ceheform10_q.htm
 
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, 2008

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 1-3187

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC

(Exact name of registrant as specified in its charter)


Texas
22-3865106
(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)
______________________________


CenterPoint Energy Houston Electric, LLC meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.

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 R  No £

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 o
Accelerated filer o
Non-accelerated filer þ
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 £ No R

As of October 31, 2008, all 1,000 common shares of CenterPoint Energy Houston Electric, LLC were held by Utility Holding, LLC, a wholly owned subsidiary of CenterPoint Energy, Inc.
 
 
 

 

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2008

TABLE OF CONTENTS

PART I.
FINANCIAL INFORMATION
   
       
Item 1.
  1  
         
       
 
Three and Nine Months Ended September 30, 2007 and 2008 (unaudited)
  1  
         
       
 
December 31, 2007 and September 30, 2008 (unaudited)
  2  
         
       
 
Nine Months Ended September 30, 2007 and 2008 (unaudited)
  4  
         
    5  
         
Item 2.
  14  
         
  Item 4T.
  20  
         
PART II.
OTHER INFORMATION
     
         
Item 1.
  20  
         
   Item 1A.
  21  
         
Item 5.
  22  
         
Item 6.
  22  
 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

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

The following are some of the factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements:
 
 
·
the resolution of the true-up proceedings, including, in particular, the results of appeals to the courts regarding rulings obtained to date;
 
 
·
state and federal legislative and regulatory actions or developments, including deregulation or re-regulation of our business, environmental regulations, including regulations related to global climate change, and changes in or application of laws or regulations applicable to the various aspects of our business;
 
 
·
timely and appropriate legislative and regulatory actions allowing securitization or other recovery of costs associated with Hurricane Ike;
 
 
·
timely and appropriate rate actions and increases, allowing recovery of costs, and a reasonable return on investment;
 
 
·
industrial, commercial and residential growth in our service territory and changes in market demand and demographic patterns;
 
 
·
weather variations and other natural phenomena;
 
 
·
changes in interest rates or rates of inflation;
 
 
·
commercial bank and financial market conditions, our access to capital, the cost of such capital, and the results of our financing and refinancing efforts, including availability of funds in the debt capital markets;
 
 
·
actions by rating agencies;
 
 
·
non-payment for our services due to financial distress of our customers, including Reliant Energy, Inc. (RRI);
 
 
·
the ability of RRI and its subsidiaries to satisfy their other obligations to us, including indemnity obligations;
 
 
·
the outcome of litigation brought by or against us;
 
 
·
our ability to control costs;
 
 
·
the investment performance of CenterPoint Energy Inc.’s employee benefit plans;
 

 
·
our potential business strategies, including acquisitions or dispositions of assets or businesses, which we cannot assure will be completed or will have the anticipated benefits to us;
 
 
·
acquisitions and merger activities involving our parent 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, 2007, which is incorporated herein by reference, “Risk Factors” 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.
 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Millions of Dollars)
(Unaudited)


   
Three Months Ended
 September 30,
   
Nine Months Ended
 September 30,
 
   
2007
   
2008
   
2007
   
2008
 
                         
Revenues
  $ 528     $ 552     $ 1,399     $ 1,471  
                                 
Expenses:
                               
Operation and maintenance
    164       169       469       507  
Depreciation and amortization
    110       133       302       354  
Taxes other than income taxes
    58       48       171       153  
Total
    332       350       942       1,014  
Operating Income
    196       202       457       457  
                                 
Other Income (Expense):
                               
Interest and other finance charges
    (27 )     (27 )     (81 )     (80 )
Interest on transition bonds
    (30 )     (34 )     (93 )     (102 )
Other, net
    17       11       51       34  
Total
    (40 )     (50 )     (123 )     (148 )
                                 
Income Before Income Taxes
    156       152       334       309  
Income tax expense
    (51 )     (54 )     (111 )     (113 )
Net Income
  $ 105     $ 98     $ 223     $ 196  


See Notes to the Company’s Interim Condensed Consolidated Financial Statements


CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
(Unaudited)

ASSETS
   
December 31,
2007
   
September 30,
2008
 
 
Current Assets:
           
Cash and cash equivalents
  $ 128     $ 83  
Accounts and notes receivable, net
    172       193  
Accounts and notes receivable – affiliated companies
    25       5  
Accrued unbilled revenues
    102       111  
Materials and supplies
    60       70  
    Taxes receivable
    3       373  
    Other
    70       64  
Total current assets
    560       899  
                 
 
Property, Plant and Equipment:
               
Property, plant and equipment
    6,993       7,186  
Less accumulated depreciation and amortization
    2,602       2,600  
Property, plant and equipment, net
    4,391       4,586  
                 
 
Other Assets:
               
Regulatory assets
    2,621       2,852  
Notes receivable — affiliated companies
    750       750  
    Other
    36       54  
Total other assets
    3,407       3,656  
                 
Total Assets
  $ 8,358     $ 9,141  


See Notes to the Company’s Interim Condensed Consolidated Financial Statements


CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS — (Continued)
(Millions of Dollars)
(Unaudited)

LIABILITIES AND MEMBER’S EQUITY

   
December 31,
2007
   
September 30,
2008
 
Current Liabilities:
           
Current portion of transition bond long-term debt
  $ 159     $ 208  
Accounts payable
    47       564  
Accounts and notes payable affiliated companies
    75       26  
Taxes accrued
    87       70  
Interest accrued
    83       58  
Other
    74       101  
Total current liabilities
    525       1,027  
                 
Other Liabilities:
               
Accumulated deferred income taxes, net
    1,189       1,545  
Unamortized investment tax credits
    28       23  
Benefit obligations
    176       174  
Regulatory liabilities
    354       310  
Notes payable affiliated companies
    151       151  
Other
    134       154  
Total other liabilities
    2,032       2,357  
                 
Long-term Debt:
               
Transition bonds
    2,101       2,381  
Other
    1,642       1,762  
Total long-term debt
    3,743       4,143  
                 
Commitments and Contingencies (Note 7)
               
                 
Member’s Equity:
               
Common stock
           
Paid-in capital
    1,712       1,230  
Retained earnings
    346       384  
Total member’s equity
    2,058       1,614  
                 
Total Liabilities and Member’s Equity
  $ 8,358     $ 9,141  


See Notes to the Company’s Interim Condensed Consolidated Financial Statements


CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Millions of Dollars)
(Unaudited)


   
Nine Months Ended
September 30,
 
   
2007
   
2008
 
Cash Flows from Operating Activities:
           
Net income
  $ 223     $ 196  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    302       354  
Amortization of deferred financing costs
    8       9  
Deferred income taxes
    (34 )     373  
Changes in other assets and liabilities:
               
Accounts and notes receivable, net
    (71 )     (30 )
Accounts receivable/payable, affiliates
    35       18  
Inventory
    (1 )     (10 )
Accounts payable
    (20 )     (2 )
Taxes receivable
    34       (370 )
Interest and taxes accrued
    (61 )     (42 )
Net regulatory assets and liabilities
    33       (55 )
Other current assets
    6       14  
Other current liabilities
    8       27  
Other assets
    (1 )     (3 )
Other liabilities
          (4 )
Other, net
          (10 )
Net cash provided by operating activities
    461       465  
                 
Cash Flows from Investing Activities:
               
Capital expenditures
    (310 )     (257 )
Increase in restricted cash of transition bond companies
          (8 )
Other, net
    19       (2 )
Net cash used in investing activities
    (291 )     (267 )
                 
Cash Flows from Financing Activities:
               
Long-term revolving credit facility, net
          121  
Proceeds from long-term debt
          488  
Payments of long-term debt
    (147 )     (159 )
Debt issuance costs
          (6 )
Decrease in short-term notes with affiliates, net
    (95 )     (47 )
Dividend to parent
          (640 )
Other, net
    1        
Net cash used in financing activities
    (241 )     (243 )
                 
Net Decrease in Cash and Cash Equivalents
    (71 )     (45 )
Cash and Cash Equivalents at Beginning of Period
    122       128  
Cash and Cash Equivalents at End of Period
  $ 51     $ 83  
                 
Supplemental Disclosure of Cash Flow Information:
               
Cash Payments:
               
Interest, net of capitalized interest
  $ 219     $ 214  
Income taxes
    87       98  
Non-cash transactions:
               
Accounts payable related to capital expenditures
    17       163  


See Notes to the Company’s Interim Condensed Consolidated Financial Statements


CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC 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 Houston Electric, LLC are the condensed consolidated interim financial statements and notes (Interim Condensed Financial Statements) of CenterPoint Energy Houston Electric, LLC and its subsidiaries (collectively, CenterPoint Houston or the Company). 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 Houston for the year ended December 31, 2007 (CenterPoint Houston Form 10-K).

Background. The Company engages in the electric transmission and distribution business in a 5,000-square mile area of the Texas Gulf Coast that includes Houston. The Company is an indirect wholly owned subsidiary of CenterPoint Energy, Inc. (CenterPoint Energy), a public utility holding company. At September 30, 2008, the Company had three subsidiaries, CenterPoint Energy Transition Bond Company, LLC, CenterPoint Energy Transition Bond Company II, LLC and CenterPoint Energy Transition Bond Company III, LLC (collectively, the transition bond companies). Each is a special purpose Delaware limited liability company formed for the principal purpose of purchasing and owning transition property, issuing transition bonds and performing activities incidental thereto. For further discussion of the transition bond companies, see Note 4.

Basis of Presentation. The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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.

The Company’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 the Company’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, (b) timing of maintenance and other expenditures and (c) acquisitions and dispositions of businesses, assets and other interests.

(2)           New Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115” (SFAS No. 159). SFAS No. 159 permits the Company to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). The Company would report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting period. This accounting standard is effective as of the beginning of the first fiscal year that begins after November 15, 2007 but is not required to be applied. The Company currently has no plans to apply SFAS No. 159.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007),Business Combinations” (SFAS No. 141R). SFAS No. 141R will significantly change the accounting for business combinations. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date fair value with limited exceptions. SFAS No. 141R also includes a substantial number of new disclosure requirements and applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. As the provisions of SFAS No. 141R are applied prospectively, the impact to the Company cannot be determined until applicable transactions occur.

In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51” (SFAS No. 160). SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This

 
accounting standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company will adopt SFAS No. 160 as of January 1, 2009. The Company expects that the adoption of SFAS No. 160 will not have a material impact on its financial position, results of operations or cash flows.

Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (SFAS No. 157), which requires additional disclosures about the Company’s financial assets and liabilities that are measured at fair value. FASB Staff Position No. FAS 157-2 delays the effective date for SFAS No. 157 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008. The Company has elected to defer the adoption of SFAS No. 157 for the measurement of asset retirement obligations until January 1, 2009, as permitted. Beginning in January 2008, assets and liabilities recorded at fair value in the Condensed Consolidated Balance Sheet are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined in SFAS No. 157 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 are investments.  At September 30, 2008, the Company held Level 1 investments of $57 million.

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. The Company had no Level 2 assets and liabilities during the nine months ended September 30, 2008.

 Level 3: Inputs are unobservable for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset. The Company had no Level 3 assets and liabilities during the nine months ended September 30, 2008.

(3)           Employee Benefit Plans

The Company’s employees participate in CenterPoint Energy’s postretirement benefit plan. The Company’s net periodic cost includes the following components relating to postretirement benefits:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2007
   
2008
   
2007
   
2008
 
   
(in millions)
 
Service cost
  $ 1     $ 1     $ 1     $ 1  
Interest cost
    5       4       13       13  
Expected return on plan assets
    (2 )     (2 )     (8 )     (8 )
Amortization of transition obligation
          1       4       4  
Net periodic cost
  $ 4     $ 4     $ 10     $ 10  

The Company expects to contribute approximately $7 million to its postretirement benefits plan in 2008, of which less than $1 million and $5 million, respectively, were contributed during the three and nine months ended September 30, 2008.

(4)           Regulatory Matters

(a) Hurricane Ike

The Company’s electric delivery system suffered substantial damage as a result of Hurricane Ike, which struck the upper Texas coast in September 2008.
 
 
The Company estimates that total costs to restore the electric delivery facilities damaged as a result of Hurricane Ike will be in the range of $650 million to $750 million. As is common with electric utilities servicing coastal regions, the poles, towers, wires, street lights and pole mounted equipment that comprise the Company’s transmission and distribution system are not covered by property insurance, but office buildings and warehouses and their contents and substations are covered by insurance that provides for a maximum deductible of $10 million. Current estimates are that total losses to property covered by this insurance were approximately $25 million.

The Company is deferring the uninsured storm restoration costs as management believes it is probable that such costs will be recovered through the regulatory process. As a result, storm restoration costs will not affect the Company’s reported net income for 2008. As of September 30, 2008, the Company recorded an increase of $141 million in construction work in progress and $434 million in regulatory assets, for restoration costs incurred through September 30, 2008.  Approximately $503 million of these costs are based on estimates and are included in accounts payable as of September 30, 2008.  Additional restoration costs will continue to be incurred during the fourth quarter of 2008 and possibly during the first quarter of 2009.

Assuming necessary enabling legislation is enacted by the Texas Legislature in the session that begins in January 2009, the Company expects to obtain recovery of its storm restoration costs through the issuance of non-recourse securitization bonds similar to the storm recovery bonds issued by another Texas utility following Hurricane Rita. Assuming those bonds are issued, the Company will recover the amount of storm restoration costs approved by the Public Utility Commission of Texas (Texas Utility Commission) out of the bond proceeds, with the bonds being repaid over time through a charge imposed on customers. Alternatively, if securitization is not available, recovery of those costs would be sought through traditional regulatory mechanisms. Under its 2006 rate case settlement, the Company is entitled to seek an adjustment to rates in this situation, even though in most instances its rates are frozen until 2010.

(b) Recovery of True-Up Balance

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

The Company and other parties filed appeals of the True-Up Order to a district court in Travis County, Texas. In August 2005, that court issued its judgment on the various appeals. In its judgment, the district court:

 
·
reversed the Texas Utility Commission’s ruling that had denied recovery of a portion of the capacity auction true-up amounts;

 
·
reversed the Texas Utility Commission’s ruling that precluded the Company from recovering the interest component of the EMCs paid to retail electric providers (REPs); and

 
·
affirmed the True-Up Order in all other respects.

The district court’s decision would have had the effect of restoring approximately $650 million, plus interest, of the $1.7 billion the Texas Utility Commission had disallowed from the Company’s initial request.

The Company and other parties appealed the district court’s judgment to the Texas Third Court of Appeals, which issued its decision in December 2007. In its decision, the court of appeals:

 
·
reversed the district court’s judgment to the extent it restored the capacity auction true-up amounts;

 
·
reversed the district court’s judgment to the extent it upheld the Texas Utility Commission’s decision to allow the Company to recover EMCs paid to Reliant Energy, Inc. (RRI);

 
·
ordered that the tax normalization issue described below be remanded to the Texas Utility Commission as requested by the Texas Utility Commission; and

 
·
affirmed the district court’s judgment in all other respects.

In April 2008, the court of appeals denied all motions for rehearing and reissued substantially the same opinion as it had rendered in December 2007.

In June 2008, the Company petitioned the Texas Supreme Court for review of the court of appeals decision. In its petition, the Company seeks reversal of the parts of the court of appeals decision that (i) denied recovery of EMCs paid to RRI, (ii) denied recovery of the capacity auction true up amounts allowed by the district court, (iii) affirmed the Texas Utility Commission’s rulings that denied recovery of approximately $378 million related to depreciation and (iv) affirmed the Texas Utility Commission’s refusal to permit the Company to utilize the partial stock valuation methodology for determining the market value of its former generation assets. Two other petitions for review were filed with the Texas Supreme Court by other parties to the appeal. In those petitions parties contend (i) that the Texas Utility Commission was without authority to fashion the methodology it used for valuing the former generation assets after it had determined that the Company could not use the partial stock valuation method, (ii) that in fashioning the method it used for valuing the former generating assets, the Texas Utility Commission deprived parties of their due process rights and an opportunity to be heard, (iii) that the net book value of the generating assets should have been adjusted downward due to the impact of a purchase option that had been granted to RRI, (iv) that the Company should not have been permitted to recover construction work in progress balances without proving those amounts in the manner required by law and (v) that the Texas Utility Commission was without authority to award interest on the capacity auction true up award.

Review by the Texas Supreme Court of the court of appeals decision is at the discretion of the court. There is no prescribed time in which the Texas Supreme Court must determine whether to grant review or, if review is granted, for a decision by that court. Although the Company believes that its true-up request is consistent with applicable statutes and regulations and, accordingly, that it is reasonably possible that it will be successful in its appeal to the Texas Supreme Court, the Company can provide no assurance as to the ultimate court rulings on the issues to be considered in the appeal or with respect to the ultimate decision by the Texas Utility Commission on the tax normalization issue described below.

To reflect the impact of the True-Up Order, in 2004 and 2005, the Company recorded a net after-tax extraordinary loss of $947 million. No amounts related to the district court’s judgment or the decision of the court of appeals have been recorded in the Company’s consolidated financial statements. However, if the court of appeals decision is not reversed or modified as a result of further review by the Texas Supreme Court, the Company anticipates that it would be required to record an additional loss to reflect the court of appeals decision. The amount of that loss would depend on several factors, including ultimate resolution of the tax normalization issue described below and the calculation of interest on any amounts the Company ultimately is authorized to recover or is required to refund beyond the amounts recorded based on the True-up Order, but could range from $130 million to $350 million (pre-tax) plus interest subsequent to December 31, 2007.

In the True-Up Order, the Texas Utility Commission reduced the Company’s stranded cost recovery by approximately $146 million, which was included in the extraordinary loss discussed above, for the present value of certain deferred tax benefits associated with its former electric generation assets. The Company believes that the Texas Utility Commission based its order on proposed regulations issued by the Internal Revenue Service (IRS) in March 2003 which would have allowed utilities owning assets that were deregulated before March 4, 2003 to make a retroactive election to pass the benefits of Accumulated Deferred Investment Tax Credits (ADITC) and Excess Deferred Federal Income Taxes (EDFIT) back to customers. However, the IRS subsequently withdrew those proposed normalization regulations and in March 2008 adopted final regulations that would not permit utilities like the Company to pass the tax benefits back to customers without creating normalization violations. In addition, CenterPoint Energy received a Private Letter Ruling (PLR) from the IRS in August 2007, prior to adoption of the final regulations, that confirmed that the Texas Utility Commission’s order reducing the Company’s stranded cost recovery by $146 million for ADITC and EDFIT would cause normalization violations with respect to the ADITC and EDFIT.


If the Texas Utility Commission’s order relating to the ADITC reduction is not reversed or otherwise modified on remand so as to eliminate the normalization violation, the IRS could require CenterPoint Energy to pay an amount equal to the Company’s unamortized ADITC balance as of the date that the normalization violation is deemed to have occurred. In addition, the IRS could deny the Company the ability to elect accelerated tax depreciation benefits beginning in the taxable year that the normalization violation is deemed to have occurred. Such treatment, if required by the IRS, could have a material adverse impact on the Company’s results of operations, financial condition and cash flows in addition to any potential loss resulting from final resolution of the True-Up Order. In its opinion, the court of appeals ordered that this issue be remanded to the Texas Utility Commission, as that commission requested. No party, in the petitions for review filed with the Texas Supreme Court, has challenged that order by the court of appeals, though the Texas Supreme Court, if it grants review, will have authority to consider all aspects of the rulings above, not just those challenged specifically by the appellants. The Company and CenterPoint Energy will continue to pursue a favorable resolution of this issue through the appellate or administrative process. Although the Texas Utility Commission has not previously required a company subject to its jurisdiction to take action that would result in a normalization violation, no prediction can be made as to the ultimate action the Texas Utility Commission may take on this issue on remand.

The Texas electric restructuring law allowed the amounts awarded to the Company in the Texas Utility Commission’s True-Up Order to be recovered either through the issuance of transition bonds or through implementation of a competition transition charge (CTC) or both. Pursuant to a financing order issued by the Texas Utility Commission in March 2005 and affirmed by a Travis County district court, in December 2005 a subsidiary of the Company issued $1.85 billion in transition bonds with interest rates ranging from 4.84% to 5.30% and final maturity dates ranging from February 2011 to August 2020. Through issuance of the transition bonds, the Company recovered approximately $1.7 billion of the true-up balance determined in the True-Up Order plus interest through the date on which the bonds were issued.

