CenterPoint Energy, Inc.
CENTERPOINT ENERGY INC (Form: 10-Q, Received: 05/02/2013 08:16:24)

 
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 MARCH 31, 2013
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 April 18, 2013 , CenterPoint Energy, Inc. had 428,530,395  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 MARCH 31, 2013

TABLE OF CONTENTS

PART I.
 
FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2012 and 2013 (unaudited)
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2012 and 2013 (unaudited)
 
 
 
 
 
 
 
 
 
December 31, 2012 and March 31, 2013 (unaudited)
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2012 and 2013 (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 territories 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 the available 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, including the impact of severe weather events on operations and capital;

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;


ii


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;

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.), a wholly owned subsidiary of NRG Energy, Inc. (NRG), 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 and 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, joint ventures and 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;

the performance of our midstream partnership (Midstream Partnership) with OGE Energy Corp. (OGE) and affiliates of ArcLight Capital Partners, LLC (ArcLight), including whether or not the Midstream Partnership is able to achieve anticipated operational and commercial synergies, or realize expected growth opportunities;

the integration of the operations of the businesses we contributed to the Midstream Partnership with those contributed by OGE and ArcLight;

future economic conditions in regional and national markets and their effect on sales, prices and costs; 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, 2012 , which is incorporated herein by reference, and in Item 1A of Part II of this Quarterly Report on Form 10-Q, 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
 
March 31,
 
2012
 
2013
 
 
 
 
Revenues
$
2,084

 
$
2,388

 
 
 
 
Expenses:
 

 
 

Natural gas
969

 
1,224

Operation and maintenance
455

 
484

Depreciation and amortization
224

 
240

Taxes other than income taxes
98

 
108

Total
1,746

 
2,056

Operating Income
338

 
332

 
 
 
 
Other Income (Expense):
 

 
 

Gain on marketable securities
46

 
74

Loss on indexed debt securities
(33
)
 
(51
)
Interest and other finance charges
(110
)
 
(98
)
Interest on transition and system restoration bonds
(37
)
 
(35
)
Equity in earnings of unconsolidated affiliates
9

 
5

Other, net
6

 
6

Total
(119
)
 
(99
)
 
 
 
 
Income Before Income Taxes
219

 
233

Income tax expense
72

 
86

Net Income
$
147

 
$
147

 
 
 
 
Basic Earnings Per Share
$
0.34

 
$
0.34

 
 
 
 
Diluted Earnings Per Share
$
0.34

 
$
0.34

 
 
 
 
Dividends Declared Per Share
$
0.2025

 
$
0.2075

 
 
 
 
Weighted Average Shares Outstanding, Basic
426

 
428

 
 
 
 
Weighted Average Shares Outstanding, Diluted
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)

 
For the Three Months Ended
 
March 31,
 
2012
 
2013
Net income
$
147

 
$
147

Other comprehensive income:
 

 
 

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

 
3

Total
2

 
3

Comprehensive income
$
149

 
$
150


2

Table of Contents


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

ASSETS

 
December 31,
2012
 
March 31,
2013
Current Assets:
 
 
 
Cash and cash equivalents ($266 and $166 related to VIEs at December 31, 2012 and March 31, 2013, respectively)
$
646

 
$
245

Investment in marketable securities
540

 
614

Accounts receivable, net ($68 and $65 related to VIEs at December 31, 2012 and March 31, 2013, respectively)
768

 
860

Accrued unbilled revenues
339

 
276

Natural gas inventory
145

 
22

Materials and supplies
177

 
181

Non-trading derivative assets
36

 
18

Taxes receivable
7

 
10

Prepaid expenses and other current assets ($54 and $53 related to VIEs at December 31, 2012 and March 31, 2013, respectively)
216

 
137

Total current assets
2,874

 
2,363

 
 
 
 
Property, Plant and Equipment:
 

 
 

Property, plant and equipment
18,377

 
18,598

Less accumulated depreciation and amortization
4,780

 
4,890

Property, plant and equipment, net
13,597

 
13,708

 
 
 
 
Other Assets:
 

 
 

Goodwill
1,468

 
1,468

Regulatory assets ($3,545 and $3,470 related to VIEs at December 31, 2012 and March 31, 2013, respectively)
4,324

 
4,229

Non-trading derivative assets
6

 
5

Investment in unconsolidated affiliates
405

 
400

Other
197

 
197

Total other assets
6,400

 
6,299

 
 
 
 
Total Assets
$
22,871

 
$
22,370


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,
2012
 
March 31,
2013
Current Liabilities:
 
 
 
Short-term borrowings
$
38

 
$

Current portion of VIE transition and system restoration bonds long-term debt
447

 
417

Current portion of indexed debt
138

 
139

Current portion of other long-term debt
815

 
524

Indexed debt securities derivative
268

 
319

Accounts payable
561

 
510

Taxes accrued
160

 
123

Interest accrued
150

 
128

Non-trading derivative liabilities
14

 
10

Accumulated deferred income taxes, net
604

 
609

Other
380

 
347

Total current liabilities
3,575

 
3,126

 
 
 
 
 
 
 
 
Other Liabilities:
 

 
 

Accumulated deferred income taxes, net
4,153

 
4,211

Non-trading derivative liabilities
2

 
2

Benefit obligations
1,143

 
1,137

Regulatory liabilities
1,093

 
1,135

Other
247

 
258

Total other liabilities
6,638

 
6,743

 
 
 
 
Long-term Debt:
 

 
 

VIE transition and system restoration bonds
3,400

 
3,269

Other
4,957

 
4,861

Total long-term debt
8,357

 
8,130

 
 
 
 
Commitments and Contingencies (Note 12)


 


 
 
 
 
Shareholders’ Equity:
 

 
 

Common stock (427,599,564 shares and 428,523,140 shares outstanding at December 31, 2012 and March 31, 2013, respectively)
4

 
4

Additional paid-in capital
4,130

 
4,139

Retained earnings
302

 
360

Accumulated other comprehensive loss
(135
)
 
