form10-q.htm


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

FORM 10-Q

(Mark One)
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
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 1-31447

CENTERPOINT ENERGY, INC.

(Exact name of registrant as specified in its charter)

Texas
74-0694415
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
1111 Louisiana
 
Houston, Texas 77002
(713) 207-1111
(Address and zip code of principal executive offices)
(Registrant’s telephone number, including area code)
____________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R  No £

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 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 þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
   
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £  No R

As of October 19, 2009, CenterPoint Energy, Inc. had 390,371,433 shares of common stock outstanding, excluding 166 shares held as treasury stock.
 


 
 


CENTERPOINT ENERGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2009

TABLE OF CONTENTS

 
PART I.
 
FINANCIAL INFORMATION
   
         
Item 1.
   
1
         
       
   
Three and Nine Months Ended September 30, 2008 and 2009 (unaudited)
 
1
         
       
   
December 31, 2008 and September 30, 2009 (unaudited)
 
2
         
       
   
Nine Months Ended September 30, 2008 and 2009 (unaudited)
 
4
         
     
5
         
Item 2.
   
29
         
Item 3.
   
45
         
Item 4.
   
46
         
PART II.
 
OTHER INFORMATION
   
         
Item 1.
   
46
         
   Item 1A.
   
46
         
Item 5.
   
56
         
Item 6.
   
57


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:

 
the resolution of the true-up proceedings , including, in particular, the results of appeals to the Texas Supreme Court regarding rulings obtained to date;
 
 
state and federal legislative and regulatory actions or developments, including deregulation, re-regulation, environmental regulations, including regulations related to global climate change and health care reform, and changes in or application of laws or regulations applicable to the various aspects of our business;
 
 
timely and appropriate regulatory actions allowing securitization or other recovery of costs associated with any future hurricanes or natural disasters;
 
 
timely and appropriate rate actions and increases, allowing recovery of costs and a reasonable return on investment;
 
 
cost overruns on major capital projects that cannot be recouped in prices;
 
 
industrial, commercial and residential growth in our service territory and changes in market demand and demographic patterns;
 
 
the timing and extent of changes in commodity prices, particularly natural gas and natural gas liquids;
 
 
the timing and extent of changes in the supply of natural gas, including supplies available for gathering by our field services business;
 
 
the timing and extent of changes in natural gas basis differentials;
 
 
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;
 
 
effectiveness of our risk management activities;
 
 
inability of various counterparties to meet their obligations to us;
 
 
non-payment for our services due to financial distress of our customers;
 
 
the ability of RRI Energy, Inc. (RRI) (formerly known as Reliant Energy, Inc. and Reliant Resources, Inc.)
 
ii

 
 
and its subsidiaries to satisfy their obligations to us, including indemnity obligations, or in connection with the contractual arrangements pursuant to which we are their guarantor;
 
 
the ability of NRG Retail, LLC, the successor to RRI’s retail electric provider and the largest customer of CenterPoint Houston, to satisfy its obligations to us and our subsidiaries;
 
 
the outcome of litigation brought by or against us;
 
 
our ability to control costs;
 
 
the investment performance of our 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;
 
 
acquisition and merger activities involving us or our competitors; and
 
 
other factors we discuss in "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.
 
 
 

iii


PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS
 
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Millions of Dollars, Except Per Share Amounts)
(Unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2008
   
2009
   
2008
   
2009
 
                         
Revenues
  $ 2,515     $ 1,576     $ 8,548     $ 5,982  
                                 
Expenses:
                               
Natural gas
    1,532       582       5,675       3,081  
Operation and maintenance
    371       415       1,078       1,226  
Depreciation and amortization
    194       208       540       562  
Taxes other than income taxes
    81       84       285       288  
Total
    2,178       1,289       7,578       5,157  
Operating Income
    337       287       970       825  
                                 
Other Income (Expense):
                               
Gain (loss) on marketable securities
    (36 )     47       (73 )     68  
Gain (loss) on indexed debt securities
    33       (30 )     66       (54 )
Interest and other finance charges
    (116 )     (126 )     (346 )     (384 )
Interest on transition bonds
    (34 )     (32 )     (102 )     (98 )
Equity in earnings of unconsolidated affiliates
    23       (3 )     46       8  
Other, net
    6       9       10       31  
Total
    (124 )     (135 )     (399 )     (429 )
                                 
Income Before Income Taxes
    213       152       571       396  
Income tax expense
    (77 )     (38 )     (212 )     (129 )
Net Income
  $ 136     $ 114     $ 359     $ 267  
                                 
Basic Earnings Per Share
  $ 0.40     $ 0.31     $ 1.08     $ 0.75  
                                 
Diluted Earnings Per Share
  $ 0.39     $ 0.31     $ 1.05     $ 0.74  

See Notes to CenterPoint Energy’s Interim Condensed Consolidated Financial Statements


1


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

ASSETS

   
December 31,
2008
   
September 30,
2009
 
Current Assets:
           
Cash and cash equivalents
  $ 167     $ 61  
Investment in marketable securities
    218       286  
Accounts receivable, net
    1,009       609  
Accrued unbilled revenues
    541       161  
Natural gas inventory
    441       225  
Materials and supplies
    128       148  
Non-trading derivative assets
    118       50  
Taxes receivable
    -       108  
Prepaid expenses and other current assets
    413       347  
Total current assets
    3,035       1,995  
                 
Property, Plant and Equipment:
               
Property, plant and equipment
    14,006       14,463  
Less accumulated depreciation and amortization
    3,710       3,915  
Property, plant and equipment, net
    10,296       10,548  
                 
Other Assets:
               
Goodwill
    1,696       1,696  
Regulatory assets
    3,684       3,701  
Non-trading derivative assets
    20       15  
Investment in unconsolidated affiliates
    345       471  
Notes receivable from unconsolidated affiliates
    323       -  
Other
    277       227  
Total other assets
    6,345       6,110  
                 
Total Assets
  $ 19,676     $ 18,653  



See Notes to CenterPoint Energy’s Interim Condensed Consolidated Financial Statements


2


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

LIABILITIES AND SHAREHOLDERS’ EQUITY

   
December 31,
2008
   
September 30,
2009
 
Current Liabilities:
           
Short-term borrowings
  $ 153     $ 40  
Current portion of transition bond long-term debt
    208       221  
Current portion of other long-term debt
    125       339  
Indexed debt securities derivative
    133       187  
Accounts payable
    897       351  
Taxes accrued
    189       138  
Interest accrued
    180       139  
Non-trading derivative liabilities
    87       45  
Accumulated deferred income taxes, net
    372       425  
Other
    504       427  
Total current liabilities
    2,848       2,312  
                 
Other Liabilities:
               
Accumulated deferred income taxes, net
    2,608       2,757  
Unamortized investment tax credits
    24       18  
Non-trading derivative liabilities
    47       42  
Benefit obligations
    849       851  
Regulatory liabilities
    821       916  
Other
    276       342  
Total other liabilities
    4,625       4,926  
                 
Long-term Debt:
               
Transition bonds
    2,381       2,160  
Other
    7,800       6,667  
Total long-term debt
    10,181       8,827  
                 
Commitments and Contingencies (Note 11)
               
                 
Shareholders’ Equity:
               
Common stock (346,088,548 shares and 390,331,500 shares outstanding
at December 31, 2008 and September 30, 2009, respectively)
    3       4  
Additional paid-in capital
    3,158       3,650  
Accumulated deficit
    (1,008 )     (944 )
Accumulated other comprehensive loss
    (131 )     (122 )
Total shareholders’ equity
    2,022       2,588  
                 
Total Liabilities and Shareholders’ Equity
  $ 19,676     $ 18,653  



See Notes to CenterPoint Energy’s Interim Condensed Consolidated Financial Statements

3


CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Millions of Dollars)
(Unaudited)

   
Nine Months Ended September 30,
 
   
2008
   
2009
 
Cash Flows from Operating Activities:
           
Net income
  $ 359     $ 267  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    540       562  
Amortization of deferred financing costs
    21       29  
Deferred income taxes
    471       250  
Unrealized loss (gain) on marketable securities
    73       (68 )
Unrealized loss (gain) on indexed debt securities
    (66 )     54  
Write-down of natural gas inventory
    24       6  
Equity in earnings of unconsolidated affiliates, net of distributions
    (45 )     (4 )
Changes in other assets and liabilities:
               
Accounts receivable and unbilled revenues, net
    441       796  
Inventory
    (252 )     190  
Taxes receivable
    (289 )     (108 )
Accounts payable
    (119 )     (527 )
Fuel cost over (under) recovery
    (11 )     (53 )
Non-trading derivatives, net
    (28 )     24  
Margin deposits, net
    (96 )     89  
Interest and taxes accrued
    (173 )     (93 )
Net regulatory assets and liabilities
    (48 )     19  
Other current assets
    (2 )     (1 )
Other current liabilities
    (6 )     (18 )
Other assets
    (15 )     1  
Other liabilities
    (20 )     14  
Other, net
    (35 )     8  
Net cash provided by operating activities
    724       1,437  
                 
Cash Flows from Investing Activities:
               
Capital expenditures
    (632 )     (809 )
Decrease (increase) in restricted cash of transition bond companies
    (8 )     3  
Decrease (increase) in notes receivable from unconsolidated affiliates
    (175 )     323  
Investment in unconsolidated affiliates
    (207 )     (111 )
Other, net
    31       12  
Net cash used in investing activities
    (991 )     (582 )
                 
Cash Flows from Financing Activities:
               
Decrease in short-term borrowings, net
    (82 )     (113 )
Long-term revolving credit facilities, net
    737       (1,431 )
Proceeds from commercial paper, net
    -       15  
Proceeds from long-term debt
    1,088       500  
Payments of long-term debt
    (1,373 )     (215 )
Debt issuance costs
    (11 )     (4 )
Payment of common stock dividends
    (183 )     (202 )
Proceeds from issuance of common stock, net
    45       489  
Other, net
    1       -  
Net cash provided by (used in) financing activities
    222       (961 )
                 
Net Decrease in Cash and Cash Equivalents
    (45 )     (106 )
Cash and Cash Equivalents at Beginning of Period
    129       167  
Cash and Cash Equivalents at End of Period
  $ 84     $ 61  
                 
Supplemental Disclosure of Cash Flow Information:
               
Cash Payments:
               
Interest, net of capitalized interest
  $ 447     $ 507  
Income taxes, net
    188       57  
Non-cash transactions:
               
Accounts payable related to capital expenditures
    218       77  

See Notes to CenterPoint Energy’s Interim Condensed Consolidated Financial Statements
 
4

 
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1)
Background and Basis of Presentation

General. Included in this Quarterly Report on Form 10-Q (Form 10-Q) of CenterPoint Energy, Inc. are the condensed consolidated interim financial statements and notes (Interim Condensed Financial Statements) of CenterPoint Energy, Inc. and its subsidiaries (collectively, CenterPoint Energy). The Interim Condensed Financial Statements are unaudited, omit certain financial statement disclosures and should be read with the Annual Report on Form 10-K of CenterPoint Energy for the year ended December 31, 2008 (CenterPoint Energy Form 10-K).