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

Certain parties appealed the CTC Order to a district court in Travis County. In May 2006, the district court issued a judgment reversing the CTC Order in three respects. First, the court ruled that the Texas Utility Commission had improperly relied on provisions of its rule dealing with the interest rate applicable to CTC amounts. The district court reached that conclusion based on its belief that the Texas Supreme Court had previously invalidated that entire section of the rule. The 11.075% interest rate in question was applicable from the implementation of the CTC Order on September 13, 2005 until August 1, 2006, the effective date of the implementation of a new CTC in compliance with the revised rule discussed above. Second, the district court reversed the Texas Utility Commission’s ruling that allows the Company to recover through the Rider RCE the costs (approximately $5 million) for a panel appointed by the Texas Utility Commission in connection with the valuation of electric generation assets. Finally, the district court accepted the contention of one party that the CTC should not be allocated to retail customers that have switched to new on-site generation. The Texas Utility Commission and the Company appealed the district court’s judgment to the Texas Third Court of Appeals, and in July 2008, the court of appeals reversed the district court’s judgment in all respects and affirmed the Texas Utility Commission’s order. Two of the appellants have requested further review from the Texas Supreme Court. The ultimate outcome of this matter cannot be predicted at this time. However, the Company does not expect the disposition of this matter to have a material adverse effect on its financial condition, results of operations or cash flows.

During the three months ended September 30, 2007 and 2008, the Company recognized approximately $11 million and $-0-, respectively, in operating income from the CTC, which was terminated in February 2008 when the transition bonds described below were issued. Additionally, during the three months ended September 30, 2007

 
and 2008, the Company recognized approximately $5 million and $4 million, respectively, of the allowed equity return not previously recorded.

During the nine months ended September 30, 2007 and 2008, the Company recognized approximately $32 million and $5 million, respectively, in operating income from the CTC, which was terminated in February 2008 when the transition bonds described below were issued. Additionally, during the nine months ended September 30, 2007 and 2008, the Company recognized approximately $11 million and $10 million, respectively, of the allowed equity return not previously recorded.

During the 2007 legislative session, the Texas legislature amended statutes prescribing the types of true-up balances that can be securitized by utilities and authorized the issuance of transition bonds to recover the balance of the CTC. In June 2007, the Company filed a request with the Texas Utility Commission for a financing order that would allow the securitization of the remaining balance of the CTC, adjusted to refund certain unspent environmental retrofit costs and to recover the amount of the final fuel reconciliation settlement. The Company reached substantial agreement with other parties to this proceeding, and a financing order was approved by the Texas Utility Commission in September 2007. In February 2008, pursuant to the financing order, a new special purpose subsidiary of the Company issued approximately $488 million of transition bonds in two tranches with interest rates of 4.192% and 5.234% and final maturity dates of February 2020 and February 2023, respectively. Contemporaneously with the issuance of those bonds, the CTC was terminated and a transition charge was implemented.

As of September 30, 2008, the Company had not recorded an allowed equity return of $209 million on the Company’s true-up balance because such return will be recognized as it is recovered in rates.

(c) Rate Proceedings

In September 2008, the Company filed an application with the Texas Utility Commission requesting an interim update to its wholesale transmission rate.  The filing results in a revenue requirement increase of $22.5 million over rates that are currently in effect.  Approximately 74% will be paid by distribution companies other than the Company.  The remaining 26% represents the Company’s share.  That amount cannot be included in rates until 2010 under the terms of the rate freeze implemented in the settlement of the Company’s 2006 rate proceeding.  In September 2008, the Texas Utility Commission staff recommended approval of the Company’s request.  The new rates went into effect in early November 2008.

(5)           Related Party Transactions and Major Customers

Related Party Transactions. The Company participates in a money pool through which it can borrow or invest on a short-term basis. Funding needs are aggregated and external borrowing or investing is based on the net cash position. The net funding requirements of the money pool are expected to be met with borrowings by CenterPoint Energy under its revolving credit facility or the sale by CenterPoint Energy of its commercial paper. The Company had borrowings from the money pool of $47 million and $-0- at December 31, 2007 and September 30, 2008, respectively.

At December 31, 2007 and September 30, 2008, the Company had a $750 million note receivable from its parent.

For the three months ended September 30, 2007 and 2008, the Company had net interest income related to affiliate borrowings of $13 million and $8 million, respectively, and $36 million and $25 million, respectively, for the nine months ended September 30, 2007 and 2008.

CenterPoint Energy provides some corporate services to the Company. The costs of services have been charged directly to the Company using methods that management believes are reasonable. These methods include negotiated usage rates, dedicated asset assignment and proportionate corporate formulas based on operating expenses, assets, gross margin, employees and a composite of assets, gross margin and employees. These charges are not necessarily indicative of what would have been incurred had the Company not been an affiliate. Amounts charged to the Company for these services were $25 million and $27 million for the three months ended September 30, 2007 and

 
2008, respectively, and $75 million and $85 million for the nine months ended September 30, 2007 and 2008, respectively, and are included primarily in operation and maintenance expenses.

The Company paid a dividend of $158 million to its parent during the three months ended September 30, 2008.

Major Customers. Revenues derived from energy delivery charges provided by the Company to subsidiaries of RRI totaled $196 million and $199 million for the three months ended September 30, 2007 and 2008, respectively, and $496 million and $492 million for the nine months ended September 30, 2007 and 2008, respectively.

(6)           Long-Term Debt

Revolving Credit Facility. As of December 31, 2007 and September 30, 2008, the Company had $50 million and $171 million of borrowings, respectively, under its $300 million credit facility. As of both December 31, 2007 and September 30, 2008, the Company had approximately $4 million of outstanding letters of credit under its credit facility. The Company was in compliance with all debt covenants as of September 30, 2008.

Other. At both December 31, 2007 and September 30, 2008, the Company had issued $151 million of first mortgage bonds and $527 million of general mortgage bonds as collateral for long-term debt of CenterPoint Energy. These bonds are not reflected in the consolidated financial statements because of the contingent nature of the obligations.

(7)           Commitments and Contingencies

Legal Matters

RRI Indemnified Litigation

The Company, CenterPoint Energy or their predecessor, Reliant Energy, Incorporated (Reliant Energy), and certain of their former subsidiaries are named as defendants in several lawsuits described below. Under a master separation agreement between CenterPoint Energy and Reliant Energy, Inc. (formerly Reliant Resources, Inc.) (RRI), CenterPoint Energy and its subsidiaries, including the Company,  are entitled to be indemnified by RRI for any losses, including attorneys’ fees and other costs, arising out of the lawsuits described below under “Gas Market Manipulation Cases,” “Electricity Market Manipulation Cases” and “Other Class Action Lawsuits.” Pursuant to the indemnification obligation, RRI is defending CenterPoint Energy and its subsidiaries to the extent named in these lawsuits. Although the ultimate outcome of these matters cannot be predicted at this time, CenterPoint Energy has not considered it necessary to establish reserves related to this litigation.

Gas Market Manipulation Cases. 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 2000-2001. CenterPoint Energy’s former affiliate, RRI, was a participant in gas trading in the California and Western markets. These lawsuits, many of which have been filed as class actions, allege violations of state and federal antitrust laws. Plaintiffs in these lawsuits are seeking a variety of forms of relief, including 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 2007. In October 2006, RRI reached a settlement of 11 class action natural gas cases pending in state court in California. The court approved this settlement in June 2007. In the other gas cases consolidated in state court in California, the Court of Appeals found that CenterPoint Energy was not a successor to the liabilities of a subsidiary of RRI, and CenterPoint Energy was dismissed from these suits in April 2008. In the Nevada federal litigation, three of the complaints were dismissed based on defendants’ filed rate doctrine defense, but the Ninth Circuit Court of Appeals reversed those dismissals and remanded the cases back to the district court for further proceedings.  In July 2008, the plaintiffs in four of the federal court cases agreed to dismiss the Company from those cases. In August 2008, the plaintiffs in five additional cases also agreed to dismiss CenterPoint Energy from those cases, but one of these plaintiffs has moved to amend its complaint to add CenterPoint Energy Services, Inc., a subsidiary of CenterPoint Energy, as a defendant in that case.  As a result, CenterPoint Energy remains a party in only two remaining gas market manipulation cases, one pending in Nevada state court in Clark County and one in federal district court in Nevada.  CenterPoint Energy believes it is not a proper defendant in the remaining cases and will continue to pursue dismissal from those cases.
 
 
Electricity Market Manipulation Cases. A large number of lawsuits were filed against numerous market participants in connection with the operation of the California electricity markets in 2000-2001. CenterPoint Energy’s former affiliate, RRI, was a participant in the California markets, owning generating plants in the state and participating in both electricity and natural gas trading in that state and in western power markets generally. CenterPoint Energy was a defendant in approximately five of these suits. These lawsuits, many of which were filed as class actions, were based on a number of legal theories, including violation of state and federal antitrust laws, laws against unfair and unlawful business practices, the federal Racketeer Influenced Corrupt Organization Act, false claims statutes and similar theories and breaches of contracts to supply power to governmental entities. In August 2005, RRI reached a settlement with the Federal Energy Regulatory Commission (FERC) enforcement staff, the states of California, Washington and Oregon, California’s three largest investor-owned utilities, classes of consumers from California and other western states, and a number of California city and county government entities that resolves their claims against RRI related to the operation of the electricity markets in California and certain other western states in 2000-2001. The settlement has been approved by the FERC, by the California Public Utilities Commission and by the courts in which the electricity class action cases were pending. Two parties appealed the courts’ approval of the settlement to the California Court of Appeals, but that appeal was denied and the deadline to appeal to the California Supreme Court has passed. A party in the FERC proceedings filed a motion for rehearing of the FERC’s order approving the settlement, which the FERC denied in May 2006. That party has filed for review of the FERC’s orders in the Ninth Circuit Court of Appeals. CenterPoint Energy is not a party to the settlement, but may rely on the settlement as a defense to any claims.

Environmental Matters

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

Other Environmental. From time to time the Company has received notices from regulatory authorities or others regarding its status as a potentially responsible party in connection with sites found to require remediation due to the presence of environmental contaminants. In addition, the Company 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, the Company does not expect, based on its experience to date, these matters, either individually or in the aggregate, to have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

Other Proceedings

The Company 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. The Company regularly analyzes current information and, as necessary, provides accruals for probable liabilities on the eventual disposition of these matters. The Company does not expect the disposition of these matters to have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
 

(8)           Income Taxes

During each of the three months and nine months ended September 30, 2007, the effective tax rate was 33%. During the three months and nine months ended September 30, 2008, the effective tax rate was 36% and 37%, respectively. The most significant item affecting the comparability of the effective tax rate is the 2008 classification of approximately $2 million and $9 million for the three months and nine months ended September 30, 2008, respectively, of Texas margin tax as an income tax.

