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CEHE Q3 2012 10-Q

 

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

FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012
OR
¨
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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
  Large accelerated filer 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 by Rule 12b-2 of the Exchange Act).  Yes o No þ
As of October 16, 2012, 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, 2012

TABLE OF CONTENTS
 
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
Condensed Statements of Consolidated Income
 
 
Three and Nine Months Ended September 30, 2011 and 2012 (unaudited)
 
 
 
 
Condensed Consolidated Balance Sheets
 
 
December 31, 2011 and September 30, 2012 (unaudited)
 
 
 
 
Condensed Statements of Consolidated Cash Flows
 
 
Nine Months Ended September 30, 2011 and 2012 (unaudited)
 
 
 
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
Item 2.
Management’s Narrative Analysis of Results of Operations
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
Exhibits
 

i

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

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

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

•
state and federal legislative and regulatory actions or developments affecting various aspects of our business, including, among others, energy deregulation or re-regulation, health care reform, financial reform, tax legislation and actions regarding the rates charged by us;

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

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

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

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

•
weather variations and other natural phenomena;

•
any direct or indirect effects on our facilities, operations and financial condition resulting from terrorism, cyber attacks, data security breaches or other attempts to disrupt our businesses or the businesses of third parties, or other catastrophic events;

•
the impact of unplanned facility outages;

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

•
changes in interest rates or rates of inflation;

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

•
actions by credit rating agencies;

•
inability of various counterparties to meet their obligations to us;

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

•
the ability of GenOn Energy, Inc. (formerly known as RRI Energy, Inc., Reliant Energy, Inc. and Reliant Resources, Inc.) and its subsidiaries to satisfy their obligations to us, including indemnity obligations;

•
the ability of retail electric providers (REPs), including REP affiliates of NRG Energy, Inc. and REP affiliates of Energy Future Holdings Corp., which are our two largest customers, to satisfy their obligations to us and our subsidiaries;

ii


•
the outcome of litigation brought by or against us;

•
our ability to control costs;

•
the investment performance of CenterPoint Energy, Inc.’s pension and postretirement benefit plans;

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

•
acquisition and merger activities involving us or our competitors; and

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

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


iii

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,
 
2011
 
2012
 
2011
 
2012
 
 
 
 
Revenues
$
707

 
$
748

 
$
1,802

 
$
1,955

 
 
 
 
 
 
 
 
Expenses:
 

 
 

 
 

 
 

Operation and maintenance
230

 
233

 
661

 
692

Depreciation and amortization
179

 
219

 
453

 
563

Taxes other than income taxes
54

 
54

 
158

 
160

Total
463

 
506

 
1,272

 
1,415

Operating Income
244

 
242

 
530

 
540

 
 
 
 
 
 
 
 
Other Income (Expense):
 

 
 

 
 

 
 

Interest and other finance charges
(38
)
 
(36
)
 
(113
)
 
(110
)
Interest on transition and system restoration bonds
(31
)
 
(37
)
 
(96
)
 
(112
)
Return on true-up balance
352

 
—

 
352

 
—

Other, net
15

 
15

 
30

 
32

Total
298

 
(58
)
 
173

 
(190
)
Income Before Income Taxes
542

 
184

 
703

 
350

Income tax expense
175

 
46

 
233

 
98

Income Before Extraordinary Item
367

 
138

 
470

 
252

Extraordinary Item, net of tax
598

 
—

 
598

 
—

Net Income
$
965

 
$
138

 
$
1,068

 
$
252


See Notes to the Interim Condensed Consolidated Financial Statements



1

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

 
$
699

Accounts and notes receivable, net ($52 and $104 related to VIEs at December 31, 2011 and September 30, 2012, respectively)
201

 
307

Accounts and notes receivable—affiliated companies
1,027

 
293

Accrued unbilled revenues
72

 
90

Inventory
80

 
91

Taxes receivable
2

 
—

Deferred tax asset
3

 
6

Other ($42 and $53 related to VIEs at December 31, 2011 and September 30, 2012, respectively)
65

 
67

Total current assets
1,670

 
1,553

 
 
 
 
Property, Plant and Equipment:
 
 
 
Property, plant and equipment
7,827

 
8,052

Less accumulated depreciation and amortization
2,784

 
2,800

Property, plant and equipment, net
5,043

 
5,252

 
 
 
 
Other Assets:
 

 
 

Regulatory assets ($2,289 and $3,635 related to VIEs at December 31, 2011 and September 30, 2012, respectively)
3,726

 
3,465

Notes receivable—affiliated companies
750

 
750

Other
35

 
36

Total other assets
4,511

 
4,251

 
 
 
 
Total Assets
$
11,224

 
$
11,056



See Notes to the Interim Condensed Consolidated Financial Statements


















2

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

LIABILITIES AND MEMBER’S EQUITY
 
December 31,
 
September 30,
 
2011
 
2012
Current Liabilities:
 

 
 

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

 
$
451

Current portion of other long-term debt
46

 
450

Accounts payable
113

 
78

Accounts and notes payable—affiliated companies
32

 
45

Taxes accrued
101

 
83

Interest accrued
96

 
51

Other
98

 
97

Total current liabilities
793

 
1,255

Other Liabilities:
 

 
 

Accumulated deferred income taxes, net
2,113

 
2,134

Benefit obligations
252

 
253

Regulatory liabilities
441

 
473

Notes payable—affiliated companies
151

 
151

Other
78

 
34

Total other liabilities
3,035

 
3,045

Long-term Debt:
 

