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EX-12 - COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES - CENTERPOINT ENERGY RESOURCES CORPcercexhibit12_3312012.htm
EX-32.2 - SECTION 1350 CERTIFICATION OF GARY L. WHITLOCK - CENTERPOINT ENERGY RESOURCES CORPcercexhibit322_3312012.htm
EX-32.1 - SECTION 1350 CERTIFICATION OF DAVID M. MCCLANAHAN - CENTERPOINT ENERGY RESOURCES CORPcercexhibit321_3312012.htm
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF GARY L. WHITLOCK - CENTERPOINT ENERGY RESOURCES CORPcercexhibit312_3312012.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF DAVID M. MCCLANAHAN - CENTERPOINT ENERGY RESOURCES CORPcercexhibit311_3312012.htm
EXCEL - IDEA: XBRL DOCUMENT - CENTERPOINT ENERGY RESOURCES CORPFinancial_Report.xls

 

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

FORM 10-Q
 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
FOR THE TRANSITION PERIOD FROM                                         TO                                      
 
Commission File Number 1-13265
______________________
CENTERPOINT ENERGY RESOURCES CORP.
(Exact name of registrant as specified in its charter)
Delaware
76-0511406
(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 Resources Corp. meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No o
  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
Yes þ No o
  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
  
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).Yes o  No þ

As of April 16, 2012, all 1,000 shares of CenterPoint Energy Resources Corp. common stock were held by Utility Holding, LLC, a wholly owned subsidiary of CenterPoint Energy, Inc.
 




CENTERPOINT ENERGY RESOURCES CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2012

TABLE OF CONTENTS

PART I.
FINANCIAL INFORMATION
 
 
 
Page
Item 1.
Financial Statements
 
 
 
 
Condensed Statements of Consolidated Income



 
 
Three Months Ended March 31, 2011 and 2012 (unaudited)
 
 
 
 
Condensed Statements of Consolidated Comprehensive Income

 
 
Three Months Ended March 31, 2011 and 2012 (unaudited)
 
 
 
 
Condensed Consolidated Balance Sheets

 
 
December 31, 2011 and March 31, 2012 (unaudited)
 
 
 
 
Condensed Statements of Consolidated Cash Flows

 
 
Three Months Ended March 31, 2011 and 2012 (unaudited)
 
 
 
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
Item 2.
Management’s Narrative Analysis of Results of Operations
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
Exhibits


i



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

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

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

state and federal legislative and regulatory actions or developments affecting various aspects of our business, including, among others, energy deregulation or re-regulation, pipeline integrity and safety, 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;
the timing and outcome of any audits, disputes and other proceedings related to taxes;
problems with construction, implementation of necessary technology or other issues with respect to major capital projects that result in delays or in cost overruns that cannot be recouped in rates;
industrial, commercial and residential growth in our service territory and changes in market demand, including the effects of energy efficiency measures and demographic patterns;
the timing and extent of changes in commodity prices, particularly natural gas and natural gas liquids, and the effects of geographic and seasonal commodity price differentials, including the effects of these circumstances on re-contracting available capacity on our interstate pipelines;
the timing and extent of changes in the supply of natural gas, particularly supplies available for gathering by our field services business and transporting by our interstate pipelines, including the impact of natural gas prices on the level of drilling and production activities in the regions we serve;
competition in our mid-continent region footprint for access to natural gas supplies and markets;

weather variations and other natural phenomena;
any direct or indirect effects on our facilities, operations and financial condition resulting from terrorism, cyber attacks, data security breaches or other attempts to disrupt our businesses or the businesses of third parties, or other catastrophic events;
the impact of unplanned facility outages;
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;
effectiveness of our risk management activities;

ii



inability of various counterparties to meet their obligations to us;
non-payment for our services due to financial distress of our customers;
the ability of GenOn Energy, Inc. (formerly known as RRI Energy, Inc., Reliant Energy, Inc. and Reliant Resources, Inc.) and its subsidiaries to satisfy their obligations to us, including indemnity obligations, or obligations in connection with the contractual arrangements pursuant to which we are their guarantor;
the outcome of litigation brought by or against us;
our ability to control costs;
the investment performance of CenterPoint Energy, Inc.’s pension and postretirement benefit plans;
our potential business strategies, including restructurings, acquisitions or dispositions of assets or businesses, which we cannot assure you will be completed or will have the anticipated benefits to us;
acquisition and merger activities involving us or our competitors; and
other factors we discuss in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2011, which is incorporated herein by reference, and other reports we file from time to time with the Securities and Exchange Commission.
You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement.



 

iii



PART I. FINANCIAL INFORMATION


Item 1.  FINANCIAL STATEMENTS
CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Millions of Dollars)
(Unaudited)

 
Three Months Ended March 31,
 
2011
 
2012
 
 
Revenues
$
2,095

 
$
1,550

 
 
 
 
Expenses:
 

 
 

Natural gas
1,476

 
969

Operation and maintenance
240

 
239

Depreciation and amortization
66

 
69

Taxes other than income taxes
53

 
44

Total
1,835

 
1,321

Operating Income
260

 
229

 
 
 
 
Other Income (Expense):
 

 
 

Interest and other finance charges
(49
)
 
(45
)
Equity in earnings of unconsolidated affiliates
6

 
9

Other, net
1

 

Total
(42
)
 
(36
)
Income Before Income Taxes
218

 
193

Income tax expense
85

 
75

Net Income
$
133

 
$
118




See Notes to the Interim Condensed Consolidated Financial Statements

CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Millions of Dollars)
(Unaudited)

 
For the Three Months Ended
 
March 31,
 
2011
 
2012
 
 
 
 
Net income
$
133

 
$
118

Other comprehensive income, net of tax:
 
 
 

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

 

Other comprehensive income

 

Comprehensive income
$
133

 
$
118



See Notes to the Interim Condensed Consolidated Financial Statements


1



CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
(Unaudited)
 
ASSETS
 
December 31, 2011
 
March 31, 2012
Current Assets:
 
 
 
Cash and cash equivalents
$
1

 
$
5

Accounts receivable, net
542

 
475

Accrued unbilled revenue
253

 
106

Accounts and notes receivable — affiliated companies
17

 
15

Materials and supplies
86

 
85

Inventory
187

 
87

Non-trading derivative assets
87

 
84

Taxes receivable
1

 
2

Deferred income tax assets
8

 
7

Prepaid expenses and other current assets
122

 
130

Total current assets
1,304

 
996

 
 
 
 
Property, Plant and Equipment:
 
 
 
Property, plant and equipment
8,519

 
8,618

Less accumulated depreciation and amortization
1,489

 
1,547

Property, plant and equipment, net
7,030

 
7,071

 
 
 
 
Other Assets:
 

 
 

Goodwill
1,696

 
1,696

Non-trading derivative assets
20

 
18

Investment in unconsolidated affiliates
472

 
474

Other
165

 
158

Total other assets
2,353

 
2,346

 
 
 
 
Total Assets
$
10,687

 
$
10,413



See Notes to the Interim Condensed Consolidated Financial Statements


















2




CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
(Unaudited)
 
LIABILITIES AND STOCKHOLDER'S EQUITY

 
December 31, 2011
 
March 31, 2012
Current Liabilities:
 

 
 

Short-term borrowings
$
62

 
$
9

Accounts payable
427

 
260

Accounts and notes payable — affiliated companies
419

 
513

Taxes accrued
82

 
92

Interest accrued
48

 
56

Customer deposits
74

 
76

Non-trading derivative liabilities
46

 
18

Other
157

 
94

Total current liabilities
1,315

 
1,118

 
 
 
 
Other Liabilities:
 

 
 

Accumulated deferred income taxes, net
1,420

 
1,522

Non-trading derivative liabilities
6

 
5

Benefit obligations
108

 
108

Regulatory liabilities
597

 
611

Other
232

 
203

Total other liabilities
2,363

 
2,449

 
 
