NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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(1)
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Background
and Basis of Presentation
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General.
Included in this
Quarterly Report on Form 10-Q (Form 10-Q) of CenterPoint Energy, Inc. are the
condensed consolidated interim financial statements and notes (Interim Condensed
Financial Statements) of CenterPoint Energy, Inc. and its subsidiaries
(collectively, CenterPoint Energy). The Interim Condensed Financial Statements
are unaudited, omit certain financial statement disclosures and should be read
with the Annual Report on Form 10-K of CenterPoint Energy for the year
ended December 31, 2008 (CenterPoint Energy Form 10-K).
Background.
CenterPoint
Energy, Inc. is a public utility holding company. CenterPoint Energy’s operating
subsidiaries own and operate electric transmission and distribution facilities,
natural gas distribution facilities, interstate pipelines and natural gas
gathering, processing and treating facilities. As of September 30, 2009,
CenterPoint Energy’s indirect wholly owned subsidiaries included:
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CenterPoint
Energy Houston Electric, LLC (CenterPoint Houston), which engages in the
electric transmission and distribution business in a 5,000-square mile
area of the Texas Gulf Coast that includes Houston;
and
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CenterPoint
Energy Resources Corp. (CERC Corp. and, together with its subsidiaries,
CERC), which owns and operates natural gas distribution systems in six
states. Subsidiaries of CERC Corp. own interstate natural gas pipelines
and gas gathering systems and provide various ancillary services. A wholly
owned subsidiary of CERC Corp. offers variable and fixed-price physical
natural gas supplies primarily to commercial and industrial customers and
electric and gas utilities.
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Basis of Presentation.
The
preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CenterPoint
Energy’s Interim Condensed Financial Statements reflect all normal recurring
adjustments that are, in the opinion of management, necessary to present fairly
the financial position, results of operations and cash flows for the respective
periods. Amounts reported in CenterPoint Energy’s Condensed Statements of
Consolidated Income are not necessarily indicative of amounts expected for a
full-year period due to the effects of, among other things, (a) seasonal
fluctuations in demand for energy and energy services, (b) changes in energy
commodity prices, (c) timing of maintenance and other expenditures and (d)
acquisitions and dispositions of businesses, assets and other
interests.
For a
description of CenterPoint Energy’s reportable business segments, reference is
made to Note 15.
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(2)
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New
Accounting Pronouncements
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Effective
January 1, 2009, CenterPoint Energy adopted new accounting guidance which
requires enhanced disclosures of derivative instruments and hedging activities
such as the fair value of derivative instruments and presentation of their gains
or losses in tabular format, as well as disclosures regarding credit risks and
strategies and objectives for using derivative instruments. These
disclosures are included as part of CenterPoint Energy’s Derivatives Instruments
footnote (see Note 5).
In May
2008, the Financial Accounting Standards Board (FASB) issued new accounting
guidance on accounting for convertible debt instruments that may be settled in
cash upon conversion (including partial cash settlement) which changed the
accounting treatment for convertible securities that the issuer may settle fully
or partially in cash. Under this new guidance, cash settled convertible
securities are separated into their debt and equity components. The value
assigned to the debt component is the estimated fair value, as of the issuance
date, of a similar debt instrument without the conversion feature, and the
difference between the proceeds for the convertible debt and the
amount
reflected as a debt liability is recorded as additional paid-in capital. As a
result, the debt is recorded at a discount reflecting its below-market coupon
interest rate. The debt is then subsequently accreted to its par value over its
expected life, with the rate of interest that reflects the market rate at
issuance being reflected on the income statement. CenterPoint Energy adopted
this new accounting guidance effective January 1, 2009, which required
retrospective application to all periods presented. CenterPoint Energy currently
has no convertible debt that is within the scope of this new guidance, but did
during prior periods presented. Accordingly, the implementation of this
new guidance had a non-cash effect on net income for prior periods and the
consolidated balance sheets when CenterPoint Energy had contingently convertible
debt outstanding. There was no effect on net income for the three months ended
September 30, 2008. The effect on net income for the nine months ended
September 30, 2008 was a decrease in net income of $1 million. There
was no impact on basic or diluted earnings per share. Upon adoption of this new
guidance, the effect on the balance sheet as of January 1, 2009 was a credit to
Additional Paid-In-Capital of $23 million, with an offsetting debit to
retained earnings.
In
December 2008, the FASB issued new accounting guidance on employers’ disclosures
about postretirement benefit plan assets which expands the disclosures about
employers’ plan assets to include more detailed disclosures about the employers’
investment strategies, major categories of plan assets, concentrations of risk
within plan assets and valuation techniques used to measure the fair value of
plan assets. This new accounting guidance is effective for fiscal years ending
after December 15, 2009. CenterPoint Energy expects that the adoption of this
new guidance will not have a material impact on its financial position, results
of operations or cash flows.
In April
2009, the FASB issued new accounting guidance on interim disclosures about fair
value of financial instruments which expands the fair value disclosures required
for all financial instruments to interim periods. This new guidance also
requires entities to disclose in interim periods the methods and significant
assumptions used to estimate the fair value of financial instruments. This new
accounting guidance is effective for interim reporting periods ending after June
15, 2009. CenterPoint Energy’s adoption of this new guidance did not have a
material impact on its financial position, results of operations or cash
flows. See Note 13 for the required disclosures.
In May
2009, the FASB issued new accounting guidance on subsequent events that
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. This new accounting guidance is effective for
interim or annual periods ending after June 15, 2009. CenterPoint Energy’s
adoption of this new guidance did not have a material impact on its financial
position, results of operations or cash flows. See Note 16 for the subsequent
event related disclosures.
In June
2009, the FASB issued new accounting guidance on consolidation of variable
interest entities (VIEs) that changes how a reporting entity
determines a primary beneficiary that would consolidate the VIE from a
quantitative risk and rewards approach to a qualitative approach based on which
variable interest holder has the power to direct the economic performance
related activities of the VIE as well as the obligation to absorb losses or
right to receive benefits that could potentially be significant to the VIE. This
new guidance requires the primary beneficiary assessment to be performed on an
ongoing basis and also requires enhanced disclosures that will provide more
transparency about a company’s involvement in a VIE. This new guidance is
effective for a reporting entity’s first annual reporting period that begins
after November 15, 2009. CenterPoint Energy expects that the adoption of
this new guidance will not have a material impact on its financial position,
results of operations or cash flows.
In June
2009, the FASB issued new accounting guidance on the FASB Accounting Standards
Codification (Codification) and the hierarchy of generally accepted accounting
principles. This new accounting guidance establishes the Codification
as the source of authoritative U.S. generally accepted accounting principles
recognized by the FASB to be applied by nongovernmental entities.
Rules and interpretive releases of the Securities and Exchange Commission
(SEC) under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. This new accounting guidance is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. CenterPoint Energy’s adoption of this new guidance did
not have any impact on its financial position, results of operations or cash
flows.
Management
believes the impact of other recently issued standards, which are not yet
effective, will not have a material impact on CenterPoint Energy’s consolidated
financial position, results of operations or cash flows upon
adoption.
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(3)
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Employee
Benefit Plans
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CenterPoint
Energy’s net periodic cost includes the following components relating to pension
and postretirement benefits:
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Three
Months Ended September 30,
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2008
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2009
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Pension
Benefits
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Postretirement
Benefits
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Pension
Benefits
(1)
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Postretirement
Benefits
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(in
millions)
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Service
cost
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$
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8
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$
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-
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$
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7
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$
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-
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Interest
cost
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25
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6
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28
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7
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Expected
return on plan assets
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(37
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)
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(3
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)
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(24
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)
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(2
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)
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Amortization
of prior service credit
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(2
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)
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-
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-
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-
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Amortization
of net loss
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6
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-
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17
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-
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Amortization
of transition obligation
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-
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2
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-
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2
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Net
periodic cost
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$
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-
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$
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5
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$
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28
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$
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7
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Nine
Months Ended September 30,
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2008
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2009
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Pension
Benefits
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Postretirement
Benefits
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Pension
Benefits
(1)
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Postretirement
Benefits
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(in
millions)
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Service
cost
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$
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23
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$
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1
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$
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19
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$
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1
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Interest
cost
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76
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20
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85
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21
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Expected
return on plan assets
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(111
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)
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(9
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)
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(73
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)
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(7
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)
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Amortization
of prior service cost (credit)
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(5
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)
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3
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2
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2
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Amortization
of net loss
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18
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|
|
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-
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51
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-
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Amortization
of transition obligation
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-
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4
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|
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-
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5
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Net
periodic cost
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$
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1
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$
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19
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$
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84
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$
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22
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(1)
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Net
periodic cost in these tables is before considering amounts subject to
overhead allocations for capital expenditure projects or for amounts
subject to deferral for regulatory purposes. CenterPoint
Houston’s actuarially determined pension expense for 2009 in excess of the
2007 base year amount is being deferred for rate making purposes until its
next general rate case pursuant to Texas law. CenterPoint
Houston deferred as a regulatory asset $8 million and
$21 million in pension expense during the three and nine months ended
September 30, 2009,
respectively.
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CenterPoint
Energy expects to contribute approximately $22 million to its pension plans
in 2009, of which $2 million and $19 million, respectively, have been
contributed during the three and nine months ended September 30,
2009.
CenterPoint
Energy expects to contribute approximately $26 million to its
postretirement benefits plan in 2009, of which $8 million and
$20 million, respectively, have been contributed during the three and nine
months ended September 30, 2009.
Effective
January 1, 2008, CenterPoint Energy adopted new accounting guidance on
accounting for deferred compensation and postretirement benefit aspects of
endorsement split-dollar life insurance arrangements which required CenterPoint
Energy to recognize the effect of implementation through a cumulative effect
adjustment to retained earnings or other components of equity as of the
beginning of the year of adoption. CenterPoint Energy calculated the
impact as negligible at the time of adoption on January 1,
2008. During the quarter ended June 30, 2009, CenterPoint Energy
determined that its adoption calculation had omitted the impact that increasing
future premium costs would have on the liability and, therefore, it recorded as
a cumulative effect adjustment a $15 million correction to increase other
non-current liabilities and accumulated deficit as of January 1,
2008. The effects of the correction on the previously reported
accumulated deficit and net income for 2008 and for 2009 were not material
to CenterPoint Energy’s financial position, results of operations or cash
flows.
(a)
Hurricane Ike
CenterPoint
Houston’s electric delivery system suffered substantial damage as a result of
Hurricane Ike, which struck the upper Texas coast in
September 2008.
As is
common with electric utilities serving coastal regions, the poles, towers,
wires, street lights and pole mounted equipment that comprise CenterPoint
Houston’s transmission and distribution system are not covered by property
insurance, but office buildings and warehouses and their contents and
substations are covered by insurance that provides for a maximum deductible of
$10 million. Current estimates are that total losses to property covered by
this insurance were approximately $28 million.