 
 

VIE transition and system restoration bonds
2,215

 
3,459

Other
2,047

 
1,595

Total long-term debt
4,262

 
5,054

 
 
 
 
Commitments and Contingencies (Note 8)


 


 
 
 
 
Member’s Equity:
 
 
 
Common stock
—

 
—

Paid-in capital
1,230

 
1,231

Retained earnings
1,904

 
471

Total member’s equity
3,134

 
1,702

 
 
 
 
Total Liabilities and Member’s Equity
$
11,224

 
$
11,056



See Notes to the Interim Condensed Consolidated Financial Statements

3

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,
 
2011
 
2012
Cash Flows from Operating Activities:
 
 
 
Net income
$
1,068

 
$
252

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
453

 
563

Amortization of deferred financing costs
9

 
10

Deferred income taxes
188

 
(36
)
Extraordinary item, net of tax
(598
)
 
—

Return on true-up balance
(352
)
 
—

Changes in other assets and liabilities:
 

 
 

Accounts and notes receivable, net
(107
)
 
(119
)
Accounts receivable/payable, affiliates
4

 
1

Inventory
(4
)
 
(11
)
Accounts payable
2

 
(23
)
Taxes receivable
63

 
2

Interest and taxes accrued
(73
)
 
(63
)
Net regulatory assets and liabilities
(25
)
 
25

Other current assets
(1
)
 
10

Other current liabilities
16

 
(1
)
Other assets
(3
)
 
3

Other liabilities
2

 
(1
)
Other, net
—

 
(2
)
Net cash provided by operating activities
642

 
610

 
 
 
 
Cash Flows from Investing Activities:
 

 
 

Capital expenditures
(449
)
 
(429
)
Decrease (increase) in notes receivable from affiliates, net
(117
)
 
746

Increase in restricted cash of transition and system restoration bond companies
(2
)
 
(12
)
Cash received from U.S. Department of Energy grant
110

 
—

Other, net
5

 
(9
)
Net cash provided by (used in) investing activities
(453
)
 
296

 
 
 
 
Cash Flows from Financing Activities:
 

 
 

Proceeds from long-term debt
—

 
2,495

Payments of long-term debt
(283
)
 
(1,153
)
Dividend to parent
—

 
(1,685
)
Cash paid for debt retirement
—

 
(69
)
Debt issuance costs
(2
)
 
(16
)
Other, net
1

 
1

Net cash used in financing activities
(284
)
 
(427
)
 
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents
(95
)
 
479

Cash and Cash Equivalents at Beginning of Period
198

 
220

Cash and Cash Equivalents at End of Period
$
103

 
$
699

 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 

 
 

Cash Payments:
 

 
 

Interest, net of capitalized interest
$
279

 
$
265

Income taxes (refunds), net
(29
)
 
126

Non-cash transactions:
 

 
 

Accounts payable related to capital expenditures
$
38

 
$
42


See Notes to the Interim Condensed Consolidated Financial Statements



4

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). 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, 2011.

Background. CenterPoint Houston engages in the electric transmission and distribution business in the Texas Gulf Coast area that includes the city of Houston.  CenterPoint Houston is an indirect wholly owned subsidiary of CenterPoint Energy, Inc. (CenterPoint Energy), a public utility holding company.  At September 30, 2012, CenterPoint Houston had five subsidiaries, CenterPoint Energy Transition Bond Company, LLC, CenterPoint Energy Transition Bond Company II, LLC, CenterPoint Energy Transition Bond Company III, LLC, CenterPoint Energy Restoration Bond Company, LLC and CenterPoint Energy Transition Bond Company IV, LLC (Bond Company IV).  The transition and system restoration bond companies, which are classified as variable interest entities, are wholly-owned bankruptcy remote special purpose entities that were formed specifically for the purpose of securitizing transition and system restoration related property. Creditors of CenterPoint Houston have no recourse to any assets or revenues of the transition and system restoration bond companies. The bonds issued by these companies are payable only from and secured by transition and system restoration property, and the bondholders have no recourse to the general credit of CenterPoint Houston.

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

CenterPoint Houston’s Interim Condensed Financial Statements reflect all normal recurring adjustments that are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the respective periods. Amounts reported in CenterPoint Houston’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

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

(3)
Employee Benefit Plans

CenterPoint Houston’s employees participate in CenterPoint Energy’s postretirement benefit plan. CenterPoint Houston’s net periodic cost includes the following components relating to postretirement benefits:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2011
 
2012
 
2011
 
2012
 
 
(in millions)
Interest cost
 
$
4

 
$
4

 
$
12

 
$
12

Expected return on plan assets
 
(2
)
 
(2
)
 
(6
)
 
(5
)
Amortization of loss
 
1

 
1

 
1

 
2

Amortization of transition obligation
 
1

 
2

 
4

 
5

Net periodic cost
 
$
4

 
$
5

 
$
11

 
$
14


CenterPoint Houston expects to contribute approximately $7 million to its postretirement benefit plan in 2012, of which $6 million has been contributed as of September 30, 2012.

5


(4)
Regulatory Accounting

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

(5)
Fair Value Measurements

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

Level 1: Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets carried at Level 1 fair value are investments listed in active markets.  At December 31, 2011 and September 30, 2012, CenterPoint Houston held Level 1 investments of $38 million and $50 million, respectively, which were primarily money market funds.

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. CenterPoint Houston had no Level 2 assets or liabilities at either December 31, 2011 or September 30, 2012.