 
 
Long-Term Debt
2,919

 
2,636

 
 
 
 
Commitments and Contingencies (Note 9)


 


 
 
 
 
Stockholder’s Equity:
 
 
 
Common stock

 

Paid-in capital
2,416

 
2,418

Retained earnings
1,681

 
1,799

Accumulated other comprehensive loss
(7
)
 
(7
)
Total stockholder’s equity
4,090

 
4,210

 
 
 
 
Total Liabilities And Stockholder’s Equity
$
10,687

 
$
10,413



See Notes to the Interim Condensed Consolidated Financial Statements


3



CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Millions of Dollars)
(Unaudited)
 
Three Months Ended March 31,
 
2011
 
2012
Cash Flows from Operating Activities:
 
 
 
Net income
$
133

 
$
118

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

 
 

Depreciation and amortization
66

 
69

Amortization of deferred financing costs
3

 
3

Deferred income taxes
80

 
70

Write-down of natural gas inventory

 
4

Equity in earnings of unconsolidated affiliates, net of distributions
(3
)
 
2

Changes in other assets and liabilities:
 

 
 

Accounts receivable and unbilled revenues, net
48

 
189

Accounts receivable/payable, affiliates
(27
)
 
2

Inventory
180

 
97

Taxes receivable
58

 
(1
)
Accounts payable
(155
)
 
(153
)
Fuel cost over (under) recovery
13

 
(43
)
Interest and taxes accrued
20

 
16

Non-trading derivatives, net
3

 
(1
)
Margin deposits, net
36

 
14

Other current assets
13

 
(4
)
Other current liabilities
(19
)
 
(33
)
Other assets
3

 
3

Other liabilities
9

 
9

Other, net
(1
)
 
1

Net cash provided by operating activities
460

 
362

Cash Flows from Investing Activities:
 

 
 

Capital expenditures
(182
)
 
(114
)
Investment in unconsolidated affiliates
(3
)
 
(4
)
Other, net
(1
)
 

Net cash used in investing activities
(186
)
 
(118
)
Cash Flows from Financing Activities:
 

 
 

Decrease in short-term borrowings, net
(53
)
 
(53
)
Payments of commercial paper, net
(5
)
 
(285
)
Proceeds from long-term debt
550

 

Payments of long-term debt
(606
)
 

Cash paid for debt exchange
(58
)
 

Debt issuance costs
(9
)
 

Increase (decrease) in notes payable to affiliates
(92
)
 
94

Other, net

 
4

Net cash used in financing activities
(273
)
 
(240
)
 
 
 
 
Net Increase in Cash and Cash Equivalents
1

 
4

Cash and Cash Equivalents at Beginning of Period
1

 
1

Cash and Cash Equivalents at End of Period
$
2

 
$
5

 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 

 
 

Cash Payments:
 

 
 

Interest, net of capitalized interest
$
41

 
$
33

Income tax refunds, net
(61
)
 

Non-cash transactions:
 

 
 

Accounts payable related to capital expenditures
$
55

 
$
39


See Notes to the Interim Condensed Consolidated Financial Statements

4



CENTERPOINT ENERGY RESOURCES CORP. 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 Resources Corp. (CERC Corp.) are the condensed consolidated interim financial statements and notes (Interim Condensed Financial Statements) of CenterPoint Energy Resources Corp. and its subsidiaries (collectively, CERC).  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 CERC Corp. for the year ended December 31, 2011.

Background. CERC owns and operates natural gas distribution systems (Gas Operations).  Subsidiaries of CERC Corp. own interstate natural gas pipelines and gas gathering systems and provide various ancillary services.  A wholly owned subsidiary of CERC Corp. offers variable and fixed-price physical natural gas supplies primarily to commercial and industrial customers and electric and gas utilities.

CERC Corp. is an indirect wholly owned subsidiary of CenterPoint Energy, Inc. (CenterPoint Energy), a public utility holding company.

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.

CERC’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 CERC’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 CERC’s reportable business segments, see Note 11.

(2)       New Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (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 non-financial 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 was effective for interim and annual periods beginning after December 15, 2011.  CERC’s adoption of this new guidance did not have an impact on its financial position, results of operations or cash flows. See Note 5 for the required disclosures.

In June 2011, the FASB issued new accounting guidance on the presentation of comprehensive income. The new guidance is intended to improve the overall quality of financial reporting by increasing the prominence of items reported in other comprehensive income and aligning the presentation of other comprehensive income in financial statements prepared in accordance with U.S. GAAP with those prepared in accordance with IFRS. The new guidance requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance was effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Adoption of this new guidance did not have an impact on CERC’s financial position, results of operations or cash flows.

In September 2011, the FASB issued new accounting guidance that is intended to simplify how entities test goodwill for impairment. The new accounting guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.  If, after performing the qualitative assessment, it is determined that the fair value of a reporting unit is more likely than not less than its carrying value, then the quantitative two-step goodwill impairment test that exists under current U.S. GAAP must be performed; otherwise, goodwill is deemed to not be impaired and no further testing is required. An entity has the unconditional option to bypass the qualitative assessment and proceed directly to the quantitative assessment. This new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. CERC’s adoption of this new guidance did not have an impact on its financial position, results of operations or cash flows.

In December 2011, the FASB issued new accounting guidance that will require disclosure of information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The new disclosure requirements mandate that entities disclose both gross and net information for instruments and transactions eligible for offset in the statement of financial position as well as disclosure of collateral received and posted in connection with these instruments. This new guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods therein, with retrospective application required. CERC 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 CERC’s consolidated financial position, results of operations or cash flows upon adoption.

(3)       Employee Benefit Plans

CERCs employees participate in CenterPoint Energys postretirement benefit plan. CERCs net periodic cost includes the following components relating to postretirement benefits:
 
Three Months Ended
 
March 31,
 
2011

2012
 
(in millions)
Interest cost on accumulated benefit obligation
1

 
1

Amortization of prior service cost
1

 
1

Net periodic cost
$
2

 
$
2


CERC expects to contribute approximately $9 million to its postretirement benefit plan in 2012, of which $2 million was contributed during the three months ended March 31, 2012.

(4)       Derivative Instruments

CERC is exposed to various market risks. These risks arise from transactions entered into in the normal course of business.  CERC 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 CERC’s Consolidated Balance Sheets at their fair value unless CERC elects the normal purchase and sales exemption for qualified physical transactions. A derivative may be designated as a normal purchase or normal sale if the intent is to physically receive or deliver the product for use or sale in the normal course of business.

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

CERC’s policies prohibit the use of leveraged financial instruments. A leveraged financial instrument, for this purpose, is a transaction involving a derivative whose financial impact will be based on an amount other than the notional amount or volume of the instrument.

(a) Non-Trading Activities

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

During the three months ended March 31, 2011, CERC recorded decreased natural gas revenues from unrealized net losses of $17 million and decreased natural gas expense from unrealized net gains of $15 million, resulting in a net unrealized loss of $2 million. During the three months ended March 31, 2012, CERC recorded decreased natural gas revenues from unrealized net losses of $5 million and decreased natural gas expense from unrealized net gains of $4 million, resulting in a net unrealized loss of $1 million.

Weather Hedges. CERC 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 Gas Operations’ results in the remaining jurisdictions.

