ceheform-10q.htm


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

FORM 10-Q
 
(Mark One)
R
QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009
OR
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
FOR THE TRANSITION PERIOD FROM               TO             
______________________________

Commission file number 1-3187

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC

(Exact name of registrant as specified in its charter)

Texas
22-3865106
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
1111 Louisiana
 
Houston, Texas 77002
(713) 207-1111
(Address and zip code of principal executive offices)
(Registrant’s telephone number, including area code)
______________________________


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

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

Indicate by check mark whether the registrant 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 £  No £

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

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

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

As of July 27, 2009, all 1,000 common shares of CenterPoint Energy Houston Electric, LLC were held by Utility Holding, LLC, a wholly owned subsidiary of CenterPoint Energy, Inc.




CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2009

TABLE OF CONTENTS

PART I.
 
FINANCIAL INFORMATION
   
         
Item 1.
   
1
         
       
   
Three and Six Months Ended June 30, 2008 and 2009 (unaudited)
 
1
         
       
   
December 31, 2008 and June 30, 2009 (unaudited)
 
2
         
       
   
Six Months Ended June 30, 2008 and 2009 (unaudited)
 
4
         
     
5
         
Item 2.
   
15
         
Item 4T.
   
22
         
PART II.
 
OTHER INFORMATION
   
         
Item 1.
   
22
         
Item 1A.
   
22
         
Item 5.
   
23
         
Item 6.
   
23

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

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

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

 
the resolution of the true-up components, including, in particular, the results of appeals to the Texas Supreme Court regarding rulings obtained to date;
 
 
state and federal legislative and regulatory actions or developments, including deregulation, re-regulation, environmental regulations, including regulations related to global climate change, and changes in or application of laws or regulations applicable to the various aspects of our business;
 
 
timely and appropriate regulatory actions allowing securitization or other recovery of costs associated with Hurricane Ike;
 
 
timely and appropriate rate actions and increases, allowing recovery of costs and a reasonable return on investment;
 
 
industrial, commercial and residential growth in our service territory and changes in market demand and demographic patterns;
 
 
weather variations and other natural phenomena;
 
 
changes in interest rates or rates of inflation;
 
 
commercial bank and financial market conditions, our access to capital, the cost of such capital, and the results of our financing and refinancing efforts, including availability of funds in the debt capital markets;
 
 
actions by rating agencies;
 
 
non-payment for our services due to financial distress of our customers;
 
 
the ability of RRI Energy, Inc. (RRI) (formerly known as Reliant Energy, Inc. and Reliant Resources, Inc.)and its subsidiaries and any successor companies to satisfy their obligations to us, including indemnity obligations;
 
 
the ability of NRG Retail, LLC, the successor to RRI’s retail electric provider and our largest customer, to satisfy its obligations to us and our subsidiaries;
 
 
the outcome of litigation brought by or against us;
 
 
our ability to control costs;
 
 
the investment performance of CenterPoint Energy, Inc's employee benefit plans;
 

 
our potential business strategies, including acquisitions or dispositions of assets or businesses, which we cannot assure will be completed or will have the anticipated benefits to us;
 
 
acquisition and merger activities involving our parent or our competitors; and
 
 
other factors we discuss in "Risk Factors" in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2008, 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.
 
 
 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

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


   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2008
   
2009
   
2008
   
2009
 
                         
Revenues
  $ 510     $ 521     $ 919     $ 933  
                                 
Expenses:
                               
Operation and maintenance
    169       183       338       372  
Depreciation and amortization
    125       123       221       223  
Taxes other than income taxes
    52       53       105       106  
Total
    346       359       664       701  
Operating Income
    164       162       255       232  
                                 
Other Income (Expense):
                               
Interest and other finance charges
    (26 )     (40 )     (53 )     (79 )
Interest on transition bonds
    (35 )     (33 )     (68 )     (66 )
Other, net
    10       20       23       27  
Total
    (51 )     (53 )     (98 )     (118 )
                                 
Income Before Income Taxes
    113       109       157       114  
Income tax expense
    (41 )     (42 )     (59 )     (45 )
Net Income
  $ 72     $ 67     $ 98     $ 69  


See Notes to the Interim Condensed Consolidated Financial Statements
 

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

ASSETS
   
December 31,
2008
   
June 30,
2009
 
Current Assets:
           
Cash and cash equivalents
  $ 166     $ 125  
Accounts and notes receivable, net
    227       268  
Accounts and notes receivable – affiliated companies
    30       187  
Accrued unbilled revenues
    60       73  
Inventory
    74       72  
Taxes receivable
    8        
Deferred tax asset, net
    1       1  
Other
    82       64  
Total current assets
    648       790  
                 
Property, Plant and Equipment:
               
Property, plant and equipment
    7,256       7,319  
Less accumulated depreciation and amortization
    2,652       2,638  
Property, plant and equipment, net
    4,604       4,681  
                 
Other Assets:
               
Regulatory assets
    2,832       2,781  
Notes receivable — affiliated companies
    750       750  
Other
    48       54  
Total other assets
    3,630       3,585  
                 
Total Assets
  $ 8,882     $ 9,056  


See Notes to the Interim Condensed Consolidated Financial Statements
 

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

LIABILITIES AND MEMBER’S EQUITY

   
December 31,
2008
   
June 30,
2009
 
Current Liabilities:
           
Current portion of transition bond long-term debt
  $ 208     $ 211  
Accounts payable
    150       61  
Accounts and notes payable — affiliated companies
    36       44  
Taxes accrued
    87       80  
Interest accrued
    100       113  
Other
    89       91  
Total current liabilities
    670       600  
                 
Other Liabilities:
               
Accumulated deferred income taxes, net
    1,506       1,448  
Unamortized investment tax credits
    21       18  
Benefit obligations
    187       188  
Regulatory liabilities
    313       346  
Notes payable — affiliated companies
    151       151  
Other
    170       230  
Total other liabilities
    2,348       2,381  
                 
Long-term Debt:
               
Transition bonds
    2,381       2,274  
Other
    1,843       2,092  
Total long-term debt
    4,224       4,366  
                 
Commitments and Contingencies (Note 8)
               
                 
Member’s Equity:
               
Common stock
           
Paid-in capital
    1,230       1,230  
Retained earnings
    410       479  
Total member’s equity
    1,640       1,709  
                 
Total Liabilities and Member’s Equity
  $ 8,882     $ 9,056  


See Notes to the Interim Condensed Consolidated Financial Statements
 

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


   
Six Months Ended June 30,
 
   
2008
   
2009
 
Cash Flows from Operating Activities:
           
Net income
  $ 98     $ 69  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    221       223  
Amortization of deferred financing costs
    6       13  
Deferred income taxes
    (31 )     (1 )
Changes in other assets and liabilities:
               
Accounts and notes receivable, net
    (57 )     (54 )
Accounts receivable/payable, affiliates
    (11 )     16  
Inventory
    (1 )     2  
Accounts payable
    6       (74 )
Taxes receivable
    3       8  
Interest and taxes accrued
    9       6  
Net regulatory assets and liabilities
    5       (18 )
Other current assets
    15       12  
Other current liabilities
    6       2  
Other assets
           
Other liabilities
    (4 )     1  
Other, net
    (9 )      
Net cash provided by operating activities
    256       205  
                 
Cash Flows from Investing Activities:
               
Capital expenditures
    (184 )     (222 )
Increase in notes receivable from affiliates, net
          (157 )
Decrease (increase) in restricted cash of transition bond companies
    (7 )     6  
Other, net
    1       (6 )
Net cash used in investing activities
    (190 )     (379 )
                 
Cash Flows from Financing Activities:
               
Long-term revolving credit facility, net
    52       (251 )
Proceeds from long-term debt
    488       500  
Payments of long-term debt
    (77 )     (104 )
Debt issuance costs
    (6 )     (4 )
Decrease in short-term notes with affiliates, net
    (43 )     (8 )
Dividend to parent
    (483 )      
Other, net
    1        
Net cash provided by (used in) financing activities
    (68 )     133  
                 
Net Decrease in Cash and Cash Equivalents
    (2 )     (41 )
Cash and Cash Equivalents at Beginning of Period
    128       166  
Cash and Cash Equivalents at End of Period
  $ 126     $ 125  
                 
Supplemental Disclosure of Cash Flow Information:
               
Cash Payments:
               
Interest, net of capitalized interest
  $ 108     $ 128  
Income taxes (refunds), net
    44       (3 )
Non-cash transactions:
               
Accounts payable related to capital expenditures
    15       27  


See Notes to the Interim Condensed Consolidated Financial Statements
 

CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1)       Background and Basis of Presentation

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

Background. CenterPoint Houston engages in the electric transmission and distribution business in a 5,000-square mile area of the Texas Gulf Coast that includes Houston. CenterPoint Houston is an indirect wholly owned subsidiary of CenterPoint Energy, Inc. (CenterPoint Energy), a public utility holding company. At June 30, 2009, CenterPoint Houston had three subsidiaries, CenterPoint Energy Transition Bond Company, LLC, CenterPoint Energy Transition Bond Company II, LLC and CenterPoint Energy Transition Bond Company III, LLC (collectively, the transition bond companies). Each is a special purpose Delaware limited liability company formed for the principal purpose of purchasing and owning transition property, issuing transition bonds and performing activities incidental thereto. For further discussion of the transition bond companies, see Note 4.

