UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


________________




Form 10-K





(Mark One)R
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010OR£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM  TO





Commission file number 1-3187


______________________________





CenterPoint Energy Houston Electric, LLC


(Exact name of registrant as specified in its charter)





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





Securities registered pursuant to Section 12(b) of the act:





Title of each class
Name of each exchange on which registered9.15% First Mortgage Bonds due 2021
New York Stock Exchange6.95% General Mortgage Bonds due 2033
New York Stock Exchange





Securities registered pursuant to Section 12(g) of the act:


None





CenterPoint Energy Houston Electric, LLC meets the conditions set forth in general instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced disclosure format.





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No þ





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o No þ





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





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





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ





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





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





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





The aggregate market value of the common equity held by non-affiliates as of June 30, 2010: None
















TABLE OF CONTENTS




PART IPageItem 1.
Business
1Item 1A.
Risk Factors
14Item 1B.
Unresolved Staff Comments
21Item 2.
Properties
21Item 3.
Legal Proceedings
21Item 4.
Removed and Reserved
21PART IIItem 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
22Item 6.
Selected Financial Data
22Item 7.
Management’s Narrative Analysis of Results of Operations
22Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
33Item 8.
Financial Statements and Supplementary Data
34Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
60Item 9A.
Controls and Procedures
60Item 9B.
Other Information
60PART IIIItem 10.
Directors, Executive Officers and Corporate Governance
60Item 11.
Executive Compensation
60Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
60Item 13.
Certain Relationships and Related Transactions, and Director Independence
61Item 14.
Principal Accounting Fees and Services
61PART IVItem 15.
Exhibits and Financial Statement Schedules
61







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We meet the conditions specified in General Instruction I (1)(a) and (b) of Form 10-K and are thereby permitted to use the reduced disclosure format for wholly owned subsidiaries of reporting companies specified therein. Accordingly, we have omitted from this report the information called for by Item 10 (Directors, Executive Officers and Corporate Governance), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters) and Item 13 (Certain Relationships and Related Transactions, and Director Independence) of Form 10-K. In lieu of the information called for by Item 6 (Selected Financial Data) and Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Form 10-K, we have included, under Item 7, Management’s Narrative Analysis of Results of Operations to explain the reasons for material changes in the amount of revenue and expense items between 2008, 2009 and 2010.





CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION





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





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





Some of the factors that could cause actual results to differ from those expressed or implied by our forward-looking statements are described under “Risk Factors” in Item 1A and “Management’s Narrative Analysis of Results of Operations — Certain Factors Affecting Future  Earnings” in Item 7 of this report, which discussions are incorporated herein by reference.





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






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PART I





Item 1. Business





OUR BUSINESS





Overview





We provide electric transmission and distribution services to retail electric providers (REPs) serving approximately 2.1 million metered customers in a 5,000-square mile area of the Texas Gulf Coast that has a population of approximately 5.9 million people and includes the city of Houston. In this report, unless the content indicates otherwise, references to “CenterPoint Houston,” “we,” “us” or similar terms mean CenterPoint Energy Houston Electric, LLC and its subsidiaries. We are an indirect wholly owned subsidiary of CenterPoint Energy, Inc. (CenterPoint Energy), a public utility holding company.  We have only one reportable business segment: Electric Transmission & Distribution.





Our principal executive offices are located at 1111 Louisiana, Houston, Texas 77002 (telephone number: 713-207-1111).





We make available free of charge on our parent company’s Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the Securities and Exchange Commission (SEC).  Our parent company’s website address is www.centerpointenergy.com.  Except to the extent explicitly stated herein, documents and information on our parent company’s website are not incorporated by reference herein.





Electric Transmission & Distribution





In 1999, the Texas legislature adopted the Texas Electric Choice Plan (Texas electric restructuring law) that led to the restructuring of certain integrated electric utilities operating within Texas. Pursuant to that legislation, integrated electric utilities operating within the Electric Reliability Council of Texas, Inc. (ERCOT) were required to unbundle their integrated operations into separate retail sales, power generation and transmission and distribution companies. The legislation also required that the prices for wholesale generation and retail electric sales be unregulated, but services by companies providing transmission and distribution service, such as us, would remain regulated by the Public Utility Commission of Texas (Texas Utility Commission). The legislation provided for a transition period to move to the new market structure and provided a true-up mechanism for the formerly integrated electric utilities to recover stranded and certain other costs resulting from the transition to competition. Those costs were recoverable after approval by the Texas Utility Commission either through the issuance of securitization bonds or through the implementation of a competition transition charge (CTC) as a rider to the utility’s tariff.





We are a transmission and distribution electric utility that operates wholly within the state of Texas. Neither we nor any other subsidiary of CenterPoint Energy makes retail or wholesale sales of electric energy, or owns or operates any electric generating facilities.





Electric Transmission





On behalf of retail electric providers (REPs), we deliver electricity from power plants to substations, from one substation to another and to retail electric customers taking power at or above 69 kilovolts (kV) in locations throughout our certificated service territory. We construct and maintain transmission facilities and provide transmission services under tariffs approved by the Texas Utility Commission.





Electric Distribution





In ERCOT, end users purchase their electricity directly from certificated REPs. We deliver electricity for REPs in our certificated service area by carrying lower-voltage power from the substation to the retail electric customer. Our





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 distribution network receives electricity from the transmission grid through power distribution substations and delivers electricity to end users through distribution feeders. Our operations include construction and maintenance of distribution facilities, metering services, outage response services and call center operations. We provide distribution services under tariffs approved by the Texas Utility Commission. Texas Utility Commission rules and market protocols govern the commercial operations of distribution companies and other market participants. Rates for these existing services are established pursuant to rate proceedings conducted before municipalities that have original jurisdiction and the Texas Utility Commission.





ERCOT Market Framework





We are a member of ERCOT. ERCOT serves as the regional reliability coordinating council for member electric power systems in Texas. ERCOT membership is open to consumer groups, investor and municipally-owned electric utilities, rural electric cooperatives, independent generators, power marketers, river authorities and REPs. The ERCOT market includes most of the State of Texas, other than a portion of the panhandle, portions of the eastern part of the state bordering Arkansas and Louisiana and the area in and around El Paso. The ERCOT market represents approximately 85% of the demand for power in Texas and is one of the nation’s largest power markets. The ERCOT market included available generating capacity of approximately 76,000 megawatts (MW) at December 31, 2010. There are only limited direct current interconnections between the ERCOT market and other power markets in the United States and Mexico.





The ERCOT market operates under the reliability standards set by the North American Electric Reliability Corporation (NERC) and approved by the Federal Energy Regulatory Commission (FERC). These reliability standards are administered by the Texas Regional Entity (TRE), a functionally independent division of ERCOT. The Texas Utility Commission has primary jurisdiction over the ERCOT market to ensure the adequacy and reliability of electricity supply across the state’s main interconnected power transmission grid. The ERCOT independent system operator (ERCOT ISO) is responsible for operating the bulk electric power supply system in the ERCOT market. Its responsibilities include ensuring that electricity production and delivery are accurately accounted for among the generation resources and wholesale buyers and sellers. Unlike certain other regional power markets, the ERCOT market is not a centrally dispatched power pool, and the ERCOT ISO does not procure energy on behalf of its members other than to maintain the reliable operations of the transmission system. Members who sell and purchase power are responsible for contracting sales and purchases of power bilaterally. The ERCOT ISO also serves as agent for procuring ancillary services for those members who elect not to provide their own ancillary services.





Our electric transmission business, along with those of other owners of transmission facilities in Texas, supports the operation of the ERCOT ISO. The transmission business has planning, design, construction, operation and maintenance responsibility for the portion of the transmission grid and for the load-serving substations it owns, primarily within its certificated area. We participate with the ERCOT ISO and other ERCOT utilities to plan, design, obtain regulatory approval for and construct new transmission lines necessary to increase bulk power transfer capability and to remove existing constraints on the ERCOT transmission grid.





Recovery of True-Up Balance





The Texas electric restructuring law substantially revised the regulatory structure governing electric utilities in order to allow retail competition for electric customers beginning in January 2002. The Texas electric restructuring law required the Texas Utility Commission to conduct a “true-up” proceeding to determine our stranded costs and certain other costs resulting from the transition to a competitive retail electric market and to provide for our recovery of those costs.





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


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





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





•
reversed the Texas Utility Commission’s ruling that precluded us from recovering the interest component of the EMCs paid to REPs; and





•
affirmed the True-Up Order in all other respects.





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





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





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





•
reversed the district court’s judgment to the extent it upheld the Texas Utility Commission’s decision to allow us to recover EMCs paid to our former affiliate Reliant Energy, Inc.  (Reliant Energy, Inc., formerly known as Reliant Resources, Inc., changed its name in 2009 to “RRI Energy, Inc.” in connection with the sale of its Texas retail electric business, and again in December 2010 to “GenOn Energy, Inc.” in connection with the merger of one of its wholly owned subsidiaries with Mirant Corporation.  For convenience, we refer to this company as “RRI” in the context of discussing transactions relating to our formation, our pending true-up appeal and other historical matters, and as “GenOn” in the present and future context, unless stated otherwise.);





•
ordered that the tax normalization issue described below be remanded to the Texas Utility Commission as requested by the Texas Utility Commission; and





•
affirmed the district court’s judgment in all other respects.





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





In June 2008, we petitioned the Texas Supreme Court for review of the court of appeals decision. In our petition, we seek reversal of the parts of the court of appeals decision that (i) denied recovery of EMCs paid to RRI, (ii) denied recovery of the capacity auction true-up amounts allowed by the district court, (iii) affirmed the Texas Utility Commission’s rulings that denied recovery of approximately $378 million related to depreciation and (iv) affirmed the Texas Utility Commission’s refusal to permit us to utilize the partial stock valuation methodology for determining the market value of our former generation assets. Two other petitions for review were filed with the Texas Supreme Court by other parties to the appeal. In those petitions, parties contend that (i) the Texas Utility Commission was without authority to fashion the methodology it used for valuing the former generation assets after it had determined that we could not use the partial stock valuation method, (ii) in fashioning the method it used for valuing the former generating assets, the Texas Utility Commission deprived parties of their due process rights and an opportunity to be heard, (iii) the net book value of the generating assets should have been adjusted downward due to the impact of a purchase option that had been granted to RRI, (iv) we should not have been permitted to recover construction work in progress balances without proving those amounts in the manner required by law and (v) the Texas Utility Commission was without authority to award interest on the capacity auction true-up award.





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 we and CenterPoint Energy believe that our true-up request is consistent with applicable statutes and regulations and, accordingly, that it is reasonably possible that we will be successful in our appeal to the Texas Supreme Court, we can provide no assurance as to the ultimate court


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rulings on the issues to be considered in the appeal or with respect to the ultimate decision by the Texas Utility Commission on the tax normalization issue described below.





To reflect the impact of the True-Up Order, in 2004 and 2005, we recorded a net after-tax extraordinary loss of $947 million. No amounts related to the district court’s judgment or the decision of the court of appeals have been recorded in our consolidated financial statements. However, if the court of appeals decision is not reversed or modified as a result of further review by the Texas Supreme Court, we anticipate that we would be required to record an additional loss to reflect the court of appeals decision. The amount of that loss would depend on several factors, including ultimate resolution of the tax normalization issue described below, but could range from $190 million to $440 million (pre-tax) plus interest subsequent to December 31, 2010.