Background. CenterPoint Energy, Inc. is a public utility holding company. CenterPoint Energy’s operating subsidiaries own and operate electric transmission and distribution facilities, natural gas distribution facilities, interstate pipelines and natural gas gathering, processing and treating facilities. As of September 30, 2009, CenterPoint Energy’s indirect wholly owned subsidiaries included:

 
CenterPoint Energy Houston Electric, LLC (CenterPoint Houston), which engages in the electric transmission and distribution business in a 5,000-square mile area of the Texas Gulf Coast that includes Houston; and

 
CenterPoint Energy Resources Corp. (CERC Corp. and, together with its subsidiaries, CERC), which owns and operates natural gas distribution systems in six states. Subsidiaries of CERC Corp. own interstate natural gas pipelines and gas gathering systems and provide various ancillary services. A wholly owned subsidiary of CERC Corp. offers variable and fixed-price physical natural gas supplies primarily to commercial and industrial customers and electric and gas utilities.

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

CenterPoint Energy’s Interim Condensed Financial Statements reflect all normal recurring adjustments that are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the respective periods. Amounts reported in CenterPoint Energy’s Condensed Statements of Consolidated Income are not necessarily indicative of amounts expected for a full-year period due to the effects of, among other things, (a) seasonal fluctuations in demand for energy and energy services, (b) changes in energy commodity prices, (c) timing of maintenance and other expenditures and (d) acquisitions and dispositions of businesses, assets and other interests.

For a description of CenterPoint Energy’s reportable business segments, reference is made to Note 15.

(2)
New Accounting Pronouncements

Effective January 1, 2009, CenterPoint Energy adopted new accounting guidance which requires enhanced disclosures of derivative instruments and hedging activities such as the fair value of derivative instruments and presentation of their gains or losses in tabular format, as well as disclosures regarding credit risks and strategies and objectives for using derivative instruments.  These disclosures are included as part of CenterPoint Energy’s Derivatives Instruments footnote (see Note 5).

In May 2008, the Financial Accounting Standards Board (FASB) issued new accounting guidance on accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) which changed the accounting treatment for convertible securities that the issuer may settle fully or partially in cash. Under this new guidance, cash settled convertible securities are separated into their debt and equity components. The value assigned to the debt component is the estimated fair value, as of the issuance date, of a similar debt instrument without the conversion feature, and the difference between the proceeds for the convertible debt and the
 
5

 
amount reflected as a debt liability is recorded as additional paid-in capital. As a result, the debt is recorded at a discount reflecting its below-market coupon interest rate. The debt is then subsequently accreted to its par value over its expected life, with the rate of interest that reflects the market rate at issuance being reflected on the income statement. CenterPoint Energy adopted this new accounting guidance effective January 1, 2009, which required retrospective application to all periods presented. CenterPoint Energy currently has no convertible debt that is within the scope of this new guidance, but did during prior periods presented.  Accordingly, the implementation of this new guidance had a non-cash effect on net income for prior periods and the consolidated balance sheets when CenterPoint Energy had contingently convertible debt outstanding. There was no effect on net income for the three months ended September 30, 2008. The effect on net income for the nine months ended September 30, 2008 was a decrease in net income of $1 million. There was no impact on basic or diluted earnings per share. Upon adoption of this new guidance, the effect on the balance sheet as of January 1, 2009 was a credit to Additional Paid-In-Capital of $23 million, with an offsetting debit to retained earnings.

In December 2008, the FASB issued new accounting guidance on employers’ disclosures about postretirement benefit plan assets which expands the disclosures about employers’ plan assets to include more detailed disclosures about the employers’ investment strategies, major categories of plan assets, concentrations of risk within plan assets and valuation techniques used to measure the fair value of plan assets. This new accounting guidance is effective for fiscal years ending after December 15, 2009. CenterPoint Energy expects that the adoption of this new guidance will not have a material impact on its financial position, results of operations or cash flows.

In April 2009, the FASB issued new accounting guidance on interim disclosures about fair value of financial instruments which expands the fair value disclosures required for all financial instruments to interim periods. This new guidance also requires entities to disclose in interim periods the methods and significant assumptions used to estimate the fair value of financial instruments. This new accounting guidance is effective for interim reporting periods ending after June 15, 2009. CenterPoint Energy’s adoption of this new guidance did not have a material impact on its financial position, results of operations or cash flows.  See Note 13 for the required disclosures.

In May 2009, the FASB issued new accounting guidance on subsequent events that establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This new accounting guidance is effective for interim or annual periods ending after June 15, 2009. CenterPoint Energy’s adoption of this new guidance did not have a material impact on its financial position, results of operations or cash flows. See Note 16 for the subsequent event related disclosures.

In June 2009, the FASB issued new accounting guidance on consolidation of variable interest entities (VIEs) that  changes how a reporting entity determines a primary beneficiary that would consolidate the VIE from a quantitative risk and rewards approach to a qualitative approach based on which variable interest holder has the power to direct the economic performance related activities of the VIE as well as the obligation to absorb losses or right to receive benefits that could potentially be significant to the VIE. This new guidance requires the primary beneficiary assessment to be performed on an ongoing basis and also requires enhanced disclosures that will provide more transparency about a company’s involvement in a VIE. This new guidance is effective for a reporting entity’s first annual reporting period that begins after November 15, 2009. CenterPoint Energy expects that the adoption of this new guidance will not have a material impact on its financial position, results of operations or cash flows.

In June 2009, the FASB issued new accounting guidance on the FASB Accounting Standards Codification (Codification) and the hierarchy of generally accepted accounting principles.  This new accounting guidance establishes the Codification as the source of authoritative U.S. generally accepted accounting principles recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This new accounting guidance is effective for financial statements issued for interim and annual periods ending after September 15, 2009. CenterPoint Energy’s adoption of this new guidance did not have any impact on its financial position, results of operations or cash flows.

Management believes the impact of other recently issued standards, which are not yet effective, will not have a material impact on CenterPoint Energy’s consolidated financial position, results of operations or cash flows upon adoption.
 
6


(3)
Employee Benefit Plans

CenterPoint Energy’s net periodic cost includes the following components relating to pension and postretirement benefits:

   
Three Months Ended September 30,
 
   
2008
   
2009
 
   
Pension
Benefits
   
Postretirement
Benefits
   
Pension
Benefits (1)
   
Postretirement
Benefits
 
   
(in millions)
 
Service cost
  $ 8     $ -     $ 7     $ -  
Interest cost
    25       6       28       7  
Expected return on plan assets
    (37 )     (3 )     (24 )     (2 )
Amortization of prior service credit
    (2 )     -       -       -  
Amortization of net loss
    6       -       17       -  
Amortization of transition obligation
    -       2       -       2  
Net periodic cost
  $ -     $ 5     $ 28     $ 7  
                                 

   
Nine Months Ended September 30,
 
   
2008
   
2009
 
   
Pension
Benefits
   
Postretirement
Benefits
   
Pension
Benefits (1)
   
Postretirement
Benefits
 
   
(in millions)
 
Service cost
  $ 23     $ 1     $ 19     $ 1  
Interest cost
    76       20       85       21  
Expected return on plan assets
    (111 )     (9 )     (73 )     (7 )
Amortization of prior service cost (credit)
    (5 )     3       2       2  
Amortization of net loss
    18       -       51       -  
Amortization of transition obligation
    -       4       -       5  
Net periodic cost
  $ 1     $ 19     $ 84     $ 22  

 
(1)
Net periodic cost in these tables is before considering amounts subject to overhead allocations for capital expenditure projects or for amounts subject to deferral for regulatory purposes.  CenterPoint Houston’s actuarially determined pension expense for 2009 in excess of the 2007 base year amount is being deferred for rate making purposes until its next general rate case pursuant to Texas law.  CenterPoint Houston deferred as a regulatory asset $8 million and $21 million in pension expense during the three and nine months ended September 30, 2009, respectively.

CenterPoint Energy expects to contribute approximately $22 million to its pension plans in 2009, of which $2 million and $19 million, respectively, have been contributed during the three and nine months ended September 30, 2009.

CenterPoint Energy expects to contribute approximately $26 million to its postretirement benefits plan in 2009, of which $8 million and $20 million, respectively, have been contributed during the three and nine months ended September 30, 2009.

Effective January 1, 2008, CenterPoint Energy adopted new accounting guidance on accounting for deferred compensation and postretirement benefit aspects of endorsement split-dollar life insurance arrangements which required CenterPoint Energy to recognize the effect of implementation through a cumulative effect adjustment to retained earnings or other components of equity as of the beginning of the year of adoption.  CenterPoint Energy calculated the impact as negligible at the time of adoption on January 1, 2008.  During the quarter ended June 30, 2009, CenterPoint Energy determined that its adoption calculation had omitted the impact that increasing future premium costs would have on the liability and, therefore, it recorded as a cumulative effect adjustment a $15 million correction to increase other non-current liabilities and accumulated deficit as of January 1, 2008.  The effects of the correction on the previously reported accumulated deficit and net income for 2008 and for 2009 were not material to CenterPoint Energy’s financial position, results of operations or cash flows.
 