(132
)
Total shareholders’ equity
4,301

 
4,371

 
 
 
 
Total Liabilities and Shareholders’ Equity
$
22,871

 
$
22,370


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)
 
Three Months Ended March 31,
 
2012
 
2013
Cash Flows from Operating Activities:
 
 
 
Net income
$
147

 
$
147

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
224

 
240

Amortization of deferred financing costs
8

 
8

Deferred income taxes
64

 
57

Unrealized gain on marketable securities
(46
)
 
(74
)
Unrealized loss on indexed debt securities
33

 
51

Write-down of natural gas inventory
4

 

Equity in earnings of unconsolidated affiliates, net of distributions
2

 
4

Changes in other assets and liabilities:
 
 
 
Accounts receivable and unbilled revenues, net
193

 
(66
)
Inventory
94

 
119

Taxes receivable

 
(3
)
Accounts payable
(172
)
 
(33
)
Fuel cost recovery
(43
)
 
105

Non-trading derivatives, net
(3
)
 
7

Margin deposits, net
14

 
12

Interest and taxes accrued
(87
)
 
(76
)
Net regulatory assets and liabilities
42

 
39

Other current assets
(7
)
 
8

Other current liabilities
(57
)
 
(32
)
Other assets
2

 
1

Other liabilities
8

 
7

Other, net
4

 
12

Net cash provided by operating activities
424

 
533

 
 
 
 
Cash Flows from Investing Activities:
 

 
 

Capital expenditures
(264
)
 
(271
)
Decrease (increase) in restricted cash of transition and system restoration bond companies
(15
)
 
1

Investment in unconsolidated affiliates
(4
)
 

Other, net
(9
)
 
(4
)
Net cash used in investing activities
(292
)
 
(274
)
 
 
 
 
Cash Flows from Financing Activities:
 

 
 

Decrease in short-term borrowings, net
(53
)
 
(38
)
Proceeds from (payments of) commercial paper, net
(285
)
 
61

Proceeds from long-term debt
1,695

 

Payments of long-term debt
(526
)
 
(612
)
Debt issuance costs
(8
)
 

Payment of common stock dividends
(87
)
 
(89
)
Proceeds from issuance of common stock, net
2

 
1

Other, net
6

 
17

Net cash provided by (used in) financing activities
744

 
(660
)
 
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents
876

 
(401
)
Cash and Cash Equivalents at Beginning of Period
220

 
646

Cash and Cash Equivalents at End of Period
$
1,096

 
$
245

 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 

 
 

Cash Payments:
 

 
 

Interest, net of capitalized interest
$
178

 
$
147

Income tax refunds, net
(8
)
 
(3
)
Non-cash transactions:
 
 
 
Accounts payable related to capital expenditures
88

 
92

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, 2012 (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 March 31, 2013 , 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 March 31, 2013 , 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 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

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (ASU 2013-02). The objective of ASU 2013-02 is to improve the transparency of changes in other comprehensive income and items reclassified out of Accumulated Other Comprehensive Income in financial statements. This new guidance is effective for a reporting entity's first reporting period beginning after December 15, 2012 and should be applied prospectively. CenterPoint Energy's adoption of this new guidance did not have a material impact on its financial position, results of operations or cash flows.

In December 2011 and January 2013, the FASB issued Accounting Standards Update No. 2011-11, “Disclosures About Offsetting Assets and Liabilities” (ASU 2011-11) and No. 2013-01, “Clarifying the Scope of Disclosures About Offsetting Assets and Liabilities” (ASU 2013-01), respectively. The objective of ASU 2011-11 is to enhance disclosures about the nature of an

6


entity's rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The objective of ASU 2013-01 is to clarify which instruments and transactions are subject to ASU 2011-11. Both ASU 2011-11 and ASU 2013-01 are effective for a reporting entity's first reporting period beginning on or after January 1, 2013 and should be applied retrospectively. CenterPoint Energy's adoption of this new guidance did not have a material impact on its financial position, results of operations or cash flows.

Management believes that 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 March 31,
 
2012
 
2013
 
Pension
Benefits   (1)
 
Postretirement
Benefits
 
Pension
Benefits   (1)
 
Postretirement
Benefits
 
(in millions)
Service cost
$
9

 
$

 
$
11

 
$

Interest cost
25

 
6

 
23

 
5

Expected return on plan assets
(30
)
 
(2
)
 
(34
)
 
(2
)
Amortization of prior service credit
2

 
1

 
2

 

Amortization of net loss
15

 
1

 
16

 
2

Amortization of transition obligation

 
2

 

 
2

Net periodic cost
$
21

 
$
8

 
$
18

 
$
7

 
________________
(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's changes in accumulated comprehensive loss related to defined benefit and postretirement plans are as follows:
 
 
Three Months Ended March 31, 2013
 
 
Pension and Postretirement Plans
 
 
(in millions)
 
 
 
Beginning Balance
 
$
(132
)
Amounts reclassified from accumulated other comprehensive income:
 
 
     Prior service cost (1)
 
1

     Actuarial gains (1)
 
4

Total reclassifications from accumulated other comprehensive income
 
5

Tax expense
 
(2
)
Net current period other comprehensive income
 
3

Ending Balance
 
$
(129
)
________________
(1)
These accumulated other comprehensive components are included in the computation of net periodic cost.

CenterPoint Energy expects to contribute a total of approximately $92 million to its pension plans in 2013, of which approximately $8 million was contributed during the three months ended March 31, 2013 . A contribution of approximately $27 million was made in April 2013.

CenterPoint Energy expects to contribute a total of approximately $17 million to its postretirement benefits plan in 2013, of which approximately $4 million was contributed during the three months ended March 31, 2013 .

7



(4)
Regulatory Accounting

As of March 31, 2013 , CenterPoint Energy has not recognized an allowed equity return of $545 million because such return will be recognized as it is recovered in rates. During both the three months ended March 31, 2012 and 2013 , CenterPoint Houston recognized approximately $8 million of the allowed equity return not previously recognized.