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





If the Texas Utility Commission’s order relating to the ADITC reduction is not reversed or otherwise modified on remand so as to eliminate the normalization violation, the IRS could require CenterPoint Energy to pay an amount equal to our unamortized ADITC balance as of the date that the normalization violation is deemed to have occurred. In addition, the IRS could deny us the ability to elect accelerated tax depreciation benefits beginning in the taxable year that the normalization violation is deemed to have occurred. Such treatment, if required by the IRS, could have a material adverse impact on our results of operations, financial condition and cash flows in addition to any potential loss resulting from final resolution of the True-Up Order. Following the adoption by the IRS of the final regulations described above, the Texas Utility Commission requested, and the court of appeals ordered, that this issue be remanded to that commission for further consideration. 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. We and CenterPoint Energy will continue to pursue a favorable resolution of this issue through the appellate and administrative process. Although the Texas Utility Commission has requested that this issue be remanded to it by the courts and 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 us in the Texas Utility Commission’s True-Up Order to be recovered either through securitization or through implementation of a 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 ours 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, we recovered approximately $1.7 billion of the true-up balance determined in the True-Up Order plus interest through the date on which the bonds were issued.





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


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was reduced from 11.075% to 8.06% pursuant to a revised rule adopted by the Texas Utility Commission in June 2006. Recovery of rate case expenses under Rider RCE was completed in September 2008.





Certain parties appealed the CTC Order to a district court in Travis County. In May 2006, the district court issued a judgment reversing the CTC Order in three respects. First, the court ruled that the Texas Utility Commission had improperly relied on provisions of its rule dealing with the interest rate applicable to CTC amounts. The district court reached that conclusion based on its belief that the Texas Supreme Court had previously invalidated that entire section of the rule. The 11.075% interest rate in question was applicable from the implementation of the CTC Order on September 13, 2005 until August 1, 2006, the effective date of the implementation of a new CTC in compliance with the revised rule discussed above. Second, the district court reversed the Texas Utility Commission’s ruling that allows us to recover through Rider RCE the costs (approximately $5 million) for a panel appointed by the Texas Utility Commission in connection with the valuation of electric generation assets. Finally, the district court accepted the contention of one party that the CTC should not be allocated to retail customers that have switched to new on-site generation. We and the Texas Utility Commission appealed the district court’s judgment to the Texas Third Court of Appeals, and in July 2008, the court of appeals reversed the district court’s judgment in all respects and affirmed the Texas Utility Commission’s order. Two parties appealed the court of appeals decision to the Texas Supreme Court and on October 22, 2010, the Texas Supreme Court issued an opinion affirming the judgment of the court of appeals. The Texas Supreme Court’s decision did not have an impact on our financial position, results of operations or cash flows.





During the 2007 legislative session, the Texas legislature amended statutes prescribing the types of true-up balances that can be securitized by utilities and authorized the issuance of transition bonds to recover the balance of the CTC. In June 2007, we filed a request with the Texas Utility Commission for a financing order that would allow the securitization of the remaining balance of the CTC, adjusted to refund certain unspent environmental retrofit costs and to recover the amount of the final fuel reconciliation settlement. We 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 ours issued approximately $488 million of transition bonds in two tranches with interest rates of 4.192% and 5.234% and final maturity dates of February 2020 and February 2023, respectively. Contemporaneously with the issuance of those bonds, the CTC was terminated and a transition charge was implemented. During the year ended December 31, 2008, we recognized approximately $5 million in operating income from the CTC.





As of December 31, 2010, we have not recognized an allowed equity return of $178 million on our true-up balance because such return will be recognized as it is recovered in rates. During the years ended December 31, 2008, 2009 and 2010, we recognized approximately $13 million, $13 million and $15 million, respectively, of the allowed equity return.





Hurricane Ike





Our electric delivery system suffered substantial damage as a result of Hurricane Ike, which struck the upper Texas coast in September 2008. We deferred the 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 our reported operating income for 2008 or 2009.





We 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, we reached a settlement agreement with the parties to the proceeding.  Under that settlement agreement, we were entitled to recover a total of $663 million in costs relating to Hurricane Ike, along with carryingcosts from September 1, 2009 until system restoration bonds were issued. The Texas Utility Commission issued an order in August 2009 approving 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.


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In August 2009, the Texas Utility Commission issued a financing order allowing us 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, we issued approximately $665 million of system restoration bonds through our 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.





In accordance with the financing order, we 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 accumulated deferred federal income taxes (ADFIT) associated with the storm restoration costs (including a carrying charge of 11.075%). The beginning balance of the ADFIT related to storm restoration costs was approximately $207 million and will decline over the life of the system restoration bonds as taxes are paid on the system restoration tariffs. The ADFIT Credit reduced operating income in 2010 by approximately $23 million.





Customers





We serve nearly all of the Houston/Galveston metropolitan area. Our customers consist of 99 REPs, which sell electricity to over two million metered customers in our certificated service area, and municipalities, electric cooperatives and other distribution companies located outside our certificated service area. Each REP is licensed by, and must meet minimum creditworthiness criteria established by, the Texas Utility Commission.





Sales to REPs that are subsidiaries of NRG Retail LLC (NRG Retail) represented approximately 48%, 44% and 38% of our transmission and distribution revenues in 2008, 2009 and 2010, respectively.  Sales to subsidiaries of TXU Energy Retail Company LLC (TXU Energy Retail) represented approximately 11%, 12% and 12% of our transmission and distribution revenues in 2008, 2009 and 2010, respectively.  Our billed receivables balance from REPs as of December 31, 2010 was $138 million.  Approximately 33% and 13% of this amount was owed by subsidiaries of NRG Retail and TXU Energy Retail, respectively. We do not have long-term contracts with any of our customers. We operate using a continuous billing cycle, with meter readings being conducted and invoices being distributed to REPs each business day.





Advanced Metering System and Distribution Grid Automation (Intelligent Grid)





In December 2008, we received approval from the Texas Utility Commission to deploy an advanced metering system (AMS) across our service territory over the next five years. We began installing advanced meters in March 2009.  This innovative technology should encourage greater energy conservation by giving Houston-area electric consumers the ability to better monitor and manage their electric use and its cost in near real time. We are currently recovering the cost for the AMS through a monthly surcharge to all REPs over 12 years.  The surcharge for each residential consumer for the first 24 months, which began in February 2009, was $3.24 per month.  Beginning in February 2011, the surcharge was reduced to $3.05 per month.  These amounts are subject to upward or downward adjustment in future proceedings to reflect actual costs incurred and to address required changes in scope.





We are also pursuing deployment of an electric distribution grid automation strategy that involves the implementation of an “Intelligent Grid” (IG) which would make use of our facilities to provide on-demand data and information about the status of facilities on our system. Although this technology is still in the developmental stage, we believe it has the potential to provide a significant improvement in grid planning, operations, maintenance and customer service for our distribution system. These improvements are expected to contribute to fewer and shorter outages, better customer service, improved operations costs, improved security and more effective use of our workforce. We expect to include the costs of the deployment in future rate proceedings before the Texas Utility Commission.





In October 2009, the U.S. Department of Energy (DOE) notified us that we had been selected for a $200 million grant for our AMS and IG projects.  In March 2010, we and the DOE completed negotiations and finalized the agreement. Under the terms of the agreement, the DOE has agreed to reimburse us for 50% of our eligible costs until the total amount of the grant has been paid. Through December 31, 2010, we have requested $100 million of grant





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 funding from the DOE, of which $90 million had been received. We estimate that capital expenditures of approximately $645 million for the installation of the advanced meters and corresponding communication and data management systems will be incurred over the deployment period. We are using $150 million of the grant funding to accelerate completion of our current deployment of advanced meters to 2012, instead of 2014 as originally scheduled.  We will use the other $50 million from the grant to begin deployment of an IG in a portion of our service territory over the next three years.  It is expected that the portion of the IG project subject to funding by the DOE will cost approximately $115 million.





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





Competition





There are no other electric transmission and distribution utilities in our service area. In order for another provider of transmission and distribution services to provide such services in our territory, it would be required to obtain a certificate of convenience and necessity from the Texas Utility Commission and, depending on the location of the facilities, may also be required to obtain franchises from one or more municipalities. We know of no other party intending to enter this business in our service area at this time.





Seasonality





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





Properties





All of our properties are located in Texas. Our properties consist primarily of high voltage electric transmission lines and poles, distribution lines, substations, service wires and meters. Most of our transmission and distribution lines have been constructed over lands of others pursuant to easements or along public highways and streets as permitted by law.





All of our real and tangible properties, subject to certain exclusions, are currently subject to:





•
the lien of a Mortgage and Deed of Trust (the Mortgage) dated November 1, 1944, as supplemented; and





•
the lien of a General Mortgage (the General Mortgage) dated October 10, 2002, as supplemented, which is junior to the lien of the Mortgage.





As of December 31, 2010, we had approximately $2.5 billion aggregate principal amount of general mortgage bonds outstanding under the General Mortgage, including approximately $527 million held in trust to secure pollution control bonds for which CenterPoint Energy is obligated and approximately $229 million held in trust to secure pollution control bonds for which we are obligated. Additionally, we had approximately $253 million aggregate principal amount of first mortgage bonds outstanding under the Mortgage, including approximately $151 million held in trust to secure certain pollution control bonds for which CenterPoint Energy is obligated. We may issue additional general mortgage bonds on the basis of retired bonds, 70% of property additions or cash deposited with the trustee. Approximately $2.3 billion of additional first mortgage bonds and general mortgage bonds in the aggregate could be issued on the basis of retired bonds and 70% of property additions as of December 31, 2010. However, we have contractually agreed that we will not issue additional first mortgage bonds, subject to certain exceptions.





Electric Lines — Overhead.  As of December 31, 2010, we owned 27,842 pole miles of overhead distribution lines and 3,728 circuit miles of overhead transmission lines, including 422 circuit miles operated at 69,000 volts, 2,090 circuit miles operated at 138,000 volts and 1,216 circuit miles operated at 345,000 volts.





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Electric Lines — Underground.  As of December 31, 2010, we owned 20,390 circuit miles of underground distribution lines and 26 circuit miles of underground transmission lines, including 2 circuit miles operated at 69,000 volts and 24 circuit miles operated at 138,000 volts.





Substations.  As of December 31, 2010, we owned 233 major substation sites having a total installed rated transformer capacity of 52,938 megavolt amperes.





Service Centers.  We operate 14 regional service centers located on a total of 291 acres of land. These service centers consist of office buildings, warehouses and repair facilities that are used in the business of transmitting and distributing electricity.





Franchises





We hold non-exclusive franchises from the incorporated municipalities in our service territory. In exchange for the payment of fees, these franchises give us the right to use the streets and public rights-of way of these municipalities to construct, operate and maintain our transmission and distribution system and to use that system to conduct our electric delivery business and for other purposes that the franchises permit. The terms of the franchises, with various expiration dates, typically range from 30 to 50 years.





REGULATION





We are subject to regulation by various federal, state and local governmental agencies, including the regulations described below.





Federal Energy Regulatory Commission




We are not a “public utility” under the Federal Power Act and, therefore, are not generally regulated by the FERC, although certain of our transactions are subject to limited FERC jurisdiction. The Energy Act conferred new jurisdiction and responsibilities on the FERC with respect to ensuring the reliability of electric transmission service, including transmission facilities owned by us and other utilities within ERCOT. Under this authority, the FERC has designated the NERC as the Electric Reliability Organization (ERO) to promulgate standards, under FERC oversight, for all owners, operators and users of the bulk power system (Electric Entities). The ERO and the FERC have authority to (a) impose fines and other sanctions on Electric Entities that fail to comply with approved standards and (b) audit compliance with approved standards. The FERC has approved the delegation by the NERC of authority for reliability in ERCOT to the TRE. We do not anticipate that the reliability standards proposed by the NERC and approved by the FERC will have a material adverse impact on our operations. To the extent that we are required to make additional expenditures to comply with these standards, it is anticipated that we will seek to recover those costs through the transmission charges that are imposed on all distribution service providers within ERCOT for electric transmission provided.





As a public utility holding company, under the Public Utility Holding Company Act of 2005, CenterPoint Energy  and its subsidiaries, including us, are subject to reporting and accounting requirements and are required to maintain certain books and records and make them available for review by the FERC and state regulatory authorities in certain circumstances.