The following table summarizes the Company’s liability for uncertain tax positions in accordance with FASB Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109,” at December 31, 2007 and September 30, 2008 (in millions):

   
December 31,
2007
   
September 30,
2008
 
Liability for uncertain tax positions
  $ 92     $ 112  
Portion of liability for uncertain tax positions that, if recognized, would reduce the effective income tax rate
    8       11  
Interest accrued on uncertain tax positions
    7       12  


ITEM 2.  MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS

The following narrative 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, 2007 (2007 Form 10-K).

We meet the conditions specified in General Instruction H(1)(a) and (b) to Form 10-Q and are therefore permitted to use the reduced disclosure format for wholly owned subsidiaries of reporting companies. Accordingly, we have omitted from this report the information called for by Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations), Item 3 (Quantitative and Qualitative Disclosures About Market Risk) of Part I and the following Part II items of Form 10-Q: Item 2 (Unregistered Sales of Equity Securities and Use of Proceeds), Item 3 (Defaults Upon Senior Securities) and Item 4 (Submission of Matters to a Vote of Security Holders). The following discussion explains material changes in our results of operations between the three and nine months ended September 30, 2007 and the three and nine months ended September 30, 2008. Reference is made to “Management’s Narrative Analysis of Results of Operations” in Item 7 of our 2007 Form 10-K.

EXECUTIVE SUMMARY
Recent Events

Hurricane Ike

Our electric delivery system suffered substantial damage as a result of Hurricane Ike, which struck the upper Texas coast early Saturday, September 13, 2008.

The strong Category 2 storm initially left more than 90 percent of our more than 2 million metered customers without power, the largest outage in our 130-year history. Most of the widespread power outages were due to power lines damaged by downed trees and debris blown by Hurricane Ike’s hurricane-force wind. In addition, on Galveston Island and along the coastal areas of the Gulf of Mexico and Galveston Bay, the storm surge and flooding from rains accompanying the storm caused significant damage or destruction of houses and businesses served by us.

We estimate that total costs to restore the electric delivery facilities damaged as a result of Hurricane Ike will be in the range of $650 million to $750 million. As is common with electric utilities serving coastal regions, the poles, towers, wires, street lights and pole mounted equipment that comprise our transmission and distribution system are not covered by property insurance, but office buildings and warehouses and their contents and substations are covered by insurance that provides for a maximum deductible of $10 million. Current estimates are that total losses to property covered by this insurance were approximately $25 million.

In addition to storm restoration costs, we estimate that we lost approximately $17 million in revenue through September 30, 2008, and will continue to lose minor amounts of revenue that would otherwise have been anticipated from those customers whose service will not be restored for a longer period. Within the first 18 days after the storm, we had restored power to all customers capable of receiving it.

We are deferring the uninsured storm restoration costs as management believes it is probable that such costs will be recovered through the regulatory process. As a result, storm restoration costs will not affect our reported net income for 2008. As of September 30, 2008, we recorded an increase of $141 million in construction work in progress and $434 million in regulatory assets for restoration costs incurred through September 30, 2008.  Approximately $503 million of these costs are based on estimates and are included in accounts payable as of September 30, 2008.  Additional restoration costs will continue to be incurred during the fourth quarter of 2008 and possibly during the first quarter of 2009.

Assuming necessary enabling legislation is enacted by the Texas Legislature in the session that begins in January 2009, we expect to obtain recovery of our storm restoration costs through the issuance of non-recourse securitization bonds similar to the storm recovery bonds issued by another Texas utility following Hurricane Rita. Assuming those bonds are issued, we will recover the amount of storm restoration costs approved by the Public Utility Commission of Texas out of the bond proceeds, with the bonds being repaid over time through a charge imposed on customers. Alternatively, if securitization is not available, recovery of those costs would be sought

 
through traditional regulatory mechanisms. Under our 2006 rate case settlement, we are entitled to seek an adjustment to rates in this situation, even though in most instances our rates are frozen until 2010.

CONSOLIDATED RESULTS OF OPERATIONS

Our results of operations are affected by seasonal fluctuations in the demand for electricity. Our results of operations are also affected by, among other things, the actions of various governmental authorities having jurisdiction over rates we charge, debt service costs, income tax expense, our ability to collect receivables from retail electric providers and our ability to recover our stranded costs and regulatory assets. For more information regarding factors that may affect the future results of operations of our business, please read “Risk Factors” in Item 1A of Part I of our 2007 Form 10-K and “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q.
 
The following table sets forth our consolidated results of operations for the three and nine months ended September 30, 2007 and 2008, followed by a discussion of our consolidated results of operations based on operating income.
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2007
   
2008
   
2007
   
2008
 
   
(in millions, except customer data)
 
Revenues:
                       
Electric transmission and distribution utility
  $ 445     $ 455     $ 1,187     $ 1,220  
Transition bond companies
    83       97       212       251  
Total revenues
    528       552       1,399       1,471  
Expenses:
                               
Operation and maintenance, excluding transition bond companies
    163       167       467       502  
Depreciation and amortization, excluding transition bond companies
    58       71       182       208  
Taxes other than income taxes
    58       48       171       153  
Transition bond companies
    53       64       122       151  
Total expenses
    332       350       942       1,014  
Operating income
    196       202       457       457  
Interest and other finance charges
    (27 )     (27 )     (81 )     (80 )
Interest on transition bonds
    (30 )     (34 )     (93 )     (102 )
Other income, net
    17       11       51       34  
Income before income taxes
    156       152       334       309  
Income tax expense
    (51 )     (54 )     (111 )     (113 )
Net income
  $ 105     $ 98     $ 223     $ 196  
                                 
Throughput (in gigawatt-hours (GWh)):
                               
Residential
    8,381       8,446       19,060       19,623  
Total
    22,726       21,594       58,561       58,523  
                                 
Average number of metered customers:
                               
Residential
    1,782,281       1,822,351       1,767,431       1,812,821  
Total
    2,022,448       2,066,538       2,006,344       2,055,723  

Three months ended September 30, 2008 compared to three months ended September 30, 2007

We reported operating income of $202 million for the three months ended September 30, 2008, consisting of $169 million from the regulated electric transmission and distribution utility (TDU) and $33 million related to transition bond companies. For the three months ended September 30, 2007, operating income totaled $196 million, consisting of $155 million from the TDU, exclusive of an additional $11 million from the competition transition charge (CTC), and $30 million related to transition bond companies. Revenues for the TDU increased due to increased usage ($13 million), continued customer growth ($8 million), with over 42,000 metered customers added since September 30, 2007, and increased transmission-related revenues ($5 million), partially offset by the loss of
 
 
revenues due to Hurricane Ike ($17 million). Operation and maintenance expense increased primarily due to higher transmission costs ($6 million) and increased support services ($2 million), partially offset by normal operating and maintenance expenses that were postponed as a result of Hurricane Ike restoration efforts ($5 million).  Depreciation and amortization increased $13 million primarily due to amounts related to the CTC, which were offset by similar amounts in revenues ($11 million). Taxes other than income taxes declined $10 million as a result of Texas margin taxes being classified as an income tax for financial reporting purposes in 2008 ($5 million) and a refund of prior year state franchise taxes ($5 million).
 
Nine months ended September 30, 2008 compared to nine months ended September 30, 2007
 
We reported operating income of $457 million for the nine months ended September 30, 2008, consisting of $352 million from the TDU, exclusive of an additional $5 million from the CTC, and $100 million related to transition bond companies. For the nine months ended September 30, 2007, operating income totaled $457 million, consisting of $335 million from the TDU, exclusive of an additional $32 million from the CTC, and $90 million related to transition bond companies. Revenues for the TDU increased due to customer growth, with over 42,000 metered customers added since September 30, 2007 ($20 million), increased usage ($18 million) primarily caused by favorable weather experienced in 2008 net of  conservation, increased transmission-related revenues ($14 million) and increased ancillary services ($6 million), partially offset by the reduced revenues due to Hurricane Ike ($17 million) and the settlement of the final fuel reconciliation in 2007 ($4 million). Operation and maintenance expense increased primarily due to higher transmission costs ($22 million), the settlement of the final fuel reconciliation in 2007 ($13 million) and increased support services ($10 million), partially offset by a gain on sale of land ($9 million) and normal operating and maintenance expenses that were postponed as a result of Hurricane Ike restoration efforts ($5 million). Depreciation and amortization increased $26 million primarily due to amounts related to the CTC, which were offset by similar amounts in revenues ($21 million). Taxes other than income taxes declined $18 million primarily as a result of the Texas margin tax being classified as an income tax for financial reporting purposes in 2008 ($16 million) and a refund of prior year state franchise taxes ($5 million).
 
Income Tax Expense

During each of the three months and nine months ended September 30, 2007, the effective tax rate was 33%. During the three months and nine months ended September 30, 2008, the effective tax rate was 36% and 37%, respectively. The most significant item affecting the comparability of the effective tax rate is the 2008 classification of approximately $2 million and $9 million for the three months and nine months ended September 30, 2008, respectively, of Texas margin tax as an income tax.

CERTAIN FACTORS AFFECTING FUTURE EARNINGS

For information on other developments, factors and trends that may have an impact on our future earnings, please read “Risk Factors” in Item 1A of Part I and “Management’s Narrative Analysis of Results of Operations — Certain Factors Affecting Future Earnings” in Item 7 of Part II of our 2007 Form 10-K and “Cautionary Statement Regarding Forward-Looking Information” and “Risk Factors” in this Quarterly Report on Form 10-Q.

LIQUIDITY AND CAPITAL RESOURCES

Our liquidity and capital requirements are affected primarily by our results of operations, capital expenditures, debt service requirements, working capital needs, various regulatory actions and appeals relating to such regulatory actions. Our principal cash requirements for the remaining three months of 2008 include approximately $125 million of capital expenditures and approximately $600 million of estimated restoration costs related to Hurricane Ike.
 
We expect that borrowings under our credit facility, borrowings from affiliates and anticipated cash flows from operations will be sufficient to meet our cash needs for the remaining three months of 2008. Cash needs or discretionary financing or refinancing may also result in the issuance of debt securities in the capital markets or the arrangement of an additional credit facility.  Issuances of debt in the capital markets and an additional credit facility may not, however, be available to us on acceptable terms.