(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.

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 and Oklahoma. Gas Operations in Texas and Minnesota 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 these jurisdictions. 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 are based on ten -year normal weather. During the three months ended March 31, 2012 and 2013 , CenterPoint Energy recognized gains of $6 million and losses of $3 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 four tables provide a balance sheet overview of CenterPoint Energy’s Derivative Assets and Liabilities as of December 31, 2012 and March 31, 2013 , while the last table provides a breakdown of the related income statement impacts for the three months ended March 31, 2012 and 2013 .
Fair Value of Derivative Instruments
 
 
 
 
December 31, 2012
Total derivatives not designated
as hedging instruments
 
Balance Sheet
Location
 
Derivative
Assets
Fair Value
 
Derivative
Liabilities
Fair Value
 
 
 
 
(in millions)
Natural gas derivatives (1) (2)
 
Current Assets: Non-trading derivative assets
 
$
37

 
$
1

Natural gas derivatives (1) (2)
 
Other Assets: Non-trading derivative assets
 
6

 

Natural gas derivatives (1) (2)
 
Current Liabilities: Non-trading derivative liabilities
 
5

 
27

Natural gas derivatives (1) (2)
 
Other Liabilities: Non-trading derivative liabilities
 
1

 
4

Indexed debt securities derivative
 
Current Liabilities
 

 
268

Total                                                                          
 
$
49

 
$
300

 ________________
(1)
The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 489 billion cubic feet (Bcf) or a net 101  Bcf long position.  Of the net long position, basis swaps constitute 73  Bcf.
 
(2)
Natural gas contracts are presented on a net basis in the Condensed Consolidated Balance Sheets. Natural gas contracts are subject to master netting arrangements. This netting applies to all undisputed amounts due or past due and causes derivative assets (liabilities) to be ultimately presented net in a liability (asset) account within the Condensed Consolidated Balance Sheets. The net of total non-trading derivative assets and liabilities was a $26 million asset as shown on CenterPoint Energy’s Condensed Consolidated Balance Sheets (and as detailed in the table below), and was comprised of the natural gas contracts derivative assets and liabilities separately shown above offset by collateral netting of $9 million :
Offsetting of Natural Gas Derivative Assets and Liabilities
 
 
December 31, 2012
 
 
Gross Amounts   Recognized (1)
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amount Presented in the Consolidated Balance Sheets (2)
 
 
(in millions)
Current Assets: Non-trading derivative assets
 
$
42

 
$
(6
)
 
$
36

Other Assets: Non-trading derivative assets
 
7

 
(1
)
 
6

Current Liabilities: Non-trading derivative liabilities
 
(28
)
 
14

 
(14
)
Other Liabilities: Non-trading derivative liabilities
 
(4
)
 
2

 
(2
)
Total
 
$
17

 
$
9

 
$
26

________________
(1)
Gross Amounts Recognized contain some derivative assets and liabilities that are not subject to master netting arrangements.

(2)
The derivative assets and liabilities on the Consolidated Balance Sheets exclude accounts receivable or accounts payable that, should they exist, could be used as offsets to these balances in the event of a default.


9


Fair Value of Derivative Instruments
 
 
 
 
March 31, 2013
Total derivatives not designated
as hedging instruments
 
Balance Sheet
Location
 
Derivative
Assets
Fair Value
 
Derivative
Liabilities
Fair Value
 
 
 
 
(in millions)
Natural gas derivatives (1) (2)
 
Current Assets: Non-trading derivative assets
 
$
26

 
$
8

Natural gas derivatives (1) (2)
 
Other Assets: Non-trading derivative assets
 
5

 
1

Natural gas derivatives (1) (2)
 
Current Liabilities: Non-trading derivative liabilities
 
1

 
11

Natural gas derivatives (1) (2)
 
Other Liabilities: Non-trading derivative liabilities
 
1

 
2

Indexed debt securities derivative
 
Current Liabilities
 

 
319

Total                                                                          
 
$
33

 
$
341

 ________________
(1)
The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 492  Bcf or a net 107  Bcf long position.  Of the net long position, basis swaps constitute 57  Bcf.

(2)
Natural gas contracts are presented on a net basis in the Condensed Consolidated Balance Sheets. Natural gas contracts are subject to master netting arrangements. This netting applies to all undisputed amounts due or past due and causes derivative assets (liabilities) to be ultimately presented net in a liability (asset) account within the Condensed Consolidated Balance Sheets. The net of total non-trading derivative assets and liabilities was an $11 million asset as shown on CenterPoint Energy’s Condensed Consolidated Balance Sheets (and as detailed in the table below), and was comprised of the natural gas contracts derivative assets and liabilities separately shown above offset by collateral netting of less than $1 million :
Offsetting of Natural Gas Derivative Assets and Liabilities
 
 
March 31, 2013
 
 
Gross Amounts   Recognized (1)
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amount Presented in the Consolidated Balance Sheets (2)
 
 
(in millions)
Current Assets: Non-trading derivative assets
 
$
27

 
$
(9
)
 
$
18

Other Assets: Non-trading derivative assets
 
6

 
(1
)
 
5

Current Liabilities: Non-trading derivative liabilities
 
(19
)
 
9

 
(10
)
Other Liabilities: Non-trading derivative liabilities
 
(3
)
 
1

 
(2
)
Total
 
$
11

 
$

 
$
11

________________
(1)
Gross Amounts Recognized contain some derivative assets and liabilities that are not subject to master netting arrangements.

(2)
The derivative assets and liabilities on the Consolidated Balance Sheets exclude accounts receivable or accounts payable that, should they exist, could be used as offsets to these balances in the event of a default.

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.