State and Local Regulation





We conduct our operations pursuant to a certificate of convenience and necessity issued by the Texas Utility Commission that covers our present service area and facilities. The Texas Utility Commission and those municipalities that have retained original jurisdiction have the authority to set the rates and terms of service provided by us under cost of service rate regulation.





Our distribution rates charged to REPs for residential customers are primarily based on amounts of energy delivered, whereas distribution rates for a majority of commercial and industrial customers are primarily based on peak demand. All REPs in our service area pay the same rates and other charges for transmission and distribution





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 services. This regulated delivery charge includes the transmission and distribution rate (which includes municipal franchise fees), a system benefit fund fee imposed by the Texas electric restructuring law, a nuclear decommissioning charge associated with decommissioning the South Texas nuclear generating facility, an energy efficiency cost recovery charge, a surcharge related to the implementation of AMS and charges associated with securitization of regulatory assets, stranded costs and restoration costs relating to Hurricane Ike. Transmission rates charged to other distribution companies are based on amounts of energy transmitted under “postage stamp” rates that do not vary with the distance the energy is being transmitted. All distribution companies in ERCOT pay us the same rates and other charges for transmission services.





Recovery of True-Up Balance.  For a discussion of our true-up proceedings, see “— Our Business — Electric Transmission & Distribution — Recovery of True-Up Balance” above.





2010 Rate Proceeding.  As required under the final order in our 2006 rate proceeding, in June 2010 we filed an application to change rates with the Texas Utility Commission and the cities in our service area, including cost data and other information supporting an annual increase of $106 million for delivery charges to the REPs that sell electricity to end-use customers in our service territory that was offset by a reduction of other utility revenues, resulting in a $92 million requested annual revenue increase. The rate filing package also supported an annual increase of $18 million for wholesale transmission customers.





In the filing, we also requested reconciliation of our AMS costs incurred as of March 31, 2010, and revision of the estimated costs to complete the AMS project in order to reflect $150 million in funds from the $200 million DOE stimulus grant awarded to us and updated cost information. The reconciliation plan also requested that the duration of the residential AMS surcharge be shortened by six years from the original 12-year plan.





In our rate filing we sought a return on equity of 11.25% and proposed that rates be based on a capital structure of 50% equity and 50% long-term debt.





Hearings concerning the rate filing concluded in October 2010, and a Proposal for Decision was issued by the presiding Administrative Law Judges.  On February 3, 2011, the Texas Utility Commission voted on the various contested issues presented by the rate filing.  The Texas Utility Commission has not yet issued a formal order implementing its decisions, and the order, once issued, will be subject to revision based on motions for rehearing by the parties to the proceeding and could be appealed to the Texas courts.





Based on the public deliberations and votes by the Commissioners, we anticipate that the order of the Texas Utility Commission will provide for a base rate increase of approximately $14.7 million per year for delivery charges to the REPs and a decrease to charges to wholesale transmission customers of $12.3 million per year.  Further, the order is expected to provide a mechanism to track amounts for uncertain tax positions and provide for ultimate recovery of those costs.





The order is expected to be based on an authorized return on equity of 10%, a cost of debt of ­6.74­%, a capital structure comprised of 55% debt and 45% common equity, and an overall rate of return of 8.21%.  The decision also will implement our request to reconcile costs incurred for the AMS project and to shorten the period for collecting the AMS surcharge from twelve to six years for residential customers in order to reflect the funds received from the DOE.





Based on our understanding of the Texas Utility Commission’s votes, we anticipate that annual operating income will be reduced by approximately $30 million from 2010 levels as a result of the Texas Utility Commission’s decision. We expect that revised rates based on the Texas Utility Commission’s decision will be implemented during the second quarter of 2011.





Other Rate Proceedings.In May 2009, we filed an application at the Texas Utility Commission seeking approval of certain estimated 2010 energy efficiency program costs, an energy efficiency performance bonus for 2008 programs, and carrying costs totaling approximately $10 million. The application sought to begin recovery of these costs through a surcharge effective July 1, 2010. In October 2009, the Texas Utility Commission issued its order approving recovery of the 2010 energy efficiency program costs and a partial performance bonus of approximately $8 million, plus carrying costs, but disallowed a recovery of a performance bonus of $2 million on approximately





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 $10 million in 2008 energy efficiency costs expended pursuant to the terms of a settlement agreement in a prior rate case.  We began collecting the approved amounts in July 2010. We appealed the denial of the full 2008 performance bonus to the 98th district court in Travis County, Texas. In October 2010, the district court upheld the Texas Utility Commission’s decision. In February 2011, we appealed the district court’s judgment to the Texas 3rd Court of Appeals at Austin, Texas, where the case remains pending.





In April 2010, we filed an application with the Texas Utility Commission seeking approval of certain estimated 2011 energy efficiency programs, an energy efficiency performance bonus for 2009 programs, and recovery of revenue losses related to the implementation of the 2009 energy efficiency program totaling approximately $14.4 million. The application sought to begin recovery of these costs through a surcharge beginning in January 2011.  In November 2010, the Texas Utility Commission issued its order approving recovery of the 2011 energy efficiency program costs and a partial performance bonus of approximately $11 million, but disallowed a recovery of a performance bonus of $2 million on the 2009 energy efficiency costs expended pursuant to the terms of the settlement agreement referenced above. The Texas Utility Commission further concluded that it does not have statutory authority to permit recovery of the approximately $1.4 million in lost revenue associated with 2009 energy efficiency programs. We began collecting the approved amounts in January 2011, but have appealed the denial of the full 2009 performance bonus and lost revenue to the 201st district court in Travis County, Texas, where the case remains pending.





Rulemaking Proceedings.In January 2010, the Texas Utility Commission published proposed amendments to its energy efficiency rule.  During the statutory comment period, we urged, as part of the rule amendments, the adoption of a lost revenue recovery mechanism to keep whole the utilities participating in the required energy efficiency programs.  In July 2010, the Texas Utility Commission adopted amendments to its energy efficiency program rules, but concluded it did not have the statutory authority to permit recovery of lost revenue associated with energy efficiency programs.  We have appealed the rule to the Texas 3rd Court of Appeals at Austin, Texas on the basis that it is invalid as amended because it does not permit lost revenue recovery.





In October 2010, amended rules of the Texas Utility Commission relating to the Transmission Cost Recovery Factor (TCRF) became effective.  The amended rules permit a distribution service provider (DSP) such as us to defer for future recovery increases in transmission costs that are charged to the DSP by transmission service providers (TSPs) during the interim period before the DSP is authorized to request an adjustment to its TCRF.  The TCRF permits a DSP to recover from REPs approved changes in transmission charges from TSPs, but the TCRF can be changed by the DSP only twice per year on application to the Texas Utility Commission.  The revised rules permit DSPs to obtain full recovery of the increased transmission charges.





ENVIRONMENTAL MATTERS




Our operations are subject to stringent and complex laws and regulations pertaining to health, safety and the environment. As an owner or operator of electric transmission and distribution systems, we must comply with these laws and regulations at the federal, state and local levels. These laws and regulations can restrict or impact our business activities in many ways, such as:





•
restricting the way we can handle or dispose of wastes;





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limiting or prohibiting construction activities in sensitive areas such as wetlands, coastal regions or areas inhabited by endangered species;





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requiring remedial action to mitigate environmental conditions caused by our operations or attributable to former operations; and





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enjoining the operations of facilities deemed in non-compliance with permits issued pursuant to such environmental laws and regulations.





In order to comply with these requirements, we may need to spend substantial amounts and devote other resources from time to time to:





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•
construct or acquire new equipment;





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acquire permits for facility operations;





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modify or replace existing and proposed equipment; and





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clean up or decommission waste disposal areas, fuel storage and management facilities and other locations and facilities.





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





The trend in environmental regulation is to place more restrictions and limitations on activities that may affect the environment, and thus there can be no assurance as to the amount or timing of future expenditures for environmental compliance or remediation, and actual future expenditures may be different from the amounts we currently anticipate. We try to anticipate future regulatory requirements that might be imposed and plan accordingly to remain in compliance with changing environmental laws and regulations and to minimize the costs of such compliance.





Based on current regulatory requirements and interpretations, we do not believe that compliance with federal, state or local environmental laws and regulations will have a material adverse effect on our business, financial position, results of operations or cash flows. In addition, we believe that our current environmental remediation activities will not materially interrupt or diminish our operational ability. We cannot assure you, however, that future events, such as changes in existing laws, the promulgation of new laws, or the development or discovery of new facts or conditions will not cause us to incur significant costs. The following is a discussion of all material environmental and safety laws and regulations that relate to our operations. We believe that we are in substantial compliance with all of these environmental laws and regulations.





Global Climate Change





In recent years, there has been increasing public debate regarding the potential impact on global climate change by various “greenhouse gases” (GHGs) such as carbon dioxide, a byproduct of burning fossil fuels, and methane. Legislation to regulate emissions of GHGs has been introduced in Congress, and there has been a wide-ranging policy debate, both nationally and internationally, regarding the impact of these gases and possible means for their regulation. Some of the proposals would require industrial sources to meet stringent new standards that would require substantial reductions in carbon emissions.  These regulations could be costly and difficult to implement. In addition, efforts have been made and continue to be made in the international community toward the adoption of international treaties or protocols that would address global climate change issues, such as the United Nations Climate Change Conference in Copenhagen in 2009.  Also, the U.S. Environmental Protection Agency (EPA) has undertaken new efforts to collect information regarding GHG emissions and their effects. Following a finding by the EPA that certain GHGs represent an endangerment to human health, the EPA proposed to expand its regulations relating to those emissions and has adopted rules imposing permitting and reporting obligations that we expect to be applicable to certain aspects of our operations.  Specifically, the EPA adopted a final rule to address permitting of methane and other  GHG emissions from stationary sources under the Clean Air Act's Prevention of Significant Deterioration and Title V programs.  Additionally, the EPA has issued the“Mandatory Reporting of Greenhouse Gases Rule,” which establishes a new comprehensive scheme for reporting GHG emissions. In late 2010, the EPA finalized new GHG reporting requirements for upstream petroleum and natural gas systems, which will be added to EPA's GHG Reporting Rule, and will require facilities containing petroleum and natural gas systems that emit 25,000 metric tons or more of CO2 equivalent per year to report annual GHG emissions, with the first report due on March 31, 2012.  These permitting and reporting requirements could lead to further regulation of GHGs by the EPA.





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It is too early to determine whether, or in what form, further regulatory action regarding GHG emissions will be adopted or what specific impacts a new regulatory action might have on us. Although it now appears unlikely that new legislation regarding GHGs will  be adopted in the near term, action by the EPA to impose new regulations and standards regarding GHG emissions is underway and appears likely to result in new standards and regulatory requirements.  Our electric transmission and distribution business, in contrast to some electric utilities, does not generate electricity and thus is not directly exposed to the risk of high capital costs and regulatory uncertainties that face electric utilities that burn fossil fuels to generate electricity.  Nevertheless, our revenues could be adversely affected to the extent any resulting regulatory action has the effect of reducing consumption of electricity by ultimate consumers within our service territory. Likewise, incentives to conserve energy or use other energy sources could result in a decrease in demand for our services.  At this point in time, however, it would be speculative to try to quantify the magnitude of the impacts from possible new regulatory actions related to GHG emissions, either positive or negative, on our business.





To the extent climate changes occur, our business may be adversely impacted, though we believe any such impacts are likely to occur very gradually and hence would be difficult to quantify with specificity.  Warmer temperatures in our service territory may increase our revenues from transmission and distribution through increased demand for electricity for cooling.  Another possible climate change is more frequent and more severe weather events, such as hurricanes or tornadoes.  Since many of our facilities are located along or near the Gulf Coast, increased or more severe hurricanes or tornadoes can increase our costs to repair damaged facilities and restore service to our customers.  When we cannot deliver electricity to customers or our customers cannot receive our services, our financial results can be impacted by lost revenues, and we generally must seek approval from regulators to recover restoration costs.  To the extent we are unable to recover those costs, or if higher rates resulting from our recovery of such costs result in reduced demand for our services, our future financial results may be adversely impacted.