7


(4)
Regulatory Matters

(a) Hurricane Ike

CenterPoint Houston’s electric delivery system suffered substantial damage as a result of Hurricane Ike, which struck the upper Texas coast in September 2008.

As is common with electric utilities serving coastal regions, the poles, towers, wires, street lights and pole mounted equipment that comprise CenterPoint Houston’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 $28 million.

CenterPoint Houston deferred the uninsured system restoration costs as management believed it was probable that such costs would be recovered through the regulatory process. As a result, system restoration costs did not affect CenterPoint Energy’s or CenterPoint Houston’s reported operating income for 2008 or the first nine months of 2009. In April 2009, CenterPoint Houston filed with the Public Utility Commission of Texas (Texas Utility Commission) an application for review and approval for recovery of approximately $608 million in system restoration costs identified as of the end of February 2009, plus $2 million in regulatory expenses, $13 million in certain debt issuance costs and $55 million in incurred and projected carrying costs, pursuant to the legislation described below.

In April 2009, the Texas Legislature enacted legislation that authorized the Texas Utility Commission to conduct proceedings to determine the amount of system restoration costs and related costs associated with hurricanes or other major storms that utilities are entitled to recover, and to issue financing orders that would permit a utility like CenterPoint Houston to recover the distribution portion of those costs and related carrying costs through the issuance of non-recourse system restoration bonds similar to the securitization bonds issued previously.  The legislation also allowed such a utility to recover, or defer for future recovery, the transmission portion of its system restoration costs through the existing mechanisms established to recover transmission level costs.  The legislation required the Texas Utility Commission to make its determination of recoverable system restoration costs within 150 days of the filing of a utility’s application and to rule on a utility’s application for a financing order for the issuance of system restoration bonds within 90 days of the filing of that application.  Alternatively, if securitization is not the least-cost option for rate payers, the legislation authorized the Texas Utility Commission to allow a utility to recover those costs through a customer surcharge mechanism.

In its application filed in April 2009, CenterPoint Houston sought approval for recovery of a total of approximately $678 million, including the $608 million in system restoration costs described above plus related regulatory expenses, certain debt issuance costs and carrying costs calculated through August 2009. In July 2009, CenterPoint Houston announced that it had reached a settlement agreement with the parties to the proceeding.  Under the terms of that settlement agreement, CenterPoint Houston would be entitled to recover a total of $663 million in costs relating to Hurricane Ike, along with carrying costs from September 1, 2009 until system restoration bonds were issued. The Texas Utility Commission issued an order in August 2009 approving CenterPoint Houston’s application and the settlement agreement and authorizing recovery of a total of $663 million, of which $643 million is attributable to distribution service and eligible for securitization and the remaining $20 million is attributable to transmission service and eligible for recovery through the existing mechanisms established to recover transmission costs.

In July 2009, CenterPoint Houston filed with the Texas Utility Commission its application for a financing order to recover the portion of approved costs related to distribution service through the issuance of system restoration bonds.  As discussed above, in August 2009, the Texas Utility Commission issued a financing order allowing CenterPoint Houston to securitize $643 million in distribution service costs plus carrying charges from September 1, 2009 through the date the system restoration bonds are issued, as well as certain up-front qualified costs capped at approximately $6 million.  In accordance with the financing order, CenterPoint Houston is to place into effect a separate customer credit related to accumulated deferred federal income taxes (ADFIT) associated with the storm restoration costs to be recovered. This separate credit (ADFIT Credit) is to be applied to customers’ bills to reflect the benefit of those deferred taxes at a carrying charge of 11.075%. The beginning balance of the ADFIT related to storm costs is approximately $207 million and will decline over the life of the system restoration bonds as taxes are paid on the system restoration tariffs. The ADFIT Credit will become effective on the same date as the tariff for the
 
8

 
system restoration charges and will reduce operating income in 2010 by approximately $24 million. CenterPoint Houston expects to issue the system restoration bonds in the fourth quarter of 2009. Assuming system restoration bonds are issued, CenterPoint Houston will recover the distribution portion of approved system restoration costs out of the bond proceeds, with the bonds being repaid over time through a charge imposed on customers.  CenterPoint Houston expects to recover the remaining approximately $20 million of Hurricane Ike costs related to transmission service through the existing mechanisms established to recover transmission costs.

In accordance with the orders discussed above, as of September 30, 2009, CenterPoint Houston has recorded a net regulatory asset of $642 million associated with distribution-related storm restoration costs and $20 million associated with transmission-related storm restoration costs.  These amounts reflect carrying costs of $50 million related to distribution and $2 million related to transmission through September 30, 2009, based on the 11.075% cost of capital approved by the Texas Utility Commission.  The carrying costs have been bifurcated into two components: (i) return of borrowing costs and (ii) an allowance for earnings on shareholders’ investment.  During the three months and nine months ended September 30, 2009, the component representing a return of borrowing costs of $6 million and $20 million, respectively, has been recognized and is included in other income in CenterPoint Energy’s Condensed Statements of Consolidated Income.  That component will continue to be recognized as earned until the associated system restoration costs are recovered.  The component representing an allowance for earnings on shareholders’ investment of $32 million is being deferred and will be recognized as it is collected through rates.
 
(b) Recovery of True-Up Balance
 
In March 2004, CenterPoint Houston 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 CenterPoint Houston to recover a true-up balance of approximately $2.3 billion, which included interest through August 31, 2004, and provided for adjustment of the amount to be recovered to include interest on the balance until recovery, along with the principal portion of additional excess mitigation credits (EMCs) returned to customers after August 31, 2004 and certain other adjustments.

CenterPoint Houston 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 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 CenterPoint Houston’s initial request.

CenterPoint Houston 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 CenterPoint Houston to recover EMCs paid to RRI Energy, Inc. (RRI) (formerly known as Reliant Energy, Inc. and Reliant Resources, Inc.);

 
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.
 
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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, CenterPoint Houston petitioned the Texas Supreme Court for review of the court of appeals decision. In its petition, CenterPoint Houston 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 CenterPoint Houston 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 that (i) the Texas Utility Commission was without authority to fashion the methodology it used for valuing the former generation assets after it had determined that CenterPoint Houston could not use the partial stock valuation method, (ii) 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) 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) CenterPoint Houston should not have been permitted to recover construction work in progress balances without proving those amounts in the manner required by law and (v) the Texas Utility Commission was without authority to award interest on the capacity auction true up award.

In June 2009, the Texas Supreme Court granted the petitions for review of the court of appeals decision.  Oral argument before the court was held in October 2009.  Although CenterPoint Energy and CenterPoint Houston believe that CenterPoint Houston’s 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, CenterPoint Energy 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, CenterPoint Energy 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 CenterPoint Energy’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, CenterPoint Energy 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 CenterPoint Houston ultimately is authorized to recover or is required to refund beyond the amounts recorded based on the True-up Order, but could range from $170 million to $385 million (pre-tax) plus interest subsequent to December 31, 2008.

In the True-Up Order, the Texas Utility Commission reduced CenterPoint Houston’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. CenterPoint Energy believes that the Texas Utility Commission based its order on proposed regulations issued by the Internal Revenue Service (IRS) in March 2003 that 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 CenterPoint Houston 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 CenterPoint Houston’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 CenterPoint Houston’s unamortized ADITC balance as of the date that the normalization violation is deemed to have occurred. In addition, the IRS could deny CenterPoint Houston the ability to elect accelerated tax depreciation benefits beginning in the taxable year that the normalization violation is deemed to have occurred. Such
 
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treatment, if required by the IRS, could have a material adverse impact on CenterPoint Energy’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 or briefs filed with the Texas Supreme Court, has challenged that order by the court of appeals although the Texas Supreme Court has the authority to consider all aspects of the rulings above, not just those challenged specifically by the appellants. CenterPoint Energy and CenterPoint Houston will continue to pursue a favorable resolution of this issue through the appellate and 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 CenterPoint Houston in the Texas Utility Commission’s True-Up Order to be recovered either through securitization 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 CenterPoint Houston 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, CenterPoint Houston 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, CenterPoint Houston 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 CenterPoint Houston to impose a charge on REPs to recover the portion of the true-up balance not recovered through a financing order. The CTC Order also allowed CenterPoint Houston to collect approximately $24 million of rate case expenses over three years without a return through a separate tariff rider (Rider RCE). CenterPoint Houston 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 CenterPoint Houston’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 CenterPoint Houston 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 CenterPoint Houston 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.  In June 2009, the Texas Supreme Court agreed to hear those appeals and oral argument before the court was held in October 2009. The ultimate outcome of this matter cannot be predicted at this time. However, CenterPoint Energy does not expect the disposition of this matter to have a material adverse effect on CenterPoint Energy’s or CenterPoint Houston’s financial condition, results of operations or cash flows.

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, CenterPoint Houston 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. CenterPoint Houston reached substantial agreement with other parties to this proceeding, and a financing order was approved by
 
11

 
the Texas Utility Commission in September 2007. In February 2008, pursuant to the financing order, a new special purpose subsidiary of CenterPoint Houston 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. During the nine months ended September 30, 2008, CenterPoint Houston recognized approximately $5 million in operating income from the CTC.

As of September 30, 2009, CenterPoint Energy had not recognized an allowed equity return of $196 million on CenterPoint Houston’s true-up balance because such return will be recognized as it is recovered in rates. During the three months ended September 30, 2008 and 2009, CenterPoint Houston recognized approximately $4 million and $5 million, respectively, of the allowed equity return not previously recognized.  During the nine months ended September 30, 2008 and 2009, CenterPoint Houston recognized approximately $10 million and $11 million, respectively, of the allowed equity return not previously recognized.

