CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
| | | | | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2005 | | 2006 | | 2007 | | | Year Ended December 31, | |
| | (In millions) | | | 2007 | | | 2008 | | | 2009 | |
| | (In millions) | |
Cash Flows from Operating Activities: | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 252 | | | $ | 432 | | | $ | 399 | | | $ | 395 | | | $ | 446 | | | $ | 372 | |
Discontinued operations, net of tax | | | 3 | | | | — | | | | — | | |
Extraordinary item, net of tax | | | (30 | ) | | | — | | | | — | | |
| | | | | | | | |
Income from continuing operations and cumulative effect of accounting change | | | 225 | | | | 432 | | | | 399 | | |
Adjustments to reconcile income from continuing operations to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 541 | | | | 599 | | | | 631 | | | | 631 | | | | 708 | | | | 743 | |
Amortization of deferred financing costs | | | 77 | | | | 56 | | | | 65 | | | | 69 | | | | 29 | | | | 37 | |
Deferred income taxes | | | 232 | | | | (234 | ) | | | 8 | | | | - | | | | 487 | | | | 269 | |
Tax and interest reserves reductions related to ZENS and ACES settlement | | | — | | | | (107 | ) | | | — | | |
Investment tax credit | | | (8 | ) | | | (7 | ) | | | (8 | ) | |
Unrealized loss (gain) on Time Warner investment | | | 44 | | | | (94 | ) | | | 114 | | |
Unrealized loss (gain) on marketable securities | | | | 114 | | | | 139 | | | | (82 | ) |
Unrealized loss (gain) on indexed debt securities | | | (49 | ) | | | 80 | | | | (111 | ) | | | (111 | ) | | | (128 | ) | | | 68 | |
Write-down of natural gas inventory | | | — | | | | 66 | | | | 11 | | | | 11 | | | | 30 | | | | 6 | |
Equity in earnings of unconsolidated affiliates, net of distributions | | | | (13 | ) | | | (51 | ) | | | (3 | ) |
Changes in other assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Accounts receivable and unbilled revenues, net | | | (456 | ) | | | 262 | | | | — | | | | - | | | | (82 | ) | | | 283 | |
Inventory | | | (115 | ) | | | (82 | ) | | | (102 | ) | | | (102 | ) | | | (109 | ) | | | 236 | |
Taxes receivable | | | (53 | ) | | | 53 | | | | — | | |
Accounts payable | | | 321 | | | | (269 | ) | | | (185 | ) | | | (185 | ) | | | 87 | | | | (237 | ) |
Fuel cost over (under) recovery/surcharge | | | (129 | ) | | | 111 | | | | (93 | ) | |
Fuel cost over (under) recovery | | | | (93 | ) | | | 45 | | | | (5 | ) |
Non-trading derivatives, net | | | (12 | ) | | | (18 | ) | | | 11 | | | | 11 | | | | (25 | ) | | | 28 | |
Margin deposits, net | | | 51 | | | | (156 | ) | | | 65 | | | | 65 | | | | (182 | ) | | | 116 | |
Interest and taxes accrued | | | (471 | ) | | | 230 | | | | (33 | ) | | | (33 | ) | | | (118 | ) | | | (41 | ) |
Net regulatory assets and liabilities | | | (192 | ) | | | 79 | | | | 81 | | | | 81 | | | | (366 | ) | | | - | |
Pension contribution | | | (75 | ) | | | — | | | | — | | |
Other current assets | | | (14 | ) | | | (76 | ) | | | 13 | | | | 13 | | | | (27 | ) | | | 27 | |
Other current liabilities | | | 69 | | | | 18 | | | | (20 | ) | | | (20 | ) | | | 29 | | | | 6 | |
Other assets | | | 30 | | | | 43 | | | | (33 | ) | | | (20 | ) | | | (20 | ) | | | (1 | ) |
Other liabilities | | | 67 | | | | 6 | | | | (51 | ) | | | (51 | ) | | | (8 | ) | | | 3 | |
Other, net | | | 18 | | | | (1 | ) | | | 12 | | | | 12 | | | | (33 | ) | | | 16 | |
| | | | | | | | |
Net cash provided by operating activities of continuing operations | | | 101 | | | | 991 | | | | 774 | | |
Net cash used in operating activities of discontinued operations | | | (38 | ) | | | — | | | | — | | |
| | | | | | | | |
Net cash provided by operating activities | | | 63 | | | | 991 | | | | 774 | | | | 774 | | | | 851 | | | | 1,841 | |
| | | | | | | | |
Cash Flows from Investing Activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | (693 | ) | | | (1,007 | ) | | | (1,114 | ) | | | (1,114 | ) | | | (1,020 | ) | | | (1,160 | ) |
Proceeds from sale of Texas Genco | | | 700 | | | | — | | | | — | | |
Purchase of minority interest of Texas Genco | | | (383 | ) | | | — | | | | — | | |
Decrease in restricted cash for purchase of minority interest of Texas Genco | | | 383 | | | | — | | | | — | | |
Increase in cash of Texas Genco | | | 24 | | | | — | | | | — | | |
Increase in restricted cash of transition bond companies | | | (12 | ) | | | (32 | ) | | | (1 | ) | |
Increase in notes receivable from unconsolidated affiliates | | | — | | | | — | | | | (148 | ) | |
Decrease (increase) in restricted cash of transition and system restoration bond companies | | | | (1 | ) | | | (11 | ) | | | 26 | |
Decrease (increase) in notes receivable from unconsolidated affiliates | | | | (148 | ) | | | (175 | ) | | | 323 | |
Investment in unconsolidated affiliates | | | — | | | | (13 | ) | | | (39 | ) | | | (39 | ) | | | (206 | ) | | | (115 | ) |
Other, net | | | (2 | ) | | | (4 | ) | | | 2 | | | | 2 | | | | 44 | | | | 30 | |
| | | | | | | | |
Net cash provided by (used in) investing activities | | | 17 | | | | (1,056 | ) | | | (1,300 | ) | |
| | | | | | | | |
Net cash used in investing activities | | | | (1,300 | ) | | | (1,368 | ) | | | (896 | ) |
Cash Flows from Financing Activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Increase in short-term borrowings, net | | | 75 | | | | 187 | | | | 45 | | |
Long-term revolving credit facility, net | | | (236 | ) | | | (3 | ) | | | 331 | | |
Increase (decrease) in short-term borrowings, net | | | | 45 | | | | (79 | ) | | | (98 | ) |
Revolving credit facilities, net | | | | 331 | | | | 1,110 | | | | (1,441 | ) |
Proceeds from long-term debt | | | 3,161 | | | | 324 | | | | 900 | | | | 900 | | | | 1,088 | | | | 1,165 | |
Payments of long-term debt | | | (3,045 | ) | | | (229 | ) | | | (548 | ) | | | (548 | ) | | | (1,373 | ) | | | (222 | ) |
Debt issuance costs | | | (21 | ) | | | (5 | ) | | | (9 | ) | | | (9 | ) | | | (26 | ) | | | (10 | ) |
Payment of common stock dividends | | | (124 | ) | | | (187 | ) | | | (218 | ) | | | (218 | ) | | | (246 | ) | | | (276 | ) |
Proceeds from issuance of common stock, net | | | 17 | | | | 27 | | | | 22 | | | | 22 | | | | 80 | | | | 504 | |
Other, net | | | 2 | | | | 4 | | | | 5 | | | | 5 | | | | 1 | | | | 6 | |
| | | | | | | | |
Net cash provided by (used in) financing activities | | | (171 | ) | | | 118 | | | | 528 | | | | 528 | | | | 555 | | | | (372 | ) |
| | | | | | | | |
Net Increase (Decrease) in Cash and Cash Equivalents | | | (91 | ) | | | 53 | | | | 2 | | |
Net Increase in Cash and Cash Equivalents | | | | 2 | | | | 38 | | | | 573 | |
Cash and Cash Equivalents at Beginning of Year | | | 165 | | | | 74 | | | | 127 | | | | 127 | | | | 129 | | | | 167 | |
| | | | | | | | |
Cash and Cash Equivalents at End of Year | | $ | 74 | | | $ | 127 | | | $ | 129 | | | $ | 129 | | | $ | 167 | | | $ | 740 | |
| | | | | | | | |
Supplemental Disclosure of Cash Flow Information: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash Payments: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest, net of capitalized interest | | $ | 667 | | | $ | 532 | | | $ | 572 | | | $ | 572 | | | $ | 586 | | | $ | 624 | |
Income taxes (refunds), net | | | 351 | | | | 195 | | | | 205 | | | | 205 | | | | (84 | ) | | | (9 | ) |
Non-cash transactions: | | | | | | | | | | | | | | | | | | | | | | | | |
Increase in accounts payable related to capital expenditures | | | 35 | | | | 113 | | | | — | | |
Accounts payable related to capital expenditures | | | | 75 | | | | 96 | | | | 84 | |
See Notes to the Company’sCenterPoint Energy’s Consolidated Financial Statements
69
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2005 | | 2006 | | 2007 | | |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | 2007 | | 2008 | | 2009 | |
| | (In millions of dollars and shares) | | Shares | | Amount | | Shares | | Amount | | Shares | | | |
| (In millions of dollars and shares) | |
Preference Stock, none outstanding | | | — | | | $ | — | | | | — | | | $ | — | | | | — | | | $ | — | | - | | $ | - | | - | | $ | - | | - | | $ | - | |
Cumulative Preferred Stock, $0.01 par value; authorized 20,000,000 shares, none outstanding | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | - | | | - | | - | | | - | | - | | | - | |
Common Stock, $0.01 par value; authorized 1,000,000,000 shares | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, beginning of year | | | 308 | | | | 3 | | | | 310 | | | | 3 | | | | 314 | | | | 3 | | 314 | | | 3 | | 323 | | | 3 | | 346 | | | 3 | |
Issuances related to benefit and investment plans | | | 2 | | | | — | | | | 4 | | | | — | | | | 2 | | | | — | | 2 | | | - | | 6 | | | - | | 7 | | | - | |
Issuances related to convertible debt conversions | | | — | | | | — | | | | — | | | | — | | | | 7 | | | | — | | 7 | | | - | | 17 | | | - | | - | | | - | |
| | | | | | | | | | | | | | |
Issuances related to public offerings | | - | | | - | | - | | | - | | 38 | | | 1 | |
Balance, end of year | | | 310 | | | | 3 | | | | 314 | | | | 3 | | | | 323 | | | | 3 | | 323 | | | 3 | | 346 | | | 3 | | 391 | | | 4 | |
| | | | | | | | | | | | | | |
AdditionalPaid-in-Capital | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, beginning of year | | | — | | | | 2,891 | | | | — | | | | 2,931 | | | | — | | | | 2,977 | | | | | 2,977 | | | | | 3,046 | | | | | 3,158 | |
Cumulative effect of adoption of convertible debt pronouncement (See Note 2(o)) | | | | | 23 | | | | | - | | | | | - | |
Balance, beginning of year (as adjusted) | | | | | 3,000 | | | | | 3,046 | | | | | 3,158 | |
Issuances related to benefit and investment plans | | | — | | | | 40 | | | | — | | | | 46 | | | | — | | | | 46 | | | | | 46 | | | | | 112 | | | | | 86 | |
| | | | | | | | | | | | | | |
Issuances related to public offerings, net of issuance costs | | | | | - | | | | | - | | | | | 427 | |
Balance, end of year | | | — | | | | 2,931 | | | | — | | | | 2,977 | | | | — | | | | 3,023 | | | | | 3,046 | | | | | 3,158 | | | | | 3,671 | |
| | | | | | | | | | | | | | |
Accumulated Deficit | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, beginning of year | | | | | | | (1,728 | ) | | | | | | | (1,600 | ) | | | | | | | (1,355 | ) | | | | (1,355 | ) | | | | (1,194 | ) | | | | (1,008 | ) |
Cumulative effect of adoption of convertible debt pronouncement (See Note 2(o)) | | | | | (18 | ) | | | | - | | | | | - | |
Cumulative effect of change in accounting principle (see Note 2(p)) | | | | | - | | | | | (15 | ) | | | | - | |
Balance, beginning of year (as adjusted) | | | | | (1,373 | ) | | | | (1,209 | ) | | | | (1,008 | ) |
Net income | | | | | | | 252 | | | | | | | | 432 | | | | | | | | 399 | | | | | 395 | | | | | 446 | | | | | 372 | |
Cumulative effect of adopting FIN 48 | | | | | | | — | | | | | | | | — | | | | | | | | 2 | | |
Common stock dividends — $0.40 per share in 2005, $0.60 per share in 2006, and $0.68 per share in 2007 | | | | | | | (124 | ) | | | | | | | (187 | ) | | | | | | | (218 | ) | |
| | | | | | | | |
Cumulative effect of uncertain tax positions standard | | | | | 2 | | | | | - | | | | | - | |
Common stock dividends - $0.68 per share in 2007, $0.73 per share in 2008, and $0.76 per share in 2009 | | | | | (218 | ) | | | | (245 | ) | | | | (276 | ) |
Balance, end of year | | | | | | | (1,600 | ) | | | | | | | (1,355 | ) | | | | | | | (1,172 | ) | | | | (1,194 | ) | | | | (1,008 | ) | | | | (912 | ) |
| | | | | | | | |
Accumulated Other Comprehensive Loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, end of year: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
SFAS No. 158 incremental effect | | | | | | | — | | | | | | | | (79 | ) | | | | | | | (45 | ) | |
Minimum pension liability adjustment | | | | | | | (15 | ) | | | | | | | (3 | ) | | | | | | | (3 | ) | |
Adjustment to pension and postretirement plans | | | | | (48 | ) | | | | (127 | ) | | | | (120 | ) |
Net deferred gain (loss) from cash flow hedges | | | | | | | (23 | ) | | | | | | | 13 | | | | | | | | 4 | | | | | 4 | | | | | (4 | ) | | | | (4 | ) |
| | | | | | | | |
Total accumulated other comprehensive loss, end of year | | | | | | | (38 | ) | | | | | | | (69 | ) | | | | | | | (44 | ) | | | | (44 | ) | | | | (131 | ) | | | | (124 | ) |
| | | | | | | | |
Total Shareholders’ Equity | | | | | | $ | 1,296 | | | | | | | $ | 1,556 | | | | | | | $ | 1,810 | | | | $ | 1,811 | | | | $ | 2,022 | | | | $ | 2,639 | |
| | | | | | | | |
See Notes to the Company’sCenterPoint Energy’s Consolidated Financial Statements
70
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
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(1) | Background and Basis of Presentation |
(1) Background
CenterPoint Energy, Inc. (the Company)(CenterPoint Energy) is a public utility holding company. The Company’sCenterPoint 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 December 31, 2007, the Company’s2009, CenterPoint Energy’s indirect wholly owned subsidiaries included:
| | |
| • | CenterPoint Energy Houston Electric, LLC (CenterPoint Houston), which engages in the electric transmission and distribution business in a 5,000-square mile area of the Texas Gulf Coast that includes Houston; and |
|
| • | CenterPoint Energy Resources Corp. (CERC Corp., and, together with its subsidiaries, CERC), which owns and operates natural gas distribution systems in six states. Subsidiaries of CERC 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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(b) | Basis of Presentation |
The Company sold the fossil generation assets of Texas Genco Holdings, Inc. (Texas Genco) in December 2004 and completed the sale of Texas Genco, which had continued to own an interest in a nuclear generating facility,5,000-square mile area of the Texas Gulf Coast that includes the city of Houston; and
CenterPoint Energy Resources Corp. (CERC Corp. and, together with its subsidiaries, CERC), which owns and operates natural gas distribution systems in April 2005.six states. Subsidiaries of CERC 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.
The consolidated financial statements report the businesses described above as discontinued operations for all periods presented in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144).
For a description of the Company’sCenterPoint Energy’s reportable business segments, see Note 14.
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(2) | Summary of Significant Accounting Policies |
(2) Summary of Significant Accounting Policies
(a) Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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.
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(b) | Principles of Consolidation |
(b) Principles of Consolidation
The accounts of the CompanyCenterPoint Energy and its wholly owned and majority owned subsidiaries are included in the consolidated financial statements. All intercompany transactions and balances are eliminated in consolidation. The CompanyCenterPoint Energy uses the equity method of accounting for investments in entities in which the CompanyCenterPoint Energy has an ownership interest between 20% and 50% and exercises significant influence. SuchCenterPoint Energy’s investments were $32 millionin unconsolidated affiliates include a 50% ownership interest in Southeast Supply Header, LLC (SESH) which owns and $88 million as of December 31, 2006operates a 270-mile interstate natural gas pipeline and 2007, respectively,a 50% interest in Waskom Gas Processing Company, a Texas general partnership, which owns and are included as part of other noncurrent assets in the Company’s Consolidated Balance Sheets.operates a natural gas processing plant. Other investments, excluding marketable securities, are carried at cost.During 2009, CenterPoint Energy invested $137 million in SESH and received a capital distribution of $23 million from SESH.
The Company(c) Revenues
CenterPoint Energy records revenue for electricity delivery and natural gas sales and services under the accrual method and these revenues are recognized upon delivery to customers. Electricity deliveries not billed by month-end are accrued based on daily supply volumes, applicable rates and analyses reflecting significant historical trends
71
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and experience. Natural gas sales not billed by month-end are accrued based upon estimated purchased gas volumes, estimated lost and unaccounted for gas and currently effective tariff rates. The Interstate Pipelines and Field Services business segments record revenues as transportation and processing services are provided.
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(d) | Long-lived Assets and Intangibles |
(d) Long-lived Assets and Intangibles
CenterPoint Energy records property, plant and equipment at historical cost. The CompanyCenterPoint Energy expenses repair and maintenance costs as incurred. Property, plant and equipment includesinclude the following:
| | | | | | | | | | | | | |
| | Weighted Average
| | | | | | |
| | Useful Lives
| | December 31, | | | Weighted Average | | | | |
| | (Years) | | 2006 | | 2007 | | | Useful Lives | | | December 31, | |
| | | | (In millions) | | | (Years) | | | 2008 | | | 2009 | |
| | | | | (In millions) | |
Electric Transmission & Distribution | | | 27 | | | $ | 6,823 | | | $ | 6,993 | | | | 27 | | | $ | 7,256 | | | $ | 7,325 | |
Natural Gas Distribution | | | 31 | | | | 2,875 | | | | 3,065 | | | | 31 | | | | 3,266 | | | | 3,436 | |
Competitive Natural Gas Sales and Services | | | 24 | | | | 53 | | | | 59 | | | | 26 | | | | 67 | | | | 69 | |
Interstate Pipelines | | | 57 | | | | 1,943 | | | | 2,194 | | | | 58 | | | | 2,334 | | | | 2,524 | |
Field Services | | | 51 | | | | 429 | | | | 493 | | | | 51 | | | | 601 | | | | 931 | |
Other property | | | 30 | | | | 444 | | | | 446 | | | | 26 | | | | 482 | | | | 485 | |
| | | | | | |
Total | | | | | | | 12,567 | | | | 13,250 | | | | | | | | 14,006 | | | | 14,770 | |
| | | | | | |
Accumulated depreciation and amortization: | | | | | | | | | | | | | | | | | | | | | | | | |
Electric Transmission & Distribution | | | | | | | 2,566 | | | | 2,602 | | | | | | | | 2,652 | | | | 2,737 | |
Natural Gas Distribution | | | | | | | 462 | | | | 590 | | | | | | | | 708 | | | | 825 | |
Competitive Natural Gas Sales and Services | | | | | | | 9 | | | | 9 | | | | | | | | 11 | | | | 13 | |
Interstate Pipelines | | | | | | | 176 | | | | 160 | | | | | | | | 182 | | | | 223 | |
Field Services | | | | | | | 31 | | | | 29 | | | | | | | | 28 | | | | 27 | |
Other property | | | | | | | 119 | | | | 120 | | | | | | | | 129 | | | | 157 | |
| | | | | | |
Total accumulated depreciation and amortization | | | | | | | 3,363 | | | | 3,510 | | | | | | | | 3,710 | | | | 3,982 | |
| | | | | | |
Property, plant and equipment, net | | | | | | $ | 9,204 | | | $ | 9,740 | | | | | | | $ | 10,296 | | | $ | 10,788 | |
| | | | | | |
Goodwill by reportable business segment as of December 31, 20062008 and 20072009 is as follows (in millions):
| | | | | | | | | |
| | December 31, | | |
| | 2006 | | 2007 | | |
| |
Natural Gas Distribution | | $ | 746 | | | $ | 746 | | | $ | 746 | |
Interstate Pipelines | | | 579 | | | | 579 | | | | 579 | |
Competitive Natural Gas Sales and Services | | | 335 | | | | 335 | | | | 335 | |
Field Services | | | 25 | | | | 25 | | | | 25 | |
Other Operations(1) | | | 20 | | | | 11 | | |
| | | | | | |
Other Operations | | | | 11 | |
Total | | $ | 1,705 | | | $ | 1,696 | | | $ | 1,696 | |
| | | | | | |
| | |
(1) | | In December 2007, the Company determined that $9 million of tax benefits not previously established were associated with a prior year acquisition. In accordance with Emerging Issues Task Force (EITF) IssueNo. 93-7, “Uncertainties Related to Income Taxes in a Purchase Business Combination,” the adjustment was applied to decrease the remaining goodwill attributable to that acquisition. |
72
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The CompanyCenterPoint Energy performs its goodwill impairment tests at least annually and evaluates goodwill when events or changes in circumstances indicate that theits 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.
The CompanyCenterPoint Energy performed the test at July 1, 2007, the Company’s2009, its annual impairment testing date, and determined that no impairment charge for goodwill was required.
The CompanyCenterPoint Energy periodically evaluates long-lived assets, including property, plant and equipment, and specifically identifiable intangibles, when events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. The determination of whether an impairment has occurred is based on an estimate of undiscounted cash flows attributable to the assets, as compared to the carrying value of the assets.
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(e) | Regulatory Assets and Liabilities |
(e) Regulatory Assets and Liabilities
CenterPoint Energy applies the guidance for accounting policies established in SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation” (SFAS No. 71),regulated operations, to the accounts of the Electric Transmission & Distribution business segment and the Natural Gas Distribution business segment and to some of the accountsportions of the Interstate Pipelines business segment.
The following is a list of regulatory assets/liabilities reflected on the Company’sCenterPoint Energy’s Consolidated Balance Sheets as of December 31, 20062008 and 2007:2009:
| | | | | | | | |
| | December 31, | |
| | 2006 | | | 2007 | |
| | (In millions) | |
|
Electric generation-related regulatory assets(1) | | $ | 343 | | | $ | 325 | |
Securitized regulatory asset | | | 2,285 | | | | 2,131 | |
Unamortized loss on reacquired debt | | | 85 | | | | 79 | |
Pension and postretirement-related regulatory asset(2) | | | 483 | | | | 360 | |
Other long-term regulatory assets | | | 94 | | | | 98 | |
| | | | | | | | |
Total regulatory assets | | | 3,290 | | | | 2,993 | |
| | | | | | | | |
Electric generation-related regulatory liabilities | | | 39 | | | | 44 | |
Estimated removal costs | | | 697 | | | | 734 | |
Other long-term regulatory liabilities | | | 56 | | | | 50 | |
| | | | | | | | |
Total regulatory liabilities | | | 792 | | | | 828 | |
| | | | | | | | |
Total regulatory assets and liabilities, net | | $ | 2,498 | | | $ | 2,165 | |
| | | | | | | | |
| | December 31, | |
| | 2008 | | | 2009 | |
| | (In millions) | |
Securitized regulatory asset (1) | | $ | 2,430 | | | $ | 2,886 | |
Unrecognized equity return | | | (207 | ) | | | (232 | ) |
Unamortized loss on reacquired debt | | | 73 | | | | 67 | |
Hurricane Ike restoration cost (1) | | | 435 | | | | 5 | |
Pension and postretirement-related regulatory asset | | | 848 | | | | 781 | |
Other long-term regulatory assets(2) | | | 105 | | | | 170 | |
Total regulatory assets (1) | | | 3,684 | | | | 3,677 | |
| | | | | | | | |
Estimated removal costs | | | 779 | | | | 818 | |
Other long-term regulatory liabilities | | | 42 | | | | 103 | |
Total regulatory liabilities | | | 821 | | | | 921 | |
| | | | | | | | |
Total regulatory assets and liabilities, net | | $ | 2,863 | | | $ | 2,756 | |
__________
| | |
(1) | | Excludes $234 million and $220As discussed in Note 8(b), CenterPoint Houston securitized approximately $665 million of allowed equityHurricane Ike restoration costs in November 2009. CenterPoint Houston did not record a return on Hurricane Ike restoration costs until approval by thetrue-up balance as Public Utility Commission of Texas (Texas Utility Commission) was received in 2009. Other regulatory assets that are not earning a return were not material at December 31, 20062008 and 2007, respectively.2009. |
|
(2) | | Upon adoptionCenterPoint Houston’s actuarially determined pension expense for 2009 in excess of SFAS No. 158, “Employers’ Accountingthe 2007 base year amount is being deferred for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS No. 158), the |
73
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
| | Company recordedrate making purposes until its next general rate case pursuant to Texas law. CenterPoint Houston deferred as a regulatory asset for its unrecognized costs associated with operations that have historically recovered and currently recover$32 million in pension and postretirementother postemployment expenses in rates.during the year ended December 31, 2009. |
If events were to occur that would make the recovery of these assets and liabilities no longer probable, the Company would be required to write off or write down these regulatory assets and liabilities. During 2004, the Company wrote-off net regulatory assets of $1.5 billion ($977 million after-tax) as an extraordinary loss in response to the Public Utility Commission of Texas’ (Texas Utility Commission) order on
CenterPoint Houston’s finaltrue-up application. Based on subsequent orders received from the Texas Utility Commission, the Company recorded an extraordinary gain of $47 million ($30 million after-tax) in the second quarter of 2005 related to these regulatory assets. For further discussion of regulatory assets, see Note 4.