 
Off-Balance Sheet Arrangements. Other than operating leases and first mortgage bonds and general mortgage bonds issued as collateral for long-term debt of CenterPoint Energy as discussed below, we have no off-balance sheet arrangements.
 
Credit Facility. As of October 31, 2008, we had $243 million of borrowings and approximately $4 million of outstanding letters of credit under our $300 million credit facility. Lehman Brothers Bank, FSB, which had an approximately $11 million participation in our credit facility, stopped funding its commitments following the bankruptcy filing of its parent in September 2008. Effective November 7, 2008, we terminated Lehman Brothers Bank, FSB, as a participating lender under our facility, thereby causing an $11 million permanent reduction in the capacity of our facility.  Our credit facility’s first drawn cost is the London Interbank Offered Rate (LIBOR) plus 45 basis points based on our current credit rating. Under our credit facility, an additional utilization fee of 5 basis points applies to borrowings any time more than 50% of the facility is utilized, and the spread to LIBOR fluctuates based on our credit rating. Borrowings under the facility are subject to customary terms and conditions. However, there is no requirement that we make representations prior to borrowings as to the absence of material adverse changes or litigation that could be expected to have a material adverse effect. Borrowings under the credit facility are subject to acceleration upon the occurrence of events of default that we consider customary.

We are currently in compliance with the various business and financial covenants contained in our credit facility.

Temporary Investments. As of October 31, 2008, we had no external temporary investments.
 
Securities Registered with the SEC. In October 2008, we registered with the Securities and Exchange Commission an indeterminate principal amount of our general mortgage bonds.

Money Pool. We participate in a money pool through which we and certain of our affiliates can borrow or invest on a short-term basis. Funding needs are aggregated and external borrowing or investing is based on the net cash position. The net funding requirements of the money pool are expected to be met with borrowings under CenterPoint Energy’s revolving credit facility or the sale of CenterPoint Energy’s commercial paper. At October 31, 2008, we had borrowings from the money pool aggregating $11 million. The money pool may not provide sufficient funds to meet our cash needs.
 
Long-term Debt. Our long-term debt consists of our obligations and the transition bonds issued by wholly owned subsidiaries. At September 30, 2008, CenterPoint Energy Transition Bond Company, LLC (TBC) had $449 million aggregate principal amount of outstanding transition bonds that were issued in 2001, CenterPoint Energy Transition Bond Company II, LLC (TBC II) had $1.65 billion aggregate principal amount of outstanding transition bonds that were issued in 2005 and CenterPoint Energy Transition Bond Company III, LLC (TBC III) had $488 million aggregate principal amount of outstanding transition bonds that were issued in February 2008. All the transition bonds were issued in accordance with the Texas Electric Choice Plan (Texas electric restructuring law). The transition bonds are secured by “transition property,” as defined in the Texas electric restructuring law, which includes the irrevocable right to recover, through non-bypassable transition charges payable by retail electric customers, qualified costs provided in the Texas electric restructuring law. The transition bonds are reported as our long-term debt, although the holders of the transition bonds have no recourse to any of our assets or revenues, and our creditors have no recourse to any assets or revenues (including, without limitation, the transition charges) of the bond companies. We have no payment obligations with respect to the transition bonds except to remit collections of transition charges as set forth in a servicing agreement between us and the bond companies and in an intercreditor agreement among us, the bond companies and other parties.
 

The following table shows future maturity dates of long-term debt issued by us to third parties and affiliates and scheduled future payment dates of transition bonds issued by our subsidiaries, TBC, TBC II and TBC III, as of September 30, 2008. Amounts are expressed in millions.
 
Year
 
Third-Party
   
Affiliate
   
Sub-Total
   
Transition Bonds
   
Total
 
2008
  $     $     $     $     $  
2009
                      208       208  
2010
                      221       221  
2011
                      240       240  
2012
    216             216       263       479  
2013
    450             450       284       734  
2014
    300             300       188       488  
2015
          151       151       201       352  
2016
                      215       215  
2017
    127             127       230       357  
2018
                      247       247  
2019
                      264       264  
2021
    102             102       29       131  
2023
    200             200             200  
2027
    56             56             56  
2033
    312             312             312  
Total
  $ 1,763     $ 151     $ 1,914     $ 2,590     $ 4,504  

As of September 30, 2008, outstanding first mortgage bonds and general mortgage bonds aggregated approximately $2.3 billion as shown in the following table. Amounts are expressed in millions.

   
Issued Directly
to Third Parties
   
Issued as
Collateral for the
Company’s Debt
   
Issued as
Collateral for
CenterPoint
Energy’s Debt
   
Total
 
First Mortgage Bonds
  $ 102     $     $ 151     $ 253  
General Mortgage Bonds
    1,262       229       527       2,018  
Total
  $ 1,364     $ 229     $ 678     $ 2,271  

The lien of the general mortgage indenture is junior to that of the mortgage pursuant to which the first mortgage bonds are issued. We may issue additional general mortgage bonds on the basis of retired bonds, 70% of property additions or cash deposited with the trustee. Approximately $2.5 billion of additional first mortgage bonds and general mortgage bonds could be issued on the basis of retired bonds and 70% of property additions as of September 30, 2008. However, we have contractually agreed not to issue additional first mortgage bonds, subject to certain exceptions.

The following table shows the maturity dates of the $678 million of first mortgage bonds and general mortgage bonds that we have issued as collateral for long-term debt of CenterPoint Energy. These bonds are not reflected in our consolidated financial statements because of the contingent nature of the obligations. Amounts are expressed in millions.

Year
 
First
Mortgage Bonds
   
General
Mortgage Bonds
   
Total
 
2011
  $     $ 19     $ 19  
2015
    151             151  
2018
          50       50  
2019
          200       200  
2020
          90       90  
2026
          100       100  
2028
          68       68  
Total
  $ 151     $ 527     $ 678  

 
Impact on Liquidity of a Downgrade in Credit Ratings. As of October 31, 2008, Moody’s Investors Service, Inc. (Moody’s), Standard & Poor’s Ratings Services, a division of The McGraw Hill Companies (S&P), and Fitch, Inc. (Fitch) had assigned the following credit ratings to our senior debt.

   
Moody’s
 
S&P
 
Fitch
Instrument
 
Rating
 
Outlook(1)
 
Rating
 
Outlook(2)
 
Rating
 
Outlook(3)
Senior Secured Debt
(First Mortgage Bonds)
 
Baa2
 
Stable
 
BBB+
 
Stable
 
A-
 
Stable
Senior Secured Debt
(General Mortgage Bonds)
 
Baa2
 
Stable
 
BBB+
 
Stable
 
BBB+
 
Stable
__________

(1)
A “stable” outlook from Moody’s indicates that Moody’s does not expect to put the rating on review for an upgrade or downgrade within 18 months from when the outlook was assigned or last affirmed.

(2)
An S&P rating outlook assesses the potential direction of a long-term credit rating over the intermediate to longer term.

(3)
A “stable” outlook from Fitch encompasses a one-to-two year horizon as to the likely ratings direction.

In October 2008, Moody’s affirmed the credit ratings and stable outlook for our senior secured debt.

We cannot assure you that these ratings will remain in effect for any given period of time or that one or more of these ratings will not be lowered or withdrawn entirely by a rating agency. We note that these credit ratings are not recommendations to buy, sell or hold our securities and may be revised or withdrawn at any time by the rating agency. Each rating should be evaluated independently of any other rating. Any future reduction or withdrawal of one or more of our credit ratings could have a material adverse impact on our ability to obtain short- and long-term financing, the cost of such financings and the execution of our commercial strategies.
 
A decline in credit ratings could increase borrowing costs under our $300 million credit facility. A decline in credit ratings would also increase the interest rate on long-term debt to be issued in the capital markets and could negatively impact our ability to complete capital market transactions.
 
Cross Defaults. Under CenterPoint Energy’s revolving credit facility, a payment default on, or a non-payment default that permits acceleration of, any indebtedness exceeding $50 million by us will cause a default. Pursuant to the indenture governing CenterPoint Energy’s senior notes, a payment default by us, in respect of, or an acceleration of, borrowed money and certain other specified types of obligations, in the aggregate principal amount of $50 million will cause a default. As of September 30, 2008, CenterPoint Energy had four series of senior notes outstanding aggregating $950 million in principal amount under this indenture. A default by CenterPoint Energy would not trigger a default under our debt instruments or bank credit facility.
 
Possible acquisitions, divestitures and joint ventures.   From time to time, we consider the acquisition or the disposition of assets or businesses or possible joint ventures or other joint ownership arrangements with respect to assets or businesses. Any determination to take any action in this regard will be based on market conditions and opportunities existing at the time, and accordingly, the timing, size or success of any efforts and the associated potential capital commitments are unpredictable. We may seek to fund all or part of any such efforts with proceeds from debt and/or equity issuances. Debt or equity financing may not, however, be available to us at that time due to a variety of events, including, among others, maintenance of our credit ratings, industry conditions, general economic conditions, market conditions and market perceptions.

Pension Plan Costs.  Substantially all of our employees participate in CenterPoint Energy’s qualified non-contributory defined benefit pension plan.  Net periodic pension costs will likely increase in 2009 due to decreases in CenterPoint Energy’s pension plan assets as a result of recent declines in global equity and fixed income markets.  Pension expense increases approximately $5 million for every 5% decline in plan assets.
 

Other Factors that Could Affect Cash Requirements. In addition to the above factors, our liquidity and capital resources could be affected by:
 
 
·
increases in interest expense in connection with debt refinancings and borrowings under our credit facility;
 
 
·
various regulatory actions;
 
 
·
the ability of RRI and its subsidiaries to satisfy their obligations as our principal customers and in respect of RRI’s indemnity obligations to us;
 
 
·
the outcome of litigation brought by and against us;
 
 
·
restoration costs and revenue losses resulting from natural disasters such as hurricanes and the timing of recovery of such restoration costs; and
 
 
·
various other risks identified in “Risk Factors” in Item 1A of Part I of our 2007 Form 10-K and in “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q.
 
Certain Contractual Limits on Our Ability to Issue Securities and Borrow Money. Our credit facility limits our debt (excluding transition bonds) as a percentage of our total capitalization to 65%. Additionally, we have contractually agreed not to issue additional first mortgage bonds, subject to certain exceptions.
 
