CenterPoint Energy, Inc.
CENTERPOINT ENERGY INC (Form: 10-Q, Received: 11/02/2011 08:01:24)
 
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 SEPTEMBER 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 October 14, 2011 , CenterPoint Energy, Inc. had 425,932,721  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 SEPTEMBER 30, 2011

TABLE OF CONTENTS

PART I.
 
FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
Three and Nine Months Ended September 30, 2010 and 2011 (unaudited)
 
 
 
 
 
 
 
 
 
December 31, 2010 and September 30, 2011 (unaudited)
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2010 and 2011 (unaudited)
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
PART II.
 
OTHER INFORMATION
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.
 


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:
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;
state and federal legislative and regulatory actions or developments relating to the environment, including those related to global climate change;
timely and appropriate rate actions and increases, allowing recovery of costs and a reasonable return on investment;
factors that may impact the timing and completion of our anticipated transition bond offering to recover our true-up balance, including actions by the Public Utility Commission of Texas (Texas Utility Commission), any appeals of the financing order issued by the Texas Utility Commission authorizing the issuance of such transition bonds, and future market conditions;
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, including the effects of these circumstances on re-contracting available capacity on our interstate pipelines ;
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 direct or indirect effects on our facilities, operations and financial condition resulting from terrorism, cyber attacks, data security breaches or other attempts to disrupt our businesses or the businesses of third parties, or other catastrophic events;
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 affiliates of NRG Energy, Inc. and REP affiliates of Energy Future Holdings Corp., 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

Table of Contents

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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2010
 
2011
 
2010
 
2011
 
 
 
 
 
 
 
 
Revenues
$
1,908

 
$
1,881

 
$
6,687

 
$
6,305

 
 
 
 
 
 
 
 
Expenses:
 

 
 

 
 

 
 

Natural gas
808

 
735

 
3,521

 
2,989

Operation and maintenance
444

 
448

 
1,268

 
1,333

Depreciation and amortization
243

 
253

 
660

 
677

Taxes other than income taxes
86

 
88

 
291

 
282

Total
1,581

 
1,524

 
5,740

 
5,281

Operating Income
327

 
357

 
947

 
1,024

 
 
 
 
 
 
 
 
Other Income (Expense):
 

 
 

 
 

 
 

Gain (loss) on marketable securities
19

 
(80
)
 
35

 
(30
)
Gain (loss) on indexed debt securities
(5
)
 
88

 

 
65

Interest and other finance charges
(121
)
 
(114
)
 
(364
)
 
(341
)
Interest on transition and system restoration bonds
(34
)
 
(31
)
 
(106
)
 
(96
)
Equity in earnings of unconsolidated affiliates
10

 
8

 
22

 
22

Return on true-up balance

 
352

 

 
352

Other, net
3

 
10

 
7

 
19

Total
(128
)
 
233

 
(406
)
 
(9
)
 
 
 
 
 
 
 
 
Income Before Income Taxes and Extraordinary Item
199

 
590

 
541

 
1,015

Income tax expense
76

 
204

 
223

 
362

Income Before Extraordinary Item
123

 
386

 
318

 
653

Extraordinary Item, net of tax

 
587

 

 
587

Net Income
$
123

 
$
973

 
$
318

 
$
1,240

 
 
 
 
 
 
 
 
Basic Earnings Per Share:
 
 
 
 
 
 
 
Income Before Extraordinary Item
$
0.29

 
$
0.90

 
$
0.79

 
$
1.53

Extraordinary Item, net of tax

 
1.38

 

 
1.38

Net Income
$
0.29

 
$
2.28

 
$
0.79

 
$
2.91

 
 
 
 
 
 
 
 
Diluted Earnings Per Share:
 
 
 
 
 
 
 
Income Before Extraordinary Item
$
0.29

 
$
0.90

 
$
0.78

 
$
1.52

Extraordinary Item, net of tax

 
1.37

 

 
1.37

Net Income
$
0.29

 
$
2.27

 
$
0.78

 
$
2.89

 
 
 
 
 
 
 
 
Dividends Declared Per Share
$
0.195

 
$
0.1975

 
$
0.585

 
$
0.5925

 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding, Basic
422

 
426

 
405

 
426

 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding, Diluted
425

 
429

 
408

 
428


See Notes to Interim Condensed Consolidated Financial Statements

1

Table of Contents

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

ASSETS

 
December 31,
2010
 
September 30,
2011
Current Assets:
 
 
 
