CENTERPOINT ENERGY HOUSTON ELECTRIC LLC - FORM 10-Q

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - CENTERPOINT ENERGY HOUSTON ELECTRIC LLC	Financial_Report.xls
EX-12 - COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES - CENTERPOINT ENERGY HOUSTON ELECTRIC LLC	ex12.htm
EX-32.1 - SECTION 1350 CERTIFICATION OF DAVID M. MCCLANAHAN - CENTERPOINT ENERGY HOUSTON ELECTRIC LLC	ex32-1.htm
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF GARY L. WHITLOCK - CENTERPOINT ENERGY HOUSTON ELECTRIC LLC	ex31-2.htm
EX-32.2 - SECTION 1350 CERTIFICATION OF GARY L. WHITLOCK - CENTERPOINT ENERGY HOUSTON ELECTRIC LLC	ex32-2.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF DAVID M. MCCLANAHAN - CENTERPOINT ENERGY HOUSTON ELECTRIC LLC	ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	FOR THE TRANSITION PERIOD FROM TO

Commission file number 1-3187

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC

(Exact name of registrant as specified in its charter)

Texas	22-3865106
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1111 Louisiana
Houston, Texas 77002	(713) 207-1111
(Address and zip code of principal executive offices)	(Registrant’s telephone number, including area code)

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

As of October 14, 2011, all 1,000 common shares of CenterPoint Energy Houston Electric, LLC were held by Utility Holding, LLC, a wholly owned subsidiary of CenterPoint Energy, Inc.

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2011

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Condensed Statements of Consolidated Income
	Three and Nine Months Ended September 30, 2010 and 2011 (unaudited)	1

	Condensed Consolidated Balance Sheets
	December 31, 2010 and September 30, 2011 (unaudited)	2

	Condensed Statements of Consolidated Cash Flows
	Nine Months Ended September 30, 2010 and 2011 (unaudited)	4

	Notes to Unaudited Condensed Consolidated Financial Statements	5

Item 2.	Management’s Narrative Analysis of Results of Operations	13

Item 4.	Controls and Procedures	20

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	21

Item 1A.	Risk Factors	21

Item 5.	Other Information	21

Item 6.	Exhibits	21

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

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

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

•

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

•

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

•

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

•

factors that may impact the timing and completion of our anticipated transition bond offering to recover our true-up balance, including actions by the Public Utility Commission of Texas (Texas Utility Commission), any appeals of the financing order issued by the Texas Utility Commission authorizing the issuance of such transition bonds, and future market conditions;

•

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

•

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

•

weather variations and other natural phenomena;

•

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

•

the impact of unplanned facility outages;

•

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

•

changes in interest rates or rates of inflation;

•

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

•

actions by credit rating agencies;

•

inability of various counterparties to meet their obligations to us;

•

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

•

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

•

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

•

the outcome of litigation brought by or against us;

•

our ability to control costs;

•

the investment performance of CenterPoint Energy’s pension and postretirement benefit plans;

•

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

•

acquisition and merger activities involving us or our competitors; and

•

other factors we discuss in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2010 and in Item 1A of Part II of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, each of which is incorporated herein by reference, and other reports we file from time to time with the Securities and Exchange Commission.

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

iii

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES

(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

CONDENSED STATEMENTS OF CONSOLIDATED INCOME

(Millions of Dollars)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2011			2010			2011

Revenues	$	655		$	707		$	1,705		$	1,802

Expenses:
Operation and maintenance		217			230			615			661
Depreciation and amortization		173			179			450			453
Taxes other than income taxes		53			54			157			158
Total		443			463			1,222			1,272
Operating Income		212			244			483			530

Other Income (Expense):
Interest and other finance charges		(39	)		(38	)		(113	)		(113	)
Interest on transition and system restoration bonds		(34	)		(31	)		(106	)		(96	)
Return on true-up balance		—			352			—			352
Other, net		6			15			22			30
Total		(67	)		298			(197	)		173

Income Before Income Taxes and Extraordinary Item		145			542			286			703
Income tax expense		53			175			104			233
Income Before Extraordinary Item		92			367			182			470
Extraordinary Item, net of tax		—			598			—			598
Net Income	$	92		$	965		$	182		$	1,068

See Notes to the Interim Condensed Consolidated Financial Statements

Table of Contents

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES

(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

CONDENSED CONSOLIDATED BALANCE SHEETS

(Millions of Dollars)

(Unaudited)

ASSETS

	December 31, 2010		September 30, 2011
Current Assets:
Cash and cash equivalents ($198 and $103 related to VIEs at December 31, 2010 and September 30, 2011, respectively)	$	198	$	103
Accounts and notes receivable, net ($49 and $73 related to VIEs at December 31, 2010 and September 30, 2011, respectively)		203		276
Accounts and notes receivable – affiliated companies		919		1,024
Accrued unbilled revenues		70		79
Inventory		71		75
Taxes receivable		63		—
Deferred tax asset		3		7
Other ($39 and $41 related to VIEs at December 31, 2010 and September 30, 2011, respectively)		62		65
Total current assets		1,589		1,629

Property, Plant and Equipment:
Property, plant and equipment		7,586		7,732
Less accumulated depreciation and amortization		2,805		2,795
Property, plant and equipment, net		4,781		4,937

Other Assets:
Regulatory assets ($2,597 and $2,352 related to VIEs at December 31, 2010 and September 30, 2011, respectively)		2,675		3,743
Notes receivable — affiliated companies		750		750
Other		37		32
Total other assets		3,462		4,525

Total Assets	$	9,832	$	11,091

See Notes to the Interim Condensed Consolidated Financial Statements

Table of Contents

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES

(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

CONDENSED CONSOLIDATED BALANCE SHEETS — (Continued)

(Millions of Dollars)

(Unaudited)

LIABILITIES AND MEMBER’S EQUITY

	December 31, 2010		September 30, 2011
Current Liabilities:
Current portion of VIE transition and system restoration bonds long-term debt	$	283	$	307
Current portion of other long-term debt		—		46
Accounts payable		76		80
Accounts and notes payable — affiliated companies		36		28
Taxes accrued		92		88
Interest accrued		101		32
Other		74		90
Total current liabilities		662		671

Other Liabilities:
Accumulated deferred income taxes, net		1,428		2,154
Benefit obligations		215		214
Regulatory liabilities		417		430
Notes payable — affiliated companies		151		151
Other		297		93
Total other liabilities		2,508		3,042

Long-term Debt:
VIE transition and system restoration bonds		2,522		2,215
Other		2,092		2,046
Total long-term debt		4,614		4,261

Commitments and Contingencies (Note 8)

Member’s Equity:
Common stock		—		—
Paid-in capital		1,230		1,231
Retained earnings		818		1,886
Total member’s equity		2,048		3,117

Total Liabilities and Member’s Equity	$	9,832	$	11,091

See Notes to the Interim Condensed Consolidated Financial Statements

Table of Contents

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES

(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(Millions of Dollars)

(Unaudited)

	Nine Months Ended September 30,
	2010			2011
Cash Flows from Operating Activities:
Net income	$	182		$	1,068
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		450			453
Amortization of deferred financing costs		9			9
Deferred income taxes		(21	)		188
Extraordinary item, net of tax		—			(598	)
Return on true-up balance		—			(352	)
Changes in other assets and liabilities:
Accounts and notes receivable, net		(74	)		(107	)
Accounts receivable/payable, affiliates		(21	)		4
Inventory		1			(4	)
Accounts payable		1			2
Taxes receivable		54			63
Interest and taxes accrued		(85	)		(73	)
Net regulatory assets and liabilities		(17	)		(25	)
Other current assets		2			(1	)
Other current liabilities		5			16
Other assets		—			(3	)
Other liabilities		5			2
Other, net		—			—
Net cash provided by operating activities		491			642