CERC enters into heating-degree day swaps to mitigate the effect of fluctuations from normal weather on its results of operations and cash flows for the winter heating season.  The swaps have limits and are based on ten-year normal weather. During the three months ended March 31, 2011 and 2012, CERC recognized a loss of $5 million and a gain of $6 million, respectively, related to these swaps. Weather hedge gains and 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 CERC’s derivative instruments and hedging activities. The first two tables provide a balance sheet overview of CERC’s Derivative Assets and Liabilities as of December 31, 2011 and March 31, 2012, while the last table provides a breakdown of the related income statement impacts for the three months ended March 31, 2011 and 2012.
Fair Value of Derivative Instruments
 
 
 
 
December 31, 2011
Total derivatives not designated
as hedging instruments
 
Balance Sheet
Location
 
Derivative
Assets
Fair Value (2) (3)
 
Derivative
Liabilities
Fair Value (2) (3)
 
 
 
 
(in millions)
Natural gas derivatives (1)
 
Current Assets
 
$
88

 
$
1

Natural gas derivatives (1)
 
Other Assets
 
20

 

Natural gas derivatives (1)
 
Current Liabilities
 
15

 
110

Natural gas derivatives (1)
 
Other Liabilities
 

 
13

Total
 
$
123

 
$
124

________________
(1)
Natural gas 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.

(2)
The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 633 billion cubic feet (Bcf) or a net 84 Bcf long position.  Of the net long position, basis swaps constitute 74 Bcf and volumes associated with price stabilization activities of the Natural Gas Distribution business segment constitute 6 Bcf.

(3)
The net of total non-trading derivative assets and liabilities is a $55 million asset as shown on CERC’s Condensed Consolidated Balance Sheets, and is comprised of the natural gas contracts derivative assets and liabilities separately shown above offset by collateral netting of $56 million.
Fair Value of Derivative Instruments
 
 
 
 
March 31, 2012
Total derivatives not designated
as hedging instruments
 
Balance Sheet
Location
 
Derivative
Assets
Fair Value (2) (3)
 
Derivative
Liabilities
Fair Value (2) (3)
 
 
 
 
(in millions)
Natural gas derivatives (1)
 
Current Assets
 
$
85

 
$
1

Natural gas derivatives (1)
 
Other Assets
 
18

 

Natural gas derivatives (1)
 
Current Liabilities
 
14

 
68

Natural gas derivatives (1)
 
Other Liabilities
 
1

 
12

Total                                                                          
 
$
118

 
$
81

________________
(1)
Natural gas 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.

(2)
The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 608 Bcf or a net 127 Bcf long position.  Of the net long position, basis swaps constitute 78 Bcf.

(3)
The net of total non-trading derivative assets and liabilities is a $79 million asset as shown on CERC’s Condensed Consolidated Balance Sheets, and is comprised of the natural gas contracts derivative assets and liabilities separately shown above offset by collateral netting of $42 million.

For CERC’s price stabilization activities of the Natural Gas Distribution business segment, the settled costs of derivatives are ultimately recovered through purchased gas adjustments. Accordingly, the net unrealized gains and losses associated with these contracts are recorded as net regulatory assets. Realized and unrealized gains and losses on other derivatives are recognized in the Condensed Statements of Consolidated Income as revenue for physical natural gas sales derivative contracts and as natural gas expense for financial natural gas derivatives and other physical natural gas derivatives.
Income Statement Impact of Derivative Activity
 
 
 
 
Three Months Ended March 31,
Total derivatives not designated
as hedging instruments
 
Income Statement Location
 
2011
 
2012
 
 
 
 
(in millions)
Natural gas derivatives
 
Gains (Losses) in Revenue
 
$
5

 
$
51

Natural gas derivatives (1)
 
Gains (Losses) in Expense: Natural Gas
 
(37
)
 
(81
)
Total
 
$
(32
)
 
$
(30
)
 ________________
(1)
The Gains (Losses) in Expense: Natural Gas includes $(45) million and $(38) million of costs in 2011 and 2012, respectively, associated with price stabilization activities of the Natural Gas Distribution business segment that will be ultimately recovered through purchased gas adjustments.

(c) Credit Risk Contingent Features

CERC enters into financial derivative contracts containing material adverse change provisions.  These provisions could require CERC to post additional collateral if the Standard & Poor’s Ratings Services or Moody’s Investors Service, Inc. credit ratings of CERC are downgraded.  The total fair value of the derivative instruments that contain credit risk contingent features that are in a net liability position at December 31, 2011 and March 31, 2012 was $39 million and $13 million, respectively.  The aggregate fair value of assets that were posted as collateral was less than $1 million at both December 31, 2011 and March 31, 2012.  If all derivative contracts (in a net liability position) containing credit risk contingent features were triggered at December 31, 2011 and March 31, 2012, $38 million and $13 million, respectively, of additional assets would be required to be posted as collateral.

(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 generally are exchange-traded derivatives and equity securities.

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

Level 3: Inputs are unobservable for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. Unobservable inputs reflect CERC’s judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. CERC develops these inputs based on the best information available, including CERC’s own data. A market approach is utilized to value CERC’s Level 3 assets or liabilities. Currently, CERC’s Level 3 assets and liabilities are comprised of physical forward contracts and options. Level 3 physical forward contracts are valued using a discounted cash flow model which includes illiquid forward price curve locations (ranging from $1.47-$4.46 per mmbtu) as an unobservable input. Level 3 options are valued through Black-Scholes (including forward start) option models which include option volatilities (ranging from 0-86%) as an unobservable input.  CERC’s Level 3 derivative assets and liabilities consist of both long and short positions (forwards and options) and their fair value is sensitive to forward prices and volatilities.  If forward prices decrease, CERC’s long forwards lose value whereas its short forwards gain in value.  If volatility decreases, CERC’s long options lose value whereas its short options gain in value.

CERC determines the appropriate level for each financial asset and liability on a quarterly basis and recognizes transfers between levels at the end of the reporting period.  CERC also recognizes purchases of Level 3 financial assets and liabilities at their fair market value at the end of the reporting period.

The following tables present information about CERC’s assets and liabilities (including derivatives that are presented net) measured at fair value on a recurring basis as of December 31, 2011 and March 31, 2012, and indicate the fair value hierarchy of the valuation techniques utilized by CERC 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, 2011
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
Corporate equities
$
1

 
$

 
$

 
$

 
$
1

Investments, including money
market funds (2)
11

 

 

 

 
11

Natural gas derivatives
1

 
112

 
10

 
(16
)
 
107

Total assets
$
13

 
$
112

 
$
10

 
$
(16
)
 
$
119

Liabilities
 

 
 

 
 

 
 

 
 

Natural gas derivatives
$
19

 
$
101

 
$
4

 
$
(72
)
 
$
52

Total liabilities
$
19

 
$
101

 
$
4

 
$
(72
)
 
$
52

________________
(1)
Amounts represent the impact of legally enforceable master netting agreements that allow CERC to settle positive and negative positions and also include cash collateral of $56 million posted with the same counterparties.

(2)
Excludes money market fund investments included in Cash and cash equivalents.

 
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Netting
Adjustments (1)
 
Balance as of March 31, 2012
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
Corporate equities
$
2

 
$

 
$

 
$

 
$
2

Investments, including money
market funds (2)
10

 

 

 

 
10

Natural gas derivatives
2

 
109

 
7

 
(16
)
 
102

Total assets
$
14

 
$
109

 
$
7

 
$
(16
)
 
$
114

Liabilities
 

 
 

 
 

 
 

 
 

Natural gas derivatives
$
17

 
$
60

 
$
4

 
$
(58
)
 
$
23

Total liabilities
$
17

 
$
60

 
$
4

 
$
(58
)
 
$
23

________________
(1)
Amounts represent the impact of legally enforceable master netting agreements that allow CERC to settle positive and negative positions and also include cash collateral of $42 million posted with the same counterparties.

(2)
Excludes money market fund investments included in Cash and cash equivalents.

