CenterPoint Energy, Inc.
CENTERPOINT ENERGY INC (Form: 10-Q, Received: 11/07/2012 08:16:08)

 
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, 2012
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 16, 2012 , CenterPoint Energy, Inc. had 427,441,738  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, 2012

TABLE OF CONTENTS

PART I.
 
FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
Three and Nine Months Ended September 30, 2011 and 2012 (unaudited)
 
 
 
 
 
 
 
 
 
Three and Nine Months Ended September 30, 2011 and 2012 (unaudited)
 
 
 
 
 
 
 
 
 
December 31, 2011 and September 30, 2012 (unaudited)
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2011 and 2012 (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 businesses, including, among others, energy deregulation or re-regulation, pipeline integrity and safety, health care reform, financial reform, tax legislation and actions regarding the rates charged by our regulated businesses;

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 that allow recovery of costs and a reasonable return on investment;

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

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

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

the timing and extent of changes in commodity prices, particularly natural gas and natural gas liquids, the competitive effects of excess pipeline capacity in the regions we serve, 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, particularly supplies available for gathering by our field services business and transporting by our interstate pipelines, including the impact of natural gas and natural gas liquids prices on the level of drilling and production activities in the regions we serve;

competition in our mid-continent region footprint for access to natural gas supplies and markets;

weather variations and other natural phenomena;

any 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

ii


financing and refinancing efforts, including availability of funds in the debt capital markets;

actions by credit rating agencies;

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. (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 Energy Houston Electric, LLC’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, 2011 , 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,
 
2011
 
2012
 
2011
 
2012
 
 
 
 
 
 
 
 
Revenues
$
1,881

 
$
1,705

 
$
6,305

 
$
5,314

 
 
 
 
 
 
 
 
Expenses:
 

 
 

 
 

 
 

Natural gas
735

 
520

 
2,989

 
1,898

Operation and maintenance
448

 
458

 
1,333

 
1,364

Depreciation and amortization
253

 
301

 
677

 
800

Taxes other than income taxes
88

 
86

 
282

 
272

Goodwill impairment

 
252

 

 
252

Total
1,524

 
1,617

 
5,281

 
4,586

Operating Income
357

 
88

 
1,024

 
728

 
 
 
 
 
 
 
 
Other Income (Expense):
 

 
 

 
 

 
 

Gain (loss) on marketable securities
(80
)
 
77

 
(30
)
 
136

Gain (loss) on indexed debt securities
88

 
(52
)
 
65

 
(76
)
Interest and other finance charges
(114
)
 
(104
)
 
(341
)
 
(318
)
Interest on transition and system restoration bonds
(31
)
 
(37
)
 
(96
)
 
(112
)
Equity in earnings of unconsolidated affiliates
8

 
8

 
22

 
25

Return on true-up balance
352

 

 
352

 

Step acquisition gain

 
136

 

 
136

Other, net
10

 
12

 
19

 
28

Total
233

 
40

 
(9
)
 
(181
)
 
 
 
 
 
 
 
 
Income Before Income Taxes and Extraordinary Item
590

 
128

 
1,015

 
547

Income tax expense
204

 
118

 
362

 
264

Income Before Extraordinary Item
386

 
10

 
653

 
283

Extraordinary Item, net of tax
587

 

 
587

 

Net Income
$
973

 
$
10

 
$
1,240

 
$
283

 
 
 
 
 
 
 
 
Basic Earnings Per Share:
 
 
 
 
 
 
 
Income Before Extraordinary Item
$
0.90

 
$
0.02

 
$
1.53

 
$
0.66

Extraordinary Item, net of tax
1.38

 

 
1.38

 

Basic Earnings Per Share
$
2.28

 
$
0.02

 
$
2.91

 
$
0.66

 
 
 
 
 
 
 
 
Diluted Earnings Per Share:
 
 
 
 
 
 
 
Income Before Extraordinary Item
$
0.90

 
$
0.02

 
$
1.52

 
$
0.66

Extraordinary Item, net of tax
1.37

 

 
1.37

 

Diluted Earnings Per Share
$
2.27

 
$
0.02

 
$
2.89

 
$
0.66

 
 
 
 
 
 
 
 
Dividends Declared Per Share
$
0.1975

 
$
0.2025

 
$
0.5925

 
$
0.6075

 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding, Basic
426

 
427

 
426

 
427

 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding, Diluted
429

 
430

 
428

 
430


See Notes to Interim Condensed Consolidated Financial Statements

1

Table of Contents

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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2012
 
2011
 
2012
Net income
$
973

 
$
10

 
$
1,240

 
$
283

Other comprehensive income:
 

 
 

 
 

 
 

Adjustment related to pension and other postretirement plans (net of tax of $2, $2, $5 and $6)
2