CenterPoint
Houston deferred the uninsured system restoration costs as management believed
it was probable that such costs would be recovered through the regulatory
process. As a result, system restoration costs did not affect CenterPoint
Energy’s or CenterPoint Houston’s reported operating income for 2008 or the
first nine months of 2009. In April 2009, CenterPoint Houston filed with the
Public Utility Commission of Texas (Texas Utility Commission) an application for
review and approval for recovery of approximately $608 million in system
restoration costs identified as of the end of February 2009, plus
$2 million in regulatory expenses, $13 million in certain debt
issuance costs and $55 million in incurred and projected carrying costs,
pursuant to the legislation described below.
In April
2009, the Texas Legislature enacted legislation that authorized the Texas
Utility Commission to conduct proceedings to determine the amount of system
restoration costs and related costs associated with hurricanes or other major
storms that utilities are entitled to recover, and to issue financing orders
that would permit a utility like CenterPoint Houston to recover the distribution
portion of those costs and related carrying costs through the issuance of
non-recourse system restoration bonds similar to the securitization bonds issued
previously. The legislation also allowed such a utility to recover,
or defer for future recovery, the transmission portion of its system restoration
costs through the existing mechanisms established to recover transmission level
costs. The legislation required the Texas Utility Commission to make
its determination of recoverable system restoration costs within 150 days of the
filing of a utility’s application and to rule on a utility’s application for a
financing order for the issuance of system restoration bonds within 90 days of
the filing of that application. Alternatively, if securitization is
not the least-cost option for rate payers, the legislation authorized the Texas
Utility Commission to allow a utility to recover those costs through a customer
surcharge mechanism.
In its
application filed in April 2009, CenterPoint Houston sought approval for
recovery of a total of approximately $678 million, including the
$608 million in system restoration costs described above plus related
regulatory expenses, certain debt issuance costs and carrying costs calculated
through August 2009. In July 2009, CenterPoint Houston announced that it
had reached a settlement agreement with the parties to the
proceeding. Under the terms of that settlement agreement, CenterPoint
Houston would be entitled to recover a total of $663 million in costs
relating to Hurricane Ike, along with carrying
costs from September 1,
2009 until system restoration bonds were issued. The Texas Utility Commission
issued an order in August 2009 approving CenterPoint Houston’s application and
the settlement agreement and authorizing recovery of a total of
$663 million, of which $643 million is attributable to distribution
service and eligible for securitization and the remaining $20 million is
attributable to transmission service and eligible for recovery through the
existing mechanisms established to recover transmission costs.
In July
2009, CenterPoint Houston filed with the Texas Utility Commission its
application for a financing order to recover the portion of approved costs
related to distribution service through the issuance of system restoration
bonds. As discussed above, in August 2009, the Texas Utility
Commission issued a financing order allowing CenterPoint Houston to securitize
$643 million in distribution service costs plus carrying charges from
September 1, 2009 through the date the system restoration bonds are issued, as
well as certain up-front qualified costs capped at approximately
$6 million. In accordance with the financing order, CenterPoint
Houston is to place into effect a separate customer credit related to
accumulated deferred federal income taxes (ADFIT) associated with the storm
restoration costs to be recovered. This separate credit (ADFIT Credit) is to be
applied to customers’ bills to reflect the benefit of those deferred taxes at a
carrying charge of 11.075%. The beginning balance of the ADFIT related to storm
costs is approximately $207 million and will decline over the life of the
system restoration bonds as taxes are paid on the system restoration tariffs.
The ADFIT Credit will become effective on the same date as the tariff for
the
system
restoration charges and will reduce operating income in 2010 by approximately
$24 million. CenterPoint Houston expects to issue the system restoration bonds
in the fourth quarter of 2009. Assuming system restoration bonds are issued,
CenterPoint Houston will recover the distribution portion of approved system
restoration costs out of the bond proceeds, with the bonds being repaid over
time through a charge imposed on customers. CenterPoint Houston
expects to recover the remaining approximately $20 million of Hurricane Ike
costs related to transmission service through the existing mechanisms
established to recover transmission costs.
In
accordance with the orders discussed above, as of September 30, 2009,
CenterPoint Houston has recorded a net regulatory asset of $642 million
associated with distribution-related storm restoration costs and
$20 million associated with transmission-related storm restoration
costs. These amounts reflect carrying costs of $50 million
related to distribution and $2 million related to transmission through
September 30, 2009, based on the 11.075% cost of capital approved by
the Texas Utility Commission. The carrying costs have been bifurcated into
two components: (i) return of borrowing costs and (ii) an allowance for earnings
on shareholders’ investment. During the three months and nine months ended
September 30, 2009, the component representing a return of borrowing costs
of $6 million and $20 million, respectively, has been recognized and
is included in other income in CenterPoint Energy’s Condensed Statements of
Consolidated Income. That component will continue to be recognized as
earned until the associated system restoration costs are recovered. The
component representing an allowance for earnings on shareholders’ investment of
$32 million is being deferred and will be recognized as it is collected
through rates.
(b) Recovery of True-Up
Balance
In March
2004, CenterPoint Houston filed its true-up application with the Texas Utility
Commission, requesting recovery of $3.7 billion, excluding interest, as
allowed under the Texas Electric Choice Plan (Texas electric restructuring law).
In December 2004, the Texas Utility Commission issued its final order (True-Up
Order) allowing CenterPoint Houston to recover a true-up balance of
approximately $2.3 billion, which included interest through August 31,
2004, and provided for adjustment of the amount to be recovered to include
interest on the balance until recovery, along with the principal portion of
additional excess mitigation credits (EMCs) returned to customers after
August 31, 2004 and certain other adjustments.
CenterPoint
Houston and other parties filed appeals of the True-Up Order to a district court
in Travis County, Texas. In August 2005, that court issued its judgment on the
various appeals. In its judgment, the district court:
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reversed
the Texas Utility Commission’s ruling that had denied recovery of a
portion of the capacity auction true-up
amounts;
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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
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affirmed
the True-Up Order in all other
respects.
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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:
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reversed
the district court’s judgment to the extent it restored the capacity
auction true-up amounts;
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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.);
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ordered
that the tax normalization issue described below be remanded to the Texas
Utility Commission as requested by the Texas Utility Commission;
and
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affirmed
the district court’s judgment in all other
respects.
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In April
2008, the court of appeals denied all motions for rehearing and reissued
substantially the same opinion as it had rendered in December 2007.
In June
2008, CenterPoint Houston petitioned the Texas Supreme Court for review of the
court of appeals decision. In its petition, CenterPoint Houston seeks reversal
of the parts of the court of appeals decision that (i) denied recovery of EMCs
paid to RRI, (ii) denied recovery of the capacity auction true up amounts
allowed by the district court, (iii) affirmed the Texas Utility Commission’s
rulings that denied recovery of approximately $378 million related to
depreciation and (iv) affirmed the Texas Utility Commission’s refusal to permit
CenterPoint Houston to utilize the partial stock valuation methodology for
determining the market value of its former generation assets. Two other
petitions for review were filed with the Texas Supreme Court by other parties to
the appeal. In those petitions parties contend that (i) the Texas Utility
Commission was without authority to fashion the methodology it used for valuing
the former generation assets after it had determined that CenterPoint Houston
could not use the partial stock valuation method, (ii) in fashioning the method
it used for valuing the former generating assets, the Texas Utility Commission
deprived parties of their due process rights and an opportunity to be heard,
(iii) the net book value of the generating assets should have been adjusted
downward due to the impact of a purchase option that had been granted to RRI,
(iv) CenterPoint Houston should not have been permitted to recover construction
work in progress balances without proving those amounts in the manner required
by law and (v) the Texas Utility Commission was without authority to award
interest on the capacity auction true up award.
In June
2009, the Texas Supreme Court granted the petitions for review of the court of
appeals decision. Oral argument before the court was held in October
2009. Although CenterPoint Energy and CenterPoint Houston believe
that CenterPoint Houston’s true-up request is consistent with applicable
statutes and regulations and, accordingly, that it is reasonably possible that
it will be successful in its appeal to the Texas Supreme Court, CenterPoint
Energy can provide no assurance as to the ultimate court rulings on the issues
to be considered in the appeal or with respect to the ultimate decision by the
Texas Utility Commission on the tax normalization issue described
below.
To
reflect the impact of the True-Up Order, in 2004 and 2005, CenterPoint Energy
recorded a net after-tax extraordinary loss of $947 million. No amounts
related to the district court’s judgment or the decision of the court of appeals
have been recorded in CenterPoint Energy’s consolidated financial statements.
However, if the court of appeals decision is not reversed or modified as a
result of further review by the Texas Supreme Court, CenterPoint Energy
anticipates that it would be required to record an additional loss to reflect
the court of appeals decision. The amount of that loss would depend on several
factors, including ultimate resolution of the tax normalization issue described
below and the calculation of interest on any amounts CenterPoint Houston
ultimately is authorized to recover or is required to refund beyond the amounts
recorded based on the True-up Order, but could range from $170 million to
$385 million (pre-tax) plus interest subsequent to December 31,
2008.
In the
True-Up Order, the Texas Utility Commission reduced CenterPoint Houston’s
stranded cost recovery by approximately $146 million, which was included in
the extraordinary loss discussed above, for the present value of certain
deferred tax benefits associated with its former electric generation assets.
CenterPoint Energy believes that the Texas Utility Commission based its order on
proposed regulations issued by the Internal Revenue Service (IRS) in March 2003
that would have allowed utilities owning assets that were deregulated before
March 4, 2003 to make a retroactive election to pass the benefits of
Accumulated Deferred Investment Tax Credits (ADITC) and Excess Deferred Federal
Income Taxes (EDFIT) back to customers. However, the IRS subsequently withdrew
those proposed normalization regulations and in March 2008 adopted final
regulations that would not permit utilities like CenterPoint Houston to pass the
tax benefits back to customers without creating normalization violations. In
addition, CenterPoint Energy received a Private Letter Ruling (PLR) from the IRS
in August 2007, prior to adoption of the final regulations that confirmed that
the Texas Utility Commission’s order reducing CenterPoint Houston’s stranded
cost recovery by $146 million for ADITC and EDFIT would cause normalization
violations with respect to the ADITC and EDFIT.
If the
Texas Utility Commission’s order relating to the ADITC reduction is not reversed
or otherwise modified on remand so as to eliminate the normalization violation,
the IRS could require CenterPoint Energy to pay an amount equal to CenterPoint
Houston’s unamortized ADITC balance as of the date that the normalization
violation is deemed to have occurred. In addition, the IRS could deny
CenterPoint Houston the ability to elect accelerated tax depreciation benefits
beginning in the taxable year that the normalization violation is deemed to have
occurred. Such
treatment,
if required by the IRS, could have a material adverse impact on CenterPoint
Energy’s results of operations, financial condition and cash flows in addition
to any potential loss resulting from final resolution of the True-Up Order. In
its opinion, the court of appeals ordered that this issue be remanded to the
Texas Utility Commission, as that commission requested. No party, in the
petitions for review or briefs filed with the Texas Supreme Court, has
challenged that order by the court of appeals although the Texas Supreme Court
has the authority to consider all aspects of the rulings above, not just those
challenged specifically by the appellants. CenterPoint Energy and CenterPoint
Houston will continue to pursue a favorable resolution of this issue through the
appellate and administrative process. Although the Texas Utility Commission has
not previously required a company subject to its jurisdiction to take action
that would result in a normalization violation, no prediction can be made as to
the ultimate action the Texas Utility Commission may take on this issue on
remand.