Cash Flows from Investing Activities:
Capital expenditures		(385	)		(449	)
Increase in notes receivable from affiliates, net		(585	)		(117	)
Increase in restricted cash of transition and system restoration bond companies		(1	)		(2	)
Cash received from U.S. Department of Energy grant		58			110
Other, net		8			5
Net cash used in investing activities		(905	)		(453	)

Cash Flows from Financing Activities:
Payments of long-term debt		(241	)		(283	)
Debt issuance costs		—			(2	)
Other, net		—			1
Net cash used in financing activities		(241	)		(284	)

Net Decrease in Cash and Cash Equivalents		(655	)		(95	)
Cash and Cash Equivalents at Beginning of Period		739			198
Cash and Cash Equivalents at End of Period	$	84		$	103

Supplemental Disclosure of Cash Flow Information:
Cash Payments:
Interest, net of capitalized interest	$	290		$	279
Income taxes (refunds), net		57			(29	)
Non-cash transactions:
Accounts payable related to capital expenditures		39			38

See Notes to the Interim Condensed Consolidated Financial Statements

Table of Contents

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1)	Background and Basis of Presentation

General. Included in this Quarterly Report on Form 10-Q (Form 10-Q) of CenterPoint Energy Houston Electric, LLC are the condensed consolidated interim financial statements and notes (Interim Condensed Financial Statements) of CenterPoint Energy Houston Electric, LLC and its subsidiaries (collectively, CenterPoint Houston). The Interim Condensed Financial Statements are unaudited, omit certain financial statement disclosures and should be read with the Annual Report on Form 10-K of CenterPoint Houston for the year ended December 31, 2010.

Background. CenterPoint Houston engages in the electric transmission and distribution business in the Texas Gulf Coast area that includes the city of Houston. CenterPoint Houston is an indirect wholly owned subsidiary of CenterPoint Energy, Inc. (CenterPoint Energy), a public utility holding company. At September 30, 2011, CenterPoint Houston had four subsidiaries, CenterPoint Energy Transition Bond Company, LLC, CenterPoint Energy Transition Bond Company II, LLC, CenterPoint Energy Transition Bond Company III, LLC and CenterPoint Energy Restoration Bond Company, LLC (collectively, the transition and system restoration bond companies). Each is a special purpose Delaware limited liability company formed for the principal purpose of purchasing and owning transition and system restoration property, issuing transition and system restoration bonds and performing activities incidental thereto.

Basis of Presentation. The preparation of financial statements in conformity with generally accepted accounting principles (U.S. 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 Houston’s Interim Condensed Financial Statements reflect all normal recurring adjustments that are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the respective periods. Amounts reported in CenterPoint Houston’s Condensed Statements of Consolidated Income are not necessarily indicative of amounts expected for a full-year period due to the effects of, among other things, (a) seasonal fluctuations in demand for energy, (b) timing of maintenance and other expenditures and (c) acquisitions and dispositions of businesses, assets and other interests.

(2)	New Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued new accounting guidance to require additional fair value related disclosures. It also clarified existing fair value disclosure guidance about the level of disaggregation, inputs and valuation techniques. This new guidance was effective for the first reporting period beginning after December 15, 2009 except for certain disclosure requirements effective for the first reporting period beginning after December 15, 2010. CenterPoint Houston's adoption of this new guidance did not have a material impact on its financial position, results of operations or cash flows. See Note 5 for the required disclosures.

In May 2011, the FASB issued new accounting guidance to achieve common fair value measurements and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). Some of the provisions of the new accounting guidance include requiring (1) that only nonfinancial assets should be valued based on a determination of their best use, (2) disclosure of quantitative information about unobservable inputs used in Level 3 fair value measurements and (3) disclosure of the level within the fair value hierarchy for each class of assets or liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed. This new guidance is effective for interim and annual periods beginning after December 15, 2011. CenterPoint Houston expects that the adoption of this new guidance will not have a material 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 Houston’s consolidated financial position, results of operations or cash flows upon adoption.

Table of Contents

(3)	Employee Benefit Plans

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2011			2010			2011
				(in millions)
Interest cost	$	4		$	4		$	12		$	12
Expected return on plan assets		(2	)		(2	)		(7	)		(6	)
Amortization of transition obligation		2			1			5			4
Amortization of net loss		—			1			—			1
Net periodic cost	$	4		$	4		$	10		$	11

CenterPoint Houston expects to contribute approximately $8 million to its postretirement benefit plan in 2011, of which $-0- and $5 million, respectively, was contributed during the three and nine months ended September 30, 2011.

(4)	Regulatory Matters

(a) Resolution of True-Up Appeal

In March 2004, CenterPoint Houston filed a true-up application with the Public Utility Commission of Texas (Texas Utility Commission), requesting recovery of $3.7 billion, excluding interest, as allowed under the Texas Electric Choice Plan. 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 returned to customers after August 31, 2004 and certain other adjustments. To reflect the impact of the True-Up Order, in 2004 and 2005, CenterPoint Houston recorded a net after-tax extraordinary loss of $947 million.

Various parties, including CenterPoint Houston, appealed the True-Up Order. These appeals were heard first by a district court in Travis County, Texas, then by the Texas Third Court of Appeals and finally by the Texas Supreme Court. On March 18, 2011, the Texas Supreme Court issued a unanimous ruling on such appeals in which it affirmed in part and reversed in part the decision of the Texas Utility Commission. In June 2011, the Texas Supreme Court denied all motions for rehearing and issued a final mandate remanding the case to the Texas Utility Commission for further proceedings (the Remand Proceeding).

In September 2011, CenterPoint Houston reached an agreement in principle with the staff of the Texas Utility Commission and certain intervenors to settle the issues in the Remand Proceeding (the Settlement) and requested that the Texas Utility Commission abate the procedural schedule for the Remand Proceeding and reserve ruling on pending motions or issues until the Texas Utility Commission reviewed the Settlement. At its open meeting on October 13, 2011, the Texas Utility Commission voted to approve a final order (the Final Order) in the Remand Proceeding. The Final Order provides that (i) CenterPoint Houston is entitled to recover an additional true-up balance of $1.695 billion (the Recoverable True-Up Balance) in the Remand Proceeding, (ii) no further interest will accrue on the Recoverable True-Up Balance, and (iii) CenterPoint Houston will reimburse certain parties for their reasonable rate case expenses. The Final Order is consistent with the terms of the Settlement, which resolved all matters in the Remand Proceeding. The Final Order was issued by the Texas Utility Commission on October 19, 2011. Any party may appeal the Final Order by filing a motion for rehearing within 20 days from the date the party received notice of the Final Order.

On October 27, 2011 the Texas Utility Commission issued a financing order (the Financing Order) that authorizes the issuance of transition bonds by CenterPoint Houston to securitize the Recoverable True-Up Balance. The Financing Order is subject to appeal within 15 days from the date it was issued. The timing and completion of any transition bond offering will ultimately depend on a number of factors, including actions by the Texas Utility Commission, any appeals of the Financing Order, and future market conditions.

Table of Contents

As a result of the Final Order, CenterPoint Houston recorded a pre-tax extraordinary gain of $921 million ($598 million after-tax of $323 million) and $352 million ($229 million after-tax) of Other Income related to a portion of interest on the appealed amount. An additional $405 million ($263 million after-tax) will be recorded as an equity return over the life of the transition bonds.