 
3

 
7

 
8

Total
2

 
3

 
7

 
8

Comprehensive income
$
975

 
$
13

 
$
1,247

 
$
291


2

Table of Contents


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

ASSETS

 
December 31,
2011
 
September 30,
2012
Current Assets:
 
 
 
Cash and cash equivalents ($220 and $194 related to VIEs at December 31, 2011 and September 30, 2012, respectively)
$
220

 
$
722

Investment in marketable securities
386

 
522

Accounts receivable, net ($52 and $104 related to VIEs at December 31, 2011 and September 30, 2012, respectively)
773

 
698

Accrued unbilled revenues
326

 
167

Natural gas inventory
187

 
170

Materials and supplies
166

 
182

Non-trading derivative assets
87

 
41

Taxes receivable

 
5

Prepaid expenses and other current assets ($42 and $53 related to VIEs at December 31, 2011 and September 30, 2012, respectively)
192

 
245

Total current assets
2,337

 
2,752

 
 
 
 
Property, Plant and Equipment:
 

 
 

Property, plant and equipment
16,868

 
18,010

Less accumulated depreciation and amortization
4,466

 
4,673

Property, plant and equipment, net
12,402

 
13,337

 
 
 
 
Other Assets:
 

 
 

Goodwill
1,696

 
1,468

Regulatory assets ($2,289 and $3,635 related to VIEs at December 31, 2011 and September 30, 2012, respectively)
4,619

 
4,319

Non-trading derivative assets
20

 
10

Investment in unconsolidated affiliates
472

 
408

Other
157

 
183

Total other assets
6,964

 
6,388

 
 
 
 
Total Assets
$
21,703

 
$
22,477


See Notes to Interim Condensed Consolidated Financial Statements

3

Table of Contents

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

LIABILITIES AND SHAREHOLDERS’ EQUITY

 
December 31,
2011
 
September 30,
2012
Current Liabilities:
 
 
 
Short-term borrowings
$
62

 
$
53

Current portion of VIE transition and system restoration bonds long-term debt
307

 
451

Current portion of indexed debt
131

 
136

Current portion of other long-term debt
46

 
815

Indexed debt securities derivative
197

 
273

Accounts payable
560

 
371

Taxes accrued
207

 
171

Interest accrued
164

 
130

Non-trading derivative liabilities
46

 
20

Accumulated deferred income taxes, net
507

 
597

Other
366

 
347

Total current liabilities
2,593

 
3,364

 
 
 
 
 
 
 
 
Other Liabilities:
 

 
 

Accumulated deferred income taxes, net
3,832

 
4,070

Non-trading derivative liabilities
6

 
6

Benefit obligations
1,065

 
994

Regulatory liabilities
1,039

 
1,095

Other
305

 
276

Total other liabilities
6,247

 
6,441

 
 
 
 
Long-term Debt:
 

 
 

VIE transition and system restoration bonds
2,215

 
3,459

Other
6,426

 
4,956

Total long-term debt
8,641

 
8,415

 
 
 
 
Commitments and Contingencies (Note 12)


 


 
 
 
 
Shareholders’ Equity:
 

 
 

Common stock (426,030,345 shares and 427,441,738 shares outstanding at December 31, 2011 and September 30, 2012, respectively)
4

 
4

Additional paid-in capital
4,120

 
4,123

Retained earnings
231

 
255

Accumulated other comprehensive loss
(133
)
 
(125
)
Total shareholders’ equity
4,222

 
4,257

 
 
 
 
Total Liabilities and Shareholders’ Equity
$
21,703

 
$
22,477


See Notes to Interim Condensed Consolidated Financial Statements

4

Table of Contents

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Millions)
(Unaudited)
 
Nine Months Ended September 30,
 
2011
 
2012
Cash Flows from Operating Activities:
 
 
 
Net income
$
1,240

 
$
283

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
677

 
800

Amortization of deferred financing costs
22

 
23

Deferred income taxes
404

 
237

Extraordinary item, net of tax
(587
)
 

Return on true-up balance
(352
)
 

Goodwill impairment

 
252

Step acquisition gain

 
(136
)
Unrealized loss (gain) on marketable securities
30

 
(136
)
Unrealized loss (gain) on indexed debt securities
(65
)
 
76

Write-down of natural gas inventory
7

 
4

Equity in earnings of unconsolidated affiliates, net of distributions
3

 
(6
)
Pension contributions
(72
)
 
(80
)
Changes in other assets and liabilities:
 
 
 
Accounts receivable and unbilled revenues, net
245

 
260

Inventory
(50
)
 
(3
)
Taxes receivable
138

 
(5
)
Accounts payable
(215
)
 
(186
)
Fuel cost recovery
(52
)
 
(72
)
Non-trading derivatives, net
(10
)
 
16

Margin deposits, net
61

 
49

Interest and taxes accrued
(25
)
 
(71
)
Net regulatory assets and liabilities
22

 
71

Other current assets
14

 
(12
)
Other current liabilities
(23
)
 