The Company’sEnergy’s rate-regulated businesses recognize removal costs as a component of depreciation expense in accordance with regulatory treatment. As of December 31, 20062008 and 2007,2009, these removal costs of $697$779 million and $734$818 million, respectively, are classified as regulatory liabilities in the Company’sCenterPoint Energy’s Consolidated Balance Sheets. A portion of the amount of removal costs that relaterelated to asset retirement obligations havehas been reclassified from a regulatory liability to an asset retirement liability in accordance with Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 47, “Accountingaccounting guidance for Conditional Asset Retirement Obligations” (FIN 47).conditional asset retirement obligations. At December 31, 2008 and 2009, CenterPoint Energy’s asset retirement obligations were $63 million and $82 million, respectively. The increase in asset retirement obligation in 2009 of $19 million is primarily attributable to the decrease in the credit-adjusted risk-free rate used to value the asset retirement obligation as of the end of the period.
| |
(f) | Depreciation and Amortization Expense |
(f) Depreciation and Amortization Expense
Depreciation is computed using the straight-line method based on economic lives or a regulatory-mandated recovery period.periods. Amortization expense includes amortization of regulatory assets and other intangibles. See Notes 2(e) and 4(a)3(a) for additional discussion of these items.
The following table presents depreciation and amortization expense for 2005, 20062007, 2008 and 2007.2009 (in millions).
| | 2007 | | | 2008 | | | 2009 | |
Depreciation expense | | $ | 455 | | | $ | 478 | | | $ | 496 | |
Amortization expense | | | 176 | | | | 230 | | | | 247 | |
Total depreciation and amortization expense | | $ | 631 | | | $ | 708 | | | $ | 743 | |
| | | | | | | | | | | | |
| | 2005 | | | 2006 | | | 2007 | |
|
Depreciation expense | | $ | 432 | | | $ | 440 | | | $ | 455 | |
Amortization expense | | | 109 | | | | 159 | | | | 176 | |
| | | | | | | | | | | | |
Total depreciation and amortization expense | | $ | 541 | | | $ | 599 | | | $ | 631 | |
| | | | | | | | | | | | |
74
| |
(g) | Capitalization of Interest and Allowance for Funds Used During Construction |
(g) Capitalization of Interest and Allowance for Funds Used During Construction
Allowance for funds used during construction (AFUDC) represents the approximate net composite interest cost of borrowed funds and a reasonable return on the equity funds used for construction. Although AFUDC increases both utility plant and earnings, it is realized in cash when the assets are included in rates for subsidiaries that apply SFAS No. 71.the guidance for accounting for regulated operations. Interest and AFUDC for subsidiaries that apply SFAS No. 71 are capitalized as a component of projects under construction and will be amortized over the assets’ estimated useful lives. During 2005, 20062007, 2008 and 2007, the Company2009, CenterPoint Energy capitalized interest and AFUDC of $4$21 million, $10$12 million and $21$5 million, respectively.
The Company(h) Income Taxes
CenterPoint Energy files a consolidated federal income tax return and follows a policy of comprehensive interperiod tax allocation. The CompanyCenterPoint Energy uses the asset and liability method of accounting for deferred income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”.taxes. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Investment tax credits that were deferred are being amortized over the estimated lives of the related property. A valuation allowance is established against deferred tax assets for which management believes realization is not considered more likely than not.
74
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Prior to 2007, the Company evaluated uncertain income tax positions and recorded a tax liability for those positions that management believed were probable of an unfavorable outcome and could be reasonably estimated. Effective January 1, 2007, the Company accounts for the tax effects of uncertain income tax positions in accordance with FIN 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (FIN 48). The Company CenterPoint Energy recognizes interest and penalties as a component of income tax expense. For additional information regarding income taxes, see Note 9.
| |
(i) | Accounts Receivable and Allowance for Doubtful Accounts |
(i) Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are net of an allowance for doubtful accounts of $33$35 million and $38$24 million at December 31, 20062008 and 2007,2009, respectively. The provision for doubtful accounts in the Company’sCenterPoint Energy’s Statements of Consolidated Income for 2005, 20062007, 2008 and 20072009 was $40$45 million, $35$54 million and $45$36 million, respectively.
InOn October 2007,9, 2009, CERC amended its receivables facility and extendedto extend the termination date to October 28, 2008. The8, 2010. Availability under CERC’s 364-day receivables facility size will rangeranges from $150 million to $375 million, during the period from September 30, 2007 to the October 28, 2008 termination date. The variable size of the facility was designed to track thereflecting seasonal pattern ofchanges in receivables in CERC’s natural gas businesses.balances. At December 31, 2007,2008 and 2009, the facility size was $300 million. Commencing with an October 2006 amendment to the receivables facility, the provisions for sale accounting under SFAS No. 140, “Accounting for Transfers$128 million and Servicing of Financial Assets and Extinguishments of Liabilities,” were no longer met. Accordingly, advances received by CERC upon the sale of receivables are accounted for as short-term borrowings as of December 31, 2006 and 2007.$150 million, respectively. As of December 31, 20062008 and 2007, $187 million and $232 million, respectively, was advanced for the purchase of receivables under CERC’s receivables facility.
Funding2009, advances under the receivables facility averaged $166facilities were $78 million and $79 million in 2005 and 2006, respectively. Sales of receivables were approximately $2.0 billion and $555 million in 2005 and 2006,$-0-, respectively.
(j) Inventory
Inventory consists principally of materials and supplies and natural gas. Materials and supplies are valued at the lower of average cost or market. Natural gas inventories of the Company’sCenterPoint Energy’s Competitive Natural Gas Sales and Services business segment are also primarily valued at the lower of average cost or market. Natural gas inventories of the Company’sCenterPoint Energy’s Natural Gas Distribution business segment are primarily valued at weighted average cost. During 20062008 and 2007, the Company2009, CenterPoint Energy recorded $66$30 million and $11$6 million, respectively, in write-downs of natural gas inventory to the lower of average cost or market.
| | | | | | | | |
| | December 31, | |
| | 2006 | | | 2007 | |
| | (In millions) | |
|
Materials and supplies | | $ | 94 | | | $ | 95 | |
Natural gas | | | 305 | | | | 395 | |
| | | | | | | | |
Total inventory | | $ | 399 | | | $ | 490 | |
| | | | | | | | |
| |
(k) | Derivative Instruments |
| | December 31, | |
| | 2008 | | | 2009 | |
| | (In millions) | |
Materials and supplies | | $ | 128 | | | $ | 138 | |
Natural gas | | | 441 | | | | 189 | |
Total inventory | | $ | 569 | | | $ | 327 | |
The Company
(k) 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 weather and interest ratesweather on its operating results and cash flows. Such contractsderivatives are recognized in the Company’sCenterPoint Energy’s Consolidated Balance Sheets at their fair value unless the CompanyCenterPoint Energy elects the normal purchase and sales exemption for qualified physical transactions. A derivative contract may be designated as a normal purchase or normal sale if the intent is to physically receive or deliver the product for use or sale in the normal course of business. If derivative contracts are designated as a cash flow hedge according to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133), the effective portions of the
75
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
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 item impacts earnings. The ineffective portions of changes in fair values of derivatives designated as hedges are immediately recognized in income. Changes in other derivatives not designated as normal or as a cash flow hedge are recognized in income as they occur. The Company does not enter into or hold derivative instruments for trading purposes.
The CompanyCenterPoint Energy has a Risk Oversight Committee composed of corporate and business segment officers that oversees all commodity price, weather and credit risk activities, including the Company’s trading,CenterPoint Energy’s marketing, risk management services and hedging activities. The committee’s duties are to establish the Company’sCenterPoint Energy’s commodity risk policies, allocate board-approved commercial risk capital within limits, established by the Company’s board of directors, approve tradinguse of new products and commodities, monitor risk positions and ensure compliance with the Company’sCenterPoint Energy’s risk management policies and procedures and trading limits established by the Company’sCenterPoint Energy’s board of directors.
The Company’sCenterPoint 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.
| |
(l) | Investment(l) Investments in Other Debt and Equity Securities |
In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (SFAS No. 115), the CompanySecurities
CenterPoint Energy reports“available-for-sale” securities at estimated fair value within other long-term assets in the Company’s Consolidated Balance Sheets and any unrealized gain or loss, net of tax, as a separate component of shareholders’ equity and accumulated other comprehensive income. In accordance with SFAS No. 115, the Company reports “trading” "trading" securities at estimated fair value in the Company’sits Consolidated Balance Sheets, and any unrealized holding gains and losses are recorded as other income (expense) in the Company’sits Statements of Consolidated Income.
As of December 31, 20062008 and 2007, the Company2009, CenterPoint Energy held an investmentinvestments in Time Warner Inc. (TW) common stock (TW Common),related securities, which waswere classified as a “trading” security."trading" securities. For information regarding this investment,these investments, see Note 6.
The Company(m) Environmental Costs
CenterPoint Energy expenses or capitalizes environmental expenditures, as appropriate, depending on their future economic benefit. The CompanyCenterPoint Energy expenses amounts that relate to an existing condition caused by past operations and that do not have future economic benefit. The CompanyCenterPoint Energy records undiscounted liabilities related to these future costs when environmental assessmentsand/or remediation activities are probable and the costs can be reasonably estimated.
| |
(n) | Statements of Consolidated Cash Flows |
(n) Statements of Consolidated Cash Flows
For purposes of reporting cash flows, the CompanyCenterPoint Energy considers cash equivalents to be short-term, highly liquid investments with maturities of three months or less from the date of purchase. In connection with the issuance of transition bonds in October 2001, and December 2005 the Companyand February 2008 and system restoration bonds in November 2009, CenterPoint Energy was required to establish restricted cash accounts to collateralize the bonds that were issued in these financing transactions. These restricted cash accounts are not available for withdrawal until the maturity of the bonds. Cashbonds and are not included in cash and cash equivalents does not includeequivalents. These restricted cash accounts of $49$60 million and $34 million at both December 31, 20062008 and 2007.2009, respectively, are included in other current assets in CenterPoint Energy's Consolidated Balance Sheets. For additional information regarding transition and system restoration bonds, see Notes 4(a)3(a), 3(b) and 8(b). Cash and cash equivalents includes $123$166 million and $128$151 million at December 31, 20062008 and 2007,2009, respectively, that is held by the Company’sCenterPoint Energy’s transition and system restoration bond subsidiaries solely to support servicing the transition and system restoration bonds.
76
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES(o) New Accounting Pronouncements
Effective January 1, 2009, CenterPoint Energy adopted new accounting guidance which requires enhanced disclosures of derivative instruments and hedging activities such as the fair value of derivative instruments and presentation of their gains or losses in tabular format, as well as disclosures regarding credit risks and strategies and objectives for using derivative instruments. These disclosures are included as part of CenterPoint Energy’s Derivatives Instruments footnote (see Note 4).
Effective January 1, 2009, CenterPoint Energy adopted new accounting guidance 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 and which required retrospective application to all periods presented. 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
| |
(o) | New Accounting Pronouncements |
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 currently has no convertible debt that is within the scope of this new guidance, but did during prior periods presented. The required retrospective 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. The effect on net income for the years ended December 31, 2007 and 2008 was a decrease in net income of $4 million, or $0.02 per basic and diluted share, and $1 million, or $0.01 per basic share and no change per diluted share, respectively. The implementation effect on the Consolidated Balance Sheet as of December 31, 2008 increased Additional Paid-In-Capital and Accumulated Deficit by $23 million.
Effective January 1, 2009, CenterPoint Energy adopted 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. See Note 2(p) below for the required disclosures.
Effective June 30, 2009, CenterPoint Energy adopted 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. CenterPoint Energy’s adoption of this new guidance did not have a material impact on its financial position, results of operations or cash flows.
Effective June 30, 2009, CenterPoint Energy adopted 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. 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 15 for the subsequent event related disclosures.
Effective July 1, 2009, CenterPoint Energy adopted 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. CenterPoint Energy’s adoption of this new guidance did not have any impact on its financial position, results of operations or cash flows.
In July 2006,June 2009, the FASB issued FIN 48new 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 clarifiesvariable interest holder has the accounting for uncertain income tax positions andpower 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 Company to recognize management’s best estimate of the impact of a tax position if it is considered “more likely than not,” as defined in SFAS No. 5, “Accounting for Contingencies,” of being sustained on audit based solely on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The cumulative effect of adopting FIN 48 as of January 1, 2007 was a credit of $2 million to accumulated deficit.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 establishes a framework for measuring fair value and requires expanded disclosure about the information used to measure fair value. The statement applies whenever other statements require or permit assets or liabilitiesprimary beneficiary assessment to be measured at fair value. The statement does not expand the use of fair value accountingperformed on an ongoing basis and also requires enhanced disclosures that will provide more transparency about a company’s involvement in anya VIE. This new circumstances andguidance is effective for the Company for the year ended December 31, 2008 and for interim periods included ina reporting entity’s first annual reporting period that year, with early adoption encouraged. The Company will adopt SFAS No. 157 on January 1, 2008, for its financial assets and liabilities, which primarily consist of derivatives the Company records in accordance with SFAS No. 133, and on January 1, 2009, for its non-financial assets and liabilities. For its financial assets and liabilities, the Companybegins after November 15, 2009. CenterPoint Energy expects that the adoption of SFAS No. 157 will primarily impact its disclosures andthis new guidance will not have a material impact on its financial position, results of operations andor cash flows. The Company is currently evaluating the impact with respect to its non-financial assets and liabilities.
In February 2007,January 2010, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115” (SFAS No. 159). SFAS No. 159 permits the Companynew accounting guidance to choose, at specified election dates, to measure eligible items atrequire additional fair value (the “fair value option”). The Company would report unrealized gainsrelated disclosures including transfers into and losses on items for which theout of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value option has been elected in earnings at each subsequent reporting period.disclosure guidance about the level of disaggregation and about inputs and valuation techniques. This accounting standardnew guidance is effective as offor the beginning of the first fiscal year that begins after November 15, 2007 but is not required to be applied. The Company currently has no plans to apply SFAS No. 159.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (SFAS No. 141R). SFAS No. 141R will significantly change the accounting for business combinations. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R also includes a substantial number of new disclosure requirements and applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. As the provisions of SFAS No. 141R are applied prospectively, the impact to the Company cannot be determined until the transactions occur.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51” (SFAS No. 160). SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This accounting standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company will adopt SFAS No. 160 as of January 1, 2009. The CompanyCenterPoint Energy expects that the adoption of SFAS No. 160this new guidance will not have a material impact on its financial position, results of operations andoperation or cash flows.
| |
(p) | Stock-Based Incentive Compensation Plans and Employee Benefit Plans |
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.
(p) Stock-Based Incentive Compensation Plans and Employee Benefit Plans
The CompanyStock-Based Incentive Compensation Plans
CenterPoint Energy has long-term incentive compensation plans (LICPs)(LTIPs) that provide for the issuance of stock-based incentives, including performance-based shares, performance-based units,stock options, performance awards, restricted sharesstock unit awards and restricted and unrestricted stock options
77
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
awards to officers and key employees. A maximum of approximately 36Approximately 21 million shares of CenterPoint Energy common stock isare authorized to be issued under these plans.
Equity awards are granted to employees without cost to the participants. The performance sharesawards granted in 2007, 2008 and 2009 are distributed based upon the achievement of certain objectives over a three-year performance cycle. The stock awards granted in 2005, 20062007, 2008 and 20072009 are subject to the operational condition that total common dividends declared during the three-year vesting period must be at least $1.20, $1.80$2.04, $2.19 and $2.04$2.28 per share, respectively. The stock awards generally vest at the end of a three-year period. Upon vesting, both the performance shares and the stock awards are issued to the participants along with the value of dividend equivalents earned over the performance cycle or vesting period. CenterPoint Energy issues new shares in order to satisfy share-based payments related to LTIPs.
Option awardsStock options are generally granted with an exercise price equal to the average of the high and low sales price of the Company’sCenterPoint Energy’s stock at the date of grant. These option awardsstock options generally become exercisable in one-third increments on each of the first through third anniversaries of the grant date and have10-year contractual terms. No stock options were granted during 2005, 20062007, 2008 and 2007.2009.
The CompanyCenterPoint Energy recorded LICPLTIP compensation expense of $13$10 million, $10 million and $10$15 million for the years ended December 31, 2007, 2008 and 2009, respectively. This expense is included in 2005, 2006Operation and 2007, respectively.Maintenance Expense in the Statements of Consolidated Income.
The total income tax benefit recognized related to such arrangementsLTIPs was $5$4 million, $4 million and $4$6 million in 2005, 2006the years ended December 31, 2007, 2008 and 2007,2009, respectively. No compensation cost related to such arrangementsLTIPs was capitalized as a part of inventory or fixed assets in 2005, 20062007, 2008 or 2007.2009.
The actual tax benefit realized for tax deductions related to LTIPs totaled $7 million, $5 million and $6 million, for 2007, 2008 and 2009, respectively.
Compensation costs for the performance shares and stock awards granted under the LICPsLTIPs are measured using fair value and expected achievement levels on the grant date. The fair value of awards granted to employees after April 2009 are based on the closing stock price of CenterPoint Energy’s common stock on the grant date. The fair value of awards granted prior to May 2009 are based on the average of the high and low stock price of CenterPoint Energy’s common stock on the grant date. The compensation expense is recorded on a straight-line basis over the vesting period. Forfeitures are estimated on the date of grant andbased on historical averages. For performance awards with operational goals, the expected achievement level is revised as goal achievements are adjusted as required through the remaining vesting period.evaluated.
The following tables summarize the Company’s LICPCenterPoint Energy’s LTIP activity for 2007:2009:
Stock Options
| | | | | | | | | | | | | | | | |
| | Outstanding Options
| |
| | Year Ended December 31, 2007 | |
| | | | | | | | Remaining Average
| | | | |
| | Shares
| | | Weighted-Average
| | | Contractual
| | | Aggregate Intrinsic
| |
| | (Thousands) | | | Exercise Price | | | Life (Years) | | | Value (Millions) | |
|
Outstanding at December 31, 2006 | | | 9,573 | | | $ | 17.15 | | | | | | | | | |
Forfeited or expired | | | (890 | ) | | | 25.02 | | | | | | | | | |
Exercised | | | (1,913 | ) | | | 11.24 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding at December 31, 2007 | | | 6,770 | | | | 17.78 | | | | 3.2 | | | $ | 27 | |
| | | | | | | | | | | | | | | | |
Exercisable at December 31, 2007 | | | 6,770 | | | | 17.78 | | | | 3.2 | | | | 27 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Non-Vested Options
| |
| | Year Ended December 31, 2007 | |
| | | | | Weighted-Average
| |
| | Shares
| | | Grant Date
| |
| | (Thousands) | | | Fair Value | |
|
Outstanding at December 31, 2006 | | | 566 | | | $ | 1.86 | |
Vested | | | (560 | ) | | | 1.86 | |
Forfeited or expired | | | (6 | ) | | | 1.86 | |
| | | | | | | | |
Outstanding at December 31, 2007 | | | — | | | | — | |
| | | | | | | | |
78
| | Outstanding Options Year Ended December 31, 2009 | |
| | Shares (Thousands) | | | Weighted-Average Exercise Price | | | Remaining Average Contractual Life (Years) | | | Aggregate Intrinsic Value (Millions) | |
Outstanding at December 31, 2008 | | | 5,856 | | | $ | 17.67 | | | | | | | |
Expired | | | (573 | ) | | | 18.28 | | | | | | | |
Cancelled | | | (295 | ) | | | 25.63 | | | | | | | |
Exercised | | | (475 | ) | | | 9.23 | | | | | | | |
Outstanding at December 31, 2009 | | | 4,513 | | | | 17.95 | | | 1.9 | | | $ | 14 | |
Exercisable at December 31, 2009 | | | 4,513 | | | | 17.95 | | | 1.9 | | | | 14 | |
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
Cash received from stock options exercised was $22 million, $3 million and $4 million for 2007, 2008 and 2009, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Performance Awards
Performance Shares
| | | | | | | | | | | | | | | | |
| | Outstanding and Non-Vested Shares
| |
| | Year Ended December 31, 2007 | |
| | | | | Remaining Average
| | | | | | Weighted-Average
| |
| | Shares
| | | Contractual Life
| | | Aggregate Intrinsic
| | | Grant Date
| |
| | (Thousands) | | | (Years) | | | Value (Millions) | | | Fair Value | |
|
Outstanding at December 31, 2006 | | | 1,703 | | | | | | | | | | | $ | 12.60 | |
Granted | | | 659 | | | | | | | | | | | | 18.20 | |
Forfeited | | | (146 | ) | | | | | | | | | | | 13.57 | |
Vested and released to participants | | | (84 | ) | | | | | | | | | | | 13.79 | |
| | | | | | | | | | | | | | | | |
Outstanding at December 31, 2007 | | | 2,132 | | | | 0.9 | | | $ | 24 | | | | 14.21 | |
| | | | | | | | | | | | | | | | |
| | Outstanding and Non-Vested Shares Year Ended December 31, 2009 | |
| | Shares (Thousands) | | | Weighted-Average Grant Date Fair Value | | | Remaining Average Contractual Life (Years) | | | Aggregate Intrinsic Value (Millions) | |
Outstanding at December 31, 2008 | | | 2,102 | | | $ | 15.37 | | | | | | | |
Granted | | | 1,219 | | | | 12.42 | | | | | | | |
Forfeited or cancelled | | | (222 | ) | | | 13.25 | | | | | | | |
Vested and released to participants | | | (516 | ) | | | 13.08 | | | | | | | |
Outstanding at December 31, 2009 | | | 2,583 | | | | 14.62 | | | 1.2 | | | $ | 28 | |
The non-vested and outstanding shares displayed in the table above, tables assumeassumes that shares are issued at the maximum performance level (150%).level. The aggregate intrinsic value reflects the impacts of current expectations of achievement and stock price.