The Texas
electric restructuring law allowed the amounts awarded to CenterPoint Houston in
the Texas Utility Commission’s True-Up Order to be recovered either through
securitization or through implementation of a competition transition charge
(CTC) or both. Pursuant to a financing order issued by the Texas Utility
Commission in March 2005 and affirmed by a Travis County district court, in
December 2005 a subsidiary of CenterPoint Houston issued $1.85 billion in
transition bonds with interest rates ranging from 4.84% to 5.30% and final
maturity dates ranging from February 2011 to August 2020. Through issuance of
the transition bonds, CenterPoint Houston recovered approximately
$1.7 billion of the true-up balance determined in the True-Up Order plus
interest through the date on which the bonds were issued.
In July
2005, CenterPoint Houston received an order from the Texas Utility Commission
allowing it to implement a CTC designed to collect the remaining
$596 million from the True-Up Order over 14 years plus interest at an
annual rate of 11.075% (CTC Order). The CTC Order authorized CenterPoint Houston
to impose a charge on REPs to recover the portion of the true-up balance not
recovered through a financing order. The CTC Order also allowed CenterPoint
Houston to collect approximately $24 million of rate case expenses over
three years without a return through a separate tariff rider (Rider RCE).
CenterPoint Houston implemented the CTC and Rider RCE effective
September 13, 2005 and began recovering approximately $620 million.
The return on the CTC portion of the true-up balance was included in CenterPoint
Houston’s tariff-based revenues beginning September 13, 2005. Effective
August 1, 2006, the interest rate on the unrecovered balance of the CTC was
reduced from 11.075% to 8.06% pursuant to a revised rule adopted by the Texas
Utility Commission in June 2006. Recovery of rate case expenses under Rider RCE
was completed in September 2008.
Certain
parties appealed the CTC Order to a district court in Travis County. In May
2006, the district court issued a judgment reversing the CTC Order in three
respects. First, the court ruled that the Texas Utility Commission had
improperly relied on provisions of its rule dealing with the interest rate
applicable to CTC amounts. The district court reached that conclusion based on
its belief that the Texas Supreme Court had previously invalidated that entire
section of the rule. The 11.075% interest rate in question was applicable from
the implementation of the CTC Order on September 13, 2005 until
August 1, 2006, the effective date of the implementation of a new CTC in
compliance with the revised rule discussed above. Second, the district court
reversed the Texas Utility Commission’s ruling that allows CenterPoint Houston
to recover through the Rider RCE the costs (approximately $5 million) for a
panel appointed by the Texas Utility Commission in connection with the valuation
of electric generation assets. Finally, the district court accepted the
contention of one party that the CTC should not be allocated to retail customers
that have switched to new on-site generation. The Texas Utility Commission and
CenterPoint Houston appealed the district court’s judgment to the Texas
Third Court of Appeals, and in July 2008, the court of appeals reversed the
district court’s judgment in all respects and affirmed the Texas Utility
Commission’s order. Two of the appellants have requested further review from the
Texas Supreme Court. In June 2009, the Texas Supreme Court agreed to
hear those appeals and oral argument before the court was held in October 2009.
The ultimate outcome of this matter cannot be predicted at this time. However,
CenterPoint Energy does not expect the disposition of this matter to have a
material adverse effect on CenterPoint Energy’s or CenterPoint Houston’s
financial condition, results of operations or cash flows.
During
the 2007 legislative session, the Texas legislature amended statutes prescribing
the types of true-up balances that can be securitized by utilities and
authorized the issuance of transition bonds to recover the balance of the CTC.
In June 2007, CenterPoint Houston filed a request with the Texas Utility
Commission for a financing order that would allow the securitization of the
remaining balance of the CTC, adjusted to refund certain unspent environmental
retrofit costs and to recover the amount of the final fuel reconciliation
settlement. CenterPoint Houston reached substantial agreement with other parties
to this proceeding, and a financing order was approved by
the Texas
Utility Commission in September 2007. In February 2008, pursuant to the
financing order, a new special purpose subsidiary of CenterPoint Houston issued
approximately $488 million of transition bonds in two tranches with
interest rates of 4.192% and 5.234% and final maturity dates of February 2020
and February 2023, respectively. Contemporaneously with the issuance of those
bonds, the CTC was terminated and a transition charge was implemented. During
the nine months ended September 30, 2008, CenterPoint Houston recognized
approximately $5 million in operating income from the
CTC.
As of
September 30, 2009, CenterPoint Energy had not recognized an allowed equity
return of $196 million on CenterPoint Houston’s true-up balance because
such return will be recognized as it is recovered in rates. During the three
months ended September 30, 2008 and 2009, CenterPoint Houston recognized
approximately $4 million and $5 million, respectively, of the allowed
equity return not previously recognized. During the nine months ended
September 30, 2008 and 2009, CenterPoint Houston recognized approximately
$10 million and $11 million, respectively, of the allowed equity
return not previously recognized.
(c)
Rate Proceedings
Texas.
In March 2008, the natural gas distribution
businesses of CERC (Gas Operations) filed a request to change its rates with the
Railroad Commission of Texas (Railroad Commission) and the 47 cities in its
Texas Coast service territory, an area consisting of approximately 230,000
customers in cities and communities on the outskirts of Houston. In 2008, Gas
Operations implemented rates that are expected to increase annual revenues by
approximately $3.5 million. The implemented rates have been contested by 9
cities. CenterPoint Energy and CERC do not expect the outcome of this matter to
have a material adverse impact on the financial condition, results of operations
or cash flows of either CenterPoint Energy or CERC.
In May
2009, CenterPoint Houston filed an application at the Texas Utility Commission
seeking approval of certain energy efficiency program costs, an energy
efficiency performance bonus for 2008 programs and carrying costs totaling
approximately $10 million. The application seeks to begin recovery of these
costs through a surcharge effective July 1, 2010. CenterPoint Houston
expects an order from the Texas Utility Commission in the fourth quarter of
2009.
In July
2009, Gas Operations filed a request to change its rates with the Railroad
Commission and the 29 cities in its Houston service territory, consisting of
approximately 940,000 customers in and around Houston. The request seeks to
establish uniform rates, charges and terms and conditions of service for the
cities and environs of the Houston service territory. If approved by the
Railroad Commission and the cities, the proposed new rates would result in an
overall increase in annual revenue of $25.4 million. The proposed
increase would allow Gas Operations to recover increased operating costs, which
include higher pension expense. It would also provide a return on the
additional capital invested to serve its customers. In addition, Gas
Operations is seeking an adjustment mechanism similar to that obtained in the
Texas Coast rate proceeding discussed above that would annually adjust rates to
reflect changes in capital, expenses and usage. CERC and CenterPoint Energy do
not expect an order from the Railroad Commission and the cities until the first
quarter of 2010.
Minnesota.
In
November 2006, the Minnesota Public Utilities Commission (MPUC) denied a request
filed by Gas Operations for a waiver of MPUC rules in order to allow Gas
Operations to recover approximately $21 million in unrecovered purchased
gas costs related to periods prior to July 1, 2004. Those unrecovered gas
costs were identified as a result of revisions to previously approved
calculations of unrecovered purchased gas costs. Following that denial, Gas
Operations recorded a $21 million adjustment to reduce pre-tax earnings in
the fourth quarter of 2006 and reduced the regulatory asset related to these
costs by an equal amount. In March 2007, following the MPUC’s denial of
reconsideration of its ruling, Gas Operations petitioned the Minnesota Court of
Appeals for review of the MPUC’s decision, and in May 2008 that court ruled that
the MPUC had been arbitrary and capricious in denying Gas Operations a waiver.
The court ordered the case remanded to the MPUC for reconsideration under the
same principles the MPUC had applied in previously granted waiver requests. The
MPUC sought further review of the court of appeals decision from the Minnesota
Supreme Court, and in July 2008, the Minnesota Supreme Court agreed to review
the decision. In July 2009, the Minnesota Supreme Court issued its
decision in which it reversed the decision of the Minnesota Court of Appeals and
upheld the MPUC’s decision to deny the requested variance. The court’s decision
had no negative impact on CenterPoint Energy’s or CERC’s financial condition,
results of operations or cash flows, as the costs at issue were written off at
the time they were disallowed.
In
November 2008, Gas Operations filed a request with the MPUC to increase its
rates for utility distribution service. If approved by the MPUC, the
proposed new rates would result in an overall increase in annual revenue of
$59.8 million. The proposed increase would allow Gas Operations to
recover increased operating costs, including higher bad debt and collection
expenses, higher pension expenses, the cost of improved customer service and
inflationary increases in other expenses. It also would allow
recovery of increased costs related to conservation improvement programs and
provide a return on the additional capital invested to serve its
customers. In addition, Gas Operations is seeking an adjustment mechanism
that would annually adjust rates to reflect changes in use per customer.
In December 2008, the MPUC accepted the case and approved an interim rate
increase of $51.2 million, which became effective on January 2, 2009,
subject to refund. CERC and CenterPoint Energy do not expect an order from the
MPUC until early 2010.
Mississippi.
In
July 2009, Gas Operations filed a request to increase its rates for utility
distribution service with the Mississippi Public Service Commission
(MPSC). If approved by the MPSC, the proposed new rates would result
in an overall increase in annual revenue of $6.2 million. The
proposed increase would allow Gas Operations to recover increased operating
costs, including higher pension and benefit expenses, and provide a return on
the additional capital invested to serve its customers. The MPSC is
expected to issue an order in mid-November 2009.
(d)
Regulatory Accounting
CenterPoint
Energy has a 50% ownership interest in Southeast Supply Header, LLC (SESH) which
owns and operates a 270-mile interstate natural gas pipeline. In
2009, SESH discontinued the use of guidance for accounting for regulated
operations, which resulted in CenterPoint recording its share of the effects of
such write-offs of SESH’s regulatory assets through non-cash pre-tax charges for
the quarters ended March 31, 2009 and September 30, 2009 of $5 million and $11
million, respectively. These non-cash charges are reflected in equity
in earnings of unconsolidated affiliates in the Condensed Statements of
Consolidated Income. The related tax benefits of $2 million and $4
million, respectively, are reflected in the income tax expense line of the
Condensed Statements of Consolidated Income.
|
(5)
|
Derivative
Instruments
|
CenterPoint
Energy is exposed to various market risks. These risks arise from transactions
entered into in the normal course of business. CenterPoint Energy
utilizes derivative instruments such as physical forward contracts, swaps and
options to mitigate the impact of changes in commodity prices and weather on its
operating results and cash flows. Such derivatives are recognized in CenterPoint
Energy’s Condensed Consolidated Balance Sheets at their fair value unless
CenterPoint Energy elects the normal purchase and sales exemption for qualified
physical transactions. A derivative may be designated as a normal purchase or
sale if the intent is to physically receive or deliver the product for use or
sale in the normal course of business.