(23
)
Other assets
(1
)
 
(4
)
Other liabilities
23

 
32

Other, net
15

 
10

Net cash provided by operating activities
1,449

 
1,379

 
 
 
 
Cash Flows from Investing Activities:
 

 
 

Capital expenditures, net of acquisitions
(960
)
 
(818
)
Acquisitions, net of cash acquired

 
(360
)
Increase in restricted cash of transition and system restoration bond companies
(2
)
 
(12
)
Distributions from (investment in) unconsolidated affiliates
(9
)
 
6

Cash received from U.S. Department of Energy grant
110

 

Other, net
13

 
(25
)
Net cash used in investing activities
(848
)
 
(1,209
)
 
 
 
 
Cash Flows from Financing Activities:
 

 
 

Increase (decrease) in short-term borrowings, net
31

 
(9
)
Payments of commercial paper, net
(41
)
 
(285
)
Proceeds from long-term debt
550

 
2,495

Payments of long-term debt
(909
)
 
(1,528
)
Cash paid for debt exchange and debt retirement
(58
)
 
(69
)
Debt issuance costs
(23
)
 
(16
)
Payment of common stock dividends
(252
)
 
(259
)
Proceeds from issuance of common stock, net
5

 
3

Net cash provided by (used in) financing activities
(697
)
 
332

 
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents
(96
)
 
502

Cash and Cash Equivalents at Beginning of Period
199

 
220

Cash and Cash Equivalents at End of Period
$
103

 
$
722

 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 

 
 

Cash Payments:
 

 
 

Interest, net of capitalized interest
$
470

 
$
446

Income taxes (refunds), net
(204
)
 
46

Non-cash transactions:
 
 
 
Accounts payable related to capital expenditures
101

 
100

See Notes to Interim Condensed Consolidated Financial Statements

5

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, 2011 (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, 2012 , 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 (Gas Operations). 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.

As of September 30, 2012 , CenterPoint Energy had five variable interest entities (VIEs) consisting of transition and system restoration bond companies which it consolidates. The consolidated VIEs are wholly-owned bankruptcy remote special purpose entities that were formed specifically for the purpose of securitizing transition and system restoration related property. Creditors of CenterPoint Energy have no recourse to any assets or revenues of the transition and system restoration bond companies. The bonds issued by these VIEs are payable only from and secured by transition and system restoration property and the bondholders have no recourse to the general credit of CenterPoint Energy.

Basis of Presentation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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

Management believes the impact of 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.

6



(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,
 
2011
 
2012
 
Pension
Benefits   (1)
 
Postretirement
Benefits
 
Pension
Benefits   (1)
 
Postretirement
Benefits
 
(in millions)
Service cost
$
8

 
$

 
$
9

 
$

Interest cost
25

 
5

 
25

 
6

Expected return on plan assets
(29
)
 
(2
)
 
(30
)
 
(1
)
Amortization of prior service credit
1

 
1

 
2

 

Amortization of net loss
14

 

 
15

 
1

Amortization of transition obligation

 
2

 

 
2

Net periodic cost
$
19

 
$
6

 
$
21

 
$
8


 
Nine Months Ended September 30,
 
2011
 
2012
 
Pension
Benefits   (1)
 
Postretirement
Benefits
 
Pension
Benefits   (1)
 
Postretirement
Benefits
 
(in millions)
Service cost
$
25

 
$
1

 
$
27

 
$
1

Interest cost
75

 
17

 
74

 
18

Expected return on plan assets
(87
)
 
(7
)
 
(90
)
 
(5
)
Amortization of prior service credit
3

 
3

 
6

 
2

Amortization of net loss
42

 
1

 
45

 
3

Amortization of transition obligation

 
5

 

 
5

Net periodic cost
$
58

 
$
20

 
$
62

 
$
24

________________
(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 Energy expects to contribute a total of approximately $82 million to its pension plans in 2012, of which approximately $33 million and $80 million , respectively, was contributed during the three and nine months ended September 30, 2012 .

CenterPoint Energy expects to contribute a total of approximately $18 million to its postretirement benefits plan in 2012, of which approximately $3 million and $12 million , respectively, was contributed during the three and nine months ended September 30, 2012 .

(4)
Regulatory Accounting

As of September 30, 2012 , CenterPoint Energy has not recognized an allowed equity return of $563 million because such return will be recognized as it is recovered in rates. During the three months ended September 30, 2011 and 2012 , CenterPoint Houston recognized approximately $7 million and $16 million , respectively, of the allowed equity return not previously recognized. During the nine months ended September 30, 2011 and 2012 , CenterPoint Houston recognized approximately $15 million and $37 million , respectively, of the allowed equity return not previously recognized.

