Supreme Court. CenterPoint Energy believes that neither it nor CES is a proper defendant in these remaining cases and will continue to pursue dismissal from those cases.  CenterPoint Energy does not expect the ultimate outcome of these remaining matters to have a material impact on its financial condition, results of operations or cash flows.

Natural Gas Measurement Lawsuits. CERC Corp. and certain of its subsidiaries are defendants in two mismeasurement lawsuits brought against approximately 245 pipeline companies and their affiliates pending in state court in Stevens County, Kansas.  In one case (originally filed in May 1999 and amended four times), the plaintiffs purport to represent a class of royalty owners who allege that the defendants have engaged in systematic mismeasurement of the volume of natural gas for more than 25 years. The plaintiffs amended their petition in this suit in July 2003 in response to an order from the judge denying certification of the plaintiffs’ alleged class. In the amendment, the plaintiffs dismissed their claims against certain defendants (including two CERC Corp. subsidiaries), limited the scope of the class of plaintiffs they purport to represent and eliminated previously asserted claims based on mismeasurement of the British thermal unit (Btu) content of the gas. The same plaintiffs then filed a second lawsuit, again as representatives of a putative class of royalty owners in which they assert their claims that the defendants have engaged in systematic mismeasurement of the Btu content of natural gas for more than 25 years. In both lawsuits, the plaintiffs seek compensatory damages, along with statutory penalties, treble damages, interest, costs and fees.  In September 2009, the district court in Stevens County, Kansas, denied plaintiffs’ request for class certification of their case and, in March 2010, denied the plaintiffs’ request for reconsideration of that order. The time for seeking further review of the district court’s decision has now passed.

CERC believes that there has been no systematic mismeasurement of gas and that these lawsuits are without merit. CERC and CenterPoint Energy do not expect the ultimate outcome of the lawsuits to have a material impact on the financial condition, results of operations or cash flows of either CenterPoint Energy or CERC.
 
 
21

 
Environmental Matters

Manufactured Gas Plant Sites. CERC and its predecessors operated manufactured gas plants (MGPs) in the past. In Minnesota, CERC has completed remediation on two sites, other than ongoing monitoring and water treatment.  There are five remaining sites in CERC’s Minnesota service territory. CERC believes that it has no liability with respect to two of these sites.

At June 30, 2011, CERC had accrued $13 million for remediation of these Minnesota sites and the estimated range of possible remediation costs for these sites was $4 million to $35 million based on remediation continuing for 30 to 50 years. The cost estimates are based on studies of a site or industry average costs for remediation of sites of similar size. The actual remediation costs will be dependent upon the number of sites to be remediated, the participation of other potentially responsible parties (PRPs), if any, and the remediation methods used. The Minnesota Public Utility Commission has provided for the inclusion in rates of approximately $285,000 annually to fund normal on-going remediation costs.  As of June 30, 2011, CERC had collected $5.3 million from insurance companies to be used for future environmental remediation.

In addition to the Minnesota sites, the United States Environmental Protection Agency and other regulators have investigated MGP sites that were owned or operated by CERC or may have been owned by one of its former affiliates. CERC has been named as a defendant in a lawsuit filed in the United States District Court, District of Maine, under which contribution is sought by private parties for the cost to remediate former MGP sites based on the previous ownership of such sites by former affiliates of CERC or its divisions. CERC has also been identified as a PRP by the State of Maine for a site that is a subject of the lawsuit. In June 2006, the federal district court in Maine ruled that the current owner of the site is responsible for site remediation but that an additional evidentiary hearing would be required to determine if other potentially responsible parties, including CERC, would have to contribute to that remediation. In September 2009, the federal district court granted CERC’s motion for summary judgment in the proceeding and, in July 2011, the plaintiff appealed the federal district court’s decision to the United States Court of Appeals for the First Circuit.  CERC believes it is not liable as a former owner or operator of the site under the Comprehensive Environmental, Response, Compensation and Liability Act of 1980, as amended, and applicable state statutes, and is vigorously contesting the suit and its designation as a PRP. CERC and CenterPoint Energy do not expect the ultimate outcome to have a material adverse impact on the financial condition, results of operations or cash flows of either CenterPoint Energy or CERC.