As of September 30, 2011, CenterPoint Houston has not recognized an allowed equity return of $165 million on the portion of its true-up balance that had previously been securitized because such return will be recognized as it is recovered in rates. During the three months ended September 30, 2010 and 2011, CenterPoint Houston recognized approximately $5 million and $6 million, respectively, of the allowed equity return not previously recognized. During the nine months ended September 30, 2010 and 2011, CenterPoint Houston recognized approximately $12 million and $13 million, respectively, of the allowed equity return not previously recognized.

(b) Rate Proceedings

June 2010 Rate Proceeding. As required under the final order in its 2006 rate proceeding, in June 2010 CenterPoint Houston filed an application to change rates with the Texas Utility Commission and the cities in its service area.

Following hearings in the fall of 2010, the Texas Utility Commission issued its order on May 12, 2011. In response to motions filed by several parties, including CenterPoint Houston, on June 23, 2011, the Texas Utility Commission issued an order on rehearing, which addressed certain errors and inconsistencies identified in its prior decision. CenterPoint Houston implemented revised rates on September 1, 2011 based on the order on rehearing. The order on rehearing has been appealed to the Texas courts by various parties; however, a procedural schedule has not been established.

The order on rehearing provides for a base rate increase for CenterPoint Houston of approximately $14.7 million per year for delivery charges to the retail electric providers and a decrease to charges to wholesale transmission customers of $12.3 million per year. Further, the order adopts a mechanism to track amounts for uncertain tax positions and provide for ultimate recovery of those costs. The order authorizes a return on equity for CenterPoint Houston of 10%, a cost of debt of 6.74%, a capital structure comprised of 55% debt and 45% common equity, and an overall rate of return of 8.21%. The decision also implements CenterPoint Houston’s request to reconcile costs incurred for the advanced metering system (AMS) project and to shorten the period for collecting the AMS surcharge from twelve to six years for residential customers in order to reflect the funds received from the U.S. Department of Energy. As a result of the Texas Utility Commission’s order, CenterPoint Houston anticipates that normalized annual operating income will be reduced by approximately $30 million.

Other. In May 2009, CenterPoint Houston filed an application at the Texas Utility Commission seeking approval of certain estimated 2010 energy efficiency program costs, an energy efficiency performance bonus for 2008 programs, and carrying costs totaling approximately $10 million. The application sought to begin recovery of these costs through a surcharge effective July 1, 2010. In October 2009, the Texas Utility Commission issued its order approving recovery of the 2010 energy efficiency program costs and a partial performance bonus of approximately $8 million, plus carrying costs, but disallowed recovery of a performance bonus of $2 million on approximately $10 million in 2008 energy efficiency costs expended pursuant to the terms of a settlement agreement in a prior rate case. CenterPoint Houston began collecting the approved amounts in July 2010. CenterPoint Houston appealed the denial of the full 2008 performance bonus to the 98th district court in Travis County, Texas. In October 2010, the district court upheld the Texas Utility Commission’s decision. In February 2011, CenterPoint Houston appealed the district court’s judgment to the Texas Third Court of Appeals at Austin, Texas. Oral arguments were heard in October 2011, and the case remains pending.

In April 2010, CenterPoint Houston filed an application with the Texas Utility Commission seeking approval of the recovery of $14.4 million related to estimated 2011 energy efficiency programs, an energy efficiency performance bonus for 2009 programs, and recovery of revenue losses related to the implementation of the 2009 energy efficiency program. The application sought to begin recovery of these costs through a surcharge beginning in January 2011. In November 2010, the Texas Utility Commission issued its order approving recovery of approximately $11 million of the 2011 energy efficiency program costs and a performance bonus, but disallowed recovery of a performance bonus of $2 million on the 2009 energy efficiency costs expended pursuant to the terms of the settlement agreement referenced above. The Texas Utility Commission further concluded that it does not have

Table of Contents

statutory authority to permit recovery of the approximately $1.4 million in lost revenue associated with 2009 energy efficiency programs. CenterPoint Houston began collecting the approved amounts in January 2011, but has appealed the denial of the full 2009 performance bonus and lost revenue to the 201st district court in Travis County, Texas, where the case remains pending.

In April 2011, CenterPoint Houston filed an application with the Texas Utility Commission seeking approval of the recovery in 2012 of approximately $44.3 million consisting of: (1) estimated 2012 energy efficiency program costs of approximately $35.8 million; (2) an energy efficiency performance bonus based on CenterPoint Houston’s 2010 program achievements of approximately $5.8 million; (3) the amount of lost revenues due to verified and reported 2010 energy savings of approximately $2.2 million; and (4) approximately $0.5 million for under-recovery of 2010 program costs. In the preliminary order in this proceeding, the Texas Utility Commission has excluded approximately $2.1 million of the requested performance bonus for the 2010 programs and has concluded that it does not have the statutory authority to permit recovery of the requested $2.2 million of lost revenues associated with the 2010 programs. In August 2011, CenterPoint Houston and the parties agreed to forego a hearing and admit evidence supporting the recovery of (1) the estimated 2012 energy efficiency costs of approximately $35.8 million, (2) an energy efficiency performance bonus of approximately $3.6 million, and (3) approximately $0.5 million for under-recovery of 2010 program costs. CenterPoint Houston has filed notification that it reserves its right to appeal the denial of the full 2010 performance bonus and lost revenues. The proposed rate adjustments are expected to take effect with the commencement of CenterPoint Houston’s January 2012 billing month.

In August 2011, CenterPoint Houston filed a Transmission Cost of Service application with the Texas Utility Commission seeking an increase in annual revenue of approximately $3.4 million. In September 2011, the Texas Utility Commission approved the application and the rates became effective at that time.

In September 2011, a new rule of the Texas Utility Commission relating to a Distribution Cost Recovery Factor (DCRF) became effective. The new rule permits an electric utility such as CenterPoint Houston to file each year to recover through a separate DCRF a return on changes to certain distribution-related capital investments, net of any changes in distribution-related accumulated deferred income taxes, as well as related changes to depreciation expense and taxes. The utility is allowed to request one DCRF annually unless in the previous year it was found to have earned in excess of its authorized return on equity as calculated in its annual earnings monitoring report on a weather-adjusted basis, in which case the DCRF is not available. The utility is limited to four DCRF filings and then must seek a full rate proceeding before it can request a subsequent DCRF. The rule expires January 1, 2017.

In October 2011, CenterPoint Houston and certain other parties filed a non-unanimous stipulation (Transmission Stipulation) with the Texas Utility Commission to resolve claims related to the “transition mechanism” component of certain invalidated transmission pricing rules. The Transmission Stipulation resolves all remaining claims that arose from or relate to wholesale transmission service and charges within the Electric Reliability Council of Texas, Inc. (ERCOT) for the period from September 1, 1999 to December 31, 1999 during which the Texas Utility Commission had continued to utilize the “transition mechanism” component of the invalidated transmission pricing rules in setting ERCOT transmission rates. The Transmission Stipulation was filed by all parties to the proceeding, except CPS Energy. Under the Transmission Stipulation, CenterPoint Houston's payment of $5.6 million is to be made within 30 days after issuance of a final appealable order. It is expected that a final appealable order will be issued in early 2012. CenterPoint Houston will seek recovery of the payment through its Transmission Cost Recovery Factor mechanism.