Cash and cash equivalents ($198 and $103 related to VIEs at December 31, 2010 and September 30, 2011, respectively)
$
199

 
$
103

Investment in marketable securities
367

 
337

Accounts receivable, net ($49 and $73 related to VIEs at December 31, 2010 and September 30, 2011, respectively)
835

 
722

Accrued unbilled revenues
340

 
160

Natural gas inventory
211

 
250

Materials and supplies
164

 
168

Non-trading derivative assets
54

 
52

Taxes receivable
138

 

Prepaid expenses and other current assets ($39  and $41 related to VIEs at December 31, 2010 and September 30, 2011, respectively)
274

 
190

Total current assets
2,582

 
1,982

 
 
 
 
Property, Plant and Equipment:
 

 
 

Property, plant and equipment
16,005

 
16,591

Less accumulated depreciation and amortization
4,273

 
4,433

Property, plant and equipment, net
11,732

 
12,158

 
 
 
 
Other Assets:
 

 
 

Goodwill
1,696

 
1,696

Regulatory assets ($2,597 and $2,352 related to VIEs at December 31, 2010 and September 30, 2011, respectively)
3,446

 
4,475

Non-trading derivative assets
15

 
12

Investment in unconsolidated affiliates
468

 
474

Other
172

 
154

Total other assets
5,797

 
6,811

 
 
 
 
Total Assets
$
20,111

 
$
20,951


See Notes to Interim Condensed Consolidated Financial Statements

2

Table of Contents

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

LIABILITIES AND SHAREHOLDERS’ EQUITY

 
December 31,
2010
 
September 30,
2011
Current Liabilities:
 
 
 
Short-term borrowings
$
53

 
$
84

Current portion of VIE transition and system restoration bonds long-term
debt
283

 
307

Current portion of indexed debt
126

 
130

Current portion of other long-term debt
19

 
46

Indexed debt securities derivative
232

 
167

Accounts payable
667

 
417

Taxes accrued
156

 
184

Interest accrued
171

 
118

Non-trading derivative liabilities
68

 
53

Accumulated deferred income taxes, net
407

 
494

Other
438

 
319

Total current liabilities
2,620

 
2,319

 
 
 
 
 
 
 
 
Other Liabilities:
 

 
 

Accumulated deferred income taxes, net
2,934

 
3,814

Non-trading derivative liabilities
16

 
3

Benefit obligations
906

 
842

Regulatory liabilities
989

 
1,033

Other
447

 
236

Total other liabilities
5,292

 
5,928

 
 
 
 
Long-term Debt:
 

 
 

VIE transition and system restoration bonds
2,522

 
2,215

Other
6,479

 
6,282

Total long-term debt
9,001

 
8,497

 
 
 
 
Commitments and Contingencies (Note 12)


 


 
 
 
 
Shareholders’ Equity:
 

 
 

Common stock (424,746,177 shares and 425,919,192 shares outstanding
at December 31, 2010 and September 30, 2011, respectively)
4

 
4

Additional paid-in capital
4,100

 
4,114

Retained earnings (accumulated deficit)
(789
)
 
199

Accumulated other comprehensive loss
(117
)
 
(110
)
Total shareholders’ equity
3,198

 
4,207

 
 
 
 
Total Liabilities and Shareholders’ Equity
$
20,111

 
$
20,951


See Notes to Interim Condensed Consolidated Financial Statements

3

Table of Contents

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Millions)
(Unaudited)
 
Nine Months Ended September 30,
 
2010
 
2011
Cash Flows from Operating Activities:
 
 
 
Net income
$
318

 
$
1,240

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
660

 
677

Amortization of deferred financing costs
21

 
22

Deferred income taxes
112

 
404

Extraordinary item, net of tax

 
(587
)
Return on true-up balance

 
(352
)
Unrealized loss (gain) on marketable securities
(35
)
 
30

Unrealized gain on indexed debt securities

 
(65
)
Write-down of natural gas inventory
6

 
7

Equity in earnings of unconsolidated affiliates, net of distributions
4

 
3

Changes in other assets and liabilities:
 
 
 
Accounts receivable and unbilled revenues, net
434

 
245

Inventory
(83
)
 
(50
)
Taxes receivable
(113
)
 
138

Accounts payable
(283
)
 
(215
)
Fuel cost over (under) recovery
43

 
(52
)
Non-trading derivatives, net
(16
)
 
(10
)
Margin deposits, net
(38
)
 
61

Interest and taxes accrued
(56
)
 