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. These inputs reflect management’s best estimate of the assumptions market participants would use in determining fair value.  CenterPoint Houston had no Level 3 assets or liabilities at either December 31, 2011 or September 30, 2012.

CenterPoint Houston determines the appropriate level for each financial asset and liability on a quarterly basis and recognizes any transfers at the end of the reporting period. For the quarter ended September 30, 2012, there were no transfers between levels.

Estimated Fair Value of Financial Instruments

The fair values of cash and cash equivalents, short-term borrowings and the $750 million note receivable from CenterPoint Houston’s parent are estimated to be equivalent to carrying amounts and have been excluded from the table below.  The fair value of each debt instrument is determined by multiplying the principal amount of each debt instrument by the market price. These assets and liabilities, which are not measured at fair value in the Condensed Consolidated Balance Sheets but for which the fair value is disclosed, would be classified as Level 1 in the fair value hierarchy.
 
December 31, 2011
 
September 30, 2012
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
(in millions)
Financial liabilities:
 
 
 
 
 
 
 
Long-term debt (including $151 million of long-term notes payable to parent)
$
4,765

 
$
5,345

 
$
6,106

 
$
6,758


(6)
Related Party Transactions and Major Customers

(a) Related Party Transactions

CenterPoint Houston 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 under CenterPoint Energy’s revolving credit facility or the sale of CenterPoint Energy’s commercial paper.  CenterPoint Houston had investments in the money pool of $1.0 billion and $264 million at December 31, 2011 and September 30, 2012, respectively, which are included in accounts and notes receivable-affiliated companies in the Condensed Consolidated Balance Sheets.  

At December 31, 2011 and September 30, 2012, CenterPoint Houston had a $750 million note receivable from its parent.

6


CenterPoint Houston had net interest income related to affiliate borrowings of $5 million for both the three months ended September 30, 2011 and 2012, and $15 million and $14 million, respectively, for the nine months ended September 30, 2011 and 2012, included in Other Income.

CenterPoint Energy provides some corporate services to CenterPoint Houston. The costs of services have been charged directly to CenterPoint Houston 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 CenterPoint Houston not been an affiliate. Amounts charged to CenterPoint Houston for these services were $32 million and $33 million for the three months ended September 30, 2011 and 2012, respectively, and $103 million and $105 million for the nine months ended September 30, 2011 and 2012, respectively, and are included primarily in operation and maintenance expenses.

(b) Major Customers

Sales to affiliates of NRG Energy, Inc. (NRG) in the three months ended September 30, 2011 and 2012 represented approximately$188 million and $196 million, respectively, of CenterPoint Houston’s transmission and distribution revenues.  Sales to affiliates of Energy Future Holdings Corp. in the three months ended September 30, 2011 and 2012 represented approximately $58 million and $49 million, respectively, of CenterPoint Houston’s transmission and distribution revenues. Sales to affiliates of NRG in the nine months ended September 30, 2011 and 2012 represented approximately $448 million and $488 million, respectively, of CenterPoint Houston’s transmission and distribution revenues.  Sales to affiliates of Energy Future Holdings Corp. in the nine months ended September 30, 2011 and 2012 represented approximately $139 million and $123 million, respectively, of CenterPoint Houston's transmission and distribution revenues.

(7)
Long-term Debt

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

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

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

Revolving Credit Facility. As of December 31, 2011 and September 30, 2012, CenterPoint Houston had the following revolving credit facility and utilization of such facility (in millions):
 
 
December 31, 2011
 
September 30, 2012
Size of
Facility
 
Loans
 
Letters
of Credit
 
Loans
 
Letters
of Credit
$
300

 
$
—

 
$
4

 
$
—

 
$
4


CenterPoint Houston’s $300 million credit facility, which is scheduled to terminate September 9, 2016, can be drawn at the London Interbank Offered Rate plus 125 basis points based on CenterPoint Houston’s current credit ratings. The facility contains a debt (excluding transition and system restoration bonds) to total capitalization covenant, limiting debt to 65% of its capitalization.

Other. At both December 31, 2011 and September 30, 2012, CenterPoint Houston had issued $151 million of first mortgage bonds as collateral for long-term debt of CenterPoint Energy. As of December 31, 2011 and September 30, 2012, CenterPoint Houston had issued $508 million and $408 million of general mortgage bonds as collateral for long-term debt of CenterPoint Energy, respectively. These bonds are not reflected in the consolidated financial statements because of the contingent nature of the obligations.


7

(8)
Commitments and Contingencies

Legal Matters

Gas Market Manipulation Cases.  CenterPoint Energy, CenterPoint Houston or their predecessor, Reliant Energy, Incorporated (Reliant Energy), and certain of their former subsidiaries have been named as defendants in certain lawsuits described below. Under a master separation agreement between CenterPoint Energy and a former subsidiary, Reliant Resources, Inc. (RRI), CenterPoint Energy and its subsidiaries, including CenterPoint Houston, are entitled to be indemnified by RRI and its successors for any losses, including attorneys’ fees and other costs, arising out of these lawsuits.  In May 2009, RRI sold its Texas retail business to a subsidiary of NRG and RRI changed its name to RRI Energy, Inc. In December 2010, Mirant Corporation merged with and became a wholly owned subsidiary of RRI, and RRI changed its name to GenOn Energy, Inc. (GenOn). In July 2012, GenOn and NRG entered into a definitive merger agreement providing for NRG's acquisition of GenOn, subject to certain conditions. None of the sale of the retail business, the merger with Mirant Corporation or the pending acquisition of GenOn by NRG alters RRI's (now GenOn's) contractual obligations to indemnify CenterPoint Energy and its subsidiaries, including CenterPoint Houston, for certain liabilities, including their indemnification obligations regarding the gas market manipulation litigation.