7



(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, 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 three months ended September 30, 2012 , CenterPoint Energy recorded decreased natural gas revenues from unrealized net losses of $30 million and decreased natural gas expense from unrealized net gains of $21 million , resulting in a net unrealized loss of $9 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 .  During the nine months ended September 30, 2012 , CenterPoint Energy recorded decreased natural gas revenues from unrealized net losses of $76 million and decreased natural gas expense from unrealized net gains of $62 million , resulting in a net unrealized loss of $14 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, Mississippi, 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 for these Gas Operations jurisdictions to mitigate the effect of fluctuations from normal weather on its results of operations and cash flows for the winter heating season.  The swaps have limits and are based on ten -year normal weather. During the three and nine months ended September 30, 2011 , CenterPoint Energy recognized losses of $-0- and $6 million , respectively, related to these swaps. During the three and nine months ended September 30, 2012 , CenterPoint Energy recognized gains of $-0- and $6 million , respectively, related to these swaps. Weather hedge gains and losses are included in revenues in the Condensed Statements of Consolidated Income.

8



(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, 2011 and September 30, 2012 , while the last table provides a breakdown of the related income statement impacts for the three and nine months ended September 30, 2011 and 2012 .
Fair Value of Derivative Instruments
 
 
 
 
December 31, 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 derivatives (1)
 
Current Assets
 
$
88

 
$
1

Natural gas derivatives (1)
 
Other Assets
 
20

 

Natural gas derivatives (1)
 
Current Liabilities
 
15

 
110

Natural gas derivatives (1)
 
Other Liabilities
 

 
13

Indexed debt securities derivative
 
Current Liabilities
 

 
197

Total                                                                          
 
$
123

 
$
321

 ________________
(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 633 billion cubic feet (Bcf) or a net 84  Bcf long position.  Of the net long position, basis swaps constitute 74  Bcf and volumes associated with price stabilization activities of the Natural Gas Distribution business segment constitute 6 Bcf.
 
(3)
The net of total non-trading derivative assets and liabilities is a $55 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 $56 million .
Fair Value of Derivative Instruments
 
 
 
 
September 30, 2012
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 derivatives (1)
 
Current Assets
 
$
43

 
$
2

Natural gas derivatives (1)
 
Other Assets
 
13

 
2

Natural gas derivatives (1)
 
Current Liabilities
 
11

 
38

Natural gas derivatives (1)
 
Other Liabilities
 

 
6

Indexed debt securities derivative
 
Current Liabilities
 

 
273

Total                                                                          
 
$
67

 
$
321

 ________________
(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 566  Bcf or a net 128  Bcf long position.  Of the net long position, basis swaps constitute 69  Bcf.

(3)
The net of total non-trading derivative assets and liabilities is a $25 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 $6 million .


9


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 physical natural gas sales derivative contracts and as natural gas expense for financial natural gas derivatives and other physical natural gas derivatives. Unrealized gains and losses on indexed debt securities are recorded as Other Income (Expense) in the Condensed Statements of Consolidated Income.
Income Statement Impact of Derivative Activity
 
 
 
 
Three Months Ended September 30,
Total derivatives not designated
as hedging instruments
 
Income Statement Location
 
2011
 
2012
 
 
 
 
(in millions)
Natural gas derivatives
 
Gains (Losses) in Revenue
 
$
27

 
$
(21
)
Natural gas derivatives (1)
 
Gains (Losses) in Expense: Natural Gas
 
(30
)
 
24

Indexed debt securities derivative
 
Gains (Losses) in Other Income (Expense)
 
88

 
(52
)
Total
 
$
85

 
$
(49
)
  ________________
(1)
The Gains (Losses) in Expense: Natural Gas includes $(17) million of costs in 2011 associated with price stabilization activities of the Natural Gas Distribution business segment that will be ultimately recovered through purchased gas adjustments. There are no such costs associated with price stabilization activities of the Natural Gas Distribution business segment in the three months ended September 30, 2012 .
Income Statement Impact of Derivative Activity
 
 
 
 
Nine Months Ended September 30,
Total derivatives not designated
as hedging instruments
 
Income Statement Location
 
2011
 
2012
 
 
 
 
(in millions)
Natural gas derivatives
 
Gains (Losses) in Revenue
 
$
41

 
$
22

Natural gas derivatives (1)
 
Gains (Losses) in Expense: Natural Gas
 
(79
)
 
(44
)
Indexed debt securities derivative
 
Gains (Losses) in Other Income (Expense)
 
65

 
(76
)
Total
 
$
27

 
$
(98
)
 ________________
(1)
The Gains (Losses) in Expense: Natural Gas includes $(79) million and $(38) million of costs in 2011 and 2012 , 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, 2011 and September 30, 2012 was $39 million and $7 million , respectively.  The aggregate fair value of assets that were posted as collateral was less than $1 million at both December 31, 2011 and September 30, 2012 .  If all derivative contracts (in a net liability position) containing credit risk contingent features were triggered at December 31, 2011 and September 30, 2012 , $38 million and $6 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.