In prior
years, CenterPoint Energy entered into certain derivative instruments that were
designated as cash flow hedges. The objective of these derivative instruments
was to hedge the price risk associated with natural gas purchases and sales to
reduce cash flow variability related to meeting CenterPoint Energy’s wholesale
and retail customer obligations. If derivatives are designated as a cash
flow hedge, the effective portions of the changes in their fair values are
reflected initially as a separate component of shareholders’ equity and
subsequently recognized in income at the same time the hedged items impact
earnings. The ineffective portions of changes in fair values of derivatives
designated as hedges are immediately recognized in income. Changes in
derivatives not designated as normal or as cash flow hedges are recognized in
income as they occur. CenterPoint Energy does not enter into or hold derivative
instruments for trading purposes.
CenterPoint
Energy has a Risk Oversight Committee composed of corporate and business segment
officers that oversees all commodity price, weather and credit risk activities,
including CenterPoint Energy’s marketing, risk management services and hedging
activities. The committee’s duties are to establish CenterPoint Energy’s
commodity risk policies, allocate board-approved commercial risk limits, approve
use of new products and commodities, monitor positions and ensure compliance
with CenterPoint Energy’s risk management policies and procedures and limits
established by CenterPoint Energy’s board of directors.
CenterPoint
Energy’s policies prohibit the use of leveraged financial instruments. A
leveraged financial instrument, for this purpose, is a transaction involving a
derivative whose financial impact will be based on an amount other than the
notional amount or volume of the instrument.
(a)
Non-Trading Activities
Derivative Instruments.
CenterPoint Energy enters into certain derivative instruments to manage physical
commodity price risks that do not qualify or are not designated as cash flow or
fair value hedges. CenterPoint Energy utilizes these financial instruments to
manage physical commodity price risks and does not engage in proprietary or
speculative commodity trading.
During
the three months ended September 30, 2008, CenterPoint Energy recorded
increased natural gas revenues from unrealized net gains of $80 million and
increased natural gas expense from unrealized net losses of $34 million,
resulting in a net unrealized gain of $46 million. During the three months
ended September 30, 2009, CenterPoint Energy recorded decreased natural gas
revenues from unrealized net losses of $37 million and decreased natural
gas expense from unrealized net gains of $31 million, resulting in a net
unrealized loss of $6 million.
During
the nine months ended September 30, 2008, CenterPoint Energy recorded
increased natural gas revenues from unrealized net gains of $51 million and
increased natural gas expense from unrealized net losses of $37 million,
resulting in a net unrealized gain of $14 million. During the nine months
ended September 30, 2009, CenterPoint Energy recorded decreased natural gas
revenues from unrealized net losses of $71 million and decreased natural
gas expense from unrealized net gains of $49 million, resulting in a net
unrealized loss of $22 million.
Weather Hedges.
CenterPoint
Energy has weather normalization or other rate mechanisms that mitigate the
impact of weather on its gas operations in Arkansas, Louisiana, Oklahoma and a
portion of Texas. The remaining Gas Operations jurisdictions do not have such
mechanisms. As a result, fluctuations from normal weather may have a significant
positive or negative effect on the results of the gas operations in the
remaining jurisdictions and in CenterPoint Houston’s service
territory.
In 2007,
2008 and 2009, CenterPoint Energy entered into heating-degree day swaps to
mitigate the effect of fluctuations from normal weather on its financial
position and cash flows for the respective winter heating
seasons. The swaps were based on ten-year normal weather. During the
three and nine months ended September 30, 2008, CenterPoint Energy
recognized losses of $-0- and $13 million, respectively, related to these
swaps. During the three and nine months ended September 30,
2009, CenterPoint Energy recognized losses of $-0-and $3 million,
respectively, related to these swaps. The losses were substantially offset by
increased revenues due to colder than normal weather. Weather hedge losses are
included in revenues in the Condensed Statements of Consolidated
Income.
(b)
Derivative Fair Values and Income Statement Impacts
The
following tables present information about CenterPoint Energy’s derivative
instruments and hedging activities. The first table provides a
balance sheet overview of CenterPoint Energy’s Derivative Assets and Liabilities
as of September 30, 2009, while the latter tables provide a breakdown of
the related income statement impact for the three and nine months ended
September 30, 2009.
|
Fair
Value of Derivative Instruments
|
|
|
|
|
September 30,
2009
|
|
|
Total
derivatives not designated as hedging
instruments
|
|
Balance
Sheet
Location
|
|
Derivative
Assets
Fair
Value (2) (3)
|
|
|
Derivative
Liabilities
Fair
Value (2) (3)
|
|
|
|
|
|
|
(in
millions)
|
|
|
Commodity
contracts (1)
|
|
Current
Assets
|
|
$
|
59
|
|
|
$
|
(9
|
)
|
|
Commodity
contracts
(1)
|
|
Other
Assets
|
|
|
16
|
|
|
|
(1
|
)
|
|
Commodity
contracts (1)
|
|
Current
Liabilities
|
|
|
26
|
|
|
|
(137
|
)
|
|
Commodity
contracts (1)
|
|
Other
Liabilities
|
|
|
2
|
|
|
|
(94
|
)
|
|
Indexed
debt securities derivative
|
|
Current
Liabilities
|
|
|
-
|
|
|
|
(187
|
)
|
|
Total
|
|
$
|
103
|
|
|
$
|
(428
|
)
|
_________
|
|
(1)
|
Commodity
contracts are subject to master netting arrangements and are presented on
a net basis in the Condensed Consolidated Balance Sheets. This netting
causes derivative assets (liabilities) to be ultimately presented net in a
liability (asset) account within the Condensed Consolidated Balance
Sheets.
|
|
|
(2)
|
The
fair value shown for commodity contracts is comprised of derivative gross
volumes totaling 668 billion cubic feet (Bcf) or a net 138 Bcf long
position. Of the net long position, basis swaps constitute 61
Bcf and volumes associated with price stabilization activities of the
Natural Gas Distribution business segment comprise 56
Bcf.
|
|
|
(3)
|
The
net of total non-trading derivative assets and liabilities is a
$22 million liability as shown on CenterPoint Energy’s Condensed
Consolidated Balance Sheets, and is comprised of the commodity contracts
derivative assets and liabilities separately shown above offset by
collateral netting of
$116 million.
|
For
CenterPoint Energy’s price stabilization activities of the Natural Gas
Distribution business segment, the settled costs of derivatives are ultimately
recovered through purchased gas adjustments. Accordingly, the net unrealized
gains and losses associated with interim price movements on contracts that are
accounted for as derivatives and probable of recovery through purchased gas
adjustments are recorded as net regulatory assets. For those derivatives that
are not included in purchased gas adjustments, unrealized gains and losses and
settled amounts are recognized in the Condensed Statements of Consolidated
Income as revenue for retail sales derivative contracts and as natural gas
expense for natural gas derivatives and non-retail related physical gas
derivatives. Unrealized gains and losses on indexed debt securities are recorded
as Other Income (Expense) on the Condensed Statements of Consolidated
Income.
|
Income
Statement Impact of Derivative Activity
|
|
|
Total
derivatives not designated as hedging
instruments
|
|
Income
Statement Location
|
|
Three
Months
Ended
September 30,
2009
|
|
|
|
|
|
|
(in
millions)
|
|
|
Commodity
contracts
|
|
Gains
(Losses) in Revenue
|
|
$
|
(4
|
)
|
|
Commodity
contracts (1)
|
|
Gains
(Losses) in Expense: Natural Gas
|
|
|
(27
|
)
|
|
Indexed
debt securities derivative
|
|
Gains
(Losses) in Other Income (Expense)
|
|
|
(30
|
)
|
|
Total
|
|
$
|
(61
|
)
|
_________
|
|
(1)
|
The
Gains (Losses) in Expense: Natural Gas includes $(31) million of
costs associated with price stabilization activities of the Natural Gas
Distribution business segment that will be ultimately recovered through
purchased gas adjustments.
|
|
Income
Statement Impact of Derivative Activity
|
|
|
Total
derivatives not designated as hedging
instruments
|
|
Income
Statement Location
|
|
Nine
Months
Ended
September 30,
2009
|
|
|
|
|
|
|
(in
millions)
|
|
|
Commodity
contracts
|
|
Gains
(Losses) in Revenue
|
|
$
|
80
|
|
|
Commodity
contracts (1)
|
|
Gains
(Losses) in Expense: Natural Gas
|
|
|
(218
|
)
|
|
Indexed
debt securities derivative
|
|
Gains
(Losses) in Other Income (Expense)
|
|
|
(54
|
)
|
|
Total
|
|
$
|
(192
|
)
|
_________
|
|
(1)
|
The
Gains (Losses) in Expense: Natural Gas includes $(148) million of
costs associated with price stabilization activities of the Natural Gas
Distribution business segment that will be ultimately recovered through
purchased gas adjustments.
|
(c)
Credit Risk Contingent Features
CenterPoint
Energy enters into financial derivative contracts containing material adverse
change provisions. These provisions require CenterPoint Energy to
post additional collateral if the Standard & Poor’s Rating Services or
Moody’s Investors Service, Inc. credit rating of CenterPoint Energy is
downgraded. The total fair value of the derivative instruments that
contain credit risk contingent features that are in a net liability position at
September 30, 2009 is $151 million. The aggregate fair
value of assets that are already posted as collateral at September 30, 2009
is $82 million. If all derivative contracts (in a net liability
position) containing credit risk contingent features were triggered at
September 30, 2009, $69 million of additional assets would be required
to be posted as collateral.
|
(6)
|
Fair
Value Measurements
|
Effective
January 1, 2008, CenterPoint Energy adopted new accounting guidance on fair
value measurements which requires additional disclosures about CenterPoint
Energy’s financial assets and liabilities that are measured at fair
value. Effective January 1, 2009, CenterPoint Energy adopted this new
guidance for nonfinancial assets and liabilities, which adoption had no impact
on CenterPoint Energy’s financial position, results of operations or cash
flows. Beginning in January 2008, assets and liabilities recorded at
fair value in the Condensed Consolidated Balance Sheets are categorized based
upon the level of judgment associated with the inputs used to measure their
value. Hierarchical levels, as defined in this guidance and directly related to
the amount of subjectivity associated with the inputs to fair valuations of
these assets and liabilities, are as follows:
Level 1:
Inputs are unadjusted quoted prices in active markets for identical assets or
liabilities at the measurement date. The types of assets carried at Level 1
fair value generally are financial derivatives, investments and equity
securities listed in active markets.
Level 2:
Inputs, other than quoted prices included in Level 1, are observable for the
asset or liability, either directly or indirectly. Level 2 inputs include quoted
prices for similar instruments in active markets, and inputs other than quoted
prices that are observable for the asset or liability. Fair value assets
and liabilities that are generally included in this category are derivatives
with fair values based on inputs from actively quoted markets.
Level 3:
Inputs are unobservable for the asset or liability, and include situations where
there is little, if any, market activity for the asset or liability. In certain
cases, the inputs used to measure fair value may fall into different levels of
the fair value hierarchy. In such cases, the level in the fair value hierarchy
within which the fair value measurement in its entirety falls has been
determined based on the lowest level input that is significant to the fair value
measurement in its entirety. Unobservable inputs reflect CenterPoint Energy’s
judgments about the assumptions market participants would use in pricing the
asset or liability since limited market data exists. CenterPoint Energy develops
these inputs based on the best information available, including CenterPoint
Energy’s own data. CenterPoint Energy’s Level 3 derivative
instruments primarily consist of options that are not traded on recognized
exchanges and are valued using option pricing models.