(25
)
Net regulatory assets and liabilities
23

 
22

Other current assets
17

 
14

Other current liabilities
(38
)
 
(23
)
Other assets
(8
)
 
(1
)
Other liabilities
2

 
(49
)
Other, net
13

 
15

Net cash provided by operating activities
983

 
1,449

 
 
 
 
Cash Flows from Investing Activities:
 

 
 

Capital expenditures
(1,053
)
 
(960
)
Increase in restricted cash of transition and system restoration bond companies
(1
)
 
(2
)
Investment in unconsolidated affiliates
(21
)
 
(9
)
Cash received from U.S Department of Energy grant
58

 
110

Other, net
3

 
13

Net cash used in investing activities
(1,014
)
 
(848
)
 
 
 
 
Cash Flows from Financing Activities:
 

 
 

Increase in short-term borrowings, net
18

 
31

Proceeds from commercial paper, net

 
(41
)
Proceeds from long-term debt

 
550

Payments of long-term debt
(783
)
 
(909
)
Cash paid for debt exchange

 
(58
)
Debt issuance costs
(2
)
 
(23
)
Payment of common stock dividends
(236
)
 
(252
)
Proceeds from issuance of common stock, net
392

 
5

Other, net
1

 

Net cash used in financing activities
(610
)
 
(697
)
 
 
 
 
Net Decrease in Cash and Cash Equivalents
(641
)
 
(96
)
Cash and Cash Equivalents at Beginning of Period
740

 
199

Cash and Cash Equivalents at End of Period
$
99

 
$
103

 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 

 
 

Cash Payments:
 

 
 

Interest, net of capitalized interest
$
505

 
$
470

Income taxes (refunds), net
210

 
(204
)
Non-cash transactions:
 
 
 
Accounts payable related to capital expenditures
104

 
101

See Notes to Interim Condensed Consolidated Financial Statements

4

Table of Contents

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 September 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. 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

5

Table of Contents

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.

In September 2011, the FASB issued new accounting guidance that is intended to simplify how entities test goodwill for impairment. The new accounting guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.  If, after performing the qualitative assessment, it is determined that the fair value of a reporting unit is more likely than not less than its carrying value, then the quantitative two-step goodwill impairment test that exists under current GAAP must be performed; otherwise, goodwill is deemed to not be impaired and no further testing is required. An entity has the unconditional option to bypass the qualitative assessment and proceed directly to the quantitative assessment. This new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. CenterPoint Energy did not elect early adoption, but 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 September 30,
 
2010
 
2011
 
Pension
Benefits (1)
 
Postretirement
Benefits
 
Pension
Benefits (1)
 
Postretirement
Benefits
 
(in millions)
Service cost
$
8

 
$

 
$
8

 
$

Interest cost
26

 
7

 
25

 
5

Expected return on plan assets
(27
)
 
(2
)
 
(29
)
 
(2
)
Amortization of prior service credit

 

 
1

 
1

Amortization of net loss
15

 

 
14

 

Amortization of transition obligation

 
2

 

 
2

Net periodic cost
$
22

 
$
7

 
$
19

 
$
6


 
Nine Months Ended September 30,
 
2010
 
2011
 
Pension
Benefits (1)
 
Postretirement
Benefits
 
Pension
Benefits (1)
 
Postretirement
Benefits
 
(in millions)
Service cost
$
24

 
$
1

 
$
25

 
$
1

Interest cost
77

 
19

 
75

 
17

Expected return on plan assets
(82
)
 
(7
)
 
(87
)
 
(7
)
Amortization of prior service credit
2

 
2

 
3

 
3

Amortization of net loss
44

 

 
42

 
1

Amortization of transition obligation

 
5

 

 
5

Net periodic cost
$
65

 
$
20

 
$
58

 
$
20

________________
(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 in excess of amounts authorized for recovery in base rates is being deferred for rate making purposes. CenterPoint Houston deferred as a regulatory asset $6 million and $2 million , respectively, in pension expense during the three months

6

Table of Contents

ended September 30, 2010 and 2011 , and $18 million and $13 million , respectively, in pension expense during the nine months ended September 30, 2010 and 2011 .

CenterPoint Energy expects to contribute approximately $75 million to its pension plans in 2011, of which approximately $69 million and $72 million , respectively, were contributed during the three and nine months ended September 30, 2011 .

CenterPoint Energy expects to contribute approximately $18 million to its postretirement benefits plan in 2011, of which approximately $0 and $11 million , respectively, were contributed during the three and nine months ended September 30, 2011 .