A large number of lawsuits were filed against numerous gas market participants in a number of federal and western state courts in connection with the operation of the natural gas markets in 2000-2002. CenterPoint Energy’s former affiliate, RRI, was a participant in gas trading in the California and Western markets. These lawsuits, many of which were filed as class actions, allege violations of state and federal antitrust laws. Plaintiffs in these lawsuits are seeking a variety of forms of relief, including, among others, recovery of compensatory damages (in some cases in excess of $1 billion), a trebling of compensatory damages, full consideration damages and attorneys’ fees. CenterPoint Energy and/or Reliant Energy were named in approximately 30 of these lawsuits, which were instituted between 2003 and 2009. CenterPoint Energy and its affiliates have been released or dismissed from all but two of such cases. CenterPoint Energy Services, Inc. (CES), a subsidiary of CenterPoint Energy Resources Corp., is a defendant in a case now pending in federal court in Nevada alleging a conspiracy to inflate Wisconsin natural gas prices in 2000-2002. In July 2011, the court issued an order dismissing the plaintiffs’ claims against the other defendants in the case, each of whom had demonstrated Federal Energy Regulatory Commission jurisdictional sales for resale during the relevant period, based on federal preemption.  The plaintiffs have appealed this ruling to the United States Court of Appeals for the Ninth Circuit. Additionally, CenterPoint Energy was a defendant in a lawsuit filed in state court in Nevada that was dismissed in 2007, but in March 2010 the plaintiffs appealed the dismissal to the Nevada Supreme Court. In September 2012, the Nevada Supreme Court affirmed the dismissal. In October 2012, the Nevada Supreme Court granted the plaintiffs’ motion to stay the dismissal of this case pending the filing and final disposition of their petition for a writ of certiorari to the Supreme Court of the United States. CenterPoint Energy believes that neither it nor CES is a proper defendant in these remaining cases and will continue to pursue dismissal from those cases. CenterPoint Houston does not expect the ultimate outcome of these remaining matters to have a material impact on its financial condition, results of operations or cash flows.

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 CenterPoint Houston, 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 or CenterPoint Houston, but most existing claims relate to facilities previously owned by CenterPoint Energy’s other subsidiaries or CenterPoint Houston, but currently owned by NRG Texas LP. CenterPoint Energy anticipates that additional claims like those received may be asserted in the future. In 2004 and early 2005, CenterPoint Energy sold its generating business, to which most of these claims relate, to a company which is now an affiliate of NRG. Under the terms of the arrangements regarding separation of the generating business from CenterPoint Energy and its sale of that business, ultimate financial responsibility for uninsured losses from claims relating to the generating business has been assumed by the NRG affiliate, but CenterPoint Energy has agreed to continue to defend such claims to the extent they are covered by insurance maintained by CenterPoint Energy, subject to reimbursement of the costs of such defense by the NRG affiliate. Although their ultimate outcome cannot be predicted at this time, CenterPoint Houston or CenterPoint Energy, as appropriate, intends to continue vigorously contesting claims that are not considered to have merit and CenterPoint Houston does not expect, based on its experience to date, these matters, either individually or in the aggregate, to have a material adverse effect on its financial condition, results of operations or cash flows.

Other Environmental.  From time to time CenterPoint Houston identifies the presence of environmental contaminants on property where it conducts or has conducted operations.  Other such sites involving contaminants may be identified in the future.  CenterPoint Houston has and expects to continue to remediate identified sites consistent with its legal obligations. From time to time CenterPoint Houston 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, CenterPoint Houston has been named from time to time as a defendant in litigation related to such sites. Although the ultimate outcome of such matters cannot

8

be predicted at this time, CenterPoint Houston does not expect, based on its experience to date, these matters, either individually or in the aggregate, to have a material adverse effect on its financial condition, results of operations or cash flows.

Other Proceedings

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

(9)       Income Taxes

The effective tax rate for the three and nine months ended September 30, 2012 was 25% and 28%, respectively, compared to 32% and 33% for the same periods in 2011. The decrease in the effective tax rate for the three and nine months ended September 30, 2012 was primarily due to favorable tax adjustments, including the re-measurement of certain unrecognized tax benefits, of $17 million and $25 million for the three and nine months ended September 30, 2012, respectively, related to CenterPoint Energy's Internal Revenue Service (IRS) settlement of tax years 2006 through 2009.

The following table summarizes CenterPoint Houston’s unrecognized tax benefits at December 31, 2011 and September 30, 2012:
 
 
December 31, 2011
 
September 30,
2012
 
 
(in millions)
Unrecognized tax benefits
 
$
44

 
$
—

Portion of unrecognized tax benefits that, if recognized,
would reduce the effective income tax rate
 
18

 
—

Interest accrued on unrecognized tax benefits
 
5

 
—


CenterPoint Energy has a tentative settlement with the IRS for tax years 2008 and 2009 that is under review by the Joint Committee on Taxation. In September 2012, the IRS commenced its examination of CenterPoint Energy’s 2011 consolidated federal income tax return in conjunction with its review of CenterPoint Energy's 2010 consolidated federal income tax return.