(5)	Fair Value Measurements

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

Level 1: Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets carried at Level 1 fair value are investments listed in active markets. At December 31, 2010 and September 30, 2011, CenterPoint Houston held Level 1 investments of $36 million and $37 million, respectively, which were primarily money market funds.

Table of Contents

Level 2: Inputs, other than quoted prices included in Level 1, are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability. CenterPoint Houston had no Level 2 assets or liabilities at either December 31, 2010 or September 30, 2011.

Level 3: Inputs are unobservable for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. These inputs reflect management’s best estimate of the assumptions market participants would use in determining fair value. CenterPoint Houston had no Level 3 assets or liabilities at either December 31, 2010 or September 30, 2011.

CenterPoint Houston determines the appropriate level for each financial asset and liability on a quarterly basis and recognizes any transfers at the end of the reporting period. For the quarter ended September 30, 2011, there were no transfers between levels.

Estimated Fair Value of Financial Instruments

The fair values of cash and cash equivalents, short-term borrowings and the $750 million note receivable from CenterPoint Houston’s parent are estimated to be equivalent to carrying amounts and have been excluded from the table below. The fair value of each debt instrument is determined by multiplying the principal amount of each debt instrument by the market price.

	December 31, 2010				September 30, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
			(in millions)
Financial liabilities:
Long-term debt (including $151 million of long- term notes payable to parent)	$	5,048	$	5,499	$	4,765	$	5,348

(6)	Related Party Transactions and Major Customers

Related Party Transactions. CenterPoint Houston participates in a money pool through which it can borrow or invest on a short-term basis. Funding needs are aggregated and external borrowing or investing is based on the net cash position. The net funding requirements of the money pool are expected to be met with borrowings under CenterPoint Energy’s revolving credit facility or the sale of CenterPoint Energy’s commercial paper. CenterPoint Houston had investments in the money pool of $899 million and $1.0 billion at December 31, 2010 and September 30, 2011, respectively, which are included in accounts and notes receivable-affiliated companies in the Condensed Consolidated Balance Sheets.

At December 31, 2010 and September 30, 2011, CenterPoint Houston had a $750 million note receivable from its parent.

CenterPoint Houston had net interest income related to affiliate borrowings of $5 million for both the three months ended September 30, 2010 and 2011 and $14 million and $15 million, respectively, for the nine months ended September 30, 2010 and 2011, included in Other Income.

CenterPoint Energy provides some corporate services to CenterPoint Houston. The costs of services have been charged directly to CenterPoint Houston using methods that management believes are reasonable. These methods include negotiated usage rates, dedicated asset assignment and proportionate corporate formulas based on operating expenses, assets, gross margin, employees and a composite of assets, gross margin and employees. These charges are not necessarily indicative of what would have been incurred had CenterPoint Houston not been an affiliate. Amounts charged to CenterPoint Houston for these services were $32 million for both the three months ended September 30, 2010 and 2011, respectively, and $96 million and $103 million for the nine months ended September 30, 2010 and 2011, respectively, and are included primarily in operation and maintenance expenses.

Major Customers. Sales to affiliates of NRG Energy, Inc. (NRG) in the three months ended September 30, 2010 and 2011 represented approximately $179 million and $188 million, respectively, of CenterPoint Houston’s transmission and distribution revenues. Sales to affiliates of Energy Future Holdings Corp. (Energy Future Holdings) in the three months ended September 30, 2010 and 2011 represented approximately $57 million and

Table of Contents

$58 million, respectively, of CenterPoint Houston’s transmission and distribution revenues. Sales to affiliates of NRG in the nine months ended September 30, 2010 and 2011 represented approximately $446 million and $448 million, respectively, of CenterPoint Houston’s transmission and distribution revenues. Sales to affiliates of Energy Future Holdings in the nine months ended September 30, 2010 and 2011 represented approximately $141 million and $139 million, respectively, of CenterPoint Houston’s transmission and distribution revenues.

(7)	Long-term Debt

Revolving Credit Facility. In the third quarter of 2011, CenterPoint Houston’s revolving credit facility was replaced with a five-year revolving credit facility of similar borrowing capacity. As of December 31, 2010 and September 30, 2011, CenterPoint Houston had the following revolving credit facility and utilization of such facility (in millions):

December 31, 2010						September 30, 2011
Size of Facility		Loans		Letters of Credit		Size of Facility		Loans		Letters of Credit
$	289	$	—	$	4	$	300	$	—	$	4

CenterPoint Houston’s $300 million credit facility, which is scheduled to terminate September 9, 2016, can be drawn at London Interbank Offered Rate (LIBOR) plus 150 basis points based on CenterPoint Houston's current credit ratings. The facility contains a debt (excluding transition and system restoration bonds) to total capitalization covenant which limits debt to 65% of the borrower's total capitalization.

Other. At both December 31, 2010 and September 30, 2011, CenterPoint Houston had issued $151 million of first mortgage bonds as collateral for long-term debt of CenterPoint Energy. As of December 31, 2010 and September 30, 2011, CenterPoint Houston had issued $527 million and $508 million, respectively, of general mortgage bonds as collateral for long-term debt of CenterPoint Energy. These bonds are not reflected in the consolidated financial statements because of the contingent nature of the obligations.

(8)	Commitments and Contingencies

Legal Matters

Gas Market Manipulation Cases. CenterPoint Energy, CenterPoint Houston or their predecessor, Reliant Energy, Incorporated (Reliant Energy), and certain of their former subsidiaries are named as defendants in certain lawsuits described below. Under a master separation agreement between CenterPoint Energy and a former subsidiary, RRI, CenterPoint Energy and its subsidiaries are entitled to be indemnified by RRI and its successors for any losses, including attorneys’ fees and other costs, arising out of these lawsuits. In May 2009, RRI sold its Texas retail business to a subsidiary of NRG and changed its name to RRI Energy, Inc. In December 2010, Mirant Corporation merged with and became a wholly owned subsidiary of RRI Energy, Inc., and RRI Energy, Inc. changed its name to GenOn Energy, Inc. (GenOn). Neither the sale of the retail business nor the merger with Mirant Corporation alters RRI’s (now GenOn’s) contractual obligations to indemnify CenterPoint Energy and its subsidiaries, including CenterPoint Houston, for certain liabilities, including their indemnification obligations regarding the gas market manipulation litigation, nor does it affect the terms of existing guaranty arrangements for certain GenOn gas transportation contracts discussed below.

A large number of lawsuits were filed against numerous gas market participants in a number of federal and western state courts in connection with the operation of the natural gas markets in 2000-2002. CenterPoint Energy’s former affiliate, RRI, was a participant in gas trading in the California and Western markets. These lawsuits, many of which 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), an indirect subsidiary of CenterPoint Energy, is a defendant in a case now pending in federal court in Nevada alleging a conspiracy to inflate Wisconsin natural gas prices in 2000-2002. In July 2011, the court issued an order dismissing the plaintiffs’ claims against the other

Table of Contents

defendants in the case, each of whom had demonstrated Federal Energy Regulatory Commission jurisdictional sales for resale during the relevant period, based on federal preemption. The plaintiffs have appealed this ruling to the United States Court of Appeals for the Ninth Circuit. Additionally, CenterPoint Energy was a defendant in a lawsuit filed in state court in Nevada that was dismissed in 2007, but in March 2010 the plaintiffs appealed the dismissal to the Nevada Supreme Court. CenterPoint Energy believes that neither it nor CES is a proper defendant in these remaining cases and will continue to pursue dismissal from those cases. CenterPoint Houston does not expect the ultimate outcome of these remaining matters to have a material impact on its financial condition, results of operations or cash flows.