(4)
Regulatory Matters

(a)
Resolution of True-Up Appeal

In March 2004, CenterPoint Houston filed a 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. 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 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 . In June 2011, the Texas Supreme Court denied all motions for rehearing and issued a final mandate remanding the case to the Texas Utility Commission for further proceedings (the Remand Proceeding).

In September 2011, CenterPoint Houston reached an agreement in principle with the staff of the Texas Utility Commission and certain intervenors to settle the issues in the Remand Proceeding (the Settlement) and requested that the Texas Utility Commission abate the procedural schedule for the Remand Proceeding and reserve ruling on pending motions or issues until the Texas Utility Commission reviewed the Settlement. At its open meeting on October 13, 2011, the Texas Utility Commission voted to approve a final order (the Final Order) in the Remand Proceeding. The Final Order provides that (i) CenterPoint Houston is entitled to recover an additional true-up balance of $1.695 billion (the Recoverable True-Up Balance) in the Remand Proceeding, (ii) no further interest will accrue on the Recoverable True-Up Balance, and (iii) CenterPoint Houston will reimburse certain parties for their reasonable rate case expenses. The Final Order is consistent with the terms of the Settlement, which resolved all matters in the Remand Proceeding.   The Final Order was issued by the Texas Utility Commission on October 19, 2011. Any party may appeal the Final Order by filing a motion for rehearing within 20 days from the date the party received notice of the Final Order.

On October 27, 2011, the Texas Utility Commission issued a financing order (the Financing Order) that authorizes the issuance of transition bonds by CenterPoint Houston to securitize the Recoverable True-Up Balance. The Financing Order is subject to appeal within 15 days from the date it was issued. The timing and completion of any transition bond offering will ultimately depend on a number of factors, including actions by the Texas Utility Commission, any appeals of the Financing Order, and future market conditions.

As a result of the Final Order, CenterPoint Houston recorded a pre-tax extraordinary gain of $921 million ( $587 million after-tax of $334 million ) and $352 million ( $224 million after-tax) of Other Income related to a portion of interest on the appealed amount.  An additional $405 million ( $258 million after-tax) will be recorded as an equity return over the life of the transition bonds.

As of September 30, 2011 , CenterPoint Energy has not recognized an allowed equity return of $165 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 the three months ended September 30, 2010 and 2011 , CenterPoint Houston recognized approximately $5 million and $6 million , respectively, of the allowed equity return not previously recognized.  During the nine months ended September 30, 2010 and 2011 , CenterPoint Houston recognized approximately $12 million and $13 million , respectively, of the allowed equity return not previously recognized.

7

Table of Contents


(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 implemented revised rates on September 1, 2011 based on the order on rehearing.  The order on rehearing has been appealed to the Texas courts by various parties; however, a procedural schedule has not been established.

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. Oral arguments were heard in October 2011, and 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. In August 2011, CenterPoint Houston and the parties agreed to forego a hearing and admit evidence supporting the recovery of (1) the estimated 2012 energy efficiency costs of approximately $35.8 million , (2) an energy efficiency performance bonus of approximately $3.6 million , and (3) approximately $0.5 million for under-recovery of 2010 program costs. CenterPoint Houston has filed notification that it reserves its right to appeal the denial of the full 2010 performance bonus and lost revenues. The proposed rate adjustments are expected to take effect with the commencement of CenterPoint Houston’s January

8

Table of Contents

2012 billing month.

In August 2011, CenterPoint Houston filed a Transmission Cost of Service application with the Texas Utility Commission seeking an increase in annual revenue of approximately $3.4 million . In September 2011, the Texas Utility Commission approved the application and the rates became effective at that time.

In September 2011, a new rule of the Texas Utility Commission relating to a Distribution Cost Recovery Factor (DCRF) became effective. The new rule permits an electric utility such as CenterPoint Houston to file each year to recover through a separate DCRF a return on changes to certain distribution-related capital investments, net of any changes in distribution-related accumulated deferred income taxes, as well as related changes to depreciation expense and taxes. The utility is allowed to request one DCRF annually unless in the previous year it was found to have earned in excess of its authorized return on equity as calculated in its annual earnings monitoring report on a weather-adjusted basis, in which case the DCRF is not available. The utility is limited to four DCRF filings and then must seek a full rate proceeding before it can request a subsequent DCRF. The rule expires January 1, 2017.