Relationship with CenterPoint Energy. We are an indirect wholly owned subsidiary of CenterPoint Energy. As a result of this relationship, the financial condition and liquidity of our parent company could affect our access to capital, our credit standing and our financial condition.
 
NEW ACCOUNTING PRONOUNCEMENTS

See Note 2 to our Interim Condensed Financial Statements for a discussion of new accounting pronouncements that affect us.

Item 4T.      CONTROLS AND PROCEDURES

In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2008 to provide assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure.

There has been no change in our internal controls over financial reporting that occurred during the three months ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II.  OTHER INFORMATION

Item 1.        LEGAL PROCEEDINGS

For a discussion of material legal and regulatory proceedings affecting us, please read Notes 4 and 7 to our Interim Condensed Financial Statements, each of which is incorporated herein by reference. See also “Business — Regulation” and “— Environmental Matters” in Item 1 and “Legal Proceedings” in Item 3 of our 2007 Form 10-K.
 

Item 1A.     RISK FACTORS

Other than with respect to the risk factors set forth below, there have been no material changes from the risk factors disclosed in our 2007 Form 10-K.

We must seek recovery of significant restoration costs arising from Hurricane Ike.
 
Our electric delivery system suffered substantial damage as a result of Hurricane Ike, which struck the upper Texas coast on September 13, 2008. The total cost for the restoration of the system is currently estimated to be in the range of $650 million to $750 million, but that estimate is preliminary and costs ultimately incurred could vary from that estimate.
 
We believe we are entitled to recover prudently incurred storm costs in accordance with applicable regulatory and legal principles. We plan to seek passage of legislation to allow securitization of the storm restoration costs through the issuance of dedicated bonds, which would be repaid over time through a charge imposed on customers. Alternatively, we have the right to seek recovery of these costs under traditional rate making principles. Our failure to recover costs incurred as a result of Hurricane Ike could adversely affect our liquidity and financial condition.
 
Our receivables are concentrated in a small number of retail electric providers, and any delay or default in payment could adversely affect our cash flows, financial condition and results of operations.
 
Our receivables from the distribution of electricity are collected from retail electric providers that supply the electricity we distribute to their customers. As of September 30, 2008, we did business with 80 retail electric providers. Adverse economic conditions, structural problems in the market served by the Electric Reliability Council of Texas, Inc. or financial difficulties of one or more retail electric providers could impair the ability of these retail providers to pay for our services or could cause them to delay such payments. We depend on these retail electric providers to remit payments on a timely basis. Applicable regulatory provisions require that customers be shifted to a provider of last resort if a retail electric provider cannot make timely payments. Applicable Texas Utility Commission regulations limit the extent to which we can demand credit protection from retail electric providers for payments not made prior to the shift to the provider of last resort. RRI, through its subsidiaries, is our largest customer. Approximately 48% of our $182 million in billed receivables from retail electric providers at September 30, 2008 was owed by subsidiaries of RRI. Any delay or default in payment could adversely affect our cash flows, financial condition and results of operations. RRI’s unsecured debt ratings are currently below investment grade. If RRI were unable to meet its obligations, it could consider, among various options, restructuring under the bankruptcy laws, in which event RRI’s subsidiaries might seek to avoid honoring their obligations and claims might be made by creditors involving payments we have received from RRI’s subsidiaries.
 
Our insurance coverage may not be sufficient. Insufficient insurance coverage and increased insurance costs could adversely impact our results of operations, financial condition and cash flows.
 
We currently have general liability and property insurance in place to cover certain of our facilities in amounts that we consider appropriate. Such policies are subject to certain limits and deductibles and do not include business interruption coverage. Insurance coverage may not be available in the future at current costs or on commercially reasonable terms, and the insurance proceeds received for any loss of, or any damage to, any of our facilities may not be sufficient to restore the loss or damage without negative impact on our results of operations, financial condition and cash flows.
 
In common with other companies in its line of business that serve coastal regions, we do not have insurance covering our transmission and distribution system because we believe it to be cost prohibitive. We may not be able to recover the losses and damages to our transmission and distribution properties as a result of Hurricane Ike, or any such losses or damages sustained in the future, through a change in our regulated rates, and any such recovery may not be timely granted. Therefore, we may not be able to restore loss of, or damage to, any of our transmission and distribution properties without negative impact on our results of operations, financial condition and cash flows.
 
 
The global financial crisis may have impacts on our business and financial condition that we currently cannot predict.
 
  The continued credit crisis and related turmoil in the global financial system may have an impact on our business and our financial condition.  Our ability to access the capital markets may be severely restricted at a time when we would like, or need, to access those markets, which could have an impact on our flexibility to react to changing economic and business conditions. In addition, the cost of debt financing may be materially adversely impacted by these market conditions.  With respect to our existing debt arrangements, Lehman Brothers Bank, FSB, which had an approximately $11 million participation in our credit facility, stopped funding its commitments following the bankruptcy filing of its parent in September 2008 and was terminated as a participating lender in November 2008, causing an $11 million reduction to the total available capacity under our facility. The credit crisis could have an impact on our remaining lenders or our customers, causing them to fail to meet their obligations to us.   Additionally, the crisis could have a broader impact on business in general in ways that could lead to reduced electricity usage, which could have a negative impact on our revenues.
 
Item 5.        OTHER INFORMATION

Our ratio of earnings to fixed charges for the nine months ended September 30, 2007 and 2008 was 2.78 and 2.61, respectively. We do not believe that the ratios for these nine-month periods are necessarily indicators of the ratios for the twelve-month periods due to the seasonal nature of our business. The ratios were calculated pursuant to applicable rules of the Securities and Exchange Commission.

Item 6.        EXHIBITS

 
The following exhibits are filed herewith:

Exhibits not incorporated by reference to a prior filing are designated by a cross (+); all exhibits not so designated are incorporated by reference to a prior filing of CenterPoint Houston or CenterPoint Energy as indicated.

Exhibit Number
   
Description
 
Report or
Registration Statement
 
SEC File or
Registration Number
 
Exhibit References
3.1
 
Articles of Organization of CenterPoint Energy Houston Electric
 
CenterPoint Houston’s Form 8-K dated August 31, 2002 filed with the SEC on September 3, 2002
 
1-3187
 
3(b)
                   
3.2
 
Limited Liability Company Regulations of CenterPoint Energy Houston Electric
 
CenterPoint Houston’s Form 8-K dated August 31, 2002 filed with the SEC on September 3, 2002
 
1-3187
 
3(c)
                   
4.1
 
$300,000,000 Second Amended and Restated Credit Agreement, dated as of June 29, 2007, among CenterPoint Houston, as Borrower, and the banks named therein
 
CenterPoint Houston’s Form 10-Q for the quarter ended June 30, 2007
 
1-3187
 
4.1
                   
+12
 
Computation of Ratios of Earnings to Fixed Charges
           
                   
+31.1
 
Rule 13a-14(a)/15d-14(a) Certification of David M. McClanahan
           
                   
+31.2
 
Rule 13a-14(a)/15d-14(a) Certification of Gary L. Whitlock
           
                   

Exhibit Number
   
Description
 
Report or
Registration Statement
 
SEC File or
Registration Number
 
Exhibit References
+32.1
 
Section 1350 Certification of David M. McClanahan
           
                   
+32.2
 
Section 1350 Certification of Gary L. Whitlock
           
                   
+99.1
 
Items incorporated by reference from the CenterPoint Houston Form 10-K.  Item 1A “—Risk Factors.”
           


SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
   
   
 
By:  /s/ Walter L. Fitzgerald
 
Walter L. Fitzgerald
 
Senior Vice President and Chief Accounting Officer
   

Date:  November 10, 2008


Index to Exhibits

The following exhibits are filed herewith:

Exhibits not incorporated by reference to a prior filing are designated by a cross (+); all exhibits not so designated are incorporated by reference to a prior filing as indicated.

Exhibit Number
   
Description
 
Report or Registration Statement
 
SEC File or Registration Number
 
Exhibit References
3.1
 
Articles of Organization of CenterPoint Energy Houston Electric
 
CenterPoint Houston’s Form 8-K dated August 31, 2002 filed with the SEC on September 3, 2002
 
1-3187
 
3(b)
                   
3.2
 
Limited Liability Company Regulations of CenterPoint Energy Houston Electric
 
CenterPoint Houston’s Form 8-K dated August 31, 2002 filed with the SEC on September 3, 2002
 
1-3187
 
3(c)
                   
4.1
 
$300,000,000 Second Amended and Restated Credit Agreement, dated as of June 29, 2007, among CenterPoint Houston, as Borrower, and the banks named therein
 
CenterPoint Houston’s Form 10-Q for the quarter ended June 30, 2007
 
1-3187
 
4.1
                   
+12
 
Computation of Ratios of Earnings to Fixed Charges
           
                   
+31.1
 
Rule 13a-14(a)/15d-14(a) Certification of David M. McClanahan
           
                   
+31.2
 
Rule 13a-14(a)/15d-14(a) Certification of Gary L. Whitlock
           
                   
+32.1
 
Section 1350 Certification of David M. McClanahan
           
                   
+32.2
 
Section 1350 Certification of Gary L. Whitlock
           
                   
+99.1
 
Items incorporated by reference from the CenterPoint Houston Form 10-K.  Item 1A “—Risk Factors.”
           