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ITEM 2.    MANAGEMENT’S NARRATIVE ANALYSIS OF 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, 2011 (2011 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) and 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, 2011 and the three and nine months ended September 30, 2012. Reference is made to “Management’s Narrative Analysis of Results of Operations” in Item 7 of our 2011 Form 10-K.

EXECUTIVE SUMMARY

Recent Events

Debt Financing Transactions

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

In August 2012, we redeemed $300 million principal amount of our 5.75% general mortgage bonds due 2014 at a price of 107.332% of their principal amount and $500 million principal amount of our 7.00% general mortgage bonds due 2014 at a price of 109.397% of their principal amount.  Redemption premiums for the two series aggregated approximately $69 million.  

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 (REPs) and our ability to recover our 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 the 2011 Form 10-K.


10

The following table sets forth our consolidated results of operations for the three and nine months ended September 30, 2011 and 2012, followed by a discussion of our consolidated results of operations based on operating income.
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
2011
 
2012
 
2011
 
2012
 
(in millions, except throughput and customer data)
Revenues:
 
 
 
 
 
 
 
Electric transmission and distribution utility
$
565

 
$
563

 
$
1,454

 
$
1,492

Transition and system restoration bond companies
142

 
185

 
348

 
463

Total revenues
707

 
748

 
1,802

 
1,955

Expenses:
 

 
 

 
 

 
 
Operation and maintenance, excluding transition and system restoration bond companies
228

 
228

 
655

 
680

Depreciation and amortization, excluding transition and system restoration bond companies
70

 
76

 
207

 
224

Taxes other than income taxes
54

 
54

 
158

 
160

Transition and system restoration bond companies
111

 
148

 
252

 
351

Total expenses
463

 
506

 
1,272

 
1,415

Operating income
244

 
242

 
530

 
540

Interest and other finance charges
(38
)
 
(36
)
 
(113
)
 
(110
)
Interest on transition and system restoration bonds
(31
)
 
(37
)
 
(96
)
 
(112
)
Return on True-Up Balance
352

 
—

 
352

 
—

Other income, net
15

 
15

 
30

 
32

Income before income taxes
542

 
184

 
703

 
350

Income tax expense
175

 
46

 
233

 
98

Income Before Extraordinary Item
367

 
138

 
470

 
252

Extraordinary Item, net of tax
598

 
—

 
598

 
—

Net income
$
965

 
$
138

 
$
1,068

 
$
252

 
 
 
 
 
 
 
 
Operating Income:
 
 
 
 
 
 
 
Electric transmission and distribution utility
213

 
205

 
434

 
428

Transition and system restoration bond companies (1)
31

 
37

 
96

 
112

Total operating income
244

 
242

 
530

 
540

 
 
 
 
 
 
 
 
Throughput (in gigawatt-hours (GWh)):
 

 
 

 
 

 
 
Residential
10,682

 
9,524

 
23,338

 
21,967

Total
24,957

 
23,753

 
62,802

 
61,284

 
 
 
 
 
 
 
 
Number of metered customers at end of period:
 

 
 

 
 

 
 
Residential
1,898,789

 
1,934,078

 
1,898,789

 
1,934,078

Total
2,149,594

 
2,189,796

 
2,149,594

 
2,189,796

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

Three months ended September 30, 2012 compared to three months ended September 30, 2011

We reported operating income of $242 million for the three months ended September 30, 2012, consisting of $205 million from the regulated electric transmission and distribution utility (TDU) and $37 million related to transition and system restoration bond companies (Bond Companies). For the three months ended September 30, 2011, operating income totaled $244 million, consisting of $213 million from the TDU and $31 million related to Bond Companies. TDU operating income decreased $8 million due to decreased usage ($38 million), primarily due to a return to more normal weather when compared to the weather experienced in 2011, and the impact of the 2010 rate case implemented in September 2011 ($9 million), partially offset by higher transmission-related revenues net of higher costs billed by transmission providers ($13 million), higher equity return ($9 million) primarily related to true-up proceeds, customer growth ($7 million) from the addition of over 40,000 new customers, decreased labor and benefits costs ($6 million) and increased miscellaneous revenues ($5 million), primarily from right-of-way access and easement grants.



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Nine months ended September 30, 2012 compared to nine months ended September 30, 2011

We reported operating income of $540 million for the nine months ended September 30, 2012, consisting of $428 million from the TDU and $112 million related to Bond Companies. For the nine months ended September 30, 2011, operating income totaled $530 million, consisting of $434 million from the TDU and $96 million related to Bond Companies. TDU operating income decreased $6 million due to decreased usage ($49 million), primarily due to a return to more normal weather when compared to the weather experienced in 2011, and the impact of the 2010 rate case implemented in September 2011 ($36 million), partially offset by increased miscellaneous revenues ($23 million), primarily from right-of-way access and easement grants, higher equity return ($22 million) primarily related to true-up proceeds, customer growth ($19 million) from the addition of over 40,000 new customers, higher transmission-related revenues net of higher costs billed by transmission providers ($10 million) and decreased labor and benefits costs ($6 million).

Income Tax Expense. The effective tax rate for the three and nine months ended September 30, 2012 was 25% and 28%, respectively, compared to 32% and 33% for the same periods in 2011. The decrease in the effective tax rate for the three and nine months ended September 30, 2012 was primarily due to favorable tax adjustments, including the re-measurement of certain unrecognized tax benefits, of $17 million and $25 million for the three and nine months ended September 30, 2012, respectively, related to CenterPoint Energy's Internal Revenue Service settlement of tax years 2006 through 2009.