10


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

Level 3: Inputs are unobservable for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. 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. Currently, CenterPoint Energy’s Level 3 assets and liabilities are comprised of physical forward contracts and options. Level 3 physical forward contracts are valued using a discounted cash flow model which includes illiquid forward price curve locations (ranging from $2.89 - $4.90 per one million British thermal units) as an unobservable input. Level 3 options are valued through Black-Scholes (including forward start) option models which include option volatilities (ranging from 0 - 67% ) as an unobservable input.  CenterPoint Energy’s Level 3 derivative assets and liabilities consist of both long and short positions (forwards and options) and their fair value is sensitive to forward prices and volatilities.  If forward prices decrease, CenterPoint Energy’s long forwards lose value whereas its short forwards gain in value.  If volatility decreases, CenterPoint Energy’s long options lose value whereas its short options gain in value.

CenterPoint Energy determines the appropriate level for each financial asset and liability on a quarterly basis and recognizes transfers between levels at the end of the reporting period.  For the nine months ended September 30, 2012, there were no transfers between Level 1 and 2 with regard to Natural Gas derivatives. CenterPoint Energy also recognizes purchases of Level 3 financial assets and liabilities at their fair market value at the end of the reporting period.

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, 2011 and September 30, 2012 , 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, 2011
 
 
 
 
 
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
Corporate equities
$
387

 
$

 
$

 
$

 
$
387

Investments, including money
market funds (2)
56

 

 

 

 
56

Natural gas derivatives
1

 
112

 
10

 
(16
)
 
107

Total assets
$
444

 
$
112

 
$
10

 
$
(16
)
 
$
550

Liabilities
 

 
 

 
 

 
 

 
 

Indexed debt securities derivative
$

 
$
197

 
$

 
$

 
$
197

Natural gas derivatives
19

 
101

 
4

 
(72
)
 
52

Total liabilities
$
19

 
$
298

 
$
4

 
$
(72
)
 
$
249

 ________________
(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 $56 million posted with the same counterparties.

(2)
Excludes money market fund investments included in Cash and cash equivalents.

11


 
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, 2012
 
 
 
 
 
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
Corporate equities
$
524

 
$

 
$

 
$

 
$
524

Investments, including money
market funds (2)
75

 

 

 

 
75

Natural gas derivatives
5

 
49

 
13

 
(16
)
 
51

Total assets
$
604

 
$
49

 
$
13

 
$
(16
)
 
$
650

Liabilities
 

 
 

 
 

 
 

 
 

Indexed debt securities derivative
$

 
$
273

 
$

 
$

 
$
273

Natural gas derivatives
8

 
28

 
12

 
(22
)
 
26

Total liabilities
$
8

 
$
301

 
$
12

 
$
(22
)
 
$
299

 ________________
(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 $6 million posted with the same counterparties.

(2)
Excludes money market fund investments included in Cash and cash equivalents.

The following table presents 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,
 
Nine Months Ended September 30,
 
2011
 
2012
 
2011
 
2012
 
(in millions)
Beginning balance
$
5

 
$
3

 
$
3

 
$
6

Total unrealized gain (losses) (1)
(1
)
 

 
3

 
4

Total settlements (1)
(1
)
 
(2
)
 
(3
)
 
(8
)
Transfers out of Level 3

 

 

 
(1
)
Ending balance (2)
$
3

 
$
1

 
$
3

 
$
1

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
)
 
$
2

 
$

 ________________
(1)
CenterPoint Energy did not have Level 3 unrealized gains (losses) or settlements related to price stabilization activities of the Natural Gas Distribution business segment for either the three or nine months ended September 30, 2011 or 2012 .

(2)
During both the three and nine months ended September 30, 2011 and 2012 , CenterPoint Energy did not have material Level 3 purchases, sales or significant transfers into Level 3.


12


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. These assets and liabilities, which are not measured at fair value in the Condensed Consolidated Balance Sheets but for which the fair value is disclosed, would be classified as Level 1 in the fair value hierarchy.
 
December 31, 2011
 
September 30, 2012
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
(in millions)
Financial liabilities:
 
 
 
 
 
 
 
Long-term debt
$
8,994

 
$
10,049

 
$
9,681

 
$
10,916


(7) Acquisition

On July 31, 2012, CenterPoint Energy purchased the 50% interest that it did not already own in Waskom Gas Processing Company (Waskom), a Texas general partnership, which owns and operates a natural gas processing plant and natural gas gathering assets, as well as other gathering and related assets from a third-party for approximately $273 million . The amount of the purchase price allocated to the acquisition of the 50% interest in Waskom was approximately $201 million , with the remaining purchase price allocated to the other gathering assets, based on a discounted cash flow methodology. The $273 million purchase price was allocated as follows: $253 million to property, plant and equipment; $16 million to goodwill; and the remaining balance to other assets and liabilities. The purchase of the 50% interest in Waskom was determined to be a business combination achieved in stages, and as such CenterPoint Energy recorded a pre-tax gain of approximately $136 million on July 31, 2012, which is the result of remeasuring its original 50% interest in Waskom to fair value. As a result of the purchase, CenterPoint Energy recorded goodwill of $24 million , which includes $17 million related to Waskom (including the re-measurement of its existing 50% interest) and $7 million related to the other gathering and related assets.