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

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

(2)       New Accounting Pronouncements

In December 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (FSP 132(R)-1), which amends Statement of Financial Accounting Standards (SFAS) No. 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.”  FSP 132(R)-1 expands the disclosures about employers’ plan assets to include more detailed disclosures about the employers’ investment strategies, major categories of plan assets, concentrations of risk within plan assets and valuation techniques used to measure the fair value of plan assets. FSP 132(R)-1 is effective for fiscal years ending after December 15, 2009. CenterPoint Houston expects that the adoption of FSP 132(R)-1 will not have a material impact on its financial position, results of operations or cash flows.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSP 107-1), which amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” (SFAS No. 107) and APB 28, “Interim Financial Reporting.” FSP 107-1 expands the fair value disclosures required for all financial instruments within the scope of SFAS No. 107 to interim periods. FSP 107-1 also requires entities to disclose in interim periods the methods and significant assumptions used to estimate the fair value of financial instruments. FSP 107-1 is effective for interim reporting periods ending after June 15, 2009. CenterPoint Houston’s adoption of FSP 107-1 did not have a material impact on its financial position, results of operations or cash flows.  See Note 10 for the required disclosures.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (SFAS No. 165). SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before
 

financial statements are issued or are available to be issued. SFAS No. 165 is effective for interim or annual periods ending after June 15, 2009. CenterPoint Houston’s adoption of SFAS No. 165 did not have a material impact on its financial position, results of operations or cash flows. See Note 11 for the subsequent event related disclosures.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (SFAS No. 167). SFAS No. 167 changes how a reporting entity determines a primary beneficiary that would consolidate the variable interest entity (VIE) from a quantitative risk and rewards approach to a qualitative approach based on which variable interest holder has the power to direct the economic performance related activities of the VIE as well as the obligation to absorb losses or right to receive benefits that could potentially be significant to the VIE. SFAS No. 167 requires the primary beneficiary assessment to be performed on an ongoing basis.  SFAS No. 167 also requires enhanced disclosures that will provide more transparency about a company’s involvement in a VIE. SFAS No.167 is effective for a reporting entity’s first annual reporting period that begins after November 15, 2009. CenterPoint Houston expects that the adoption of SFAS No. 167 will not have a material impact on its financial position, results of operations or cash flows.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162” (SFAS No. 168). SFAS No. 168 establishes the FASB Accounting Standards Codification (Codification) as the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. CenterPoint Houston expects that the adoption of SFAS No. 168 will not have a material impact on its financial position, results of operations or cash flows.

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

(3)       Employee Benefit Plans

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

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2008
   
2009
   
2008
   
2009
 
   
(in millions)
 
Interest cost
  $ 5     $ 4     $ 9     $ 9  
Expected return on plan assets
    (3 )     (2 )     (6 )     (4 )
Amortization of transition obligation
    1       2       3       3  
Net periodic cost
  $ 3     $ 4     $ 6     $ 8  

CenterPoint Houston expects to contribute approximately $8 million to CenterPoint Energy’s postretirement benefit plan in 2009, of which $3 million and $5 million, respectively, was contributed during the three and six months ended June 30, 2009.
 
(4)       Regulatory Matters

(a) Hurricane Ike

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

As is common with electric utilities serving coastal regions, the poles, towers, wires, street lights and pole mounted equipment that comprise CenterPoint Houston’s transmission and distribution system are not covered by property insurance, but office buildings and warehouses and their contents and substations are covered by insurance that provides for a maximum deductible of $10 million. Current estimates are that total losses to property covered by this insurance were approximately $17 million.

 
CenterPoint Houston deferred the uninsured system restoration costs as management believes it is probable that such costs will be recovered through the regulatory process. As a result, system restoration costs did not affect CenterPoint Houston’s reported net income for 2008 or the first six months of 2009. As of June 30, 2009, CenterPoint Houston had balances of $163 million in property, plant and equipment and $442 million in regulatory assets related to restoration costs incurred through June 30, 2009.  In April 2009, CenterPoint Houston filed with the Public Utility Commission of Texas (Texas Utility Commission) an application for review and approval for recovery of approximately $608 million in system restoration costs identified as of the end of February 2009, plus $2 million in regulatory expenses, $13 million in certain debt issuance costs, and $55 million in projected carrying costs, pursuant to the legislation described below. CenterPoint Houston expects to incur additional costs, currently estimated at $12 million, related to Hurricane Ike, principally related to the reconstruction of certain substations on Galveston Island, and will seek to recover those costs through the regulatory process at a later date.

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

In accordance with the legislation discussed above, CenterPoint Houston has recorded a regulatory asset of $41 million representing the carrying costs on recoverable system restoration costs for the period from September 12, 2008 through June 30, 2009.  CenterPoint Houston will continue to accrue carrying costs until the associated system restoration costs are recovered by CenterPoint Houston, either through rates or through the issuance of system restoration bonds, as discussed above.  The carrying costs are based on the cost of capital established by the Texas Utility Commission in CenterPoint Houston’s 2001 rate proceeding.   In accordance with SFAS No. 92, “Regulated Enterprises — Accounting for Phase-in Plans,” the carrying costs have been bifurcated into two components: (i) return of borrowing costs and (ii) an allowance for earnings on shareholders’ investment.  The component representing a return of borrowing costs of $14 million has been recognized in the second quarter of 2009 and is included in other income in CenterPoint Houston’s Condensed Statements of Consolidated Income.  That component will continue to be recognized as earned until the associated system restoration costs are recovered.  The component representing an allowance for earnings on shareholders’ investment of $27 million is being deferred and will be recognized as it is collected through rates or, if the system restoration costs are recovered through issuance of system restoration bonds, over the life of those bonds.

In the application it filed in April 2009, CenterPoint Houston sought approval for recovery of a total of approximately $678 million, including the $608 million in system restoration costs described above plus related regulatory expenses, certain debt issuance costs and carrying costs calculated through August 2009. On July 31, 2009, CenterPoint Houston announced that it had reached a settlement agreement with the parties to the proceeding.  Under the terms of that settlement agreement, CenterPoint Houston will be entitled to recover a total of $663 million in costs relating to Hurricane Ike, along with carrying costs from September 1, 2009 until system restoration bonds are issued.  The Texas Utility Commission is expected to take final action on CenterPoint Houston’s application and the settlement agreement in August 2009.  In July 2009, CenterPoint Houston filed with the Texas Utility Commission its application for a financing order to recover the portion of approved costs related to distribution service through the issuance of system restoration bonds.  Based on the $663 million in total costs that would be approved under the settlement agreement, approximately $643 million, plus certain costs of issuance, are eligible to be recovered through the issuance of system restoration bonds . The exact size of the bond offering will be determined by the Texas Utility Commission in a hearing currently scheduled for September 2009.  The Texas Utility Commission’s financing order, which would authorize issuance of the system restoration bonds, is expected to contain provisions related to the regulatory treatment of deferred federal income taxes associated with the costs to
 
 
7

 
be recovered.  In previous securitization cases, the Texas Utility Commission has reduced the amount of costs eligible for securitization by the benefit of those deferred taxes.  Assuming system restoration bonds are issued, CenterPoint Houston will recover the distribution portion of approved system restoration costs out of the bond proceeds, with the bonds being repaid over time through a charge imposed on customers.  CenterPoint Houston will seek to recover the remaining approximately $20 million of Hurricane Ike costs related to transmission service through the existing transmission cost of service process.  Although there can be no assurance that the Texas Utility Commission’s orders will authorize recovery or securitization of the full amounts set forth in the settlement agreement, CenterPoint Houston does not believe the outcome of these proceedings will have a material adverse impact on its financial condition, results of operations or cash flows.
 
(b) Recovery of True-Up Balance
 
In March 2004, CenterPoint Houston filed its true-up application with the Texas Utility Commission, requesting recovery of $3.7 billion, excluding interest, as allowed under the Texas Electric Choice Plan (Texas electric restructuring law). In December 2004, the Texas Utility Commission issued its final order (True-Up Order) allowing CenterPoint Houston to recover a true-up balance of approximately $2.3 billion, which included interest through August 31, 2004, and provided for adjustment of the amount to be recovered to include interest on the balance until recovery, along with the principal portion of additional excess mitigation credits (EMCs) returned to customers after August 31, 2004 and certain other adjustments.

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

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

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

 
affirmed the True-Up Order in all other respects.

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

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

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

 
reversed the district court’s judgment to the extent it upheld the Texas Utility Commission’s decision to allow CenterPoint Houston to recover EMCs paid to RRI Energy, Inc. (RRI) (formerly known as Reliant Energy, Inc. and Reliant Resources, Inc.);

 
ordered that the tax normalization issue described below be remanded to the Texas Utility Commission as requested by the Texas Utility Commission; and
 
 
affirmed the district court’s judgment in all other respects.

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

In June 2008, CenterPoint Houston petitioned the Texas Supreme Court for review of the court of appeals decision. In its petition, CenterPoint Houston seeks reversal of the parts of the court of appeals decision that (i) denied recovery of EMCs paid to RRI, (ii) denied recovery of the capacity auction true up amounts allowed by the district court, (iii) affirmed the Texas Utility Commission’s rulings that denied recovery of approximately $378 million related to depreciation and (iv) affirmed the Texas Utility Commission’s refusal to permit CenterPoint Houston to utilize the partial stock valuation methodology for determining the market value of its former generation
 
 
8

 
assets. Two other petitions for review were filed with the Texas Supreme Court by other parties to the appeal. In those petitions parties contend that (i) the Texas Utility Commission was without authority to fashion the methodology it used for valuing the former generation assets after it had determined that CenterPoint Houston could not use the partial stock valuation method, (ii) in fashioning the method it used for valuing the former generating assets, the Texas Utility Commission deprived parties of their due process rights and an opportunity to be heard, (iii) the net book value of the generating assets should have been adjusted downward due to the impact of a purchase option that had been granted to RRI, (iv) CenterPoint Houston should not have been permitted to recover construction work in progress balances without proving those amounts in the manner required by law and (v) the Texas Utility Commission was without authority to award interest on the capacity auction true up award.

In June 2009, the Texas Supreme Court granted the petitions for review of the court of appeals decision.  Oral argument before the court is scheduled for October 2009.  Although CenterPoint Houston believes that its true-up request is consistent with applicable statutes and regulations and, accordingly, that it is reasonably possible that it will be successful in its appeal to the Texas Supreme Court, CenterPoint Houston can provide no assurance as to the ultimate court rulings on the issues to be considered in the appeal or with respect to the ultimate decision by the Texas Utility Commission on the tax normalization issue described below.