Air Emissions





Our operations are subject to the federal Clean Air Act and comparable state laws and regulations. These laws and regulations regulate emissions of air pollutants from various industrial sources, and also impose various monitoring and reporting requirements. Such laws and regulations may require that we obtain pre-approval for the construction or modification of certain projects or facilities expected to produce air emissions or result in the increase of existing air emissions, obtain and strictly comply with air permits containing various emissions and operational limitations, or utilize specific emission control technologies to limit emissions. Our failure to comply with these requirements could subject us to monetary penalties, injunctions, conditions or restrictions on operations, and potentially criminal enforcement actions. We may be required to incur certain capital expenditures in the future for air pollution control equipment in connection with obtaining and maintaining operating permits and approvals for air emissions.  We believe, however, that our operations will not be materially adversely affected by such requirements.





Water Discharges





Our operations are subject to the Federal Water Pollution Control Act of 1972, as amended, also known as the Clean Water Act, and analogous state laws and regulations. These laws and regulations impose detailed requirements and strict controls regarding the discharge of pollutants into waters of the United States. The unpermitted discharge of pollutants, including discharges resulting from a spill or leak incident, is prohibited. The Clean Water Act and regulations implemented thereunder also prohibit discharges of dredged and fill material in wetlands and other waters of the United States unless authorized by an appropriately issued permit. Any unpermitted release of petroleum or other pollutants from our facilities could result in fines or penalties as well as significant remedial obligations.





Hazardous Waste





Our operations generate wastes, including some hazardous wastes, that are subject to the federal Resource Conservation and Recovery Act (RCRA), and comparable state laws, which impose detailed requirements for the handling, storage, treatment and disposal of hazardous and solid waste. Ordinary industrial wastes such as paint wastes, waste solvents, laboratory wastes and waste compressor oils may be regulated as hazardous waste.


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Liability for Remediation





The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA), also known as “Superfund,” and comparable state laws impose liability, without regard to fault or the legality of the original conduct, on certain classes of persons responsible for the release of hazardous substances into the environment. Such classes of persons include the current and past owners or operators of sites where a hazardous substance was released and companies that disposed or arranged for the disposal of hazardous substances at offsite locations such as landfills. In the course of our ordinary operations we generate wastes that may fall within the definition of a “hazardous substance.” CERCLA authorizes the EPA and, in some cases, third parties to take action in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. Under CERCLA, we could be subject to joint and several liability for the costs of cleaning up and restoring sites where hazardous substances have been released, for damages to natural resources, and for the costs of certain health studies.





Liability for Preexisting Conditions




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





Other Environmental. From time to time we have received notices from regulatory authorities or others regarding our status as a potentially responsible party in connection with sites found to require remediation due to the presence of environmental contaminants. In addition, we have 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, we do not expect, based on our experience to date, these matters, either individually or in the aggregate, to have a material adverse effect on our financial condition, results of operations or cash flows.





EMPLOYEES




As of December 31, 2010, we had 2,813 full-time employees, of which approximately 45% are subject to a collective bargaining agreement.





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Item 1A.Risk Factors





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




Risk Factors Affecting Our Business





Following the exhaustion of all judicial appeals in our true-up proceeding, we may lose certain tax benefits and/or may not recover the full amount of our true-up request.  Such a result could have an adverse impact on our results of operations, financial condition and cash flows.





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





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





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





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reversed the Texas Utility Commission’s ruling that precluded us from recovering the interest component of the EMCs paid to REPs; and





•
affirmed the True-Up Order in all other respects.





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





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





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





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reversed the district court’s judgment to the extent it upheld the Texas Utility Commission’s decision to allow us to recover EMCs paid to RRI;





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ordered that the tax normalization issue described below be remanded to the Texas Utility Commission as requested by the Texas Utility Commission; and





•
affirmed the district court’s judgment in all other respects.





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





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





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





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.





To reflect the impact of the True-Up Order, in 2004 and 2005, we recorded a net after-tax extraordinary loss of $947 million. No amounts related to the district court’s judgment or the decision of the court of appeals have been recorded in our consolidated financial statements. However, if the court of appeals decision is not reversed or modified as a result of further review by the Texas Supreme Court, we anticipate that we would be required to record an additional loss to reflect the court of appeals decision. The amount of that loss would depend on several factors, including ultimate resolution of the tax normalization issue described below, but could range from $190 million to $440 million (pre-tax) plus interest subsequent to December 31, 2010.





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





If the Texas Utility Commission’s order relating to the ADITC reduction is not reversed or otherwise modified on remand so as to eliminate the normalization violation, the IRS could require CenterPoint Energy to pay an amount equal to our unamortized ADITC balance as of the date that the normalization violation is deemed to have occurred. In addition, the IRS could deny us the ability to elect accelerated tax depreciation benefits beginning in the taxable year that the normalization violation is deemed to have occurred. Such treatment, if required by the IRS, could have a material adverse impact on our results of operations, financial condition and cash flows in addition to any potential loss resulting from final resolution of the True-Up Order. Following the adoption by the IRS of the final regulations described above, the Texas Utility Commission requested, and the court of appeals ordered, that this issue be remanded to that commission for further consideration. 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. We and CenterPoint Energy will continue to pursue a favorable resolution of this issue through the appellate and administrative process. Although the Texas Utility Commission has requested that this issue be remanded to it by the courts and 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.





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





Our receivables from the distribution of electricity are collected from REPs that supply the electricity we distribute to their customers. As of December 31, 2010, we did business with 99 REPs. Adverse economic conditions, structural problems in the market served by ERCOT or financial difficulties of one or more REPs could impair the ability of these REPs to pay for our services or could cause them to delay such payments. We depend on these REPs to remit payments on a timely basis. Applicable regulatory provisions require that customers be shifted to a provider of last resort if a REP cannot make timely payments. Applicable Texas Utility Commission regulations significantly limit the extent to which we can apply normal commercial terms or otherwise seek credit protection





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 from firms desiring to provide retail electric service in our service territory, and thus we remain at risk for payments not made prior to the shift to the provider of last resort. The Texas Utility Commission revised its regulations in 2009 to (i) increase the financial qualifications from REPs that began selling power after January 1, 2009, and (ii) authorize utilities to defer bad debts resulting from defaults by REPs for recovery in a future rate case. A subsidiary of NRG Energy, Inc., NRG Retail, (which acquired the Texas retail business of RRI) and its subsidiaries are together considered the largest REP in our service territory. Approximately 33% of our $138 million in billed receivables from REPs at December 31, 2010 was owed by subsidiaries of NRG Retail and approximately 13% of the $138 million in billed receivables was owed by subsidiaries of TXU Energy Retail. Any delay or default in payment by REPs could adversely affect our cash flows, financial condition and results of operations.  If a REP were unable to meet its obligations, it could consider, among various options, restructuring under the bankruptcy laws, in which event any REP might seek to avoid honoring its obligations and claims might be made by creditors involving payments we had received from such REP.





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





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





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





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





Our revenues and results of operations are seasonal.





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





Risk Factors Associated with Our Consolidated Financial Condition





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





As of December 31, 2010, we had $4.9 billion of outstanding indebtedness on a consolidated basis, which includes $2.8 billion of non-recourse transition and system restoration bonds. Our future financing activities may be significantly affected by, among other things:





•
the resolution of the true-up proceedings, including, in particular, the results of appeals to the Texas Supreme Court regarding rulings obtained to date;




•
general economic and capital market conditions;




•
credit availability from financial institutions and other lenders;




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




•
maintenance of acceptable credit ratings by us and CenterPoint Energy;




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•
market expectations regarding our future earnings and cash flows;




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




•
our exposure to GenOn in connection with its indemnification obligations arising in connection with its separation from CenterPoint Energy; and




•
provisions of relevant tax and securities laws.




As of December 31, 2010, we had approximately $2.5 billion aggregate principal amount of general mortgage bonds outstanding under the General Mortgage, including approximately $527 million held in trust to secure pollution control bonds for which CenterPoint Energy is obligated and approximately $229 million held in trust to secure pollution control bonds for which we are obligated. Additionally, we had approximately $253 million aggregate principal amount of first mortgage bonds outstanding under the Mortgage, including approximately $151 million held in trust to secure certain pollution control bonds for which CenterPoint Energy is obligated. We may issue additional general mortgage bonds on the basis of retired bonds, 70% of property additions or cash deposited with the trustee. Approximately $2.3 billion of additional first mortgage bonds and general mortgage bonds in the aggregate could be issued on the basis of retired bonds and 70% of property additions as of December 31, 2010. However, we have contractually agreed that we will not issue additional first mortgage bonds, subject to certain exceptions.





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





The creditworthiness and liquidity of our parent company and our affiliates could affect our creditworthiness and liquidity.





Our credit ratings and liquidity may be impacted by the creditworthiness and liquidity of our affiliates.  As of December 31, 2010, CenterPoint Energy and its subsidiaries other than us have approximately $567 million principal amount of debt required to be paid through 2013.  This amount excludes (i) $550 million principal amount of CenterPoint Energy Resources Corp. (CERC Corp.) senior notes that were repaid at their maturity in February 2011 with proceeds from the issuance in January 2011 of $550 million principal amount of CERC Corp. senior notes maturing subsequent to 2013, (ii) $397 million principal amount of CERC Corp. 7.875% senior notes due 2013 that were exchanged in January 2011 for CERC Corp. senior notes maturing subsequent to 2013 and (iii) principal repayments of approximately $920 million on transition and system restoration bonds, for which a dedicated revenue stream exists. If CenterPoint Energy were to experience a deterioration in its creditworthiness or liquidity, our creditworthiness, liquidity and the repayment of notes receivable from CenterPoint Energy in the amount of $750 million as of December 31, 2010 could be adversely affected.  In addition, from time to time we and other affiliates invest or borrow funds in the money pool maintained by CenterPoint Energy.  If CenterPoint Energy or the affiliates that borrow our invested funds were to experience a deterioration in their creditworthiness or liquidity, our creditworthiness, liquidity and the repayment of notes receivable from CenterPoint Energy and our affiliates under the money pool could be adversely impacted.  As of December 31, 2010, we had invested $899 million in the CenterPoint Energy money pool.





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





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





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•
our payment of dividends;




•
decisions on our financings and our capital raising activities;




•
mergers or other business combinations; and




•
our acquisition or disposition of assets.




Other than the financial covenant contained in our credit facility (described under “Liquidity and Capital Resources” in Item 7 of this report), which could have the practical effect of limiting the payment of dividends under certain circumstances, there are no contractual restrictions on our ability to pay dividends to CenterPoint Energy. Our management could decide to increase our dividends to CenterPoint Energy to support its cash needs. This could adversely affect our liquidity. However, under our credit facility, our ability to pay dividends is restricted by a covenant that debt, excluding transition and system restoration bonds, as a percentage of total capitalization may not exceed 65%.





Other Risks





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





Our operations are subject to stringent and complex laws and regulations pertaining to health, safety and the environment. As an owner or operator of electric transmission and distribution systems, we must comply with these laws and regulations at the federal, state and local levels. These laws and regulations can restrict or impact our business activities in many ways, such as:





•
restricting the way we can handle or dispose of wastes;




•
limiting or prohibiting construction activities in sensitive areas such as wetlands, coastal regions, or areas inhabited by endangered species;




•
requiring remedial action to mitigate environmental conditions caused by our operations, or attributable to former operations; and




•
enjoining the operations of facilities deemed in non-compliance with permits issued pursuant to such environmental laws and regulations.




In order to comply with these requirements, we may need to spend substantial amounts and devote other resources from time to time to:





•
construct or acquire new equipment;




•
acquire permits for facility operations;




•
modify or replace existing and proposed equipment; and




•
clean up or decommission waste disposal areas, fuel storage and management facilities and other locations and facilities.