The
following tables present information about CenterPoint Energy’s assets and
liabilities (including derivatives that are presented net) measured at fair
value on a recurring basis as of December 31, 2008 and September 30,
2009, and indicate the fair value hierarchy of the valuation techniques utilized
by CenterPoint Energy to determine such fair value.
|
|
|
Quoted
Prices in
Active
Markets
for Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Netting
Adjustments
(1)
|
|
|
Balance
as
of
December 31,
2008
|
|
|
|
|
(in
millions)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
equities
|
|
$
|
218
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
218
|
|
|
Investments,
including money
market
funds
|
|
|
70
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
70
|
|
|
Derivative
assets
|
|
|
8
|
|
|
|
155
|
|
|
|
49
|
|
|
|
(74
|
)
|
|
|
138
|
|
|
Total
assets
|
|
$
|
296
|
|
|
$
|
155
|
|
|
$
|
49
|
|
|
$
|
(74
|
)
|
|
$
|
426
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indexed
debt securities
derivative
|
|
$
|
-
|
|
|
$
|
133
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
133
|
|
|
Derivative
liabilities
|
|
|
44
|
|
|
|
244
|
|
|
|
107
|
|
|
|
(261
|
)
|
|
|
134
|
|
|
Total
liabilities
|
|
$
|
44
|
|
|
$
|
377
|
|
|
$
|
107
|
|
|
$
|
(261
|
)
|
|
$
|
267
|
|
__________
|
|
(1)
|
Amounts
represent the impact of legally enforceable master netting agreements that
allow CenterPoint Energy to settle positive and negative positions and
also include cash collateral held or placed with the same
counterparties.
|
|
|
|
Quoted
Prices in
Active
Markets
for Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Netting
Adjustments
(1)
|
|
|
Balance
as
of
September 30,
2009
|
|
|
|
|
(in
millions)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
equities
|
|
$
|
287
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
287
|
|
|
Investments,
including money
market
funds
|
|
|
67
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
67
|
|
|
Derivative
assets
|
|
|
2
|
|
|
|
94
|
|
|
|
7
|
|
|
|
(38
|
)
|
|
|
65
|
|
|
Total
assets
|
|
$
|
356
|
|
|
$
|
94
|
|
|
$
|
7
|
|
|
$
|
(38
|
)
|
|
$
|
419
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indexed
debt securities
derivative
|
|
$
|
-
|
|
|
$
|
187
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
187
|
|
|
Derivative
liabilities
|
|
|
16
|
|
|
|
207
|
|
|
|
18
|
|
|
|
(154
|
)
|
|
|
87
|
|
|
Total
liabilities
|
|
$
|
16
|
|
|
$
|
394
|
|
|
$
|
18
|
|
|
$
|
(154
|
)
|
|
$
|
274
|
|
__________
|
|
(1)
|
Amounts
represent the impact of legally enforceable master netting agreements that
allow CenterPoint Energy to settle positive and negative positions and
also include cash collateral of $116 million posted with the same
counterparties.
|
The
following tables present additional information about assets or liabilities,
including derivatives that are measured at fair value on a recurring basis for
which CenterPoint Energy has utilized Level 3 inputs to determine fair
value:
|
|
|
Fair
Value Measurements Using Significant Unobservable Inputs (Level
3)
|
|
|
|
|
Derivative
assets and liabilities, net
|
|
|
|
|
Three
Months Ended September 30,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
(in
millions)
|
|
|
Beginning
balance
|
|
$
|
6
|
|
|
$
|
(17
|
)
|
|
Total
unrealized gains or (losses):
|
|
|
|
|
|
|
|
|
|
Included
in earnings
|
|
|
(61
|
)
|
|
|
2
|
|
|
Included
in regulatory assets
|
|
|
-
|
|
|
|
3
|
|
|
Purchases,
sales, other settlements, net
|
|
|
(4
|
)
|
|
|
1
|
(1)
|
|
Ending
balance
|
|
$
|
(59
|
)
|
|
$
|
(11
|
)
|
|
The
amount of total gains for the period included in earnings
attributable
to
the change in unrealized gains or losses relating to
assets
still held at the reporting date
|
|
$
|
4
|
|
|
$
|
3
|
|
__________
|
|
(1)
|
Purchases,
sales, other settlements, net include a less than $1 million gain
associated with price stabilization activities of CenterPoint Energy’s
Natural Gas Distribution business
segment.
|
|
|
|
Fair
Value Measurements Using Significant Unobservable Inputs (Level
3)
|
|
|
|
|
Derivative
assets and liabilities, net
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
(in
millions)
|
|
|
Beginning
balance
|
|
$
|
(3
|
)
|
|
$
|
(58
|
)
|
|
Total
unrealized gains or (losses):
|
|
|
|
|
|
|
|
|
|
Included
in earnings
|
|
|
(52
|
)
|
|
|
-
|
|
|
Included
in regulatory assets
|
|
|
-
|
|
|
|
(13
|
)
|
|
Purchases,
sales, other settlements, net
|
|
|
(4
|
)
|
|
|
60
|
(1)
|
|
Ending
balance
|
|
$
|
(59
|
)
|
|
$
|
(11
|
)
|
|
The
amount of total gains (losses) for the period included in
earnings
attributable
to the change in unrealized gains or losses relating to
assets
still held at the reporting date
|
|
$
|
9
|
|
|
$
|
2
|
|
_________
|
|
(1)
|
Purchases,
sales, other settlements, net include a $57 million gain associated
with price stabilization activities of CenterPoint Energy’s Natural Gas
Distribution business segment.
|
Goodwill
by reportable business segment as of both December 31, 2008 and
September 30, 2009 is as follows (in millions):
|
Natural
Gas Distribution
|
|
$
|
746
|
|
|
Interstate
Pipelines
|
|
|
579
|
|
|
Competitive
Natural Gas Sales and Services
|
|
|
335
|
|
|
Field
Services
|
|
|
25
|
|
|
Other
Operations
|
|
|
11
|
|
|
Total
|
|
$
|
1,696
|
|
CenterPoint
Energy performs its goodwill impairment tests at least annually and evaluates
goodwill when events or changes in circumstances indicate that the carrying
value of these assets may not be recoverable. The impairment evaluation for
goodwill is performed by using a two-step process. In the first step, the fair
value of each reporting unit is compared with the carrying amount of the
reporting unit, including goodwill. The estimated fair value of the reporting
unit is generally determined on the basis of discounted future cash flows. If
the estimated fair value of the reporting unit is less than the carrying amount
of the reporting unit, then a second step must be completed in order to
determine the amount of the goodwill impairment that should be recorded. In the
second step, the implied fair value of the reporting unit’s goodwill is
determined by allocating the reporting unit’s fair value to all of its assets
and liabilities other than goodwill (including any unrecognized intangible
assets) in a manner similar to a purchase price allocation. The resulting
implied fair value of the goodwill that results from the application of this
second step is then compared to the carrying amount of the goodwill and an
impairment charge is recorded for the difference.
CenterPoint
Energy performed the test at July 1, 2009, its annual impairment testing
date, and determined that no impairment charge for goodwill was
required.
The
following table summarizes the components of total comprehensive income (net of
tax):
|
|
|
For
the Three Months Ended
September 30,
|
|
|
For
the Nine Months Ended
September 30,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
|
(in
millions)
|
|
|
Net
income
|
|
$
|
136
|
|
|
$
|
114
|
|
|
$
|
359
|
|
|
$
|
267
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
to pension and other postretirement
plans (net of tax
of $2, $2, $3 and $5)
|
|
|
-
|
|
|
|
3
|
|
|
|
3
|
|
|
|
9
|
|
|
Net
deferred loss from cash flow hedges
(net of tax of
$-0-, $-0-, $2 and $-0-)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
Reclassification
of deferred gain from cash flow
hedges realized in
net income (net of tax of
$-0-, $-0-, $2 and
$-0-)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
Total
|
|
|
(1
|
)
|
|
|
3
|
|
|
|
(5
|
)
|
|
|
9
|
|
|
Comprehensive
income
|
|
$
|
135
|
|
|
$
|
117
|
|
|
$
|
354
|
|
|
$
|
276
|
|
The
following table summarizes the components of accumulated other comprehensive
loss:
|
|
|
December 31,
2008
|
|
|
September 30,
2009
|
|
|
|
|
(in
millions)
|
|
|
Adjustment
to pension and postretirement
plans
|
|
$
|
(127
|
)
|
|
$
|
(118
|
)
|
|
Net
deferred loss from cash flow hedges
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
Total
accumulated other comprehensive
loss
|
|
$
|
(131
|
)
|
|
$
|
(122
|
)
|
CenterPoint
Energy has 1,020,000,000 authorized shares of capital stock, comprised of
1,000,000,000 shares of $0.01 par value common stock and
20,000,000 shares of $0.01 par value preferred stock. At December 31,
2008, 346,088,714 shares of CenterPoint Energy common stock were issued and
346,088,548 shares were outstanding. At September 30, 2009,
390,331,666 shares of CenterPoint Energy common stock were issued and
390,331,500 shares were outstanding. Outstanding common shares exclude 166
treasury shares at both December 31, 2008 and September 30,
2009.
During
the three months ended September 30, 2009, CenterPoint Energy received
proceeds of approximately $11 million from the sale of approximately
0.9 million common shares to its defined contribution plan and proceeds of
approximately $4 million from the sale of approximately 0.3 million
common shares to participants in its enhanced dividend reinvestment
plan. During the nine months ended September 30, 2009,
CenterPoint Energy received proceeds of approximately $47 million from the
sale of approximately 4.1 million common shares to its defined contribution
plan and proceeds of approximately $11 million from the sale of
approximately 1.0 million common shares to participants in its enhanced
dividend reinvestment plan.
CenterPoint
Energy received net proceeds of $148 million from the issuance of
14.3 million shares of its common stock through a continuous offering
program during the nine months ended September 30, 2009.
In
September 2009, CenterPoint Energy received net proceeds of approximately
$280 million from the issuance of 24.2 million shares of its common
stock in an underwritten public offering.
|
(10)
|
Short-term
Borrowings and Long-term Debt
|
(a)
Short-term Borrowings
Receivables
Facility.
On October 9, 2009, CERC amended its receivables
facility to extend the termination date to October 8,
2010. Availability under CERC’s 364-day receivables facility now
ranges from $150 million to $375 million, reflecting seasonal changes
in receivables balances. As of December 31, 2008 and
September 30, 2009, the facility size was $128 million and
$150 million, respectively. As of December 31, 2008 and
September 30, 2009, advances under the receivables facilities were
$78 million and $40 million, respectively.
Inventory Financing
. In
December 2008, CERC entered into an asset management agreement whereby it sold
$110 million of its natural gas in storage and agreed to repurchase an
equivalent amount of natural gas during the 2008-2009 winter heating season for
payments totaling $114 million. This transaction was accounted
for as a financing and, as of December 31, 2008 and September 30,
2009, CenterPoint Energy’s financial statements reflect natural gas inventory of
$75 million and $-0-, respectively, and a financing obligation of
$75 million and $-0-, respectively, related to this
transaction.