To reflect the impact of the True-Up Order, in 2004 and 2005, CenterPoint Houston recorded a net after-tax extraordinary loss of $947 million. No amounts related to the district court’s judgment or the decision of the court of appeals have been recorded in CenterPoint Houston’s consolidated financial statements. However, if the court of appeals decision is not reversed or modified as a result of further review by the Texas Supreme Court, CenterPoint Houston anticipates that it would be required to record an additional loss to reflect the court of appeals decision. The amount of that loss would depend on several factors, including ultimate resolution of the tax normalization issue described below and the calculation of interest on any amounts CenterPoint Houston ultimately is authorized to recover or is required to refund beyond the amounts recorded based on the True-up Order, but could range from $170 million to $385 million (pre-tax) plus interest subsequent to December 31, 2008.

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

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

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

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

Certain parties appealed the CTC Order to a district court in Travis County. In May 2006, the district court issued a judgment reversing the CTC Order in three respects. First, the court ruled that the Texas Utility Commission had improperly relied on provisions of its rule dealing with the interest rate applicable to CTC amounts. The district court reached that conclusion based on its belief that the Texas Supreme Court had previously invalidated that entire section of the rule. The 11.075% interest rate in question was applicable from the implementation of the CTC Order on September 13, 2005 until August 1, 2006, the effective date of the implementation of a new CTC in compliance with the revised rule discussed above. Second, the district court reversed the Texas Utility Commission’s ruling that allows CenterPoint Houston to recover through the Rider RCE the costs (approximately $5 million) for a panel appointed by the Texas Utility Commission in connection with the valuation of electric generation assets. Finally, the district court accepted the contention of one party that the CTC should not be allocated to retail customers that have switched to new on-site generation. The Texas Utility Commission and CenterPoint Houston appealed the district court’s judgment to the Texas Third Court of Appeals, and in July 2008, the court of appeals reversed the district court’s judgment in all respects and affirmed the Texas Utility Commission’s order. Two of the appellants have requested further review from the Texas Supreme Court.  In June 2009, the Texas Supreme Court agreed to hear those appeals, with oral argument before the court scheduled for October 2009. The ultimate outcome of this matter cannot be predicted at this time. However, CenterPoint Houston does not expect the disposition of this matter to have a material adverse effect on its financial condition, results of operations or cash flows.

During the 2007 legislative session, the Texas legislature amended statutes prescribing the types of true-up balances that can be securitized by utilities and authorized the issuance of transition bonds to recover the balance of the CTC. In June 2007, CenterPoint Houston filed a request with the Texas Utility Commission for a financing order that would allow the securitization of the remaining balance of the CTC, adjusted to refund certain unspent environmental retrofit costs and to recover the amount of the final fuel reconciliation settlement. CenterPoint Houston reached substantial agreement with other parties to this proceeding, and a financing order was approved by the Texas Utility Commission in September 2007. In February 2008, pursuant to the financing order, a new special purpose subsidiary of CenterPoint Houston issued approximately $488 million of transition bonds in two tranches with interest rates of 4.192% and 5.234% and final maturity dates of February 2020 and February 2023, respectively. Contemporaneously with the issuance of those bonds, the CTC was terminated and a transition charge was implemented. During the six months ended June 30, 2008, CenterPoint Houston recognized approximately $5 million in operating income from the CTC.

As of June 30, 2009, CenterPoint Energy had not recognized an allowed equity return of $201 million on CenterPoint Houston’s true-up balance because such return will be recognized as it is recovered in rates. During the three months ended June 30, 2008 and 2009, CenterPoint Houston recognized approximately $2 million and $4 million, respectively, of the allowed equity return not previously recognized.  During the six months ended
 
 
10

 
June 30, 2008 and 2009, CenterPoint Houston recognized approximately $4 million and $6 million, respectively, of the allowed equity return not previously recognized.

(c) Rate Proceedings

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

(5)       Fair Value Measurements

Effective January 1, 2008, CenterPoint Houston adopted SFAS No. 157, “Fair Value Measurements” (SFAS No. 157), which requires additional disclosures about CenterPoint Houston’s financial assets and liabilities that are measured at fair value. Effective January 1, 2009, CenterPoint Houston adopted SFAS No. 157 for nonfinancial assets and liabilities, which adoption had no impact on CenterPoint Houston’s financial position, results of operations or cash flows.  Beginning in January 2008, assets and liabilities recorded at fair value in the Consolidated Balance Sheet are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined in SFAS No. 157 and directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, are as follows:

Level 1: Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets carried at Level 1 fair value are investments listed in active markets.  At June 30, 2009, CenterPoint Houston held Level 1 investments of $53 million, which were primarily money market funds.

Level 2:  Inputs, other than quoted prices included in Level 1, are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability. CenterPoint Houston had no Level 2 assets or liabilities at June 30, 2009.

Level 3: Inputs are unobservable for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Unobservable inputs reflect CenterPoint Houston’s judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. CenterPoint Houston develops these inputs based on the best information available, including CenterPoint Houston’s own data.  CenterPoint Houston had no Level 3 assets or liabilities at June 30, 2009.
 
(6)       Related Party Transactions and Major Customers

Related Party Transactions. CenterPoint Houston participates in a money pool through which it can borrow or invest on a short-term basis. Funding needs are aggregated and external borrowing or investing is based on the net cash position. The net funding requirements of the money pool are expected to be met with borrowings by CenterPoint Energy under its revolving credit facility or the sale by CenterPoint Energy of its commercial paper. CenterPoint Houston had borrowings from the money pool of $8 million at December 31, 2008 and investments in the money pool of $157 million at June 30, 2009.

At December 31, 2008 and June 30, 2009, CenterPoint Houston had a $750 million note receivable from its parent.

For the three months ended June 30, 2008 and 2009, CenterPoint Houston had net interest income related to affiliate borrowings of $7 million and $5 million, respectively, and $17 million and $10 million, respectively, for the six months ended June 30, 2008 and 2009.

 
CenterPoint Energy provides some corporate services to CenterPoint Houston. The costs of services have been charged directly to CenterPoint Houston using methods that management believes are reasonable. These methods include negotiated usage rates, dedicated asset assignment and proportionate corporate formulas based on operating expenses, assets, gross margin, employees and a composite of assets, gross margin and employees. These charges are not necessarily indicative of what would have been incurred had CenterPoint Houston not been an affiliate. Amounts charged to CenterPoint Houston for these services were $29 million and $30 million for the three months ended June 30, 2008 and 2009, respectively, and $58 million and $62 million for the six months ended June 30, 2008 and 2009, respectively, and are included primarily in operation and maintenance expenses.

Major Customers. Revenues derived from energy delivery charges to CenterPoint Houston’s largest customer, a REP that was formerly a subsidiary of RRI and is currently a subsidiary of NRG Energy, Inc., totaled $151 million for each of the three months ended June 30, 2008 and 2009 and $293 million for each of the six months ended June 30, 2008 and 2009.  In May 2009, RRI completed the previously announced sale of its Texas retail business to NRG Retail LLC, a subsidiary of NRG Energy, Inc.

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

(a) Short-term Borrowings

Revolving Credit Facility. CenterPoint Houston’s $600 million 364-day credit facility is secured by a pledge of $600 million of CenterPoint Houston’s general mortgage bonds. Borrowing costs for the London Interbank Offered Rate (LIBOR)-based loans under such facility will be at a margin of 2.25 percent above LIBOR rates, based on CenterPoint Houston’s current ratings. In addition, CenterPoint Houston will pay lenders, based on current ratings, a per annum commitment fee of 0.5 percent for their commitments under the facility and a quarterly duration fee of 0.75 percent on the average amount of outstanding borrowings during the quarter. The spread to LIBOR and the commitment fee fluctuate based on CenterPoint Houston’s credit rating. The facility contains covenants, including a debt (excluding transition and other securitization bonds) to total capitalization covenant. Bank fees associated with the establishment of this credit facility aggregated approximately $13 million.  From inception through June 30, 2009, there have been no borrowings under the credit facility.

In April 2009, the Texas Legislature enacted legislation that authorizes the Texas Utility Commission to conduct proceedings to determine the amount of system restoration costs associated with hurricanes or other major storms that utilities are entitled to recover.  The legislation authorizes the Texas Utility Commission to issue a financing order that would permit a utility like CenterPoint Houston to recover the distribution portion of those costs through the issuance of non-recourse system restoration bonds similar to the securitization bonds issued previously. CenterPoint Houston filed an application for a financing order in July 2009 and expects to issue such bonds during 2009.  CenterPoint Houston’s $600 million credit facility will terminate prior to its November 24, 2009 scheduled expiration date if bonds are issued to securitize costs incurred as a result of Hurricane Ike.
 
(b) Long-term Debt

General Mortgage Bonds. In January 2009, CenterPoint Houston issued $500 million aggregate principal amount of general mortgage bonds, due in March 2014 with an interest rate of 7.00%.  The proceeds from the sale of the bonds were used for general corporate purposes, including the repayment of outstanding borrowings under its revolving credit facility and the money pool, capital expenditures and storm restoration costs associated with Hurricane Ike.

Revolving Credit Facility. CenterPoint Houston’s $289 million credit facility’s first drawn cost is LIBOR plus 45 basis points based on CenterPoint Houston’s current credit ratings. The facility contains a debt (excluding transition and other securitization bonds) to total capitalization covenant.  An additional utilization fee of 5 basis points applies to borrowings any time more than 50% of the facility is utilized. The spread to LIBOR and the utilization fee fluctuate based on CenterPoint Houston’s credit rating.

As of December 31, 2008 and June 30, 2009, CenterPoint Houston had $251 million and $-0- of borrowings, respectively, under its $289 million credit facility. In addition, CenterPoint Houston had approximately $4 million of outstanding letters of credit under its $289 million credit facility as of both December 31, 2008 and June 30, 2009. CenterPoint Houston was in compliance with all debt covenants as of June 30, 2009.

 
Other. At both December 31, 2008 and June 30, 2009, CenterPoint Houston had issued $151 million of first mortgage bonds and $527 million of general mortgage bonds as collateral for long-term debt of CenterPoint Energy. These bonds are not reflected in the consolidated financial statements because of the contingent nature of the obligations.

(8)       Commitments and Contingencies

Legal Matters

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

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

Environmental Matters

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

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

Other Proceedings

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

(9)       Income Taxes

During the three months and six months ended June 30, 2008, the effective tax rate was 36% and 38%, respectively.  During the three months and six months ended June 30, 2009, the effective tax rate was 39% and 40%, respectively.