(c) Rate Proceedings

Texas. In March 2008, the natural gas distribution businesses of CERC (Gas Operations) filed a request to change its rates with the Railroad Commission of Texas (Railroad Commission) and the 47 cities in its Texas Coast service territory, an area consisting of approximately 230,000 customers in cities and communities on the outskirts of Houston. In 2008, Gas Operations implemented rates that are expected to increase annual revenues by approximately $3.5 million.  The implemented rates have been contested by 9 cities. CenterPoint Energy and CERC do not expect the outcome of this matter to have a material adverse impact on the financial condition, results of operations or cash flows of either CenterPoint Energy or CERC.

In May 2009, CenterPoint Houston filed an application at the Texas Utility Commission seeking approval of certain energy efficiency program costs, an energy efficiency performance bonus for 2008 programs and carrying costs totaling approximately $10 million. The application seeks to begin recovery of these costs through a surcharge effective July 1, 2010.  CenterPoint Houston expects an order from the Texas Utility Commission in the fourth quarter of 2009.

In July 2009, Gas Operations filed a request to change its rates with the Railroad Commission and the 29 cities in its Houston service territory, consisting of approximately 940,000 customers in and around Houston. The request seeks to establish uniform rates, charges and terms and conditions of service for the cities and environs of the Houston service territory. If approved by the Railroad Commission and the cities, the proposed new rates would result in an overall increase in annual revenue of $25.4 million.  The proposed increase would allow Gas Operations to recover increased operating costs, which include higher pension expense.  It would also provide a return on the additional capital invested to serve its customers.  In addition, Gas Operations is seeking an adjustment mechanism similar to that obtained in the Texas Coast rate proceeding discussed above that would annually adjust rates to reflect changes in capital, expenses and usage. CERC and CenterPoint Energy do not expect an order from the Railroad Commission and the cities until the first quarter of 2010.

Minnesota. In November 2006, the Minnesota Public Utilities Commission (MPUC) denied a request filed by Gas Operations for a waiver of MPUC rules in order to allow Gas Operations to recover approximately $21 million in unrecovered purchased gas costs related to periods prior to July 1, 2004. Those unrecovered gas costs were identified as a result of revisions to previously approved calculations of unrecovered purchased gas costs. Following that denial, Gas Operations recorded a $21 million adjustment to reduce pre-tax earnings in the fourth quarter of 2006 and reduced the regulatory asset related to these costs by an equal amount. In March 2007, following the MPUC’s denial of reconsideration of its ruling, Gas Operations petitioned the Minnesota Court of Appeals for review of the MPUC’s decision, and in May 2008 that court ruled that the MPUC had been arbitrary and capricious in denying Gas Operations a waiver. The court ordered the case remanded to the MPUC for reconsideration under the same principles the MPUC had applied in previously granted waiver requests. The MPUC sought further review of the court of appeals decision from the Minnesota Supreme Court, and in July 2008, the Minnesota Supreme Court agreed to review the decision.  In July 2009, the Minnesota Supreme Court issued its decision in which it reversed the decision of the Minnesota Court of Appeals and upheld the MPUC’s decision to deny the requested variance. The court’s decision had no negative impact on CenterPoint Energy’s or CERC’s financial condition, results of operations or cash flows, as the costs at issue were written off at the time they were disallowed.
 
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In November 2008, Gas Operations filed a request with the MPUC to increase its rates for utility distribution service.  If approved by the MPUC, the proposed new rates would result in an overall increase in annual revenue of $59.8 million.  The proposed increase would allow Gas Operations to recover increased operating costs, including higher bad debt and collection expenses, higher pension expenses, the cost of improved customer service and inflationary increases in other expenses.  It also would allow recovery of increased costs related to conservation improvement programs and provide a return on the additional capital invested to serve its customers.  In addition, Gas Operations is seeking an adjustment mechanism that would annually adjust rates to reflect changes in use per customer.  In December 2008, the MPUC accepted the case and approved an interim rate increase of $51.2 million, which became effective on January 2, 2009, subject to refund. CERC and CenterPoint Energy do not expect an order from the MPUC until early 2010.

Mississippi.  In July 2009, Gas Operations filed a request to increase its rates for utility distribution service with the Mississippi Public Service Commission (MPSC).  If approved by the MPSC, the proposed new rates would result in an overall increase in annual revenue of $6.2 million.  The proposed increase would allow Gas Operations to recover increased operating costs, including higher pension and benefit expenses, and provide a return on the additional capital invested to serve its customers.  The MPSC is expected to issue an order in mid-November 2009.

(d) Regulatory Accounting

CenterPoint Energy has a 50% ownership interest in Southeast Supply Header, LLC (SESH) which owns and operates a 270-mile interstate natural gas pipeline.  In 2009, SESH discontinued the use of guidance for accounting for regulated operations, which resulted in CenterPoint recording its share of the effects of such write-offs of SESH’s regulatory assets through non-cash pre-tax charges for the quarters ended March 31, 2009 and September 30, 2009 of $5 million and $11 million, respectively.  These non-cash charges are reflected in equity in earnings of unconsolidated affiliates in the Condensed Statements of Consolidated Income.  The related tax benefits of $2 million and $4 million, respectively, are reflected in the income tax expense line of the Condensed Statements of Consolidated Income.

(5)
Derivative Instruments

CenterPoint Energy is exposed to various market risks. These risks arise from transactions entered into in the normal course of business.  CenterPoint Energy utilizes derivative instruments such as physical forward contracts, swaps and options to mitigate the impact of changes in commodity prices and weather on its operating results and cash flows. Such derivatives are recognized in CenterPoint Energy’s Condensed Consolidated Balance Sheets at their fair value unless CenterPoint Energy elects the normal purchase and sales exemption for qualified physical transactions. A derivative may be designated as a normal purchase or sale if the intent is to physically receive or deliver the product for use or sale in the normal course of business.

In prior years, CenterPoint Energy entered into certain derivative instruments that were designated as cash flow hedges. The objective of these derivative instruments was to hedge the price risk associated with natural gas purchases and sales to reduce cash flow variability related to meeting CenterPoint Energy’s wholesale and retail customer obligations.  If derivatives are designated as a cash flow hedge, the effective portions of the changes in their fair values are reflected initially as a separate component of shareholders’ equity and subsequently recognized in income at the same time the hedged items impact earnings. The ineffective portions of changes in fair values of derivatives designated as hedges are immediately recognized in income. Changes in derivatives not designated as normal or as cash flow hedges are recognized in income as they occur. CenterPoint Energy does not enter into or hold derivative instruments for trading purposes.

CenterPoint Energy has a Risk Oversight Committee composed of corporate and business segment officers that oversees all commodity price, weather and credit risk activities, including CenterPoint Energy’s marketing, risk management services and hedging activities. The committee’s duties are to establish CenterPoint Energy’s commodity risk policies, allocate board-approved commercial risk limits, approve use of new products and commodities, monitor positions and ensure compliance with CenterPoint Energy’s risk management policies and procedures and limits established by CenterPoint Energy’s board of directors.

CenterPoint Energy’s policies prohibit the use of leveraged financial instruments. A leveraged financial instrument, for this purpose, is a transaction involving a derivative whose financial impact will be based on an amount other than the notional amount or volume of the instrument.
 
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(a) Non-Trading Activities

Derivative Instruments. CenterPoint Energy enters into certain derivative instruments to manage physical commodity price risks that do not qualify or are not designated as cash flow or fair value hedges. CenterPoint Energy utilizes these financial instruments to manage physical commodity price risks and does not engage in proprietary or speculative commodity trading.

During the three months ended September 30, 2008, CenterPoint Energy recorded increased natural gas revenues from unrealized net gains of $80 million and increased natural gas expense from unrealized net losses of $34 million, resulting in a net unrealized gain of $46 million. During the three months ended September 30, 2009, CenterPoint Energy recorded decreased natural gas revenues from unrealized net losses of $37 million and decreased natural gas expense from unrealized net gains of $31 million, resulting in a net unrealized loss of $6 million.

During the nine months ended September 30, 2008, CenterPoint Energy recorded increased natural gas revenues from unrealized net gains of $51 million and increased natural gas expense from unrealized net losses of $37 million, resulting in a net unrealized gain of $14 million. During the nine months ended September 30, 2009, CenterPoint Energy recorded decreased natural gas revenues from unrealized net losses of $71 million and decreased natural gas expense from unrealized net gains of $49 million, resulting in a net unrealized loss of $22 million.

Weather Hedges. CenterPoint Energy has weather normalization or other rate mechanisms that mitigate the impact of weather on its gas operations in Arkansas, Louisiana, Oklahoma and a portion of Texas. The remaining Gas Operations jurisdictions do not have such mechanisms. As a result, fluctuations from normal weather may have a significant positive or negative effect on the results of the gas operations in the remaining jurisdictions and in CenterPoint Houston’s service territory.

In 2007, 2008 and 2009, CenterPoint Energy entered into heating-degree day swaps to mitigate the effect of fluctuations from normal weather on its financial position and cash flows for the respective winter heating seasons.  The swaps were based on ten-year normal weather. During the three and nine months ended September 30, 2008, CenterPoint Energy recognized losses of $-0- and $13 million, respectively, related to these swaps.  During the three and nine months ended September 30, 2009, CenterPoint Energy recognized losses of $-0-and $3 million, respectively, related to these swaps. The losses were substantially offset by increased revenues due to colder than normal weather. Weather hedge losses are included in revenues in the Condensed Statements of Consolidated Income.

(b) Derivative Fair Values and Income Statement Impacts

The following tables present information about CenterPoint Energy’s derivative instruments and hedging activities.  The first table provides a balance sheet overview of CenterPoint Energy’s Derivative Assets and Liabilities as of September 30, 2009, while the latter tables provide a breakdown of the related income statement impact for the three and nine months ended September 30, 2009.