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 of our 2011 Form 10-K and “Management’s Narrative Analysis of Results of Operations - Certain Factors Affecting Future Earnings” in Item 7 of Part II of our 2011 Form 10-K and “Cautionary Statement Regarding Forward-Looking Information” in this 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, tax payments and working capital needs. Substantially all of our capital expenditures are expected to be used for investment in infrastructure to maintain the reliability and safety of our operations. Our principal anticipated cash requirements for the remaining three months of 2012 include approximately $158 million of capital expenditures and $62 million of scheduled principal payments on transition and system restoration bonds.

We expect our external temporary investments and cash flows from operations will be sufficient to meet our anticipated cash needs in the remaining three months of 2012. In March 2012, we distributed approximately $1.7 billion to our parent. Funds for the payment of the distribution were obtained from our January 2012 sale of transition property in connection with the issuance of transition bonds by CenterPoint Energy Transition Bond Company IV, LLC (Bond Company IV).

Longer term cash requirements or discretionary financing or refinancing may result in the issuance of debt securities in the capital markets, borrowing under our revolving credit facility or the arrangement of additional credit facilities. Issuances of debt in the capital markets and additional credit facilities may not, however, be available to us on acceptable terms.

Off-Balance Sheet Arrangements.  Other than first mortgage bonds and general mortgage bonds issued as collateral for long-term debt of CenterPoint Energy as discussed below and operating leases, we have no off-balance sheet arrangements.

Regulatory Matters. Regulatory developments that have occurred since our 2011 Form 10-K was filed with the Securities and Exchange Commission (SEC) are discussed below.

June 2010 Rate Case. The order on rehearing issued by the Public Utility Commission of Texas (Texas Utility Commission) in connection with our 2010 rate case was appealed to the Texas courts by various parties and a trial is scheduled for December 2012.

Other.  In May 2012, we filed an application, subsequently modified consistent with the Texas Utility Commission's preliminary order, requesting approval to recover a total of approximately $47.5 million in 2013 consisting of: (1) estimated 2013 energy efficiency program costs of $42.9 million; (2) a credit of $1.8 million related to the over-recovery of 2011 program costs; (3) a performance incentive for 2011 program achievements of $6.3 million and (4) certain rate case expenses.  In October 2012, the Texas Utility Commission approved a settlement agreement filed by the parties to recover a total of $46.2 million.  The $1.3 million reduction was attributable to settlement spending from our 2006 rate settlement included in the 2011 performance incentive calculation.  The

12

settlement preserves our right to appeal the reduction in our requested performance bonus amount.  The rates will take effect with the commencement of our January 2013 billing month.

Debt Financing Transactions. In January 2012, Bond Company IV issued $1.695 billion of transition bonds in three tranches with interest rates ranging from 0.9012% to 3.0282% and final maturity dates ranging from April 15, 2018 to October 15, 2025. Through the issuance of the transition bonds, we recovered the additional true-up balance of $1.695 billion, less approximately $10.4 million of offering expenses. The transition bonds will be repaid over time through a charge imposed on customers in our service territory.

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

In August 2012, we redeemed $300 million principal amount of our 5.75% general mortgage bonds due 2014 at a price of 107.332% of their principal amount and $500 million principal amount of our 7.00% general mortgage bonds due 2014 at a price of 109.397% of their principal amount. Redemption premiums for the two series aggregated approximately $69 million.

Credit Facility.  As of October 16, 2012, we had the following revolving credit facility and utilization of such facility (in millions):
Date Executed
 
Size of
Facility
 
Amount
Utilized
 
 
Termination Date
September 9, 2011
 
$
300

 
$
4

(1)
 
September 9, 2016
_________
(1)
Represents outstanding letters of credit.

Our $300 million credit facility can be drawn at the London Interbank Offered Rate (LIBOR) plus 125 basis points based on our current credit ratings. The facility contains a debt (excluding transition and system restoration bonds) to total capitalization covenant which limits debt to 65% of our total capitalization.

Borrowings under our credit 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 our credit facility are subject to acceleration upon the occurrence of events of default that we consider customary.  The facility also provides for customary fees, including commitment fees, administrative agent fees, fees in respect of letters of credit and other fees. In our credit facility, the LIBOR borrowing spread and the commitment fees fluctuate based on our credit rating. We are currently in compliance with the various business and financial covenants contained in our credit facility.

Securities Registered with the SEC. We have filed a shelf registration statement with the SEC registering an indeterminate principal amount of our general mortgage bonds.

Temporary Investments.  As of October 16, 2012, we had external temporary investments aggregating $585 million.

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. As of October 16, 2012, we had $207 million invested in the money pool. The money pool may not provide sufficient funds to meet our cash needs.