10


Income Statement Impact of Derivative Activity
 
 
 
 
Three Months Ended March 31,
Total derivatives not designated
as hedging instruments
 
Income Statement Location
 
2012
 
2013
 
 
 
 
(in millions)
Natural gas derivatives
 
Gains (Losses) in Revenue
 
$
51

 
$
(14
)
Natural gas derivatives (1)
 
Gains (Losses) in Expense: Natural Gas
 
(81
)
 
16

Indexed debt securities derivative
 
Gains (Losses) in Other Income (Expense)
 
(33
)
 
(51
)
Total
 
$
(63
)
 
$
(49
)
 
 ________________
(1)
The Gains (Losses) in Expense: Natural Gas includes $(38) million and $-0- of costs in 2012 and 2013 , 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, 2012 and March 31, 2013 was $5 million and $3 million , respectively.  The aggregate fair value of assets that were posted as collateral was less than $1 million at both December 31, 2012 and March 31, 2013 .  If all derivative contracts (in a net liability position) containing credit risk contingent features were triggered at December 31, 2012 and March 31, 2013 , $5 million and $2 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 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 $3.71 - $4.75 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 - 49% ) 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 three months ended March 31, 2013 , there were no transfers

11


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, 2012 and March 31, 2013 , 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, 2012
 
 
 
 
 
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
Corporate equities
$
542

 
$

 
$

 
$

 
$
542

Investments, including money
market funds
76

 

 

 

 
76

Natural gas derivatives
1

 
40

 
7

 
(6
)
 
42

Total assets
$
619

 
$
40

 
$
7

 
$
(6
)
 
$
660

Liabilities
 

 
 

 
 

 
 

 
 

Indexed debt securities derivative
$

 
$
268

 
$

 
$

 
$
268

Natural gas derivatives
5

 
21

 
5

 
(15
)
 
16

Total liabilities
$
5

 
$
289

 
$
5

 
$
(15
)
 
$
284

 ________________
(1)
Amounts represent the impact of legally enforceable master netting arrangements that allow CenterPoint Energy to settle positive and negative positions and also include cash collateral of $9 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
March 31, 2013
 
 
 
 
 
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
Corporate equities
$
616

 
$

 
$

 
$

 
$
616

Investments, including money
market funds
75

 

 

 

 
75

Natural gas derivatives
4

 
23

 
6

 
(10
)
 
23

Total assets
$
695

 
$
23

 
$
6

 
$
(10
)
 
$
714

Liabilities
 

 
 

 
 

 
 

 
 

Indexed debt securities derivative
$

 
$
319

 
$

 
$

 
$
319

Natural gas derivatives
2

 
17

 
3

 
(10
)
 
12

Total liabilities
$
2

 
$
336

 
$
3

 
$
(10
)
 
$
331

 ________________
(1)
Amounts represent the impact of legally enforceable master netting arrangements that allow CenterPoint Energy to settle positive and negative positions and also include cash collateral of less than $1 million posted with the same counterparties.






12


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 March 31,
 
2012
 
2013
 
(in millions)
Beginning balance
$
6

 
$
2

Total gains (1)
2

 
2

Total settlements  (1)
(4
)
 
(1
)
Transfers out of Level 3
(1
)
 

Ending balance (2)
$
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
$

 
$
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 months ended March 31, 2012 or 2013 .

(2)
During both the three months ended March 31, 2012 and 2013 , CenterPoint Energy did not have significant Level 3 purchases, sales or transfers into Level 3.

Estimated Fair Value of Financial Instruments

The fair values of cash and cash equivalents, investments in debt and equity securities classified as “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 (ZENS) 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, 2012
 
March 31, 2013
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
(in millions)
Financial liabilities:
 
 
 
 
 
 
 
Long-term debt
$
9,619

 
$
10,807

 
$
9,071

 
$
10,151


(7) Midstream Partnership

On March 14, 2013, CenterPoint Energy entered into a Master Formation Agreement with OGE Energy Corp. (OGE) and affiliates of ArcLight Capital Partners, LLC (ArcLight), pursuant to which CenterPoint Energy, OGE and ArcLight agreed to form a midstream partnership (Midstream Partnership) that will initially operate as a private limited partnership. On May 1, 2013, the parties closed on the formation of the Midstream Partnership. In connection with the closing (i) CERC Corp. converted its direct wholly owned subsidiary, CenterPoint Energy Field Services, LLC, a Delaware limited liability company (CEFS), into a Delaware limited partnership that became the Midstream Partnership, (ii) CERC Corp. contributed to the Midstream Partnership its equity interests in each of CenterPoint Energy Gas Transmission Company, LLC (CEGT), CenterPoint Energy - Mississippi River Transmission, LLC (MRT), certain of its other midstream subsidiaries, and a 24.95% interest in Southeast Supply Header, LLC, and (iii) OGE and ArcLight indirectly contributed 100% of the equity interests in Enogex LLC to the Midstream Partnership. The Midstream Partnership is controlled equally by CERC Corp. and OGE.


13


(8)
Goodwill

Goodwill by reportable business segment as of December 31, 2012 and March 31, 2013 was as follows (in millions):
Natural Gas Distribution
 
$
746

Interstate Pipelines
 
579

Competitive Natural Gas Sales and Services
 
83

Field Services
 
49

Other Operations
 
11

Total
 
$
1,468


(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, 2012 , 427,599,730  shares of CenterPoint Energy, Inc. common stock were issued and 427,599,564  shares were outstanding. At March 31, 2013 , 428,523,306  shares of CenterPoint Energy, Inc. common stock were issued and 428,523,140 shares were outstanding. Outstanding common shares exclude 166 treasury shares at both December 31, 2012 and March 31, 2013 .

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

(a)
Short-term Borrowings

Inventory Financing . Gas Operations has asset management agreements associated with its utility distribution service in Arkansas, north Louisiana and Oklahoma that extend through 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 had an associated principal obligation of $38 million and $-0- as of December 31, 2012 and March 31, 2013 , respectively.