Performance-Based Units
| | | | | | | | | | | | | | | | |
| | Outstanding and Non-Vested Units
| |
| | Year Ended December 31, 2007 | |
| | | | | Weighted-Average
| | | Remaining Average
| | | | |
| | Units
| | | Grant Date
| | | Contractual Life
| | | Aggregate Intrinsic
| |
| | (Thousands) | | | Fair Value | | | (Years) | | | Value (Millions) | |
|
Outstanding at December 31, 2006 | | | 31 | | | $ | 100.00 | | | | | | | | | |
Forfeited | | | — | | | | 100.00 | | | | | | | | | |
Vested and released to participants | | | (31 | ) | | | 100.00 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding at December 31, 2007 | | | — | | | | — | | | | — | | | $ | — | |
| | | | | | | | | | | | | | | | |
Stock Awards
| | | | | | | | | | | | | | | | |
| | Outstanding and Non-Vested Shares
| |
| | Year Ended December 31, 2007 | |
| | | | | Weighted-Average
| | | Remaining Average
| | | | |
| | Shares
| | | Grant Date
| | | Contractual Life
| | | Aggregate Intrinsic
| |
| | (Thousands) | | | Fair Value | | | (Years) | | | Value (Millions) | |
|
Outstanding at December 31, 2006 | | | 753 | | | $ | 12.14 | | | | | | | | | |
Granted | | | 245 | | | | 18.29 | | | | | | | | | |
Forfeited | | | (58 | ) | | | 13.27 | | | | | | | | | |
Vested and released to participants | | | (220 | ) | | | 11.14 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding at December 31, 2007 | | | 720 | | | | 14.45 | | | | 1.2 | | | $ | 12 | |
| | | | | | | | | | | | | | | | |
| | Outstanding and Non-Vested Stock Shares Year Ended December 31, 2009 | |
| | Shares (Thousands) | | | Weighted-Average Grant Date Fair Value | | | Remaining Average Contractual Life (Years) | | | Aggregate Intrinsic Value (Millions) | |
Outstanding at December 31, 2008 | | | 789 | | | $ | 15.33 | | | | | | | |
Granted | | | 460 | | | | 12.30 | | | | | | | |
Forfeited or cancelled | | | (9 | ) | | | 14.02 | | | | | | | |
Vested and released to participants | | | (289 | ) | | | 13.73 | | | | | | | |
Outstanding at December 31, 2009 | | | 951 | | | | 14.36 | | | 1.3 | | | $ | 14 | |
The weighted-average grant-date fair values of awards granted were as follows for 2005, 20062007, 2008 and 2007:2009:
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2005 | | | 2006 | | | 2007 | |
|
Performance shares | | $ | 12.13 | | | $ | 13.05 | | | $ | 18.20 | |
Stock awards | | | 12.25 | | | | 12.96 | | | | 18.29 | |
79
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
| | Year Ended December 31, | |
| | 2007 | | | 2008 | | | 2009 | |
Performance awards | | $ | 18.20 | | | $ | 15.40 | | | $ | 12.42 | |
Stock awards | | | 18.29 | | | | 15.09 | | | | 12.30 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Valuation Data
The total intrinsic value of awards received by participants was as follows for 2005, 20062007, 2008 and 2007:2009:
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2005 | | | 2006 | | | 2007 | |
| | (In millions) | |
|
Options exercised | | $ | 8 | | | $ | 10 | | | $ | 13 | |
Performance shares | | | 5 | | | | 10 | | | | — | |
Performance units | | | — | | | | — | | | | 3 | |
Stock awards | | | — | | | | 7 | | | | 4 | |
| | Year Ended December 31, | |
| | 2007 | | | 2008 | | | 2009 | |
| | (In millions) | |
Stock options exercised | | $ | 13 | | | $ | 2 | | | $ | 2 | |
Performance awards | | | 3 | | | | 6 | | | | 7 | |
Stock awards | | | 4 | | | | 5 | | | | 4 | |
The total grant date fair value of performance and stock awards which vested during the years ended December 31, 2007, 2008 and 2009 was $7 million, $8 million and $11 million, respectively. As of December 31, 20072009, there was $21$27 million of total unrecognized compensation cost related to non-vested LICP arrangements. That costperformance and stock awards which is expected to be recognized over a weighted-average period of 1.71.8 years.
Cash received from LICPs was $9 million, $17 million and $22 million for 2005, 2006 and 2007, respectively.
The actual tax benefit realized for tax deductions related to LICPs totaled $5 million, $11 million and $7 million, for 2005, 2006 and 2007, respectively.
The Company has a policy of issuing new shares in order to satisfy share-based payments related to LICPs.
Pension and Postretirement Benefits
The CompanyCenterPoint Energy maintains a non-contributory qualified defined benefit pension plan covering substantially all employees, with benefits determined using a cash balance formula. Under the cash balance formula, participants accumulate a retirement benefit based upon 4%5% of eligible earnings, which increased from 4% effective January 1, 2009, and accrued interest. Prior to 1999, the pension plan accrued benefits based on years of service, final average pay and covered compensation. Certain employees participating in the plan as of December 31, 1998 automatically receive the greater of the accrued benefit calculated under the prior plan formula through 2008 or the cash balance formula. Participants have historically been 100% vested in their benefit after completing five years of service. Effective January 1, 2008, the CompanyCenterPoint Energy changed the vesting schedule to provide for 100% vesting after three years to comply with the Pension Protection Act of 2006. In addition to the non-contributory qualified defined benefit pension plan, the CompanyCenterPoint Energy maintains aunfunded non-qualified benefit restoration planplans which allowsallow participants to receive the benefits to which they would have been entitled under the Company’sCenterPoint Energy’s non-contributory pension plan except for federally mandated limits on qualified plan benefits or on the level of compensation on which qualified plan benefits may be calculated.
The CompanyCenterPoint Energy provides certain healthcare and life insurance benefits for retired employees on a contributory and non-contributory basis. Employees become eligible for these benefits if they have met certain age and service requirements at retirement, as defined in the plans. Under plan amendments, effective in early 1999, healthcare benefits for future retirees were changed to limit employer contributions for medical coverage.
Such benefit costs are accrued over the active service period of employees. The net unrecognized transition obligation, resulting from the implementation of accrual accounting, is being amortized over approximately 20 years.
On January 5, 2006, the Company offered a Voluntary Early Retirement Program (VERP) to approximately 200 employees who were age 55 or older with at least five years of service as of February 28, 2006. The election period was from January 5, 2006 through February 28, 2006. For those electing to accept the VERP, three years of age and service were added to their qualified pension plan benefit and three years of service were added to their postretirement benefit. The one-time additional pension and postretirement expense of $9 million is reflected in the table below as a benefit enhancement.
80
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’sCenterPoint Energy’s net periodic cost includes the following components relating to pension, including the benefit restoration plan, and postretirement benefits:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2005 | | | 2006 | | | 2007 | |
| | Pension
| | | Postretirement
| | | Pension
| | | Postretirement
| | | Pension
| | | Postretirement
| |
| | Benefits | | | Benefits | | | Benefits | | | Benefits | | | Benefits | | | Benefits | |
| | (In millions) | |
|
Service cost | | $ | 35 | | | $ | 2 | | | $ | 37 | | | $ | 2 | | | $ | 37 | | | $ | 2 | |
Interest cost | | | 99 | | | | 27 | | | | 101 | | | | 26 | | | | 100 | | | | 26 | |
Expected return on plan assets | | | (137 | ) | | | (12 | ) | | | (143 | ) | | | (12 | ) | | | (149 | ) | | | (12 | ) |
Amortization of prior service cost | | | (7 | ) | | | 2 | | | | (7 | ) | | | 2 | | | | (7 | ) | | | — | |
Amortization of net loss | | | 46 | | | | — | | | | 50 | | | | — | | | | 34 | | | | 3 | |
Amortization of transition obligation | | | — | | | | 7 | | | | — | | | | 7 | | | | — | | | | 7 | |
Benefit enhancement | | | — | | | | — | | | | 8 | | | | 1 | | | | — | | | | — | |
Other | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net periodic cost | | $ | 36 | | | $ | 27 | | | $ | 46 | | | $ | 26 | | | $ | 15 | | | $ | 26 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2007 | | | 2008 | | | 2009 | |
| | Pension Benefits | | | Postretirement Benefits | | | Pension Benefits | | | Postretirement Benefits | | | Pension Benefits | | | Postretirement Benefits | |
| | (In millions) | |
| | | | | | | | | | | | | | | | | | |
Service cost | | $ | 37 | | | $ | 2 | | | $ | 31 | | | $ | 1 | | | $ | 25 | | | $ | 1 | |
Interest cost | | | 100 | | | | 26 | | | | 101 | | | | 27 | | | | 113 | | | | 28 | |
Expected return on plan assets | | | (149 | ) | | | (12 | ) | | | (147 | ) | | | (12 | ) | | | (98 | ) | | | (9 | ) |
Amortization of prior service cost (credit) | | | (7 | ) | | | - | | | | (8 | ) | | | 3 | | | | 3 | | | | 3 | |
Amortization of net loss | | | 34 | | | | 3 | | | | 23 | | | | - | | | | 68 | | | | - | |
Amortization of transition obligation | | | - | | | | 7 | | | | - | | | | 7 | | | | - | | | | 7 | |
Benefit enhancement | | | - | | | | - | | | | 1 | | | | - | | | | - | | | | - | |
Net periodic cost | | $ | 15 | | | $ | 26 | | | $ | 1 | | | $ | 26 | | | $ | 111 | | | $ | 30 | |
The Company
CenterPoint Energy used the following assumptions to determine net periodic cost relating to pension and postretirement benefits:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, | | |
| | 2005 | | 2006 | | 2007 | | |
| | Pension
| | Postretirement
| | Pension
| | Postretirement
| | Pension
| | Postretirement
| | | December 31, | |
| | Benefits | | Benefits | | Benefits | | Benefits | | Benefits | | Benefits | | | 2007 | | | 2008 | | | 2009 | |
| | Pension Benefits | | | Postretirement Benefits | | | Pension Benefits | | | Postretirement Benefits | | | Pension Benefits | | | Postretirement Benefits | |
Discount rate | | | 5.75 | % | | | 5.75 | % | | | 5.70 | % | | | 5.70 | % | | | 5.85 | % | | | 5.85 | % | | | 5.85 | % | | | 5.85 | % | | | 6.40 | % | | | 6.40 | % | | | 6.90 | % | | | 6.90 | % |
Expected return on plan assets | | | 8.50 | | | | 8.00 | | | | 8.50 | | | | 8.00 | | | | 8.50 | | | | 7.60 | | | | 8.50 | | | | 7.60 | | | | 8.50 | | | | 7.60 | | | | 8.00 | | | | 7.05 | |
Rate of increase in compensation levels | | | 4.60 | | | | — | | | | 4.60 | | | | — | | | | 4.60 | | | | — | | | | 4.60 | | | | - | | | | 4.60 | | | | - | | | | 4.60 | | | | - | |
In determining net periodic benefits cost, the CompanyCenterPoint Energy uses fair value, as of the beginning of the year, as its basis for determining expected return on plan assets.
81
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes changes in the benefit obligation, plan assets, the amounts recognized in consolidated balance sheets and the key assumptions of ourCenterPoint Energy’s pension, including benefit restoration, and postretirement plans. The measurement dates for plan assets and obligations were December 31, 20062008 and 2007.2009.
| | | | | | | | | | | | | | | | |
| | December 31, | |
| | 2006 | | | 2007 | |
| | Pension
| | | Postretirement
| | | Pension
| | | Postretirement
| |
| | Benefits | | | Benefits | | | Benefits | | | Benefits | |
| | (In millions) | |
|
Change in Benefit Obligation | | | | | | | | | | | | | | | | |
Benefit obligation, beginning of year | | $ | 1,830 | | | $ | 467 | | | $ | 1,776 | | | $ | 469 | |
Service cost | | | 37 | | | | 2 | | | | 37 | | | | 2 | |
Interest cost | | | 101 | | | | 26 | | | | 100 | | | | 26 | |
Participant contributions | | | — | | | | 6 | | | | — | | | | 5 | |
Benefits paid | | | (161 | ) | | | (42 | ) | | | (145 | ) | | | (35 | ) |
Actuarial gain | | | (39 | ) | | | (3 | ) | | | (123 | ) | | | (33 | ) |
Plan amendment | | | — | | | | 8 | | | | — | | | | — | |
Medicare reimbursement | | | — | | | | 4 | | | | — | | | | 3 | |
Benefit enhancement | | | 8 | | | | 1 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Benefit obligation, end of year | | | 1,776 | | | | 469 | | | | 1,645 | | | | 437 | |
| | | | | | | | | | | | | | | | |
Change in Plan Assets | | | | | | | | | | | | | | | | |
Plan assets, beginning of year | | | 1,729 | | | | 154 | | | | 1,806 | | | | 158 | |
Employer contributions | | | 7 | | | | 27 | | | | 9 | | | | 22 | |
Participant contributions | | | — | | | | 6 | | | | — | | | | 5 | |
Benefits paid | | | (161 | ) | | | (42 | ) | | | (145 | ) | | | (35 | ) |
Actual investment return | | | 231 | | | | 13 | | | | 122 | | | | 11 | |
| | | | | | | | | | | | | | | | |
Plan assets, end of year | | | 1,806 | | | | 158 | | | | 1,792 | | | | 161 | |
| | | | | | | | | | | | | | | | |
Funded status, end of year | | $ | 30 | | | $ | (311 | ) | | $ | 147 | | | $ | (276 | ) |
| | | | | | | | | | | | | | | | |
82
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
| | December 31, | |
| | 2008 | | | 2009 | |
| | Pension Benefits | | | Postretirement Benefits | | | Pension Benefits | | | Postretirement Benefits | |
| | (In millions, except for actuarial assumptions) | |
Change in Benefit Obligation | | | | | | | | | | | | |
Benefit obligation, beginning of year | | $ | 1,645 | | | $ | 437 | | | $ | 1,710 | | | $ | 426 | |
Service cost | | | 31 | | | | 1 | | | | 25 | | | | 1 | |
Interest cost | | | 101 | | | | 27 | | | | 113 | | | | 28 | |
Participant contributions | | | - | | | | 5 | | | | - | | | | 6 | |
Benefits paid | | | (123 | ) | | | (38 | ) | | | (111 | ) | | | (42 | ) |
Actuarial gain (loss) | | | (59 | ) | | | (10 | ) | | | 129 | | | | 29 | |
Plan amendment | | | 114 | | | | - | | | | - | | | | - | |
Medicare reimbursement | | | - | | | | 4 | | | | - | | | | 2 | |
Benefit enhancement | | | 1 | | | | - | | | | - | | | | - | |
Benefit obligation, end of year | | | 1,710 | | | | 426 | | | | 1,866 | | | | 450 | |
Change in Plan Assets | | | | | | | | | | | | | | | | |
Fair Value of plan assets, beginning of year | | | 1,792 | | | | 161 | | | | 1,276 | | | | 135 | |
Employer contributions | | | 8 | | | | 27 | | | | 20 | | | | 28 | |
Participant contributions | | | - | | | | 5 | | | | - | | | | 6 | |
Benefits paid | | | (123 | ) | | | (38 | ) | | | (111 | ) | | | (42 | ) |
Actual investment return | | | (401 | ) | | | (20 | ) | | | 247 | | | | 19 | |
Fair value of plan assets, end of year | | | 1,276 | | | | 135 | | | | 1,432 | | | | 146 | |
Funded status, end of year | | $ | (434 | ) | | $ | (291 | ) | | $ | (434 | ) | | $ | (304 | ) |
Amounts Recognized in Balance Sheets | | | | | | | | | | | | | | | | |
Current liabilities-other | | $ | (9 | ) | | $ | (10 | ) | | $ | (9 | ) | | $ | (9 | ) |
Other liabilities-benefit obligations | | | (425 | ) | | | (281 | ) | | | (425 | ) | | | (295 | ) |
Net liability, end of year | | $ | (434 | ) | | $ | (291 | ) | | $ | (434 | ) | | $ | (304 | ) |
Actuarial Assumptions | | | | | | | | | | | | | | | | |
Discount rate | | | 6.90 | % | | | 6.90 | % | | | 5.70 | % | | | 5.70 | % |
Expected return on plan assets | | | 8.00 | | | | 7.05 | | | | 8.00 | | | | 7.05 | |
Rate of increase in compensation levels | | | 4.60 | | | | - | | | | 4.60 | | | | - | |
Healthcare cost trend rate assumed for the next year | | | - | | | | 6.50 | | | | - | | | | 7.50 | |
Prescription drug cost trend rate assumed for the next year | | | - | | | | 12.00 | | | | - | | | | 8.00 | |
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | | | - | | | | 5.50 | | | | - | | | | 5.50 | |
Year that the healthcare rate reaches the ultimate trend rate | | | - | | | | 2011 | | | | - | | | | 2014 | |
Year that the prescription drug rate reaches the ultimate trend rate | | | - | | | | 2014 | | | | - | | | | 2015 | |
| | | | | | | | | | | | | | | | |
| | December 31, | |
| | 2006 | | | 2007 | |
| | Pension
| | | Postretirement
| | | Pension
| | | Postretirement
| |
| | Benefits | | | Benefits | | | Benefits | | | Benefits | |
| | | | | (In millions) | | | | |
|
Amounts Recognized in Balance Sheets | | | | | | | | | | | | | | | | |
Other assets-other | | $ | 109 | | | $ | — | | | $ | 231 | | | $ | — | |
Current liabilities-other | | | (7 | ) | | | (8 | ) | | | (8 | ) | | | (8 | ) |
Other liabilities-benefit obligations | | | (72 | ) | | | (303 | ) | | | (76 | ) | | | (268 | ) |
| | | | | | | | | | | | | | | | |
Net asset (liability), end of year | | $ | 30 | | | $ | (311 | ) | | $ | 147 | | | $ | (276 | ) |
| | | | | | | | | | | | | | | | |
Actuarial Assumptions | | | | | | | | | | | | | | | | |
Discount rate | | | 5.85 | % | | | 5.85 | % | | | 6.40 | % | | | 6.40 | % |
Expected return on plan assets | | | 8.50 | | | | 7.60 | | | | 8.50 | | | | 7.60 | |
Rate of increase in compensation levels | | | 4.60 | | | | — | | | | 5.75 | | | | — | |
Healthcare cost trend rate assumed for the next year | | | — | | | | 7.00 | | | | — | | | | 7.00 | |
Prescription drug cost trend rate assumed for the next year | | | — | | | | 13.00 | | | | — | | | | 13.00 | |
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | | | — | | | | 5.50 | | | | — | | | | 5.50 | |
Year that the healthcare rate reaches the ultimate trend rate | | | — | | | | 2011 | | | | — | | | | 2012 | |
Year that the prescription drug rate reaches the ultimate trend rate | | | — | | | | 2014 | | | | — | | | | 2015 | |
At December 31, 2008, the pension benefit obligation increased by $114 million due to a plan amendment effective January 1, 2009. ��The amendment increased certain cash balance accounts in conjunction with a transition to a uniform cash balance program effective 2009.
The accumulated benefit obligation for all defined benefit pension plans was $1,719$1,708 million and $1,623$1,864 million as of December 31, 20062008 and 2007,2009, respectively.
The expected rate of return assumption was developed by reviewinga weighted-average return analysis of the targeted asset allocationsallocation of CenterPoint Energy’s plans and historical index performance of the applicableexpected real return for each asset classes over a15-year period,class, based on the long-term capital market assumptions, adjusted for investment fees and diversification effects.effects, in addition to expected inflation.
The discount rate assumption was determined by reviewing yields onmatching the accrued cash flows of CenterPoint Energy’s plans against a hypothetical yield curve of high-quality corporate bonds that receive one of the two highest ratings givenrepresented by a recognized rating agency and the expected durationseries of obligations specificannualized individual discount rates from one-half to the characteristics of the Company’s plans.thirty years.
For measurement purposes, healthcare costs are assumed to increase 7%7.50% during 2008,2010, after which this rate decreases until reaching the ultimate trend rate of 5.5%5.50% in 2012.2014. Prescription drug costs are assumed to increase 13%8.00% during 2008,2010, after which this rate decreases until reaching the ultimate trend rate of 5.5%5.50% in 2015.
83
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Amounts recognized in accumulated other comprehensive incomeloss consist of the following:
| | | | | | | | | | | | | | | | |
| | December 31, | |
| | 2006 | | | 2007 | |
| | Pension
| | | Postretirement
| | | Pension
| | | Postretirement
| |
| | Benefits | | | Benefits | | | Benefits | | | Benefits | |
| | (In millions) | |
|
Unrecognized actuarial loss (gain) | | $ | 128 | | | $ | 8 | | | $ | 99 | | | $ | (4 | ) |
Unrecognized prior service cost (credit) | | | (7 | ) | | | 16 | | | | (6 | ) | | | 14 | |
Unrecognized transition obligation | | | — | | | | 4 | | | | — | | | | 4 | |
| | | | | | | | | | | | | | | | |
Net amount recognized in other comprehensive income | | $ | 121 | | | $ | 28 | | | $ | 93 | | | $ | 14 | |
| | | | | | | | | | | | | | | | |
| | December 31, | |
| | 2008 | | | 2009 | |
| | Pension Benefits | | | Postretirement Benefits | | | Pension Benefits | | | Postretirement Benefits | |
| | (In millions) | |
Unrecognized actuarial loss | | $ | 181 | | | $ | 5 | | | $ | 162 | | | $ | 15 | |
Unrecognized prior service cost | | | 17 | | | | 11 | | | | 16 | | | | 9 | |
Unrecognized transition obligation | | | - | | | | 3 | | | | - | | | | 3 | |
Net amount recognized in accumulated other comprehensive loss | | $ | 198 | | | $ | 19 | | | $ | 178 | | | $ | 27 | |
The changes in plan assets and benefit obligations recognized in other comprehensive income during 20072009 are as follows:follows (in millions):
| | | | | | | | | |
| | Pension
| | Postretirement
| | |
| | Benefits | | Benefits | | |
| | Pension Benefits | | | Postretirement Benefits | |
Net loss (gain) | | $ | (20 | ) | | $ | (11 | ) | | $ | (34 | ) | | $ | 10 | |
Amortization of net loss | | | (9 | ) | | | — | | | | 15 | | | | - | |
Prior service credit | | | | (2 | ) | | | (4 | ) |
Amortization of prior service credit (cost) | | | 1 | | | | (2 | ) | | | 1 | | | | 2 | |
Amortization of transition obligation | | | — | | | | (1 | ) | |
| | | | | | |
Total recognized in comprehensive income | | $ | (28 | ) | | $ | (14 | ) | | $ | (20 | ) | | $ | 8 | |
| | | | | | |
The total expense recognized in net periodic costs and other comprehensive income was a benefit of $13$91 million and an expense of $12$38 million for pension and postretirement benefits, respectively, for the year ended December 31, 2007.2009.
The amounts in accumulated other comprehensive incomeloss expected to be recognized as components of net periodic benefit cost during 20082010 are as follows:follows (in millions):
| | Pension Benefits | | | Postretirement Benefits | |
Unrecognized actuarial loss | | $ | 13 | | | $ | - | |
Unrecognized prior service cost | | | 1 | | | | 2 | |
Amounts in comprehensive income to be recognized in net periodic cost in 2010 | | $ | 14 | | | $ | 2 | |
| | | | | | | | |
| | Pension
| | | Postretirement
| |
| | Benefits | | | Benefits | |
|
Unrecognized actuarial loss | | $ | 15 | | | $ | — | |
Unrecognized transition obligation | | | — | | | | 1 | |
Unrecognized prior service cost (credit) | | | (1 | ) | | | 2 | |
| | | | | | | | |
Amounts in comprehensive income to be recognized in net periodic cost in 2008 | | $ | 14 | | | $ | 3 | |
| | | | | | | | |
The following table displays pension benefits related to the Company’s non-qualified benefits restoration planCenterPoint Energy’s pension plans that have accumulated benefit obligations in excess of plan assets:
| | | | | | | | |
| | December 31, | |
| | 2006 | | | 2007 | |
| | (In millions) | |
|
Accumulated benefit obligation | | $ | 78 | | | $ | 82 | |
Projected benefit obligation | | | 79 | | | | 84 | |
Plan assets | | | — | | | | — | |
84
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
| | December 31, | |
| | 2008 | | | 2009 | |
| | Pension Qualified | | | Pension Non-qualified | | | Pension Qualified | | | Pension Non-qualified | |
| | (In millions) | |
Accumulated benefit obligation | | $ | 1,622 | | | $ | 86 | | | $ | 1,770 | | | $ | 94 | |
Projected benefit obligation | | | 1,624 | | | | 86 | | | | 1,772 | | | | 94 | |
Fair value of plan assets | | | 1,276 | | | | - | | | | 1,432 | | | | - | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Assumed healthcare cost trend rates have a significant effect on the reported amounts for the Company’sCenterPoint Energy’s postretirement benefit plans. A 1% change in the assumed healthcare cost trend rate would have the following effects:
| | | | | | | | | |
| | 1%
| | 1%
| | |
| | Increase | | Decrease | | |
| | (In millions) | | | 1% Increase | | | 1% Decrease | |
| | (In millions) | |
Effect on the postretirement benefit obligation | | $ | 19 | | | $ | 16 | | | $ | 17 | | | $ | 15 | |
Effect on total of service and interest cost | | | 1 | | | | 1 | | | | 1 | | | | 1 | |
The following table displays the weighted-average asset allocations as of December 31, 2006 and 2007 for the Company’s pension and postretirement benefit plans:
| | | | | | | | | | | | | | | | |
| | December 31, | |
| | 2006 | | | 2007 | |
| | Pension
| | | Postretirement
| | | Pension
| | | Postretirement
| |
| | Benefits | | | Benefits | | | Benefits | | | Benefits | |
|
Domestic equity securities | | | 50 | % | | | 28 | % | | | 49 | % | | | 26 | % |
Global equity securities | | | 11 | | | | — | | | | 11 | | | | — | |
International equity securities | | | 10 | | | | 11 | | | | 12 | | | | 9 | |
Debt securities | | | 27 | | | | 61 | | | | 27 | | | | 64 | |
Real estate | | | 1 | | | | — | | | | 1 | | | | — | |
Cash | | | 1 | | | | — | | | | — | | | | 1 | |
| | | | | | | | | | | | | | | | |
Total | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | | | | | |
In managing the investments associated with the benefit plans, the Company’sCenterPoint Energy’s objective is to preserve and enhance the value of plan assets while maintaining an acceptable level of volatility. These objectives are expected to be achieved through an investment strategy that manages liquidity requirements while maintaining a long-term horizon in making investment decisions and efficient and effective management of plan assets.