The following tables present additional information about assets or liabilities, including derivatives that are measured at fair value on a recurring basis for which CERC has utilized Level 3 inputs to determine fair value:
 
Fair Value Measurements Using Significant
 Unobservable Inputs (Level 3)
 
Derivative Assets and Liabilities, net
 
Three Months Ended March 31,
 
2011
 
2012
 
(in millions)
Beginning balance
$
3

 
$
6

Total unrealized gains (1)
3

 
2

Total settlements (1)

 
(4
)
Transfers out of Level 3

 
(1
)
Ending balance (2)
$
6

 
$
3

The amount of total gains for the period included in earnings
attributable to the change in unrealized gains or losses relating
to assets still held at the reporting date
$
4

 
$

_____________
(1)
CERC did not have Level 3 unrealized gain (losses) or settlements related to price stabilization activities of the Natural Gas Distribution business segment for either the three months ended March 31, 2011 or 2012.

(2)
During both the three months ended March 31, 2011 and 2012, CERC did not have Level 3 purchases, sales or significant transfers into Level 3.

Estimated Fair Value of Financial Instruments

The fair values of cash and cash equivalents and short-term borrowings are estimated to be approximately equivalent to carrying amounts and have been excluded from the table below. Non-trading derivative assets and liabilities are stated at fair value and are excluded from the table below. The fair value of each debt instrument is determined by multiplying the principal amount of each debt instrument by the market price. These assets and liabilities, which are not measured at fair value in the Condensed Consolidated Balance Sheets but for which the fair value is disclosed, would be classified as Level 1 in the fair value hierarchy.
 
December 31, 2011
 
March 31, 2012
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
(in millions)
Financial liabilities:
 
 
 
 
 
 
 
Long-term debt
$
2,919

 
$
3,272

 
$
2,636

 
$
2,949


(6)       Goodwill

Goodwill by reportable business segment as of both December 31, 2011 and March 31, 2012 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


(7)       Related Party Transactions

CERC 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. CERC had money pool borrowings of $383 million and $477 million at December 31, 2011 and March 31, 2012, respectively, which are included in accounts and notes payable —affiliated companies in the Condensed Consolidated Balance Sheets.  

CERC had net interest expense related to affiliate borrowings of less than $1 million for both the three months ended March 31, 2011 and 2012.

CenterPoint Energy provides some corporate services to CERC. The costs of services have been charged directly to CERC 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 CERC not been an affiliate of CenterPoint Energy. Amounts charged to CERC for these services were $39 million and $40 million for the three months ended March 31, 2011 and 2012, respectively, and are included primarily in operation and maintenance expenses.

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

(a)Short-term Borrowings

Inventory Financing. Gas Operations has asset management agreements associated with its utility distribution service in Arkansas, north Louisiana and Oklahoma that extend through March 2015. Pursuant to the provisions of the agreements, Gas Operations sells natural gas and agrees to repurchase an equivalent amount of natural gas during the winter heating seasons at the same cost, plus a financing charge. These transactions are accounted for as a financing and they had an associated principal obligation of $62 million and $9 million as of December 31, 2011 and March 31, 2012, respectively.

(b)
Long-term Debt

Revolving Credit Facility.   As of December 31, 2011 and March 31, 2012, CERC had the following revolving credit facility and utilization of such facility (in millions):
 
 
December 31, 2011
 
March 31, 2012
Size of
Facility
 
Loans
 
Letters
of Credit
 
Commercial
Paper
 
Loans
 
Letters
of Credit
 
Commercial
Paper
$
950

 
$

 
$

 
$
285

 
$

 
$

 
$


CERC Corp.’s $950 million credit facility, which is scheduled to terminate September 9, 2016, can be drawn at the London Interbank Offered Rate plus 150 basis points based on CERC Corp.’s current credit ratings. The facility contains a debt to total capitalization covenant which limits debt to 65% of its total capitalization.

(9)           Commitments and Contingencies

(a) Natural Gas Supply Commitments

Natural gas supply commitments include natural gas contracts related to CERC’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 CERC’s Condensed Consolidated Balance Sheets as of December 31, 2011 and March 31, 2012 as these contracts meet the exception to be classified as “normal purchases contracts” or do not meet the definition of a derivative. Natural gas supply commitments also include natural gas transportation contracts that do not meet the definition of a derivative. As of March 31, 2012, minimum payment obligations for natural gas supply commitments are approximately $226 million for the remaining nine months in 2012, $418 million in 2013, $337 million in 2014, $211 million in 2015, $149 million in 2016 and $251 million after 2016.

(b) Long-Term Gas Gathering and Treating Agreements

CenterPoint Energy Field Services, LLC (CEFS), a subsidiary of CERC Corp., has long-term agreements with an indirect wholly-owned subsidiary of Encana Corporation (Encana) and an indirect wholly-owned subsidiary of Royal Dutch Shell plc (Shell) to provide gathering and treating services for their natural gas production from certain Haynesville Shale and Bossier Shale formations in Texas and Louisiana.  

Under the long-term agreements, Encana or Shell may elect to require CEFS to expand the capacity of its gathering systems by up to an additional 1.3 Bcf per day.  CEFS estimates that the cost to expand the capacity of its gathering systems by an additional 1.3 Bcf per day would be as much as $440 million.  Encana and Shell would provide incremental volume commitments in connection with an election to expand system capacity.

(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 certain lawsuits described below. Under a master separation agreement between CenterPoint Energy and a former subsidiary, RRI Energy, Inc. (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 Energy, Inc. and changed its name to RRI Energy, Inc. In December 2010, Mirant Corporation merged with and became a wholly owned subsidiary of RRI, and RRI changed its name to GenOn Energy, Inc. (GenOn). 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), a subsidiary of CERC Corp., is a defendant in a case now pending in federal court in Nevada alleging a conspiracy to inflate Wisconsin natural gas prices in 2000-2002.  In July 2011, the court issued an order dismissing the plaintiffs’ claims against the other defendants in the case, each of whom had demonstrated Federal Energy Regulatory Commission jurisdictional sales for resale during the relevant period, based on federal preemption.  The plaintiffs have appealed this ruling to the United States Court of Appeals for the Ninth Circuit. Additionally, CenterPoint Energy was a defendant in a lawsuit filed in state court in Nevada that was dismissed in 2007, but in March 2010 the plaintiffs appealed the dismissal to the Nevada Supreme Court. CenterPoint Energy believes that neither it nor CES is a proper defendant in these remaining cases and will continue to pursue dismissal from those cases.  CenterPoint Energy does not expect the ultimate outcome of these remaining matters to have a material impact on its financial condition, results of operations or cash flows.

Natural Gas Measurement Lawsuits. CERC Corp. and certain of its subsidiaries are defendants in two mismeasurement lawsuits brought against approximately 245 pipeline companies and their affiliates pending in state court in Stevens County, Kansas.  In one case (originally filed in May 1999 and amended four times), the plaintiffs purport to represent a class of royalty owners who allege that the defendants have engaged in systematic mismeasurement of the volume of natural gas for more than 25 years. The plaintiffs amended their petition in this suit in July 2003 in response to an order from the judge denying certification of the plaintiffs’ alleged class. In the amendment, the plaintiffs dismissed their claims against certain defendants (including two CERC Corp. subsidiaries), limited the scope of the class of plaintiffs they purport to represent and eliminated previously asserted claims based on mismeasurement of the 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 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 and, in March 2010, denied the plaintiffs’ request for reconsideration of that order.  The time for seeking review of the district court’s decision has now passed.

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

Environmental Matters

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

At March 31, 2012, CERC had accrued $13 million for remediation of these Minnesota sites and the estimated range of possible remediation costs for these sites was $6 million to $41 million based on remediation continuing for 30 to 50 years. The cost estimates are based on studies of a site or industry average costs for remediation of sites of similar size. The actual remediation costs will be dependent upon the number of sites to be remediated, the participation of other potentially responsible parties (PRPs), if any, and the remediation methods used. The Minnesota Public Utility Commission provided for the inclusion in rates of approximately $285,000 annually to fund normal on-going remediation costs.  As of March 31, 2012, CERC had collected $5.6 million from insurance companies to be used to mitigate future environmental costs.