(b)
Long-term Debt

Credit Facilities. As of December 31, 2012 and March 31, 2013 , CenterPoint Energy, CenterPoint Houston and CERC Corp. had the following revolving credit facilities and utilization of such facilities (in millions):
 
 
 
December 31, 2012
 
March 31, 2013
 
Size of
Facility
 
Loans
 
Letters
of Credit
 
Commercial
Paper
 
Loans
 
Letters
of Credit
 
Commercial
Paper
CenterPoint Energy
$
1,200

 
$

 
$
7

 
$

 
$

 
$
7

 
$

CenterPoint Houston
300

 

 
4

 

 

 
4

 

CERC Corp.
950

 

 

 

 

 

 
61

Total
$
2,450

 
$

 
$
11

 
$

 
$

 
$
11

 
$
61


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.


14


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 months ended March 31, 2013 was 37% , compared to 33% for the same period in 2012. The lower effective tax rate for the three months ended March 31, 2012 was primarily due to an $11 million reduction to the uncertain tax liability related to a settlement with the Internal Revenue Service (IRS) of CenterPoint Energy's consolidated federal income tax returns for tax years 2006 and 2007.

On January 2, 2013, The American Taxpayer Relief Act of 2012 was signed into law. For CenterPoint Energy, the most significant provision is the extension for one year of the 50 percent bonus depreciation for qualified property. The provision applies to qualified property placed in service before January 1, 2014 (before January 1, 2015, for certain longer-lived and transportation assets). CenterPoint Energy has reflected the effect of the change in tax law in the three months ended March 31, 2013.

The following table summarizes CenterPoint Energy’s unrecognized tax benefits (expenses) at December 31, 2012 and March 31, 2013 :
 
December 31,
2012
 
March 31,
2013
 
(in millions)
Unrecognized tax expenses
$
(23
)
 
$
(23
)
Portion of unrecognized tax expenses that, if recognized,
would increase the effective income tax rate
(3
)
 
(3
)
Interest accrued on unrecognized tax expenses
(8
)
 
(8
)

CenterPoint Energy does not expect the change to the amount of unrecognized tax expenses over the twelve months ending March 31, 2014 to materially impact the financial position of CenterPoint Energy.
  
CenterPoint Energy's consolidated federal income tax returns have been audited by the IRS and settled through the 2009 tax year. CenterPoint Energy has filed claims for income tax refunds that are pending review by the IRS for tax years 2002, 2003 and 2004. CenterPoint Energy is currently under examination by the IRS for tax years 2010 and 2011. CenterPoint Energy has considered the effects of these examinations in its accrual for settled issues and liability for uncertain income tax positions as of March 31, 2013.

(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, 2012 and March 31, 2013 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 March 31, 2013 , minimum payment obligations for natural gas supply commitments are approximately $204 million for the remaining nine months in 2013, $328 million in 2014, $219 million in 2015, $152 million in 2016, $99 million in 2017 and $158 million after 2017.

(b)
Long-Term Agreements

Long-term Gas Gathering and Treating Agreements. 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

15


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.

Long-term Agreement with XTO Energy. In March 2013, CenterPoint Energy Bakken Crude Services, LLC (CEBCS), a wholly owned subsidiary of the Midstream Partnership, entered into a long-term agreement with XTO Energy Inc. (XTO), a subsidiary of Exxon Mobil Corporation, to provide gathering services for certain of XTO’s crude oil production through a new crude oil gathering and transportation pipeline system in North Dakota’s liquids-rich Bakken shale. The agreement with XTO was entered into pursuant to the open season announced by CEBCS in February 2013. Under the terms of the agreement, which includes volume commitments, CEBCS will provide service to XTO over a gathering system to be constructed by CEBCS in Dunn and McKenzie counties in North Dakota with a capacity of up to 19,500 barrels per day. CEBCS estimates that the construction of these facilities may cost as much as $125 million .
(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 certain 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 December 2012, NRG acquired GenOn through a merger in which GenOn became a wholly owned subsidiary of NRG. None of the sale of the retail business, the merger with Mirant Corporation, or the 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 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 appealed this ruling to the United States Court of Appeals for the Ninth Circuit, which reversed the trial court's dismissal of the plaintiffs' claims. The other defendants may seek rehearing en banc before the Ninth Circuit or seek further review by filing a writ of certiorari with the U.S. Supreme Court. 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 December 2012, the plaintiffs filed a petition for writ of certiorari with the Supreme Court of the United States. On April 1, 2013, the Supreme Court asked for a reply brief. 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 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

16


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 district court subsequently signed an order dismissing without prejudice certain defendants from both lawsuits, including the remaining CenterPoint Energy defendants.

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 March 31, 2013 , CERC had recorded a liability of $13 million for remediation of these Minnesota sites. The estimated range of possible remediation costs for the sites for which CERC believes it may have responsibility 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 March 31, 2013 , CERC had collected $5.9 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 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 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.


17


(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 $70 million as of March 31, 2013 .  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. If GenOn should fail to perform the contractual obligations, CERC could have to honor its guarantee and, in such event, any collateral then provided as security may be insufficient to satisfy CERC’s obligations.

CenterPoint Energy, Inc. has provided guarantees (CenterPoint Midstream Guarantees) with respect to the performance of certain obligations of the Midstream Partnership under long-term gas gathering and treating agreements with Encana and Shell. As of May 1, 2013, CenterPoint Energy, Inc. had guaranteed the Midstream Partnership's obligations up to an aggregate amount of $100 million under these agreements. CERC Corp. has provided guarantees (CERC Midstream Guarantees) with respect to the performance of certain obligations of the Midstream Partnership, CEGT and MRT under certain contractual arrangements with third parties, which guarantees are scheduled to expire between July 2013 and December 2018. The maximum aggregate amount payable by CERC Corp. under these guarantees is $157.2 million . The aggregate dollar amount of the obligations covered by the CERC Midstream Guarantees varies over time. During the month of April 2013, the obligations supported by the CERC Corp. Midstream Guarantees totaled less than $1 million . Under the terms of the omnibus agreement entered into in connection with the closing of the formation of the Midstream Partnership, the Midstream Partnership and CenterPoint Energy, Inc. have agreed to use commercially reasonable efforts and cooperate with each other to terminate the CenterPoint Midstream Guarantees and the CERC Midstream Guarantees, and to release CenterPoint Energy, Inc. or CERC Corp. from such guarantees within 180 days following the formation of the Midstream Partnership by causing the Midstream Partnership or one of its subsidiaries to enter into substitute guarantees or to assume the CenterPoint Midstream Guarantees or CERC Midstream Guarantees, as applicable. CERC Corp. has also provided a guarantee of collection of the Midstream Partnership's obligations under its $ 1.05 billion 3-year unsecured term loan facility, which guarantee is subordinated to all senior debt of CERC Corp.