 
25


ex12.htm
 
Exhibit 12
 
 
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Millions of Dollars)
 

   
Nine Months Ended
September 30,
 
   
2007
   
2008
 
             
Net Income
  $ 223     $ 196  
Income taxes
    111       113  
Capitalized interest
    (8 )     (5 )
      326       304  
                 
Fixed charges, as defined:
               
                 
Interest                                                                               
    174       182  
Capitalized interest                                                                               
    8       5  
Interest component of rentals charged to operating expense
    1       1  
Total fixed charges                                                                               
    183       188  
                 
Earnings, as defined
   $ 509      $ 492  
                 
Ratio of earnings to fixed charges
    2.78       2.61  
          ________
 (1)
Excluded from the computation of fixed charges for the nine months ended September 30, 2007 and 2008 is interest expense of $3 million and $7 million, respectively, which is included in income tax expense. The ratio of earnings to fixed charges would be 2.74 and 2.53, respectively, for the nine months ended September 30, 2007 and 2008, if the interest expense included in income tax expense were included in the computation of fixed charges.

ex31-1.htm
 
Exhibit 31.1
 
CERTIFICATIONS
 
I, David M. McClanahan, certify that:
 
1.           I have reviewed this quarterly report on Form 10-Q of CenterPoint Energy Houston Electric, LLC;
 
2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.           Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.           The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.           The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:  November 10, 2008
 
 
/s/ David M. McClanahan
 
David M. McClanahan
 
Chairman (Principal Executive Officer)

 
 

 

ex31-2.htm
 
Exhibit 31.2
 
CERTIFICATIONS
 
I, Gary L. Whitlock, certify that:
 
1.           I have reviewed this quarterly report on Form 10-Q of CenterPoint Energy Houston Electric, LLC;
 
2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.           Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.           The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.           The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:  November 10, 2008
 
 
/s/ Gary L. Whitlock
 
Gary L. Whitlock
 
Executive Vice President and Chief Financial Officer

 
 

 

ex32-1.htm
 
Exhibit 32.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of CenterPoint Energy Houston Electric, LLC (the “Company”) on Form 10-Q for the quarter ended September 30, 2008 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, David M. McClanahan, Chairman (Principal Executive Officer), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

1.           The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ David M. McClanahan
 
David M. McClanahan
 
Chairman (Principal Executive Officer)
 
November 10, 2008
 

 
 

 

ex32-2.htm
 
Exhibit 32.2
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of CenterPoint Energy Houston Electric, LLC (the “Company”) on Form 10-Q for the quarter ended September 30, 2008 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Gary L. Whitlock, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

1.           The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ Gary L. Whitlock
 
Gary L. Whitlock
 
Executive Vice President and Chief Financial Officer
 
November 10, 2008
 

 

 
 

 

ex99-1.htm
 
Exhibit 99.1

 
Item 1A.    Risk Factors
 
        The following, along with any additional legal proceedings identified or incorporated by reference in Item 3 of this report, summarizes the principal risk factors associated with our business.
 
Risk Factors Affecting Our Business
 
We may not be successful in ultimately recovering the full value of our true-up components, which could result in the elimination of certain tax benefits and could have an adverse impact on our results of operations, financial condition and cash flows.
 
In March 2004, we filed our true-up application with the Texas Utility Commission, requesting recovery of $3.7 billion, excluding interest, as allowed under the Texas electric restructuring law. In December 2004, the Texas Utility Commission issued the True-Up Order allowing us to recover a true-up balance of approximately $2.3 billion, which included interest through August 31, 2004, and provided for adjustment of the amount to be recovered to include interest on the balance until recovery, along with the principal portion of additional EMCs returned to customers after August 31, 2004 and in certain other respects.
 
We and other parties filed appeals of the True-Up Order to a district court in Travis County, Texas. In August 2005, that court issued its judgment on the various appeals. In its judgment, the district court:
 
 
reversed the Texas Utility Commission’s ruling that had denied recovery of a portion of the capacity auction true-up amounts;
 
 
reversed the Texas Utility Commission’s ruling that precluded CenterPoint Houston from recovering the interest component of the EMCs paid to REPs; and
 
 
affirmed the True-Up Order in all other respects.
 
The district court’s decision would have had the effect of restoring approximately $650 million, plus interest, of the $1.7 billion the Texas Utility Commission had disallowed from CenterPoint Houston’s initial request.
 
        We and other parties appealed the district court’s judgment to the Texas Third Court of Appeals, which issued its decision in December 2007. In its decision, the court of appeals:
 
 
reversed the district court’s judgment to the extent it restored the capacity auction true-up amounts;
 
 
reversed the district court’s judgment to the extent it upheld the Texas Utility Commission’s decision to allow us to recover EMCs paid to RRI;
 
 
ordered that the tax normalization issue described below be remanded to the Texas Utility Commission; and
 
 
affirmed the district court’s judgment in all other respects.
 
We and two other parties filed motions for rehearing with the court of appeals. In the event that the motions for rehearing are not resolved in a manner favorable to us, we intend to seek further review by the Texas Supreme Court. Although we believe that our true-up request is consistent with applicable statutes and regulations and accordingly that it is reasonably possible that we will be successful in our further appeals, we can provide no assurance as to the ultimate rulings by the courts on the issues to be considered in the various appeals or with respect to the ultimate decision by the Texas Utility Commission on the tax normalization issue described below.
 
To reflect the impact of the True-Up Order, in 2004 and 2005 we recorded a net after-tax extraordinary loss of $947 million. No amounts related to the district court’s judgment or the decision of the court of appeals have been recorded in our consolidated financial statements. However, if the court of appeals decision is not reversed or modified as a result of the pending motions for rehearing or on further review by the Texas Supreme Court, we anticipate that we would be required to record an additional loss to reflect the court of appeals decision. The amount of that loss would depend on several factors, including ultimate resolution of the tax normalization issue described below and the calculation of interest on any amounts we ultimately are authorized to recover or is required to refund
 

 
beyond the amounts recorded based on the True-up Order, but could range from $130 million to $350 million, plus interest subsequent to December 31, 2007.
 
In the True-Up Order the Texas Utility Commission reduced our stranded cost recovery by approximately $146 million, which was included in the extraordinary loss discussed above, for the present value of certain deferred tax benefits associated with our former electric generation assets. We believe that the Texas Utility Commission based its order on proposed regulations issued by the IRS in March 2003 which would have allowed utilities owning assets that were deregulated before March 4, 2003 to make a retroactive election to pass the benefits of ADITC and EDFIT back to customers. However, in December 2005, the IRS withdrew those proposed normalization regulations and issued new proposed regulations that do not include the provision allowing a retroactive election to pass the tax benefits back to customers. CenterPoint Energy subsequently requested a Private Letter Ruling (PLR) asking the IRS whether the Texas Utility Commission’s order reducing our stranded cost recovery by $146 million for ADITC and EDFIT would cause normalization violations. In that ruling, which was received in August 2007, the IRS concluded that such reductions would cause normalization violations with respect to the ADITC and EDFIT. As in a similar PLR issued in May 2006 to another Texas utility, the IRS did not reference its proposed regulations.
 
The district court affirmed the Texas Utility Commission’s ruling on the tax normalization issue, but in response to a request from the Texas Utility Commission, the court of appeals ordered that the tax normalization issue be remanded for further consideration. If the Texas Utility Commission’s order relating to the ADITC reduction is not reversed or otherwise modified on remand so as to eliminate the normalization violation, the IRS could require CenterPoint Energy to pay an amount equal to our unamortized ADITC balance as of the date that the normalization violation is deemed to have occurred. In addition, the IRS could deny us the ability to elect accelerated tax depreciation benefits beginning in the taxable year that the normalization violation is deemed to have occurred. Such treatment if required by the IRS, could have a material adverse impact on our results of operations, financial condition and cash flows in addition to any potential loss resulting from final resolution of the True-Up Order. However, we and CenterPoint Energy will continue to pursue a favorable resolution of this issue through the appellate or administrative process. Although the Texas Utility Commission has not previously required a company subject to its jurisdiction to take action that would result in a normalization violation, no prediction can be made as to the ultimate action the Texas Utility Commission may take on this issue on remand.
 
Our receivables are concentrated in a small number of REPs, and any delay or default in payment could adversely affect our cash flows, financial condition and results of operations.
 
Our receivables from the distribution of electricity are collected from REPs that supply the electricity we distribute to our customers. Currently, we do business with 74 REPs. Adverse economic conditions, structural problems in the market served by ERCOT or financial difficulties of one or more REPs could impair the ability of these retail providers to pay for our services or could cause them to delay such payments. We depend on these REPs to remit payments on a timely basis. Applicable regulatory provisions require that customers be shifted to a provider of last resort if a retail electric provider cannot make timely payments. Applicable Texas Utility Commission regulations limit the extent to which we can demand security from REPs for payment of its delivery charges. RRI, through its subsidiaries, is our largest customer. Approximately 48% of CenterPoint Houston’s $141 million in billed receivables from REPs at December 31, 2007 was owed by subsidiaries of RRI. Any delay or default in payment could adversely affect our cash flows, financial condition and results of operations.
 
Rate regulation of our business may delay or deny our ability to earn a reasonable return and fully recover its costs.
 
Our rates are regulated by certain municipalities and the Texas Utility Commission based on an analysis of its invested capital and its expenses in a test year. Thus, the rates that we are allowed to charge may not match its expenses at any given time. In this connection, pursuant to the Settlement Agreement, discussed in “Business — Regulation — State and Local Regulation — Rate Agreement” in Item 1 of this report, until June 30, 2010 we are limited in our ability to request rate relief. The regulatory process by which rates are determined may not always result in rates that will produce full recovery of our costs and enable us to earn a reasonable return on its invested capital.
 
 
 

 

Disruptions at power generation facilities owned by third parties could interrupt our sales of transmission and distribution services.
 
We transmit and distribute to customers of REPs electric power that the REPs obtain from power generation facilities owned by third parties. We do not own or operate any power generation facilities. If power generation is disrupted or if power generation capacity is inadequate, our sales of transmission and distribution services may be diminished or interrupted, and our results of operations, financial condition and cash flows may be adversely affected.
 
Our revenues and results of operations are seasonal.
 
A significant portion of our revenue is derived from rates that we collect from each REP based on the amount of electricity we distribute on behalf of such REP. Thus, our revenues and results of operations are subject to seasonality, weather conditions and other changes in electricity usage, with revenues being higher during the warmer months.
 
Risk Factors Associated with Our Consolidated Financial Condition
 
If we are unable to arrange future financings on acceptable terms, our ability to refinance existing indebtedness could be limited.
 
As of December 31, 2007, we had $3.9 billion of outstanding indebtedness on a consolidated basis, which includes $2.3 billion of non-recourse transition bonds. In February 2008, we issued approximately $488 million of additional non-recourse transition bonds. Our future financing activities may depend, at least in part, on:
 
 
the resolution of the true-up components, including, in particular, the results of appeals to the courts regarding rulings obtained to date;
 
 
general economic and capital market conditions;
 
 
credit availability from financial institutions and other lenders;
 
 
investor confidence in us and the markets in which we operate;
 
 
maintenance of acceptable credit ratings;
 
 
market expectations regarding our future earnings and cash flows;
 
 
market perceptions of our ability to access capital markets on reasonable terms;
 
 
our exposure to RRI as our customer and in connection with its indemnification obligations arising in connection with its separation from CenterPoint Energy; and
 
 
provisions of relevant tax and securities laws.
 