Fair Value of Derivative Instruments
 
   
September 30, 2009
 
Total derivatives not designated as hedging
instruments
 
Balance Sheet
Location
 
Derivative
Assets
Fair Value (2) (3)
   
Derivative
Liabilities
Fair Value (2) (3)
 
       
(in millions)
 
Commodity contracts (1)
 
Current Assets
  $ 59     $ (9 )
Commodity contracts (1) 
 
Other Assets
    16       (1 )
Commodity contracts (1)
 
Current Liabilities
    26       (137 )
Commodity contracts (1)
 
Other Liabilities
    2       (94 )
Indexed debt securities derivative
 
Current Liabilities
    -       (187 )
Total                                                                       
  $ 103     $ (428 )
_________
 
(1)
Commodity contracts are subject to master netting arrangements and are presented on a net basis in the Condensed Consolidated Balance Sheets. This netting causes derivative assets (liabilities) to be ultimately presented net in a liability (asset) account within the Condensed Consolidated Balance Sheets.
 
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(2)
The fair value shown for commodity contracts is comprised of derivative gross volumes totaling 668 billion cubic feet (Bcf) or a net 138 Bcf long position.   Of the net long position, basis swaps constitute 61 Bcf and volumes associated with price stabilization activities of the Natural Gas Distribution business segment comprise 56 Bcf.

 
(3)
The net of total non-trading derivative assets and liabilities is a $22 million liability as shown on CenterPoint Energy’s Condensed Consolidated Balance Sheets, and is comprised of the commodity contracts derivative assets and liabilities separately shown above offset by collateral netting of $116 million.

For CenterPoint Energy’s price stabilization activities of the Natural Gas Distribution business segment, the settled costs of derivatives are ultimately recovered through purchased gas adjustments. Accordingly, the net unrealized gains and losses associated with interim price movements on contracts that are accounted for as derivatives and probable of recovery through purchased gas adjustments are recorded as net regulatory assets. For those derivatives that are not included in purchased gas adjustments, unrealized gains and losses and settled amounts are recognized in the Condensed Statements of Consolidated Income as revenue for retail sales derivative contracts and as natural gas expense for natural gas derivatives and non-retail related physical gas derivatives. Unrealized gains and losses on indexed debt securities are recorded as Other Income (Expense) on the Condensed Statements of Consolidated Income.

Income Statement Impact of Derivative Activity
 
Total derivatives not designated as hedging
instruments
 
Income Statement Location
 
Three Months
Ended
September 30, 2009
 
       
(in millions)
 
Commodity contracts
 
Gains (Losses) in Revenue
  $ (4 )
Commodity contracts (1)
 
Gains (Losses) in Expense: Natural Gas
    (27 )
Indexed debt securities derivative
 
Gains (Losses) in Other Income (Expense)
    (30 )
Total
  $ (61 )
_________
 
(1)
The Gains (Losses) in Expense: Natural Gas includes $(31) million of costs associated with price stabilization activities of the Natural Gas Distribution business segment that will be ultimately recovered through purchased gas adjustments.

Income Statement Impact of Derivative Activity
 
Total derivatives not designated as hedging
instruments
 
Income Statement Location
 
Nine Months
Ended
September 30, 2009
 
       
(in millions)
 
Commodity contracts
 
Gains (Losses) in Revenue
  $ 80  
Commodity contracts (1)
 
Gains (Losses) in Expense: Natural Gas
    (218 )
Indexed debt securities derivative
 
Gains (Losses) in Other Income (Expense)
    (54 )
Total
  $ (192 )
_________
 
(1)
The Gains (Losses) in Expense: Natural Gas includes $(148) million of costs associated with price stabilization activities of the Natural Gas Distribution business segment that will be ultimately recovered through purchased gas adjustments.

(c) Credit Risk Contingent Features

CenterPoint Energy enters into financial derivative contracts containing material adverse change provisions.  These provisions require CenterPoint Energy to post additional collateral if the Standard & Poor’s Rating Services or Moody’s Investors Service, Inc. credit rating of CenterPoint Energy is downgraded.  The total fair value of the derivative instruments that contain credit risk contingent features that are in a net liability position at September 30, 2009 is $151 million.  The aggregate fair value of assets that are already posted as collateral at September 30, 2009 is $82 million.  If all derivative contracts (in a net liability position) containing credit risk contingent features were triggered at September 30, 2009, $69 million of additional assets would be required to be posted as collateral.
 
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(6)
Fair Value Measurements

Effective January 1, 2008, CenterPoint Energy adopted new accounting guidance on fair value measurements which requires additional disclosures about CenterPoint Energy’s financial assets and liabilities that are measured at fair value. Effective January 1, 2009, CenterPoint Energy adopted this new guidance for nonfinancial assets and liabilities, which adoption had no impact on CenterPoint Energy’s financial position, results of operations or cash flows.  Beginning in January 2008, assets and liabilities 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 in this guidance and directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, are as follows:

Level 1: Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets carried at Level 1 fair value generally are financial derivatives, investments and equity securities listed in active markets.

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

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. Unobservable inputs reflect CenterPoint Energy’s judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. CenterPoint Energy develops these inputs based on the best information available, including CenterPoint Energy’s own data.  CenterPoint Energy’s Level 3 derivative instruments primarily consist of options that are not traded on recognized exchanges and are valued using option pricing models.

The following tables present information about CenterPoint Energy’s assets and liabilities (including derivatives that are presented net) measured at fair value on a recurring basis as of December 31, 2008 and September 30, 2009, and indicate the fair value hierarchy of the valuation techniques utilized by CenterPoint Energy to determine such fair value.

   
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
   
Significant Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Netting
Adjustments (1)
   
Balance
as of
December 31,
2008
 
   
(in millions)
 
Assets
                             
Corporate equities
  $ 218     $ -     $ -     $ -     $ 218  
Investments, including money
market funds
    70       -       -       -       70  
Derivative assets
    8       155       49       (74 )     138  
Total assets
  $ 296     $ 155     $ 49     $ (74 )   $ 426  
Liabilities
                                       
Indexed debt securities
derivative
  $ -     $ 133     $ -     $ -     $ 133  
Derivative liabilities
    44       244       107       (261 )     134  
Total liabilities
  $ 44     $ 377     $ 107     $ (261 )   $ 267  
__________
 
(1)
Amounts represent the impact of legally enforceable master netting agreements that allow CenterPoint Energy to settle positive and negative positions and also include cash collateral held or placed with the same counterparties.
 
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Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
   
Significant Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Netting
Adjustments (1)
   
Balance
as of
September 30,
2009
 
   
(in millions)
 
Assets
                             
Corporate equities
  $ 287     $ -     $ -     $ -     $ 287  
Investments, including money
market funds
    67       -       -       -       67  
Derivative assets
    2       94       7       (38 )     65  
Total assets
  $ 356     $ 94     $ 7     $ (38 )   $ 419  
Liabilities
                                       
Indexed debt securities
derivative
  $ -     $ 187     $ -     $ -     $ 187  
Derivative liabilities
    16       207       18       (154 )     87  
Total liabilities
  $ 16     $ 394     $ 18     $ (154 )   $ 274  
__________
 
(1)
Amounts represent the impact of legally enforceable master netting agreements that allow CenterPoint Energy to settle positive and negative positions and also include cash collateral of $116 million posted with the same counterparties.

The following tables present additional information about assets or liabilities, including derivatives that are measured at fair value on a recurring basis for which CenterPoint Energy has utilized Level 3 inputs to determine fair value:

   
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
   
Derivative assets and liabilities, net
 
   
Three Months Ended September 30,
 
   
2008
   
2009
 
   
(in millions)
 
Beginning balance
  $ 6     $ (17 )
Total unrealized gains or (losses):
               
Included in earnings
    (61 )     2  
Included in regulatory assets
    -       3  
Purchases, sales, other settlements, net
    (4 )     1 (1)
Ending balance
  $ (59 )   $ (11 )
The amount of total gains for the period included in earnings
attributable to the change in unrealized gains or losses relating to
assets still held at the reporting date
  $ 4     $ 3  
__________
 
(1)
Purchases, sales, other settlements, net include a less than $1 million gain associated with price stabilization activities of CenterPoint Energy’s Natural Gas Distribution business segment.

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Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
   
Derivative assets and liabilities, net
 
   
Nine Months Ended September 30,
 
   
2008
   
2009
 
   
(in millions)
 
Beginning balance
  $ (3 )   $ (58 )
Total unrealized gains or (losses):
               
Included in earnings
    (52 )     -  
Included in regulatory assets
    -       (13 )
Purchases, sales, other settlements, net
    (4 )     60 (1)
Ending balance
  $ (59 )   $ (11 )
The amount of total gains (losses) for the period included in earnings
attributable to the change in unrealized gains or losses relating to
assets still held at the reporting date
  $ 9     $ 2  
_________
 
(1)
Purchases, sales, other settlements, net include a $57 million gain associated with price stabilization activities of CenterPoint Energy’s Natural Gas Distribution business segment.

(7)
Goodwill

Goodwill by reportable business segment as of both December 31, 2008 and September 30, 2009 is as follows (in millions):

Natural Gas Distribution
  $ 746  
Interstate Pipelines
    579  
Competitive Natural Gas Sales and Services
    335  
Field Services
    25  
Other Operations
    11  
Total
  $ 1,696  

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

CenterPoint Energy performed the test at July 1, 2009, its annual impairment testing date, and determined that no impairment charge for goodwill was required.
 