Revolving Credit Facility.
On
October 6, 2009, CenterPoint Houston terminated its $600 million 364-day
credit facility which was secured by a pledge of $600 million of general
mortgage bonds issued by CenterPoint Houston. From inception through
its termination, there had been no borrowings under the credit
facility.
General Mortgage Bonds
. In
January 2009, CenterPoint Houston issued $500 million aggregate principal
amount of general mortgage bonds, due in March 2014 with an interest rate of
7.00%. The proceeds from the sale of the bonds were used for general
corporate purposes, including the repayment of outstanding borrowings under its
revolving credit facility and the money pool, capital expenditures and storm
restoration costs associated with Hurricane Ike.
Revolving Credit Facilities.
CenterPoint Energy’s $1.2 billion credit facility has a first drawn
cost of the London Interbank Offered Rate (LIBOR) plus 55 basis points based on
CenterPoint Energy’s current credit ratings. The facility contains a debt
(excluding transition and other securitization bonds) to earnings before
interest, taxes, depreciation and amortization (EBITDA) covenant, which was
modified (i) in August 2008 so that the permitted ratio of debt to EBITDA would
continue at its then-current level for the remaining term of the facility and
(ii) in November 2008 so that the permitted ratio of debt to EBITDA would be
temporarily increased until the earlier of December 31, 2009 or CenterPoint
Houston’s issuance of bonds to securitize the costs incurred as a result of
Hurricane Ike, after which time the permitted ratio would revert to the level
that existed prior to the November 2008 modification. Non-recourse
securitization bonds are not included within the definition of debt for purposes
of this covenant.
CenterPoint
Houston’s $289 million credit facility contains a debt (excluding
transition and other securitization bonds) to total capitalization covenant. The
facility’s first drawn cost is LIBOR plus 45 basis points based on CenterPoint
Houston’s current credit ratings.
On
October 7, 2009, the size of the CERC Corp. revolving credit facility was
reduced from $950 million to $915 million through removal of Lehman
Brothers Bank, FSB (Lehman) as a lender. Prior to its removal, Lehman
had a $35 million commitment to lend. All credit facility loans
to CERC Corp. that were funded by Lehman were repaid in September
2009. CERC Corp.’s $915 million credit facility’s first drawn
cost is LIBOR plus 45 basis points based on CERC Corp.’s current credit ratings.
The facility contains a debt to total capitalization covenant.
Under
CenterPoint Energy’s $1.2 billion credit facility, CenterPoint Houston’s
$289 million credit facility and CERC Corp.’s $915 million credit
facility, an additional utilization fee of 5 basis points applies to borrowings
any time more than 50% of the facility is utilized. The spread to LIBOR and the
utilization fee fluctuate based on the borrower’s credit rating.
As of
December 31, 2008 and September 30, 2009, the following loan balances
were outstanding under CenterPoint Energy’s long-term revolving credit
facilities (in millions):
|
|
|
December 31,
2008
|
|
|
September 30,
2009
|
|
|
CenterPoint
Energy credit facility borrowings
|
|
$
|
264
|
|
|
$
|
-
|
|
|
CenterPoint
Houston credit facility borrowings
|
|
|
251
|
|
|
|
-
|
|
|
CERC
Corp. credit facility borrowings
|
|
|
926
|
|
|
|
10
|
|
|
Total
credit facility borrowings
|
|
$
|
1,441
|
|
|
$
|
10
|
|
In
addition, as of both December 31, 2008 and September 30, 2009,
CenterPoint Energy had approximately $27 million of outstanding letters of
credit under its $1.2 billion credit facility and CenterPoint Houston had
approximately $4 million of outstanding letters of credit under its
$289 million credit facility. There was no commercial paper outstanding
that would have been backstopped by CenterPoint Energy’s $1.2 billion
credit facility as of December 31, 2008 and September 30,
2009. There was $-0- and $15 million of outstanding commercial
paper backstopped by CERC Corp.’s credit facility as of December 31, 2008
and September 30, 2009, respectively. CenterPoint Energy,
CenterPoint Houston and CERC Corp. were in compliance with all debt covenants as
of September 30, 2009.
|
(11)
|
Commitments
and Contingencies
|
(a)
Natural Gas Supply Commitments
Natural
gas supply commitments include natural gas contracts related to CenterPoint
Energy’s Natural Gas Distribution and Competitive Natural Gas Sales and Services
business segments, which have various quantity requirements and durations, that
are not classified as non-trading derivative assets and liabilities in
CenterPoint Energy’s Condensed Consolidated Balance Sheets as of
December 31, 2008 and September 30, 2009 as these contracts meet the
exception to be classified as "normal purchases contracts" or do not meet the
definition of a derivative. Natural gas supply commitments also include natural
gas transportation contracts that do not meet the definition of a derivative. As
of September 30, 2009, minimum payment obligations for natural gas supply
commitments are approximately $151 million for the remaining three months
in 2009, $449 million in 2010, $466 million in 2011, $383 million
in 2012, $371 million in 2013 and $738 million after
2013.
(b)
Capital Commitments
In
September 2009, CenterPoint Energy Field Services, Inc. (CEFS), a wholly-owned
natural gas gathering and treating subsidiary of CERC Corp., entered into
long-term agreements with an indirect wholly-owned subsidiary of EnCana
Corporation (EnCana) and an indirect wholly-owned subsidiary of Royal Dutch
Shell plc (Shell) to provide gathering and treating services for their natural
gas production from the Haynesville Shale and Bossier Shale formations in Texas
and Louisiana. CEFS has also acquired existing jointly-owned gathering
facilities from EnCana and Shell in De Soto and Red River parishes in northwest
Louisiana.
Under the
terms of the agreements, CEFS commenced gathering and treating services
immediately utilizing the acquired facilities. CEFS will also expand the
acquired facilities to gather and treat up to 700 million cubic feet (MMcf)
per day of natural gas from their current throughput of over 100 MMcf per day.
If EnCana or Shell elect, CEFS will further expand the facilities in order to
gather and treat additional future volumes.
New
construction to reach capacity of 700 MMcf per day includes more than 200 miles
of pipelines, nearly 25,500 horsepower of compression and over 800 MMcf per day
of treating capacity.
Each of
the agreements includes volume commitments for which CEFS has exclusive rights
to gather Shell’s and EnCana’s natural gas production.
CEFS
estimates that the purchase of existing facilities and construction to gather
700 MMcf per day will cost up to $325 million. If EnCana and Shell elect
expansion of the project to gather and process additional future volumes of up
to 1 billion cubic feet per day, CEFS estimates that the expansion would
cost as much as an additional $300 million and EnCana and Shell would
provide incremental volume commitments.
(c) Legal, Environmental and Other
Regulatory Matters
Legal
Matters
Gas Market Manipulation
Cases
. CenterPoint Energy, CenterPoint Houston or their predecessor,
Reliant Energy, Incorporated (Reliant Energy), and certain of their former
subsidiaries are named as defendants in several lawsuits described below. Under
a master separation agreement between CenterPoint Energy and RRI (formerly known
as Reliant Resources, Inc. and Reliant Energy, Inc.), CenterPoint Energy and its
subsidiaries are entitled to be indemnified by RRI for any losses, including
attorneys’ fees and other costs, arising out of these
lawsuits. Pursuant to the indemnification obligation, RRI is
defending CenterPoint Energy and its subsidiaries to the extent named in these
lawsuits. A large number of lawsuits were filed against numerous gas
market participants in a number of federal and western state courts in
connection with the operation of the natural gas markets in 2000-2002.
CenterPoint Energy’s former affiliate, RRI, was a participant in gas trading in
the California and Western markets. These lawsuits, many of which have been
filed as class actions, allege violations of state and federal antitrust laws.
Plaintiffs in these lawsuits are seeking a variety of forms of relief,
including, among others, recovery of compensatory damages (in some cases in
excess of $1 billion), a trebling of compensatory damages, full
consideration damages and attorneys’ fees. CenterPoint Energy and/or Reliant
Energy were named in approximately 30 of these lawsuits, which were instituted
between 2003 and 2009. CenterPoint Energy and its affiliates have been released
or dismissed from all but two of such cases. CenterPoint Energy Services, Inc.
(CES), a subsidiary of CERC Corp., is a defendant in a case now pending in
federal court in Nevada alleging a conspiracy to inflate Wisconsin natural gas
prices in 2000-2002. Additionally, CenterPoint Energy was a defendant
in a lawsuit filed in state court in Nevada that was dismissed in 2007, but the
plaintiffs have indicated that they will appeal the dismissal. CenterPoint
Energy believes that neither it nor CES is a proper defendant in these remaining
cases and will continue to pursue dismissal from those
cases. CenterPoint Energy does not expect the ultimate outcome of
these remaining matters to have a material impact on its financial condition,
results of operations or cash flows.
On May 1,
2009, RRI completed the previously announced sale of its Texas retail business
to NRG Retail LLC, a subsidiary of NRG Energy, Inc. In connection
with the sale, RRI changed its name to RRI Energy, Inc. and no longer provides
service as a REP in CenterPoint Houston’s service territory. The sale
does not alter RRI’s contractual obligations to indemnify CenterPoint Energy and
its subsidiaries, including CenterPoint Houston, for certain liabilities,
including their indemnification regarding certain litigation, nor does it affect
the terms of existing guaranty arrangements for certain RRI gas transportation
contracts.
Natural Gas Measurement
Lawsuits.
CERC Corp. and certain of its subsidiaries are defendants in a
lawsuit filed in 1997 under the Federal False Claims Act alleging mismeasurement
of natural gas produced from federal and Indian lands. The suit seeks
undisclosed damages, along with statutory penalties, interest, costs and fees.
The complaint is part of a larger series of complaints filed against 77 natural
gas pipelines and their subsidiaries and affiliates. An earlier single action
making substantially similar allegations against the pipelines was dismissed by
the federal district court for the District of Columbia on grounds of improper
joinder and lack of jurisdiction. As a result, the various individual complaints
were filed in numerous courts throughout the country. This case has been
consolidated, together with the other similar False Claims Act cases, in the
federal district court in Cheyenne, Wyoming. In October 2006, the judge
considering this matter granted the defendants’ motion to dismiss the suit on
the ground that the court lacked subject matter jurisdiction over the claims
asserted. The plaintiff sought review of that dismissal from the Tenth Circuit
Court of Appeals, which affirmed the district court’s dismissal in March 2009.
Following dismissal of the plaintiff’s motion to the Tenth Circuit for
rehearing, the plaintiff sought review by the United States Supreme Court, but
his petition for certiorari was denied in October 2009.