(8)
Goodwill

Goodwill by reportable business segment as of September 30, 2012 and changes in the carrying amount of goodwill for the nine months ended September 30, 2012 are as follows (in millions):
 
December 31, 2011
 
Impairment charge
 
Acquisition
 
September 30, 2012
Natural Gas Distribution
$
746

 
$

 
$

 
$
746

Interstate Pipelines
579

 

 

 
579

Competitive Natural Gas Sales and Services
335

 
252

 

 
83

Field Services
25

 

 
24

 
49

Other Operations
11

 

 

 
11

Total
$
1,696

 
$
252

 
$
24

 
$
1,468


CenterPoint Energy performs its goodwill impairment tests at least annually and evaluates goodwill when events or changes in circumstances indicate that its carrying value 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 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.


13


CenterPoint Energy performed its annual impairment test in the third quarter of 2012 and determined that a non-cash goodwill impairment charge in the amount of $252 million was required for the Competitive Natural Gas Sales and Services reportable segment. CenterPoint Energy also determined that no impairment charge was required for any other reportable segment.

CenterPoint Energy estimated the value of the Competitive Natural Gas Sales and Services reporting unit using an income approach. Under this approach, the fair value of the reporting unit is determined by using the present value of future expected cash flows, which are based on management projections of revenue growth, gross margin, and overall market conditions. These estimated future cash flows are then discounted using a rate that approximates the weighted average cost of capital of a market participant.

The Competitive Natural Gas Sales and Services reporting unit fair value analysis resulted in an implied fair value of goodwill of $83 million for this reporting unit, and as a result, a non-cash impairment charge in the amount of $252 million was recorded in the third quarter of 2012. The adverse wholesale market conditions facing CenterPoint Energy's energy services business, specifically the prospects for continued low geographic and seasonal price differentials for natural gas, led to a reduction in the estimate of the fair value of goodwill associated with this reporting unit.

(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, 2011 , 426,030,511  shares of CenterPoint Energy, Inc. common stock were issued and 426,030,345  shares were outstanding. At September 30, 2012 , 427,441,904  shares of CenterPoint Energy, Inc. common stock were issued and 427,441,738 shares were outstanding. Outstanding common shares exclude 166 treasury shares at both December 31, 2011 and September 30, 2012 .

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

(a)
Short-term Borrowings

Inventory Financing . Gas Operations has entered into asset management agreements associated with its utility distribution service in Arkansas, north Louisiana and Oklahoma that extend through March 2015. 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 $62 million and $53 million as of December 31, 2011 and September 30, 2012 , respectively.

(b)
Long-term Debt

Transition Bonds. In January 2012, CenterPoint Energy Transition Bond Company IV, LLC, a new special purpose subsidiary of CenterPoint Houston, issued $1.695 billion of transition bonds in three tranches with interest rates ranging from 0.9012% to 3.0282% and final maturity dates ranging from April 15, 2018 to October 15, 2025 . The transition bonds will be repaid over time through a charge imposed on customers in CenterPoint Houston’s service territory.

Pollution Control Bonds. In February 2012, CenterPoint Energy purchased $275 million aggregate principal amount of pollution control bonds issued on its behalf at 100% of their principal amount plus accrued interest pursuant to the mandatory tender provisions of the bonds. The purchased pollution control bonds will remain outstanding and may be remarketed. Prior to the purchase, the pollution control bonds had fixed interest rates ranging from 5.15% to 5.95% . Additionally, in March 2012, CenterPoint Energy redeemed $100 million aggregate principal amount of pollution control bonds issued on its behalf at 100% of their principal amount plus accrued interest pursuant to the optional redemption provisions of the bonds. The redeemed pollution control bonds had a fixed interest rate of 5.25% .

General Mortgage Bonds. In August 2012, CenterPoint Houston issued $300 million of 2.25% general mortgage bonds due 2022 and $500 million of 3.55% general mortgage bonds due 2042 . The net proceeds from the sale of the bonds were used to fund a portion of the redemption of the general mortgage bonds discussed below.

In August 2012, CenterPoint Houston redeemed $300 million principal amount of its 5.75% general mortgage bonds due 2014 at a price of 107.332% of their principal amount and $500 million principal amount of its 7.00% general mortgage bonds due 2014 at a price of 109.397% of their principal amount. Redemption premiums for the two series aggregated approximately $69 million and were deferred as regulatory assets.