In October 2011, CenterPoint Houston and certain other parties filed a non-unanimous stipulation (Transmission Stipulation) with the Texas Utility Commission to resolve claims related to the “transition mechanism” component of certain invalidated transmission pricing rules. The Transmission Stipulation resolves all remaining claims that arose from or relate to wholesale transmission service and charges within the Electric Reliability Council of Texas, Inc. (ERCOT) for the period from September 1, 1999 to December 31, 1999 during which the Texas Utility Commission had continued to utilize the “transition mechanism” component of the invalidated transmission pricing rules in setting ERCOT transmission rates. The Transmission Stipulation was filed by all parties to the proceeding, except CPS Energy.  Under the Transmission Stipulation, CenterPoint Houston's payment of $5.6 million is to be made within 30 days after issuance of a final appealable order.  It is expected that a final appealable order will be issued in early 2012.  CenterPoint Houston will seek recovery of the payment through its Transmission Cost Recovery Factor mechanism.

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 appealed the court’s ruling on the cost of service adjustment mechanism to the Texas Third Court of Appeals in Austin, Texas. Oral arguments were held in February 2011. In October 2011, the Texas Third Court of Appeals reversed the district court's ruling. Parties opposed to the decision may request the Texas Third Court of Appeals to reconsider or appeal to the Texas Supreme Court. 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, which request was granted in July 2011.

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. 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.


9

Table of Contents


 
(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 September 30, 2010 , CenterPoint Energy recorded increased natural gas revenues from unrealized net gains of $28 million and increased natural gas expense from unrealized net losses of $9 million , resulting in a net unrealized gain of $19 million .  During the three months ended September 30, 2011 , CenterPoint Energy recorded increased natural gas revenues from unrealized net gains of $18 million and increased natural gas expense from unrealized net losses of $12 million , resulting in a net unrealized gain of $6 million .  During the nine months ended September 30, 2010 , CenterPoint Energy recorded increased natural gas revenues from unrealized net gains of $45 million and increased natural gas expense from unrealized net losses of $31 million , resulting in a net unrealized gain of $14 million .  During the nine months ended September 30, 2011 , CenterPoint Energy recorded decreased natural gas revenues from unrealized net losses of $1 million and decreased natural gas expense from unrealized net gains of $9 million , resulting in a net unrealized gain of $8 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 nine months ended September 30, 2010 , CenterPoint Energy recognized losses of $0 and $5 million , respectively, related to these swaps. During the three and nine months ended September 30, 2011 , CenterPoint Energy recognized losses of $0 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 September 30, 2011 , while the last table provides a breakdown of the related income statement impacts for the three and nine months ended September 30, 2010 and 2011 .


10

Table of Contents

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 constitute 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
 
 
 
 
September 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
 
$
52

 
$

Natural gas contracts   (1)
 
Other Assets
 
12

 

Natural gas contracts (1)
 
Current Liabilities
 
22

 
104

Natural gas contracts (1)
 
Other Liabilities
 
1

 
7

Indexed debt securities derivative
 
Current Liabilities
 

 
167

Total                                                                          
 
$
87

 
$
278

 ________________
(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 585  Bcf or a net 69  Bcf long position.  Of the net long position, basis swaps constitute 69  Bcf and volumes associated with price stabilization activities of the Natural Gas Distribution business segment constitute 10  Bcf.

(3)
The net of total non-trading derivative assets and liabilities is an $8 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 $32 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.

11

Table of Contents


Income Statement Impact of Derivative Activity
 
 
 
 
Three Months Ended September 30,
Total derivatives not designated
as hedging instruments
 
Income Statement Location
 
2010
 
2011
 
 
 
 
(in millions)
Natural gas contracts
 
Gains (Losses) in Revenue
 
$
41

 
$
27

Natural gas contracts (1)
 
Gains (Losses) in Expense: Natural Gas
 
(41
)
 
(30
)
Indexed debt securities derivative
 
Gains (Losses) in Other Income (Expense)
 
(5
)
 
88

Total
 
$
(5
)
 
$
85

  ________________
(1)
The Gains (Losses) in Expense: Natural Gas includes $(24) 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
 
 
 
 
Nine Months Ended September 30,
Total derivatives not designated
as hedging instruments
 
Income Statement Location
 
2010
 
2011
 
 
 
 
(in millions)
Natural gas contracts
 
Gains (Losses) in Revenue
 
$
90

 
$
41

Natural gas contracts (1)
 
Gains (Losses) in Expense: Natural Gas
 
(133
)
 
(79
)
Indexed debt securities derivative
 
Gains (Losses) in Other Income (Expense)
 

 
65

Total
 
$
(43
)
 
$
27

________________
(1)
The Gains (Losses) in Expense: Natural Gas includes $(74) million and $(79) 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 September 30, 2011 was $107 million and $51 million , respectively.  The aggregate fair value of assets that are already posted as collateral was $31 million and $2 million , respectively, at December 31, 2010 and September 30, 2011 .  If all derivative contracts (in a net liability position) containing credit risk contingent features were triggered at December 31, 2010 and September 30, 2011 , $76 million and $48 million , respectively, of additional assets would be required to be posted as collateral.