In
addition, CERC Corp. and certain of its subsidiaries are defendants in two
mismeasurement lawsuits brought against approximately 245 pipeline companies and
their affiliates pending in state court in Stevens County, Kansas. In
one case (originally filed in May 1999 and amended four times), the plaintiffs
purport to represent a class of royalty owners who allege that the defendants
have engaged in systematic mismeasurement of the volume of natural gas for more
than 25 years. The plaintiffs amended their petition in this suit in July 2003
in response to an order from the judge denying certification of the plaintiffs’
alleged class. In the amendment the plaintiffs dismissed their claims against
certain defendants (including two CERC Corp. subsidiaries), limited the scope of
the class of plaintiffs they purport to represent and eliminated previously
asserted claims based on mismeasurement of the British thermal unit (Btu)
content of the gas. The same plaintiffs then filed a second lawsuit, again as
representatives of a putative class of royalty owners, in which they assert
their claims that the defendants have engaged in
systematic
mismeasurement of the Btu content of natural gas for more than 25 years. In both
lawsuits, the plaintiffs seek compensatory damages, along with statutory
penalties, treble damages, interest, costs and fees. In September
2009, the district court in Stevens County, Kansas, denied plaintiffs’ request
for class certification of their case, but the plaintiffs have sought rehearing
of that dismissal.
CERC
believes that there has been no systematic mismeasurement of gas and that these
lawsuits are without merit. CERC and CenterPoint Energy do not expect the
ultimate outcome of the lawsuits to have a material impact on the financial
condition, results of operations or cash flows of either CenterPoint Energy or
CERC.
Gas Cost Recovery Litigation.
In October 2004, a lawsuit was filed by certain CERC ratepayers in Texas
and Arkansas in circuit court in Miller County, Arkansas against CenterPoint
Energy, CERC Corp., Entex Gas Marketing Company (EGMC), CenterPoint Energy Gas
Transmission Company (CEGT), CenterPoint Energy Field Services (CEFS),
CenterPoint Energy Pipeline Services, Inc. (CEPS), Mississippi River
Transmission Corp. (MRT) and various non-affiliated companies alleging fraud,
unjust enrichment and civil conspiracy with respect to rates charged to certain
consumers of natural gas in Arkansas, Louisiana, Minnesota, Mississippi,
Oklahoma and Texas. Subsequently, the plaintiffs dropped CEGT and MRT as
defendants. Although the plaintiffs in the Miller County case sought class
certification, no class was certified. In June 2007, the Arkansas Supreme Court
determined that the Arkansas claims were within the sole and exclusive
jurisdiction of the Arkansas Public Service Commission (APSC). In response to
that ruling, in August 2007 the Miller County court stayed but refused to
dismiss the Arkansas claims. In February 2008, the Arkansas Supreme Court
directed the Miller County court to dismiss the entire case for lack of
jurisdiction. The Miller County court subsequently dismissed the case in
accordance with the Arkansas Supreme Court’s mandate and all appellate deadlines
have expired.
In June
2007, CenterPoint Energy, CERC Corp., EGMC and other defendants in the Miller
County case filed a petition in a district court in Travis County, Texas seeking
a determination that the Railroad Commission has exclusive original jurisdiction
over the Texas claims asserted in the Miller County case. In October 2007, CEFS
and CEPS joined the petition in the Travis County case. In October
2008, the district court ruled that the Railroad Commission had exclusive
original jurisdiction over the Texas claims asserted against CenterPoint Energy,
CERC Corp., EGMC and the other defendants in the Miller County
case. In January 2009, the court entered a final declaratory judgment
ruling that the Railroad Commission has exclusive jurisdiction over Texas
claims. All appellate deadlines expired without an appeal of the
final declaratory judgment.
In August
2007, the Arkansas plaintiff in the Miller County litigation initiated a
complaint at the APSC seeking a decision concerning the extent of the APSC’s
jurisdiction over the Miller County case and an investigation into the merits of
the allegations asserted in his complaint with respect to CERC. In February
2009, the Arkansas plaintiff notified the APSC that he would no longer pursue
his claims, and in July 2009 the complaint proceeding was dismissed by the APSC.
All appellate deadlines expired without an appeal of the dismissal
order.
Environmental
Matters
Manufactured Gas Plant Sites.
CERC and its predecessors operated manufactured gas plants (MGPs) in the past.
In Minnesota, CERC has completed remediation on two sites, other than ongoing
monitoring and water treatment. There are five remaining sites in CERC’s
Minnesota service territory. CERC believes that it has no liability with respect
to two of these sites.
At
September 30, 2009, CERC had accrued $14 million for remediation of
these Minnesota sites and the estimated range of possible remediation costs for
these sites was $4 million to $35 million based on remediation
continuing for 30 to 50 years. The cost estimates are based on studies of a site
or industry average costs for remediation of sites of similar size. The actual
remediation costs will be dependent upon the number of sites to be remediated,
the participation of other potentially responsible parties (PRP), if any, and
the remediation methods used. CERC has utilized an environmental expense tracker
mechanism in its rates in Minnesota to recover estimated costs in excess of
insurance recovery. As of September 30, 2009, CERC had collected
$13 million from insurance companies and rate payers to be used for future
environmental remediation.
In
addition to the Minnesota sites, the United States Environmental Protection
Agency and other regulators have investigated MGP sites that were owned or
operated by CERC or may have been owned by one of its former affiliates. CERC
has been named as a defendant in a lawsuit filed in the United States District
Court, District of
Maine,
under which contribution is sought by private parties for the cost to remediate
former MGP sites based on the previous ownership of such sites by former
affiliates of CERC or its divisions. CERC has also been identified as a PRP by
the State of Maine for a site that is the subject of the lawsuit. In June 2006,
the federal district court in Maine ruled that the current owner of the site is
responsible for site remediation but that an additional evidentiary hearing is
required to determine if other potentially responsible parties, including CERC,
would have to contribute to that remediation. CERC believes it is not liable as
a former owner or operator of the site under the Comprehensive Environmental,
Response, Compensation and Liability Act of 1980, as amended, and applicable
state statutes, and is vigorously contesting the suit and its designation as a
PRP. In September 2009, the federal district court granted CERC’s
motion for summary judgment in the proceeding. Although it is likely
that the plaintiff will pursue an appeal from that dismissal, further action
will not be taken until the district court disposes of claims against other
defendants in the case. CERC and CenterPoint Energy do not expect the ultimate
outcome to have a material impact on the financial condition, results of
operations or cash flows of either CenterPoint Energy or
CERC.
Mercury Contamination.
CenterPoint Energy’s pipeline and distribution operations have in the past
employed elemental mercury in measuring and regulating equipment. It is possible
that small amounts of mercury may have been spilled in the course of normal
maintenance and replacement operations and that these spills may have
contaminated the immediate area with elemental mercury. CenterPoint Energy has
found this type of contamination at some sites in the past, and CenterPoint
Energy has conducted remediation at these sites. It is possible that other
contaminated sites may exist and that remediation costs may be incurred for
these sites. Although the total amount of these costs is not known at this time,
based on CenterPoint Energy’s experience and that of others in the natural gas
industry to date and on the current regulations regarding remediation of these
sites, CenterPoint Energy believes that the costs of any remediation of these
sites will not be material to CenterPoint Energy’s financial condition, results
of operations or cash flows.
Asbestos.
Some facilities
owned by CenterPoint Energy contain or have contained asbestos insulation and
other asbestos-containing materials. CenterPoint Energy or its subsidiaries have
been named, along with numerous others, as a defendant in lawsuits filed by a
number of individuals who claim injury due to exposure to asbestos. Some of the
claimants have worked at locations owned by CenterPoint Energy, but most
existing claims relate to facilities previously owned by CenterPoint Energy’s
subsidiaries. CenterPoint Energy anticipates that additional claims like those
received may be asserted in the future. In 2004, CenterPoint Energy sold its
generating business, to which most of these claims relate, to Texas Genco LLC,
which is now known as NRG Texas LP. Under the terms of the arrangements
regarding separation of the generating business from CenterPoint Energy and its
sale to NRG Texas LP, ultimate financial responsibility for uninsured losses
from claims relating to the generating business has been assumed by NRG Texas
LP, but CenterPoint Energy has agreed to continue to defend such claims to the
extent they are covered by insurance maintained by CenterPoint Energy, subject
to reimbursement of the costs of such defense from NRG Texas LP. Although their
ultimate outcome cannot be predicted at this time, CenterPoint Energy intends to
continue vigorously contesting claims that it does not consider to have merit
and does not expect, based on its experience to date, these matters, either
individually or in the aggregate, to have a material adverse effect on
CenterPoint Energy’s financial condition, results of operations or cash
flows.
Groundwater Contamination
Litigation.
Predecessor entities of CERC, along with several other
entities, are defendants in litigation,
St. Michel Plantation, LLC, et al,
v. White, et al
., pending in civil district court in Orleans Parish,
Louisiana. In the lawsuit, the plaintiffs allege that their property in
Terrebonne Parish, Louisiana suffered salt water contamination as a result of
oil and gas drilling activities conducted by the defendants. Although a
predecessor of CERC held an interest in two oil and gas leases on a portion of
the property at issue, neither it nor any other CERC entities drilled or
conducted other oil and gas operations on those leases. In January 2009,
CERC and the plaintiffs reached agreement on the terms of a settlement that, if
ultimately approved by the Louisiana Department of Natural Resources, is
expected to resolve this litigation. CenterPoint Energy and CERC do not expect
the outcome of this litigation to have a material adverse impact on the
financial condition, results of operations or cash flows of either CenterPoint
Energy or CERC.
Other Environmental.
From
time to time CenterPoint Energy has received notices from regulatory authorities
or others regarding its status as a PRP in connection with sites found to
require remediation due to the presence of environmental contaminants. In
addition, CenterPoint Energy has been named from time to time as a defendant in
litigation related to such sites. Although the ultimate outcome of such matters
cannot be predicted at this time, CenterPoint Energy does not expect, based on
its experience to date, these matters, either individually or in
the
aggregate,
to have a material adverse effect on CenterPoint Energy’s financial condition,
results of operations or cash flows.
Other
Proceedings
CenterPoint
Energy is involved in other legal, environmental, tax and regulatory proceedings
before various courts, regulatory commissions and governmental agencies
regarding matters arising in the ordinary course of business. Some of these
proceedings involve substantial amounts. CenterPoint Energy regularly analyzes
current information and, as necessary, provides accruals for probable
liabilities on the eventual disposition of these matters. CenterPoint Energy
does not expect the disposition of these matters to have a material adverse
effect on CenterPoint Energy’s financial condition, results of operations or
cash flows.
(d)
Guaranties
Prior to
CenterPoint Energy’s distribution of its ownership in RRI to its shareholders,
CERC had guaranteed certain contractual obligations of what became RRI’s trading
subsidiary. When the companies separated, RRI agreed to secure CERC
against obligations under the guaranties RRI had been unable to extinguish by
the time of separation. Pursuant to such agreement, as amended in December
2007, RRI has agreed to provide to CERC cash or letters of credit
as security against CERC’s obligations under its remaining guaranties for
demand charges under certain gas purchase and transportation agreements if and
to the extent changes in market conditions expose CERC to a risk of loss on
those guaranties. As of September 30, 2009, RRI was not required to
provide security to CERC. If RRI should fail to perform the contractual
obligations, CERC could have to honor its guarantee and, in such event,
collateral provided as security may be insufficient to satisfy CERC’s
obligations.