As of December 31, 2007, we had outstanding $2.0 billion aggregate principal amount of general mortgage bonds, including approximately $527 million held in trust to secure pollution control bonds for which we are obligated and approximately $229 million held in trust to secure pollution control bonds for which we are obligated. Additionally, we had outstanding approximately $253 million aggregate principal amount of first mortgage bonds, including approximately $151 million held in trust to secure certain pollution control bonds for which CenterPoint Energy is obligated. We may issue additional general mortgage bonds on the basis of retired bonds, 70% of property additions or cash deposited with the trustee. Approximately $2.3 billion of additional first mortgage bonds and general mortgage bonds in the aggregate could be issued on the basis of retired bonds and 70% of property additions as of December 31, 2007. However, we have contractually agreed that we will not issue additional first mortgage bonds, subject to certain exceptions.
 
 
 

 

Our current credit ratings are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Future Sources and Uses of Cash — Impact on Liquidity of a Downgrade in Credit Ratings” in Item 7 of this report. These credit ratings may not remain in effect for any given period of time and one or more of these ratings may be lowered or withdrawn entirely by a rating agency. We note that these credit ratings are not recommendations to buy, sell or hold our securities. Each rating should be evaluated independently of any other rating. Any future reduction or withdrawal of one or more of our credit ratings could have a material adverse impact on our ability to access capital on acceptable terms.
 
The financial condition and liquidity of our parent company could affect our access to capital, our credit standing and our financial condition.
 
Our ratings and credit may be impacted by CenterPoint Energy’s credit standing. As of December 31, 2007, CenterPoint Energy and its subsidiaries other than us have approximately $842 million principal amount of debt required to be paid through 2010. This amount excludes amounts related to capital leases, transition bonds and indexed debt securities obligations, but includes $123 million of 3.75% convertible notes converted by holders in January and February 2008. In addition, CenterPoint Energy has cash settlement obligations with respect to $412 million of outstanding 3.75% convertible notes on which holders could exercise their conversion rights during the first quarter of 2008 and in subsequent quarters in which CenterPoint Energy’s common stock price causes such notes to be convertible. If CenterPoint Energy were to experience a deterioration in its credit standing or liquidity difficulties, our access to credit and our ratings could be adversely affected and the repayment of notes receivable from CenterPoint Energy in the amount of $750 million as of December 31, 2007 could be adversely affected.
 
We are an indirect wholly owned subsidiary of CenterPoint Energy. CenterPoint Energy can exercise substantial control over our dividend policy and business and operations and could do so in a manner that is adverse to our interests.

We are managed by officers and employees of CenterPoint Energy. Our management will make determinations with respect to the following:

 
our payment of dividends;
 
 
decisions on our financings and our capital raising activities;
 
 
mergers or other business combinations;
 
 
investor confidence in us and the markets in which we operate; and
 
 
our acquisition or disposition of assets.
 
There are no contractual restrictions on our ability to pay dividends to CenterPoint Energy. Our management could decide to increase our dividends to CenterPoint Energy to support its cash needs. This could adversely affect our liquidity. However, under our credit facility, our ability to pay dividends is restricted by a covenant that debt, excluding transition bonds, as a percentage of total capitalization may not exceed 65%.

Other Risks
 
We are subject to operational and financial risks and liabilities arising from environmental laws and regulations.
 
Our operations are subject to stringent and complex laws and regulations pertaining to health, safety and the environment, as discussed in “Business — Environmental Matters” in Item 1 of this report. As an owner or operator of natural gas pipelines and distribution systems, gas gathering and processing systems, and electric transmission and distribution systems, we must comply with these laws and regulations at the federal, state and local levels. These laws and regulations can restrict or impact our business activities in many ways, such as:
 
 
 

 

 
restricting the way we can handle or dispose of wastes;
 
 
limiting or prohibiting construction activities in sensitive areas such as wetlands, coastal regions, or areas inhabited by endangered species;
 
 
requiring remedial action to mitigate pollution conditions caused by our operations, or attributable to former operations; and
 
 
enjoining the operations of facilities deemed in non-compliance with permits issued pursuant to such environmental laws and regulations.
 
In order to comply with these requirements, we may need to spend substantial amounts and devote other resources from time to time to:
 
 
construct or acquire new equipment;
 
 
acquire permits for facility operations;
 
 
modify or replace existing and proposed equipment; and
 
 
clean up or decommission waste disposal areas, fuel storage and management facilities and other locations and facilities.
 
Failure to comply with these laws and regulations may trigger a variety of administrative, civil and criminal enforcement measures, including the assessment of monetary penalties, the imposition of remedial actions, and the issuance of orders enjoining future operations. Certain environmental statutes impose strict, joint and several liability for costs required to clean up and restore sites where hazardous substances have been disposed or otherwise released. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances or other waste products into the environment.
 
Our insurance coverage may not be sufficient. Insufficient insurance coverage and increased insurance costs could adversely impact our results of operations, financial condition and cash flows.
 
We currently have general liability and property insurance in place to cover certain of our facilities in amounts that we consider appropriate. Such policies are subject to certain limits and deductibles and do not include business interruption coverage. Insurance coverage may not be available in the future at current costs or on commercially reasonable terms, and the insurance proceeds received for any loss of, or any damage to, any of our facilities may not be sufficient to restore the loss or damage without negative impact on our results of operations, financial condition and cash flows.
 
In common with other companies in its line of business that serve coastal regions, we do not have insurance covering its transmission and distribution system because we believe it to be cost prohibitive. If we were to sustain any loss of, or damage to, its transmission and distribution properties, it may not be able to recover such loss or damage through a change in its regulated rates, and any such recovery may not be timely granted. Therefore, we may not be able to restore any loss of, or damage to, any of its transmission and distribution properties without negative impact on its results of operations, financial condition and cash flows.
 
We and CenterPoint Energy could incur liabilities associated with businesses and assets that we have transferred to others.
 
Under some circumstances, we and CenterPoint Energy could incur liabilities associated with assets and businesses we and CenterPoint Energy no longer own. These assets and businesses were previously owned by Reliant Energy, Incorporated (Reliant Energy), our predecessor, directly or through subsidiaries and include:
 
 
 

 
 
 
those transferred to RRI or its subsidiaries in connection with the organization and capitalization of RRI prior to its initial public offering in 2001; and
 
 
those transferred to Texas Genco in connection with its organization and capitalization.
 
In connection with the organization and capitalization of RRI, RRI and its subsidiaries assumed liabilities associated with various assets and businesses Reliant Energy transferred to them. RRI also agreed to indemnify, and cause the applicable transferee subsidiaries to indemnify, CenterPoint Energy and its subsidiaries, including us, with respect to liabilities associated with the transferred assets and businesses. These indemnity provisions were intended to place sole financial responsibility on RRI and its subsidiaries for all liabilities associated with the current and historical businesses and operations of RRI, regardless of the time those liabilities arose. If RRI were unable to satisfy a liability that has been so assumed in circumstances in which Reliant Energy and its subsidiaries were not released from the liability in connection with the transfer, we and CenterPoint Energy could be responsible for satisfying the liability.
 
RRI’s unsecured debt ratings are currently below investment grade. If RRI were unable to meet its obligations, it would need to consider, among various options, restructuring under the bankruptcy laws, in which event RRI might not honor its indemnification obligations and claims by RRI’s creditors might be made against us as its former owner.
 
Reliant Energy and RRI are named as defendants in a number of lawsuits arising out of energy sales in California and other markets and financial reporting matters. Although these matters relate to the business and operations of RRI, claims against Reliant Energy have been made on grounds that include the effect of RRI’s financial results on Reliant Energy’s historical financial statements and liability of Reliant Energy as a controlling shareholder of RRI. We or CenterPoint Energy could incur liability if claims in one or more of these lawsuits were successfully asserted against us or CenterPoint Energy and indemnification from RRI were determined to be unavailable or if RRI were unable to satisfy indemnification obligations owed with respect to those claims.
 
In connection with the organization and capitalization of Texas Genco, Texas Genco assumed liabilities associated with the electric generation assets Reliant Energy transferred to it. Texas Genco also agreed to indemnify, and cause the applicable transferee subsidiaries to indemnify, Centerpoint Energy and its subsidiaries, including CenterPoint us, with respect to liabilities associated with the transferred assets and businesses. In many cases the liabilities assumed our obligations and we were not released by third parties from these liabilities. The indemnity provisions were intended generally to place sole financial responsibility on Texas Genco and its subsidiaries for all liabilities associated with the current and historical businesses and operations of Texas Genco, regardless of the time those liabilities arose. In connection with the sale of Texas Genco’s fossil generation assets (coal, lignite and gas-fired plants) to Texas Genco LLC, the separation agreement we entered into with Texas Genco in connection with the organization and capitalization of Texas Genco was amended to provide that all of Texas Genco’s rights and obligations under the separation agreement relating to its fossil generation assets, including Texas Genco’s obligation to indemnify Centerpoint Energy with respect to liabilities associated with the fossil generation assets and related business, were assigned to and assumed by Texas Genco LLC. In addition, under the amended separation agreement, Texas Genco is no longer liable for, and CenterPoint Energy has assumed and agreed to indemnify Texas Genco LLC against, liabilities that Texas Genco originally assumed in connection with its organization to the extent, and only to the extent, that such liabilities are covered by certain insurance policies or other similar agreements held by CenterPoint Energy. If Texas Genco or Texas Genco LLC were unable to satisfy a liability that had been so assumed or indemnified against, and provided CenterPoint Energy had not been released from the liability in connection with the transfer, we could be responsible for satisfying the liability.
 
CenterPoint Energy of its subsidiaries have been named, along with numerous others, as a defendant in lawsuits filed by a large number of individuals who claim injury due to exposure to asbestos. Most claimants in such litigation have been workers who participated in construction of various industrial facilities, including power plants. Some of the claimants have worked at locations CenterPoint Energy owns, but most existing claims relate to facilities previously owned by its subsidiaries but currently owned by Texas Genco LLC, which is now known as NRG Texas LP. We anticipate that additional claims like those received may be asserted in the future. Under the terms of the arrangements regarding separation of the generating business from us and its sale to Texas Genco LLC, ultimate financial responsibility for uninsured losses from claims relating to the generating business has been assumed by Texas Genco LLC and its successor, 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 Texas Genco LLC.