As part of the investment strategy discussed above, the CompanyCenterPoint Energy has adopted and maintains the following weighted average allocation targets for its benefit plans:
| | Pension Benefits | | | | | Postretirement Benefits | |
| | Pension
| | | Postretirement
| |
| | Benefits | | | Benefits | |
|
Domestic equity securities | | | 25-35 | % | | | 22-3221-31 | % |
Global equity securities | | | 7-13 | % | | | —- | |
International equity securities | | | 17-23 | % | | | 4-14 | % |
Debt securities | | | 30-40 | % | | | 60-70 | % |
Real estate | | | 0-5 | % | | | —- | |
Cash | | | 0-2 | % | | | 0-2 | % |
The fair values of CenterPoint Energy’s pension plan assets at December 31, 2009, by asset allocation targetscategory are as follows:
| | Fair Value Measurements at December 31, 2009 (in millions) | |
| | Total | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Cash | | $ | 11 | | | $ | 11 | | | $ | - | | | $ | - | |
Common collective trust funds (1) | | | 733 | | | | - | | | | 733 | | | | - | |
Corporate Bonds: | | | | | | | | | | | | | | | | |
Investment grade or above | | | 193 | | | | - | | | | 192 | | | | 1 | |
High yield | | | 2 | | | | - | | | | 2 | | | | | |
Equity securities: | | | | | | | | | | | | | | | | |
International companies | | | 162 | | | | 160 | | | | 2 | | | | - | |
U.S. companies | | | 96 | | | | 96 | | | | - | | | | - | |
Securities received as collateral | | | 114 | | | | 114 | | | | - | | | | - | |
U.S. government back agencies bonds | | | 55 | | | | 55 | | | | - | | | | - | |
U.S. treasuries | | | 50 | | | | 50 | | | | - | | | | - | |
Mortgage backed securities | | | 39 | | | | - | | | | 39 | | | | - | |
Asset backed securities | | | 27 | | | | - | | | | 24 | | | | 3 | |
Municipal bonds | | | 22 | | | | 2 | | | | 20 | | | | - | |
Mutual funds (2) | | | 21 | | | | 21 | | | | - | | | | - | |
International government bonds | | | 12 | | | | - | | | | 12 | | | | - | |
Real estate | | | 9 | | | | - | | | | - | | | | 9 | |
Obligation to return securities received as collateral | | | (114 | ) | | | (114 | ) | | | - | | | | - | |
Total | | $ | 1,432 | | | $ | 395 | | | $ | 1,024 | | | $ | 13 | |
| (1) | 30% of the amount invested in common collective trust funds is in fixed income securities, 31% is in U.S. equities and 39% is in international equities. |
| (2) | 48% of the amount invested in mutual funds is in fixed income securities and 52% is in U.S. equities. |
The pension plan utilized both exchange traded and over-the-counter financial instruments such as futures, interest rate options and swaps that were marked to market daily with the gains/losses settled in the table above reflect changes approved by the Company’s Benefits Committee during 2007 that were implemented in January 2008.
cash accounts. The pension plan did not include any holdings of CenterPoint Energy common stock as of December 31, 20062008 or 2007.2009.
The following table sets forth a summary of changes in the fair value of the pension plan’s level 3 investments for the year ended December 31, 2009:
| | Level 3 Investments | |
| | Year Ended December 31, 2009 (in millions) | |
| | Corporate bonds | | | Asset backed securities | | | Real estate | | | Total | |
Balance, beginning of year | | $ | 1 | | | $ | 3 | | | $ | 14 | | | $ | 18 | |
Unrealized gains/(losses) relating to instruments still held at the reporting date | | | - | | | | - | | | | (5 | ) | | | (5 | ) |
Balance, end of year | | $ | 1 | | | $ | 3 | | | $ | 9 | | | $ | 13 | |
The Companyfair values of CenterPoint Energy’s postretirement plan assets at December 31, 2009, by asset category are as follows:
| | Fair Value Measurements at December 31, 2009 (in millions) | |
| | Total | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Input (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Mutual funds (1) | | $ | 146 | | | $ | 146 | | | $ | - | | | $ | - | |
Total | | $ | 146 | | | $ | 146 | | | $ | - | | | $ | - | |
| (1) | 65% of the amount invested in mutual funds is in fixed income securities, 26% is in U.S. equities and 9% is in international equities. |
CenterPoint Energy contributed $13 million, $7 million and $26 million to its qualified pension, non-qualified pension and postretirement benefits plans, respectively, in 2009. CenterPoint Energy expects to contribute approximately $9 million and $22$19 million to its non-qualified pension and postretirement benefits plans, respectively, in 2007, respectively. The Company expects to contribute approximately $8 million and $21 million to its non-qualified pension and postretirement benefits plans in 2008, respectively.
85
2010.
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following benefit payments are expected to be paid by the pension and postretirement benefit plans (in millions):
| | | | | | | | | | | | | | | | | Postretirement Benefit Plan | |
| | | | Postretirement Benefit Plan | | | Pension Benefits | | | Benefit Payments | | | Medicare Subsidy Receipts | |
| | | | | | Medicare
| | |
| | Pension
| | Benefit
| | Subsidy
| | |
| | Benefits | | Payments | | Receipts | | |
| |
2008 | | $ | 123 | | | $ | 32 | | | $ | (4 | ) | |
2009 | | | 127 | | | | 33 | | | | (4 | ) | |
2010 | | | 130 | | | | 34 | | | | (4 | ) | | $ | 136 | | | $ | 33 | | | $ | (4 | ) |
2011 | | | 131 | | | | 36 | | | | (4 | ) | | | 138 | | | | 35 | | | | (5 | ) |
2012 | | | 134 | | | | 37 | | | | (5 | ) | | | 142 | | | | 36 | | | | (5 | ) |
2013-2017 | | | 680 | | | | 199 | | | | (28 | ) | |
2013 | | | | 145 | | | | 38 | | | | (6 | ) |
2014 | | | | 144 | | | | 39 | | | | (6 | ) |
2015-2019 | | | | 743 | | | | 216 | | | | (38 | ) |
Savings Plan
The CompanyCenterPoint Energy has a qualifiedtax-qualified employee savings plan that includes a cash or deferred arrangement under Section 401(k) of the Internal Revenue Code of 1986, as amended (the Code), and an employee stock ownership plan (ESOP) under Section 4975(e)(7) of the Code. Under the plan, participating employees may contribute a portion of their compensation, on a pre-tax or after-tax basis, generally up to a maximum of 16%50% of eligible compensation. The Company matches 75%100% of the first 6% of each employee’s compensation contributed. The Company may contribute an additional discretionary match of up to 50% of the first 6% of each employee’s compensation contributed. These matching contributions are fully vested at all times.
Participating employees may elect to invest all or a portion of their contributions to the plan in CenterPoint Energy common stock, to have dividends reinvested in additional shares or to receive dividend payments in cash on any investment in CenterPoint Energy common stock, and to transfer all or part of their investment in CenterPoint Energy common stock to other investment options offered by the plan.
The savings plan has significant holdings of CenterPoint Energy common stock. As of December 31, 2007, an aggregate of 20,511,9032009, 21,320,436 shares of CenterPoint Energy’s common stock were held by the savings plan, which represented 24.8%approximately 23% of its investments. Given the concentration of the investments in CenterPoint Energy’s common stock, the savings plan and its participants have market risk related to this investment.
The Company’sCenterPoint Energy’s savings plan benefit expense wasexpenses were $35 million, $34$39 million and $35$31 million in 2005, 20062007, 2008 and 2007,2009, respectively. Included in the 2005 amount is less than $1 million savings plan benefit expense related to Texas Genco participants. Amounts for Texas Genco’s participants are reflected as discontinued operations in the Statements of Consolidated Income.
Postemployment Benefits
NetCenterPoint Energy provides postemployment benefit costsbenefits for former or inactive employees, their beneficiaries and covered dependents, after employment but before retirement (primarily healthcare and life insurance benefits for participants in the long-term disability plan) were $8 million and $6 million in 2005 and 2006, respectively.. The Company recorded postemployment benefit income of $2 million, $1 million and $-0- in 2007.2007, 2008 and 2009, respectively.
Included in “Benefit Obligations”"Benefit Obligations" in the accompanying Consolidated Balance Sheets at December 31, 20062008 and 20072009 was $43$32 million and $37$29 million, respectively, relating to postemployment obligations.
Other Non-Qualified Plans
The CompanyCenterPoint Energy has non-qualified deferred compensation plans that provide benefits payable to directors, officers and certain key employees or their designated beneficiaries at specified future dates, upon termination,
86
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
retirement or death. Benefit payments are made from the general assets of the Company.CenterPoint Energy. During 2005, 20062007, 2008 and 2007, the Company2009, CenterPoint Energy recorded benefit expense relating to these plans of $8$7 million, $6$4 million and $7$6 million, respectively. Included in “Benefit Obligations”"Benefit Obligations" in the accompanying Consolidated Balance Sheets at December 31, 20062008 and 20072009 was $105$83 million and $100$79 million, respectively, relating to deferred compensation plans.
Effective January 1, 2008, CenterPoint Energy adopted new 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 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 effect of the correction is not material to CenterPoint Energy’s previously issued financial statements and did not affect CenterPoint Energy’s results of operations or cash flows. Included in Benefit Obligations in CenterPoint Energy’s Consolidated Balance Sheets at December 31, 2008 and 2009 was $16 million and $19 million, respectively, relating to split-dollar life insurance arrangements.
Change in Control Agreements and Other Employee Matters
Effective January 1, 2007, the Company entered intoCenterPoint Energy has agreements with certain of its officers that generally provide, to the extent applicable, in the case of a change in control of the CompanyCenterPoint Energy and termination of employment, for severance benefits of up to three times annual base salary plus bonus, and other benefits. By their terms, theseThese agreements are for a one-year term with automatic renewal unless action is taken by the BoardCenterPoint Energy’s board of directors prior to the renewal. Effective January 1, 2008, these agreements were amended in minor respects.
As of December 31, 2007,2009, approximately 30% of the Company’sCenterPoint Energy’s employees are subject to collective bargaining agreements. The Company has fourOne of the collective bargaining agreements (1) United Steelcovering approximately 14% of CenterPoint Energy’s employees, the International Brotherhood of Electrical Workers (USW)Union Local13-227, (2) Office and Professional Employees International Union (OPEIU) Local 12 Metro, (3) OPEIU Local 12 Mankato, and (4) USW Local13-1, that are No. 66, is scheduled to expire in 2008 that collectively cover approximately 8% of its employees. The CompanyMay 2010. CenterPoint Energy has a good relationship with thesethis bargaining unitsunit and expects to renegotiatenegotiate a new agreementsagreement in 2010.
(3) Regulatory Matters
(a) Hurricane Ike
CenterPoint Houston’s electric delivery system suffered substantial damage as a result of Hurricane Ike, which struck the upper Texas coast in September 2008.
As is common with electric utilities serving coastal regions, the poles, towers, wires, street lights and pole mounted equipment that comprise CenterPoint Houston’s transmission and distribution system are not covered by property insurance, but office buildings and warehouses and their contents and substations are covered by insurance
| |
(3) | Discontinued Operations |
that provides for a maximum deductible of $10 million. Current estimates are that total losses to property covered by this insurance were approximately $30 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 2009.
Legislation enacted by the Texas Legislature in April 2009 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 costs.
Pursuant to such legislation, CenterPoint Houston filed with the Texas Utility Commission an application for review and approval for recovery of approximately $678 million, including 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 calculated through August 2009. In July 2009, CenterPoint Houston announced a settlement agreement with the parties to the proceeding. Under that settlement agreement, CenterPoint Houston was 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 $663 million, of which $643 million was attributable to distribution service and eligible for securitization and the remaining $20 million was attributable to transmission service and eligible for recovery through the existing mechanisms established to recover transmission costs.
In July 2004,2009, 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. 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 were issued, as well as certain up-front qualified costs capped at approximately $6 million. In November 2009, CenterPoint Houston issued approximately $665 million of system restoration bonds through its CenterPoint Energy Restoration Bond Company, announced its agreementLLC subsidiary with interest rates of 1.833% to sell Texas Genco4.243% and final maturity dates ranging from February 2016 to Texas Genco LLC. August 2023. The bonds will be repaid over time through a charge imposed on customers.
In December 2004, Texas Genco completedaccordance with the salefinancing order, CenterPoint Houston also placed a separate customer credit in effect when the storm restoration bonds were issued. That credit (ADFIT Credit) is applied to customers’ bills while the bonds are outstanding to reflect the benefit of its fossil generation assets (coal, lignite and gas-fired plants) to Texas Genco LLC for $2.813 billion in cash. Followingaccumulated deferred federal income taxes (ADFIT) associated with the sale, Texas Genco’s principal remaining asset was its ownership interest in the South Texas Project Electric Generating Station,storm restoration costs (including a nuclear generating facility.carrying charge of 11.075%). The final stepbeginning balance of the transaction,ADFIT related to storm restoration costs was approximately $207 million and will decline over the merger of Texas Genco with a subsidiary of Texas Genco LLC in exchange for an additional cash payment to the Company of $700 million, was completed in April 2005.
The following table summarizes the componentslife of the loss from discontinued operationssystem restoration bonds as taxes are paid on the system restoration tariffs. The ADFIT Credit will reduce operating income in 2010 by approximately $24 million.
In accordance with the orders discussed above, as of December 31, 2009, CenterPoint Houston has recorded $651 million associated with distribution-related storm restoration costs as a net regulatory asset and $20 million associated with transmission-related storm restoration costs, of which $18 million is recorded in property, plant and equipment and $2 million of related carrying costs is recorded in regulatory assets. These amounts reflect carrying costs of $60 million related to distribution and $2 million related to transmission through December 31, 2009, based on the 11.075% cost of capital approved by the Texas GencoUtility 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 year ended December 31, 2005 (in millions):
| | | | | | | | |
Texas Genco net income as reported | | | | | | $ | 10 | |
Adjustment for general corporate overhead reclassification, net of tax(1) | | | | | | | 1 | |
| | | | | | | | |
Income from discontinued operations of Texas Genco, net of tax and minority interest | | | | | | | 11 | |
| | | | | | | | |
Loss on sale of Texas Genco, net of tax | | | | | | | (4 | ) |
Loss offsetting Texas Genco’s earnings, net of tax | | | | | | | (10 | ) |
| | | | | | | | |
Loss on disposal of Texas Genco, net of tax | | | | | | | (14 | ) |
| | | | | | | | |
Total Discontinued Operations of Texas Genco | | | | | | $ | (3 | ) |
| | | | | | | | |
2009, the component representing a return of borrowing costs of $23 million has been recognized and is included in other income in CenterPoint Energy’s Statements of Consolidated Income. The component representing an allowance for earnings on shareholders’ investment of $39 million is being deferred and will be recognized as it is collected through rates.
| | |
(1) | | General corporate overhead previously allocated to Texas Genco from CenterPoint Energy, which will not be eliminated by the sale of Texas Genco, was excluded from income from discontinued operations and is reflected as general corporate overhead of CenterPoint Energy in income from continuing operations in accordance with SFAS No. 144. |
87
Revenues related to Texas Genco included in discontinued operations for the year ended December 31, 2005 were $62 million. Income from these discontinued operations for the year ended December 31, 2005 is reported net
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(b) Recovery of True-Up Balance
| |
(a) | Recovery ofTrue-Up Balance |
In March 2004, CenterPoint Houston filed itstrue-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 (True-Up Order) allowing CenterPoint Houston to recover atrue-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 in certain other respects.adjustments.
CenterPoint Houston and other parties filed appeals of theTrue-Up Order to a district court in Travis County, Texas. In August 2005, that court issued its judgment on the various appeals. In its judgment, the district court:
| | |
| • | reversed the Texas Utility Commission’s ruling that had denied recovery of a portion of the capacity auctiontrue-up amounts; |
|
| • | reversed the Texas Utility Commission’s ruling that precluded CenterPoint Houston from recovering the interest component of the EMCs paid to retail electric providers; and |
|
| • | affirmed theTrue-Up Order in all other respects. |
reversed the Texas Utility Commission’s ruling that had denied recovery of a portion of the capacity auction true-up amounts;
reversed the Texas Utility Commission’s ruling that precluded CenterPoint Houston from recovering the interest component of the EMCs paid to retail electric providers (REPs); and
affirmed the True-Up Order in all other respects.
The district court’s decision would have had the effect of restoring approximately $650 million, plus interest, of the $1.7 billion the Texas Utility Commission had disallowed from CenterPoint Houston’s initial request.
CenterPoint Houston and other parties appealed the district court’s judgment to the Texas Third Court of Appeals, which issued its decision in December 2007. In its decision, the court of appeals:
| | |
| • | reversed the district court’s judgment to the extent it restored the capacity auctiontrue-up amounts; |
|
| • | reversed the district court’s judgment to the extent it restored the capacity auction true-up amounts;
reversed the district court’s judgment to the extent it upheld the Texas Utility Commission’s decision to allow CenterPoint Houston to recover EMCs paid to Reliant Energy, Inc. (RRI); |
|
| • | ordered that the tax normalization issue described below be remanded to the Texas Utility Commission; and |
|
| • | affirmed the district court’s judgment in all other respects. |
CenterPoint Houston to recover EMCs paid to RRI Energy, Inc. (RRI) (formerly known as Reliant Energy, Inc. and twoReliant Resources, Inc.);
ordered that the tax normalization issue described below be remanded to the Texas Utility Commission as requested by the Texas Utility Commission; and
affirmed the district court’s judgment in all other parties filedrespects.
In April 2008, the court of appeals denied all motions for rehearing withand 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.appeals decision. In the event that the motions for rehearing are not resolved in a manner favorable to it,its petition, CenterPoint Houston intendsseeks reversal of the parts of the court of appeals decision that (i) denied recovery of EMCs paid to seek furtherRRI, (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 bywere filed with the Texas Supreme Court.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 the CompanyCenterPoint Energy and CenterPoint Houston believe that CenterPoint Houston’strue-up request is consistent with applicable statutes and regulations and, accordingly, that it is reasonably possible that it will be successful in its further appeals,appeal to the CompanyTexas Supreme Court, CenterPoint Energy can provide no assurance as to the ultimate court rulings by the courts on the issues to be considered in the various appealsappeal or with respect to the ultimate decision by the Texas Utility Commission on the tax normalization issue described below.
To reflect the impact of theTrue-Up Order, in 2004 and 2005, the CompanyCenterPoint 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 the Company’sCenterPoint Energy’s consolidated financial statements. However, if the court of appeals decision is not reversed or modified as a result of the pending motions for rehearing or on further review by the Texas Supreme Court, the CompanyCenterPoint 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 theTrue-up True-Up Order, but could range from $130$180 million to $350$410 million (pre-tax) plus interest subsequent to December 31, 2007.
88
2009.
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In theTrue-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. The CompanyCenterPoint Energy believes that the Texas Utility Commission based its order on proposed regulations issued by the Internal Revenue Service (IRS) in March 2003 whichthat 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, in December 2005, the IRS subsequently withdrew those proposed normalization regulations and, issued new proposedin March 2008, adopted final regulations that dowould not include the provision allowing a retroactive electionpermit utilities like CenterPoint Houston to pass the tax benefits back to customers. The Company subsequently requestedcustomers without creating normalization violations. In addition, CenterPoint Energy received a Private Letter Ruling (PLR) askingfrom the IRS whetherin 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. In that ruling, which was received in August 2007, the IRS concluded that such reductions would cause normalization violations with respect to the ADITC and EDFIT. As in a similar PLR issued in May 2006 to another Texas utility, the IRS did not reference its proposed regulations.
The district court affirmed the Texas Utility Commission’s ruling on the tax normalization issue, but in response to a request from the Texas Utility Commission, the court of appeals ordered that the tax normalization issue be remanded for further consideration. 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 the CompanyCenterPoint 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 the Company’sCenterPoint Energy’s results of operations, financial condition and cash flows in addition to any potential loss resulting from final resolution of theTrue-Up Order. However,In its opinion, the Companycourt of appeals ordered that this issue be remanded to the Texas Utility Commission, as that commission requested. No party 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 orand 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’sTrue-Up Order to be recovered either through the issuance of transition bondssecuritization 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 new special purpose 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 thetrue-up balance determined in theTrue-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 theTrue-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 retail electric providersREPs to recover the portion of thetrue-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. Effective September 13, 2005, theThe return on the CTC portion of thetrue-up balance iswas included in CenterPoint Houston’s tariff-based revenues.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
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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 newrevised rule discussed below.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 newon-site generation. The Texas Utility Commission and CenterPoint Houston disagree withappealed the district court’s conclusions and, in May 2006, appealed the judgment to the Texas Third Court of Appeals, and if required, CenterPoint Houston plansin July 2008, the court of appeals reversed the district court’s judgment in all respects and affirmed the Texas Utility Commission’s order. Two parties appealed the court of appeals decision to seek further review from the Texas Supreme Court. All briefsCourt which heard oral argument in the appeal have been filed, and oral arguments were held in December 2006.October 2009. The ultimate outcome of this matter cannot be predicted at this time. However, the CompanyCenterPoint Energy does not expect the disposition of this matter to have a material adverse effect on the Company’sCenterPoint Energy’s or CenterPoint Houston’s financial condition, results of operations or cash flows.
In June 2006, the Texas Utility Commission adopted the revised rule governing the carrying charges on unrecovered CTC balances as recommended by its staff (Staff). The rule, which applies to CenterPoint Houston, reduced the allowed interest rate on the unrecovered CTC balance prospectively from 11.075% to a weighted average cost of capital of 8.06%. The annualized impact on operating income is a reduction of approximately $18 million per year for the first year with lesser impacts in subsequent years. In July 2006, CenterPoint Houston made a compliance filing necessary to implement the rule changes effective August 1, 2006.
During the years ended December 31, 2005, 2006 and 2007, CenterPoint Houston recognized approximately $19 million, $55 million and $42 million, respectively, in operating income from the CTC. Additionally, during the years ended December 31, 2005, 2006 and 2007, CenterPoint Houston recognized approximately $1 million, $13 million and $14 million, respectively, of the allowed equity return not previously recorded. As of December 31, 2007, the Company had not recorded an allowed equity return of $220 million on CenterPoint Houston’strue-up balance because such return will be recognized as it is recovered in rates.
During the 2007 legislative session, the Texas legislature amended statutes prescribing the types oftrue-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, after taking into accountadjusted to refund certain unspent environmental retrofit costs and to recover the environmental refund andamount of the final fuel reconciliation settlement amounts discussed below.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 pursuant to the financing order 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.
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(b) | Final Fuel Reconciliation |
The results of During the Texas Utility Commission’s final decision related to CenterPoint Houston’s final fuel reconciliation were a component of theTrue-Up Order.years ended December 31, 2007 and 2008, CenterPoint Houston appealed certain portions of theTrue-Up Order involving a disallowance ofrecognized approximately $67$42 million relating to the final fuel reconciliationand $5 million, respectively, in 2003 plus interest of $10 million. That decision was upheld by a Travis County district court and affirmed by the Texas Third Court of Appeals. Although it filed an appeal with the Texas Supreme Court, in February 2007 CenterPoint Houston asked the Texas Supreme Court to hold that appeal in abeyance pending consideration by the Texas Utility Commission of a tentative settlement reached by the parties. In October 2007 the Texas Utility
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Commission issued a final order consistent with the settlement, and the Texas Supreme Court ultimately vacated the lower court decisions. The settlement allows CenterPoint Houston recovery of $12.5 million plus interestoperating income from January 2002. As a result of the settlement, CenterPoint Houston recorded a regulatory asset of $17 million in 2007.
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(c) | Refund of Environmental Retrofit Costs |
TheTrue-Up Order allowed recovery of approximately $699 million of environmental retrofit costs related to CenterPoint Houston’s generation assets. TheTrue-Up Order required CenterPoint Houston to provide evidence by January 31, 2007 that the entire $699 million was actually spent by December 31, 2006 on environmental programs and provided for the Texas Utility Commission to determine the appropriate manner to return to customers any unused portion of these funds, including interest on the funds and on stranded costs attributable to the environmental costs portion of the stranded costs recovery. In January 2007, the successor in interest to CenterPoint Houston’s generation assets advised that, as of December 31, 2006, it had spent only approximately $664 million. On January 31, 2007, CenterPoint Houston made the required filing with the Texas Utility Commission, identifying approximately $35 million in unspent funds to be refunded to customers along with approximately $7 million of interest and requesting permission to refund these amounts through a reduction of the CTC. Such amounts were recorded as regulatory liabilities as of December 31, 2006. In July 2007, CenterPoint Houston, the Staff and the other parties filed a settlement agreement in which it was agreed that the total amount of the refund, including all principal and interest, was $45 million as of May 31, 2007, that interest would continue to accrue after May 31, 2007 on any unrefunded balance at a rate of 5.4519% per year and that the refund should be used to offset the principal amount proposed in CenterPoint Houston’s application to securitize the CTC and other amounts. The offset occurred in connection with the $488 million of transition bonds issued in February 2008. In August 2007, the Texas Utility Commission issued a final order consistent with the terms of that settlement agreement.