Environmental Matters

Asbestos. Some facilities owned by CenterPoint Energy contain or have contained asbestos insulation and other asbestos-containing materials. CenterPoint Energy or its subsidiaries, including CenterPoint Houston, have been named, along with numerous others, as a defendant in lawsuits filed by a number of individuals who claim injury due to exposure to asbestos. Some of the claimants have worked at locations owned by CenterPoint Energy or CenterPoint Houston, but most existing claims relate to facilities previously owned by CenterPoint Energy’s 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 Houston or CenterPoint Energy, as appropriate, intends to continue vigorously contesting claims that are not considered to have merit and CenterPoint Houston does not expect, based on its experience to date, these matters, either individually or in the aggregate, to have a material adverse effect on its financial condition, results of operations or cash flows.

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

Other Proceedings

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

(9)	Income Taxes

During the three and nine months ended September 30, 2010, the effective tax rate was 37% and 36%, respectively. During the three and nine months ended September 30, 2011, the effective tax rate was 32% and 33%, respectively. The most significant item affecting the comparability of the effective tax rate for both the three and nine months ended September 30, 2010 and 2011 is a change in tax reserve. CenterPoint Houston recorded an $11 million and $9 million decrease in accrued interest for tax reserves related to the potential normalization violation during the three months and nine months ended September 30, 2011, respectively.

Table of Contents

December 31, 2012. Based upon the actuarially determined net present value of lost future retiree health care deductions related to the subsidies, CenterPoint Houston reduced its deferred tax asset related to future retiree health care deductions by approximately $7 million in March 2010. The entire reduction in the deferred tax asset was recorded as an adjustment to regulatory assets because CenterPoint Houston believes it will be recovered through the regulatory process. Additionally, the regulatory assets were adjusted in March 2010 by approximately $4 million related to the recovery of CenterPoint Houston’s income taxes.

The following table summarizes CenterPoint Houston’s unrecognized tax benefits at December 31, 2010 and September 30, 2011:

	December 31, 2010		September 30, 2011
	(in millions)
Unrecognized tax benefits	$	232	$	44
Portion of unrecognized tax benefits that, if recognized, would reduce the effective income tax rate		14		16
Interest accrued on unrecognized tax benefits		17		4

The decrease of $188 million in unrecognized tax benefits from December 31, 2010 is primarily related to the remeasurement of unrecognized tax benefits for the potential normalization violation. As a result of the Settlement, discussed in Note 4(a), CenterPoint Houston has determined that the potential normalization violation has been prevented and consequently, recorded a reduction to the unrecognized tax benefits by $268 million during the three months ended September 30, 2011, of which $203 million was related to the balance as of December 31, 2010 with the remaining $65 million related to the six months ended June 30, 2011. The unrecognized tax benefit for the normalization issue was a temporary difference and, therefore, the decrease in the balance thereto resulted in an increase to the deferred tax liability of $257 million and a decrease in income tax expense of $11 million for the release of accrued interest expense.

It is reasonably possible that the total amount of unrecognized tax benefits could decrease by $30 million over the next 12 months depending on the result of CenterPoint Energy’s administrative appeal relating to the Internal Revenue Service’s (IRS) disallowance of CenterPoint Houston’s casualty loss deduction associated with the damage caused by Hurricane Ike. Additionally, the casualty loss deduction is a temporary difference and, therefore, any increase or decrease in the balance of unrecognized tax benefits related thereto would not affect the effective tax rate.

In January 2011, the IRS commenced its examination of CenterPoint Energy’s 2008 and 2009 consolidated federal income tax returns, of which CenterPoint Houston is a member.

Table of Contents

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

The following narrative analysis should be read in combination with our Interim Condensed Financial Statements contained in this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2010 (2010 Form 10-K).

We meet the conditions specified in General Instruction H(1)(a) and (b) to Form 10-Q and are therefore permitted to use the reduced disclosure format for wholly owned subsidiaries of reporting companies. Accordingly, we have omitted from this report the information called for by Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations), Item 3 (Quantitative and Qualitative Disclosures About Market Risk) of Part I and the following Part II items of Form 10-Q: Item 2 (Unregistered Sales of Equity Securities and Use of Proceeds), Item 3 (Defaults Upon Senior Securities) and Item 4 (Submission of Matters to a Vote of Security Holders). The following discussion explains material changes in our results of operations between the three and nine months ended September 30, 2010 and the three and nine months ended September 30, 2011. Reference is made to “Management’s Narrative Analysis of Results of Operations” in Item 7 of our 2010 Form 10-K.

Recent Events

Resolution of True-Up Appeal

In March 2004, we filed a true-up application with the Public Utility Commission of Texas (Texas Utility Commission), requesting recovery of $3.7 billion, excluding interest, as allowed under the Texas Electric Choice Plan. In December 2004, the Texas Utility Commission issued its final order (True-Up Order) allowing us to recover a true-up balance of approximately $2.3 billion, which included interest through August 31, 2004, and provided for adjustment of the amount to be recovered to include interest on the balance until recovery, along with the principal portion of additional excess mitigation credits returned to customers after August 31, 2004 and certain other adjustments. To reflect the impact of the True-Up Order, in 2004 and 2005, we recorded a net after-tax extraordinary loss of $947 million.

Various parties, including us, appealed the True-Up Order. These appeals were heard first by a district court in Travis County, Texas, then by the Texas Third Court of Appeals and finally by the Texas Supreme Court. On March 18, 2011, the Texas Supreme Court issued a unanimous ruling on such appeals in which it affirmed in part and reversed in part the decision of the Texas Utility Commission. In June 2011, the Texas Supreme Court denied all motions for rehearing and issued a final mandate remanding the case to the Texas Utility Commission for further proceedings (the Remand Proceeding).

In September 2011, we reached an agreement in principle with the staff of the Texas Utility Commission and certain intervenors to settle the issues in the Remand Proceeding (the Settlement) and requested that the Texas Utility Commission abate the procedural schedule for the Remand Proceeding and reserve ruling on pending motions or issues until the Texas Utility Commission reviewed the Settlement. At its open meeting on October 13, 2011, the Texas Utility Commission voted to approve a final order (the Final Order) in the Remand Proceeding. The Final Order provides that (i) we are entitled to recover an additional true-up balance of $1.695 billion (the Recoverable True-Up Balance) in the Remand Proceeding, (ii) no further interest will accrue on the Recoverable True-Up Balance, and (iii) we will reimburse certain parties for their reasonable rate case expenses. The Final Order is consistent with the terms of the Settlement, which resolved all matters in the Remand Proceeding. The Final Order was issued by the Texas Utility Commission on October 19, 2011. Any party may appeal the Final Order by filing a motion for rehearing within 20 days from the date the party received notice of the Final Order.

On October 27, 2011, the Texas Utility Commission issued a financing order (the Financing Order) that authorizes the issuance of transition bonds by us to securitize the Recoverable True-Up Balance. The Financing Order is subject to appeal within 15 days from the date it was issued. The timing and completion of any transition bond offering will ultimately depend on a number of factors, including actions by the Texas Utility Commission, any appeals of the Financing Order, and future market conditions.

As a result of the Final Order, we recorded a pre-tax extraordinary gain of $921 million ($598 million after-tax of $323 million) and $352 million ($229 million after-tax) of Other Income related to a portion of interest on the

Table of Contents

appealed amount. An additional $405 million ($263 million after-tax) will be recorded as an equity return over the life of the transition bonds.