(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 March 31,
 
2012
 
2013
 
(in millions, except share and per share amounts)
Net income
$
147

 
$
147

 
 
 
 
Basic weighted average shares outstanding
426,499,000

 
427,961,000

Plus: Incremental shares from assumed conversions:
 

 
 

Stock options
240,000

 
100,000

Restricted stock
1,753,000

 
1,611,000

Diluted weighted average shares
428,492,000

 
429,672,000

 
 
 
 
Basic earnings per share:
 

 
 

Net income
$
0.34

 
$
0.34

 
 
 
 
Diluted earnings per share:
 

 
 

Net income
$
0.34

 
$
0.34



18


(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.

Financial data for business segments are as follows (in millions):
 
For the Three Months Ended March 31, 2012
 
 
 
 
Revenues from
External
Customers
 
Net
Intersegment
Revenues
 
Operating
Income
 
Total Assets
as of December 31,
2012
 
Electric Transmission & Distribution
$
531

(1)  
$

 
$
107

 
$
11,174

 
Natural Gas Distribution
849

 
5

 
121

 
4,775

 
Competitive Natural Gas Sales and Services
520

 
5

 
1

 
839

 
Interstate Pipelines
82

 
45

 
60

 
4,004

 
Field Services
99

 
6

 
47

 
2,453

 
Other Operations
3

 

 
2

 
2,600

(2)  
Eliminations

 
(61
)
 

 
(2,974
)
 
Consolidated
$
2,084


$

 
$
338

 
$
22,871

 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended March 31, 2013
 
 
 
 
Revenues from
External
Customers
 
Net
Intersegment
Revenues
 
Operating
Income (Loss)
 
Total Assets
as of March 31,
2013
 
Electric Transmission & Distribution
$
532

(1)  
$

 
$
84

 
$
10,404

 
Natural Gas Distribution
1,043

 
8

 
139

 
4,734

 
Competitive Natural Gas Sales and Services
588

 
9

 
7

 
874

 
Interstate Pipelines
92

 
40

 
52

 
4,039

 
Field Services
130

 
11

 
53

 
2,450

 
Other Operations
3

 

 
(3
)
 
2,647

(2)  
Eliminations

 
(68
)
 

 
(2,778
)
 
Consolidated
$
2,388


$

 
$
332

 
$
22,370

 
 
________________
(1)
Sales to affiliates of NRG in the three months ended March 31, 2012 and 2013 represented approximately $140 million and $144 million , respectively, of CenterPoint Houston’s transmission and distribution revenues.  Sales to affiliates of Energy Future Holdings Corp. in both the three months ended March 31, 2012 and 2013 represented approximately $36 million of CenterPoint Houston’s transmission and distribution revenues.

(2)
Included in total assets of Other Operations as of December 31, 2012 and March 31, 2013 are pension and other postemployment related regulatory assets of $832 million and $817 million , respectively.

19



(15)
Subsequent Events

On April 25, 2013 , CenterPoint Energy’s board of directors declared a regular quarterly cash dividend of $0.2075 per share of common stock payable on June 10, 2013 , to shareholders of record as of the close of business on May 16, 2013 .






20


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

The following discussion and analysis should be read in combination with our Interim Condensed Financial Statements contained in this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2012 (2012 Form 10-K).

EXECUTIVE SUMMARY

Recent Events

Midstream Partnership. As previously disclosed, on March 14, 2013, we entered into a Master Formation Agreement (MFA) with OGE Energy Corp. (OGE) and affiliates of ArcLight Capital Partners, LLC (ArcLight), pursuant to which we, OGE and ArcLight agreed to form a midstream partnership (Midstream Partnership) that will initially operate as a private limited partnership. On May 1, 2013, the parties closed on the formation of the Midstream Partnership pursuant to the terms of the MFA. In connection with the closing (i) CenterPoint Energy Resources Corp. (CERC Corp. and, together with its subsidiaries, CERC) converted its direct wholly owned subsidiary, CenterPoint Energy Field Services, LLC, a Delaware limited liability company (CEFS), into a Delaware limited partnership that became the Midstream Partnership, (ii) CERC Corp. contributed to the Midstream Partnership its equity interests in each of CenterPoint Energy Gas Transmission Company, LLC (CEGT), CenterPoint Energy - Mississippi River Transmission, LLC (MRT), certain of its other midstream subsidiaries, and a 24.95% interest in Southeast Supply Header, LLC, and (iii) OGE and ArcLight indirectly contributed 100% of the equity interests in Enogex LLC to the Midstream Partnership.
After closing, CERC Corp. holds approximately 58.3% of the limited partner interests, OGE holds approximately 28.5% of the limited partner interests, and ArcLight holds approximately 13.2% of the limited partner interests in the Midstream Partnership. The Midstream Partnership is equally controlled by CERC Corp. and OGE, who each own 50% of the management rights in the general partner of the Midstream Partnership. CERC Corp. and OGE will also own a 40% and 60% interest, respectively, in any incentive distribution rights to be held by the general partner of the Midstream Partnership following an initial public offering of the Midstream Partnership. The general partner of the Midstream Partnership will initially be governed by a board made up of an equal number of representatives designated by each of us and OGE.
In connection with the closing, the Midstream Partnership (i) entered into a $1.05 billion 3-year senior unsecured term loan facility, (ii) repaid $1.05 billion of intercompany indebtedness owed to CERC, and (iii) entered into a $1.4 billion senior unsecured revolving credit facility.
Long-term Agreement with XTO Energy. In March 2013, CenterPoint Energy Bakken Crude Services, LLC (CEBCS), a wholly owned subsidiary of the Midstream Partnership, entered into a long-term agreement with XTO Energy Inc. (XTO), a subsidiary of Exxon Mobil Corporation, to provide gathering services for certain of XTO’s crude oil production through a new crude oil gathering and transportation pipeline system in North Dakota’s liquids-rich Bakken shale. The agreement with XTO was entered into pursuant to the open season announced by CEBCS in February 2013. Under the terms of the agreement, which includes volume commitments, CEBCS will provide service to XTO over a gathering system to be constructed by CEBCS in Dunn and McKenzie counties in North Dakota with a capacity of up to 19,500 barrels per day. CEBCS estimates that the construction of these facilities may cost as much as $125 million.
Debt Matters. In March 2013, CenterPoint Energy Houston Electric, LLC (CenterPoint Houston) retired $450 million aggregate principal amount of its 5.70% general mortgage bonds at their maturity. In April 2013, CERC retired approximately $365 million aggregate principal amount of its 7.875% senior notes at their maturity.