As of December 31, 2009, CenterPoint Energy has not recognized an allowed equity return of $193 million on CenterPoint Houston’s true-up balance because such return will be recognized as it is recovered in rates. During the years ended December 31, 2007, 2008 and 2009, CenterPoint Houston had recorded a regulatory liabilityrecognized approximately $14 million, $13 million and $13 million, respectively, of $46 million related to this matter.the allowed equity return not previously recognized.
Natural Gas Distribution(c) Rate Proceedings
Arkansas.Texas. In January 2007, CERC Corp.’sMarch 2008, the natural gas distribution businessbusinesses of CERC (Gas Operations) filed an application with the Arkansas Public Service Commission (APSC)a request to change its natural gas distribution rates in order to increase its annual base revenues by approximately $51 million. Gas Operations subsequently agreed to reduce its request to approximately $40 million. As part of its filing, Gas Operations also proposed a revenue stabilization tariff (also known as decoupling) that would help stabilize revenues and eliminate the potential conflict between its efforts to earn a reasonable return on invested capital while promoting energy efficiency initiatives.
In September 2007, the APSC staff and Gas Operations entered into and filed with the APSC a Stipulation and Settlement Agreement (Settlement Agreement) under which the annual base revenues of Gas Operations would increase by approximately $20 million, and a revenue stabilization tariff would be allowed to go into effect, with an authorized rate of return on equity of 9.65% (reflecting a 10 basis point reduction for the implementation of the revenue stabilization tariff). The other parties to the proceeding agreed not to oppose the Settlement Agreement. In October 2007, the APSC issued an order approving the Settlement Agreement, and the new rates became effective with bills rendered on and after November 1, 2007.
Texas. In December 2006, Gas Operations filed a statement of intent with the Railroad Commission of Texas (Railroad Commission) seeking to implement an increaseand the 47 cities in miscellaneous service charges and to allow recovery of the costs of financial hedging transactions through its purchased gas cost adjustment in the environs of its Texas Coast service territory. After approvalterritory, an area consisting of approximately 230,000 customers in cities and communities on the filingoutskirts of
Houston. In 2008, Gas Operations implemented rates increasing annual revenues by approximately $3.5 million. The implemented rates were contested by 9 cities in an appeal to the 353rd District Court in Travis County, Texas. In January 2010, that court reversed the Railroad Commission’s order in part and remanded the matter to the Railroad Commission. The court concluded that the Railroad Commission did not have statutory authority to impose on the newcomplaining cities the cost of service charges were implemented in the second quarter of 2007.
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In response to an explosion resulting from the failure of a certain type of compression coupling on another company’s natural gas distribution system in Texas,adjustment mechanism which the Railroad Commission has begunhad approved in its order. Certain parties filed a rulemaking focusing on leak surveys, leak gradingmotion to modify the district court’s judgment and a final decision is not expected until April 2010. CenterPoint Energy and CERC do not expect the replacementoutcome of specific types of compression couplings. In addition, the Railroad Commission issued a directive in November 2007 requiring the removal of service risers knownthis matter to have compression fittings that do not meet certain performance specifications. After reviewinga material adverse impact on the Company’s records as required by the directive,financial condition, results of operations or cash flows of either CenterPoint Energy or CERC.
In July 2009, Gas Operations has no indication that it has the type of coupling described in that directive. However, at this time the Company does not know what additional requirements may result from the pending Railroad Commission rulemaking or what impacts on its gas operations may result from any future regulatory initiatives adopted with respect to this issue.
In the first quarter of 2008, Gas Operations expects to filefiled a request to change its rates with the Railroad Commission and the 4729 cities in its Texas CoastHouston service territory.territory, consisting of approximately 940,000 customers in and around Houston. The request will seekseeks to establish uniform rates, charges and terms and conditions of service for the cities and environs of the Houston service territory. As finally submitted to the Railroad Commission and the cities, the proposed new rates would result in an overall increase in annual revenue of $20.4 million, excluding carrying costs on gas inventory of approximately $2 million. In January 2010, Gas Operations withdrew its request for an annual cost of service adjustment mechanism due to the uncertainty caused by the court’s ruling in the above-mentioned Texas Coast service territory.appeal. In February 2010, the Railroad Commission issued its decision authorizing a revenue increase of $5.1 million annually, reflecting reduced depreciation rates of $1.2 million. The effecthearing examiner also recommended a surcharge of $0.9 million per year to recover Hurricane Ike costs over three years.
In May 2009, CenterPoint Houston filed an application at the Texas Utility Commission seeking approval of certain estimated 2010 energy efficiency program costs, an energy efficiency performance bonus for 2008 programs and carrying costs, totaling approximately $10 million. The application sought to begin recovery of these costs through a surcharge effective July 1, 2010. In October 2009, the Texas Utility Commission issued its order approving recovery of the requested2010 energy efficiency program costs and a partial performance bonus, plus carrying costs, but refused to permit CenterPoint Houston to recover a performance bonus of $2 million on approximately $10 million in 2008 energy efficiency costs expended pursuant to the terms of a settlement agreement reached in CenterPoint Houston’s 2006 rate changes will beproceeding. CenterPoint Houston has appealed the denial of the full 2008 performance bonus to increase the district court in Travis County, Texas, Coast service territory’s revenues by approximately $7 million per year.where the case remains pending.
Minnesota. In November 2005, Gas Operations filed a request with2006, the Minnesota Public Utilities Commission (MPUC) to increase annual base rates by approximately $41 million. In December 2005, the MPUC approved an interim rate increase of approximately $35 million that was implemented January 1, 2006. In January 2007, the MPUC issued a final order granting a rate increase of approximately $21 million and approving a $5 million affordability program to assist low-income customers, the actual cost of which will be recovered in rates in addition to the $21 million rate increase. Final rates were implemented beginning May 1, 2007, and Gas Operations completed refunding to customers the proportional share of the excess of the amounts collected in interim rates over the amount allowed by the final order in the second quarter of 2007.
In November 2006, the 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. Thatdecision, and in May 2008 that court heard oral argumentsruled that the MPUC had been arbitrary and capricious in denying Gas Operations a waiver. The MPUC sought further review of the court of appeals decision from the Minnesota Supreme Court. In July 2009, the Minnesota Supreme Court 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 appealcosts 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 by $59.8 million annually. In addition, Gas Operations sought an adjustment mechanism that would annually adjust rates to reflect changes in Februaryuse per customer. In December 2008, the MPUC accepted the case and is expectedapproved an interim rate increase of $51.2 million, which became effective on January 2, 2009, subject to renderrefund. In January 2010, the MPUC issued its decision within 90 daysauthorizing a revenue increase of $41 million per year, with an overall rate of return of 8.09% (10.24% return on equity).The difference between the rates approved by the MPUC and amounts collected under the interim rates, $10 million as of December 31, 2009, is recorded in other current liabilities and will be refunded to customers. The MPUC also authorized Gas Operations to implement a pilot program for residential and small volume commercial customers that hearing.is intended to decouple gas revenues from customers’ natural gas usage. In February 2010, CERC filed a request for rehearing of the order by the MPUC. No prediction can be made as
other party to the ultimate outcomecase filed such a request. CERC and CenterPoint Energy do not expect a final order to be issued in this proceeding until spring 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). In November 2009, as part of this matter.a settlement agreement in which the MPSC approved Gas Operations’ retention of the compensation paid under the terms of an asset management agreement, Gas Operations withdrew its rate request.
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(5) | Derivative Instruments |
(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 Energy recording its share of the effects of such write-offs of SESH’s regulatory assets through non-cash pre-tax charges for the year ended December 31, 2009 of $16 million. These non-cash charges are reflected in equity in earnings of unconsolidated affiliates in the Statements of Consolidated Income. The Companyrelated tax benefits of $6 million are reflected in the Income Tax Expense line in the Statements of Consolidated Income.
(4) Derivative Instruments
CenterPoint Energy is exposed to various market risks. These risks arise from transactions entered into in the normal course of business. The CompanyCenterPoint Energy utilizes derivative instruments such as physical forward contracts, swaps and options to mitigate the impact of changes in commodity prices, weather and interest rates on its operating results and cash flows.
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(a) | Non-Trading Activities |
Cash Flow Hedges. The Company(a) Non-Trading Activities
Derivative Instruments. CenterPoint Energy enters into certain derivative instruments thatto manage physical commodity price risks and does not engage in proprietary or speculative commodity trading. These financial instruments do not qualify or are not designated as cash flow hedges under SFAS No. 133.or fair value hedges.
During the year ended December 31, 2007, CenterPoint Energy recorded increased natural gas expense from unrealized net losses of $10 million. During the year ended December 31, 2008, CenterPoint Energy recorded increased natural gas revenues from unrealized net gains of $101 million and increased natural gas expense from unrealized net losses of $88 million, a net unrealized gain of $13 million. During the year ended December 31, 2009, CenterPoint Energy recorded decreased revenues from unrealized net losses of $80 million and decreased natural gas expense from unrealized net gains of $57 million, a net unrealized loss of $23 million.
In prior years, CenterPoint Energy entered into certain derivative instruments that were designated as cash flow hedges. The objective of these derivative instruments iswas to hedge the price risk associated with natural gas purchases and sales to reduce cash flow variability related to meeting the Company’sCenterPoint Energy’s wholesale and retail customer obligations. During the years endedIn 2007, CenterPoint Energy discontinued designating these instruments as cash flow hedges. As of December 31, 2005, 2006 and 2007, hedge ineffectiveness resulted2009, there are no remaining amounts deferred in a loss of $2 million, a gain of $2 million and a loss of less than $1 million, respectively, from derivativesother comprehensive income related to these instruments that qualify for and arehad previously been designated as cash flow hedges. No component of the derivative instruments’ gain or loss was excluded from the assessment of effectiveness. If it becomes probable that an anticipated transaction being hedged will not occur, the Company realizes in net income the deferred gains and losses previously recognized in accumulated other
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comprehensive loss. The Company recognized a gain of $2 million in 2007 because it became probable that certain anticipated transactions being hedged would not occur. When an anticipated transaction being hedged affects earnings, the accumulated deferred gain or loss recognized in accumulated other comprehensive loss is reclassified and included in the Statements of Consolidated Income under the “Expenses” caption “Natural gas.” Cash flows resulting from these transactions in non-trading energy derivatives are included in the Statements of Consolidated Cash Flows in the same category as the item being hedged. As of December 31, 2007, the Company expects $7 million ($4 million after-tax) in accumulated other comprehensive income to be reclassified as a decrease in Natural gas expense during the next twelve months.
The length of time the Company is hedging its exposure to the variability in future cash flows using derivative instruments that have been designated and have qualified as cash flow hedging instruments is primarily a year, with a limited amount up to two years. The Company’s policy is not to exceed ten years in hedging its exposure.
Other Derivative Instruments. The Company 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 under SFAS No. 133. The Company utilizes these financial instruments to manage physical commodity price risks and does not engage in proprietary or speculative commodity trading. During the years ended December 31, 2005, 2006 and 2007, the Company recognized unrealized net gains of $2 million and $34 million and net losses of $10 million, respectively. These derivative gains and losses are included in the Statements of Consolidated Income under the “Expenses” caption “Natural gas.”
Weather Derivatives. The CompanyHedges. CenterPoint Energy has weather normalization or other rate mechanisms that mitigate the impact of weather on its gas operations in certainArkansas, Louisiana, Oklahoma and a portion of its Gas Operations jurisdictions.Texas. The remaining Gas Operations jurisdictions Minnesota, Mississippi and Texas, do not have such mechanisms. As a result, fluctuations from normal weather may have a significant positive or negative effect on the results of these operations.the gas operations in the remaining jurisdictions and in CenterPoint Houston’s service territory.
In 2007, the Company2008 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 the2007/2008 respective winter heating season.seasons. The swaps arewere based on ten-year normal weather and provide for a maximum payment by either party of $18 million. Throughweather. During the years ended December 31, 2007, the existence2008 and 2009, CenterPoint Energy recognized losses of the swaps had no material impact on the Company’s earnings or cash flow.$-0-, $17 million and $7 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 Statements of Consolidated Income.
Interest Rate Swaps. During 2002, the CompanyCenterPoint Energy settled forward-starting interest rate swaps having an aggregate notional amount of $1.5 billion at a cost of $156 million, which was recorded in other comprehensive loss and was amortized into interest expense over the five-year life of the designated fixed-rate debt anddebt. The settlement amount was fully amortized at December 31, 2007. Amortization of amounts deferred in accumulated other comprehensive loss for 2005, 2006 and 2007 was $31 million, $31 million and $20 million, respectively.million.
Hedging of Future Debt Issuances.In each of December 2007 and January 2008, the CompanyCenterPoint Energy entered into treasury rate lock derivative instruments (treasury rate locks) having an aggregate notional valueamount of $150$300 million and a weighted-average locked U.S. treasury rate on ten-year debt of 4.05%. These treasury rate locks were executed to hedge the risk of changesten-year U.S. treasury rate expected to be used in the benchmark interest rate prior to the forecasted issuance ofpricing $300 million of fixed-rate debt CenterPoint Energy planned to issue in 2008, asbecause changes in the benchmark interestU.S treasury rate would cause variability in the Company’sCenterPoint Energy’s forecasted interest payments. These treasury rate lock derivatives were designated as cash flow hedges. Accordingly, unrealized gains and losses associated with the treasury rate lock derivative instruments arewere recorded as a component of accumulated other comprehensive income. In May 2008, CenterPoint Energy settled its treasury rate locks for a payment of $7 million. The realized gain or$7 million loss recognized upon settlement of the treasury rate lock agreement will be initiallylocks was recorded as a component of accumulated other comprehensive incomeloss and will be recognized as a component of interest expense over the ten-year life of the related financing arrangement. In$300 million senior notes issued in May 2008. Amortization of amounts deferred in accumulated other comprehensive loss for the years ended December 31, 2008 and 2009 was less than $1 million. During the years ended December 31, 2007 the Companyand 2008, CenterPoint Energy recognized a loss of $2 million lossand $5 million, respectively, for these treasury rate locks in accumulated other comprehensive income.loss. Ineffectiveness for the treasury rate locks was not material in 2007.during the years ended December 31, 2007 and 2008.
(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 Non-trading Derivative Assets and Liabilities as of December 31, 2009, while the latter tables provide a breakdown of the related income statement impact for the year ended December 31, 2009.
Fair Value of Derivative Instruments | |
| | December 31, 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 | | $ | 46 | | | $ | (7 | ) |
Commodity contracts (1) | | Other Assets | | | 16 | | | | (1 | ) |
Commodity contracts (1) | | Current Liabilities | | | 20 | | | | (123 | ) |
Commodity contracts (1) | | Other Liabilities | | | 1 | | | | (86 | ) |
Indexed debt securities derivative | | Current Liabilities | | | - | | | | (201 | ) |
Total | | $ | 83 | | | $ | (418 | ) |
_________
| (1) | Commodity contracts are subject to master netting arrangements and are presented on a net basis in the Consolidated Balance Sheets. This netting can cause derivative assets to be ultimately presented in a (liability) account on the Consolidated Balance Sheets. Likewise, derivative (liabilities) could be presented in an asset account. |
| (2) | The fair value shown for commodity contracts is comprised of derivative gross volumes totaling 674 billion cubic feet (Bcf) or a net 152 Bcf long position. Of the net long position, basis swaps constitute 71 Bcf and volumes associated with price stabilization activities of the Natural Gas Distribution business segment comprise 51 Bcf. |
| (3) | The net of total non-trading derivative assets and liabilities is a $39 million liability as shown on CenterPoint Energy’s Consolidated Balance Sheets, and is comprised of the commodity contracts derivative assets and liabilities separately shown above offset by collateral netting of $95 million. |
Embedded Derivative. The Company’s 3.75% convertible senior notes contain contingent interest provisions. The contingent interest component is an embedded derivative as defined by SFAS No. 133, and accordingly,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
must be split fromFor CenterPoint Energy’s price stabilization activities of the host instrumentNatural 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 at fair valueas 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 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 balance sheet. Statements of Consolidated Income.
Income Statement Impact of Derivative Activity | |
Total derivatives not designated as hedging instruments | | Income Statement Location | | Year Ended December 31, 2009 | |
| | | | (in millions) | |
Commodity contracts | | Gains (Losses) in Revenue | | $ | 102 | |
Commodity contracts (1) | | Gains (Losses) in Expense: Natural Gas | | | (255 | ) |
Indexed debt securities derivative | | Gains (Losses) in Other Income (Expense) | | | (68 | ) |
Total | | $ | (221 | ) |
_________
| (1) | The Gains (Losses) in Expense: Natural Gas includes $(181) 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 interest component was not material at issuance orfeatures that are in a net liability position at December 31, 2007.2009 is $140 million. The aggregate fair value of assets that are already posted as collateral at December 31, 2009 is $65 million. If all derivative contracts (in a net liability position) containing credit risk contingent features were triggered at December 31, 2009, a maximum of $75 million of additional assets would be required to be posted as collateral.
(d) Credit Quality of Counterparties
In addition to the risk associated with price movements, credit risk is also inherent in the Company’sCenterPoint Energy’s non-trading derivative activities. Credit risk relates to the risk of loss resulting from non-performance of contractual obligations by a counterparty. The following table shows the composition of counterparties to the non-trading derivative assets of the CompanyCenterPoint Energy as of December 31, 20062008 and 20072009 (in millions):
| | | | | | | | | | | | | | | | |
| | December 31, 2006 | | | December 31, 2007 | |
| | Investment
| | | | | | Investment
| | | | |
| | Grade(1) | | | Total | | | Grade(1) | | | Total | |
|
Energy marketers | | $ | 22 | | | $ | 27 | | | $ | 16 | | | $ | 18 | |
Financial institutions | | | 51 | | | | 51 | | | | 25 | | | | 25 | |
Other | | | 41 | | | | 41 | | | | 3 | | | | 7 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 114 | | | $ | 119 | | | $ | 44 | | | $ | 50 | |
| | | | | | | | | | | | | | | | |
| | December 31, 2008 | | | December 31, 2009 | |
| | Investment Grade(1) | | | Total | | | Investment Grade(1) | | | Total | |
Energy marketers | | $ | 8 | | | $ | 9 | | | $ | 6 | | | $ | 6 | |
Financial institutions | | | 4 | | | | 4 | | | | 2 | | | | 4 | |
Retail end users (2) | | | 5 | | | | 125 | | | | 1 | | | | 44 | |
Total | | $ | 17 | | | $ | 138 | | | $ | 9 | | | $ | 54 | |
__________ | | |
(1) | | “"Investment grade”grade" is primarily determined using publicly available credit ratings along with the consideration of credit support (such as parent company guaranties) and collateral, which encompass cash and standby letters of credit. For unrated counterparties, the CompanyCenterPoint Energy performs financial statement analysis, considering contractual rights and restrictions and collateral, to create a synthetic credit rating. |
| (2) | Retail end users represent commercial and industrial customers who have contracted to fix the price of a portion of their physical gas requirements for future periods. |
(5) 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 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 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 | |
__________
| |
(6) (1) | Indexed Debt Securities (ZENS)Amounts represent the impact of legally enforceable master netting agreements that allow CenterPoint Energy to settle positive and Time Warner Securitiesnegative positions and also include cash collateral of $187 million posted 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 December 31, 2009 | |
| | (in millions) | |
Assets | | | | | | | | | | | | | | | |
Corporate equities | | $ | 301 | | | $ | - | | | $ | - | | | $ | - | | | $ | 301 | |
Investments, including money market funds | | | 41 | | | | - | | | | - | | | | - | | | | 41 | |
Derivative assets | | | 1 | | | | 77 | | | | 5 | | | | (29 | ) | | | 54 | |
Total assets | | $ | 343 | | | $ | 77 | | | $ | 5 | | | $ | (29 | ) | | $ | 396 | |
Liabilities | | | | | | | | | | | | | | | | | | | | |
Indexed debt securities derivative | | $ | - | | | $ | 201 | | | $ | - | | | $ | - | | | $ | 201 | |
Derivative liabilities | | | 12 | | | | 194 | | | | 11 | | | | (124 | ) | | | 93 | |
Total liabilities | | $ | 12 | | | $ | 395 | | | $ | 11 | | | $ | (124 | ) | | $ | 294 | |
__________
| |
(a) (1) | Original Investment in Time Warner SecuritiesAmounts 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 $95 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 | |
| | Year Ended December 31, | |
| | 2008 | | | 2009 | |
| | (in millions) | |
Beginning balance | | $ | (3 | ) | | $ | (58 | ) |
Total unrealized gains or (losses): | | | | | | | | |
Included in earnings | | | (11 | ) | | | (1 | ) |
Included in regulatory assets | | | (10 | ) | | | (16 | ) |
Purchases, sales, other settlements, net | | | (35 | ) | | | 69 | (1) |
Net transfers into Level 3 | | | 1 | | | | - | |
Ending balance | | $ | (58 | ) | | $ | (6 | ) |
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 | | $ | 7 | | | $ | 1 | |
__________ | (1) | Purchases, sales, other settlements, net include a $41 million loss and a $66 million gain in 2008 and 2009, respectively, associated with price stabilization activities of CenterPoint Energy’s Natural Gas Distribution business segment. |
(6) Indexed Debt Securities (ZENS) and Time Warner Securities
(a) Investment in Time Warner Securities
In 1995, the CompanyCenterPoint Energy sold a cable television subsidiary to TW and received TW convertible preferred stock (TW Preferred) as partial consideration. In July 1999, the CompanyCenterPoint Energy converted its 11 million shares of TW Preferred into 45.8 million shares of TW Common.common stock (TW Common). In March 2009, TW spun off its ownership of Time Warner Cable Inc. (TWC) by distributing 0.08367 shares of TWC common stock (TWC Common) for every share of TW Common held. Subsequently, in March 2009 TW declared a 1-for-3 reverse stock split. In December 2009, TW spun off its ownership in AOL Inc. (AOL) by distributing one share of AOL common
stock (AOL Common) for every 11 shares of TW Common held. A subsidiary of the CompanyCenterPoint Energy now holds 21.67.2 million shares of TW Common, 1.8 million shares of TWC Common and 0.7 million shares of AOL Common (together with the TW Common and TWC Common, the TW Securities) which are classified as trading securities under SFAS No. 115 and are expected to be held to facilitate the Company’sCenterPoint Energy’s ability to meet its obligation under the 2.0% Zero-Premium Exchangeable Subordinated Notes due 2029 (ZENS). Unrealized gains and losses resulting from changes in the market value of the TW CommonSecurities are recorded in the Company’sCenterPoint Energy’s Statements of Consolidated Income.
(b) ZENS
In September 1999, the Companywe issued its ZENS having an original principal amount of $1.0 billion.billion of which $840 million remain outstanding at December 31, 2009. Each ZENS arenote was originally exchangeable at the holder’s option at any time for an amount of cash equal to 95% of the market value of a specifiedthe reference shares of TW Common attributable to such note. The number and identity of the reference shares attributable to each ZENS note are adjusted for certain corporate events. As of December 31, 2009, the reference shares for each ZENS note consisted of 0.5 share of TW Common, 0.125505 share of TWC Common and 0.045455 share of AOL Common, which reflects adjustments resulting from the March 2009 distribution by TW of shares of TWC Common, TW’s March 2009 reverse stock split and the December 2009 distribution by TW common. The Companyof shares of AOL Common. CenterPoint Energy pays interest on the ZENS at an annual rate of 2% plus the amount of any quarterly cash dividends paid in respect of the reference shares of TW Common attributable to the ZENS. The principal amount of ZENS is subject to being increased or decreased to the extent that the annual yield from interest and cash dividends on the reference shares of TW Common is less than or more than 2.309%. This is defined in the ZENS instrument as "contingent principal." At December 31, 2007,2009, ZENS having an original principal amount of $840 million and a contingent principal amount of $820$814 million were outstanding and were exchangeable, at the option of the holders, for cash equal to 95% of the market value of 21.6 millionreference shares of TW Common deemed to be attributable to the ZENS. At December 31, 2007,2009, the market value of such shares was approximately $357$300 million, which would provide an exchange amount of $404$340 for each $1,000 original principal amount of ZENS. At maturity the holders of the ZENS in 2029, CenterPoint Energy will receivebe obligated to pay in cash the higher of the contingent principal amount of the ZENS or an amount based on the then-current market value of TW Common, or otherthe reference shares, which will include any additional publicly-traded securities distributed with respect to TW Common.
94
the current reference shares prior to maturity.