(6)
Fair Value Measurements

Assets and liabilities that are recorded at fair value in the Condensed Consolidated Balance Sheets 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

12

Table of Contents

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 September 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 September 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
 
 
 
 
 
September 30,
2011
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
Corporate equities
$
339

 
$

 
$

 
$

 
$
339

Investments, including money
market funds
54

 

 

 

 
54

Natural gas derivatives
8

 
72

 
7

 
(23
)
 
64

Total assets
$
401

 
$
72

 
$
7

 
$
(23
)
 
$
457

Liabilities
 

 
 

 
 

 
 

 
 

Indexed debt securities
derivative
$

 
$
167

 
$

 
$

 
$
167

Natural gas derivatives
11

 
96

 
4

 
(55
)
 
56

Total liabilities
$
11

 
$
263

 
$
4

 
$
(55
)
 
$
223

 ________________
(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 $32 million posted with the same counterparties.

13

Table of Contents


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 September 30,
 
2010
 
2011
 
(in millions)
Beginning balance
$
5

 
$
5

Total unrealized losses:
 

 
 

Included in earnings

 
(1
)
Total settlements, gross (1) :
 

 
 

Included in earnings
(2
)
 
(1
)
Ending balance
$
3

 
$
3

The amount of total gains (losses) 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 September 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
 
Nine Months Ended September 30,
 
2010
 
2011
 
(in millions)
Beginning balance
$
(6
)
 
$
3

Total unrealized gains (losses):
 

 
 

Included in earnings
2

 
3

Included in regulatory assets
(1
)
 

Total settlements, gross (1) :
 

 
 

Included in earnings
(1
)
 
(3
)
Included in regulatory assets
9

 

Ending balance
$
3

 
$
3

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
$
4

 
$
2

 ________________
(1)
During both the nine months ended September 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.


14

Table of Contents

 
December 31, 2010
 
September 30, 2011
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
(in millions)
Financial liabilities:
 
 
 
 
 
 
 
Long-term debt
$
9,303

 
$
10,071

 
$
8,850

 
$
9,870


(7)
Goodwill

Goodwill by reportable business segment as of both December 31, 2010 and September 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


CenterPoint Energy performs its goodwill impairment tests at least annually and evaluates goodwill when events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. The impairment evaluation for goodwill is performed by using a two-step process. In the first step, the fair value of each reporting unit is compared with the carrying amount of the reporting unit, including goodwill. The estimated fair value of the reporting unit is generally determined on the basis of discounted future cash flows. If the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, then a second step must be completed in order to determine the amount of the goodwill impairment that should be recorded. In the second step, the implied fair value of the reporting unit's goodwill is determined by allocating the reporting unit's fair value to all of its assets and liabilities other than goodwill (including any unrecognized intangible assets) in a manner similar to a purchase price allocation. The resulting implied fair value of the goodwill that results from the application of this second step is then compared to the carrying amount of the goodwill and an impairment charge is recorded for the difference.

CenterPoint Energy performed the test as of July 1, 2011, its annual impairment testing date, and determined that no impairment existed.

(8)
Comprehensive Income

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

 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
 
September 30,
 
2010
 
2011
 
2010
 
2011
 
(in millions)
Net income
$
123

 
$
973

 
$
318

 
$
1,240

Other comprehensive income:
 

 
 

 
 

 
 

Adjustment related to pension and other postretirement
plans (net of tax of $2, $2, $5 and $5)
2

 
2

 
7

 
7

Reclassification of deferred loss from cash flow hedges realized in net income (net of tax of $-0-, $-0-, $-0- and $-0-)
1

 

 
1

 

Total
3

 
2

 
8

 
7

Comprehensive income
$
126

 
$
975

 
$
326

 
$
1,247


15

Table of Contents


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

 
December 31,
2010
 
September 30,
2011
 
(in millions)
Adjustment related to pension and postretirement plans
$
(114
)
 
$
(107
)
Net deferred loss from cash flow hedges
(3
)
 
(3
)
Total accumulated other comprehensive loss
$
(117
)
 
$
(110
)

(9)
Capital Stock

CenterPoint Energy, Inc. 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 September 30, 2011 , 425,919,358  shares of CenterPoint Energy common stock were issued and 425,919,192 shares were outstanding. Outstanding common shares exclude 166 treasury shares at both December 31, 2010 and September 30, 2011 .