During
the three months and nine months ended September 30, 2008, the effective tax
rate was 36% and 37%, respectively. During the three months and nine
months ended September 30, 2009, the effective tax rate was 25% and 33%,
respectively. CenterPoint Energy’s settlement of its federal income
tax return examinations for tax years 2004 and 2005 affected the comparability
of the effective tax rate. As a result of the settlement, CenterPoint Energy
recognized a reduction in the liability for uncertain tax positions of
approximately $42 million, which included approximately $4 million of
uncertain tax positions existing as of December 31, 2008 which reduced income
tax expense. Additionally, CenterPoint Energy recognized
approximately $9 million as a reduction in accrued interest.
The
following table summarizes CenterPoint Energy’s uncertain tax positions at
December 31, 2008 and September 30, 2009:
|
|
|
December 31,
2008
|
|
|
September 30,
2009
|
|
|
|
|
(in
millions)
|
|
|
Liability
for uncertain tax
positions
|
|
$
|
117
|
|
|
$
|
169
|
|
|
Portion
of liability for uncertain tax positions that, if
recognized,
would reduce the effective income tax rate
|
|
|
14
|
|
|
|
9
|
|
|
Interest
accrued on uncertain tax
positions
|
|
|
10
|
|
|
|
2
|
|
|
(13)
|
Estimated
Fair Value of Financial Instruments
|
The fair
values of cash and cash equivalents, investments in debt and equity securities
classified as "available-for-sale" and "trading" and short-term borrowings are
estimated to be approximately equivalent to carrying amounts and have been
excluded from the table below. The fair values of non-trading derivative assets
and liabilities are equivalent to their carrying amounts in the Condensed
Consolidated Balance Sheets at December 31, 2008 and September 30,
2009 and have been determined using quoted market prices for the same or similar
instruments when
available
or other estimation techniques (see Notes 5 and 6). Therefore, these financial
instruments are stated at fair value and are excluded from the table
below. The fair value of each debt instrument is determined by
multiplying the principal amount of each debt instrument by the market
price.
|
|
|
December 31,
2008
|
|
|
September 30,
2009
|
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
|
|
(in
millions)
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt (excluding capital leases)
|
|
$
|
10,396
|
|
|
$
|
9,875
|
|
|
$
|
9,266
|
|
|
$
|
9,754
|
|
The
following table reconciles numerators and denominators of CenterPoint Energy’s
basic and diluted earnings per share calculations:
|
|
|
Three
Months Ended September 30,
|
|
|
Nine Months
Ended September 30,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
|
(in
millions, except share and per share amounts)
|
|
|
Basic
earnings per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
136
|
|
|
$
|
114
|
|
|
$
|
359
|
|
|
$
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
342,228,000
|
|
|
|
369,512,000
|
|
|
|
333,652,000
|
|
|
|
356,570,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
0.40
|
|
|
$
|
0.31
|
|
|
$
|
1.08
|
|
|
$
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
136
|
|
|
$
|
114
|
|
|
$
|
359
|
|
|
$
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
342,228,000
|
|
|
|
369,512,000
|
|
|
|
333,652,000
|
|
|
|
356,570,000
|
|
|
Plus:
Incremental shares from assumed conversions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options (1)
|
|
|
841,000
|
|
|
|
514,000
|
|
|
|
846,000
|
|
|
|
459,000
|
|
|
Restricted
stock
|
|
|
1,515,000
|
|
|
|
1,716,000
|
|
|
|
1,515,000
|
|
|
|
1,716,000
|
|
|
3.75%
convertible senior notes
|
|
|
-
|
|
|
|
-
|
|
|
|
6,174,000
|
|
|
|
-
|
|
|
Weighted
average shares assuming dilution
|
|
|
344,584,000
|
|
|
|
371,742,000
|
|
|
|
342,187,000
|
|
|
|
358,745,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
0.39
|
|
|
$
|
0.31
|
|
|
$
|
1.05
|
|
|
$
|
0.74
|
|
__________
|
|
(1)
|
Options
to purchase 2,720,083 shares were outstanding for both the three and
nine months ended September 30, 2008, and options to purchase
2,521,030 shares were outstanding for both the three and nine months
ended September 30, 2009, but were not included in the computation of
diluted earnings per share because the options’ exercise price was greater
than the average market price of the common shares for the respective
periods.
|
Substantially
all of the 3.75% contingently convertible senior notes provided for settlement
of the principal portion in cash rather than stock. The portion of the
conversion value of such notes that was required to be settled in cash rather
than stock is excluded from the computation of diluted earnings per share from
continuing operations. CenterPoint Energy included the conversion spread in the
calculation of diluted earnings per share when the average market price of
CenterPoint Energy’s common stock in the respective reporting period exceeded
the conversion price.
In April 2008, CenterPoint
Energy called its 3.75% convertible senior notes for redemption on May 30,
2008. Substantially all of CenterPoint Energy’s 3.75% convertible senior notes
were submitted for conversion on or prior to the May 30, 2008 redemption
date.
|
(15)
|
Reportable
Business Segments
|
CenterPoint
Energy’s determination of reportable business segments considers the strategic
operating units under which CenterPoint Energy manages sales, allocates
resources and assesses performance of various products and services to wholesale
or retail customers in differing regulatory environments. The accounting
policies of the
business
segments are the same as those described in the summary of significant
accounting policies except that some executive benefit costs have not been
allocated to business segments. CenterPoint Energy uses operating income as the
measure of profit or loss for its business segments.
CenterPoint
Energy’s reportable business segments include the following: Electric
Transmission & Distribution, Natural Gas Distribution, Competitive Natural
Gas Sales and Services, Interstate Pipelines, Field Services and Other
Operations. The electric transmission and distribution function (CenterPoint
Houston) is reported in the Electric Transmission & Distribution business
segment. Natural Gas Distribution consists of intrastate natural gas sales to,
and natural gas transportation and distribution for, residential, commercial,
industrial and institutional customers. Competitive Natural Gas Sales and
Services represents CenterPoint Energy’s non-rate regulated gas sales and
services operations, which consist of three operational functions: wholesale,
retail and intrastate pipelines. The Interstate Pipelines business segment
includes the interstate natural gas pipeline operations. The Field Services
business segment includes the natural gas gathering operations. Other Operations
consists primarily of other corporate operations which support all of
CenterPoint Energy’s business operations.
Financial
data for business segments and products and services are as follows (in
millions):
|
|
|
For
the Three Months Ended September 30, 2008
|
|
|
|
|
Revenues
from
External
Customers
|
|
|
Net
Intersegment
Revenues
|
|
|
Operating
Income
(Loss)
|
|
|
Electric
Transmission & Distribution
|
|
$
|
552
|
(1)
|
|
$
|
-
|
|
|
$
|
202
|
|
|
Natural
Gas Distribution
|
|
|
548
|
|
|
|
2
|
|
|
|
(6
|
)
|
|
Competitive
Natural Gas Sales and Services
|
|
|
1,256
|
|
|
|
13
|
|
|
|
35
|
|
|
Interstate
Pipelines
|
|
|
96
|
|
|
|
47
|
|
|
|
55
|
(3)
|
|
Field
Services
|
|
|
60
|
|
|
|
11
|
|
|
|
44
|
|
|
Other
Operations
|
|
|
3
|
|
|
|
-
|
|
|
|
7
|
|
|
Eliminations
|
|
|
-
|
|
|
|
(73
|
)
|
|
|
-
|
|
|
Consolidated
|
|
$
|
2,515
|
|
|
$
|
-
|
|
|
$
|
337
|
|
|
|
|
For
the Three Months Ended September 30, 2009
|
|
|
|
|
Revenues
from
External
Customers
|
|
|
Net
Intersegment
Revenues
|
|
|
Operating
Income
(Loss)
|
|
|
Electric
Transmission & Distribution
|
|
$
|
608
|
(1)
|
|
$
|
-
|
|
|
$
|
218
|
|
|
Natural
Gas Distribution
|
|
|
400
|
|
|
|
2
|
|
|
|
(15
|
)
|
|
Competitive
Natural Gas Sales and Services
|
|
|
395
|
|
|
|
4
|
|
|
|
(8
|
)
|
|
Interstate
Pipelines
|
|
|
119
|
|
|
|
34
|
|
|
|
64
|
|
|
Field
Services
|
|
|
51
|
|
|
|
12
|
|
|
|
23
|
|
|
Other
Operations
|
|
|
3
|
|
|
|
-
|
|
|
|
5
|
|
|
Eliminations
|
|
|
-
|
|
|
|
(52
|
)
|
|
|
-
|
|
|
Consolidated
|
|
$
|
1,576
|
|
|
$
|
-
|
|
|
$
|
287
|
|
|
|
|
For
the Nine Months Ended September 30, 2008
|
|
|
|
|
|
|
|
Revenues
from
External
Customers
|
|
|
Net
Intersegment
Revenues
|
|
|
Operating
Income
|
|
|
Total
Assets
as
of December 31,
2008
|
|
|
Electric
Transmission & Distribution
|
|
$
|
1,471
|
(1)
|
|
$
|
-
|
|
|
$
|
457
|
(2)
|
|
$
|
8,880
|
|
|
Natural
Gas Distribution
|
|
|
2,969
|
|
|
|
7
|
|
|
|
119
|
|
|
|
4,961
|
|
|
Competitive
Natural Gas Sales and Services
|
|
|
3,599
|
|
|
|
33
|
|
|
|
36
|
|
|
|
1,315
|
|
|
Interstate
Pipelines
|
|
|
337
|
|
|
|
131
|
|
|
|
227
|
(3)
|
|
|
3,578
|
|
|
Field
Services
|
|
|
164
|
|
|
|
27
|
|
|
|
121
|
(4)
|
|
|
826
|
|
|
Other
Operations
|
|
|
8
|
|
|
|
-
|
|
|
|
10
|
|
|
|
2,185
|
(5)
|
|
Eliminations
|
|
|
-
|
|
|
|
(198
|
)
|
|
|
-
|
|
|
|
(2,069
|
)
|
|
Consolidated
|
|
$
|
8,548
|
|
|
$
|
-
|
|
|
$
|
970
|
|
|
$
|
19,676
|
|
|
|
|
For
the Nine Months Ended September 30, 2009
|
|
|
|
|
|
|
|
Revenues
from
External
Customers
|
|
|
Net
Intersegment
Revenues
|
|
|
Operating
Income
|
|
|
Total
Assets
as
of September 30,
2009
|
|
|
Electric
Transmission & Distribution
|
|
$
|
1,541
|
(1)
|
|
$
|
-
|
|
|
$
|
450
|
|
|
$
|
9,017
|
|
|
Natural
Gas Distribution
|
|
|
2,334
|
|
|
|
7
|
|
|
|
105
|
|
|
|
4,281
|
|
|
Competitive
Natural Gas Sales and Services
|
|
|
1,585
|
|
|
|
11
|
|
|
|
-
|
|
|
|
1,065
|
|
|
Interstate
Pipelines
|
|
|
355
|
|
|
|
106
|
|
|
|
194
|
|
|
|
3,478
|
|
|
Field
Services
|
|
|
158
|
|
|
|
18
|
|
|
|
72
|
|
|
|
934
|
|
|
|