The following table summarizes CenterPoint Houston’s uncertain tax positions in accordance with FASB Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109,” at December 31, 2008 and June 30, 2009:

   
December 31,
2008
   
June 30,
2009
 
   
(in millions)
 
Liability for uncertain tax positions                                                                          
  $ 123     $ 177  
Portion of liability for uncertain tax positions that, if
    recognized, would reduce the effective income tax rate
    11       13  
Interest accrued on uncertain tax positions                                                                          
    14       22  

In July 2009, CenterPoint Energy settled its federal income tax returns for tax years 2004 and 2005.  As a result of the settlement, CenterPoint Houston, included in the consolidated income tax returns of CenterPoint Energy, expects to recognize a reduction in the liability for uncertain tax positions of approximately $37 million.
 

(10)       Estimated Fair Value of Financial Instruments

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

   
December 31, 2008
   
June 30, 2009
 
   
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
   
(in millions)
 
Financial liabilities:
                       
Long-term debt (including $151 million of long-
    term notes payable to parent and excluding
    capital leases)
  $ 4,582     $ 4,424     $ 4,728     $ 4,842  

(11)       Subsequent Events

CenterPoint Houston has evaluated all subsequent events through the date these Interim Condensed Financial Statements were issued, which was August 11, 2009.
 
 
ITEM 2.    MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS

The following narrative analysis should be read in combination with our Interim Condensed Financial Statements contained in this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 10-K).

We meet the conditions specified in General Instruction H(1)(a) and (b) to Form 10-Q and are therefore permitted to use the reduced disclosure format for wholly owned subsidiaries of reporting companies.  Accordingly, we have omitted from this report the information called for by Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations), Item 3 (Quantitative and Qualitative Disclosures About Market Risk) of Part I and the following Part II items of Form 10-Q: Item 2 (Unregistered Sales of Equity Securities and Use of Proceeds), Item 3 (Defaults Upon Senior Securities) and Item 4 (Submission of Matters to a Vote of Security Holders).  The following discussion explains material changes in our results of operations between the three and six months ended June 30, 2008 and the three and six months ended June 30, 2009.  Reference is made to “Management’s Narrative Analysis of Results of Operations” in Item 7 of our 2008 Form 10-K.

Recent Events

Hurricane Ike

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

As is common with electric utilities serving coastal regions, the poles, towers, wires, street lights and pole mounted equipment that comprise our transmission and distribution system are not covered by property insurance, but office buildings and warehouses and their contents and substations are covered by insurance that provides for a maximum deductible of $10 million. Current estimates are that total losses to property covered by this insurance were approximately $17 million.

We deferred the uninsured system restoration costs as management believes it is probable that such costs will be recovered through the regulatory process. As a result, system restoration costs did not affect our reported net income for 2008 or the first six months of 2009. As of June 30, 2009, we had balances of $163 million in property, plant and equipment and $442 million in regulatory assets related to restoration costs incurred through June 30, 2009.  In April 2009, we filed with the Public Utility Commission of Texas (Texas Utility Commission) an application for review and approval for recovery of approximately $608 million in system restoration costs identified as of the end of February 2009, plus $2 million in regulatory expenses, $13 million in certain debt issuance costs, and $55 million in projected carrying costs, pursuant to the legislation described below.  We expect to incur additional costs, currently estimated at $12 million, related to Hurricane Ike, principally related to the reconstruction of certain substations on Galveston Island, and will seek to recover those costs through the regulatory process at a later date.

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

In accordance with the legislation discussed above, we have recorded a regulatory asset of $41 million representing the carrying costs on recoverable system restoration costs for the period from September 12, 2008
 
 
15

 
through June 30, 2009.  We will continue to accrue carrying costs until the associated system restoration costs are recovered by us, either through rates or through the issuance of system restoration bonds, as discussed above.  The carrying costs are based on the cost of capital established by the Texas Utility Commission in our 2001 rate proceeding.   In accordance with SFAS No. 92, “Regulated Enterprises — Accounting for Phase-in Plans,” the carrying costs have been bifurcated into two components: (i) return of borrowing costs and (ii) an allowance for earnings on shareholders’ investment.  The component representing a return of borrowing costs of $14 million has been recognized in the second quarter of 2009 and is included in other income in our Condensed Statements of Consolidated Income.  That component will continue to be recognized as earned until the associated system restoration costs are recovered.  The component representing an allowance for earnings on shareholders’ investment of $27 million is being deferred and will be recognized as it is collected through rates or, if the system restoration costs are recovered through issuance of system restoration bonds, over the life of those bonds.

In the application we filed in April 2009, we sought approval for recovery of a total of approximately $678 million, including the $608 million in system restoration costs described above plus related regulatory expenses, certain debt issuance costs and carrying costs calculated through August 2009. On July 31, 2009, we announced that we had reached a settlement agreement with the parties to the proceeding.  Under the terms of that settlement agreement, we will be entitled to recover a total of $663 million in costs relating to Hurricane Ike, along with carrying costs from September 1, 2009 until system restoration bonds are issued.  The Texas Utility Commission is expected to take final action on our application and the settlement agreement in August 2009.  In July 2009, we filed with the Texas Utility Commission our application for a financing order to recover the portion of approved costs related to distribution service through the issuance of system restoration bonds.  Based on the $663 million in total costs that would be approved under the settlement agreement, approximately $643 million, plus certain costs of issuance, are eligible to be recovered through the issuance of system restoration bonds.  The exact size of the bond offering will be determined by the Texas Utility Commission in a hearing currently scheduled for September 2009.  The Texas Utility Commission’s financing order, which would authorize issuance of the system restoration bonds, is expected to contain provisions related to the regulatory treatment of deferred federal income taxes associated with the costs to be recovered.  In previous securitization cases, the Texas Utility Commission has reduced the amount of costs eligible for securitization by the benefit of those deferred taxes.  Assuming system restoration bonds are issued, we will recover the distribution portion of approved system restoration costs out of the bond proceeds, with the bonds being repaid over time through a charge imposed on customers.  We will seek to recover the remaining approximately $20 million of Hurricane Ike costs related to transmission service through the existing transmission cost of service process.  Although there can be no assurance that the Texas Utility Commission’s orders will authorize recovery or securitization of the full amounts set forth in the settlement agreement, we do not believe the outcome of these proceedings will have a material adverse impact on our financial condition, results of operations or cash flows.
 

CONSOLIDATED RESULTS OF OPERATIONS

Our results of operations are affected by seasonal fluctuations in the demand for electricity. Our results of operations are also affected by, among other things, the actions of various governmental authorities having jurisdiction over rates we charge, debt service costs, income tax expense, our ability to collect receivables from retail electric providers (REPs) and our ability to recover our stranded costs and regulatory assets. For more information regarding factors that may affect the future results of operations of our business, please read “Risk Factors” in Item 1A of Part I of the 2008 Form 10-K.
 
The following table sets forth our consolidated results of operations for the three and six months ended June 30, 2008 and 2009, followed by a discussion of our consolidated results of operations based on operating income.
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2008
   
2009
   
2008
   
2009
 
   
(in millions, except customer data)
 
Revenues:
                       
Electric transmission and distribution utility
  $ 419     $ 432     $ 765     $ 778  
Transition bond companies
    91       89       154       155  
Total revenues
    510       521       919       933  
Expenses:
                               
Operation and maintenance, excluding transition bond
    companies
     167        181        335        369  
Depreciation and amortization, excluding transition
    bond companies
     71        69        137        137  
Taxes other than income taxes
    52       53       105       106  
Transition bond companies
    56       56       87       89  
Total expenses
    346       359       664       701  
Operating income
    164       162       255       232  
Interest and other finance charges
    (26 )     (40 )     (53 )     (79 )
Interest on transition bonds
    (35 )     (33 )     (68 )     (66 )
Other income, net
    10       20       23       27  
Income before income taxes
    113       109       157       114  
Income tax expense
    (41 )     (42 )     (59 )     (45 )
Net income
  $ 72     $ 67     $ 98     $ 69  
                                 
Throughput (in gigawatt-hours (GWh)):
                               
Residential
    6,774       6,831       11,177       10,798  
Total
    20,360       19,841       36,929       34,983  
                                 
Number of metered customers at period end:
                               
Residential
    1,820,092       1,846,908       1,820,092       1,846,908  
Total
    2,063,924       2,092,209       2,063,924       2,092,209  

Three months ended June 30, 2009 compared to three months ended June 30, 2008

We reported operating income of $162 million for the three months ended June 30, 2009, consisting of $129 million from the regulated electric transmission and distribution utility (TDU) and $33 million related to transition bond companies. For the three months ended June 30, 2008, operating income totaled $164 million, consisting of $129 million from the TDU and $35 million related to transition bond companies. TDU revenues increased $13 million primarily due to higher transmission-related revenues ($15 million), higher revenues due to customer growth ($3 million) from the addition of over 28,000 new customers and revenues from implementation of the advanced metering system (AMS) ($3 million), which were partially offset by declines in use ($4 million), primarily caused by milder weather, and lower other revenues ($2 million).  Operation and maintenance expenses increased $14 million primarily due to higher transmission costs billed by transmission providers ($6 million) and a gain on a land sale in 2008 ($9 million).

 
Six months ended June 30, 2009 compared to six months ended June 30, 2008

We reported operating income of $232 million for the six months ended June 30, 2009, consisting of $166 million from the TDU and $66 million related to transition bond companies. For the six months ended June 30, 2008, operating income totaled $255 million, consisting of $183 million from the TDU, exclusive of an additional $5 million from the CTC and $67 million related to transition bond companies. TDU revenues increased $13 million primarily due to higher transmission-related revenues ($27 million), higher revenues due to customer growth ($7 million) from the addition of over 28,000 new customers and revenues from implementation of AMS ($8 million), which were partially offset by declines in use ($22 million), in part caused by milder weather, and lower other revenues ($3 million).  Operation and maintenance expenses increased $34 million primarily due to higher transmission costs billed by transmission providers ($15 million), higher pension expense ($6 million), AMS project expenses ($3 million) and a gain on a land sale in 2008 ($9 million). Future changes in pension expense over our 2007 base year amount will be deferred until our next general rate case pursuant to Texas regulatory provisions.