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(8)
Comprehensive Income

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

   
For the Three Months Ended
September 30,
   
For the Nine Months Ended
September 30,
 
   
2008
   
2009
   
2008
   
2009
 
   
(in millions)
 
Net income
  $ 136     $ 114     $ 359     $ 267  
Other comprehensive income (loss):
                               
Adjustment to pension and other postretirement
  plans (net of tax of $2, $2, $3 and $5)
    -       3       3       9  
Net deferred loss from cash flow hedges
  (net of tax of $-0-, $-0-, $2 and $-0-)
    (1 )     -       (4 )     -  
Reclassification of deferred gain from cash flow
  hedges realized in net income (net of tax of
  $-0-, $-0-, $2 and $-0-)
    -       -       (4 )     -  
Total
    (1 )     3       (5 )     9  
Comprehensive income
  $ 135     $ 117     $ 354     $ 276  

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

   
December 31,
2008
   
September 30,
2009
 
   
(in millions)
 
Adjustment to pension and postretirement plans                                                                                                    
  $ (127 )   $ (118 )
Net deferred loss from cash flow hedges
    (4 )     (4 )
Total accumulated other comprehensive loss                                                                                                    
  $ (131 )   $ (122 )

(9)
Capital Stock

CenterPoint Energy has 1,020,000,000 authorized shares of capital stock, comprised of 1,000,000,000 shares of $0.01 par value common stock and 20,000,000 shares of $0.01 par value preferred stock. At December 31, 2008, 346,088,714 shares of CenterPoint Energy common stock were issued and 346,088,548 shares were outstanding. At September 30, 2009, 390,331,666 shares of CenterPoint Energy common stock were issued and 390,331,500 shares were outstanding. Outstanding common shares exclude 166 treasury shares at both December 31, 2008 and September 30, 2009.

During the three months ended September 30, 2009, CenterPoint Energy received proceeds of approximately $11 million from the sale of approximately 0.9 million common shares to its defined contribution plan and proceeds of approximately $4 million from the sale of approximately 0.3 million common shares to participants in its enhanced dividend reinvestment plan.  During the nine months ended September 30, 2009, CenterPoint Energy received proceeds of approximately $47 million from the sale of approximately 4.1 million common shares to its defined contribution plan and proceeds of approximately $11 million from the sale of approximately 1.0 million common shares to participants in its enhanced dividend reinvestment plan.

CenterPoint Energy received net proceeds of $148 million from the issuance of 14.3 million shares of its common stock through a continuous offering program during the nine months ended September 30, 2009.

In September 2009, CenterPoint Energy received net proceeds of approximately $280 million from the issuance of 24.2 million shares of its common stock in an underwritten public offering.
 
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(10)
Short-term Borrowings and Long-term Debt
 
(a) Short-term Borrowings
 
Receivables Facility.  On October 9, 2009, CERC amended its receivables facility to extend the termination date to October 8, 2010.  Availability under CERC’s 364-day receivables facility now ranges from $150 million to $375 million, reflecting seasonal changes in receivables balances.  As of December 31, 2008 and September 30, 2009, the facility size was $128 million and $150 million, respectively. As of December 31, 2008 and September 30, 2009, advances under the receivables facilities were $78 million and $40 million, respectively.

Inventory Financing. In December 2008, CERC entered into an asset management agreement whereby it sold $110 million of its natural gas in storage and agreed to repurchase an equivalent amount of natural gas during the 2008-2009 winter heating season for payments totaling $114 million.  This transaction was accounted for as a financing and, as of December 31, 2008 and September 30, 2009, CenterPoint Energy’s financial statements reflect natural gas inventory of $75 million and $-0-, respectively, and a financing obligation of $75 million and $-0-, respectively, related to this transaction.

Revolving Credit Facility. On October 6, 2009, CenterPoint Houston terminated its $600 million 364-day credit facility which was secured by a pledge of $600 million of general mortgage bonds issued by CenterPoint Houston.  From inception through its termination, there had been no borrowings under the credit facility.
 
(b) Long-term Debt
 
General Mortgage Bonds. In January 2009, CenterPoint Houston issued $500 million aggregate principal amount of general mortgage bonds, due in March 2014 with an interest rate of 7.00%.  The proceeds from the sale of the bonds were used for general corporate purposes, including the repayment of outstanding borrowings under its revolving credit facility and the money pool, capital expenditures and storm restoration costs associated with Hurricane Ike.

Revolving Credit Facilities. CenterPoint Energy’s $1.2 billion credit facility has a first drawn cost of the London Interbank Offered Rate (LIBOR) plus 55 basis points based on CenterPoint Energy’s current credit ratings. The facility contains a debt (excluding transition and other securitization bonds) to earnings before interest, taxes, depreciation and amortization (EBITDA) covenant, which was modified (i) in August 2008 so that the permitted ratio of debt to EBITDA would continue at its then-current level for the remaining term of the facility and (ii) in November 2008 so that the permitted ratio of debt to EBITDA would be temporarily increased until the earlier of December 31, 2009 or CenterPoint Houston’s issuance of bonds to securitize the costs incurred as a result of Hurricane Ike, after which time the permitted ratio would revert to the level that existed prior to the November 2008 modification.  Non-recourse securitization bonds are not included within the definition of debt for purposes of this covenant.

CenterPoint Houston’s $289 million credit facility contains a debt (excluding transition and other securitization bonds) to total capitalization covenant. The facility’s first drawn cost is LIBOR plus 45 basis points based on CenterPoint Houston’s current credit ratings.

On October 7, 2009, the size of the CERC Corp. revolving credit facility was reduced from $950 million to $915 million through removal of Lehman Brothers Bank, FSB (Lehman) as a lender.  Prior to its removal, Lehman had a $35 million commitment to lend.  All credit facility loans to CERC Corp. that were funded by Lehman were repaid in September 2009.  CERC Corp.’s $915 million credit facility’s first drawn cost is LIBOR plus 45 basis points based on CERC Corp.’s current credit ratings. The facility contains a debt to total capitalization covenant.

Under CenterPoint Energy’s $1.2 billion credit facility, CenterPoint Houston’s $289 million credit facility and CERC Corp.’s $915 million credit facility, an additional utilization fee of 5 basis points applies to borrowings any time more than 50% of the facility is utilized. The spread to LIBOR and the utilization fee fluctuate based on the borrower’s credit rating.
 
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As of December 31, 2008 and September 30, 2009, the following loan balances were outstanding under CenterPoint Energy’s long-term revolving credit facilities (in millions):

   
December 31,
2008
   
September 30,
2009
 
CenterPoint Energy credit facility borrowings
  $ 264     $ -  
CenterPoint Houston credit facility borrowings
    251       -  
CERC Corp. credit facility borrowings
    926       10  
Total credit facility borrowings
  $ 1,441     $ 10  

In addition, as of both December 31, 2008 and September 30, 2009, CenterPoint Energy had approximately $27 million of outstanding letters of credit under its $1.2 billion credit facility and CenterPoint Houston had approximately $4 million of outstanding letters of credit under its $289 million credit facility. There was no commercial paper outstanding that would have been backstopped by CenterPoint Energy’s $1.2 billion credit facility as of December 31, 2008 and September 30, 2009.  There was $-0- and $15 million of outstanding commercial paper backstopped by CERC Corp.’s credit facility as of December 31, 2008 and September 30, 2009, respectively.  CenterPoint Energy, CenterPoint Houston and CERC Corp. were in compliance with all debt covenants as of September 30, 2009.

(11)
Commitments and Contingencies

(a) Natural Gas Supply Commitments

Natural gas supply commitments include natural gas contracts related to CenterPoint Energy’s Natural Gas Distribution and Competitive Natural Gas Sales and Services business segments, which have various quantity requirements and durations, that are not classified as non-trading derivative assets and liabilities in CenterPoint Energy’s Condensed Consolidated Balance Sheets as of December 31, 2008 and September 30, 2009 as these contracts meet the exception to be classified as "normal purchases contracts" or do not meet the definition of a derivative. Natural gas supply commitments also include natural gas transportation contracts that do not meet the definition of a derivative. As of September 30, 2009, minimum payment obligations for natural gas supply commitments are approximately $151 million for the remaining three months in 2009, $449 million in 2010, $466 million in 2011, $383 million in 2012, $371 million in 2013 and $738 million after 2013.

(b) Capital Commitments

In September 2009, CenterPoint Energy Field Services, Inc. (CEFS), a wholly-owned natural gas gathering and treating subsidiary of CERC Corp., entered into long-term agreements with an indirect wholly-owned subsidiary of EnCana Corporation (EnCana) and an indirect wholly-owned subsidiary of Royal Dutch Shell plc (Shell) to provide gathering and treating services for their natural gas production from the Haynesville Shale and Bossier Shale formations in Texas and Louisiana. CEFS has also acquired existing jointly-owned gathering facilities from EnCana and Shell in De Soto and Red River parishes in northwest Louisiana.

Under the terms of the agreements, CEFS commenced gathering and treating services immediately utilizing the acquired facilities. CEFS will also expand the acquired facilities to gather and treat up to 700 million cubic feet (MMcf) per day of natural gas from their current throughput of over 100 MMcf per day. If EnCana or Shell elect, CEFS will further expand the facilities in order to gather and treat additional future volumes.

New construction to reach capacity of 700 MMcf per day includes more than 200 miles of pipelines, nearly 25,500 horsepower of compression and over 800 MMcf per day of treating capacity.

Each of the agreements includes volume commitments for which CEFS has exclusive rights to gather Shell’s and EnCana’s natural gas production.

CEFS estimates that the purchase of existing facilities and construction to gather 700 MMcf per day will cost up to $325 million. If EnCana and Shell elect expansion of the project to gather and process additional future volumes of up to 1 billion cubic feet per day, CEFS estimates that the expansion would cost as much as an additional $300 million and EnCana and Shell would provide incremental volume commitments.
 