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For accounting purposes, theThe ZENS obligation wasis bifurcated into a debt component and a derivative component (the holder’s option to receive the appreciated value of TW Commonthe reference shares at maturity). The bifurcated debt component accretes through interest charges at 17.4% annually up to the contingent principal amount of the ZENS in 2029 which reflects exchanges and adjustments to maintain a 2.309%2029. Such accretion will be reduced by annual yield,cash interest payments, as discusseddescribed above. The derivative component is recorded at fair value and changes in the fair value of the derivative component are recorded in the Company’sCenterPoint Energy’s Statements of Consolidated Income. During 2005, 20062007, 2008 and 2007, the Company2009, CenterPoint Energy recorded a gain (loss) of $(44)$(114) million, $94$(139) million and $(114)$82 million, respectively, on the Company’sCenterPoint Energy’s investment in TW Common.Securities. During 2005, 20062007, 2008 and 2007, the Company2009, CenterPoint Energy recorded a gain (loss) of $49$111 million, $(80)$128 million and $111$(68) million, respectively, associated with the fair value of the derivative component of the ZENS obligation. Changes in the fair value of the TW CommonSecurities held by the CompanyCenterPoint Energy are expected to substantially offset changes in the fair value of the derivative component of the ZENS.
The following table sets forth summarized financial information regarding the Company’sCenterPoint Energy’s investment in TW CommonSecurities and the Company’seach component of CenterPoint Energy’s ZENS obligation (in millions).
| | | | | | | | | | | | | |
| | | | Debt
| | Derivative
| | |
| | TW
| | Component
| | Component
| | |
| | Investment | | of ZENS | | of ZENS | | |
| |
Balance at December 31, 2004 | | $ | 421 | | | $ | 107 | | | $ | 341 | | |
Accretion of debt component of ZENS | | | — | | | | 2 | | | | — | | |
Gain on indexed debt securities | | | — | | | | — | | | | (49 | ) | |
Loss on TW Common | | | (44 | ) | | | — | | | | — | | |
| | | | | | | | |
Balance at December 31, 2005 | | | 377 | | | | 109 | | | | 292 | | |
Accretion of debt component of ZENS | | | — | | | | 2 | | | | — | | |
Loss on indexed debt securities | | | — | | | | — | | | | 80 | | |
Gain on TW Common | | | 94 | | | | — | | | | — | | |
| | | | | | | | | TW Securities | | | Debt Component of ZENS | | | Derivative Component of ZENS | |
Balance at December 31, 2006 | | | 471 | | | | 111 | | | | 372 | | | $ | 471 | | | $ | 111 | | | $ | 372 | |
Accretion of debt component of ZENS | | | — | | | | 3 | | | | — | | | | - | | | | 20 | | | | - | |
2% interest paid | | | | - | | | | (17 | ) | | | - | |
Gain on indexed debt securities | | | — | | | | — | | | | (111 | ) | | | - | | | | - | | | | (111 | ) |
Loss on TW Common | | | (114 | ) | | | — | | | | — | | | | (114 | ) | | | - | | | | - | |
| | | | | | | | |
Balance at December 31, 2007 | | $ | 357 | | | $ | 114 | | | $ | 261 | | | | 357 | | | | 114 | | | | 261 | |
| | | | | | | | |
Accretion of debt component of ZENS | | | | - | | | | 20 | | | | - | |
2% interest paid | | | | - | | | | (17 | ) | | | - | |
Gain on indexed debt securities | | | | - | | | | - | | | | (128 | ) |
Loss on TW Common | | | | (139 | ) | | | - | | | | - | |
Balance at December 31, 2008 | | | | 218 | | | | 117 | | | | 133 | |
Accretion of debt component of ZENS | | | | - | | | | 21 | | | | - | |
2% interest paid | | | | - | | | | (17 | ) | | | - | |
Loss on indexed debt securities | | | | - | | | | - | | | | 68 | |
Gain on TW Securities | | | | 82 | | | | - | | | | - | |
Balance at December 31, 2009 | | | $ | 300 | | | $ | 121 | | | $ | 201 | |
(7) Equity
(a) Capital Stock
CenterPoint Energy has 1,020,000,000 authorized shares of capital stock, comprised of 1,000,000,000 shares of $0.01 par value common stock and 20,000,000 shares of $0.01 par value cumulative preferred stock.
| |
(b) | Shareholder Rights Plan |
The CompanyDuring the year ended December 31, 2009, CenterPoint Energy received net proceeds of approximately $280 million from the issuance of 24.2 million common shares in an underwritten public offering, net proceeds of $148 million from the issuance of 14.3 million common shares through a continuous offering program, proceeds of approximately $57 million from the sale of approximately 4.9 million common shares to CenterPoint Energy’s defined contribution plan and proceeds of approximately $15 million from the sale of approximately 1.3 million common shares to participants in CenterPoint Energy’s enhanced dividend reinvestment plan.
(b) Shareholder Rights Plan
CenterPoint Energy has a Shareholder Rights Plan that states that each share of its common stock includes one associated preference stock purchase right (Right) which entitles the registered holder to purchase from the CompanyCenterPoint Energy a unit consisting of one-thousandth of a share of Series A Preference Stock. The Rights, which expire on December 11, 2011, are exercisable upon some events involving the acquisition of 20% or more of the Company’sCenterPoint Energy’s outstanding common stock. Upon the occurrence of such an event, each Right entitles the holder to receive common stock with a current market price equal to two times the exercise price of the Right. At anytimeany time prior to becoming exercisable, the CompanyCenterPoint Energy may repurchase the Rights at a price of $0.005 per Right. There are 700,000 shares of Series A Preference Stock reserved for issuance upon exercise of the Rights.
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
98
(8) Short-term Borrowings and Long-term Debt
| | December 31, 2008 | | | December 31, 2009 | |
| | Long-Term | | | Current(1) | | | Long-Term | | | Current(1) | |
| | (In millions) | |
Short-term borrowings: | | | | | | | | | | | | |
CERC Corp. receivables facility | | $ | - | | | $ | 78 | | | $ | - | | | $ | - | |
Inventory financing | | | - | | | | 75 | | | | - | | | | 55 | |
Total short-term borrowings | | | - | | | | 153 | | | | - | | | | 55 | |
Long-term debt: | | | | | | | | | | | | | | | | |
CenterPoint Energy: | | | | | | | | | | | | | | | | |
ZENS(2) | | | - | | | | 117 | | | | - | | | | 121 | |
Senior notes 5.95% to 7.25% due 2010 to 2018 | | | 950 | | | | - | | | | 750 | | | | 200 | |
Pollution control bonds 4.00% due 2015(3) | | | 151 | | | | - | | | | 151 | | | | - | |
Pollution control bonds 4.70% to 8.00% due 2011 to 2030(4)(5) | | | 871 | | | | - | | | | 581 | | | | 290 | |
Bank loans due 2012(6) | | | 264 | | | | - | | | | - | | | | - | |
Other | | | 12 | | | | 1 | | | | - | | | | 7 | |
CenterPoint Houston: | | | | | | | | | | | | | | | | |
First mortgage bonds 9.15% due 2021 | | | 102 | | | | - | | | | 102 | | | | - | |
General mortgage bonds 5.60% to 7.00% due 2013 to 2033 | | | 1,262 | | | | - | | | | 1,762 | | | | - | |
Pollution control bonds 3.625% to 5.60% due 2012 to 2027(7) | | | 229 | | | | - | | | | 229 | | | | - | |
System restoration bonds 1.833% to 4.243% due 2010 to 2022 | | | - | | | | - | | | | 645 | | | | 20 | |
Transition Bonds 4.192% to 5.63% due 2010 to 2020 | | | 2,381 | | | | 208 | | | | 2,160 | | | | 221 | |
Bank loans due 2012(6) | | | 251 | | | | - | | | | - | | | | - | |
CERC Corp.: | | | | | | | | | | | | | | | | |
Convertible subordinated debentures 6.00% due 2012 (8) | | | 44 | | | | 7 | | | | - | | | | 44 | |
Senior notes 5.95% to 7.875% due 2011 to 2037 | | | 2,747 | | | | - | | | | 2,747 | | | | - | |
Bank loans due 2012(6) | | | 926 | | | | - | | | | - | | | | - | |
Other | | | 1 | | | | - | | | | 1 | | | | - | |
Unamortized discount and premium(9) | | | (10 | ) | | | - | | | | (9 | ) | | | - | |
Total long-term debt | | | 10,181 | | | | 333 | | | | 9,119 | | | | 903 | |
Total debt | | $ | 10,181 | | | $ | 486 | | | $ | 9,119 | | | $ | 958 | |
__________
| |
(8) | Short-term Borrowings and Long-term Debt |
| | | | | | | | | | | | | | | | |
| | December 31, 2006 | | | December 31, 2007 | |
| | Long-Term | | | Current(1) | | | Long-Term | | | Current(1) | |
| | (In millions) | |
|
Short-term borrowings: | | | | | | | | | | | | | | | | |
CERC Corp. receivables facility | | $ | — | | | $ | 187 | | | $ | — | | | $ | 232 | |
Long-term debt: | | | | | | | | | | | | | | | | |
CenterPoint Energy: | | | | | | | | | | | | | | | | |
ZENS(2) | | $ | — | | | $ | 111 | | | $ | — | | | $ | 114 | |
Senior notes 5.875% to 7.25% due 2008 to 2017 | | | 600 | | | | — | | | | 650 | | | | 200 | |
Convertible senior notes 2.875% to 3.75% due 2023(3) | | | — | | | | 830 | | | | — | | | | 535 | |
Pollution control bonds 5.60% to 6.70% due 2012 to 2027(4) | | | 151 | | | | — | | | | 151 | | | | — | |
Pollution control bonds 4.70% to 8.00% due 2011 to 2030(5) | | | 1,046 | | | | — | | | | 1,046 | | | | — | |
Bank loans due 2012(6) | | | — | | | | — | | | | 131 | | | | — | |
Junior subordinated debentures payable to affiliate 8.257%(7) | | | — | | | | 103 | | | | — | | | | — | |
CenterPoint Houston: | | | | | | | | | | | | | | | | |
First mortgage bonds 9.15% due 2021 | | | 102 | | | | — | | | | 102 | | | | — | |
General mortgage bonds 5.60% to 6.95% due 2013 to 2033 | | | 1,262 | | | | — | | | | 1,262 | | | | — | |
Pollution control bonds 3.625% to 5.60% due 2012 to 2027(8) | | | 229 | | | | — | | | | 229 | | | | — | |
Transition Bonds 3.84% to 5.63% due 2006 to 2019 | | | 2,260 | | | | 147 | | | | 2,101 | | | | 159 | |
Bank loans due 2012(6) | | | — | | | | — | | | | 50 | | | | — | |
CERC Corp.: | | | | | | | | | | | | | | | | |
Convertible subordinated debentures 6.00% due 2012 | | | 56 | | | | 7 | | | | 50 | | | | 7 | |
Senior notes 5.95% to 7.875% due 2007 to 2037 | | | 2,097 | | | | — | | | | 2,447 | | | | 300 | |
Bank loans due 2012(6) | | | — | | | | — | | | | 150 | | | | — | |
Other | | | 1 | | | | — | | | | 1 | | | | — | |
Unamortized discount and premium(9) | | | (2 | ) | | | — | | | | (6 | ) | | | — | |
| | | | | | | | | | | | | | | | |
Total long-term debt | | | 7,802 | | | | 1,198 | | | | 8,364 | | | | 1,315 | |
| | | | | | | | | | | | | | | | |
Total debt | | $ | 7,802 | | | $ | 1,385 | | | $ | 8,364 | | | $ | 1,547 | |
| | | | | | | | | | | | | | | | |
| | |
(1) | | Includes amounts due or exchangeable within one year of the date noted. |
|
(2) | | Upon adoption of SFAS No. 133 effective January 1, 2001, the Company’sCenterPoint Energy’s ZENS obligation wasis bifurcated into a debt component and an embedded derivative component. For additional information regarding ZENS, see Note 6(b). As ZENS are exchangeable for cash at any time at the option of the holders, these notes are classified as a current portion of long-term debt. |
|
(3) | | All of the Company’s 2.875% convertible senior notes were either redeemed or surrendered for conversion in January 2007, as described in Note 8(b), “Long-term Debt — Convertible Debt.” |
|
(4) | | These series of debt are secured by first mortgage bonds of CenterPoint Houston. |
|
(5) | (4) | $527 million of these series of debt is secured by general mortgage bonds of CenterPoint Houston. |
96
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| (5) | In January 2010, CenterPoint Energy purchased $290 million principal amount of pollution control bonds issued on its behalf at 101% of their principal amount. |
(6) | (6) | Classified as long-term debt because the termination dates of the facilities under which the funds were borrowed are more than one year from the date noted. |
|
(7) | | The junior subordinated debentures were issued to subsidiary trusts in connection with the issuance by those trusts of preferred securities. The trust preferred securities were deconsolidated effective December 31, 2003 pursuant to the adoption of FIN 46, “Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51.” All of the junior subordinated debentures issued to the Company’s subsidiary trust were redeemed in February 2007. |
|
(8) | | These series of debt are secured by general mortgage bonds of CenterPoint Houston. |
| (8) | In January 2010, pursuant to a notice of redemption dated December 11, 2009, CERC redeemed all of its outstanding 6% convertible subordinated debentures due in 2012. |
(9) | (9) | Debt acquired in business acquisitions is adjusted to fair market value as of the acquisition date. Included in long-term debt is additional unamortized premium related to fair value adjustments of long-term debt of $4$3 million |
| | and $3$2 million at December 31, 20062008 and 2007,2009, respectively, which is being amortized over the respective remaining term of the related long-term debt. |
(a) Short-term Borrowings
InReceivables Facility. On October 2007,9, 2009, CERC amended its receivables facility and extendedto extend the termination date to October 28, 2008. The8, 2010. Availability under CERC’s 364-day receivables facility size will rangenow ranges from $150 million to $375 million, during the period from September 30, 2007 to the October 28, 2008 termination date. The variable sizereflecting seasonal changes in receivables balances. As of the facility was designed to track the seasonal pattern of receivables in CERC’s natural gas businesses. At December 31, 2007,2008 and 2009, the facility size was $300 million.$128 million and $150 million, respectively. As of December 31, 20062008 and 2009, advances under the receivables facilities were $78 million and $-0-, respectively.
Inventory Financing. In December 2008, Gas Operations 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 was paid in full during 2009.
In October 2009, Gas Operations entered into asset management agreements associated with its utility distribution service in Arkansas, Louisiana and Oklahoma. Pursuant to the provisions of the agreements, Gas Operations sold $104 million of its natural gas in storage and agreed to repurchase an equivalent amount of natural gas during the 2009-2010 winter heating season at the same cost, plus a financing charge. This transaction was accounted for as a financing and, as of December 31, 2007, $1872009, a principal obligation of $55 million remained.
Also in October 2009, Gas Operations entered into asset management agreements associated with its utility distribution service in Louisiana, Mississippi and $232 million, respectively, was advancedTexas. In connection with these asset management agreements, Gas Operations exchanged natural gas in storage for the purchaseright to receive an equivalent amount of receivables under CERC’s receivables facility.natural gas during the 2009-2010 winter heating season. Although title to the natural gas in storage was transferred to the third party, the natural gas continues to be accounted for as inventory due to the right to receive an equivalent amount of natural gas during the current winter heating season. As of December 31, 2007, advances had an interest rate2009, CenterPoint Energy’s Consolidated Balance Sheets reflect $10 million in Inventory related to these agreements.
Revolving Credit Facility. On October 6, 2009, CenterPoint Houston terminated its $600 million 364-day credit facility which was secured by a pledge of 5.36%.$600 million of general mortgage bonds issued by CenterPoint Houston.
Senior Notes.(b) Long-term Debt
General Mortgage Bonds. In February 2007, the CompanyJanuary 2009, CenterPoint Houston issued $250$500 million aggregate principal amount of senior notesgeneral mortgage bonds due in February 2017March 2014 with an interest rate of 5.95%7.00%. The proceeds from the sale of the senior notes were used to repay debt incurred in satisfying the Company’s $255 million cash payment obligation in connection with the conversion and redemption of its 2.875% Convertible Notes.
In February 2007, CERC Corp. issued $150 million aggregate principal amount of senior notes due in February 2037 with an interest rate of 6.25%. The proceeds from the sale of the senior notes were used to repay advances for the purchase of receivables under CERC Corp.’s receivables facility. Such repayment provided increased liquidity and capital resources for CERC’s general corporate purposes.
In October 2007, CERC Corp. issued $250 million aggregate principal amount of 6.125% senior notes due in November 2017 and $250 million aggregate principal amount of 6.625% senior notes due in November 2037. The proceeds from the sale of the senior notesbonds were used for general corporate purposes, including the repayment or refinancing of debt, including $300outstanding borrowings under CenterPoint Houston’s revolving credit facility and the money pool, capital expenditures and storm restoration costs associated with Hurricane Ike.
System Restoration Bonds. 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. 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 were issued, as well as certain up-front qualified costs capped at approximately $6 million. In November 2009, CenterPoint Houston issued approximately $665 million of system restoration bonds through its CenterPoint Energy Restoration Bond Company, LLC subsidiary with interest rates of 1.833% to 4.243% and final maturity dates ranging from February 2016 to August 2023. The bonds will be repaid over time through a charge imposed on customers.
Revolving Credit Facilities. As of December 31, 2008 and 2009, the following loan balances were outstanding under CenterPoint Energy’s long-term revolving credit facilities (in millions):
| | December 31, 2008 | | | December 31, 2009 | |
CenterPoint Energy credit facility borrowings | | $ | 264 | | | $ | - | |
CenterPoint Houston credit facility borrowings | | | 251 | | | | - | |
CERC Corp. credit facility borrowings | | | 926 | | | | - | |
Total credit facility borrowings | | $ | 1,441 | | | $ | - | |
In addition, as of December 31, 2008 and 2009, CenterPoint Energy had approximately $27 million and $25 million, respectively, of outstanding letters of credit under its $1.2 billion credit facility. CenterPoint Houston had approximately $4 million of outstanding letters of credit under its $289 million credit facility as of both December 31, 2008 and 2009. There was no commercial paper outstanding that would have been backstopped by CenterPoint Energy’s $1.2 billion credit facility or by CERC Corp.’s 6.5% senior notes due February 1,credit facility as of December 31, 2008 capital expenditures, working capital and loans to or investments in affiliates. Pending application of the proceeds for these purposes, CERC Corp. repaid borrowings under its revolving credit and receivables facilities.
Revolving Credit Facilities. In June 2007, the Company,2009. CenterPoint Energy, CenterPoint Houston and CERC Corp. entered into amended and restated bank credit facilities. The Company’s amended credit facility is awere in compliance with all debt covenants as of December 31, 2009.
CenterPoint Energy’s $1.2 billion five-year senior unsecured revolving credit facility. The facility has a first drawn cost of the London Interbank Offered Rate (LIBOR) plus 55 basis points based on the Company’sCenterPoint Energy’s current credit ratings, versus the previous rate of LIBOR plus 60 basis points.ratings. The facility contains covenants, including a debt (excluding transition and system restoration bonds) to earnings before interest, taxes, depreciation and amortization covenant.
(EBITDA) covenant (as those terms are defined in the facility). Such covenant was modified twice in 2008 to provide additional debt capacity. The second modification was to provide debt capacity pending the financing of system restoration costs following Hurricane Ike. That modification was terminated with CenterPoint Houston’s issuance of bonds to securitize such costs in November 2009. In February 2010, CenterPoint Energy amended its credit facility atto modify the financial ratio covenant to allow for a temporary increase of the permitted ratio of debt (excluding transition and system restoration bonds) to EBITDA from 5 times to 5.5 times if CenterPoint Houston isexperiences damage from a $300natural disaster in its service territory and CenterPoint Energy certifies to the administrative agent that CenterPoint Houston has incurred system restoration costs reasonably likely to exceed $100 million five-year senior unsecured revolvingin a calendar year, all or part of which CenterPoint Houston intends to seek to recover through securitization financing. Such temporary increase in the financial ratio covenant would be in effect from the date CenterPoint Energy delivers its certification until the earliest to occur of (i) the completion of the securitization financing, (ii) the first anniversary of CenterPoint Energy’s certification or (iii) the revocation of such certification.
CenterPoint Houston’s $289 million credit facility.facility contains a debt (excluding transition and system restoration bonds) to total capitalization covenant. The facility’s first drawn cost remains atis LIBOR plus 45 basis points based on CenterPoint Houston’s
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
current credit ratings. The facility contains covenants, including a debt (excluding transition bonds) to total capitalization covenant
On October 7, 2009, the size of 65%.
The amended facility atthe CERC Corp. is a $950 million five-year senior unsecured revolving credit facility versuswas reduced from $950 million to $915 million through removal of Lehman Brothers Bank, FSB (Lehman) as a $550lender. Prior to its removal, Lehman had a $35 million commitment to lend. All credit facility priorloans to the amendment. TheCERC Corp. that were funded by Lehman were repaid in September 2009. CERC Corp.’s $915 million credit facility’s first drawn cost remains atis LIBOR plus 45 basis points based on CERC Corp.’s current credit ratings. The facility contains covenants, including a debt to total capitalization covenant of 65%.covenant.
Under each of theCenterPoint Energy’s $1.2 billion credit facilities,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, 2007, the Company had $131 million of borrowings and approximately $28 million of outstanding letters of credit under its $1.2 billion credit facility,Maturities. CenterPoint Houston had $50 million of borrowings and approximately $4 million of outstanding letters of credit under its $300 million credit facility and CERC Corp. had $150 million of borrowings and approximately $13 million of outstanding letters of credit under its $950 million credit facility. The Company and CERC Corp. had no commercial paper outstanding at December 31, 2007. The Company, CenterPoint Houston and CERC Corp. were in compliance with all debt covenants as of December 31, 2007.
Transition Bonds. Pursuant to a financing order issued by the Texas Utility Commission in September 2007, in February 2008 a subsidiary of CenterPoint Houston issued approximately $488 million in 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. Scheduled final payment dates are February 2017 and February 2020. Through issuance of the transition bonds, CenterPoint Houston securitized transition property of approximately $483 million representing the remaining balance of the CTC less an environmental refund as reduced by the fuel reconciliation settlement amount. See Note 4(a) for further discussion.
Convertible Debt. On May 19, 2003, the Company issued $575 million aggregate principal amount of convertible senior notes due May 15, 2023 with an interest rate of 3.75%. As of December 31, 2007, holders could convert each of their notes into shares of CenterPoint Energy common stock at a conversion rate of 89.4381 shares of common stock per $1,000 principal amount of notes at any time prior to maturity under the following circumstances: (1) if the last reported sale price of CenterPoint Energy common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the previous calendar quarter is greater than or equal to 120% or, following May 15, 2008, 110% of the conversion price per share of CenterPoint Energy common stock on such last trading day, (2) if the notes have been called for redemption, (3) during any period in which the credit ratings assigned to the notes by both Moody’s Investors Service, Inc. (Moody’s) and Standard & Poor’s Ratings Services (S&P), a division of The McGraw-Hill Companies, are lower than Ba2 and BB, respectively, or the notes are no longer rated by at least one of these ratings services or their successors, or (4) upon the occurrence of specified corporate transactions, including the distribution to all holders of CenterPoint Energy common stock of certain rights entitling them to purchase shares of CenterPoint Energy common stock at less than the last reported sale price of a share of CenterPoint Energy common stock on the trading day prior to the declaration date of the distribution or the distribution to all holders of CenterPoint Energy common stock of the Company’s assets, debt securities or certain rights to purchase the Company’s securities, which distribution has a per share value exceeding 15% of the last reported sale price of a share of CenterPoint Energy common stock on the trading day immediately preceding the declaration date for such distribution. The notes originally had a conversion rate of 86.3558 shares of common stock per $1,000 principal amount of notes. However, the conversion rate has increased to 89.4381, in accordance with the terms of the notes, due to quarterly common stock dividends in excess of $0.10 per share.
Holders have the right to require the Company to purchase all or any portion of the notes for cash on May 15, 2008, May 15, 2013 and May 15, 2018 for a purchase price equal to 100% of the principal amount of the notes. The
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
convertible senior notes also have a contingent interest feature requiring contingent interest to be paid to holders of notes commencing on or after May 15, 2008, in the event that the average trading price of a note for the applicable five-trading-day period equals or exceeds 120% of the principal amount of the note as of the day immediately preceding the first day of the applicable six-month interest period. For any six-month period, contingent interest will be equal to 0.25% of the average trading price of the note for the applicable five-trading-day period.
In August 2005, the Company accepted for exchange approximately $572 million aggregate principal amount of its 3.75% convertible senior notes due 2023 (Old Notes) for an equal amount of its new 3.75% convertible senior notes due 2023 (New Notes). As of December 31, 2007, New Notes of approximately $532 million remained outstanding and Old Notes of approximately $3 million remained outstanding. Under the terms of the New Notes, which are substantially similar to the Old Notes, settlement of the principal portion will be made in cash rather than stock.
In the fourth quarter of 2007, holders of the Company’s 3.75% convertible senior notes converted approximately $40 million principal amount of such notes. Substantially all of such conversions were settled with a cash payment for the principal amount and delivery of 1.3 million shares of the Company’s common stock for the excess value due converting holders.