Failure to comply with these laws and regulations may trigger a variety of administrative, civil and criminal enforcement measures, including the assessment of monetary penalties, the imposition of remedial actions, and the issuance of orders enjoining future operations. Certain environmental statutes impose strict, joint and several liability for costs required to clean up and restore sites where hazardous substances have been disposed or otherwise released. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for





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 personal injury and property damage allegedly caused by the release of hazardous substances or other waste products into the environment.





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





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





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





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





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





•
merchant energy, energy trading and REP businesses transferred to RRI or its subsidiaries in connection with the organization and capitalization of RRI prior to its initial public offering in 2001; and




•
Texas electric generating facilities transferred to Texas Genco Holdings, Inc. (Texas Genco) in 2004 and early 2005.




In connection with the organization and capitalization of RRI, that company and its subsidiaries assumed liabilities associated with various assets and businesses Reliant Energy transferred to them. RRI also agreed to indemnify, and cause the applicable transferee subsidiaries to indemnify, CenterPoint Energy and its subsidiaries, including us, with respect to liabilities associated with the transferred assets and businesses. These indemnity provisions were intended to place sole financial responsibility on RRI and its subsidiaries for all liabilities associated with the current and historical businesses and operations of RRI, regardless of the time those liabilities arose. If GenOn were unable to satisfy a liability that has been so assumed in circumstances in which Reliant Energy and its subsidiaries were not released from the liability in connection with the transfer, we and CenterPoint Energy could be responsible for satisfying the liability.





In May 2009, RRI sold its Texas retail business to NRG Retail, a subsidiary of NRG Energy, Inc. In December 2010, Mirant Corporation merged with and became a wholly owned subsidiary of RRI (then known as RRI Energy, Inc.) and RRI changed its name from RRI Energy, Inc. to GenOn Energy, Inc. Neither the sale of the retail business nor the merger with Mirant Corporation alters GenOn’s contractual obligations to indemnify us and our subsidiaries, including CenterPoint Houston, for certain liabilities, including their indemnification obligations regarding certain litigation, nor does it affect the terms of existing guaranty arrangements for certain GenOn gas transportation contracts.





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





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





In connection with the organization and capitalization of Texas Genco, Reliant Energy and Texas Genco entered into a separation agreement in which Texas Genco assumed liabilities associated with the electric generation assets Reliant Energy transferred to it. Texas Genco also agreed to indemnify, and cause the applicable transferee subsidiaries to indemnify, CenterPoint Energy and its subsidiaries, including us, with respect to liabilities associated with the transferred assets and businesses. In many cases the liabilities assumed were obligations of ours, and we were not released by third parties from these liabilities. The indemnity provisions were intended generally to place sole financial responsibility on Texas Genco and its subsidiaries for all liabilities associated with the current and historical businesses and operations of Texas Genco, regardless of the time those liabilities arose. If Texas Genco were unable to satisfy a liability that had been so assumed or indemnified against, and provided CenterPoint Energy or Reliant Energy had not been released from the liability in connection with the transfer, we could be responsible for satisfying the liability.





In connection with CenterPoint Energy’s sale of Texas Genco to a third party, the separation agreement was amended to provide that Texas Genco would no longer be liable for, and CenterPoint Energy would assume and agree to indemnify Texas Genco against, liabilities that Texas Genco originally assumed in connection with its organization to the extent, and only to the extent, that such liabilities are covered by certain insurance policies held by CenterPoint Energy. Texas Genco and its related businesses now operate as subsidiaries of NRG Energy, Inc.





CenterPoint Energy or its subsidiaries, including us, have been named, along with numerous others, as a defendant in lawsuits filed by a number of individuals who claim injury due to exposure to asbestos. Some of the claimants have worked at locations owned by CenterPoint Energy or us, but most existing claims relate to facilities previously owned by CenterPoint Energy’s other subsidiaries or us, but currently owned by NRG Texas LP. We anticipate that additional claims like those received may be asserted in the future. Under the terms of the arrangements regarding separation of the generating business from CenterPoint Energy and its sale to NRG Texas LP, ultimate financial responsibility for uninsured losses from claims relating to the generating business has been assumed by NRG Texas LP, but CenterPoint Energy has agreed to continue to defend such claims to the extent they are covered by insurance maintained by CenterPoint Energy, subject to reimbursement of the costs of such defense by NRG Texas LP.





The unsettled conditions in the global financial system may have impacts on our business, liquidity and financial condition that we currently cannot predict.





The continued unsettled conditions in the global financial system may have an impact on our business, liquidity and financial condition. Our ability to access the capital markets may be severely restricted at a time when we would like, or need, to access those markets, which could have an impact on our liquidity and flexibility to react to changing economic and business conditions. In addition, the cost of debt financing may be materially adversely impacted by these market conditions. Defaults of lenders in our credit facilities, should they further occur, could adversely affect our liquidity. Capital market turmoil was reflected in significant reductions in equity market valuations in 2008, which significantly reduced the value of assets of CenterPoint Energy’s pension plan, in which we participate. These reductions increased pension cost in 2009.





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


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Climate change legislation and regulatory initiatives could result in increased operating costs and reduced demand for our services.





Legislation to regulate emissions of GHGs has been introduced in Congress, and there has been a wide-ranging policy debate, both nationally and internationally, regarding the impact of these gases and possible means for their regulation.  In addition, efforts have been made and continue to be made in the international community toward the adoption of international treaties or protocols that would address global climate change issues, such as the United Nations Climate Change Conference in Copenhagen in 2009. Also, the EPA has undertaken new efforts to collect information regarding GHG emissions and their effects. Following a finding by the EPA that certain GHGs represent an endangerment to human health, the EPA proposed to expand its regulations relating to those emissions and has adopted rules imposing permitting and reporting obligations that we expect to be applicable to certain of our operations. The results of the permitting and reporting requirements could lead to further regulation of these GHGs by the EPA  It is too early to determine whether, or in what form, further regulatory action regarding GHG emissions will be adopted or what specific impacts a new regulatory action might have on us and our subsidiaries. Action by the EPA to impose new regulations and standards regarding GHG emissions is underway and appears likely to result in new standards and regulatory requirements.  Our electric transmission and distribution business, in contrast to some electric utilities, does not generate electricity and thus is not directly exposed to the risk of high capital costs and regulatory uncertainties that face electric utilities that burn fossil fuels to generate electricity.  Nevertheless, our revenues could be adversely affected to the extent any resulting regulatory action has the effect of reducing consumption of electricity by ultimate consumers within our service territory. Likewise, incentives to conserve energy or use other energy sources could result in a decrease in demand for our services.





Climate changes could result in more frequent severe weather events which could affect the results of operations of our business.





To the extent climate changes occur, our businesses may be adversely impacted, though we believe any such impacts are likely to occur very gradually and hence would be difficult to quantify with specificity.  A possible climate change is more frequent and more severe weather events, such as hurricanes or tornadoes.  Since our facilities are located along or near the Gulf Coast, increased or more severe hurricanes or tornadoes can increase our costs to repair damaged facilities and restore service to our customers.  When we cannot deliver electricity to customers or our customers cannot receive our services, our financial results can be impacted by lost revenues, and we generally must seek approval from regulators to recover restoration costs.  To the extent we are unable to recover those costs, or if higher rates resulting from our recovery of such costs result in reduced demand for our services, our future financial results may be adversely impacted.





Item 1B. Unresolved Staff Comments




Not applicable.





Item 2. Properties




Character of Ownership




We own in fee or lease our principal properties. Most of our electric lines are located, pursuant to easements and other rights, on public roads or on land owned by others. For information regarding our properties, please read “Business — Electric Transmission & Distribution — Properties” in Item 1 of this report, which information is incorporated herein by reference.





Item 3. Legal Proceedings




For a discussion of material legal and regulatory proceedings affecting us, please read “Regulation” and “Environmental Matters” in Item 1 of this report and Notes 4 and 10(b) to our consolidated financial statements, which information is incorporated herein by reference.





Item 4. Removed and Reserved




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PART II





Item 5.Market for Registrant’s Common Equity, Related Stockholder Mattersand Issuer Purchases of Equity Securities




All of our 1,000 outstanding common shares are held by Utility Holding, LLC, a wholly owned subsidiary of CenterPoint Energy.





In 2008, 2009 and 2010, we paid dividends on our common shares of $640 million, $-0- and $-0-, respectively, to Utility Holding, LLC.





Our revolving credit facility limits our debt (excluding transition and system restoration bonds) as a percentage of total capitalization to 65%.  This covenant could restrict our ability to distribute dividends.





Item 6.Selected Financial Data




The information called for by Item 6 is omitted pursuant to Instruction I(2) to Form 10-K (Omission of Information by Certain Wholly Owned Subsidiaries).





Item 7. Management’s Narrative Analysis of Results of Operations





The following narrative analysis should be read in combination with our consolidated financial statements and notes contained in Item 8 of this report.




OVERVIEW





We provide electric transmission and distribution services to retail electric providers (REPs) serving approximately 2.1 million metered customers in a 5,000-square mile area of the Texas Gulf Coast that has a population of approximately 5.9 million people and includes the city of Houston.





On behalf of REPs, we deliver electricity from power plants to substations, from one substation to another and to retail electric customers in locations throughout our certificated service territory. The Electric Reliability Council of Texas, Inc. (ERCOT) serves as the regional reliability coordinating council for member electric power systems in Texas. ERCOT membership is open to consumer groups, investor and municipally-owned electric utilities, rural electric cooperatives, independent generators, power marketers and REPs. The ERCOT market represents approximately 85% of the demand for power in Texas and is one of the nation’s largest power markets. Transmission and distribution services are provided under tariffs approved by the Public Utility Commission of Texas (Texas Utility Commission).





EXECUTIVE SUMMARY





Factors Influencing Our Business




We are an electric transmission and distribution company. The majority of our revenues are generated from the transportation and delivery of electricity. We do not own or operate electric generating facilities or make retail sales to end-use electric customers. To assess our financial performance, our management primarily monitors our operating income and cash flows. Within these broader financial measures, we monitor margins, operation and maintenance expense, interest expense, capital spending and working capital requirements. In addition to these financial measures we also monitor a number of variables that management considers important to the operation of our business, including the number of customers, throughput, use per customer, and heating and cooling degree days. We also monitor system reliability, safety factors and customer satisfaction to gauge our performance.





To the extent adverse economic conditions affect our suppliers and customers, our business results may suffer.  Reduced demand and lower energy prices could lead to financial pressure on some of our customers who operate within the energy industry. Also, adverse economic conditions, coupled with concerns for protecting the environment, may cause consumers to use less energy or avoid expansions of their facilities, resulting in less demand for our services.




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Performance of our business is significantly influenced by the number of customers and energy usage per customer. Weather conditions can have a significant impact on energy usage, and we compare our results on a weather adjusted basis. During 2009 and continuing into 2010, we saw evidence that customers are seeking to reduce their energy consumption, particularly during periods of high energy prices or in times of economic distress.  That conservation can have adverse effects on our results. In our service area, we have benefited from customer growth that tends to mitigate the effects of reduced consumption.  We anticipate that this growth will continue despite recent economic downturns, though that growth may be lower than we have recently experienced.  In addition, the profitability of our business is influenced significantly by the regulatory treatment we receive from the various state and local regulators who set our electric distribution rates.





The nature of our business requires significant amounts of capital investment, and we rely on internally generated cash, borrowings under our credit facility, and issuances of debt in the capital markets to satisfy these capital needs. We strive to maintain investment grade ratings for our securities in order to access the capital markets on terms we consider reasonable. Our goal is to improve our credit ratings over time. A reduction in our ratings generally would increase our borrowing costs for new issuances of debt, as well as borrowing costs under our existing revolving credit facility. Disruptions in the financial markets, such as occurred in the last half of 2008 and continued during 2009, can also affect the availability of new capital on terms we consider attractive. In those circumstances, companies like us may not be able to obtain certain types of external financing or may be required to accept terms less favorable than they would otherwise accept. For that reason, we seek to maintain adequate liquidity for our business through the existing credit facility and prudent refinancing of existing debt.