Advanced Metering System and Distribution Grid Automation (Intelligent Grid)

In October 2009, the U.S. Department of Energy (DOE) selected us for a $200 million grant for our advanced metering system (AMS) and intelligent grid (IG) projects. In March 2010, we and the DOE completed negotiations and finalized the agreement. Under the terms of agreement, the DOE has agreed to reimburse us for 50% of our eligible costs until the total amount of the grant has been paid. Through September 30, 2011, we have received the entire $200 million of grant funding from the DOE. We estimate that capital expenditures of approximately $645 million for the installation of the advanced meters and corresponding communication and data management systems will be incurred over the deployment period. We are using $150 million of the grant funding to accelerate completion of our deployment of advanced meters to 2012, instead of 2014 as originally scheduled. We will use the other $50 million from the grant for an initial deployment of an IG in a portion of our service territory to be completed in 2013. It is expected that the portion of the IG project subject to funding by the DOE will cost approximately $115 million. We believe the IG has the potential to provide an improvement in grid planning, operations, maintenance and customer service for our distribution system.

In March 2010, the Internal Revenue Service (IRS) announced through the issuance of Revenue Procedure 2010-20 that it was providing a safe harbor to corporations that receive a Smart Grid Investment Grant. The IRS stated that it would not challenge a corporation’s treatment of the grant as a non-taxable non-shareholder contribution to capital as long as the corporation properly reduced the tax basis of specified property.

2010 Rate Case

As required under the final order in our 2006 rate proceeding, in June 2010 we filed an application to change rates with the Texas Utility Commission and the cities in our service area.

Following hearings in the fall of 2010, the Texas Utility Commission issued its order on May 12, 2011. In response to motions filed by several parties, including us, on June 23, 2011, the Texas Utility Commission issued an order on rehearing, which addressed certain errors and inconsistencies identified in its prior decision. We implemented revised rates on September 1, 2011 based on the order on rehearing. The order on rehearing has been appealed to the Texas courts by various parties; however, a procedural schedule has not been established.

The order on rehearing provides for a base rate increase for us of approximately $14.7 million per year for delivery charges to the retail electric providers (REPs) and a decrease to charges to wholesale transmission customers of $12.3 million per year. Further, the order adopts a mechanism to track amounts for uncertain tax positions and provide for ultimate recovery of those costs. The order authorizes a return on equity for us of 10%, a cost of debt of 6.74%, a capital structure comprised of 55% debt and 45% common equity, and an overall rate of return of 8.21%. The decision also implements our request to reconcile costs incurred for the AMS project and to shorten the period for collecting the AMS surcharge from twelve to six years for residential customers in order to reflect the funds received from the DOE. As a result of the Texas Utility Commission’s order, we anticipate that normalized annual operating income will be reduced by approximately $30 million.

CONSOLIDATED RESULTS OF OPERATIONS

Our results of operations are affected by seasonal fluctuations in the demand for electricity. Our results of operations are also affected by, among other things, the actions of various governmental authorities having jurisdiction over rates we charge, debt service costs, income tax expense, our ability to collect receivables from REPs and our ability to recover our stranded costs and regulatory assets. For more information regarding factors that may affect the future results of operations of our business, please read “Risk Factors” in Item 1A of Part I of our 2010 Form 10-K and Item 1A of Part II of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 (First Quarter Form 10-Q).

The following table sets forth our consolidated results of operations for the three and nine months ended September 30, 2010 and 2011, followed by a discussion of our consolidated results of operations based on operating income.

Table of Contents

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2011			2010			2011
	(in millions, except customer data)
Revenues:
Electric transmission and distribution utility	$	520		$	565		$	1,361		$	1,454
Transition and system restoration bond companies		135			142			344			348
Total revenues		655			707			1,705			1,802
Expenses:
Operation and maintenance, excluding transition and system restoration bond companies		215			228			609			655
Depreciation and amortization, excluding transition and system restoration bond companies		75			70			219			207
Taxes other than income taxes		52			54			156			158
Transition and system restoration bond companies		101			111			238			252
Total expenses		443			463			1,222			1,272
Operating income		212			244			483			530
Interest and other finance charges		(39	)		(38	)		(113	)		(113	)
Interest on transition and system restoration bonds		(34	)		(31	)		(106	)		(96	)
Return on true-up balance		—			352			—			352
Other income, net		6			15			22			30
Income before income taxes and extraordinary item		145			542			286			703
Income tax expense		53			175			104			233
Income before extraordinary item		92			367			182			470
Extraordinary item, net of tax		—			598			—			598
Net Income	$	92		$	965		$	182		$	1,068

Operating Income:
Electric transmission and distribution utility	$	178		$	213		$	377		$	434
Transition and system restoration bond companies (1)		34			31			106			96
Total operating income	$	212		$	244		$	483		$	530

Throughput (in gigawatt-hours (GWh)):
Residential		9,262			10,682			21,499			23,338
Total		23,342			24,957			59,952			62,802

Number of metered customers at period end:
Residential		1,868,421			1,899,479			1,868,421			1,899,479
Total		2,115,595			2,150,731			2,115,595			2,150,731

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

Three months ended September 30, 2011 compared to three months ended September 30, 2010

We reported operating income of $244 million for the three months ended September 30, 2011, consisting of $213 million from the regulated electric transmission and distribution utility (TDU) and $31 million related to transition and system restoration bond companies. For the three months ended September 30, 2010, operating income totaled $212 million, consisting of $178 million from the TDU and $34 million related to transition and system restoration bond companies. TDU revenues increased $45 million due to increased usage ($36 million), primarily due to favorable weather, and higher revenues due to customer growth ($6 million) from the addition of over 35,000 new customers. Operation and maintenance expenses increased $13 million due to higher transmission costs billed by transmission providers ($7 million) and increased labor and benefit costs ($7 million). Depreciation expense decreased by $5 million primarily due to lower depreciation rates implemented in September 2011 as a result of the 2010 rate case.

Table of Contents

Nine months ended September 30, 2011 compared to nine months ended September 30, 2010

We reported operating income of $530 million for the nine months ended September 30, 2011, consisting of $434 million from the TDU and $96 million related to transition and system restoration bond companies. For the nine months ended September 30, 2010, operating income totaled $483 million, consisting of $377 million from the TDU and $106 million related to transition and system restoration bond companies. TDU revenues increased $93 million due to increased usage ($45 million), primarily due to favorable weather, higher transmission-related revenues ($25 million) and higher revenues due to customer growth ($13 million) from the addition of over 35,000 new customers. Operation and maintenance expenses increased $46 million due to higher transmission costs billed by transmission providers ($24 million), increased labor and benefit costs ($10 million), increased contracts and services ($5 million) and other operating expense increases ($6 million). Depreciation expense decreased by $12 million in part due to lower depreciation rates implemented in September 2011 as a result of the 2010 rate case.

Income Tax Expense. During the three and nine months ended September 30, 2010, our effective tax rate was 37% and 36%, respectively. During the three and nine months ended September 30, 2011, our effective tax rate was 32% and 33%, respectively. The most significant item affecting the comparability of our effective tax rate for both the three and nine months ended September 30, 2010 and 2011 is a a change in tax reserve. We recorded an $11 million and $9 million decrease in accrued interest for tax reserves related to the potential normalization violation during the three months and nine months ended September 30, 2011, respectively, as discussed in Note 9.