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 does not expect the ultimate outcome of these investigations will have a material adverse impact on its financial condition, results of operations or cash flows.

Asbestos.  Some facilities owned by CERC’s predecessors contain or have contained asbestos insulation and other asbestos-containing materials. CERC or its predecessor companies 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 CERC, but most existing claims relate to facilities previously owned by CERC’s subsidiaries. CERC anticipates that additional claims like those received may be asserted in the future.  Although their ultimate outcome cannot be predicted at this time, CERC 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 its financial condition, results of operations or cash flows.

Other Environmental.  From time to time CERC identifies the presence of environmental contaminants on property where it conducts or has conducted operations. Other such sites involving contaminants may be identified in the future.  CERC has and expects to continue to remediate identified sites consistent with its legal obligations. From time to time CERC 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, CERC 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, CERC 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

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

(f) Guaranties

Prior to the distribution of CenterPoint Energy’s ownership in RRI to its shareholders, CERC had guaranteed certain contractual obligations of what became RRI’s trading subsidiary.  When the companies separated, RRI agreed to secure CERC against obligations under the guaranties RRI had been unable to extinguish by the time of separation.  Pursuant to such agreement, as amended in December 2007, RRI (now GenOn) agreed to provide to CERC cash or letters of credit as security against CERC’s obligations under its remaining guaranties for demand charges under certain gas transportation agreements if and to the extent changes in market conditions expose CERC to a risk of loss on those guaranties based on an annual calculation, with any required collateral to be posted each December.  The undiscounted maximum potential payout of the demand charges under these transportation contracts, which will be in effect until 2018, was approximately $86 million as of March 31, 2012.  Market conditions in the fourth quarters of 2010 and 2011 required posting of security under the agreement, and GenOn has posted approximately $28 million of collateral as of March 31, 2012.  If GenOn 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.

(10)           Income Taxes

CERC reported an effective tax rate of 39% for both the three months ended March 31, 2011 and 2012.

The following table summarizes CERC’s unrecognized tax benefits at December 31, 2011 and March 31, 2012.

 
December 31, 2011
 
March 31,
 2012
 
(in millions)
Unrecognized tax benefits (expense)
$
8

 
$
(11
)
Portion of unrecognized tax benefits that, if recognized, would reduce the effective income tax rate
6

 
6

Interest accrued on unrecognized tax benefits
(4
)
 
(7
)

CERC does not expect the amount of unrecognized tax benefits to change significantly over the 12 months ending March 31, 2013.

CenterPoint Energy’s federal income tax returns, which include CERC, are currently under examination by the Internal Revenue Service for tax years 2008 and 2009 and are at various stages of the examination process.

(11)           Reportable Business Segments

Because CERC is an indirect wholly owned subsidiary of CenterPoint Energy, CERC’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. CERC uses operating income as the measure of profit or loss for its business segments.

CERC’s reportable business segments include the following: Natural Gas Distribution, Competitive Natural Gas Sales and Services, Interstate Pipelines, Field Services and Other Operations.  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 CERC’s non-rate regulated gas sales and services operations. The Interstate Pipelines business segment includes the interstate natural gas pipeline operations. The Field Services business segment includes the non-rate regulated natural gas gathering, processing and treating operations. The Other Operations business segment includes unallocated corporate costs and inter-segment eliminations.

Financial data for business segments and products and services are as follows (in millions):
 
For the Three Months Ended March 31, 2011
 
 
 
Revenues
from
External
Customers
 
Inter-segment
Revenues
 
Operating
Income
(Loss)
 
Total Assets
 as of
December 31, 2011
Natural Gas Distribution
$
1,207

 
$
5

 
$
142

 
$
4,636

Competitive Natural Gas Sales and Services
697

 
9

 
10

 
1,089

Interstate Pipelines
113

 
34

 
76

 
3,867

Field Services
78

 
12

 
36

 
1,894

Other

 

 
(4
)
 
660

Reconciling Eliminations

 
(60
)
 

 
(1,459
)
Consolidated
$
2,095

 
$

 
$
260

 
$
10,687

 
 
 
 
 
 
 
 
 
For the Three Months Ended March 31, 2012
 
 

 
Revenues
from
External
Customers
 
Inter-segment
Revenues
 
Operating
Income
 
Total Assets
as of
 March 31,
2012
Natural Gas Distribution
$
849

 
$
5

 
$
121

 
$
4,518

Competitive Natural Gas Sales and Services
520

 
5

 
1

 
1,031

Interstate Pipelines
82

 
45

 
60

 
3,884

Field Services
99

 
6

 
47

 
1,902

Other

 

 

 
500

Reconciling Eliminations

 
(61
)
 

 
(1,422
)
Consolidated
$
1,550

 
$

 
$
229

 
$
10,413



(12)           Other Current Assets and Liabilities

Included in other current assets on the Condensed Consolidated Balance Sheets at both December 31, 2011 and March 31, 2012 were $17 million of margin deposits and $63 million and $67 million of under-recovered gas cost at December 31, 2011 and March 31, 2012, respectively. Included in other current liabilities on the Condensed Consolidated Balance Sheets at December 31, 2011 and March 31, 2012 were $14 million and $11 million, respectively, of over-recovered gas cost.

Item 2.  MANAGEMENTS NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS

The following narrative analysis should be read in combination with our Interim Condensed Financial Statements contained in Item 1 of this report and our Annual Report on Form 10-K for the year ended December 31, 2011 (2011 Form 10-K).

We meet the conditions specified in General Instruction H(1)(a) and (b) to Form 10-Q and are therefore permitted to use the reduced disclosure format for wholly owned subsidiaries of reporting companies. Accordingly, we have omitted from this report the information called for by Item 2 (Managements Discussion and Analysis of Financial Condition and Results of Operations) and Item 3 (Quantitative and Qualitative Disclosures About Market Risk) of Part I and the following Part II items of Form 10-Q: Item 2 (Unregistered Sales of Equity Securities and Use of Proceeds), Item 3 (Defaults Upon Senior Securities) and Item 4 (Submission of Matters to a Vote of Security Holders). The following discussion explains material changes in our revenue and expense items between the three months ended March 31, 2011 and the three months ended March 31, 2012. Reference is made to “Management's Narrative Analysis of Results of Operations” in Item 7 of our 2011 Form 10-K.

CONSOLIDATED RESULTS OF OPERATIONS

Our results of operations are affected by seasonal fluctuations in the demand for natural gas and price movements of energy commodities as well as natural gas basis differentials. Our results of operations are also affected by, among other things, the actions of various federal, state and local governmental authorities having jurisdiction over rates we charge, competition in our various business operations, the effectiveness of our risk management activities, debt service costs and income tax expense. 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 2011 Form 10-K.

The following table sets forth our consolidated results of operations for the three months ended March 31, 2011 and 2012, followed by a discussion of our consolidated results of operations.
 
Three Months Ended March 31,
 
2011
 
2012
Revenues
$
2,095

 
$
1,550

Expenses:
 

 
 

Natural gas
1,476

 
969

Operation and maintenance
240

 
239

Depreciation and amortization
66

 
69

Taxes other than income taxes
53

 
44

Total
1,835

 
1,321

Operating Income
260

 
229

Interest and other finance charges
(49
)
 
(45
)
Equity in earnings of unconsolidated affiliates
6

 
9

Other income (expense), net
1

 

Income Before Income Taxes
218

 
193

Income tax expense
85

 
75

Net Income
$
133

 
$
118


Three months ended March 31, 2012 compared to three months ended March 31, 2011

We reported net income of $118 million for 2012 compared to $133 million for 2011.  The decrease in net income of $15 million was primarily due to a $31 million decrease in operating income from our business segments as discussed below, which was partially offset by a $10 million decrease in income tax expense, a $4 million decrease in interest and other finance charges and a $3 million increase in equity in earnings of unconsolidated affiliates.