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Long-term Debt.  Our long-term debt consists of our obligations and the obligations of our subsidiaries, including transition and system restoration bonds issued by wholly owned subsidiaries.  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 and system restoration bonds issued by our subsidiaries, CenterPoint Energy Transition Bond Company, LLC (Bond Company), CenterPoint Energy Transition Bond Company II, LLC (Bond Company II), CenterPoint Energy Transition Bond Company III, LLC (Bond Company III), CenterPoint Energy Restoration Bond Company, LLC (Restoration Bond Company) and Bond Company IV as of September 30, 2012. Amounts are expressed in millions.
Year
 
Third-Party
 
Affiliate
 
Sub-Total
 
Transition and System
Restoration Bonds
 
Total
2012
 
$
—

 
$
—

 
$
—

 
$
62

 
$
62

2013
 
450

 
—

 
450

 
447

 
897

2014
 
—

 
—

 
—

 
354

 
354

2015
 
—

 
151

 
151

 
372

 
523

2016
 
—

 
—

 
—

 
391

 
391

2017
 
127

 
—

 
127

 
411

 
538

2018
 
—

 
—

 
—

 
434

 
434

2019
 
—

 
—

 
—

 
459

 
459

2020
 
—

 
—

 
—

 
231

 
231

2021
 
102

 
—

 
102

 
211

 
313

2022
 
300

 
—

 
300

 
220

 
520

2023
 
200

 
—

 
200

 
156

 
356

2024
 
—

 
—

 
—

 
162

 
162

2027
 
56

 
—

 
56

 
—

 
56

2033
 
312

 
—

 
312

 
—

 
312

2042
 
$
500

 
$
—

 
$
500

 
$
—

 
$
500

Total
 
$
2,047

 
$
151

 
$
2,198

 
$
3,910

 
$
6,108



As of September 30, 2012, outstanding first mortgage bonds and general mortgage bonds aggregated approximately $2.6 billion as shown in the following table.  Amounts are expressed in millions.
 
Issued Directly
to Third Parties
 
Issued as
Collateral for Our
Debt
 
Issued as Collateral
for CenterPoint
Energy’s Debt
 
Total
First Mortgage Bonds
$
102

 
$
—

 
$
151

 
$
253

General Mortgage Bonds
1,762

 
183

 
408

(1)
2,353

Total                                
$
1,864

 
$
183

 
$
559

 
$
2,606


 _________
(1)
Includes $290 million principal amount collateralizing bonds purchased by CenterPoint Energy in January 2010, which may be remarketed.

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 $2.8 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, 2012. However, we have contractually agreed that we will not issue additional first mortgage bonds, subject to certain exceptions.


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The following table shows the maturity dates of the $559 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
2015
 
$
151

 
$
—

 
$
151

2018
 
—

 
50

 
50

2019
 
—

 
200

(1) 
200

2020
 
—

 
90

(1) 
90

2028
 
—

 
68

 
68

Total               
 
$
151

 
$
408

 
$
559

____________
(1)
These mortgage bonds collateralize bonds purchased by CenterPoint Energy in January 2010, which may be remarketed by CenterPoint Energy.

At September 30, 2012, our subsidiaries had the following aggregate principal amount of transition and system restoration bonds outstanding. Amounts are expressed in millions.
Company
 
Aggregate Principal Amount Outstanding
 
 
 
Bond Company
 
$
109

Bond Company II
 
1,194

Bond Company III
 
356

Bond Company IV
 
1,695

Restoration Bond Company
 
556

Total
 
$
3,910


The transition bonds and system restoration bonds are paid through the imposition of “transition” or “system restoration” charges, as defined in the Texas Public Utility Regulatory Act, which are irrevocable, non-bypassable charges payable by most of our retail electric customers to the bond company subsidiaries in order to provide recovery of authorized qualified costs. The transition and system restoration bonds are reported as our long-term debt, although the holders of these 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 or system restoration charges) of the bond companies. We have no payment obligations with respect to the transition and system restoration bonds except to remit collections of transition and system restoration charges as set forth in servicing agreements between us and the bond companies and in an intercreditor agreement among us, the bond companies and other parties.

Impact on Liquidity of a Downgrade in Credit Ratings.  The interest on borrowings under our credit facility is based on our credit rating. As of October 16, 2012, Moody’s Investors Service, Inc. (Moody’s), Standard & Poor’s Ratings Services (S&P), a division of The McGraw Hill Companies, 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
 
A3
 
Positive
 
A-
 
Stable
 
A
 
Stable
____________
(1)
A Moody’s rating outlook is an opinion regarding the likely direction of an issuer’s rating over the medium term.

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

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

We cannot assure you that the ratings set forth above 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 included for

15

informational purposes and 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.  If our credit ratings had been downgraded one notch by each of the three principal credit rating agencies from the ratings that existed at September 30, 2012, the impact on the borrowing costs under our credit facility would have been immaterial.  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 $1.2 billion revolving credit facility, a payment default on, or a non-payment default that permits acceleration of, any indebtedness exceeding $75 million by us will cause a default. In addition, three outstanding series of CenterPoint Energy’s senior notes, aggregating $750 million in principal amount as of September 30, 2012, provide that 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. A default by CenterPoint Energy would not trigger a default under our debt instruments or bank credit facility.

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 legislative or regulatory actions;

•
the ability of GenOn Energy, Inc. (GenOn) and its subsidiaries to satisfy their obligations in respect of GenOn’s indemnity obligations to us;

•
the ability of REPs, including REP affiliates of NRG Energy, Inc. and REP affiliates of Energy Future Holdings Corp., which are our two largest customers, to satisfy their obligations to us and our subsidiaries;

•
the outcome of litigation brought by and against us;

•
restoration costs and revenue losses resulting from future 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 2011 Form 10-K.

Certain Contractual Limits on Our Ability to Issue Securities and Borrow Money. Our credit facility limits our debt (excluding transition and system restoration bonds) as a percentage of our total capitalization to 65%. Additionally, we have contractually agreed that we will not 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, incorporated herein by reference, for a discussion of new accounting pronouncements that affect us.