As it did with many businesses, the sharp decline in stock market values during the latter part of 2008 had a significant adverse impact on the value of CenterPoint Energy’s pension plan assets.  Consistent with the regulatory treatment of such costs, we can defer the amount of pension expense that differs from the level of pension expense included in our base rates.





Significant Events





Advanced Metering System and Distribution Grid Automation (Intelligent Grid)





In October 2009, the U.S. Department of Energy (DOE) notified us that we had been selected for a $200 million grant for our advanced metering system (AMS) and intelligent grid (IG) projects.  In March 2010, we and the DOE completed negotiations and finalized the agreement. Under the terms of the agreement, the DOE has agreed to reimburse us for 50% of our eligible costs until the total amount of the grant has been paid.  Through December 31, 2010, we have requested $100 million of grant funding from the DOE, of which $90 million had been received. We estimate that capital expenditures of approximately $645 million for the installation of the advanced meters and corresponding communication and data management systems will be incurred over the deployment period.  We are using $150 million of the grant funding to accelerate completion of our current deployment of advanced meters to 2012, instead of 2014 as originally scheduled.  We will use the other $50 million from the grant to begin deployment of an IG in a portion of our service territory over the next three years.  It is expected that the portion of the IG project subject to funding by the DOE will cost approximately $115 million.  We believe the IG has the potential to provide an improvement in grid planning, operations, maintenance and customer service for our distribution system.





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





Rate Case





As required under the final order in our 2006 rate proceeding, in June 2010 we filed an application to change rates with the Texas Utility Commission and the cities in our service area, including cost data and other information supporting an annual increase of $106 million for delivery charges to the REPs that sell electricity to end-use customers in our service territory that was offset by a reduction of other utility revenues, resulting in a $92 million requested annual revenue increase. The rate filing package also supported an annual increase of $18 million for wholesale transmission customers.





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In the filing, we also requested reconciliation of our AMS costs incurred as of March 31, 2010, and revision of the estimated costs to complete the AMS project in order to reflect $150 million in funds from the $200 million DOE stimulus grant awarded to us and updated cost information. The reconciliation plan also requested that the duration of the residential AMS surcharge be shortened by six years from the original 12-year plan.





In our rate filing we sought a return on equity of 11.25% and proposed that rates be based on a capital structure of 50% equity and 50% long-term debt.





Hearings concerning the rate filing concluded in October 2010, and a Proposal for Decision was issued by the presiding Administrative Law Judges.  On February 3, 2011, the Texas Utility Commission voted on the various contested issues presented by the rate filing.  The Texas Utility Commission has not yet issued a formal order implementing its decisions, and the order, once issued, will be subject to revision based on motions for rehearing by the parties to the proceeding and could be appealed to the Texas courts.





Based on the public deliberations and votes by the Commissioners, we anticipate that the order of the Texas Utility Commission will provide for a base rate increase of approximately $14.7 million per year for delivery charges to the REPs and a decrease to charges to wholesale transmission customers of $12.3 million per year.  Further, the order is expected to provide a mechanism to track amounts for uncertain tax positions and provide for ultimate recovery of those costs.





The order is expected to be based on an authorized return on equity of 10%, a cost of debt of ­6.74­%, a capital structure comprised of 55% debt and 45% common equity, and an overall rate of return of 8.21%.  The decision also will implement our request to reconcile costs incurred for the AMS project and to shorten the period for collecting the AMS surcharge from twelve to six years for residential customers in order to reflect the funds received from the DOE.





Based on our understanding of the Texas Utility Commission’s votes, we anticipate that annual operating income will be reduced by approximately $30 million from 2010 levels as a result of the Texas Utility Commission’s decision. We expect that revised rates based on the Texas Utility Commission’s decision will be implemented during the second quarter of 2011.





CERTAIN FACTORS AFFECTING FUTURE EARNINGS





Our past earnings and results of operations are not necessarily indicative of our future earnings and results of operations. The magnitude of our future earnings and results of our operations will depend on or be affected by numerous factors including:





•
the resolution of the true-up proceedings, including, in particular, the results of appeals to the Texas Supreme Court regarding rulings obtained to date;





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





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





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





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





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





•
weather variations and other natural phenomena;




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•
the impact of unplanned facility outages;





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





•
changes in interest rates or rates of inflation;





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





•
actions by rating agencies;





•
inability of various counterparties to meet their obligations to us;





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





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





•
the ability of REPs, including REP subsidiaries of NRG Retail LLC and REP subsidiaries of TXU Energy Retail Company LLC, which are our two largest customers, to satisfy their obligations to us and our subsidiaries;





•
the outcome of litigation brought by or against us;





•
our ability to control costs;





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





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





•
acquisition and merger activities involving us or our competitors; and





•
other factors we discuss under “Risk Factors” in Item 1A of this report and in other reports we file from time to time with the Securities and Exchange Commission.





CONSOLIDATED RESULTS OF OPERATIONS





Our results of operations are affected by seasonal fluctuations in the demand for electricity. Our results of operations are also affected by, among other things, the actions of various state and local governmental authorities having jurisdiction over rates we charge, debt service costs, income tax expense, our ability to collect receivables from REPs and our ability to recover our stranded costs and regulatory assets.





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The following table sets forth selected financial data for the years ended December 31, 2008, 2009 and 2010, followed by a discussion of our consolidated results of operations based on operating income. We have provided a reconciliation of consolidated operating income to net income below.





Year Ended December 31,2008


2009


2010(in millions,

except throughput and customer data)Revenues:Electric transmission and distribution utility

$
1,593


$
1,674


$
1,774Transition and system restoration bond companies


323



340



437Total Revenues


1,916



2,014



2,211Expenses:Operation and maintenance, excluding transition and system restoration

bond companies


703



774



841Depreciation and amortization, excluding transition and system restoration

bond companies


277



277



293Taxes other than income taxes


201



208



207Transition and system restoration bond companies


190



209



297Total Expenses


1,371



1,468



1,638Operating Income


545



546



573Interest and other finance charges


(109
)


(158
)


(149
)Interest on transition and system restoration bonds


(136
)


(131
)


(140
)Other income, net


43



53



32Income Before Income Taxes


343



310



316Income Tax Expense


(121
)


(102
)


(116
)Net Income

$
222


$
208


$
200Throughput (in gigawatt-hours (GWh)):Residential


24,258



24,815



26,554Total


74,840



74,579



76,973Number of metered customers at end of period:Residential


1,821,267



1,849,019



1,874,508Total


2,064,854



2,094,210



2,122,135





2010 Compared to 2009.We reported operating income of $573 million for 2010, consisting of $433 million from our regulated electric transmission and distribution utility operations (TDU) and $140 million related to transition and system restoration bond companies. For 2009, operating income totaled $546 million, consisting of $415 million from the TDU and $131 million related to transition and system restoration bond companies. TDU revenues increased $100 million primarily due to increased revenues from implementation of AMS ($34 million), increased usage ($35 million), in part caused by favorable weather, higher transmission-related revenues ($26 million) and higher revenues due to customer growth ($20 million) from the addition of nearly 28,000 new customers, partially offset by a customer credit related to deferred income taxes associated with Hurricane Ike storm restoration costs ($21 million).  Operation and maintenance expenses increased $67 million primarily due to higher transmission costs billed by transmission providers ($28 million), increased AMS project expenses ($11 million), increased labor costs ($10 million), increased contracts and services ($10 million) and increased environmental remediation costs ($7 million).  Increased depreciation expense is related to increased investment in AMS ($19 million).





Income Tax Expense.  Our 2010 effective tax rate of 36.7% differed from the 2009 effective tax rate of 32.9% primarily due to the settlement in 2009 of our federal income tax return examinations for tax years 2004 and 2005. For more information, see Note 9 to our consolidated financial statements.





2009 Compared to 2008.We reported operating income of $546 million for 2009, consisting of $415 million from the TDU and $131 million related to transition and system restoration bond companies. For 2008, operating income totaled $545 million, consisting of $407 million from the TDU, exclusive of an additional $5 million from the competition transition charge (CTC), and $133 million related to transition bond companies. Revenues for the TDU increased due to higher transmission-related revenues ($50 million), in part reflecting the impact of a





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 transmission rate increase implemented in November 2008, the impact of Hurricane Ike in 2008 ($17 million), revenues from implementation of AMS ($33 million) and higher revenues due to customer growth ($17 million) from the addition of over 29,000 new customers, partially offset by declines in energy demand ($26 million). Operation and maintenance expenses increased $71 million primarily due to higher transmission costs billed by transmission providers ($18 million), increased operating and maintenance expenses that were postponed in 2008 as a result of Hurricane Ike restoration efforts ($10 million), higher pension and other employee benefit costs ($10 million), expenses related to AMS ($14 million) and a gain on a land sale in 2008 ($9 million). Increased depreciation expense related to increased investment in AMS ($7 million) was offset by other declines in depreciation and amortization, primarily due to asset retirements. Taxes other than income taxes increased $7 million primarily as a result of a refund in 2008 of prior years’ state franchise taxes ($5 million). Changes in pension expense over our 2007 base year amount were deferred and included in our 2010 rate filing pursuant to Texas law.





Income Tax Expense.  Our 2009 effective tax rate of 32.9% differed from the 2008 effective tax rate of 35.4% primarily due to the settlement in 2009 of our federal income tax return examinations for tax years 2004 and 2005. For more information, see Note 9 to our consolidated financial statements.





LIQUIDITY AND CAPITAL RESOURCES





Our liquidity and capital requirements are affected primarily by our results of operations, capital expenditures, debt service requirements, tax payments, working capital needs, various regulatory actions and appeals relating to such regulatory actions. Our principal anticipated cash requirements during 2011 include approximately $605 million of capital expenditures and $283 million of scheduled principal payments on transition and system restoration bonds.





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





Capital Requirements. The following table sets forth our capital expenditures for 2010 and estimates of our capital expenditures for 2011 through 2015 (in millions):





2010

$
4632011


6052012


4682013


4692014


5062015


372





The table above includes expenditures of $119 million in 2010 and estimated capital expenditures of $225 million, $64 million and $10 million in 2011, 2012 and 2013, respectively, related to AMS and IG, net of a $200 million grant by the DOE.





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The following table sets forth estimates of our contractual obligations, including payments due by period (in millions):





Contractual Obligations

Total


2011



2012-2013



2014-2015


2016 and

thereafterTransition and system restoration bond debt(1)

$
2,805


$
283


$
637


$
484


$
1,401Other long-term debt


2,092



—



496



800



796Interest payments - transition and system

restoration bond debt (1) (2)


699



129



217



162



191Interest payments - other long-term debt (2)


1,070



130



245



128



567Capital leases


1



—



—



—



1Benefit obligations (3)


—



—



—



—



—Income taxes (4)


—



—



—



—



—Total contractual cash obligations

$
6,667


$
542


$
1,595


$
1,574


$
2,956


(1)
Transition and system restoration charges are adjusted at least annually to cover debt service on the transition and system restoration bonds.
 
 (2)
We calculated estimated interest payments for long-term fixed-rate debt and term debt based on the applicable rates and payment dates. We typically expect to settle such interest payments with cash flows from operations and short-term borrowings.
 
 (3)
We expect to contribute approximately $8 million to our postretirement benefits plan in 2011 to fund a portion of our obligations in accordance with rate orders or to fund pay-as-you-go costs associated with the plan.
 
 (4)
As of December 31, 2010, the liability for uncertain income tax positions was $232 million.  However, due to the high degree of uncertainty regarding the timing of potential future cash flows associated with these liabilities, we are unable to make a reasonably reliable estimate of the amount and period in which any such liabilities might be paid.




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





Credit Facility.Our $289 million credit facility’s first drawn cost is the London Interbank Offered Rate (LIBOR) plus 45 basis points based on our current credit ratings. The facility contains a debt (excluding transition and system restoration bonds) to total capitalization covenant, limiting debt to 65% of our total capitalization. Under our $289 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 our credit rating.