As a result of the enactment in March 2010 of the Patient Protection and Affordable Care Act and the related Health Care and Education Reconciliation Act of 2010, a portion of retiree health care costs that are reimbursed by Medicare Part D subsidies will no longer be tax deductible effective for tax years beginning after December 31, 2012. Based upon the actuarially determined net present value of lost future retiree health care deductions related to the subsidies, we reduced our deferred tax asset related to future retiree health care deductions by approximately $7 million in March 2010. The entire reduction in the deferred tax asset was recorded as an adjustment to regulatory assets because we believe it will be recovered through the regulatory process. Additionally, the regulatory assets were adjusted in March 2010 by approximately $4 million related to the recovery of our income taxes.

CERTAIN FACTORS AFFECTING FUTURE EARNINGS

For information on other developments, factors and trends that may have an impact on our future earnings, please read “Risk Factors” in Item 1A of Part I of our 2010 Form 10-K and “Management’s Narrative Analysis of Results of Operations — Certain Factors Affecting Future Earnings” in Item 7 of Part II of our 2010 Form 10-K, “Risk Factors” in Item 1A of Part II of our First Quarter Form 10-Q and “Cautionary Statement Regarding Forward-Looking Information” in this Form 10-Q.

LIQUIDITY AND CAPITAL RESOURCES

Our liquidity and capital requirements are affected primarily by our results of operations, capital expenditures, debt service requirements, tax payments, working capital needs, various regulatory actions and appeals relating to such regulatory actions. Substantially all of our capital expenditures are expected to be used for investment in infrastructure to maintain the reliability and safety of our operations. Our principal cash requirements for the remaining three months of 2011 include approximately $240 million of capital expenditures.

We expect that borrowings under our credit facility, anticipated cash flows from operations and funds from the liquidation of temporary money pool investments will be sufficient to meet our anticipated cash needs in the remaining three months of 2011. Cash needs or discretionary financing or refinancing may result in the issuance of debt securities in the capital markets or the arrangement of additional credit facilities. Issuances of debt in the capital markets and additional credit facilities may not, however, be available to us on acceptable terms.

In the fourth quarter of 2011 or the first quarter of 2012, we expect to receive proceeds of $1.695 billion, less issuance costs, from the securitization of the Recoverable True-Up Balance.

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

Table of Contents

In May 2009, RRI Energy, Inc. (RRI) (formerly known as Reliant Energy, Inc. and Reliant Resources, Inc.) sold its Texas retail business to a subsidiary of NRG Energy, Inc. (NRG). In December 2010, Mirant Corporation merged with and became a wholly owned subsidiary of RRI and RRI changed its name from RRI Energy, Inc. to GenOn Energy, Inc. (GenOn). Neither the sale of the retail business nor the merger with Mirant Corporation alters GenOn’s contractual obligations to indemnify us for certain liabilities, including its indemnification obligations regarding certain litigation.

Credit Facility. In the third quarter of 2011, our revolving credit facility was replaced with a five-year revolving credit facility of similar borrowing capacity. As of October 14, 2011, we had the following revolving credit facility and utilization of such facility (in millions):

Date Executed		Size of Facility				Amount Utilized at October 14, 2011			Termination Date
September 9, 2011		$	300			$	4	(1)	September 9, 2016

(1)

Represents outstanding letters of credit.

Our $300 million credit facility can be drawn at London Interbank Offered Rate (LIBOR) plus 150 basis points based on our current credit ratings. The facility contains a debt (excluding transition and system restoration bonds) to total capitalization covenant which limits debt to 65% of our total capitalization.

Borrowings under our credit facility are subject to customary terms and conditions. However, there is no requirement that we make representations prior to borrowing as to the absence of material adverse changes or litigation that could be expected to have a material adverse effect. Borrowings under our credit facility are subject to acceleration upon the occurrence of events of default that we consider customary. We are currently in compliance with the various business and financial covenants contained in our credit facility.

Securities Registered with the SEC. We have registered an indeterminate principal amount of our general mortgage bonds under a joint registration statement with CenterPoint Energy and CenterPoint Energy Resources Corp.

Temporary Investments. As of October 14, 2011, we had no external temporary investments.

Money Pool. We participate in a money pool through which we and certain of our affiliates can borrow or invest on a short-term basis. Funding needs are aggregated and external borrowing or investing is based on the net cash position. The net funding requirements of the money pool are expected to be met with borrowings by CenterPoint Energy under its revolving credit facility or the sale by CenterPoint Energy of its commercial paper. At October 14, 2011, we had $1.1 billion invested in the money pool. The money pool may not provide sufficient funds to meet our cash needs.

Table of Contents

Long-term Debt. Our long-term debt consists of our obligations and the obligations of our subsidiaries, including transition and system restoration bonds issued by our wholly owned subsidiaries. The following table shows future maturity dates of long-term debt issued by us to third parties and affiliates and scheduled future payment dates of transition and system restoration bonds issued by our subsidiaries: CenterPoint Energy Transition Bond Company, LLC, CenterPoint Energy Transition Bond Company II, LLC, CenterPoint Energy Transition Bond Company III, LLC and CenterPoint Energy Restoration Bond Company, LLC as of September 30, 2011. Amounts are expressed in millions.

Year	Third-Party		Affiliate		Sub-Total		Transition and System Restoration Bonds		Total
2012	$	46	$	—	$	46	$	307	$	353
2013		450		—		450		330		780
2014		800		—		800		235		1,035
2015		—		151		151		249		400
2016		—		—		—		266		266
2017		127		—		127		283		410
2018		—		—		—		303		303
2019		—		—		—		323		323
2020		—		—		—		91		91
2021		102		—		102		66		168
2022		—		—		—		69		69
2023		200		—		200		—		200
2027		56		—		56		—		56
2033		312		—		312		—		312
Total	$	2,093	$	151	$	2,244	$	2,522	$	4,766

As of September 30, 2011, outstanding first mortgage bonds and general mortgage bonds aggregated approximately $2.8 billion as shown in the following table. Amounts are expressed in millions.

	Issued Directly to Third Parties		Issued as Collateral for Our Debt		Issued as Collateral for CenterPoint Energy’s Debt			Total
First Mortgage Bonds	$	102	$	—	$	151		$	253
General Mortgage Bonds		1,762		229		508	(1)		2,499
Total	$	1,864	$	229	$	659		$	2,752

(1)

Of such amount, $290 million collateralizes bonds purchased by CenterPoint Energy in January 2010, which may be remarketed by CenterPoint Energy.

The lien of the general mortgage indenture is junior to that of the mortgage pursuant to which the first mortgage bonds are issued. We may issue additional general mortgage bonds on the basis of retired bonds, 70% of property additions or cash deposited with the trustee. Approximately $2.5 billion of additional first mortgage bonds and general mortgage bonds could be issued on the basis of retired bonds and 70% of property additions as of September 30, 2011. However, we have contractually agreed not to issue additional first mortgage bonds, subject to certain exceptions.

Table of Contents

The following table shows the maturity dates of the $659 million of first mortgage bonds and general mortgage bonds that we have issued as collateral for long-term debt of CenterPoint Energy. These bonds are not reflected in our consolidated financial statements because of the contingent nature of the obligations. Amounts are expressed in millions.

Year	First Mortgage Bonds		General Mortgage Bonds			Total
2015	$	151	$	—		$	151
2018		—		50			50
2019		—		200	(1)		200
2020		—		90	(1)		90
2026		—		100			100
2028		—		68			68
Total	$	151	$	508		$	659

(1)

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

Impact on Liquidity of a Downgrade in Credit Ratings. The interest on borrowings under our credit facility is based on our credit rating. As of October 14, 2011, Moody’s Investors Service, Inc. (Moody’s), Standard & Poor’s Ratings Services, a division of The McGraw Hill Companies (S&P), and Fitch, Inc. (Fitch) had assigned the following credit ratings to our senior debt.