Interest and Other Finance Charges

Interest and other finance charges increased for the three months and six months ended June 30, 2009 by $14 million and $26 million, respectively, due to increased borrowing levels in 2009 compared to the same periods in 2008.

Income Tax Expense

During the three months and six months ended June 30, 2008, the effective tax rate was 36% and 38%, respectively.  During the three months and six months ended June 30, 2009, the effective tax rate was 39% and 40%, respectively.

CERTAIN FACTORS AFFECTING FUTURE EARNINGS

For information on other developments, factors and trends that may have an impact on our future earnings, please read “Risk Factors” in Item 1A of Part I and “Management’s Narrative Analysis of Results of Operations — Certain Factors Affecting Future Earnings” in Item 7 of Part II of our 2008 Form 10-K and “Cautionary Statement Regarding Forward-Looking Information.”

On May 1, 2009, RRI Energy, Inc. (RRI) (formerly known as Reliant Energy, Inc. and Reliant Resources, Inc.) completed the previously announced sale of its Texas retail business to NRG Retail LLC, a subsidiary of NRG Energy, Inc.  The NRG Energy, Inc. subsidiary is the successor to the retail electric sales business of RRI and has become the largest REP in our service territory.  Under the terms of the separation agreement between us and RRI, a successor to RRI’s businesses, such as the retail electric business acquired by the NRG Energy, Inc. subsidiary, must assume certain indemnity obligations described in that separation agreement to the extent those obligations relate to the businesses acquired.  In connection with the sale, RRI changed its name to RRI Energy, Inc. and no longer provides service as a REP in our service territory. The sale does not alter RRI’s contractual obligations to indemnify us for certain liabilities, including their indemnification regarding certain litigation.

LIQUIDITY AND CAPITAL RESOURCES

Our liquidity and capital requirements are affected primarily by our results of operations, capital expenditures, debt service requirements, tax payments, working capital needs, various regulatory actions and appeals relating to such regulatory actions. Our principal cash requirements for the remaining six months of 2009 include approximately $238 million of capital expenditures and $104 million of scheduled payments on transition bonds.

We expect that borrowings under our credit facilities, anticipated cash flows from operations and intercompany borrowings will be sufficient to meet our anticipated cash needs in the remainder of 2009. Cash needs or discretionary financing or refinancing may result in the issuance of debt securities in the capital markets or the arrangement of additional credit facilities.  Issuances of debt in the capital markets and additional credit facilities may not, however, be available to us on acceptable terms.
 

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

Credit Facilities. As of July 27, 2009, we had the following facilities (in millions):

Date Executed
Type of Facility
 
Size of
Facility
   
Amount
Utilized at
July 27, 2009
 
Termination Date
June 29, 2007
Revolver
  $ 289     $ 4 (1)
June 29, 2012
November 25, 2008
Revolver
    600        
November 24, 2009
 
________
 
(1)
Includes $4 million of outstanding letters of credit.

Our $289 million credit facility’s first drawn cost is London Interbank Offered Rate (LIBOR) plus 45 basis points based on our current credit ratings. The facility contains a debt (excluding transition and other securitization bonds) to total capitalization covenant.  An additional utilization fee of 5 basis points applies to borrowings any time more than 50% of the facility is utilized. The spread to LIBOR and the utilization fee fluctuate based on our credit rating.

Our $600 million 364-day credit facility is secured by a pledge of $600 million of general mortgage bonds issued by us. Borrowing costs for the LIBOR-based loans under such facility will be at a margin of 2.25 percent above LIBOR rates, based on our current ratings. In addition, we will pay lenders, based on current ratings, a per annum commitment fee of 0.5 percent for their commitments under the facility and a quarterly duration fee of 0.75 percent on the average amount of outstanding borrowings during the quarter. The spread to LIBOR and the commitment fee fluctuate based on our credit rating. The facility contains covenants, including a debt (excluding transition and other securitization bonds) to total capitalization covenant. The credit facility will terminate prior to its November 24, 2009 scheduled expiration date if bonds are issued to securitize costs incurred as a result of Hurricane Ike.

Borrowings under each of the facilities 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 each of the credit facilities are subject to acceleration upon the occurrence of events of default that we consider customary.

We are currently in compliance with the various business and financial covenants contained in the respective credit facilities as disclosed above.

Securities Registered with the SEC. In October 2008, we registered an indeterminate principal amount of our general mortgage bonds under a joint registration statement with CenterPoint Energy.

Temporary Investments. As of July 27, 2009, 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 under CenterPoint Energy’s revolving credit facility or the sale of CenterPoint Energy’s commercial paper. At July 27, 2009, we had investments in the money pool aggregating $170 million. The money pool may not provide sufficient funds to meet our cash needs.

Long-term Debt. Our long-term debt consists of our obligations and the transition bonds issued by our wholly owned subsidiaries. At June 30, 2009, CenterPoint Energy Transition Bond Company, LLC (TBC) had $424 million aggregate principal amount of outstanding transition bonds that were issued in 2001, CenterPoint Energy Transition Bond Company II, LLC (TBC II) had $1.593 billion aggregate principal amount of outstanding transition bonds that were issued in 2005 and CenterPoint Energy Transition Bond Company III, LLC (TBC III) had $468 million aggregate principal amount of outstanding transition bonds that were issued in February 2008. All of the transition bonds were issued in accordance with the Texas Electric Choice Plan (Texas electric restructuring law). The transition bonds are secured by “transition property,” as defined in the Texas electric restructuring law, which includes the irrevocable right to recover, through non-bypassable transition charges payable by retail electric customers, qualified costs provided in the Texas electric restructuring law. The transition bonds are reported as our
 
 
19

 
long-term debt, although the holders of the transition bonds have no recourse to any of our assets or revenues, and our creditors have no recourse to any assets or revenues (including, without limitation, the transition charges) of the bond companies. We have no payment obligations with respect to the transition bonds except to remit collections of transition charges as set forth in the servicing agreements between us and the bond companies and in an intercreditor agreement among us, the bond companies and other parties.

The following table shows future maturity dates of long-term debt issued by us to third parties and affiliates and scheduled future payment dates of transition bonds issued by our subsidiaries, TBC, TBC II and TBC III, as of June 30, 2009. Amounts are expressed in millions.

Year
 
Third-Party
   
Affiliate
   
Sub-Total
   
Transition
Bonds
   
Total
 
2009
  $     $     $     $ 104     $ 104  
2010
                      221       221  
2011
                      240       240  
2012
    46             46       262       308  
2013
    450             450       283       733  
2014
    800             800       188       988  
2015
          151       151       201       352  
2016
                      215       215  
2017
    127             127       231       358  
2018
                      247       247  
2019
                      264       264  
2020
                      29       29  
2021
    102             102             102  
2023
    200             200             200  
2027
    56             56             56  
2033
    312             312             312  
Total
  $ 2,093     $ 151     $ 2,244     $ 2,485     $ 4,729  

As of June 30, 2009, outstanding first mortgage bonds and general mortgage bonds aggregated approximately $3.4 billion as shown in the following table. Amounts are expressed in millions.

   
Issued Directly
to Third Parties
   
Issued as
Collateral for
CenterPoint Houston’s Debt
   
Issued as
Collateral for
CenterPoint
Energy’s Debt
   
Total
 
First Mortgage Bonds
  $ 102     $     $ 151     $ 253  
General Mortgage Bonds
    1,762       829       527       3,118  
Total
  $ 1,864     $ 829     $ 678     $ 3,371  

The lien of the general mortgage indenture is junior to that of the mortgage pursuant to which the first mortgage bonds are issued. We may issue additional general mortgage bonds on the basis of retired bonds, 70% of property additions or cash deposited with the trustee. Approximately $1.4 billion of additional first mortgage bonds and general mortgage bonds could be issued on the basis of retired bonds and 70% of property additions as of June 30, 2009. However, we have contractually agreed not to issue additional first mortgage bonds, subject to certain exceptions.
 

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

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

Impact on Liquidity of a Downgrade in Credit Ratings. As of August 3, 2009, Moody’s Investors Service, Inc. (Moody’s), Standard & Poor’s Ratings Services, a division of The McGraw Hill Companies (S&P), and Fitch, Inc. (Fitch) had assigned the following credit ratings to our senior debt.

   
Moody’s
 
S&P
 
Fitch
Instrument
 
Rating
 
Outlook(1)
 
Rating
 
Outlook (2)
 
Rating
 
Outlook (3)
Senior Secured Debt (First Mortgage Bonds)
 
Baa1
 
Stable
 
BBB+
 
Negative
 
A-
 
Stable
Senior Secured Debt (General Mortgage Bonds)
 
Baa1
 
Stable
 
BBB+
 
Negative
 
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 “stable” outlook from Fitch encompasses a one-to-two year horizon as to the likely ratings direction.

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

A decline in credit ratings could increase borrowing costs under our two credit facilities.  A decline in credit ratings would also increase the interest rate on long-term debt to be issued in the capital markets and could negatively impact our ability to complete capital market transactions.

Cross Defaults. Under CenterPoint Energy’s $1.2 billion revolving credit facility, a payment default on, or a non-payment default that permits acceleration of, any indebtedness exceeding $50 million by us will cause a default. In addition, four outstanding series of CenterPoint Energy’s senior notes, aggregating $950 million in principal amount as of June 30, 2009, 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 facilities.
 
Other Factors that Could Adversely Affect Cash Requirements. In addition to the above factors, our liquidity and capital resources could be adversely affected by:
 
 
increases in interest expense in connection with debt refinancings and borrowings under credit facilities;

 
various regulatory actions;

 
the ability of RRI and its subsidiaries and any successor companies to satisfy their obligations in respect of

 
RRI’s indemnity obligations to us and our subsidiaries;

 
the ability of NRG Retail, LLC, the successor to RRI’s REP and our largest customer, to satisfy its obligations to us and our subsidiaries;

 
the outcome of litigation brought by and against us;

 
restoration costs and revenue losses resulting from natural disasters such as hurricanes and the timing of recovery of such restoration costs; and
 
 
various other risks identified in “Risk Factors” in Item 1A of our 2008 Form 10-K.