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





As of February 15, 2011, we had the following facility (in millions):





Date Executed

Type of
Facility

Size of
Facility


Amount Utilized at

February 15, 2011

Termination DateJune 29, 2007

Revolver

$
289


$
4
(1)
June 29, 2012





(1)
Represents outstanding letters of credit.





Securities Registered with the SEC. We have filed a shelf registration statement with the SEC registering an indeterminate principal amount of our general mortgage bonds.





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Temporary Investments.As of February 15, 2011, we had no external temporary investments.





Money Pool.  We participate in a money pool through which we and certain of our affiliates can borrow or invest on a short-term basis. Funding needs are aggregated and external borrowing or investing is based on the net cash position. The net funding requirements of the money pool are expected to be met with borrowings under CenterPoint Energy’s revolving credit facility or the sale of CenterPoint Energy’s commercial paper. At February 15, 2011, we had $839 million invested in the money pool. The money pool may not provide sufficient funds to meet our cash needs.





Long-term Debt.  Our long-term debt consists of our obligations and the obligations of our subsidiaries, including transition and system restoration bonds issued by wholly owned subsidiaries.  The following table shows future maturity dates of long-term debt issued by us to third parties and affiliates and scheduled future payment dates of transition and system restoration bonds issued by our subsidiaries, CenterPoint Energy Transition Bond Company, LLC (Bond Company), CenterPoint Energy Transition Bond Company II, LLC (Bond Company II), CenterPoint Energy Transition Bond Company III, LLC (Bond Company III) and CenterPoint Energy Restoration Bond Company, LLC (Restoration Bond Company) as of December 31, 2010. Amounts are expressed in millions.





Year

Third-Party


Affiliate


Sub-Total


Transition and System Restoration Bonds


Total2011

$
—


$
—


$
—


$
283


$
2832012


46



—



46



307



3532013


450



—



450



330



7802014


800



—



800



235



1,0352015


—



151



151



249



4002016


—



—



—



266



2662017


127



—



127



283



4102018


—



—



—



303



3032019


—



—



—



323



3232020


—



—



—



91



912021


102



—



102



66



1682022


—



—



—



69



692023


200



—



200



—



2002027


56



—



56



—



562033


312



—



312



—



312Total

$
2,093


$
151


$
2,244


$
2,805


$
5,049





As of December 31, 2010, outstanding first mortgage bonds and general mortgage bonds aggregated approximately $2.8 billion as shown in the following table.  Amounts are expressed in millions.




Issued Directly

to Third Parties


Issued as

Collateral for Our

Debt


Issued as Collateral

for CenterPoint

Energy’s Debt


TotalFirst Mortgage Bonds

$
102


$
—


$
151


$
253General Mortgage Bonds


1,762



229



527



2,518Total

$
1,864


$
229


$
678


$
2,771




The lien of the general mortgage indenture is junior to that of the mortgage, pursuant to which the first mortgage bonds are issued. We may issue additional general mortgage bonds on the basis of retired bonds, 70% of property additions or cash deposited with the trustee.  Approximately $2.3 billion of additional first mortgage bonds and general mortgage bonds could be issued on the basis of retired bonds and 70% of property additions as of December 31, 2010. However, we have contractually agreed that we will not issue additional first mortgage bonds, subject to certain exceptions.




29
 Table of Contents





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




Year

First

Mortgage Bonds


General

Mortgage Bonds


Total2011

$
—


$
19


$
192015


151



—



1512018


—



50



502019


—



200
(1)


2002020


—



90
(1)


902026


—



100



1002028


—



68



68Total

$
151


$
527


$
678


(1)
These mortgage bonds collateralize bonds purchased by CenterPoint Energy in January 2010, which may be remarketed by CenterPoint Energy.




At December 31, 2010, Bond Company had $296 million aggregate principal amount of outstanding transition bonds that were issued in 2001 in accordance with the Texas Electric Choice Plan (Texas electric restructuring law). At December 31, 2010, Bond Company II had $1.4 billion aggregate principal amount of outstanding transition bonds that were issued in 2005 in accordance with the Texas electric restructuring law. At December 31, 2010, Bond Company III had $425 million aggregate principal amount of outstanding transition bonds that were issued pursuant to a financing order issued by the Texas Utility Commission in September 2007. At December 31, 2010, Restoration Bond Company had approximately $645 million aggregate principal amount of outstanding system restoration bonds that were issued pursuant to a financing order issued by the Texas Utility Commission in August 2009.  The transition bonds and system restoration bonds are paid through the imposition of “transition” or “system restoration” charges, as defined in the Texas Public Utility Regulatory Act, which are irrevocable, non-bypassable charges payable by most of our retail electric customers in order to provide recovery of authorized qualified costs. The transition and system restoration bonds are reported as our long-term debt, although the holders of these bonds have no recourse to any of our assets or revenues, and our creditors have no recourse to any assets or revenues (including, without limitation, the transition charges) of the bond companies. We have no payment obligations with respect to the transition and system restoration bonds except to remit collections of transition and system restoration charges as set forth in servicing agreements between us and the transition and system restoration bond companies and in an intercreditor agreement among us, the bond companies and other parties.





Impact on Liquidity of a Downgrade in Credit Ratings.  The interest on borrowings under our credit facility is based on our credit rating. As of February 15, 2011, Moody’s Investors Service, Inc. (Moody’s), Standard & Poor’s Ratings Services, a division of The McGraw Hill Companies (S&P), and Fitch, Inc. (Fitch) had assigned the following credit ratings to our senior debt.





Moody’s

S&P

FitchInstrument

Rating

Outlook(1)

Rating

Outlook (2)

Rating

Outlook (3)Senior Secured Debt

A3

Stable

BBB+

Stable

A-

Stable ____________


(1)
A Moody’s rating outlook is an opinion regarding the likely direction of a rating over the medium term.





(2)
An S&P rating outlook assesses the potential direction of a long-term credit rating over the intermediate to longer term.





(3)
A “stable” outlook from Fitch encompasses a one- to two-year horizon as to the likely ratings direction.





We cannot assure you that these ratings will remain in effect for any given period of time or that one or more of these ratings will not be lowered or withdrawn entirely by a rating agency. We note that these credit ratings are included for informational purposes and are not recommendations to buy, sell or hold our securities and may be revised or withdrawn at any time by the rating agency. Each rating should be evaluated independently of any other





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 Table of Contents
 
 rating. Any future reduction or withdrawal of one or more of our credit ratings could have a material adverse impact on our ability to obtain short- and long-term financing, the cost of such financings and the execution of our commercial strategies.





A decline in credit ratings could increase borrowing costs under our credit facility.  If our credit ratings had been downgraded one notch by each of the three principal credit rating agencies from the ratings that existed at December 31, 2010, the impact on the borrowing costs under our credit facility would have been immaterial.  A decline in credit ratings would also increase the interest rate on long-term debt to be issued in the capital markets and could negatively impact our ability to complete certain capital market transactions.





Cross Defaults. Under CenterPoint Energy’s revolving credit facility, a payment default on, or a non-payment default that permits acceleration of, any indebtedness exceeding $50 million by us will cause a default. In addition, three outstanding series of CenterPoint Energy’s senior notes, aggregating $750 million in principal amount as of December 31, 2010, provide that a payment default by us in respect of, or an acceleration of, borrowed money and certain other specified types of obligations, in the aggregate principal amount of $50 million, will cause a default. A default by CenterPoint Energy would not trigger a default under our debt instruments or bank credit facility.





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





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





•
various legislative or regulatory actions;




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





•
the ability of REPs, including REP subsidiaries of NRG Retail LLC and REP subsidiaries of TXU Energy Retail Company LLC, which are our two largest customers, to satisfy their obligations to us and our subsidiaries;





•
the outcome of litigation brought by and against us;





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





•
various other risks identified in “Risk Factors” in Item 1A of this report.





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





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





CRITICAL ACCOUNTING POLICIES




A critical accounting policy is one that is both important to the presentation of our financial condition and results of operations and requires management to make difficult, subjective or complex accounting estimates. An accounting estimate is an approximation made by management of a financial statement element, item or account in the financial statements. Accounting estimates in our historical consolidated financial statements measure the effects of past business transactions or events, or the present status of an asset or liability. The accounting estimates described below require us to make assumptions about matters that are highly uncertain at the time the estimate is made. Additionally, different estimates that we could have used or changes in an accounting estimate that are





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 reasonably likely to occur could have a material impact on the presentation of our financial condition or results of operations. The circumstances that make these judgments difficult, subjective and/or complex have to do with the need to make estimates about the effect of matters that are inherently uncertain. Estimates and assumptions about future events and their effects cannot be predicted with certainty. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments. These estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Our significant accounting policies are discussed in Note 2 to our consolidated financial statements. We believe the following accounting policies involve the application of critical accounting estimates. Accordingly, these accounting estimates have been reviewed and discussed with the audit committee of the board of directors of CenterPoint Energy.





Accounting for Rate Regulation




Accounting guidance for regulated operations provides that rate-regulated entities account for and report assets and liabilities consistent with the recovery of those incurred costs in rates if the rates established are designed to recover the costs of providing the regulated service and if the competitive environment makes it probable that such rates can be charged and collected. We apply this accounting guidance. Certain expenses and revenues subject to utility regulation or rate determination normally reflected in income are deferred on the balance sheet as regulatory assets or liabilities and are recognized in income as the related amounts are included in service rates and recovered from or refunded to customers.  Regulatory assets and liabilities are recorded when it is probable that these items will be recovered or reflected in future rates.  Determining probability requires significant judgment on the part of management and includes, but is not limited to, consideration of testimony presented in regulatory hearings, proposed regulatory decisions, final regulatory orders and the strength or status of applications for rehearing or state court appeals.  If events were to occur that would make the recovery of these assets and liabilities no longer probable, we would be required to write off or write down these regulatory assets and liabilities.  At December 31, 2010, we had recorded regulatory assets of $2.7 billion and regulatory liabilities of $417 million.





Impairment of Long-Lived Assets and Intangibles




We review the carrying value of our long-lived assets, including identifiable intangibles, whenever events or changes in circumstances indicate that such carrying values may not be recoverable.  Unforeseen events and changes in circumstances and market conditions and material differences in the value of long-lived assets and intangibles due to changes in estimates of future cash flows, interest rates, regulatory matters and operating costs could negatively affect the fair value of our assets and result in an impairment charge.





Fair value is the amount at which the asset could be bought or sold in a current transaction between willing parties and may be estimated using a number of techniques, including quoted market prices or valuations by third parties, present value techniques based on estimates of cash flows, or multiples of earnings or revenue performance measures. The fair value of the asset could be different using different estimates and assumptions in these valuation techniques.





Unbilled Energy Revenues




Revenues related to electricity delivery are generally recognized upon delivery to customers. However, the determination of deliveries to individual customers is based on the reading of their meters, which is performed on a systematic basis throughout the month. At the end of each month, deliveries to customers since the date of the last meter reading are estimated and the corresponding unbilled revenue is estimated. Unbilled electricity delivery revenue is estimated each month based on daily supply volumes, applicable rates and analyses reflecting significant historical trends and experience. As additional information becomes available, or actual amounts are determinable, the recorded estimates are revised. Consequently, operating results can be affected by revisions to prior accounting estimates.





NEW ACCOUNTING PRONOUNCEMENTS




See Note 2(l) to the consolidated financial statements, incorporated herein by reference, for a discussion of new accounting pronouncements that affect us.