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 (c) Legal, Environmental and Other Regulatory Matters

Legal Matters

Gas Market Manipulation Cases. CenterPoint Energy, CenterPoint Houston or their predecessor, Reliant Energy, Incorporated (Reliant Energy), and certain of their former subsidiaries are named as defendants in several lawsuits described below. Under a master separation agreement between CenterPoint Energy and RRI (formerly known as Reliant Resources, Inc. and Reliant Energy, Inc.), CenterPoint Energy and its subsidiaries are entitled to be indemnified by RRI for any losses, including attorneys’ fees and other costs, arising out of these lawsuits.  Pursuant to the indemnification obligation, RRI is defending CenterPoint Energy and its subsidiaries to the extent named in these lawsuits.  A large number of lawsuits were filed against numerous gas market participants in a number of federal and western state courts in connection with the operation of the natural gas markets in 2000-2002. CenterPoint Energy’s former affiliate, RRI, was a participant in gas trading in the California and Western markets. These lawsuits, many of which have been filed as class actions, allege violations of state and federal antitrust laws. Plaintiffs in these lawsuits are seeking a variety of forms of relief, including, among others, recovery of compensatory damages (in some cases in excess of $1 billion), a trebling of compensatory damages, full consideration damages and attorneys’ fees. CenterPoint Energy and/or Reliant Energy were named in approximately 30 of these lawsuits, which were instituted between 2003 and 2009. CenterPoint Energy and its affiliates have been released or dismissed from all but two of such cases. CenterPoint Energy Services, Inc. (CES), a subsidiary of CERC Corp., is a defendant in a case now pending in federal court in Nevada alleging a conspiracy to inflate Wisconsin natural gas prices in 2000-2002.  Additionally, CenterPoint Energy was a defendant in a lawsuit filed in state court in Nevada that was dismissed in 2007, but the plaintiffs have indicated that they will appeal the dismissal. CenterPoint Energy believes that neither it nor CES is a proper defendant in these remaining cases and will continue to pursue dismissal from those cases.  CenterPoint Energy does not expect the ultimate outcome of these remaining matters to have a material impact on its financial condition, results of operations or cash flows.

On May 1, 2009, RRI completed the previously announced sale of its Texas retail business to NRG Retail LLC, a subsidiary of NRG Energy, Inc.  In connection with the sale, RRI changed its name to RRI Energy, Inc. and no longer provides service as a REP in CenterPoint Houston’s service territory.  The sale does not alter RRI’s contractual obligations to indemnify CenterPoint Energy and its subsidiaries, including CenterPoint Houston, for certain liabilities, including their indemnification regarding certain litigation, nor does it affect the terms of existing guaranty arrangements for certain RRI gas transportation contracts.

Natural Gas Measurement Lawsuits. CERC Corp. and certain of its subsidiaries are defendants in a lawsuit filed in 1997 under the Federal False Claims Act alleging mismeasurement of natural gas produced from federal and Indian lands. The suit seeks undisclosed damages, along with statutory penalties, interest, costs and fees. The complaint is part of a larger series of complaints filed against 77 natural gas pipelines and their subsidiaries and affiliates. An earlier single action making substantially similar allegations against the pipelines was dismissed by the federal district court for the District of Columbia on grounds of improper joinder and lack of jurisdiction. As a result, the various individual complaints were filed in numerous courts throughout the country. This case has been consolidated, together with the other similar False Claims Act cases, in the federal district court in Cheyenne, Wyoming. In October 2006, the judge considering this matter granted the defendants’ motion to dismiss the suit on the ground that the court lacked subject matter jurisdiction over the claims asserted. The plaintiff sought review of that dismissal from the Tenth Circuit Court of Appeals, which affirmed the district court’s dismissal in March 2009. Following dismissal of the plaintiff’s motion to the Tenth Circuit for rehearing, the plaintiff sought review by the United States Supreme Court, but his petition for certiorari was denied in October 2009.

In addition, CERC Corp. and certain of its subsidiaries are defendants in two mismeasurement lawsuits brought against approximately 245 pipeline companies and their affiliates pending in state court in Stevens County, Kansas.  In one case (originally filed in May 1999 and amended four times), the plaintiffs purport to represent a class of royalty owners who allege that the defendants have engaged in systematic mismeasurement of the volume of natural gas for more than 25 years. The plaintiffs amended their petition in this suit in July 2003 in response to an order from the judge denying certification of the plaintiffs’ alleged class. In the amendment the plaintiffs dismissed their claims against certain defendants (including two CERC Corp. subsidiaries), limited the scope of the class of plaintiffs they purport to represent and eliminated previously asserted claims based on mismeasurement of the British thermal unit (Btu) content of the gas. The same plaintiffs then filed a second lawsuit, again as representatives of a putative class of royalty owners, in which they assert their claims that the defendants have engaged in
 
22

 
systematic mismeasurement of the Btu content of natural gas for more than 25 years. In both lawsuits, the plaintiffs seek compensatory damages, along with statutory penalties, treble damages, interest, costs and fees.  In September 2009, the district court in Stevens County, Kansas, denied plaintiffs’ request for class certification of their case, but the plaintiffs have sought rehearing of that dismissal.

CERC believes that there has been no systematic mismeasurement of gas and that these lawsuits are without merit. CERC and CenterPoint Energy do not expect the ultimate outcome of the lawsuits to have a material impact on the financial condition, results of operations or cash flows of either CenterPoint Energy or CERC.

Gas Cost Recovery Litigation. In October 2004, a lawsuit was filed by certain CERC ratepayers in Texas and Arkansas in circuit court in Miller County, Arkansas against CenterPoint Energy, CERC Corp., Entex Gas Marketing Company (EGMC), CenterPoint Energy Gas Transmission Company (CEGT), CenterPoint Energy Field Services (CEFS), CenterPoint Energy Pipeline Services, Inc. (CEPS), Mississippi River Transmission Corp. (MRT) and various non-affiliated companies alleging fraud, unjust enrichment and civil conspiracy with respect to rates charged to certain consumers of natural gas in Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma and Texas. Subsequently, the plaintiffs dropped CEGT and MRT as defendants. Although the plaintiffs in the Miller County case sought class certification, no class was certified. In June 2007, the Arkansas Supreme Court determined that the Arkansas claims were within the sole and exclusive jurisdiction of the Arkansas Public Service Commission (APSC). In response to that ruling, in August 2007 the Miller County court stayed but refused to dismiss the Arkansas claims. In February 2008, the Arkansas Supreme Court directed the Miller County court to dismiss the entire case for lack of jurisdiction. The Miller County court subsequently dismissed the case in accordance with the Arkansas Supreme Court’s mandate and all appellate deadlines have expired.

In June 2007, CenterPoint Energy, CERC Corp., EGMC and other defendants in the Miller County case filed a petition in a district court in Travis County, Texas seeking a determination that the Railroad Commission has exclusive original jurisdiction over the Texas claims asserted in the Miller County case. In October 2007, CEFS and CEPS joined the petition in the Travis County case.  In October 2008, the district court ruled that the Railroad Commission had exclusive original jurisdiction over the Texas claims asserted against CenterPoint Energy, CERC Corp., EGMC and the other defendants in the Miller County case.  In January 2009, the court entered a final declaratory judgment ruling that the Railroad Commission has exclusive jurisdiction over Texas claims.  All appellate deadlines expired without an appeal of the final declaratory judgment.
 
In August 2007, the Arkansas plaintiff in the Miller County litigation initiated a complaint at the APSC seeking a decision concerning the extent of the APSC’s jurisdiction over the Miller County case and an investigation into the merits of the allegations asserted in his complaint with respect to CERC. In February 2009, the Arkansas plaintiff notified the APSC that he would no longer pursue his claims, and in July 2009 the complaint proceeding was dismissed by the APSC. All appellate deadlines expired without an appeal of the dismissal order.

Environmental Matters

Manufactured Gas Plant Sites. CERC and its predecessors operated manufactured gas plants (MGPs) in the past. In Minnesota, CERC has completed remediation on two sites, other than ongoing monitoring and water treatment. There are five remaining sites in CERC’s Minnesota service territory. CERC believes that it has no liability with respect to two of these sites.

At September 30, 2009, CERC had accrued $14 million for remediation of these Minnesota sites and the estimated range of possible remediation costs for these sites was $4 million to $35 million based on remediation continuing for 30 to 50 years. The cost estimates are based on studies of a site or industry average costs for remediation of sites of similar size. The actual remediation costs will be dependent upon the number of sites to be remediated, the participation of other potentially responsible parties (PRP), if any, and the remediation methods used. CERC has utilized an environmental expense tracker mechanism in its rates in Minnesota to recover estimated costs in excess of insurance recovery. As of September 30, 2009, CERC had collected $13 million from insurance companies and rate payers to be used for future environmental remediation.

In addition to the Minnesota sites, the United States Environmental Protection Agency and other regulators have investigated MGP sites that were owned or operated by CERC or may have been owned by one of its former affiliates. CERC has been named as a defendant in a lawsuit filed in the United States District Court, District of
 
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Maine, under which contribution is sought by private parties for the cost to remediate former MGP sites based on the previous ownership of such sites by former affiliates of CERC or its divisions. CERC has also been identified as a PRP by the State of Maine for a site that is the subject of the lawsuit. In June 2006, the federal district court in Maine ruled that the current owner of the site is responsible for site remediation but that an additional evidentiary hearing is required to determine if other potentially responsible parties, including CERC, would have to contribute to that remediation. CERC believes it is not liable as a former owner or operator of the site under the Comprehensive Environmental, Response, Compensation and Liability Act of 1980, as amended, and applicable state statutes, and is vigorously contesting the suit and its designation as a PRP.  In September 2009, the federal district court granted CERC’s motion for summary judgment in the proceeding.  Although it is likely that the plaintiff will pursue an appeal from that dismissal, further action will not be taken until the district court disposes of claims against other defendants in the case. CERC and CenterPoint Energy do not expect the ultimate outcome to have a material impact on the financial condition, results of operations or cash flows of either CenterPoint Energy or CERC.

Mercury Contamination. CenterPoint Energy’s pipeline and distribution operations have in the past employed elemental mercury in measuring and regulating equipment. It is possible that small amounts of mercury may have been spilled in the course of normal maintenance and replacement operations and that these spills may have contaminated the immediate area with elemental mercury. CenterPoint Energy has found this type of contamination at some sites in the past, and CenterPoint Energy has conducted remediation at these sites. It is possible that other contaminated sites may exist and that remediation costs may be incurred for these sites. Although the total amount of these costs is not known at this time, based on CenterPoint Energy’s experience and that of others in the natural gas industry to date and on the current regulations regarding remediation of these sites, CenterPoint Energy believes that the costs of any remediation of these sites will not be material to CenterPoint Energy’s financial condition, results of operations or cash flows.