In January and February 2008, holders of the Company’s 3.75% convertible senior notes converted approximately $123 million principal amount of such notes. Substantially all of such conversions were settled with a cash payment for the principal amount and delivery of 4.1 million shares of the Company’s common stock for the excess value due converting holders. A February 2008 conversion notice by a holder of $10 million principal amount of the Company’s 3.75% convertible senior notes is expected to result in a March 2008 conversion and settlement with a cash payment for the principal amount and delivery of shares of the Company’s common stock for the excess value due the converting holder.
As of December 31, 2006 and December 31, 2007, the 3.75% convertible senior notes are included as current portion of long-term debt in the Consolidated Balance Sheets because the last reported sale price of CenterPoint Energy common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the quarter was greater than or equal to 120% of the conversion price of the 3.75% convertible senior notes and therefore, the 3.75% convertible senior notes meet the criteria that make them eligible for conversion at the option of the holders of these notes.
In December 2006, the Company called its 2.875% Convertible Senior Notes due 2024 (2.875% Convertible Notes) for redemption on January 22, 2007 at 100% of their principal amount. The 2.875% Convertible Notes became immediately convertible at the option of the holders upon the call for redemption and were convertible through the close of business on the redemption date. Substantially all the $255 million aggregate principal amount of the 2.875% Convertible Notes were converted in January 2007. The $255 million principal amount of the 2.875% Convertible Notes was settled in cash and the excess value due converting holders of $97 million was settled by delivering approximately 5.6 million shares of the Company’s common stock.
Junior Subordinated Debentures (Trust Preferred Securities). In February 2007, the Company’s 8.257% Junior Subordinated Deferrable Interest Debentures having an aggregate principal amount of $103 million were redeemed at 104.1285% of their principal amount and the related 8.257% capital securities issued by HL&P Capital Trust II were redeemed at 104.1285% of their aggregate liquidation value of $100 million.
Maturities. The Company’sEnergy’s maturities of long-term debt, capital leases and sinking fund requirements, excluding the ZENS obligation, and the 3.75% convertible senior notes, are $666 million in 2008, $181 million in 2009, $397$782 million in 2010, $782$852 million in 2011, and $636$353 million in 2012.2012, $1.5 billion in 2013 and $1.2 billion in 2014. Maturities include transition and system restoration bond principal repayments on scheduled payment dates aggregating $241 million in 2010, $283 million in 2011, $307 million in 2012, $330 million in 2013 and $235 million in 2014. Maturities in 2010 include $290 million of pollution control bonds issued on behalf of CenterPoint Energy which were purchased by CenterPoint Energy in January 2010 and $45 million of debentures redeemed in January 2010.
Liens. As of December 31, 2007,2009, CenterPoint Houston’s assets were subject to liens securing approximately $253 million of first mortgage bonds. Sinking or improvement fund and replacement fund requirements on the first mortgage bonds may be satisfied by certification of property additions. Sinking fund and replacement fund
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
requirements for 2005, 20062007, 2008 and 20072009 have been satisfied by certification of property additions. The replacement fund requirement to be satisfied in 20082010 is approximately $164$172 million, and the sinking fund requirement to be satisfied in 20082010 is approximately $3 million. The CompanyCenterPoint Energy expects CenterPoint Houston to meet these 20082010 obligations by certification of property additions. As of December 31, 2007,2009, CenterPoint Houston’s assets were also subject to liens securing approximately $2.0$2.5 billion of general mortgage bonds which are junior to the liens of the first mortgage bonds.
(9) Income Taxes
The components of the Company’sCenterPoint Energy’s income tax expense (benefit) were as follows:
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2005 | | | 2006 | | | 2007 | |
| | (In millions) | |
|
Current: | | | | | | | | | | | | |
Federal | | $ | (74 | ) | | $ | 373 | | | $ | 163 | |
State | | | 2 | | | | 37 | | | | 32 | |
| | | | | | | | | | | | |
Total current | | | (72 | ) | | | 410 | | | | 195 | |
| | | | | | | | | | | | |
Deferred: | | | | | | | | | | | | |
Federal | | | 208 | | | | (362 | ) | | | 47 | |
State | | | 17 | | | | 14 | | | | (47 | ) |
| | | | | | | | | | | | |
Total deferred | | | 225 | | | | (348 | ) | | | — | |
| | | | | | | | | | | | |
Income tax expense | | $ | 153 | | | $ | 62 | | | $ | 195 | |
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2007 | | | 2008 | | | 2009 | |
| | (In millions) | |
Current income tax expense (benefit): | | | | | | | | | |
Federal | | $ | 161 | | | $ | (221 | ) | | $ | (103 | ) |
State | | | 32 | | | | 11 | | | | 10 | |
Total current expense (benefit) | | | 193 | | | | (210 | ) | | | (93 | ) |
Deferred income tax expense (benefit): | | | | | | | | | | | | |
Federal | | | 47 | | | | 437 | | | | 251 | |
State | | | (47 | ) | | | 50 | | | | 18 | |
Total deferred expense | | | - | | | | 487 | | | | 269 | |
Total income tax expense | | $ | 193 | | | $ | 277 | | | $ | 176 | |
A reconciliation of the expected federal income tax expense using the federal statutory income tax rate to the actual income tax expense and resulting effective income tax rate is as follows:
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2005 | | | 2006 | | | 2007 | |
| | (In millions) | |
|
Income from continuing operations before income taxes and extraordinary item | | $ | 378 | | | $ | 494 | | | $ | 594 | |
Federal statutory rate | | | 35 | % | | | 35 | % | | | 35 | % |
| | | | | | | | | | | | |
Income taxes at statutory rate | | | 132 | | | | 173 | | | | 208 | |
| | | | | | | | | | | | |
Net addition (reduction) in taxes resulting from: | | | | | | | | | | | | |
State income taxes (benefit), net of valuation allowance and federal income tax | | | 13 | | | | 33 | | | | (10 | ) |
Amortization of investment tax credit | | | (8 | ) | | | (7 | ) | | | (8 | ) |
Tax basis balance sheet adjustments | | | — | | | | — | | | | 25 | |
Increase (decrease) in settled and uncertain income tax positions | | | 32 | | | | (118 | ) | | | (20 | ) |
Other, net | | | (16 | ) | | | (19 | ) | | | — | |
| | | | | | | | | | | | |
Total | | | 21 | | | | (111 | ) | | | (13 | ) |
| | | | | | | | | | | | |
Income tax expense | | $ | 153 | | | $ | 62 | | | $ | 195 | |
| | | | | | | | | | | | |
Effective income tax rate | | | 40.6 | % | | | 12.6 | % | | | 32.8 | % |
| | Year Ended December 31, | |
| | 2007 | | | 2008 | | | 2009 | |
| | (In millions) | |
Income before income taxes | | $ | 588 | | | $ | 723 | | | $ | 548 | |
Federal statutory income tax rate | | | 35 | % | | | 35 | % | | | 35 | % |
Expected federal income tax expense | | | 206 | | | | 253 | | | | 192 | |
Increase (decrease) in tax expense resulting from: | | | | | | | | | | | | |
State income tax expense (benefit), net of federal income tax | | | (10 | ) | | | 40 | | | | 18 | |
Amortization of investment tax credit | | | (8 | ) | | | (7 | ) | | | (7 | ) |
Tax basis balance sheet adjustments | | | 25 | | | | - | | | | - | |
Increase (decrease) in settled and uncertain income tax positions | | | (20 | ) | | | 8 | | | | (5 | ) |
Other, net | | | - | | | | (17 | ) | | | (22 | ) |
Total | | | (13 | ) | | | 24 | | | | (16 | ) |
Total income tax expense | | $ | 193 | | | $ | 277 | | | $ | 176 | |
Effective tax rate | | | 32.8 | % | | | 38.4 | % | | | 32.1 | % |
In 2007, the Company recorded a $25 million deferred federal income tax expense as
As a result of its settlement with the IRS for tax basis balance sheet analysis.years 2004 and 2005, CenterPoint Energy recorded an income tax benefit of approximately $11 million in 2009 related to a reduction in the liability for uncertain tax positions of approximately $41 million. The 2007state income tax expense of $18 million for 2009 includes a benefit of approximately $12 million, net of federal income tax effect, related to adjustments in prior years’ state estimates. Changes in the Texas State Franchise Tax Law (Texas margin tax) resulted in classifying Texas margin tax of approximately $8 million and $10 million, net of federal income tax effect, as income tax expense in 2008 and 2009, respectively, for CenterPoint Houston. The state income tax benefit of $10 million for 2007 includes a benefit of approximately
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$30 $30 million, net of federal income tax effect, as a result of the revised Texas Franchise Tax Law (Texas Margin Tax)margin tax and a Texas state tax examination for the tax years 2002 throughand 2004.
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities were as follows:
| | | | | | | | | |
| | December 31, | | |
| | 2006 | | 2007 | | | December 31, | |
| | (In millions) | | | 2008 | | | 2009 | |
| | (In millions) | |
Deferred tax assets: | | | | | | | | | | | | | | |
Current: | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 17 | | | $ | 17 | | | $ | 15 | | | $ | 10 | |
Deferred gas costs | | | — | | | | 26 | | | | 13 | | | | 7 | |
| | | | | | |
Other | | | | 1 | | | | - | |
Total current deferred tax assets | | | 17 | | | | 43 | | | | 29 | | | | 17 | |
| | | | | | |
Non-current: | | | | | | | | | | | | | | | | |
Loss and credit carryforwards | | | 27 | | | | 52 | | | | 36 | | | | 42 | |
Deferred gas costs | | | 60 | | | | — | | |
Employee benefits | | | 186 | | | | 173 | | | | 360 | | | | 366 | |
Other | | | 56 | | | | 6 | | | | 57 | | | | 51 | |
| | | | | | |
Total non-current deferred tax assets before valuation allowance | | | 329 | | | | 231 | | | | 453 | | | | 459 | |
| | | | | | |
Valuation allowance | | | (22 | ) | | | (18 | ) | | | (5 | ) | | | (5 | ) |
| | | | | | |
Total non-current deferred tax assets | | | 307 | | | | 213 | | |
| | | | | | |
Total deferred tax assets, net | | | 324 | | | | 256 | | |
Total non-current deferred tax assets, net of valuation allowance | | | | 448 | | | | 454 | |
Total deferred tax assets, net of valuation allowance | | | | 477 | | | | 471 | |
| | | | | | | | | | | | | |
Deferred tax liabilities: | | | | | | | | | | | | | | | | |
Current: | | | | | | | | | | | | | | | | |
Unrealized gain on indexed debt securities | | $ | 194 | | | $ | 294 | | | $ | 373 | | | $ | 366 | |
Unrealized gain on TW Common | | | 109 | | | | 77 | | |
Other | | | 30 | | | | 22 | | |
| | | | | | |
Unrealized gain on TW securities | | | | 28 | | | | 57 | |
Total current deferred tax liabilities | | | 333 | | | | 393 | | | | 401 | | | | 423 | |
| | | | | | |
Non-current: | | | | | | | | | | | | | | | | |
Depreciation | | | 1,370 | | | | 1,359 | | | | 1,679 | | | | 1,887 | |
Regulatory assets, net | | | 1,173 | | | | 1,039 | | | | 1,319 | | | | 1,298 | |
Other | | | 87 | | | | 50 | | | | 58 | | | | 45 | |
| | | | | | |
Total non-current deferred tax liabilities | | | 2,630 | | | | 2,448 | | | | 3,056 | | | | 3,230 | |
| | | | | | |
Total deferred tax liabilities | | | 2,963 | | | | 2,841 | | | | 3,457 | | | | 3,653 | |
| | | | | | |
Accumulated deferred income taxes, net | | $ | 2,639 | | | $ | 2,585 | | | $ | 2,980 | | | $ | 3,182 | |
| | | | | | |
Tax Attribute Carryforwards and Valuation Allowance. At December 31, 2007, the Company2009, CenterPoint Energy has approximately $181$213 million of state net operating loss carryforwards which expire in various years between 20082010 and 2027.2029. A valuation allowance has been established for approximately $79$49 million of the state net operating loss carryforwards that may not be realized. The Company has a state tax credit carryforward of approximately $45 million which expires in 2026.
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2007, the CompanyCenterPoint Energy has approximately $174$244 million of state capital loss carryforwards which expire in 2017 for which a valuation allowance has been established.
Uncertain Income Tax Positions.Positions. The Company adoptedfollowing table reconciles the provisionsbeginning and ending balance of FIN 48 on January 1, 2007. AsCenterPoint Energy’s unrecognized tax benefits:
| | December 31, | |
| | 2007 | | | 2008 | | | 2009 | |
| | (In millions) | |
Balance, beginning of year | | $ | 72 | | | $ | 82 | | | $ | 117 | |
Tax Positions related to prior years: | | | | | | | | | | | | |
Additions | | | 28 | | | | 20 | | | | 56 | |
Reductions | | | (20 | ) | | | (2 | ) | | | (25 | ) |
Tax Positions related to current year: | | | | | | | | | | | | |
Additions | | | 4 | | | | 17 | | | | 56 | |
Settlements | | | (2 | ) | | | — | | | | (17 | ) |
Balance, end of year | | $ | 82 | | | $ | 117 | | | $ | 187 | |
The net increase in the total amount of unrecognized tax benefits during 2009 is primarily related to the tax normalization issue described in Note 3(b) to our consolidated financial statements, a change in tax accounting method for repairs and maintenance of our network assets and a casualty loss deduction associated with Hurricane
Ike. These three uncertain income tax positions are temporary differences and therefore, any increase or decrease in the balance of unrecognized tax benefits related thereto would not affect the effective tax rate. It is reasonably possible that the total amount of unrecognized tax benefits could increase between $22 million and $65 million over the next 12 months primarily as a result of the adoption of FIN 48, the Company recognizedtax normalization issue, a decrease oftemporary difference.
CenterPoint Energy has approximately $2$10 million, in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 accumulated deficit. A reconciliation of the change in unrecognized tax benefits from January 1, 2007 to December 31, 2007 is as follows (in millions):
| | | | |
Balance at January 1, 2007 | | $ | 72 | |
Tax positions related to prior years: | | | | |
Additions | | | 28 | |
Reductions | | | (20 | ) |
Tax positions related to current year: | | | | |
Additions | | | 4 | |
Settlements | | | (2 | ) |
| | | | |
Balance at December 31, 2007 | | $ | 82 | |
| | | | |
The Company has approximately$14 million and $10 million of unrecognized tax benefits that, if recognized, would reduce the effective income tax rate. The Companyrate for 2007, 2008 and 2009, respectively. CenterPoint Energy recognizes interest and penalties as a component of income tax expense. InCenterPoint Energy recognized approximately $3 million and $6 million of income tax expense and $7 million of income tax benefit related to interest on uncertain income tax positions during 2007, the Company recognized approximately2008 and 2009, respectively. CenterPoint Energy accrued $10 million and $3 million of interest on uncertain income tax positions in the Statements of Consolidated Income and $4 million in the Consolidated Balance Sheets at January 1, 2007 and December 31, 2007. The Company does not expect the amount of unrecognized tax benefits to change significantly over the next 12 months.2008 and 2009, respectively.
Tax Audits and Settlements. The Company’s CenterPoint Energy’s consolidated federal income tax returns have been audited and settled through the 19962005 tax year. The CompanyCenterPoint Energy is currently under examination by the IRS for tax years 19972006 through 20052007 and is at various stages of the examination process. The CompanyCenterPoint Energy has considered the effects of these examinations in its accrual for settled issues and liability for uncertain income tax positions as of December 31, 2007.2009.
In the fourth quarter of 2006, the Company reached a final settlement with the IRS on the ACES(10) Commitments and ZENS issues and executed a closing agreement on the ZENS resulting in a net reduction in income tax expense in 2006 of approximately $92 million. The Company also reached a tentative settlement on other tax issues, including those related to prior acquisitions and dispositions, resulting in a reduction in income tax expense for 2006 of approximately $26 million.Contingencies
| |
(10) | Commitments and Contingencies |
(a) Natural Gas Supply Commitments
| |
(a) | Natural Gas Supply Commitments |
Natural gas supply commitments include natural gas contracts related to the Company’sCenterPoint 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 the Company’sCenterPoint Energy’s Consolidated Balance Sheets as of December 31, 20062008 and December 31, 20072009 as these contracts meet the SFAS No. 133 exception to be classified as “normal"normal purchases contracts”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 December 31, 2007,2009, minimum payment obligations for natural gas supply
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
commitments are approximately $743 million in 2008, $285 million in 2009, $278$439 million in 2010, $280$490 million in 2011, $270$427 million in 2012, and $1.2 billion$390 million in 2013, $269 million in 2014 and thereafter.$543 million after 2014.
(b) Asset Management Agreements
Gas Operations has entered into asset management agreements associated with its utility distribution service in Arkansas, Louisiana, Mississippi, Oklahoma and Texas. Generally, these asset management agreements are contracts between Gas Operations and an asset manager that are intended to transfer the working capital obligation and maximize the utilization of the assets. In these agreements, Gas Operations agreed to release transportation and storage capacity to other parties to manage gas storage, supply and delivery arrangements for Gas Operations and to use the released capacity for other purposes when it is not needed for Gas Operations. Gas Operations is compensated by the asset manager through payments made over the life of the agreements based in part on the results of the asset optimization. Under the provisions of these asset management agreements, Gas Operations has an obligation to purchase its winter storage requirements from the asset manager. The agreements have varying terms, the longest of which expires in 2016.
(c) Lease Commitments
The following table sets forth information concerning the Company’sCenterPoint Energy’s obligations under non-cancelable long-term operating leases at December 31, 2007,2009, which primarily consist of rental agreements for building space, data processing equipment and vehicles (in millions):
| | | | |
2008 | | $ | 19 | | |
2009 | | | 13 | | |
2010 | | | 9 | | | $ | 12 | |
2011 | | | 7 | | | | 13 | |
2012 | | | 6 | | | | 9 | |
2013 and beyond | | | 14 | | |
| | | | |
2013 | | | | 6 | |
2014 | | | | 4 | |
2015 and beyond | | | | 7 | |
Total | | $ | 68 | | | $ | 51 | |
| | | | |
Total lease expense for all operating leases was $48 million, $46 million and $37 million $56 millionduring 2007, 2008 and $48 million during 2005, 2006 and 2007,2009, respectively.
Carthage to Perryville.(d) Other Commitments
In 2007,December 2008, CenterPoint Energy entered into an agreement to purchase software licenses, support and maintenance over the next five years. As of December 31, 2009, payment obligations under this agreement are $7 million in 2010, $6 million in 2011, $6 million in 2012 and $6 million in 2013.
Long-Term Gas Transmission Company (CEGT) completed phases oneGathering and twoTreating Agreements. In September 2009, CenterPoint Energy Field Services, Inc. (CEFS), a wholly-owned natural gas gathering and treating subsidiary of its CarthageCERC 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 Perryville pipeline projectprovide gathering and treating services for their natural gas production from certain Haynesville Shale and Bossier Shale formations in Louisiana. CEFS also acquired jointly-owned gathering facilities from EnCana and Shell in De Soto and Red River parishes in northwest Louisiana. Each of the agreements includes acreage dedication and volume commitments for which CEFS has rights to gather Shell’s and EnCana’s natural gas production from the dedicated areas.
In connection with a totalthe agreements, CEFS commenced gathering and treating services utilizing the acquired facilities. CEFS is expanding the acquired facilities in order to gather and treat up to 700 million cubic feet (MMcf) per day of natural gas. If EnCana or Shell elect, CEFS will further expand the facilities in order to gather and treat additional future volumes. The construction necessary to reach the contractual capacity of 1.25 billion cubic feet (Bcf)700 MMcf per day.day includes more than 200 miles of gathering lines, nearly 25,500 horsepower of compression and over 800 MMcf per day of treating capacity.
In May 2007, CEGT received Federal Energy Regulatory Commission (FERC) approval forCEFS estimates that the third phasepurchase 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 expand capacitygather and process additional future volumes of the pipelineup to 1.5 Bcf per day by adding additional compression and operating at higher pressures, and in July 2007, CEGT received approval from the Pipeline and Hazardous Materials Administration (PHMSA) to increase the maximum allowable operating pressure. The PHMSA’s approval contained certain conditions and requirements, which CEGT expects to complete in the first quarter of 2008. CEGT has executed contracts for approximately 150 MMcf per day of the 250 MMcf per day phase three expansion. The third phase is projected to be in-service in the second quarter of 2008. The additional cost in 2008 to complete phase three is expected to be approximately $10 million.
During the four-year period subsequent to the in-service date of the pipeline, XTO Energy, CEGT’s anchor shipper, can request, and subject to mutual negotiations that meet specific financial parameters and to FERC approval, CEGT would construct a67-mile extension from CEGT’s Perryville hub to an interconnect with Texas Eastern Gas Transmission at Union Church, Mississippi.
Southeast Supply Header. In June 2006, CenterPoint Energy Southeast Pipelines Holding, L.L.C., a wholly owned subsidiary of CERC Corp., and a subsidiary of Spectra Energy Corp. (Spectra) formed a joint venture (Southeast Supply Header or SESH) to construct, own and operate a270-mile pipeline with a capacity of approximately 1 Bcf per day, CEFS estimates that will extend from CEGT’s Perryville hub in northeast Louisiana to an interconnection in southern Alabama with Gulfstream Natural Gas System, which is 50% owned by an affiliate of Spectra. The Company accounts for its 50% interest in SESHthe expansion would cost as much as an additional $300 million and EnCana and Shell would provide incremental volume commitments. Funds for construction are being provided from anticipated cash flows from operations, lines of credit or proceeds from the sale of debt or equity investment.securities. As of December 31, 2007, subsidiaries2009, approximately $176 million has been spent on this project, including the purchase of CERC Corp. have advanced approximately $198 million to SESH, of which $52 million was in the form of an equity contributionexisting facilities.
(e) Legal, Environmental and $146 million was in the form of a loan. In 2006, SESH signed agreements with shippers for firm transportation services, which subscribed capacity of 945 MMcf per day. Additionally, SESH and Southern Natural Gas (SNG) have executed a definitive agreement that provides for SNG to jointly own the first 115 miles of the pipeline. Under the agreement, SNG will own an undivided interest in the portion of the pipeline from
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Perryville, Louisiana to an interconnect with SNG in Mississippi. The pipe diameter was increased from 36 inches to 42 inches, thereby increasing the initial capacity of 1 Bcf per day by 140 MMcf per day to accommodate SNG. SESH will own assets providing approximately 1 Bcf per day of capacity as initially planned and will maintain economic expansion opportunities in the future. SNG will own assets providing 140 MMcf per day of capacity, and the agreement provides for a future compression expansion that will increase the jointly owned capacity up to 500 MMcf per day, subject to FERC approval.
An application to construct, own and operate the pipeline was filed with the FERC in December 2006. In September 2007, the FERC issued the certificate authorizing the construction of the pipeline. This FERC approval does not include the expansion capacity that would take SNG to 500 MMcf per day. SESH began construction in November 2007. SESH expects to complete construction of the pipeline as approved by the FERC in the second half of 2008. SESH’s net costs after SNG’s contribution are estimated to have increased to approximately $1 billion.
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(d) | Legal, Environmental and Other Regulatory Matters |
Legal Matters
RRI Indemnified LitigationGas Market Manipulation Cases
The Company,. 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 the CompanyCenterPoint Energy and RRI the Company(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 the lawsuits described below under“Electricity and Gas Market Manipulation Cases”and“Other Class Action Lawsuits.”these lawsuits. Pursuant
to the indemnification obligation, RRI is defending the CompanyCenterPoint Energy and its subsidiaries to the extent named in these lawsuits. Although the ultimate outcome of these matters cannot be predicted at this time, the Company has not considered it necessary to establish reserves related to this litigation.
Electricity and Gas Market Manipulation Cases.A large number of lawsuits have beenwere filed against numerous gas market participants in a number of federal and remain pending in federal court in Wisconsin, Missouri and Nevada and inwestern state court in California and Nevadacourts in connection with the operation of the electricity and natural gas markets in 2000-2002. CenterPoint Energy’s former affiliate, RRI, was a participant in gas trading in the California and certain other states in2000-2001, a time of power shortages and significant increases in prices.Western markets. These lawsuits, many of which have been filed as class actions, are based on a number of legal theories, including violationallege violations of state and federal antitrust laws, laws against unfair and unlawful business practices, the federal Racketeer Influenced Corrupt Organization Act, false claims statutes and similar theories and breaches of contracts to supply power to governmental entities.laws. Plaintiffs in these lawsuits which include state officials and governmental entities as well as private litigants, 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, and punitivefull consideration damages injunctive relief, restitution, interest due, disgorgement, civil penalties and fines, costs of suit and attorneys’ fees. The Company’s former subsidiary, RRI, was a participant in the California markets, owning generating plants in the state and participating in both electricity and natural gas trading in that state and in western power markets generally.