Certain Contractual Limits on Our Ability to Issue Securities and Borrow Money. Our credit facilities limit our debt (excluding transition and other securitization bonds) as a percentage of our total capitalization to 65%. Additionally, we have contractually agreed that we will not issue additional first mortgage bonds, subject to certain exceptions.
 
Relationship with CenterPoint Energy. We are an indirect wholly owned subsidiary of CenterPoint Energy. As a result of this relationship, the financial condition and liquidity of our parent company could affect our access to capital, our credit standing and our financial condition.
 
NEW ACCOUNTING PRONOUNCEMENTS

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

Item 4T.       CONTROLS AND PROCEDURES

In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2009 to provide assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure.

There has been no change in our internal controls over financial reporting that occurred during the three months ended June 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II.  OTHER INFORMATION

Item 1.          LEGAL PROCEEDINGS

For a discussion of material legal and regulatory proceedings affecting us, please read Notes 4 and 8 to our Interim Condensed Financial Statements, each of which is incorporated herein by reference. See also “Business — Regulation” and “— Environmental Matters” in Item 1 and “Legal Proceedings” in Item 3 of our 2008 Form 10-K.

Item 1A.       RISK FACTORS

There have been no material changes from the risk factors disclosed in our 2008 Form 10-K.
 

Item 5.          OTHER INFORMATION

Our ratio of earnings to fixed charges for the six months ended June 30, 2008 and 2009 was 2.22 and 1.77, respectively. We do not believe that the ratios for these six-month periods are necessarily indicative of the ratios for the twelve-month periods due to the seasonal nature of our business. The ratios were calculated pursuant to applicable rules of the Securities and Exchange Commission.

Item 6.          EXHIBITS

The following exhibits are filed herewith:

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

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

Exhibit Number
 
Description
 
Report or Registration
Statement
 
SEC File or
Registration
Number
 
Exhibit
References
3.1
 
Articles of Organization of CenterPoint Houston
 
CenterPoint Houston’s Form 8-K dated August 31, 2002 filed with the SEC on September 3, 2002
 
 
1-3187
 
3(b)
3.2
 
Limited Liability Company Regulations of CenterPoint Houston
 
CenterPoint Houston’s Form 8-K dated August 31, 2002 filed with the SEC on September 3, 2002
 
 
1-3187
 
3(c)
4.1
 
$300,000,000 Second Amended and Restated Credit Agreement, dated as of June 29, 2007, among CenterPoint Houston, as Borrower, and the banks named therein
 
 
CenterPoint Houston’s Form 10-Q for the quarter ended June 30, 2007
 
1-3187
 
4.1
4.2
 
First Amendment to Exhibit 4.1, dated as of November 18, 2008, among CenterPoint Houston, as Borrower, and the banks named therein
 
 
CenterPoint Energy’s Form 8-K dated November 18, 2008
 
1-31447
 
4.2
4.3
 
$600,000,000 Credit Agreement dated as of November 25, 2008, among CenterPoint Houston, as Borrower, and the banks named therein
 
 
CenterPoint Energy’s Form 8-K dated November 25, 2008
 
1-31447
 
4.1
 
 
Exhibit Number
 
Description
 
Report or Registration
Statement
 
SEC File or
Registration
Number
 
Exhibit
References
+12
 
Computation of Ratios of Earnings to Fixed Charges
 
           
+31.1
 
Rule 13a-14(a)/15d-14(a) Certification of David M. McClanahan
 
           
+31.2
 
Rule 13a-14(a)/15d-14(a) Certification of Gary L. Whitlock
 
           
+32.1
 
Section 1350 Certification of David M. McClanahan
 
           
+32.2
 
Section 1350 Certification of Gary L. Whitlock
 
           
+99.1
 
Items incorporated by reference from the CenterPoint Houston Form 10-K.  Item 1A “—Risk Factors.”
 
           
 

 
 
 
 
SIGNATURES



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

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

Date:  August 11, 2009

 
 
 
 
 
Index to Exhibits
 
    The following exhibits are filed herewith:
 
    Exhibits not incorporated by reference to a prior filing are designated by a cross (+); all exhibits not so designated are incorporated by reference to a prior filing of CenterPoint Houston or CenterPoint Energy as indicated.
   
    Agreements included as exhibits are included only to provide information to investors regarding their terms. Agreements listed below may contain representations, warranties and other provisions that were made, among other things, to provide the parties thereto with specified rights and obligations and to allocate risk among them, and no such agreement should be relied upon as constituting or providing any factual disclosures about CenterPoint Energy Houston Electric, LLC, any other persons, any state of affairs or other matters.

Exhibit Number
 
Description
 
Report or Registration
Statement
 
SEC File or
Registration
Number
 
Exhibit
References
3.1
 
Articles of Organization of CenterPoint Houston
 
CenterPoint Houston’s Form 8-K dated August 31, 2002 filed with the SEC on September 3, 2002
 
 
1-3187
 
3(b)
3.2
 
Limited Liability Company Regulations of CenterPoint Houston
 
CenterPoint Houston’s Form 8-K dated August 31, 2002 filed with the SEC on September 3, 2002
 
 
1-3187
 
3(c)
4.1
 
$300,000,000 Second Amended and Restated Credit Agreement, dated as of June 29, 2007, among CenterPoint Houston, as Borrower, and the banks named therein
 
 
CenterPoint Houston’s Form 10-Q for the quarter ended June 30, 2007
 
1-3187
 
4.1
4.2
 
First Amendment to Exhibit 4.1, dated as of November 18, 2008, among CenterPoint Houston, as Borrower, and the banks named therein
 
 
CenterPoint Energy’s Form 8-K dated November 18, 2008
 
1-31447
 
4.2
4.3
 
$600,000,000 Credit Agreement dated as of November 25, 2008, among CenterPoint Houston, as Borrower, and the banks named therein
 
 
CenterPoint Energy’s Form 8-K dated November 25, 2008
 
1-31447
 
4.1
+12
 
Computation of Ratios of Earnings to Fixed Charges
 
           
+31.1
 
Rule 13a-14(a)/15d-14(a) Certification of David M. McClanahan
 
           
+31.2
 
Rule 13a-14(a)/15d-14(a) Certification of Gary L. Whitlock
 
           
+32.1
 
Section 1350 Certification of David M. McClanahan
 
           
+32.2
 
Section 1350 Certification of Gary L. Whitlock
 
           
 
 
Exhibit Number
 
Description
 
Report or Registration
Statement
 
SEC File or
Registration
Number
 
Exhibit
References
+99.1
 
Items incorporated by reference from the CenterPoint Houston Form 10-K.  Item 1A “—Risk Factors.”
 
           
 
 

 
 
27

 
ex12.htm
Exhibit 12


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

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

   
    Six Months Ended June 30,
 
   
     2008 (1)
   
     2009 (1)
 
             
Net Income
  $ 98     $ 69  
Income taxes
    59       45  
Capitalized interest
    (4 )     (2 )
      153       112  
                 
Fixed charges, as defined:
               
                 
Interest                                                                                   
    121       145  
Capitalized interest                                                                                   
    4       2  
Interest component of rentals charged to operating income
           
Total fixed charges                                                                                   
    125       147  
                 
Earnings, as defined
  $ 278     $ 259  
                 
Ratio of earnings to fixed charges
    2.22       1.77  
  ________
 
(1)
Excluded from the computation of fixed charges for the six months ended June 30, 2008 and 2009 is interest expense of $3 million and $8 million, respectively, which is included in income tax expense.
 

 

 
 

 

ex31-1.htm
 
Exhibit 31.1
 
CERTIFICATIONS
 
I, David M. McClanahan, certify that:
 
1.           I have reviewed this quarterly report on Form 10-Q of CenterPoint Energy Houston Electric, LLC;
 
2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.           Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.           The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.           The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:  August 11, 2009
 
 
/s/ David M. McClanahan
 
David M. McClanahan
 
Chairman (Principal Executive Officer)

 
 

 

ex31-2.htm
 
Exhibit 31.2
 
CERTIFICATIONS
 
I, Gary L. Whitlock, certify that:
 
1.           I have reviewed this quarterly report on Form 10-Q of CenterPoint Energy Houston Electric, LLC;
 
2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.           Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.           The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.           The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:  August 11, 2009
 
 
/s/ Gary L. Whitlock
 
Gary L. Whitlock
 
Executive Vice President and Chief Financial Officer

 
 

 

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

In connection with the Quarterly Report of CenterPoint Energy Houston Electric, LLC (the “Company”) on Form 10-Q for the quarter ended June 30, 2009 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, David M. McClanahan, Chairman (Principal Executive Officer), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

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

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


/s/ David M. McClanahan
 
David M. McClanahan
 
Chairman (Principal Executive Officer)
 
August 11, 2009
 
 
 

 
 
 

 

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

In connection with the Quarterly Report of CenterPoint Energy Houston Electric, LLC (the “Company”) on Form 10-Q for the quarter ended June 30, 2009 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Gary L. Whitlock, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

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

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


/s/ Gary L. Whitlock
 
Gary L. Whitlock
 
Executive Vice President and Chief Financial Officer
 
August 11, 2009
 
 

 
 

 
 

 

ex99-1.htm
Exhibit 99.1

Item 1A.  Risk Factors

The following, along with any additional legal proceedings identified or incorporated by reference in Item 3 of this report, summarizes the principal risk factors associated with our business.
 
Risk Factors Affecting Our Business

We may not be successful in ultimately recovering the full value of our true-up components, which could result in the elimination of certain tax benefits and could have an adverse impact on our results of operations, financial condition and cash flows.

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

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

 
reversed the Texas Utility Commission’s ruling that had denied recovery of a portion of the capacity auction true-up amounts;
 
 
reversed the Texas Utility Commission’s ruling that precluded us from recovering the interest component of the EMCs paid to REPs; and
 
 
affirmed the True-Up Order in all other respects.
 