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

Groundwater Contamination Litigation. Predecessor entities of CERC, along with several other entities, are defendants in litigation, St. Michel Plantation, LLC, et al, v. White, et al., pending in civil district court in Orleans Parish, Louisiana.  In the lawsuit, the plaintiffs allege that their property in Terrebonne Parish, Louisiana suffered salt water contamination as a result of oil and gas drilling activities conducted by the defendants.  Although a predecessor of CERC held an interest in two oil and gas leases on a portion of the property at issue, neither it nor any other CERC entities drilled or conducted other oil and gas operations on those leases.  In January 2009, CERC and the plaintiffs reached agreement on the terms of a settlement that, if ultimately approved by the Louisiana Department of Natural Resources, is expected to resolve this litigation. CenterPoint Energy and CERC do not expect the outcome of this litigation to have a material adverse impact on the financial condition, results of operations or cash flows of either CenterPoint Energy or CERC.

Other Environmental. From time to time CenterPoint Energy has received notices from regulatory authorities or others regarding its status as a PRP in connection with sites found to require remediation due to the presence of environmental contaminants. In addition, CenterPoint Energy has been named from time to time as a defendant in litigation related to such sites. Although the ultimate outcome of such matters cannot be predicted at this time, CenterPoint Energy does not expect, based on its experience to date, these matters, either individually or in the
 
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aggregate, to have a material adverse effect on CenterPoint Energy’s financial condition, results of operations or cash flows.

Other Proceedings

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

(d) Guaranties

Prior to CenterPoint Energy’s distribution of its ownership in RRI to its shareholders, CERC had guaranteed certain contractual obligations of what became RRI’s trading subsidiary.  When the companies separated, RRI agreed to secure CERC against obligations under the guaranties RRI had been unable to extinguish by the time of separation.  Pursuant to such agreement, as amended in December 2007, RRI has agreed to provide to CERC cash or letters of credit as security against CERC’s obligations under its remaining guaranties for demand charges under certain gas purchase and transportation agreements if and to the extent changes in market conditions expose CERC to a risk of loss on those guaranties.  As of September 30, 2009, RRI was not required to provide security to CERC.  If RRI should fail to perform the contractual obligations, CERC could have to honor its guarantee and, in such event, collateral provided as security may be insufficient to satisfy CERC’s obligations.

(12)
Income Taxes

During the three months and nine months ended September 30, 2008, the effective tax rate was 36% and 37%, respectively.  During the three months and nine months ended September 30, 2009, the effective tax rate was 25% and 33%, respectively.  CenterPoint Energy’s settlement of its federal income tax return examinations for tax years 2004 and 2005 affected the comparability of the effective tax rate. As a result of the settlement, CenterPoint Energy recognized a reduction in the liability for uncertain tax positions of approximately $42 million, which included approximately $4 million of uncertain tax positions existing as of December 31, 2008 which reduced income tax expense.  Additionally, CenterPoint Energy recognized approximately $9 million as a reduction in accrued interest.

The following table summarizes CenterPoint Energy’s uncertain tax positions at December 31, 2008 and September 30, 2009:

   
December 31,
2008
   
September 30,
2009
 
   
(in millions)
 
Liability for uncertain tax positions                                                                          
  $ 117     $ 169  
Portion of liability for uncertain tax positions that, if
recognized, would reduce the effective income tax rate
    14       9  
Interest accrued on uncertain tax positions                                                                          
    10       2  

(13)
Estimated Fair Value of Financial Instruments

The fair values of cash and cash equivalents, investments in debt and equity securities classified as "available-for-sale" and "trading" and short-term borrowings are estimated to be approximately equivalent to carrying amounts and have been excluded from the table below. The fair values of non-trading derivative assets and liabilities are equivalent to their carrying amounts in the Condensed Consolidated Balance Sheets at December 31, 2008 and September 30, 2009 and have been determined using quoted market prices for the same or similar instruments when

25


available or other estimation techniques (see Notes 5 and 6). Therefore, these financial instruments are stated at fair value and are excluded from the table below.  The fair value of each debt instrument is determined by multiplying the principal amount of each debt instrument by the market price.

   
December 31, 2008
   
September 30, 2009
 
   
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
   
(in millions)
 
Financial liabilities:
                       
Long-term debt (excluding capital leases)
  $ 10,396     $ 9,875     $ 9,266     $ 9,754  

(14)
Earnings Per Share

The following table reconciles numerators and denominators of CenterPoint Energy’s basic and diluted earnings per share calculations:

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2008
   
2009
   
2008
   
2009
 
   
(in millions, except share and per share amounts)
 
Basic earnings per share calculation:
                       
Net income
  $ 136     $ 114     $ 359     $ 267  
                                 
Weighted average shares outstanding
    342,228,000       369,512,000       333,652,000       356,570,000  
                                 
Basic earnings per share:
                               
Net income
  $ 0.40     $ 0.31     $ 1.08     $ 0.75  
                                 
Diluted earnings per share calculation:
                               
Net income
  $ 136     $ 114     $ 359     $ 267  
                                 
Weighted average shares outstanding
    342,228,000       369,512,000       333,652,000       356,570,000  
Plus: Incremental shares from assumed conversions:
                               
Stock options (1)
    841,000       514,000       846,000       459,000  
Restricted stock
    1,515,000       1,716,000       1,515,000       1,716,000  
3.75% convertible senior notes
    -       -       6,174,000       -  
Weighted average shares assuming dilution
    344,584,000       371,742,000       342,187,000       358,745,000  
                                 
Diluted earnings per share:
                               
Net income
  $ 0.39     $ 0.31     $ 1.05     $ 0.74  
__________
 
 
(1)
Options to purchase 2,720,083 shares were outstanding for both the three and nine months ended September 30, 2008, and options to purchase 2,521,030 shares were outstanding for both the three and nine months ended September 30, 2009, but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares for the respective periods.
 
Substantially all of the 3.75% contingently convertible senior notes provided for settlement of the principal portion in cash rather than stock. The portion of the conversion value of such notes that was required to be settled in cash rather than stock is excluded from the computation of diluted earnings per share from continuing operations. CenterPoint Energy included the conversion spread in the calculation of diluted earnings per share when the average market price of CenterPoint Energy’s common stock in the respective reporting period exceeded the conversion price. In April 2008, CenterPoint Energy called its 3.75% convertible senior notes for redemption on May 30, 2008. Substantially all of CenterPoint Energy’s 3.75% convertible senior notes were submitted for conversion on or prior to the May 30, 2008 redemption date.

(15)
Reportable Business Segments

CenterPoint Energy’s determination of reportable business segments considers the strategic operating units under which CenterPoint Energy manages sales, allocates resources and assesses performance of various products and services to wholesale or retail customers in differing regulatory environments. The accounting policies of the
 
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business segments are the same as those described in the summary of significant accounting policies except that some executive benefit costs have not been allocated to business segments. CenterPoint Energy uses operating income as the measure of profit or loss for its business segments.

CenterPoint Energy’s reportable business segments include the following: Electric Transmission & Distribution, Natural Gas Distribution, Competitive Natural Gas Sales and Services, Interstate Pipelines, Field Services and Other Operations. The electric transmission and distribution function (CenterPoint Houston) is reported in the Electric Transmission & Distribution business segment. Natural Gas Distribution consists of intrastate natural gas sales to, and natural gas transportation and distribution for, residential, commercial, industrial and institutional customers. Competitive Natural Gas Sales and Services represents CenterPoint Energy’s non-rate regulated gas sales and services operations, which consist of three operational functions: wholesale, retail and intrastate pipelines. The Interstate Pipelines business segment includes the interstate natural gas pipeline operations. The Field Services business segment includes the natural gas gathering operations. Other Operations consists primarily of other corporate operations which support all of CenterPoint Energy’s business operations.

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

   
For the Three Months Ended September 30, 2008
 
   
Revenues from
External
Customers
   
Net
Intersegment
Revenues
   
Operating
Income (Loss)
 
Electric Transmission & Distribution
  $ 552 (1)   $ -     $ 202  
Natural Gas Distribution
    548       2       (6 )
Competitive Natural Gas Sales and Services
    1,256       13       35  
Interstate Pipelines
    96       47       55 (3)
Field Services
    60       11       44  
Other Operations
    3       -       7  
Eliminations
    -       (73 )     -  
Consolidated
  $ 2,515     $ -     $ 337  

   
For the Three Months Ended September 30, 2009
 
   
Revenues from
External
Customers
   
Net
Intersegment
Revenues
   
Operating
Income (Loss)
 
Electric Transmission & Distribution
  $ 608 (1)   $ -     $ 218  
Natural Gas Distribution
    400       2       (15 )
Competitive Natural Gas Sales and Services
    395       4       (8 )
Interstate Pipelines
    119       34       64  
Field Services
    51       12       23  
Other Operations
    3       -       5  
Eliminations
    -       (52 )     -  
Consolidated
  $ 1,576     $ -     $ 287  

   
For the Nine Months Ended September 30, 2008
       
   
Revenues from
External
Customers
   
Net
Intersegment
Revenues
   
Operating
Income
   
Total Assets
as of December 31,
2008
 
Electric Transmission & Distribution
  $ 1,471 (1)   $ -     $ 457 (2)   $ 8,880  
Natural Gas Distribution
    2,969       7       119       4,961  
Competitive Natural Gas Sales and Services
    3,599       33       36       1,315  
Interstate Pipelines
    337       131       227 (3)     3,578  
Field Services
    164       27       121 (4)     826  
Other Operations
    8       -       10       2,185 (5)
Eliminations
    -       (198 )     -       (2,069 )
Consolidated
  $ 8,548     $ -     $ 970     $