(10)
Short-term Borrowings and Long-term Debt

(a)
Short-term Borrowings

Receivables Facility.  CERC’s receivables facility terminated pursuant to its terms on September 14, 2011.  As of December 31, 2010 , the facility size was $160 million and there were no advances under the 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 $84 million as of December 31, 2010 and September 30, 2011 , respectively.

(b)
Long-term Debt

Revolving Credit Facilities. In the third quarter of 2011, the revolving credit facilities of CenterPoint Energy, CenterPoint Houston and CERC Corp. were replaced with five - year revolving credit facilities of similar borrowing capacity. As of December 31, 2010 and September 30, 2011 , CenterPoint Energy, CenterPoint Houston and CERC Corp. had the following revolving credit facilities and utilization of such facilities (in millions):
 
December 31, 2010
 
September 30, 2011
 
Size of
Facility
 
Loans
 
Letters
of Credit
 
Commercial
Paper
 
Size of
Facility
 
Loans
 
Letters
of Credit
 
Commercial
Paper
CenterPoint Energy
$
1,156

 
$

 
$
20

 
$

 
$
1,200

 
$

 
$
16

 
$

CenterPoint Houston
289

 

 
4

 

 
300

 

 
4

 

CERC Corp.
915

 

 

 
183

 
950

 

 

 
142

Total
$
2,360

 
$

 
$
24

 
$
183

 
$
2,450

 
$

 
$
20

 
$
142


CenterPoint Energy’s $1.2 billion credit facility, which is scheduled to terminate September 9, 2016, can be drawn at the London Interbank Offered Rate (LIBOR) plus 175 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). The facility allows for a temporary increase of the permitted ratio in the financial covenant 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 consecutive twelve -month period, all or part of which CenterPoint Houston intends to seek to recover through securitization financing. Such temporary increase in the financial 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.


16

Table of Contents

CenterPoint Houston’s $300 million credit facility, which is scheduled to terminate September 9, 2016, can be drawn at LIBOR plus 150 basis points based on CenterPoint Houston's current credit ratings. The facility contains a debt (excluding transition and system restoration bonds) to total capitalization covenant which limits debt to 65% of the borrower's total capitalization.

CERC Corp.’s $950 million credit facility, which is scheduled to terminate September 9, 2016, can be drawn at LIBOR plus 150 basis points based on CERC Corp.’s current credit ratings. The facility contains a debt to total capitalization covenant which limits debt to 65% of CERC's total capitalization.

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 nine months ended September 30, 2010 , the effective tax rate was 38% and 41% , respectively. During the three and nine months ended September 30, 2011 , the effective tax rate was 35% and 36% , respectively. The most significant items affecting the comparability of the effective tax rate for the nine months ended September 30, 2010 and 2011 are a non-cash, $21 million increase in the 2010 income tax expense as a result of a change in tax law and a $9 million decrease in the 2011 income tax expense related to a decrease in accrued interest for tax reserves related to the potential normalization violation.

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 September 30, 2011 :

 
December 31,
2010
 
September 30,
2011
 
(in millions)
Unrecognized tax benefits
$
252

 
$
52

Portion of unrecognized tax benefits that, if recognized,
would reduce the effective income tax rate
17

 
20

Interest accrued on unrecognized tax benefits
12

 


The decrease of $200 million in unrecognized tax benefits from December 31, 2010 is primarily related to the remeasurement of unrecognized tax benefits for the potential normalization violation. As a result of the Settlement, discussed in Note 4(a), CenterPoint Houston has determined that the potential normalization violation has been prevented and consequently, recorded a reduction to the liability for unrecognized income tax benefits by $279 million during the three months ended September 30, 2011 of which $211 million was related to the balance as of December 31, 2010 with the remaining $68 million related to the six months ended June 30, 2011. The unrecognized tax benefit for the normalization issue was a temporary difference and, therefore, the decrease in the balance thereto resulted in an increase to the deferred tax liability of $268 million and a decrease in income tax expense of $11 million for the release of accrued interest expense.