Asbestos. Some facilities owned by CenterPoint Energy contain or have contained asbestos insulation and other asbestos-containing materials. CenterPoint Energy or its subsidiaries have been named, along with numerous others, as a defendant in lawsuits filed by a number of individuals who claim injury due to exposure to asbestos. Some of the claimants have worked at locations owned by CenterPoint Energy, but most existing claims relate to facilities previously owned by CenterPoint Energy’s subsidiaries. CenterPoint Energy anticipates that additional claims like those received may be asserted in the future. In 2004, CenterPoint Energy sold its generating business, to which most of these claims relate, to Texas Genco LLC, which is now known as NRG Texas LP. Under the terms of the arrangements regarding separation of the generating business from CenterPoint Energy and its sale to NRG Texas LP, ultimate financial responsibility for uninsured losses from claims relating to the generating business has been assumed by NRG Texas LP, but CenterPoint Energy has agreed to continue to defend such claims to the extent they are covered by insurance maintained by CenterPoint Energy, subject to reimbursement of the costs of such defense from NRG Texas LP. Although their ultimate outcome cannot be predicted at this time, CenterPoint Energy intends to continue vigorously contesting claims that it does not consider to have merit and does not expect, based on its experience to date, these matters, either individually or in the aggregate, to have a material adverse effect on CenterPoint Energy’s financial condition, results of operations or cash flows.

Other Environmental. From time to time CenterPoint Energy has received notices from regulatory authorities or others regarding its status as a PRP in connection with sites found to require remediation due to the presence of environmental contaminants. In addition, CenterPoint Energy has been named from time to time as a defendant in litigation related to such sites. Although the ultimate outcome of such matters cannot be predicted at this time, CenterPoint Energy does not expect, based on its experience to date, these matters, either individually or in the aggregate, to have a material adverse effect on CenterPoint Energy’s financial condition, results of operations or cash flows.
 
 
22

 
Other Proceedings

CenterPoint Energy is involved in other legal, environmental, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies regarding matters arising in the ordinary course of business. Some of these proceedings involve substantial amounts. CenterPoint Energy regularly analyzes current information and, as necessary, provides accruals for probable liabilities on the eventual disposition of these matters. CenterPoint Energy does not expect the disposition of these matters to have a material adverse effect on CenterPoint Energy’s financial condition, results of operations or cash flows.

(d) Guaranties

Prior to the distribution of CenterPoint Energy’s ownership in RRI to its shareholders, CERC had guaranteed certain contractual obligations of what became RRI’s trading subsidiary.  When the companies separated, RRI agreed to secure CERC against obligations under the guaranties RRI had been unable to extinguish by the time of separation.  Pursuant to such agreement, as amended in December 2007, RRI (now GenOn) agreed to provide to CERC cash or letters of credit as security against CERC’s obligations under its remaining guaranties for demand charges under certain gas transportation agreements if and to the extent changes in market conditions expose CERC to a risk of loss on those guaranties based on an annual calculation, with any required collateral to be posted each December.  The undiscounted maximum potential payout of the demand charges under these transportation contracts, which will be in effect until 2018, was approximately $105 million as of June 30, 2011. Market conditions in the fourth quarter of 2010 required posting of security under the agreement, and GenOn posted approximately $7 million in collateral in December 2010.  If GenOn should fail to perform the contractual obligations, CERC could have to honor its guarantee and, in such event, collateral provided as security may be insufficient to satisfy CERC’s obligations.