14


Revolving Credit Facilities. As of December 31, 2011 and September 30, 2012 , CenterPoint Energy, CenterPoint Houston and CERC Corp. had the following revolving credit facilities and utilization of such facilities (in millions):
 
 
 
December 31, 2011
 
September 30, 2012
 
Size of
Facility
 
Loans
 
Letters
of Credit
 
Commercial
Paper
 
Loans
 
Letters
of Credit
 
Commercial
Paper
CenterPoint Energy
$
1,200

 
$

 
$
16

 
$

 
$

 
$
7

 
$

CenterPoint Houston
300

 

 
4

 

 

 
4

 

CERC Corp.
950

 

 

 
285

 

 

 

Total
$
2,450

 
$

 
$
20

 
$
285

 
$

 
$
11

 
$


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 150 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.

CenterPoint Houston’s $300 million credit facility, which is scheduled to terminate September 9, 2016, can be drawn at LIBOR plus 125 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.

(11)
Income Taxes

The effective tax rate for the three and nine months ended September 30, 2012 was 92% and 48% , respectively, compared to 35% and 36% for the same periods in 2011. The increase in the effective tax rate for the three and nine months ended September 30, 2012 was primarily due to the unfavorable tax effect of the impairment of non-tax deductible goodwill of $252 million , partially offset by favorable tax adjustments, including the re-measurement of certain unrecognized tax benefits, of $18 million and $31 million for the three and nine months ended September 30, 2012, respectively, related to CenterPoint Energy’s Internal Revenue Service (IRS) settlement of tax years 2006 through 2009.

The following table summarizes CenterPoint Energy’s unrecognized tax benefits (expense) at December 31, 2011 and September 30, 2012 :
 
December 31,
2011
 
September 30,
2012
 
(in millions)
Unrecognized tax benefits (expense)
$
51

 
$
(13
)
Portion of unrecognized tax benefits that, if recognized,
would reduce the effective income tax rate
21

 
4

Interest accrued on unrecognized tax benefits
(1
)
 
(8
)

CenterPoint Energy does not expect the change to the amount of unrecognized tax benefits over the twelve months ending September 30, 2013 to materially impact the financial position of CenterPoint Energy.
  
CenterPoint Energy's settlement with the IRS for tax years 2008 and 2009 was approved by the Joint Committee on Taxation during the third quarter of 2012. In September 2012, the IRS commenced its examination of CenterPoint Energy’s 2011 consolidated federal income tax return in conjunction with its review of CenterPoint Energy's 2010 consolidated federal income tax return.

15



(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, 2011 and September 30, 2012 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, 2012 , minimum payment obligations for natural gas supply commitments are approximately $143 million for the remaining three months in 2012, $437 million in 2013, $352 million in 2014, $216 million in 2015, $150 million in 2016 and $251 million after 2016.

(b)
Long-Term Gas Gathering and Treating Agreements

CenterPoint Energy Field Services, LLC (CEFS) has 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 Texas and Louisiana.  Under the long-term agreements, Encana or Shell may elect to require CEFS to expand the capacity of its gathering systems by up to an additional 1.3 Bcf per day.  CEFS estimates that the cost to expand the capacity of its gathering systems by an additional 1.3 Bcf per day would be as much as $440 million .  Encana and Shell would provide incremental volume commitments in connection with an election to expand system 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 have been named as defendants in certain lawsuits described below. Under a master separation agreement between CenterPoint Energy and a former subsidiary, Reliant Resources, 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 RRI changed its name to RRI Energy, Inc. In December 2010, Mirant Corporation merged with and became a wholly owned subsidiary of RRI, and RRI changed its name to GenOn Energy, Inc. (GenOn). In July 2012, GenOn and NRG entered into a definitive merger agreement providing for NRG's acquisition of GenOn, subject to certain conditions. None of the sale of the retail business, the merger with Mirant Corporation, or the pending acquisition of GenOn by NRG 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 were 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 since 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. In September 2012, the Nevada Supreme Court affirmed the dismissal. In October 2012, the Nevada Supreme Court granted the plaintiffs’ motion to stay the dismissal of this case pending the filing and final disposition of their petition for a writ of certiorari to the Supreme Court of the United States. 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

16


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. In July 2012, the plaintiffs filed a motion to dismiss certain defendants from both lawsuits, including the remaining CenterPoint Energy defendants.

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.

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, 2012 , CERC had accrued $13 million for remediation of these Minnesota sites and the estimated range of possible remediation costs for the sites CERC believes it has responsibility for 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 Utilities Commission includes approximately $285,000 annually in rates to fund normal on-going remediation costs.  As of September 30, 2012 , CERC had collected $5.7 million from insurance companies to be used to mitigate future environmental costs.

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 and CenterPoint Energy do not expect the ultimate outcome of these investigations will have a material adverse impact on the financial condition, results of operations or cash flows of either CenterPoint Energy or CERC.