Item 4.
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, 2012 to provide assurance that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act

16

of 1934, as amended, 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, 2012 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 certain legal and regulatory proceedings affecting us, please read Note 8 to our Interim Condensed Financial Statements and “Management’s Narrative Analysis of Results of Operations - Liquidity and Capital Resources - Regulatory Matters,” 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 2011 Form 10-K.

Item 1A. RISK FACTORS

There have been no material changes from the risk factors disclosed in our 2011 Form 10-K.

Item 5.    OTHER INFORMATION

Our ratio of earnings to fixed charges for the nine months ended September 30, 2011 and 2012 was 4.30 and 2.52, respectively. We do not believe that the ratios for these nine-month periods are necessarily indicative 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.

17


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.

Agreements included as exhibits are included only to provide information to investors regarding their terms. Agreements listed below may contain representations, warranties and other provisions that were made, among other things, to provide the parties thereto with specified rights and obligations and to allocate risk among them, and no such agreement should be relied upon as constituting or providing any factual disclosures about CenterPoint Energy Houston Electric, LLC, any other persons, any state of affairs or other matters.

Exhibit
Number
 
Description
 
Report or Registration
Statement
 
SEC File or
Registration
Number
 
Exhibit
References
3.1
 
Restated Certificate of Formation of CenterPoint Houston
 
CenterPoint Houston’s Form 10-Q for the quarter ended June 30, 2011
 
1-3187
 
3.1
3.2
 
Amended and Restated Limited Liability Company Agreement of CenterPoint Houston
 
CenterPoint Houston’s Form 10-Q for the quarter ended June 30, 2011
 
1-3187
 
3.2
4.1
 
$300,000,000 Credit Agreement, dated as of September 9, 2011, among CenterPoint Houston, as Borrower, and the banks named therein
 
CenterPoint Houston’s Form 8-K dated September 9, 2011
 
1-3187
 
4.2
+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
 
 
 
 
 
 
+101.INS
 
XBRL Instance Document (1)
 
 
 
 
 
 
+101.SCH
 
XBRL Taxonomy Extension Schema Document (1)
 
 
 
 
 
 
+101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document (1)
 
 
 
 
 
 
+101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document (1)
 
 
 
 
 
 
+101.LAB
 
XBRL Taxonomy Extension Labels Linkbase Document (1)
 
 
 
 
 
 
+101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document (1)
 
 
 
 
 
 
    
(1)     Furnished, not filed.



18

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 9, 2012





19

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 of CenterPoint Houston or CenterPoint Energy as indicated.

Agreements included as exhibits are included only to provide information to investors regarding their terms. Agreements listed below may contain representations, warranties and other provisions that were made, among other things, to provide the parties thereto with specified rights and obligations and to allocate risk among them, and no such agreement should be relied upon as constituting or providing any factual disclosures about CenterPoint Energy Houston Electric, LLC, any other persons, any state of affairs or other matters.


Exhibit
Number
 
Description
 
Report or Registration
Statement
 
SEC File or
Registration
Number
 
Exhibit
References
3.1
 
Restated Certificate of Formation of CenterPoint Houston
 
CenterPoint Houston’s Form 10-Q for the quarter ended June 30, 2011
 
1-3187
 
3.1
3.2
 
Amended and Restated Limited Liability Company Agreement of CenterPoint Houston
 
CenterPoint Houston’s Form 10-Q for the quarter ended June 30, 2011
 
1-3187
 
3.2
4.1
 
$300,000,000 Credit Agreement, dated as of September 9, 2011, among CenterPoint Houston, as Borrower, and the banks named therein
 
CenterPoint Houston’s Form 8-K dated September 9, 2011
 
1-3187
 
4.2
+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
 
 
 
 
 
 
+101.INS
 
XBRL Instance Document (1)
 
 
 
 
 
 
+101.SCH
 
XBRL Taxonomy Extension Schema Document (1)
 
 
 
 
 
 
+101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document (1)
 
 
 
 
 
 
+101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document (1)
 
 
 
 
 
 
+101.LAB
 
XBRL Taxonomy Extension Labels Linkbase Document (1)
 
 
 
 
 
 
+101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document (1)
 
 
 
 
 
 

        (1)     Furnished, not filed.

20
CEHE_Exhibit 12_09.30.2012


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,
 
2011 (1)
 
2012 (1)
Income before extraordinary item
$
470

 
$
252

Income taxes
233

 
98

Capitalized interest
(3
)
 
(5
)
 
700

 
345

Fixed charges, as defined:
 

 
 

 
 
 
 
Interest
209

 
222

Capitalized interest
3

 
5

Interest component of rentals charged to operating expense
—

 
—

Total fixed charges
212

 
227

 
 
 
 
Earnings, as defined
$
912

 
$
572

 
 
 
 
Ratio of earnings to fixed charges
4.30

 
2.52

  ____________
(1)
Excluded from the computation of fixed charges for the nine months ended September 30, 2011 and 2012 is interest income of $13 million and $8 million, respectively, which is included in income tax expense.


CEHE_Exhibit 31.1_09.30.2012


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 9, 2012
 
 
/s/ David M. McClanahan
 
David M. McClanahan
 
Chairman (Principal Executive Officer)


CEHE_Exhibit 31.2_09.30.2012


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 9, 2012
 
 
/s/ Gary L. Whitlock
 
Gary L. Whitlock
 
Executive Vice President and Chief Financial Officer


CEHE_Exhibit 32.1_09.30.2012


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 three months ended September 30, 2012 (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 9, 2012
 


CEHE_Exhibit 32.2_09.30.2012


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 three months ended September 30, 2012 (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 9, 2012