Income Tax Expense.  We reported an effective tax rate of 39% for both the three months ended March 31, 2011 and 2012.

5




RESULTS OF OPERATIONS BY BUSINESS SEGMENT

The following table presents operating income (loss) for each of our business segments for the three months ended March 31, 2011 and 2012, followed by a discussion of the results of operations by business segment based on operating income. Included in revenues are intersegment sales.  We account for intersegment sales as if the sales were to third parties, that is, at current market prices.
 
Three Months Ended March 31,
 
2011
 
2012
Natural Gas Distribution
$
142

 
$
121

Competitive Natural Gas Sales and Services
10

 
1

Interstate Pipelines
76

 
60

Field Services
36

 
47

Other Operations
(4
)
 

Total Consolidated Operating Income
$
260

 
$
229


Natural Gas Distribution

For information regarding factors that may affect the future results of operations of our Natural Gas Distribution business segment, please read “Risk Factors ─ Risk Factors Affecting Our Businesses,” “─ Risk Factors Associated with Our Consolidated Financial Condition” and “─ Other Risks” in Item 1A of Part I of our 2011 Form 10-K.

The following table provides summary data of our Natural Gas Distribution business segment for the three months ended March 31, 2011 and 2012 (in millions, except throughput and customer data):

 
Three Months Ended March 31,
 
2011
 
2012
Revenues
$
1,212

 
$
854

Expenses:
 

 
 

Natural gas
818

 
493

Operation and maintenance
168

 
163

Depreciation and amortization
42

 
43

Taxes other than income taxes
42

 
34

Total expenses
1,070

 
733

Operating Income
$
142

 
$
121

Throughput (in billion cubic feet (Bcf)):
 

 
 

Residential
90

 
62

Commercial and industrial
88

 
74

Total Throughput
178

 
136

Number of customers at end of period:
 

 
 

Residential
3,029,079

 
3,042,617

Commercial and industrial
246,987

 
246,852

Total
3,276,066

 
3,289,469


Three months ended March 31, 2012 compared to three months ended March 31, 2011

Our Natural Gas Distribution business segment reported operating income of $121 million for the three months ended March 31, 2012 compared to $142 million for the three months ended March 31, 2011.  Operating income decreased $21 million primarily as a result of decreased throughput primarily due to the impacts of warmer winter weather partially mitigated by weather hedges and weather normalization adjustments ($24 million) and increased other expenses ($3 million). Adverse impacts were partially offset by the addition of over 13,000 customers ($1 million), lower bad debt expense ($5 million) and rate increases ($4 million).  Increased expense related to energy efficiency programs ($3 million) and decreased expense related to lower gross receipt taxes ($9 million) were offset by the related revenues.

6




Competitive Natural Gas Sales and Services

For information regarding factors that may affect the future results of operations of our Competitive Natural Gas Sales and Services business segment, please read “Risk Factors ─ Risk Factors Affecting Our Businesses,” “─ Risk Factors Associated with Our Consolidated Financial Condition” and “─ Other Risks” in Item 1A of Part I of our 2011 Form 10-K.

The following table provides summary data of our Competitive Natural Gas Sales and Services business segment for the three months ended March 31, 2011 and 2012 (in millions, except throughput and customer data):
 
Three Months Ended March 31,
 
2011
 
2012
Revenues
$
706

 
$
525

Expenses:
 

 
 

Natural gas
685

 
511

Operation and maintenance
10

 
12

Depreciation and amortization
1

 
1

Taxes other than income taxes

 

Total expenses
696

 
524

Operating Income
$
10

 
$
1

Throughput (in Bcf)
155

 
161

Number of customers at end of period
11,942

 
14,495


Three months ended March 31, 2012 compared to three months ended March 31, 2011

Our Competitive Natural Gas Sales and Services business segment reported operating income of $1 million for the three months ended March 31, 2012 compared to $10 million for the three months ended March 31, 2011.  The decrease in operating income of $9 million is attributable to milder winter weather and compressed margins of $4 million, higher operation and maintenance expenses of $2 million and a $4 million write-down of natural gas inventory to the lower of cost or market.  The first quarter of 2012 also included charges of $1 million resulting from mark-to-market accounting for derivatives associated with certain forward natural gas purchases and sales used to lock in economic margins compared to charges of $2 million for the same period of 2011. Throughput volumes and the number of customers increased in the first quarter of 2012 compared to the first quarter of 2011 as a result of continued growth in this segment’s commercial retail business.

7



Interstate Pipelines

For information regarding factors that may affect the future results of operations of our Interstate Pipelines business segment, please read “Risk Factors ─ Risk Factors Affecting Our Businesses,” “─ Risk Factors Associated with Our Consolidated Financial Condition” and “─ Other Risks” in Item 1A of Part I of our 2011 Form 10-K.

The following table provides summary data of our Interstate Pipelines business segment for the three months ended March 31, 2011 and 2012 (in millions, except throughput data):
 
Three Months Ended March 31,
 
2011
 
2012
 
 
 
 
Revenues
$
147

 
$
127

Expenses:
 

 
 

Natural gas
18

 
7

Operation and maintenance
31

 
38

Depreciation and amortization
13

 
14

Taxes other than income taxes
9

 
8

Total expenses
71

 
67

Operating Income
$
76

 
$
60

 
 
 
 
Equity in earnings of unconsolidated affiliates
$
4

 
$
6

 
 
 
 
Transportation throughput (in Bcf)
455

 
378


Three months ended March 31, 2012 compared to three months ended March 31, 2011

Our Interstate Pipeline business segment reported operating income of $60 million for the three months ended March 31, 2012 compared to $76 million for the three months ended March 31, 2011.  Margins (revenues less natural gas costs) decreased $9 million primarily due to lower revenues on the Carthage to Perryville pipeline as a result of an expired backhaul contract ($10 million) and from reduced gains on retained fuel and other revenues ($3 million) as well as lower off-system revenues ($3 million), which were partially offset by increased revenues from the effects of the restructured 10-year agreement with our natural gas distribution affiliate ($4 million) and ancillary services ($3 million). Operation and maintenance expenses increased $7 million primarily due to a 2011 insurance settlement ($4 million) and timing of expenses ($3 million). Depreciation and amortization expenses increased primarily due to prior year expenditures for maintenance capital ($1 million) which were offset by a decrease in taxes other than income ($1 million).

Equity Earnings.  In addition, this business segment recorded equity income of $4 million and $6 million for the three months ended March 31, 2011 and 2012, respectively, from its 50% interest in the Southeast Supply Header, a jointly-owned pipeline.  These amounts are included in Equity in Earnings of Unconsolidated Affiliates under the Other Income (Expense) caption.


8



Field Services

For information regarding factors that may affect the future results of operations of our Field Services business segment, please read “Risk Factors ─ Risk Factors Affecting Our Businesses,” “─ Risk Factors Associated with Our Consolidated Financial Condition” and “─ Other Risks” in Item 1A of Part I of our 2011 Form 10-K.

The following table provides summary data of our Field Services business segment for the three months ended March 31, 2011 and 2012 (in millions, except throughput data):
 
Three Months Ended March 31,
 
2011
 
2012
 
 
 
 
Revenues
$
90

 
$
105

Expenses:
 

 
 

Natural gas
15

 
18

Operation and maintenance
29

 
27

Depreciation and amortization
9

 
11

Taxes other than income taxes
1

 
2

Total expenses
54

 
58

Operating Income
$
36

 
$
47

 
 
 
 
Equity in earnings of unconsolidated affiliates
$
2

 
$
3

 
 
 
 
Gathering throughput (in Bcf)
183

 
237


Three months ended March 31, 2012 compared to three months ended March 31, 2011

Our Field Services business segment reported operating income of $47 million for the three months ended March 31, 2012 compared to $36 million for the three months ended March 31, 2011.  Margins (revenues less natural gas costs) increased $12 million primarily due to to higher throughput from gathering projects in the Haynesville and Fayetteville shales and growth in core gathering services, including revenues from annual contracted volume commitments ($18 million), partially offset by lower commodity prices ($6 million) from sales of retained natural gas. Higher depreciation expense ($2 million) related to new assets placed in service and an increase in taxes other than income ($1 million) were partially offset by lower operation and maintenance expenses ($2 million).