21

Table of Contents


CONSOLIDATED RESULTS OF OPERATIONS

All dollar amounts in the tables that follow are in millions, except for per share amounts.

 
Three Months Ended March 31,
 
2012
 
2013
Revenues
$
2,084

 
$
2,388

Expenses
1,746

 
2,056

Operating Income
338

 
332

Interest and Other Finance Charges
(110
)
 
(98
)
Interest on Transition and System Restoration Bonds
(37
)
 
(35
)
Equity in Earnings of Unconsolidated Affiliates
9

 
5

Other Income, net
19

 
29

Income Before Income Taxes
219

 
233

Income Tax Expense
72

 
86

Net Income
$
147

 
$
147

 
 
 
 
Basic Earnings Per Share
$
0.34

 
$
0.34

 
 
 
 
Diluted Earnings Per Share
$
0.34

 
$
0.34


Three months ended March 31, 2013 compared to three months ended March 31, 2012

We reported consolidated net income of $147 million ( $0.34 per diluted share) for both the three months ended March 31, 2013 and 2012 . Although net income was unchanged, increased gains on our marketable securities ($28 million) and decreased interest expense ($14 million) were offset by increased income tax expense ($14 million), increased loss on our indexed debt securities ($18 million), decreased operating income ($6 million) (discussed below by segment) and decreased equity in earnings of unconsolidated affiliates ($4 million).

Income Tax Expense

Our effective tax rate for the three months ended March 31, 2013 was 37% compared to 33% for the same period in 2012. The lower effective tax rate for the three months ended March 31, 2012 was primarily due to an $11 million reduction to the uncertain tax liability related to a settlement with the Internal Revenue Service of our consolidated federal income tax returns for tax years 2006 and 2007.

RESULTS OF OPERATIONS BY BUSINESS SEGMENT

The following table presents operating income (loss) (in millions) for each of our business segments for the three months ended March 31, 2012 and 2013 .  Included in revenues are intersegment sales. We account for intersegment sales as if the sales were to third parties, that is, at current market prices.
 
Three Months Ended March 31,
 
2012
 
2013
Electric Transmission & Distribution
$
107

 
$
84

Natural Gas Distribution
121

 
139

Competitive Natural Gas Sales and Services
1

 
7

Interstate Pipelines
60

 
52

Field Services
47

 
53

Other Operations
2

 
(3
)
Total Consolidated Operating Income
$
338

 
$
332



22

Table of Contents

Electric Transmission & Distribution

For information regarding factors that may affect the future results of operations of our Electric Transmission & Distribution business segment, please read “Risk Factors ─ Risk Factors Affecting Our Electric Transmission & Distribution Business,” “─ Risk Factors Associated with Our Consolidated Financial Condition” and “─ Risks Common to Our Businesses and Other Risks” in Item 1A of Part I of our 2012 Form 10-K and Item 1A of Part II of this Form 10-Q.

The following tables provide summary data of our Electric Transmission & Distribution business segment for the three months ended March 31, 2012 and 2013 (in millions, except throughput and customer data):
 
Three Months Ended March 31,
 
2012
 
2013
Revenues:
 
 
 
Electric transmission and distribution utility
$
415

 
$
421

Transition and system restoration bond companies
116

 
111

Total revenues
531

 
532

Expenses:
 

 
 

Operation and maintenance, excluding transition and system restoration bond companies
220

 
238

Depreciation and amortization, excluding transition and system restoration bond companies
73

 
79

Taxes other than income taxes
52

 
55

Transition and system restoration bond companies
79

 
76

Total expenses
424

 
448

Operating Income
$
107

 
$
84

 
 
 
 
Operating Income:
 

 
 

Electric transmission and distribution utility
$
70

 
$
49

Transition and system restoration bond companies (1)
37

 
35

Total segment operating income
$
107

 
$
84

 
 
 
 
Throughput (in gigawatt-hours (GWh)):
 

 
 

Residential
4,525

 
4,558

Total
16,544

 
16,361

 
 
 
 
Number of metered customers at end of period:
 

 
 

Residential
1,914,906

 
1,953,947

Total
2,167,052

 
2,211,481

  ________________
(1)
Represents the amount necessary to pay interest on the transition and system restoration bonds.

Three months ended March 31, 2013 compared to three months ended March 31, 2012

Our Electric Transmission & Distribution business segment reported operating income of $84 million for the three months ended March 31, 2013 , consisting of $49 million from the regulated electric transmission and distribution utility (TDU) and $35 million related to transition and system restoration bond companies (Bond Companies). For the three months ended March 31, 2012 , operating income totaled $107 million , consisting of $70 million from the TDU and $37 million related to Bond Companies. TDU operating income decreased $21 million primarily due to decreased right-of-way revenues ($9 million), increased operating and maintenance expenses ($6 million, excluding $12 million of higher transmission costs largely offset by increased transmission revenue) and increased depreciation expense ($6 million).