Asbestos. Some facilities owned by CenterPoint Energy contain or have contained asbestos insulation and other asbestos-containing materials. CenterPoint Energy or its subsidiaries have been named, along with numerous others, as a defendant in lawsuits filed by a number of individuals who claim injury due to exposure to asbestos. Some of the claimants have worked at locations owned by subsidiaries of 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 and early 2005, CenterPoint Energy sold its generating business, to which most of these claims relate, to a company which is now an affiliate of NRG. Under the terms of the arrangements regarding separation of the generating business from CenterPoint Energy and its sale of that business, ultimate financial responsibility for uninsured losses from claims relating to the generating business has been assumed by the NRG affiliate, 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 by the NRG affiliate. 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, based on its experience to date, does not expect 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 identifies the presence of environmental contaminants on property where its subsidiaries conduct or have conducted operations.  Other such sites involving contaminants may be identified in the future.  CenterPoint Energy has and expects to continue to remediate identified sites consistent with its legal obligations. From

17


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 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 $77 million as of September 30, 2012 . Based on market conditions in the fourth quarter of 2012 at the time the most recent annual calculation was made under the agreement, GenOn was not obligated to post any security. As a result, CenterPoint Energy currently anticipates returning to GenOn in December 2012 the approximately $28 million of aggregate collateral previously posted by GenOn under the agreement. If GenOn should fail to perform the contractual obligations, CERC could have to honor its guarantee and, in such event, any collateral provided as security may be insufficient to satisfy CERC’s obligations.

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(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,
 
2011
 
2012
 
2011
 
2012
 
(in millions, except share and per share amounts)
Basic earnings per share calculation:
 
 
 
 
 
 
 
Income before extraordinary item
$
386

 
$
10

 
$
653

 
$
283

Extraordinary item, net of tax
587

 

 
587

 

Net income
$
973

 
$
10

 
$
1,240

 
$
283

 
 
 
 
 
 
 
 
Weighted average shares outstanding
425,885,000

 
427,406,000

 
425,517,000

 
427,086,000

 
 
 
 
 
 
 
 
Basic earnings per share:
 

 
 

 
 
 
 
Income before extraordinary item
$
0.90

 
$
0.02

 
$
1.53

 
$
0.66

Extraordinary item, net of tax
1.38

 

 
1.38

 

Net income
$
2.28

 
$
0.02

 
$
2.91

 
$
0.66

 
 
 
 
 
 
 
 
Diluted earnings per share calculation:
 

 
 

 
 

 
 

Net income
$
973

 
$
10

 
$
1,240

 
$
283

 
 
 
 
 
 
 
 
Weighted average shares outstanding
425,885,000

 
427,406,000

 
425,517,000

 
427,086,000

Plus: Incremental shares from assumed conversions:
 

 
 

 
 

 
 

Stock options
399,000

 
230,000

 
377,000

 
222,000

Restricted stock
2,558,000

 
2,347,000

 
2,558,000

 
2,347,000

Weighted average shares assuming dilution
428,842,000

 
429,983,000

 
428,452,000

 
429,655,000

 
 
 
 
 
 
 
 
Diluted earnings per share:
 

 
 

 
 

 
 

Income before extraordinary item
$
0.90

 
$
0.02

 
$
1.52

 
$
0.66

Extraordinary item, net of tax
1.37

 

 
1.37

 

Net income
$
2.27

 
$
0.02

 
$
2.89

 
$
0.66

 
(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. 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.


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

Field Services
108

 
9

 
61

Other Operations
3

 

 
4

Eliminations

 
(49
)
 

Consolidated
$
1,881

 
$

 
$
357

 
 
 
 
 
 
 
For the Three Months Ended September 30, 2012
 
Revenues from
External
Customers
 
Net
Intersegment
Revenues
 
Operating
Income (Loss)
Electric Transmission & Distribution
$
748

(1)  
$

 
$
242

Natural Gas Distribution
351

 
4

 
5

Competitive Natural Gas Sales and Services
382

 
7

 
(259
)
Interstate Pipelines
92

 
30

 
48

Field Services
129

 
12

 
55

Other Operations
3

 

 
(3
)
Eliminations

 
(53
)
 

Consolidated
$
1,705

 
$

 
$
88


 
For the Nine Months Ended September 30, 2011
 
 
 
 
Revenues from
External
Customers
 
Net
Intersegment
Revenues
 
Operating
Income
 
Total Assets
as of December 31,
2011
 
Electric Transmission & Distribution
$
1,802

(1)  
$

 
$
530

 
$
11,221

 
Natural Gas Distribution
2,034

 
14

 
153

 
4,636

 
Competitive Natural Gas Sales and Services
1,858

 
18

 
3

 
1,089

 
Interstate Pipelines
328

 
96

 
196

 
3,867

 
Field Services
274

 
31

 
136

 
1,894

 
Other Operations
9

 

 
6