The district court’s decision would have had the effect of restoring approximately $650 million, plus interest, of the $1.7 billion the Texas Utility Commission had disallowed from our initial request.

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

 
reversed the district court’s judgment to the extent it restored the capacity auction true-up amounts;
 
 
reversed the district court’s judgment to the extent it upheld the Texas Utility Commission’s decision to allow us to recover EMCs paid to RRI;
 
 
ordered that the tax normalization issue described below be remanded to the Texas Utility Commission as requested by the Texas Utility Commission; and
 
 
affirmed the district court’s judgment in all other respects.
 
In April 2008, the court of appeals denied all motions for rehearing and reissued substantially the same opinion as it had rendered in December 2007.

In June 2008, we petitioned the Texas Supreme Court for review of the court of appeals decision. In our petition, we seek reversal of the parts of the court of appeals decision that (i) denied recovery of EMCs paid to RRI, (ii) denied recovery of the capacity auction true-up amounts allowed by the district court, (iii) affirmed the Texas Utility Commission’s rulings that denied recovery of approximately $378 million related to depreciation and (iv) affirmed the Texas Utility Commission’s refusal to permit us to utilize the partial stock valuation methodology for determining the market value of its former generation assets. Two other petitions for review were filed with the Texas Supreme Court by other parties to the appeal. In those petitions parties contend that (i) the Texas Utility Commission was without authority to fashion the methodology it used for valuing the former generation assets after

 
1

 

it had determined that we could not use the partial stock valuation method, (ii) in fashioning the method it used for valuing the former generating assets, the Texas Utility Commission deprived parties of their due process rights and an opportunity to be heard, (iii) the net book value of the generating assets should have been adjusted downward due to the impact of a purchase option that had been granted to RRI, (iv) we should not have been permitted to recover construction work in progress balances without proving those amounts in the manner required by law and (v) the Texas Utility Commission was without authority to award interest on the capacity auction true-up award.

Review by the Texas Supreme Court of the court of appeals decision is at the discretion of the court. In November 2008, the Texas Supreme Court requested the parties to the Petitions for Review to submit briefs on the merits of the issues raised.  Briefing at the Texas Supreme Court should be completed in the second quarter of 2009.    Although the Texas Supreme Court has not indicated whether it will grant review of the lower court’s decision, its request for full briefing on the merits allowed the parties to more fully explain their positions. There is no prescribed time in which the Texas Supreme Court must determine whether to grant review or, if review is granted, for a decision by that court. Although we and CenterPoint Energy believe that our true-up request is consistent with applicable statutes and regulations and, accordingly, that it is reasonably possible that we will be successful in our appeal to the Texas Supreme Court, we can provide no assurance as to the ultimate court rulings on the issues to be considered in the appeal or with respect to the ultimate decision by the Texas Utility Commission on the tax normalization issue described below.

To reflect the impact of the True-Up Order, in 2004 and 2005, we recorded a net after-tax extraordinary loss of $947 million. No amounts related to the district court’s judgment or the decision of the court of appeals have been recorded in our consolidated financial statements. However, if the court of appeals decision is not reversed or modified as a result of further review by the Texas Supreme Court, we anticipate that we would be required to record an additional loss to reflect the court of appeals decision. The amount of that loss would depend on several factors, including ultimate resolution of the tax normalization issue described below and the calculation of interest on any amounts we ultimately are authorized to recover or are required to refund beyond the amounts recorded based on the True-Up Order, but could range from $170 million to $385 million (pre-tax) plus interest subsequent to December 31, 2008.

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

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

 
2

 
 
We must seek recovery of significant restoration costs arising from Hurricane Ike.

Our electric delivery system suffered substantial damage as a result of Hurricane Ike, which struck the upper Texas coast on September 13, 2008. We estimate that total costs to restore the electric delivery facilities damaged as a result of Hurricane Ike will be in the range of $600 million to $650 million.

We believe we are entitled to recover prudently incurred storm costs in accordance with applicable regulatory and legal principles. The Texas Legislature currently is considering  passage of legislation that would (i) authorize the Texas Utility Commission to determine the amount of storm restoration costs that we would be entitled to recover and (ii) permit the Texas Utility Commission to issue a financing order that would allow us to recover the amount of storm restoration costs determined in such a proceeding through issuance of dedicated securitization bonds, which would be repaid over time through a charge imposed on REPs. In proceedings to determine and seek recovery of storm restoration costs under the proposed legislation, we would be required to prove to the Texas Utility Commission’s satisfaction our prudently incurred costs as well as to demonstrate the cost benefit from using securitization to recover those costs instead of alternative means.  Alternatively, we have the right to seek recovery of these costs under traditional rate making principles. Our failure to recover costs incurred as a result of Hurricane Ike could adversely affect our liquidity, results of operations and financial condition. For more information about our recovery from Hurricane Ike, please read “Business — Electric Transmission & Distribution — Hurricane Ike” in Item 1 of this report.

Our receivables are concentrated in a small number of REPs, and any delay or default in payment could adversely affect our cash flows, financial condition and results of operations.

Our receivables from the distribution of electricity are collected from REPs that supply the electricity we distribute to their customers. As of December 31, 2008, we did business with 79 REPs. Adverse economic conditions, structural problems in the market served by ERCOT or financial difficulties of one or more REPs could impair the ability of these REPs to pay for our services or could cause them to delay such payments. We depend on these REPs to remit payments on a timely basis. Applicable regulatory provisions require that customers be shifted to a provider of last resort if a REP cannot make timely payments. Applicable Texas Utility Commission regulations significantly limit the extent to which we can demand credit protection from REPs for payments not made prior to the shift to the provider of last resort. However, the Texas Utility Commission is currently considering proposed revisions to those regulations that, as currently proposed, would (i) increase the credit protections that could be required from REPs and (ii) allow utilities to defer the loss of  payments for recovery in a future rate case. Whether such revised regulations will ultimately be adopted and their terms cannot now be determined. RRI, through its subsidiaries, is our largest customer. Approximately 46% of our $141 million in billed receivables from REPs at December 31, 2008 was owed by subsidiaries of RRI. Any delay or default in payment by REPs such as RRI could adversely affect our cash flows, financial condition and results of operations. RRI’s unsecured debt ratings are currently below investment grade. If RRI were unable to meet its obligations, it could consider, among various options, restructuring under the bankruptcy laws, in which event RRI’s subsidiaries might seek to avoid honoring their obligations and claims might be made by creditors involving payments we have received from RRI’s subsidiaries.

Rate regulation of our business may delay or deny our ability to earn a reasonable return and fully recover our costs.

Our rates are regulated by certain municipalities and the Texas Utility Commission based on an analysis of our invested capital and our expenses in a test year. Thus, the rates that we are allowed to charge may not match our expenses at any given time. The regulatory process by which rates are determined may not always result in rates that will produce full recovery of our costs and enable us to earn a reasonable return on our invested capital.

In this regard, pursuant to the Stipulation and Settlement Agreement approved by the Texas Utility Commission in September 2006, until June 30, 2010 we are limited in our ability to request retail rate relief. For more information on the Stipulation and Settlement Agreement, please read “Business — Regulation — State and Local Regulation — Electric Transmission & Distribution — Rate Agreement” in Item 1 of this report.

 
3

 
 
Disruptions at power generation facilities owned by third parties could interrupt our sales of transmission and distribution services.

We transmit and distribute to customers of REPs electric power that the REPs obtain from power generation facilities owned by third parties. We do not own or operate any power generation facilities. If power generation is disrupted or if power generation capacity is inadequate, our sales of transmission and distribution services may be diminished or interrupted, and our results of operations, financial condition and cash flows could be adversely affected.

Our revenues and results of operations are seasonal.

A significant portion of our revenues is derived from rates that we collect from each REP based on the amount of electricity we deliver on behalf of such REP. Thus, our revenues and results of operations are subject to seasonality, weather conditions and other changes in electricity usage, with revenues being higher during the warmer months.

Risk Factors Associated with Our Consolidated Financial Condition

If we are unable to arrange future financings on acceptable terms, our ability to refinance existing indebtedness could be limited.

As of December 31, 2008, we had $4.4 billion of outstanding indebtedness on a consolidated basis, which includes $2.6 billion of non-recourse transition bonds. Our future financing activities may be significantly affected by, among other things:

 
the resolution of the true-up components, including, in particular, the results of appeals to the courts regarding rulings obtained to date;

 
our recovery of costs arising from Hurricane Ike;

 
general economic and capital market conditions;

 
credit availability from financial institutions and other lenders;

 
investor confidence in us and the markets in which we operate;

 
maintenance of acceptable credit ratings by us and CenterPoint Energy;

 
market expectations regarding our future earnings and cash flows;

 
market perceptions of our and CenterPoint Energy’s ability to access capital markets on reasonable terms;

 
our exposure to RRI as our customer and in connection with its indemnification obligations arising in connection with its separation from CenterPoint Energy; and

 
provisions of relevant tax and securities laws.

As of December 31, 2008, we had outstanding approximately $2.6 billion aggregate principal amount of general mortgage bonds, including approximately $527 million held in trust to secure pollution control bonds for which CenterPoint Energy is obligated, $600 million securing borrowings under a credit facility which was unutilized and approximately $229 million held in trust to secure pollution control bonds for which CenterPoint Energy is obligated. Additionally, we had outstanding approximately $253 million aggregate principal amount of first mortgage bonds, including approximately $151 million held in trust to secure certain pollution control bonds for which we are obligated. We may issue additional general mortgage bonds on the basis of retired bonds, 70% of property additions or cash deposited with the trustee. Approximately $1.8 billion of additional first mortgage bonds and general mortgage bonds in the aggregate could be issued on the basis of retired bonds and 70% of property additions as of December 31, 2008. However, we have contractually agreed that we will not issue additional first
 
 
4

 

mortgage bonds, subject to certain exceptions. In January 2009, we issued $500 million aggregate principal amount of general mortgage bonds in a public offering.