Equity Earnings.  In addition, this business segment recorded equity income of $2 million and $3 million in the three months ended March 31, 2011 and 2012, respectively, from its 50% general partnership interest in Waskom Gas Processing Company.  These amounts are included in Equity in Earnings of Unconsolidated Affiliates under the Other Income (Expense) caption.

CERTAIN FACTORS AFFECTING FUTURE EARNINGS

For information on other developments, factors and trends that may have an impact on our future earnings, please read “Risk Factors” in Item 1A of Part I of our 2011 Form 10-K and “Management’s Narrative Analysis of Results of Operations - Certain Factors Affecting Future Earnings” in Item 7 of Part II of our 2011 Form 10-K and “Cautionary Statement Regarding Forward-Looking Information” in this Form 10-Q.

LIQUIDITY AND CAPITAL RESOURCES

Our liquidity and capital requirements are affected primarily by our results of operations, capital expenditures, debt service requirements, tax payments and working capital needs. Substantially all of our capital expenditures are expected to be used for investment in infrastructure for our natural gas transmission, distribution and gathering operations. These capital expenditures relate to reliability and safety and system expansions. Our principal anticipated cash requirements for the remaining nine months of 2012 include approximately $588 million of capital expenditures.

We expect that proceeds from sales of commercial paper, borrowings under our credit facility, anticipated cash flows from operations and borrowings from affiliates will be sufficient to meet our anticipated cash needs for the remaining nine months of 2012. 


9



Longer term cash requirements 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, funds raised in the commercial paper markets and additional credit facilities may not, however, be available to us on acceptable terms.

Off-Balance Sheet Arrangements.  Other than the guaranties discussed below and operating leases, we have no off-balance sheet arrangements.

Prior to the distribution of CenterPoint Energy Inc.’s ownership in RRI Energy, Inc. (RRI) to its shareholders, we had guaranteed certain contractual obligations of what became RRI’s trading subsidiary.  When the companies separated, RRI agreed to secure us against obligations under the guaranties RRI had been unable to extinguish by the time of separation.  Pursuant to such agreement, as amended in December 2007, RRI (now GenOn Energy, Inc. (GenOn)) agreed to provide to us cash or letters of credit as security against our obligations under its remaining guaranties for demand charges under certain gas transportation agreements if and to the extent changes in market conditions expose us to a risk of loss on those guaranties based on an annual calculation, with any required collateral to be posted each December.  The undiscounted maximum potential payout of the demand charges under these transportation contracts, which will be in effect until 2018, was approximately $86 million as of March 31, 2012.  Market conditions in the fourth quarters of 2010 and 2011 required posting of security under the agreement, and GenOn has posted approximately $28 million of collateral as of March 31, 2012. If GenOn should fail to perform the contractual obligations, we could have to honor our guarantee and, in such event, collateral provided as security may be insufficient to satisfy our obligations.

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

Minnesota Conservation Improvement Program (CIP). In May 2012, our natural gas business (Gas Operations) filed a request with the Minnesota Public Utilities Commission for a $4.6 million CIP incentive.

Oklahoma Performance Based Rate Change (PBRC). In March 2012, Gas Operations filed a PBRC with the Oklahoma Corporation Commission showing that it had earnings for 2011 above the prescribed threshold and would refund approximately $1.86 million to customers beginning in July 2012.  An expedited procedural schedule is being discussed with a hearing scheduled in May 2012.   

Houston and South Texas Gas Reliability Infrastructure Programs (GRIP). Gas Operations’ Houston and South Texas Divisions each submitted annual GRIP filings on March 30, 2012.  For the Houston division, this filing is to recover costs related to $51.2 million in incremental capital expenditures that were incurred in 2011.  The increase in revenue requirements for this filing period is $9.4 million annually based on an authorized rate of return of 8.65%.  For the South Texas division, this filing is to recover costs related to $14.5 million in incremental capital expenditures that were incurred since the last rate case.  The increase in revenue requirements for this filing period is $2.4 million annually based on an authorized rate of return of 8.75%.  For both GRIP filings, rates are expected to go into effect in July 2012.

Credit Facilitiy. As of April 16, 2012, we had the following revolving credit facility (in millions): 
Date Executed
 
Size of
Facility
 
Amount
Utilized at
April 16,
2012
 
 
Termination Date
September 9, 2011
 
$
950

 

 
 
September 9, 2016
 
CERC Corp.’s $950 million credit facility can be drawn at the London Interbank Offered Rate (LIBOR) plus 150 basis points based on our current credit ratings. The facility contains a debt to total capitalization covenant which limits debt to 65% of our total capitalization.

Borrowings under the facility are subject to customary terms and conditions. However, there is no requirement that we make representations prior to borrowings as to the absence of material adverse changes or litigation that could be expected to have a material adverse effect. Borrowings under the credit facility are subject to acceleration upon the occurrence of events of default that we consider customary. The facility provides for customary fees, including commitment fees, administrative agent fees, fees in respect of letters of credit and other fees. The LIBOR borrowing spread and the commitment fees fluctuate based on our credit rating. We are currently in compliance with the various business and financial covenants in our revolving credit facility.

CERC Corp.’s $950 million credit facility backstops a $915 million commercial paper program. As of April 16, 2012, CERC Corp. had no outstanding commercial paper. As a result of the credit ratings on our commercial paper program, we do not expect to

10



be able to rely on the sale of commercial paper to fund all of our short-term borrowing requirements.

During the first quarter of 2012, we met substantially all of our liquidity requirements with borrowings from the money pool described below under “—Money Pool” and with commercial paper proceeds. We currently expect that we may be required to access financing sources in addition to money pool borrowings in order to satisfy our liquidity requirements for the remainder of 2012.  These sources could include commercial paper proceeds or borrowings under our revolving credit facility.

Securities Registered with the SEC.  We have filed a shelf registration statement with the SEC registering an indeterminate principal amount of our senior debt securities.

Temporary Investments.  As of April 16, 2012, 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 April 16, 2012, we had borrowings of $361 million from the money pool.  The money pool may not provide sufficient funds to meet our cash needs.

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 April 16, 2012, Moody’s Investors Service, Inc. (Moody’s), Standard & Poor’s Rating Services (S&P), a division of The McGraw-Hill Companies, and Fitch, Inc. (Fitch) had assigned the following credit ratings to our senior unsecured debt:
Moody’s
 
S&P
 
Fitch
Rating
 
Outlook (1)
 
Rating
 
Outlook (2)
 
Rating
 
Outlook (3)
Baa2
 
Stable
 
BBB+
 
Stable
 
BBB
 
Stable
_______________
(1)
A Moody’s rating outlook is an opinion regarding the likely direction of a 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 these credit ratings could increase borrowing costs under our $950 million credit facility. If our credit ratings had been downgraded one notch by each of the three principal credit rating agencies from the ratings that existed at March 31, 2012, the impact on the borrowing costs under our credit facility would have been immaterial. A decline in credit ratings would also increase the interest rate on long-term debt to be issued in the capital markets and could negatively impact our ability to complete capital market transactions and to access the commercial paper markets. Additionally, a decline in credit ratings could increase cash collateral requirements and reduce earnings of our Natural Gas Distribution and Competitive Natural Gas Sales and Services business segments.