Moody’s

S&P

Fitch

Instrument

Rating

Outlook (1)

Rating

Outlook (2)

Rating

Outlook (3)

Senior Secured Debt

Stable

BBB+

Positive

A-

Positive

(1)

A Moody’s rating outlook is an opinion regarding the likely direction of an issuer’s rating over the medium term.

(2)

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

(3)

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

We cannot assure you that the ratings set forth above will remain in effect for any given period of time or that one or more of these ratings will not be lowered or withdrawn entirely by a rating agency. We note that these credit ratings are included for informational purposes and are not recommendations to buy, sell or hold our securities and may be revised or withdrawn at any time by the rating agency. Each rating should be evaluated independently of any other rating. Any future reduction or withdrawal of one or more of our credit ratings could have a material adverse impact on our ability to obtain short- and long-term financing, the cost of such financings and the execution of our commercial strategies.

A decline in credit ratings could increase borrowing costs under our credit facility. If our credit ratings had been downgraded one notch by each of the three principal credit rating agencies from the ratings that existed at September 30, 2011, the impact on the borrowing costs under our credit facility would have been immaterial. A decline in credit ratings would also increase the interest rate on long-term debt to be issued in the capital markets and could negatively impact our ability to complete capital market transactions.

Cross Defaults. Under CenterPoint Energy’s $1.2 billion revolving credit facility, a payment default on, or a non-payment default that permits acceleration of, any indebtedness exceeding $75 million by us will cause a default. In addition, three outstanding series of CenterPoint Energy’s senior notes, aggregating $750 million in principal amount as of September 30, 2011, provide that a payment default by us, in respect of, or an acceleration of, borrowed money and certain other specified types of obligations, in the aggregate principal amount of $50 million, will cause a default. A default by CenterPoint Energy would not trigger a default under our debt instruments or bank credit facility.

Table of Contents

Other Factors that Could Affect Cash Requirements. In addition to the above factors, our liquidity and capital resources could be affected by:

•

increases in interest expense in connection with debt refinancings and borrowings under our credit facility;

•

various legislative or regulatory actions;

•

the ability of GenOn and its subsidiaries to satisfy their obligations in respect of GenOn’s indemnity obligations to us;

•

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

•

the outcome of litigation brought by and against us;

•

restoration costs and revenue losses resulting from future natural disasters such as hurricanes and the timing of recovery of such restoration costs; and

•

various other risks identified in “Risk Factors” in Item 1A of Part I of our 2010 Form 10-K and in Item 1A of Part II of our First Quarter Form 10-Q.

Certain Contractual Limits on Our Ability to Issue Securities and Borrow Money. Our credit facility limits our debt (excluding transition and system restoration bonds) as a percentage of our total capitalization to 65%. Additionally, we have contractually agreed that we will not issue additional first mortgage bonds, subject to certain exceptions.

Relationship with CenterPoint Energy. We are an indirect wholly owned subsidiary of CenterPoint Energy. As a result of this relationship, the financial condition and liquidity of our parent company could affect our access to capital, our credit standing and our financial condition.

NEW ACCOUNTING PRONOUNCEMENTS

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

Item 4. CONTROLS AND PROCEDURES

In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2011 to provide assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure.

There has been no change in our internal controls over financial reporting that occurred during the three months ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Table of Contents

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

For a discussion of certain legal and regulatory proceedings affecting us, please read Notes 4 and 8 to our Interim Condensed Financial Statements, each of which is incorporated herein by reference. See also “Business — Regulation” and “— Environmental Matters” in Item 1 and “Legal Proceedings” in Item 3 of our 2010 Form 10-K.

Item 1A. RISK FACTORS

There have been no material changes from the risk factors disclosed in our 2010 Form 10-K and First Quarter Form 10-Q.

Item 5. OTHER INFORMATION

Our ratio of earnings to fixed charges for the nine months ended September 30, 2010 and 2011 was 2.30 and 4.30, respectively. We do not believe that the ratios for these nine-month periods are necessarily indicative of the ratios for the twelve-month periods due to the seasonal nature of our business. The ratios were calculated pursuant to applicable rules of the Securities and Exchange Commission.

Item 6. EXHIBITS

The following exhibits are filed herewith:

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

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

Exhibit Number	Description	Report or Registration Statement	SEC File or Registration Number	Exhibit References
3.1	Restated Certificate of Formation of CenterPoint Houston	CenterPoint Houston’s Form 10-Q for the quarter ended June 30, 2011	1-3187	3.1
3.2	Amended and Restated Limited Liability Company Agreement of CenterPoint Houston	CenterPoint Houston’s Form 10-Q for the quarter ended June 30, 2011	1-3187	3.2
4.1	$300,000,000 Credit Agreement, dated as of September 9, 2011, among CenterPoint Houston, as Borrower, and the banks named therein	CenterPoint Houston’s Form 8-K dated September 9, 2011	1-3187	4.2
+12	Computation of Ratios of Earnings to Fixed Charges
+31.1	Rule 13a-14(a)/15d-14(a) Certification of David M. McClanahan
+31.2	Rule 13a-14(a)/15d-14(a) Certification of Gary L. Whitlock

Table of Contents

Exhibit Number	Description	Report or Registration Statement	SEC File or Registration Number	Exhibit References
+32.1	Section 1350 Certification of David M. McClanahan
+32.2	Section 1350 Certification of Gary L. Whitlock
+101.INS	XBRL Instance Document (1)
+101.SCH	XBRL Taxonomy Extension Schema Document (1)
+101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (1)
+101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (1)
+101.LAB	XBRL Taxonomy Extension Labels Linkbase Document (1)
+101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (1)

(1) Furnished, not filed.

Table of Contents

SIGNATURES

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

	CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC



By:	/s/ WALTER L. FITZGERALD
	Walter L. Fitzgerald
	Senior Vice President and Chief Accounting Officer

Date: November 7, 2011

Table of Contents

Index to Exhibits

The following exhibits are filed herewith:

Exhibit Number	Description	Report or Registration Statement	SEC File or Registration Number	Exhibit References
3.1	Restated Certificate of Formation of CenterPoint Houston	CenterPoint Houston’s Form 10-Q for the quarter ended June 30, 2011	1-3187	3.1
3.2	Amended and Restated Limited Liability Company Agreement of CenterPoint Houston	CenterPoint Houston’s Form 10-Q for the quarter ended June 30, 2011	1-3187	3.2
4.1	$300,000,000 Credit Agreement, dated as of September 9, 2011, among CenterPoint Houston, as Borrower, and the banks named therein	CenterPoint Houston’s Form 8-K dated September 9, 2011	1-3187	4.2
+12	Computation of Ratios of Earnings to Fixed Charges
+31.1	Rule 13a-14(a)/15d-14(a) Certification of David M. McClanahan
+31.2	Rule 13a-14(a)/15d-14(a) Certification of Gary L. Whitlock
+32.1	Section 1350 Certification of David M. McClanahan
+32.2	Section 1350 Certification of Gary L. Whitlock
+101.INS	XBRL Instance Document (1)
+101.SCH	XBRL Taxonomy Extension Schema Document (1)
+101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (1)
+101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (1)
+101.LAB	XBRL Taxonomy Extension Labels Linkbase Document (1)
+101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (1)

(1) Furnished, not filed.

CENTERPOINT ENERGY HOUSTON ELECTRIC LLC - FORM 10-Q - November 7, 2011

Attached files

CENTERPOINT ENERGY HOUSTON ELECTRIC LLC Reports