The CompanyCenterPoint Energy and/or Reliant Energy have beenwere named in approximately 3530 of these lawsuits, which were instituted between 20012003 and 20072009. CenterPoint Energy and areits 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 Californiafederal 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 San Diego County,Nevada that was dismissed in Nevada state court in Clark County, in federal district court in Nevada and before the Ninth Circuit Court of Appeals. However, the Company, CenterPoint Houston and Reliant Energy were not participants in the electricity or natural gas markets in California. The Company and Reliant Energy have been dismissed from certain of the lawsuits, either voluntarily by2007, but the plaintiffs or by order ofhave indicated that they will appeal the court, and the Companydismissal. CenterPoint Energy believes that neither it nor CES is not a proper defendant in thethese remaining cases and will continue to seekpursue dismissal from such remainingthose cases.
To date, several of the electricity complaints have been dismissed, and several of the dismissals have been affirmed by appellate courts. Others have been resolved by the settlement described in the following paragraph. Three of the gas complaints were dismissed based on defendants’ claims of the filed rate doctrine, but the Ninth
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Circuit Court of Appeals reversed two of those dismissals and remanded the cases back to the district court for further proceedings. In June 2005, a San Diego state court refused to dismiss other gas complaints on the same basis. In October 2006, RRI reached a tentative settlement of 11 class action natural gas cases pending in state court in California. The court approved this settlement in June 2007. In the remaining gas cases in state court in California, the Court of Appeals found that the Company was not a successor to the liabilities of a subsidiary of RRI and ordered the state court to dismiss the Company. The other gas cases remain in the early procedural stages.
In August 2005, RRI reached a settlement with the FERC enforcement staff, the states of California, Washington and Oregon, California’s three largest investor-owned utilities, classes of consumers from California and other western states, and a number of California city and county government entities that resolves their claims against RRI related to the operation of the electricity markets in California and certain other western states in2000-2001. The settlement also resolves the claims of the three states and the investor-owned utilities related to the2000-2001 natural gas markets. The settlement has been approved by the FERC, by the California Public Utilities Commission and by the courts in which the electricity class action cases are pending. Two parties have appealed the courts’ approval of the settlement to the California Court of Appeals. A party in the FERC proceedings filed a motion for rehearing of the FERC’s order approving the settlement, which the FERC denied in May 2006. That party has filed for review of the FERC’s orders in the Ninth Circuit Court of Appeals. The Company is not a party to the settlement, but may rely on the settlement as a defense to any claims brought against it related to the time when the Company was an affiliate of RRI. The terms of the settlement do not require payment by the Company.
Other Class Action Lawsuits. In May 2002, three class action lawsuits were filed in federal district court in Houston on behalf of participants in various employee benefits plans sponsored by the Company. Two of the lawsuits were dismissed without prejudice. In the remaining lawsuit, the Company and certain current and former members of its benefits committee are defendants. That lawsuit alleged that the defendants breached their fiduciary duties to various employee benefits plans, directly or indirectly sponsored by the Company, in violation of the Employee Retirement Income Security Act of 1974 by permitting the plans to purchase or hold securities issued by the Company when it was imprudent to do so, including after the prices for such securities became artificially inflated because of alleged securities fraud engaged in by the defendants. The complaint sought monetary damages for losses suffered on behalf of the plans and a putative class of plan participants whose accounts held CenterPoint Energy or RRI securities, as well as restitution. In January 2006, the federal district judge granted a motion for summary judgment filed by the Company and the individual defendants. The plaintiffs appealed the ruling to the Fifth Circuit Court of Appeals, which heard oral arguments from the parties in October 2007. The Company believes that this lawsuit is without merit and will continue to vigorously defend the case. However,does not expect the ultimate outcome of this matter cannot be predicted at this time.these remaining matters to have a material impact on its financial condition, results of operations or cash flows.
Other Legal MattersOn 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, arealong with 76 other natural gas pipelines, their subsidiaries and affiliates, were 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 seekssought 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 beenwas 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 has sought review of that dismissal from the Tenth Circuit Court of Appeals, wherewhich affirmed the matter remains pending.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,
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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. The plaintiffs are seeking reconsideration of that denial.
CERC believes that there has been no systematic mismeasurement of gas and that thethese lawsuits are without merit. CERC doesand 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 the CompanyCenterPoint Energy or CERC.
Gas Cost Recovery Litigation. In October 2002, a lawsuit was filed on behalf of certain CERC ratepayers in state district court in Wharton County, Texas against the Company, CERC, Entex Gas Marketing Company (EGMC), and certain non-affiliated companies alleging fraud, violations of the Texas Deceptive Trade Practices Act, violations of the Texas Utilities Code, civil conspiracy and violations of the Texas Free Enterprise and Antitrust Act with respect to rates charged to certain consumers of natural gas in the State of Texas. The plaintiffs initially sought certification of a class of Texas ratepayers, but subsequently dropped their request for class certification. The plaintiffs later added as defendants CenterPoint Energy Marketing Inc., CEGT, United Gas, Inc., Louisiana Unit Gas Transmission Company, CenterPoint Energy Pipeline Services, Inc. (CEPS), and CenterPoint Energy Trading and Transportation Group, Inc., all of which are subsidiaries of the Company, and other non-affiliated companies. In February 2005, the case was removed to federal district court in Houston, Texas, and in March 2005, the plaintiffs voluntarily dismissed the case and agreed not to refile the claims asserted unless the Miller County case described below is not certified as a class action or is later decertified.
In October 2004, a lawsuit was filed on behalf ofby certain CERC ratepayers in Texas and Arkansas in circuit court in Miller County, Arkansas against the Company, CERC, EGMC, CEGT, CenterPoint Energy, Field Services (CEFS)CERC Corp., CEPS, Mississippi River Transmissioncertain other
subsidiaries of CenterPoint Energy and CERC Corp. (MRT) and othervarious 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,Although the plaintiffs dropped as defendants CEGT and MRT. The plaintiffs seekin the Miller County case sought class certification, but the proposedno class has not beenwas certified. In June 2007, the Arkansas Supreme Court determined that the Arkansas claims arewere within the sole and exclusive jurisdiction of the APSC. AlsoArkansas Public Service Commission (APSC) and in JuneFebruary 2008, the Arkansas Supreme Court directed the Miller County court to dismiss the entire case for lack of jurisdiction.
In August 2007, the Company, CERC, EGMC and other defendantsArkansas plaintiff in the Miller County case filed a petition in a district court in Travis County, Texas seeking a determination that the Railroad Commission has original exclusive jurisdiction over the Texas claims asserted in the Miller County case. In August 2007, the Miller County court stayed but refused to dismiss the Arkansas claims. Also in August 2007, the Arkansas plaintifflitigation 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 SeptemberFebruary 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.
In June 2007, the Company,CenterPoint Energy, CERC EGMCCorp., and other defendants in the Miller County case initiated proceedingsfiled a petition in a district court in Travis County, Texas seeking a determination that the Arkansas Supreme Court to directRailroad Commission has exclusive original jurisdiction over the Texas claims asserted in the Miller County case. In January 2009, the district court to dismiss the entire case on the groundsentered a final declaratory judgment ruling that the plaintiffs’ claims are within theRailroad Commission has exclusive jurisdiction ofover the APSC or Railroad Commission, as applicable. In October 2007, CEFSTexas claims asserted against CenterPoint Energy, and CEPS were joined as parties to the Travis County case. In February 2008, the Arkansas Supreme Court granted the Company’s request and ordered that the case be dismissed. The plaintiffs have thirty days to request rehearing from the Arkansas Supreme Court.
In February 2003, a lawsuit was filed in state court in Caddo Parish, Louisiana against CERC with respect to rates charged to a purported class of certain consumers of natural gas and gas serviceother defendants in the State of Louisiana. In February 2004, another suit was filed in state court in Calcasieu Parish, Louisiana against CERC seeking to recover alleged overcharges for gas or gas services allegedly provided by CERC to a purported class of certain consumers of
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natural gas and gas service without advance approval by the Louisiana Public Service Commission (LPSC). At the time of the filing of each of the Caddo and Calcasieu Parish cases, the plaintiffs in those cases filed petitions with the LPSC relating to the same alleged rate overcharges. The Caddo and Calcasieu Parish lawsuits have been stayed pending the resolution of the petitions filed with the LPSC. In August 2007, the LPSC issued an order approving a Stipulated Settlement in the review initiated by the plaintiffs in the Calcasieu Parish litigation. In the LPSC proceeding, CERC’s gas purchases were reviewed back to 1971. The review concluded that CERC’s gas costs were “reasonable and prudent,” but CERC agreed to credit to jurisdictional customers approximately $920,000, including interest, related to certain off-system sales. A regulatory liability was established and the Company began refunding that amount to jurisdictional customers in September 2007. A similar review by the LPSC related to the Caddo Parish litigation was resolved without additional payment by CERC.
The range of relief sought by the plaintiffs in these cases includes injunctive and declaratory relief, restitution for the alleged overcharges, exemplary damages or trebling of actual damages, civil penalties and attorney’s fees. The Company, CERC and their affiliates deny that they have overcharged any of their customers for natural gas and believe that the amounts recovered for purchased gas have been shown in the reviews described above to be in accordance with what is permitted by state and municipal regulatory authorities. The Company and CERC do not expect the outcome of these matters to have a material impact on the financial condition, results of operations or cash flows of either the Company or CERC.
Storage Facility Litigation. In February 2007, an Oklahoma district court in Coal County, Oklahoma, granted a summary judgment against CEGT in a case, Deka Exploration, Inc. v. CenterPoint Energy, filed by holders of oil and gas leaseholds and some mineral interest owners in lands underlying CEGT’s Chiles Dome Storage Facility. The dispute concerns “native gas” that may have been in the Wapanucka formation underlying the Chiles Dome facility when that facility was constructed in 1979 by a CERC entity that was the predecessor in interest of CEGT. The court ruled that the plaintiffs own native gas underlying those lands, since neither CEGT nor its predecessors had condemned those ownership interests. The court rejected CEGT’s contention that the claim should be barred by the statute of limitations, since the suit was filed over 25 years after the facility was constructed. The court also rejected CEGT’s contention that the suit is an impermissible attack on the determinations the FERC and Oklahoma Corporation Commission made regarding the absence of native gas in the lands when the facility was constructed. The summary judgment ruling was only on the issue of liability, though the court did rule that CEGT has the burden of proving that any gas in the Wapanucka formation is gas that has been injected and is not native gas. Further hearings and orders of the court are required to specify the appropriate relief for the plaintiffs. CEGT plans to appeal through the Oklahoma court system any judgment that imposes liability on CEGT in this matter. The Company and CERC do not expect the outcome of this matter to have a material impact on the financial condition, results of operations or cash flows of either the Company or CERC.
Environmental Matters
Hydrocarbon Contamination. CERC Corp. and certain of its subsidiaries were among the defendants in lawsuits filed beginning in August 2001 in Caddo Parish and Bossier Parish, Louisiana. The suits alleged that, at some unspecified date prior to 1985, the defendants allowed or caused hydrocarbon or chemical contamination of the Wilcox Aquifer, which lies beneath property owned or leased by certain of the defendants and which is the sole or primary drinking water aquifer in the area. The primary source of the contamination was alleged by the plaintiffs to be a gas processing facility in Haughton, Bossier Parish, Louisiana known as the “Sligo Facility,” which was formerly operated by a predecessor in interest of CERC Corp. This facility was purportedly used for gathering natural gas from surrounding wells, separating liquid hydrocarbons from the natural gas for marketing, and transmission of natural gas for distribution.
In July 2007, pursuant to the terms of a previously agreed settlement in principle, the parties implemented the terms of their settlement and resolved this matter. Pursuant to the agreed terms, a CERC Corp. subsidiary entered into a cooperative agreement with the Louisiana Department of Environmental Quality (LDEQ), pursuant to which
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CERC Corp.’s subsidiary will work with the LDEQ to develop a remediation plan that could be implemented by the CERC Corp. subsidiary. Pursuant to the settlement terms, CERC made a settlement payment within the amounts previously reserved for this matter. The Company and CERC do not expect the costs associated with the resolution of this matter to have a material impact on the financial condition, results of operations or cash flows of either the Company or CERC.
Manufactured Gas Plant Sites. CERC and its predecessors operated manufactured gas plants (MGP)(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 December 31, 2007,2009, 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 December 31, 2007,2009, CERC had collected $13 million from insurance companies and rate payers to be used for future environmental remediation. In January 2010, as part of its Minnesota rate case decision, the MPUC eliminated the environmental expense tracker mechanism and ordered amounts previously collected from ratepayers and related carrying costs refunded to customers. As of December 31, 2009, the balance in the environmental expense tracker account was $8.7 million. The MPUC provided for the inclusion in rates of approximately $285,000 annually to fund normal on-going remediation costs. CERC was not required to refund to customers the amount collected from insurance companies, $4.6 million at December 31, 2009, to be used to mitigate future environmental costs. The MPUC further gave assurance that any reasonable and prudent environmental clean-up costs CERC incurs in the future will be rate-recoverable under normal regulatory principles and procedures. This provision had no impact on earnings.
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 iswould be required to determine if other potentially responsible parties, including CERC, would have to contribute to that remediation. The CompanyIn September 2009, the federal district court granted CERC’s motion for summary judgment in the proceeding. Although it is investigating details regardinglikely that the site andplaintiff will pursue an appeal from that dismissal, further action will not be taken until the rangedistrict court disposes of environmental expenditures for potential remediation. However,claims against other defendants in the case. 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. CERC and CenterPoint Energy do not expect the ultimate outcome to have a material adverse impact on the financial condition, results of operations or cash flows of either CenterPoint Energy or CERC.
Mercury Contamination. The Company’s 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. The CompanyCenterPoint Energy has found this type of contamination at some sites in the past, and the CompanyCenterPoint 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 the Company’sCenterPoint Energy’s experience and that of others in the natural gas industry to date and on the current regulations regarding remediation of these sites, the CompanyCenterPoint Energy believes that the costs of any remediation of these sites will not be material to the Company’sCenterPoint Energy’s financial condition, results of operations or cash flows.
Asbestos. Some facilities owned by the CompanyCenterPoint Energy contain or have contained asbestos insulation and other asbestos-containing materials. The CompanyCenterPoint 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 the Company,CenterPoint Energy, but most existing claims relate to facilities previously owned by the Company or itsCenterPoint Energy’s subsidiaries. The CompanyCenterPoint Energy anticipates that additional claims like those received may be asserted in the future. In 2004, the CompanyCenterPoint Energy sold its generating business, to which most of these claims relate, to Texas Genco LLC, which is now known as NRG Texas LP (NRG).LP. Under the terms of the arrangements regarding separation of the generating business from the CompanyCenterPoint Energy and its sale to NRG Texas Genco LLC,LP, ultimate financial
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responsibility for uninsured losses from claims relating to the generating business has been assumed by NRG Texas Genco LLC and its successor,LP, but the CompanyCenterPoint Energy has agreed to continue to defend such claims to the extent they are covered by insurance maintained by the Company,CenterPoint Energy, subject to reimbursement of the costs of such defense from the purchaser.NRG Texas LP. Although their ultimate outcome cannot be predicted at this time, the CompanyCenterPoint 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 the Company’sCenterPoint 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 the CompanyCenterPoint 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, the CompanyCenterPoint 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, the CompanyCenterPoint 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 the Company’sCenterPoint Energy’s financial condition, results of operations or cash flows.
Other Proceedings
The CompanyCenterPoint 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. The CompanyCenterPoint Energy regularly analyzes current
information and, as necessary, provides accruals for probable liabilities on the eventual disposition of these matters. The CompanyCenterPoint Energy does not expect the disposition of these matters to have a material adverse effect on the Company’sCenterPoint Energy’s financial condition, results of operations or cash flows.
In July 2007, the CompanyDecember 2009, $3.3 million was notifieddistributed to a subsidiary of acceptance of its claimCenterPoint Energy in connection with the settlement of 2002 AOL Time Warner, Inc. securities and ERISA class action litigation by receipt of approximately $32 million from the independent settlement administrator appointed by the United States District Court, Southern District of New York.litigation. Pursuant to the terms of the Indentureindenture governing the Company’sCenterPoint Energy’s ZENS, in August 2007, the CompanyFebruary 2010, CenterPoint Energy distributed to current ZENS holders approximately $27$2.8 million, which amount represented the portion of the payment received that was attributable to the reference shares of TW Common stock corresponding to eachthe outstanding ZENS. This distribution reduced the contingent principal amount of the ZENS from $848$814 million to $821$811 million. The litigation settlement was recorded as other income and the distribution payable to ZENS holders was recorded as other expense during the third quarter of 2007.in 2009.
(f) Guaranties
Prior to the Company’sCenterPoint Energy’s distribution of its ownership in RRI to its shareholders, CERC had guaranteed certain contractual obligations of what became RRI’s trading subsidiary. UnderWhen the terms of the separation agreement between the companies separated, RRI agreed to extinguish all such guarantysecure CERC against obligations prior to separation, but atunder the time of separation in September 2002,guaranties RRI had been unable to extinguish all obligations. To secure CERC against obligations underby the remaining guaranties,time of separation. Pursuant to such agreement, as amended in December 2007, RRI has agreed to provide to CERC cash or letters of credit foras security against CERC’s benefit, and undertook to use commercially reasonable efforts to extinguish the remaining guaranties. In February 2007, the Company and CERC made a formal demand on RRI in connection with one of the twoobligations under its remaining guaranties for demand charges under procedures provided by the Master Separation Agreement, dated December 31, 2000, between Reliant Energy and RRI. That demand sought to resolve a disagreement with RRI over the amount of security RRI is obligated to provide with respect to this guaranty. In December 2007, the Company, CERC and RRI amended the agreement relating to the security to be provided by RRI for these guaranties, pursuant to which CERC released the $29.3 million in letters of credit RRI had provided as security, and RRI agreed to provide cash or new letters of credit to secure CERC against exposure under the remaining guaranties as calculated under the new agreementcertain gas transportation agreements if and to the extent changes in market conditions exposedexpose CERC to a risk of loss on those guaranties.
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CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The remaining exposure to CERC under the guaranties relates to payment of demand charges related to transportation contracts. The present value of the demand charges under thosethese transportation contracts, which will be effective until 2018, was approximately $135$96 million as of December 31, 2007.2009. As of December 31, 2009, RRI continueswas not required to meet its obligations under the contracts, and the Company believes current market conditions make those contracts valuable in the near term and that additionalprovide security is not needed at this time. However, changes in market conditions could affect the value of those contracts.to CERC. If RRI should fail to perform the contractual obligations, CERC could have to honor its obligations under the contracts or if RRI should failguarantee and, in such event, collateral provided as security may be insufficient to provide security in the event market conditions change adversely, the Company’s exposure to the counterparty under the guaranty could exceed the security provided by RRI.satisfy CERC’s obligations.
| |
(11) | Estimated Fair Value of Financial Instruments |
(11) 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” "available-for-sale" and “trading” in accordance with SFAS No. 115,"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 inand the Consolidated Balance Sheets at December 31, 2006 and 2007 and have been determined using quoted market prices for the same or similar instruments when available or other estimation techniques (see Note 5). Therefore, these financial instrumentsZENS indexed debt securities derivative 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, 2006 | | December 31, 2007 | | |
| | Carrying
| | Fair
| | Carrying
| | Fair
| | |
| | Amount | | Value | | Amount | | Value | | | December 31, 2008 | | | December 31, 2009 | |
| | (In millions) | | | Carrying Amount | | | Fair Value | | | Carrying Amount | | | Fair Value | |
| | (in millions) | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Long-term debt (excluding capital leases) | | $ | 8,889 | | | $ | 9,573 | | | $ | 9,564 | | | $ | 10,048 | | |
Long-term debt | | | $ | 10,396 | | | $ | 9,875 | | | $ | 9,900 | | | $ | 10,413 | |
109
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(12) Earnings Per Share
The following table reconciles numerators and denominators of the Company’sCenterPoint Energy’s basic and diluted earnings (loss) per share calculations:
| | | | | | | | | | | | |
| | For the Year Ended December 31, | |
| | 2005 | | | 2006 | | | 2007 | |
| | (In millions, except per share and share amounts) | |
|
Basic earnings (loss) per share calculation: | | | | | | | | | | | | |
Income from continuing operations before extraordinary item | | $ | 225 | | | $ | 432 | | | $ | 399 | |
Loss from discontinued operations, net of tax | | | (3 | ) | | | — | | | | — | |
Extraordinary item, net of tax | | | 30 | | | | — | | | | — | |
| | | | | | | | | | | | |
Net income | | $ | 252 | | | $ | 432 | | | $ | 399 | |
| | | | | | | | | | | | |
Weighted average shares outstanding | | | 309,349,000 | | | | 311,826,000 | | | | 320,480,000 | |
Basic earnings (loss) per share: | | | | | | | | | | | | |
Income from continuing operations before extraordinary item | | $ | 0.72 | | | $ | 1.39 | | | $ | 1.25 | |
Loss from discontinued operations, net of tax | | | (0.01 | ) | | | — | | | | — | |
Extraordinary item, net of tax | | | 0.10 | | | | — | | | | — | |
| | | | | | | | | | | | |
Net income | | $ | 0.81 | | | $ | 1.39 | | | $ | 1.25 | |
| | | | | | | | | | | | |
Diluted earnings (loss) per share calculation: | | | | | | | | | | | | |
Net income | | $ | 252 | | | $ | 432 | | | $ | 399 | |
Plus: Income impact of assumed conversions: | | | | | | | | | | | | |
Interest on 3.75% contingently convertible senior notes | | | 9 | | | | — | | | | — | |
| | | | | | | | | | | | |
Total earnings effect assuming dilution | | $ | 261 | | | $ | 432 | | | $ | 399 | |
| | | | | | | | | | | | |
Weighted average shares outstanding | | | 309,349,000 | | | | 311,826,000 | | | | 320,480,000 | |
Plus: Incremental shares from assumed conversions: | | | | | | | | | | | | |
Stock options(1) | | | 1,241,000 | | | | 974,000 | | | | 1,059,000 | |
Restricted stock | | | 1,851,000 | | | | 1,553,000 | | | | 1,928,000 | |
2.875% convertible senior notes | | | — | | | | 1,625,000 | | | | 291,000 | |
3.75% convertible senior notes | | | 33,587,000 | | | | 8,800,000 | | | | 18,749,000 | |
| | | | | | | | | | | | |
Weighted average shares assuming dilution | | | 346,028,000 | | | | 324,778,000 | | | | 342,507,000 | |
| | | | | | | | | | | | |
Diluted earnings (loss) per share: | | | | | | | | | | | | |
Income from continuing operations before extraordinary item | | $ | 0.67 | | | $ | 1.33 | | | $ | 1.17 | |
Loss from discontinued operations, net of tax | | | (0.01 | ) | | | — | | | | — | |
Extraordinary item, net of tax | | | 0.09 | | | | — | | | | — | |
| | | | | | | | | | | | |
Net income | | $ | 0.75 | | | $ | 1.33 | | | $ | 1.17 | |
| | | | | | | | | | | | |
| | For the Year Ended December 31, | |
| | 2007 | | | 2008 | | | 2009 | |
| | (In millions, except per share and share amounts) | |
Basic earnings per share calculation: | | | | | | | | | |
Net income | | $ | 395 | | | $ | 446 | | | $ | 372 | |
| | | | | | | | | | | | |
Weighted average shares outstanding | | | 320,480,000 | | | | 336,387,000 | | | | 365,229,000 | |
| | | | | | | | | | | | |
Basic earnings per share | | $ | 1.23 | | | $ | 1.32 | | | $ | 1.02 | |
| | | | | | | | | | | | |
Diluted earnings per share calculation: | | | | | | | | | | | | |
Net income | | $ | 395 | | | $ | 446 | | | $ | 372 | |
| | | | | | | | | | | | |
Weighted average shares outstanding | | | 320,480,000 | | | | 336,387,000 | | | | 365,229,000 | |
Plus: Incremental shares from assumed conversions: | | | | | | | | | | | | |
Stock options(1) | | | 1,059,000 | | | | 760,000 | | | | 451,000 | |
Restricted stock | | | 1,928,000 | | | | 1,772,000 | | | | 2,001,000 | |
2.875% convertible senior notes | | | 291,000 | | | | - | | | | - | |
3.75% convertible senior notes | | | 18,749,000 | | | | 4,636,000 | | | | - | |
Weighted average shares assuming dilution | | | 342,507,000 | | | | 343,555,000 | | | | 367,681,000 | |
| | | | | | | | | | | | |
Diluted earnings per share | | $ | 1.15 | | | $ | 1.30 | | | $ | 1.01 | |
_________ | | |
(1) | | Options to purchase 8,677,660, 5,863,9073,225,969, 2,617,772 and 3,225,9692,372,132 shares were outstanding for the years ended December 31, 2005, 20062007, 2008 and 2007,2009, respectively, but were not included in the computation of diluted earnings |
111
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
| | (loss) per share because the options’ exercise price was greater than the average market price of the common shares for the respective years. |