23

Table of Contents

Natural Gas Distribution

For information regarding factors that may affect the future results of operations of our Natural Gas Distribution business segment, please read “Risk Factors ─ Risk Factors Affecting Our Natural Gas Distribution, Competitive Natural Gas Sales and Services, Interstate Pipelines and Field Services Businesses,” “─ Risk Factors Associated with Our Consolidated Financial Condition” and “─ Risks Common to Our Businesses and Other Risks” in Item 1A of Part I of our 2012 Form 10-K and Item 1A of Part II of this Form 10-Q.

The following table provides summary data of our Natural Gas Distribution business segment for the three months ended March 31, 2012 and 2013 (in millions, except throughput and customer data):
 
Three Months Ended March 31,
 
2012
 
2013
Revenues
$
854

 
$
1,051

Expenses:
 
 
 
Natural gas
493

 
656

Operation and maintenance
163

 
170

Depreciation and amortization
43

 
45

Taxes other than income taxes
34

 
41

Total expenses
733

 
912

Operating Income
$
121

 
$
139

 
 
 
 
Throughput (in billion cubic feet (Bcf)):
 

 
 

Residential
62

 
80

Commercial and industrial
74

 
86

Total Throughput
136

 
166

 
 
 
 
Number of customers at end of period:
 

 
 

Residential
3,042,617

 
3,072,154

Commercial and industrial
246,852

 
247,067

Total
3,289,469

 
3,319,221


Three months ended March 31, 2013 compared to three months ended March 31, 2012

Our Natural Gas Distribution business segment reported operating income of $139 million for the three months ended March 31, 2013 compared to $121 million for the three months ended March 31, 2012 . Operating income increased $18 million primarily as a result of a return to more normal weather partially mitigated by weather hedges and weather normalization adjustments ($18 million). An increase in depreciation ($2 million) was offset by the addition of 30,000 customers ($1 million) and rate increases ($2 million). Increased expense related to energy efficiency programs ($7 million) and increased expense related to higher gross receipt taxes ($8 million) were offset by the related revenues.




24

Table of Contents

Competitive Natural Gas Sales and Services

For information regarding factors that may affect the future results of operations of our Competitive Natural Gas Sales and Services business segment, please read “Risk Factors ─ Risk Factors Affecting Our Natural Gas Distribution, Competitive Natural Gas Sales and Services, Interstate Pipelines and Field Services Businesses,” “─ Risk Factors Associated with Our Consolidated Financial Condition” and “─ Risks Common to Our Businesses and Other Risks” in Item 1A of Part I of our 2012 Form 10-K and Item 1A of Part II of this Form 10-Q.
 
The following table provides summary data of our Competitive Natural Gas Sales and Services business segment for the three months ended March 31, 2012 and 2013 (in millions, except throughput and customer data):
 
Three Months Ended March 31,
 
2012
 
2013
Revenues
$
525

 
$
597

Expenses:
 
 
 
Natural gas
511

 
578

Operation and maintenance
12

 
11

Depreciation and amortization
1

 
1

Total expenses
524

 
590

Operating Income
$
1

 
$
7

 
 
 
 
Throughput (in Bcf)
161

 
162

 
 
 
 
Number of customers at end of period
14,495

 
16,934


Three months ended March 31, 2013 compared to three months ended March 31, 2012

Our Competitive Natural Gas Sales and Services business segment reported operating income of $7 million for the three months ended March 31, 2013 compared to $1 million for the three months ended March 31, 2012 .  The increase in operating income of $6 million is due to a $9 million improvement generated from increased retail customers, increased margins and lower fixed costs from not renewing uneconomic transportation and storage contracts. A further $1 million improvement due to lower operation and maintenance expenses was offset by a $4 million decrease caused by the impact of mark-to-market accounting. Specifically, the first quarter of 2013 included a $5 million charge resulting from mark-to-market accounting for derivatives associated with certain forward natural gas purchases and sales used to lock in economic margins, compared to a $1 million charge for the same period of 2012.


25

Table of Contents

Interstate Pipelines

For information regarding factors that may affect the future results of operations of our Interstate Pipelines business segment, please read “Risk Factors ─ Risk Factors Affecting Our Natural Gas Distribution, Competitive Natural Gas Sales and Services, Interstate Pipelines and Field Services Businesses,” “─ Risk Factors Associated with Our Consolidated Financial Condition” and “─ Risks Common to Our Businesses and Other Risks” in Item 1A of Part I of our 2012 Form 10-K and Item 1A of Part II of this Form 10-Q.

The following table provides summary data of our Interstate Pipelines business segment for the three months ended March 31, 2012 and 2013 (in millions, except throughput data):
 
Three Months Ended March 31,
 
2012
 
2013
Revenues
$
127

 
$
132

Expenses:
 
 
 
Natural gas
7

 
20

Operation and maintenance
38

 
38

Depreciation and amortization
14

 
15

Taxes other than income taxes
8

 
7

Total expenses
67

 
80

Operating Income
$
60

 
$
52

 
 
 
 
Equity in earnings of unconsolidated affiliates
$
6

 
$
5

 
 
 
 
Transportation throughput (in Bcf)
378

 
365


Three months ended March 31, 2013 compared to three months ended March 31, 2012

Our Interstate Pipeline business segment reported operating income of $52 million for the three months ended March 31, 2013 compared to $60 million for the three months ended March 31, 2012 .  Operating income decreased $8 million partially as a result of a decline in off-system transportation revenues ($3 million) due to a lack of geographic price differentials, which also contributed to a reduction in pricing and volumes on some contract renewals. Declines in ancillary services ($5 million) also contributed to lower operating income.

Equity Earnings.   In addition, this business segment recorded equity income from its 50% interest in the Southeast Supply Header (SESH), a jointly owned pipeline, of $6 million and $5 million for the three months ended March 31, 2012