(13)     Earnings Per Share

The following table reconciles numerators and denominators of CenterPoint Energy’s basic and diluted earnings per share calculations:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2011
   
2010
   
2011
 
   
(in millions, except share and per share amounts)
 
Basic earnings per share calculation:
                       
Net income
  $ 81     $ 119     $ 195     $ 267  
                                 
Weighted average shares outstanding
    399,515,000       425,638,000       396,203,000       425,330,000  
                                 
Basic earnings per share:
                               
Net income
  $ 0.20     $ 0.28     $ 0.49     $ 0.63  
                                 
Diluted earnings per share calculation:
                               
Net income
  $ 81     $ 119     $ 195     $ 267  
                                 
Weighted average shares outstanding
    399,515,000       425,638,000       396,203,000       425,330,000  
Plus: Incremental shares from assumed conversions:
                               
Stock options (1)
    560,000       401,000       568,000       379,000  
Restricted stock
    1,918,000       2,245,000       1,918,000       2,245,000  
Weighted average shares assuming dilution
    401,993,000       428,284,000       398,689,000       427,954,000  
                                 
Diluted earnings per share:
                               
Net income
  $ 0.20     $ 0.28     $ 0.49     $ 0.62  
                    
 
(1)
Options to purchase 1,616,951 shares were outstanding for both the three and six months ended June 30, 2010, and options to purchase 37,497 shares were outstanding for both the three and six months ended
 
 
 
 
June 30, 2011, but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares for the respective periods.
 
(14)     Reportable Business Segments

CenterPoint Energy’s determination of reportable business segments considers the strategic operating units under which CenterPoint Energy manages sales, allocates resources and assesses performance of various products and services to wholesale or retail customers in differing regulatory environments. CenterPoint Energy uses operating income as the measure of profit or loss for its business segments.

CenterPoint Energy’s reportable business segments include the following: Electric Transmission & Distribution, Natural Gas Distribution, Competitive Natural Gas Sales and Services, Interstate Pipelines, Field Services and Other Operations. The electric transmission and distribution function (CenterPoint Houston) is reported in the Electric Transmission & Distribution business segment. Natural Gas Distribution consists of intrastate natural gas sales to, and natural gas transportation and distribution for, residential, commercial, industrial and institutional customers. Competitive Natural Gas Sales and Services represents CenterPoint Energy’s non-rate regulated gas sales and services operations, which consist of the following operational functions: wholesale, retail and intrastate pipelines. The Interstate Pipelines business segment includes the interstate natural gas pipeline operations. The Field Services business segment includes the non-rate regulated natural gas gathering, processing and treating operations. Other Operations consists primarily of other corporate operations which support all of CenterPoint Energy’s business operations.

Financial data for business segments are as follows (in millions):

   
For the Three Months Ended June 30, 2010
 
   
Revenues from
External
Customers
   
Net
Intersegment
Revenues
   
Operating
Income (Loss)
 
Electric Transmission & Distribution
  $ 562 (1)   $     $ 158  
Natural Gas Distribution
    462       3       10  
Competitive Natural Gas Sales and Services
    550       10       (6 )
Interstate Pipelines
    113       35       67  
Field Services
    66       14       31  
Other Operations
    3             3  
Eliminations
          (62 )      
Consolidated
  $ 1,756     $     $ 263  

   
For the Three Months Ended June 30, 2011
 
   
Revenues from
External
Customers
   
Net
Intersegment
Revenues
   
Operating
Income
 
Electric Transmission & Distribution
  $ 606 (1)   $     $ 185  
Natural Gas Distribution
    448       4       13  
Competitive Natural Gas Sales and Services
    581       5       3  
Interstate Pipelines
    111       31       60  
Field Services
    88       10       39  
Other Operations
    3             3  
Eliminations
          (50 )      
Consolidated
  $ 1,837     $     $ 303  

   
For the Six Months Ended June 30, 2010
       
   
Revenues from
External
Customers
   
Net
Intersegment
Revenues
   
Operating
Income
   
Total Assets
as of December 31,
2010
 
Electric Transmission & Distribution
  $ 1,044 (1)   $     $ 265     $ 9,817  
Natural Gas Distribution
    1,995       7       149       4,575  
Competitive Natural Gas Sales and Services
    1,394       18       9       1,190  
Interstate Pipelines
    216       70       139       3,672  
Field Services
    124       24       54       1,803  
Other Operations
    6             4       2,184 (2)
Eliminations
          (119 )           (3,130 )
Consolidated
  $ 4,779     $     $ 620     $ 20,111  

   
For the Six Months Ended June 30, 2011
       
   
Revenues from
External
Customers
   
Net
Intersegment