Our current credit ratings are discussed in “Management’s Narrative Analysis of Results of Operations — Liquidity— Impact on Liquidity of a Downgrade in Credit Ratings” in Item 7 of this report. These credit ratings may not remain in effect for any given period of time and one or more of these ratings may be lowered or withdrawn entirely by a rating agency. We note that these credit ratings are not recommendations to buy, sell or hold our securities. Each rating should be evaluated independently of any other rating. Any future reduction or withdrawal of one or more of our credit ratings could have a material adverse impact on our ability to access capital on acceptable terms.

The financial condition and liquidity of our parent company could affect our access to capital, our credit standing and our financial condition.
 
Our ratings and credit may be impacted by CenterPoint Energy’s credit standing.  As of December 31, 2008, CenterPoint Energy and its subsidiaries other than us have approximately $953 million principal amount of debt required to be paid through 2011.  This amount excludes amounts related to capital leases, transition bonds and indexed debt securities obligations. If CenterPoint Energy were to experience a deterioration in its credit standing or liquidity difficulties, our access to credit and our ratings could be adversely affected and the repayment of notes receivable from CenterPoint Energy in the amount of $750 million as of December 31, 2008 could be adversely affected.

We are an indirect wholly owned subsidiary of CenterPoint Energy. CenterPoint Energy can exercise substantial control over our dividend policy and business and operations and could do so in a manner that is adverse to our interests.

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

 
·
our payment of dividends;

 
·
decisions on our financings and our capital raising activities;

 
·
mergers or other business combinations; and

 
·
our acquisition or disposition of assets.

There are no contractual restrictions on our ability to pay dividends to CenterPoint Energy. Our management could decide to increase our dividends to CenterPoint Energy to support its cash needs. This could adversely affect our liquidity. However, under our credit facility, our ability to pay dividends is restricted by a covenant that debt, excluding transition bonds, as a percentage of total capitalization may not exceed 65%.

Other Risks

We are subject to operational and financial risks and liabilities arising from environmental laws and regulations.

Our operations are subject to stringent and complex laws and regulations pertaining to health, safety and the environment as described in “Business — Environmental Matters” in Item 1 of this Form 10-K. As an owner or operator of electric transmission and distribution systems, we must comply with these laws and regulations at the federal, state and local levels. These laws and regulations can restrict or impact our business activities in many ways, such as:
 
 
restricting the way we can handle or dispose of wastes;
 
 
5

 
 
 
limiting or prohibiting construction activities in sensitive areas such as wetlands, coastal regions, or areas inhabited by endangered species;
 
 
requiring remedial action to mitigate pollution conditions caused by our operations, or attributable to former operations; and
 
 
enjoining the operations of facilities deemed in non-compliance with permits issued pursuant to such environmental laws and regulations.
 
In order to comply with these requirements, we may need to spend substantial amounts and devote other resources from time to time to:

 
construct or acquire new equipment;
 
 
acquire permits for facility operations;
 
 
modify or replace existing and proposed equipment; and
 
 
clean up or decommission waste disposal areas, fuel storage and management facilities and other locations and facilities.
 
Failure to comply with these laws and regulations may trigger a variety of administrative, civil and criminal enforcement measures, including the assessment of monetary penalties, the imposition of remedial actions, and the issuance of orders enjoining future operations. Certain environmental statutes impose strict, joint and several liability for costs required to clean up and restore sites where hazardous substances have been disposed or otherwise released. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances or other waste products into the environment.

Our insurance coverage may not be sufficient. Insufficient insurance coverage and increased insurance costs could adversely impact our results of operations, financial condition and cash flows.

We currently have general liability and property insurance in place to cover certain of our facilities in amounts that we consider appropriate. Such policies are subject to certain limits and deductibles and do not include business interruption coverage. Insurance coverage may not be available in the future at current costs or on commercially reasonable terms, and the insurance proceeds received for any loss of, or any damage to, any of our facilities may not be sufficient to restore the loss or damage without negative impact on our results of operations, financial condition and cash flows.

In common with other companies in our line of business that serve coastal regions, we do not have insurance covering our transmission and distribution system because we believe it to be cost prohibitive. We may not be able to recover the costs incurred in restoring our transmission and distribution properties following Hurricane Ike, or any such costs sustained in the future, through a change in our regulated rates, and any such recovery may not be timely granted. Therefore, we may not be able to restore any loss of, or damage to, any of our transmission and distribution properties without negative impact on our results of operations, financial condition and cash flows.
 
 
6

 

We and CenterPoint Energy could incur liabilities associated with businesses and assets that we have transferred to others.

Under some circumstances, we and CenterPoint Energy could incur liabilities associated with assets and businesses we and CenterPoint Energy no longer own. These assets and businesses were previously owned by Reliant Energy, Incorporated (Reliant Energy), our predecessor, directly or through subsidiaries and include:

 
merchant energy, energy trading and REP businesses transferred to RRI or its subsidiaries in connection with the organization and capitalization of RRI prior to its initial public offering in 2001; and
 
 
Texas electric generating facilities transferred to Texas Genco Holdings, Inc. (Texas Genco) in 2004 and early 2005.
 
In connection with the organization and capitalization of RRI, RRI and its subsidiaries assumed liabilities associated with various assets and businesses Reliant Energy transferred to them. RRI also agreed to indemnify, and cause the applicable transferee subsidiaries to indemnify, CenterPoint Energy and its subsidiaries, including us, with respect to liabilities associated with the transferred assets and businesses. These indemnity provisions were intended to place sole financial responsibility on RRI and its subsidiaries for all liabilities associated with the current and historical businesses and operations of RRI, regardless of the time those liabilities arose. If RRI were unable to satisfy a liability that has been so assumed in circumstances in which Reliant Energy and its subsidiaries were not released from the liability in connection with the transfer, we and CenterPoint Energy could be responsible for satisfying the liability.

RRI’s unsecured debt ratings are currently below investment grade. If RRI were unable to meet its obligations, it would need to consider, among various options, restructuring under the bankruptcy laws, in which event RRI might not honor its indemnification obligations and claims by RRI’s creditors might be made against us as its former owner.

Reliant Energy and RRI are named as defendants in a number of lawsuits arising out of energy sales in California and other markets and financial reporting matters. Although these matters relate to the business and operations of RRI, claims against Reliant Energy have been made on grounds that include the effect of RRI’s financial results on Reliant Energy’s historical financial statements and liability of Reliant Energy as a controlling shareholder of RRI. We or CenterPoint Energy could incur liability if claims in one or more of these lawsuits were successfully asserted against us or CenterPoint Energy and indemnification from RRI were determined to be unavailable or if RRI were unable to satisfy indemnification obligations owed with respect to those claims.

In connection with the organization and capitalization of Texas Genco, Texas Genco assumed liabilities associated with the electric generation assets Reliant Energy transferred to it. Texas Genco also agreed to indemnify, and cause the applicable transferee subsidiaries to indemnify, CenterPoint Energy and its subsidiaries, including us, with respect to liabilities associated with the transferred assets and businesses. In many cases the liabilities assumed were our obligations and we were not released by third parties from these liabilities. The indemnity provisions were intended generally to place sole financial responsibility on Texas Genco and its subsidiaries for all liabilities associated with the current and historical businesses and operations of Texas Genco, regardless of the time those liabilities arose. In connection with the sale of Texas Genco’s fossil generation assets (coal, lignite and gas-fired plants) to NRG Texas LP (previously named Texas Genco LLC), the separation agreement CenterPoint Energy entered into with Texas Genco in connection with the organization and capitalization of Texas Genco was amended to provide that all of Texas Genco’s rights and obligations under the separation agreement relating to its fossil generation assets, including Texas Genco’s obligation to indemnify CenterPoint Energy with respect to liabilities associated with the fossil generation assets and related business, were assigned to and assumed by NRG Texas LP. In addition, under the amended separation agreement, Texas Genco is no longer liable for, and CenterPoint Energy has assumed and agreed to indemnify NRG Texas LP against, liabilities that Texas Genco originally assumed in connection with its organization to the extent, and only to the extent, that such liabilities are covered by certain insurance policies or other similar agreements held by CenterPoint Energy. If Texas Genco or NRG Texas LP were unable to satisfy a liability that had been so assumed or indemnified against, and provided Reliant Energy had not been released from the liability in connection with the transfer, we could be responsible for satisfying the liability.

 
7

 

CenterPoint Energy or its subsidiaries, including us, 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. Most claimants in such litigation have been workers who participated in construction of various industrial facilities, including power plants. Some of the claimants have worked at locations owned by CenterPoint Energy or us, but most existing claims relate to facilities previously owned by CenterPoint Energy or us that are currently owned by NRG Texas LP. We anticipate that additional claims like those received may be asserted in the future. Under the terms of the arrangements regarding separation of the generating business from CenterPoint Energy and its sale to NRG Texas LP, ultimate financial responsibility for uninsured losses from claims relating to the generating business has been assumed by NRG Texas LP, but CenterPoint Energy has agreed to continue to defend such claims to the extent they are covered by insurance maintained by CenterPoint Energy, subject to reimbursement of the costs of such defense by NRG Texas LP.

The global financial crisis may have impacts on our business, liquidity and financial condition that we currently cannot predict.

The continued credit crisis and related turmoil in the global financial system may have an impact on our business, liquidity and our financial condition. Our ability to access the capital markets may be severely restricted at a time when we would like, or need, to access those markets, which could have an impact on our liquidity and flexibility to react to changing economic and business conditions. In addition, the cost of debt financing and the proceeds of equity financing may be materially adversely impacted by these market conditions. With respect to our existing debt arrangements, Lehman Brothers Bank, FSB, which had an $11 million participation in our credit facility, stopped funding its commitment following the bankruptcy filing of its parent in September 2008 and was subsequently terminated as a lender in our facility. Defaults of other lenders should they occur could adversely affect our liquidity.  Capital market turmoil was also reflected in significant reductions in equity market valuations in 2008, which significantly reduced the value of assets of CenterPoint Energy’s pension plan, in which we participate. These reductions are expected to result in increased pension expense in 2009, which will impact 2009 results of operations.

In addition to the credit and financial market issues, the national and local recessionary conditions may impact our business in a variety of ways.  These include, among other things, reduced customer usage and increased customer default rates.
 
 
8