It is reasonably possible that the total amount of unrecognized tax benefits could decrease in the range of $16 million to $35 million over the next 12 months, depending on the result of CenterPoint Energy’s administrative appeal relating to the Internal Revenue Service's (IRS) disallowance of CenterPoint Energy’s casualty loss deduction associated with the damage caused by

17

Table of Contents

Hurricane Ike.  Additionally, the casualty loss deduction is a temporary difference 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 Energy’s Condensed Consolidated Balance Sheets as of December 31, 2010 and September 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 September 30, 2011 , minimum payment obligations for natural gas supply commitments are approximately $181 million for the remaining three months in 2011, $499 million in 2012, $498 million in 2013, $388 million in 2014, $235 million in 2015 and $410 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 September 30, 2011 , CEFS had spent approximately $390 million on the 600  MMcf per day project, including the purchase of the original facilities, and expects to incur up to an additional $35 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.


18

Table of Contents

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 a subsidiary of NRG Energy, Inc. (NRG) 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.  The plaintiffs have appealed this ruling to the United States Court of Appeals for the Ninth Circuit. 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.

19

Table of Contents


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 September 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 $6 million to $41 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 September 30, 2011 , CERC had collected $5.4 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.  On September 12, 2011, the First Circuit Court of Appeals dismissed the plaintiff's appeal with respect to 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.

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

20

Table of Contents

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 $100 million as of September 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.  As a result of market conditions in the fourth quarter of 2011, CERC has provided notice to GenOn of its obligation to post additional security in December 2011. 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 September 30,
 
Nine Months Ended September 30,
 
2010
 
2011
 
2010
 
2011
 
(in millions, except share and per share amounts)
Basic earnings per share calculation:
 
 
 
 
 
 
 
Income before extraordinary item
$
123

 
$
386

 
$
318

 
$
653

Extraordinary item, net of tax

 
587

 

 
587

Net income
$
123

 
$
973

 
$
318

 
$
1,240

 
 
 
 
 
 
 
 
Weighted average shares outstanding
422,178,000

 
425,885,000

 
404,957,000

 
425,517,000

 
 
 
 
 
 
 
 
Basic earnings per share:
 

 
 

 
 

 
 

Income before extraordinary item
$
0.29

 
$
0.90

 
$
0.79

 
$
1.53

Extraordinary item, net of tax

 
1.38

 

 
1.38

Net income
$
0.29

 
$
2.28

 
$
0.79

 
$
2.91

 
 
 
 
 
 
 
 
Diluted earnings per share calculation:
 

 
 

 
 

 
 

Net income
$
123

 
$
973

 
$
318

 
$
1,240

 
 
 
 
 
 
 
 
Weighted average shares outstanding
422,178,000

 
425,885,000

 
404,957,000

 
425,517,000

Plus: Incremental shares from assumed conversions:
 

 
 

 
 

 
 

Stock options (1)
548,000

 
399,000

 
529,000

 
377,000

Restricted stock
2,242,000

 
2,558,000

 
2,242,000

 
2,558,000

Weighted average shares assuming dilution
424,968,000

 
428,842,000

 
407,728,000

 
428,452,000

 
 
 
 
 
 
 
 
Diluted earnings per share:
 

 
 

 
 

 
 

Income before extraordinary item
$
0.29

 
$
0.90

 
$
0.78

 
$
1.52

Extraordinary item, net of tax

 
1.37

 

 
1.37

Net income
$
0.29

 
$
2.27

 
$
0.78

 
$
2.89

  ________________
(1)
Options to purchase 1,522,444  shares were outstanding for both the three and nine months ended September 30, 2010 , 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.

21

Table of Contents


(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 September 30, 2010
 
Revenues from
External
Customers
 
Net
Intersegment
Revenues
 
Operating
Income (Loss)
Electric Transmission & Distribution
$
655

(1)  
$

 
$
212

Natural Gas Distribution
395

 
3

 
(4
)
Competitive Natural Gas Sales and Services
638

 
9

 
7

Interstate Pipelines
136

 
34

 
68

Field Services
81

 
13

 
40

Other Operations
3

 

 
4

Eliminations

 
(59
)
 

Consolidated
$
1,908

 
$

 
$
327


 
For the Three Months Ended September 30, 2011
 
Revenues from
External
Customers
 
Net
Intersegment
Revenues
 
Operating
Income (Loss)
Electric Transmission & Distribution
$
707

(1)  
$

 
$
244

Natural Gas Distribution
379

 
5

 
(2
)
Competitive Natural Gas Sales and Services
580

 
4

 
(10
)
Interstate Pipelines
104

 
31

 
60