We and our subsidiaries purchase natural gas from one of our suppliers under supply agreements that contain an aggregate credit threshold of $120 million based on CERC Corp.’s S&P senior unsecured long-term debt rating of BBB+. Under these agreements, we may need to provide collateral if the aggregate threshold is exceeded. Upgrades and downgrades from this BBB+ rating will increase and decrease the aggregate credit threshold accordingly.

CenterPoint Energy Services, Inc. (CES), our wholly owned subsidiary operating in our Competitive Natural Gas Sales and Services business segment, provides comprehensive natural gas sales and services primarily to commercial and industrial customers and electric and gas utilities throughout the central and eastern United States. In order to economically hedge its exposure to natural gas prices, CES uses derivatives with provisions standard for the industry, including those pertaining to credit thresholds. Typically, the credit threshold negotiated with each counterparty defines the amount of unsecured credit that such counterparty will extend to CES. To the extent that the credit exposure that a counterparty has to CES at a particular time does not exceed that credit threshold, CES is not obligated to provide collateral. Mark-to-market exposure in excess of the credit threshold is routinely collateralized by

11



CES. As of March 31, 2012, the amount posted as collateral aggregated approximately $59 million. Should the credit ratings of CERC Corp. (as the credit support provider for CES) fall below certain levels, CES would be required to provide additional collateral up to the amount of its previously unsecured credit limit. We estimate that as of March 31, 2012, unsecured credit limits extended to CES by counterparties aggregate $371 million and $15 million of such amount was utilized.

Pipeline tariffs and contracts typically provide that if the credit ratings of a shipper or the shipper’s guarantor drop below a threshold level, which is generally investment grade ratings from both Moody’s and S&P, cash or other collateral may be demanded from the shipper in an amount equal to the sum of three months’ charges for pipeline services plus the unrecouped cost of any lateral built for such shipper. If the credit ratings of CERC Corp. decline below the applicable threshold levels, we might need to provide cash or other collateral of as much as $172 million as of March 31, 2012. The amount of collateral will depend on seasonal variations in transportation levels.

Cross Defaults. Under CenterPoint Energy’s revolving credit facility, a payment default on, or a non-payment default that permits acceleration of, any indebtedness exceeding $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 March 31, 2012, provide that a payment default by us in respect of, or an acceleration of, borrowed money and certain other specified types of obligations, in the aggregate principal amount of $50 million, will cause a default. A default by CenterPoint Energy would not trigger a default under our debt instruments or bank credit facility.

Possible Acquisitions, Divestitures and Joint Ventures.  From time to time, we consider the acquisition or the disposition of assets or businesses or possible joint ventures or other joint ownership arrangements with respect to assets or businesses. Any determination to take action in this regard will be based on market conditions and opportunities existing at the time, and accordingly, the timing, size or success of any efforts and the associated potential capital commitments are unpredictable. We may seek to fund all or part of any such efforts with proceeds from debt issuances. Debt financing may not, however, be available to us at that time due to a variety of events, including, among others, maintenance of our credit ratings, industry conditions, general economic conditions, market conditions and market perceptions.

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

cash collateral requirements that could exist in connection with certain contracts, including our weather hedging arrangements, and gas purchases, gas price and gas storage activities of our Natural Gas Distribution and Competitive Natural Gas Sales and Services business segments;

acceleration of payment dates on certain gas supply contracts under certain circumstances, as a result of increased gas prices and concentration of natural gas suppliers;
 
increased costs related to the acquisition of natural gas;

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

various legislative or  regulatory actions;

incremental collateral, if any, that may be required due to regulation of derivatives;

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

slower customer payments and increased write-offs of receivables due to higher gas prices or changing economic conditions;

the outcome of litigation brought by and against us;

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

various other risks identified in “Risk Factors” in Item 1A of Part I of our 2011 Form 10-K.

Certain Contractual Limits on Our Ability to Issue Securities and Borrow Money. Our revolving credit facility limits our debt

12



as a percentage of our total capitalization to 65%.

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 March 31, 2012 to provide assurance that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure.

There has been no change in our internal controls over financial reporting that occurred during the three months ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1.    LEGAL PROCEEDINGS

For a discussion of material legal and regulatory proceedings affecting us, please read Note 9(c) 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 2011 Form 10-K.

Item 1A. RISK FACTORS

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

Item 5.  OTHER INFORMATION

Our ratio of earnings to fixed charges for the three months ended March 31, 2011 and 2012 was 4.96 and 5.15, respectively. We do not believe that the ratios for these three-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.

13




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 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 Resources Corp., any other persons, any state of affairs or other matters.
Exhibit
Number
 
Description
 
Report or Registration
Statement
 
SEC File or
Registration
Number
 
Exhibit
Reference
3.1.1
 
Certificate of Incorporation of RERC Corp.
 
Form 10-K for the year ended December 31, 1997
 
1-13265
 
3(a)(1)
3.1.2
 
Certificate of Merger merging former NorAm Energy Corp. with and into HI Merger, Inc. dated August 6, 1997
 
Form 10-K for the year ended December 31, 1997
 
1-13265
 
3(a)(2)
3.1.3
 
Certificate of Amendment changing the name to Reliant Energy Resources Corp.
 
Form 10-K for the year ended December 31, 1998
 
1-13265
 
3(a)(3)
3.1.4
 
Certificate of Amendment changing the name to CenterPoint Energy Resources Corp.
 
Form 10-Q for the quarter ended June 30, 2003
 
1-13265
 
3(a)(4)
3.2
 
Bylaws of RERC Corp.
 
Form 10-K for the year ended December 31, 1997
 
1-13265
 
3(b)
4.1
 
$950,000,000 Credit Agreement, dated as of September 9, 2011, among CERC Corp., as Borrower, and the banks named therein
 
Form 8-K dated September 9, 2011
 
1-13265
 
4.3
+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.LAB
 
XBRL Taxonomy Extension Labels Linkbase Document (1)
 
 
 
 
 
 
+101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document (1)
 
 
 
 
 
 
(1) Furnished, not filed.

14




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 RESOURCES CORP.
 
 
 
 
By:
/s/ Walter L. Fitzgerald
 
Walter L. Fitzgerald
 
Senior Vice President and Chief Accounting Officer


Date: May 10, 2012


15



Index to Exhibits

The following exhibits are filed herewith:

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

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 Resources Corp., any other persons, any state of affairs or other matters.
Exhibit
Number
 
Description
 
Report or Registration
Statement
 
SEC File or
Registration
Number
 
Exhibit
Reference
3.1.1
 
Certificate of Incorporation of RERC Corp.
 
Form 10-K for the year ended December 31, 1997
 
1-13265
 
3(a)(1)
3.1.2
 
Certificate of Merger merging former NorAm Energy Corp. with and into HI Merger, Inc. dated August 6, 1997
 
Form 10-K for the year ended December 31, 1997
 
1-13265
 
3(a)(2)
3.1.3
 
Certificate of Amendment changing the name to Reliant Energy Resources Corp.
 
Form 10-K for the year ended December 31, 1998
 
1-13265
 
3(a)(3)
3.1.4
 
Certificate of Amendment changing the name to CenterPoint Energy Resources Corp.
 
Form 10-Q for the quarter ended June 30, 2003
 
1-13265
 
3(a)(4)
3.2
 
Bylaws of RERC Corp.
 
Form 10-K for the year ended December 31, 1997
 
1-13265
 
3(b)
4.1
 
$950,000,000 Credit Agreement, dated as of September 9, 2011, among CERC Corp., as Borrower, and the banks named therein
 
Form 8-K dated September 9, 2011
 
1-13265
 
4.3
+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.LAB

 
XBRL Taxonomy Extension Labels Linkbase Document (1)
 
 
 
 
 
 
+101.PRE

 
XBRL Taxonomy Extension Presentation Linkbase Document (1)
 
 
 
 
 
 
(1) Furnished, not filed.







16