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 Table of Contents





OTHER SIGNIFICANT MATTERS




Pension Plans.As discussed in Note 5(a) to the consolidated financial statements, we participate in CenterPoint Energy’s qualified and non-qualified pension plans covering substantially all employees. We recorded pension cost of $32 million for the year ended December 31, 2010. Our actuarially determined pension and other postemployment expenses for 2010 in excess of the 2007 base year amount are being deferred for rate making purposes until the conclusion of the current general rate case pursuant to Texas law.  We deferred as a regulatory asset $26 million in pension and other postemployment expenses during the year ended December 31, 2010. Pension cost for 2011 is expected to be $28 million, of which we expect $15 million to impact pre-tax earnings after effecting such deferrals, based on an expected return on plan assets of 8.00% and a discount rate of 5.25% as of December 31, 2010. Future changes in plan asset returns, assumed discount rates and various other factors related to the pension plan will impact our future pension expense and liabilities. We cannot predict with certainty what these factors will be in the future.





Item 7A. Quantitative and Qualitative Disclosures About Market Risk




As of December 31, 2010, we had outstanding long-term debt and lease obligations that subject us to the risk of loss associated with movements in market interest rates.





At December 31, 2009 and 2010, we had outstanding fixed-rate debt aggregating $5.3 billion and $5.0 billion in principal amount and having a fair value of approximately $5.6 billion and $5.5 billion in 2009 and 2010, respectively. These instruments are fixed-rate and therefore, do not expose us to the risk of loss in earnings due to changes in market interest rates (please read Note 8 to our consolidated financial statements). However, the fair value of these instruments would increase by approximately $121 million if interest rates were to decline by 10% from their levels at December 31, 2010. In general, such an increase in fair value would impact earnings and cash flows only if we were to reacquire all or a portion of these instruments in the open market prior to their maturity.





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 Table of Contents





Item 8. Financial Statements and Supplementary Data




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the Member of


CenterPoint Energy Houston Electric, LLC


Houston, Texas





We have audited the accompanying consolidated balance sheets of CenterPoint Energy Houston Electric, LLC and subsidiaries (the “Company”, an indirect wholly owned subsidiary of CenterPoint Energy, Inc.) as of December 31, 2010 and 2009, and the related statements of consolidated income, cash flows, and member’s equity for each of the three years in the period ended December 31, 2010.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.





In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of CenterPoint Energy Houston Electric, LLCand subsidiaries at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.








/s/ DELOITTE & TOUCHE LLP








Houston, Texas


March 10, 2011




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 Table of Contents




MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL


OVER FINANCIAL REPORTING





Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:





•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;




•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and




•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.




Management has designed its internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America. Management’s assessment included review and testing of both the design effectiveness and operating effectiveness of controls over all relevant assertions related to all significant accounts and disclosures in the financial statements.





All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.





Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework, our management has concluded that our internal control over financial reporting was effective as of December 31, 2010.





This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.




/s/  DAVID M. MCCLANAHANChairman/s/  GARY L. WHITLOCKExecutive Vice President and ChiefFinancial Officer
  March 10, 2011


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 Table of Contents


CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES


(An Indirect Wholly Owned Subsidiary of CenterPoint Energy, Inc.)





STATEMENTS OF CONSOLIDATED INCOME





Year Ended December 31,2008


2009


2010(in millions)Revenues

$
1,916


$
2,014


$
2,211Expenses:Operation and maintenance


709



780



849Depreciation and amortization


460



480



582Taxes other than income taxes


202



208



207Total


1,371



1,468



1,638Operating Income


545



546



573Other Income (Expense):Interest and other finance charges


(109
)


(158
)


(149
)Interest on transition and system restoration bonds


(136
)


(131
)


(140
)Other, net


43



53



32Total


(202
)


(236
)


(257
)Income Before Income Taxes


343



310



316Income tax expense


(121
)


(102
)


(116
)Net Income

$
222


$
208


$
200











See Notes to Consolidated Financial Statements




36
 Table of Contents


CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES


(An Indirect Wholly Owned Subsidiary of CenterPoint Energy, Inc.)





CONSOLIDATED BALANCE SHEETS





December 31,2009


2010(in millions)ASSETSCurrent Assets:Cash and cash equivalents ($151 and $198 related to VIEs at December 31, 2009 and
2010, respectively)

$
739


$
198Accounts and notes receivable, net ($44 and $49 related to VIEs at December 31,
2009 and 2010, respectively)


200



203Accounts and notes receivable—affiliated companies


303



919Accrued unbilled revenues


63



70Inventory


69



71Taxes receivable


54



63Deferred tax asset


1



3Other ($34 and $39 related to VIEs at December 31, 2009 and 2010, respectively)


58



62Total current assets


1,487



1,589Property, Plant and Equipment, net


4,588



4,781Other Assets:Regulatory assets ($2,886 and $2,597 related to VIEs at December 31, 2009 and
2010, respectively)


2,885



2,675Notes receivable—affiliated companies


750



750Other


45



37Total other assets


3,680



3,462Total Assets

$
9,755


$
9,832LIABILITIES AND MEMBER’S EQUITYCurrent Liabilities:Current portion of VIE transition and system restoration bonds long-term debt

$
241


$
283Accounts payable


58



76Accounts and notes payable—affiliated companies


29



36Taxes accrued


89



92Interest accrued


100



101Other


61



74Total current liabilities


578



662Other Liabilities:Accumulated deferred income taxes, net


1,469



1,428Unamortized investment tax credits


14



7Benefit obligations


195



215Regulatory liabilities


382



417Notes payable—affiliated companies


151



151Other


221



290Total other liabilities


2,432



2,508Long-Term Debt:VIE transition and system restoration bonds


2,805



2,522Other


2,092



2,092Total long-term debt


4,897



4,614Commitments And Contingencies (Note 10)Member’s Equity


1,848



2,048Total Liabilities and Member’s Equity

$
9,755


$
9,832








See Notes to Consolidated Financial Statements


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 Table of Contents


CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES


(An Indirect Wholly Owned Subsidiary of CenterPoint Energy, Inc.)





STATEMENTS OF CONSOLIDATED CASH FLOWS





Year Ended December 31,2008


2009


2010(in millions)Cash Flows from Operating Activities:Net income

$
222


$
208


$
200Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


460



480



582Deferred income taxes


347



16



(6
)Amortization of deferred financing costs


13



23



12Changes in other assets and liabilities:Accounts and notes receivable, net


(13
)


44



12Accounts receivable/payable, affiliates


(5
)


17



1Taxes receivable


(5
)


(46
)


(9
)Inventory


(14
)


5



(2
)Accounts payable


21



(78
)


9Interest and taxes accrued


17



2



4Net regulatory assets and liabilities


(376
)


(63
)


(30
)Other current assets


(2
)


(2
)


1Other current liabilities


13



(28
)


13Other assets


1



(3
)


—Other liabilities


(5
)


(13
)


2Other, net


(9
)


—



—Net cash provided by operating activities


665



562



789Cash Flows from Investing Activities:Capital expenditures


(462
)


(442
)


(566
)Increase in notes receivable from affiliates


—



(289
)


(610
)Decrease (increase) in restricted cash of transition and system restoration
bond companies


(11
)


26



(5
)Cash received from U.S. Department of Energy grant


—



—



90Other, net


14



28



2Net cash used in investing activities


(459
)


(677
)


(1,089
)Cash Flows from Financing Activities:Revolving credit facility, net


201



(251
)


—Proceeds from long-term debt


488



1,165



—Payments of long-term debt


(159
)


(208
)


(241
)Decrease in short-term notes payable with affiliates


(39
)


(8
)


—Debt issuance costs


(19
)


(10
)


—Dividend to parent


(640
)


—



—Net cash provided by (used in) financing activities


(168
)


688



(241
)Net Increase (Decrease) in Cash and Cash Equivalents


38



573



(541
)Cash and Cash Equivalents at Beginning of the Year


128



166



739Cash and Cash Equivalents at End of the Year

$
166


$
739


$
198Supplemental Disclosure of Cash Flow Information:Cash Payments:Interest, net of capitalized interest

$
235


$
287


$
292Income taxes (refunds), net


(231
)


134



111Non-cash transactions:Accounts payable related to capital expenditures

$
42


$
28


$
37











See Notes to Consolidated Financial Statements


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CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES


(An Indirect Wholly Owned Subsidiary of CenterPoint Energy, Inc.)





STATEMENTS OF CONSOLIDATED MEMBER’S EQUITY





2008


2009


2010Shares


Amount


Shares


Amount


Shares


Amount(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 sharesBalance, beginning of year


1,000



—



1,000



—



1,000



—Balance, end of year


1,000



—



1,000



—



1,000



—Additional Paid-in-CapitalBalance, beginning of year






1,712







1,230







1,230Dividend to parent






(482
)






—







—Balance, end of year






1,230







1,230







1,230Retained EarningsBalance, beginning of year






346







410







618Net income






222







208







200Dividend to parent






(158
)






—







—Balance, end of year






410







618







818Total Member’s Equity





$
1,640






$
1,848






$
2,048











See Notes to Consolidated Financial Statements





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CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES


(An Indirect Wholly Owned Subsidiary of CenterPoint Energy, Inc.)





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





(1)       Background





CenterPoint Energy Houston Electric, LLC (CenterPoint Houston) engages in the electric transmission and distribution business in the Texas Gulf Coast area that includes the city of Houston.  CenterPoint Houston is an indirect wholly owned subsidiary of CenterPoint Energy, Inc. (CenterPoint Energy), a public utility holding company.  At December 31, 2010, CenterPoint Houston had four subsidiaries, CenterPoint Energy Transition Bond Company, LLC, CenterPoint Energy Transition Bond Company II, LLC, CenterPoint Energy Transition Bond Company III, LLC and CenterPoint Energy Restoration Bond Company, LLC (collectively, the transition and system restoration bond companies).  Each is a special purpose Delaware limited liability company formed for the principal purpose of purchasing and owning transition and system restoration property, issuing transition and system restoration bonds and performing activities incidental thereto.  For further discussion of the transition and system restoration bond companies, see Notes 4(b), 4(c) and 8.





(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.





(b) Principles of Consolidation





The accounts of CenterPoint Houston and its wholly owned subsidiaries are included in CenterPoint Houston’s consolidated financial statements. All intercompany transactions and balances are eliminated in consolidation.





(c) Revenues





CenterPoint Houston records revenue for electricity delivery 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 and experience.





(d) Long-Lived Assets and Intangibles





CenterPoint Houston records property, plant and equipment at historical cost. CenterPoint Houston expenses repair and maintenance costs as incurred.





CenterPoint Houston 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.





(e) Regulatory Assets and Liabilities





CenterPoint Houston applies the guidance for accounting for regulated operations.





CenterPoint Houston recognizes removal costs as a component of depreciation expense in accordance with regulatory treatment. As of December 31, 2009 and 2010, these removal costs of $308 million and $323 million, respectively, are classified as regulatory liabilities in CenterPoint Houston’s Consolidated Balance Sheets. A portion of the amount of removal costs that related to asset retirement obligations has been reclassified from a regulatory





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 liability to an asset retirement liability in accordance with accounting guidance for conditional asset retirement obligations.





(f) Depreciation and Amortization Expense





Depreciation is computed using the straight-line method based on economic lives or a regulatory-mandated recovery period. Transition and system restoration property is being amortized over the expected life of the four series of transition and system restoration bonds (12 to 14 years), based on estimated revenue from transition or system restoration charges, interest accruals and other expenses. Other amortization expense includes amortization of regulatory assets and other intangibles.





(g) Allowance for Funds Used During Construction





Allowance for funds used during construction (AFUDC) is capitalized as a component of projects under construction and is amortized over the assets’ estimated useful lives once the assets are placed in service. AFUDC represents the 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. During 2008, 2009 and 2010, CenterPoint Houston capitalized AFUDC of $7 million, $3 million and $3 million, respectively.





(h) Income Taxes





CenterPoint Houston is included in the consolidated income tax returns of CenterPoint Energy. CenterPoint Houston calculates its income tax provision on a separate return basis under a tax sharing agreement with CenterPoint Energy.  CenterPoint Houston uses the asset and liability method of accounting for deferred income 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. CenterPoint Houston recognizes interest and penalties as a component of income tax expense. Current federal and certain state income taxes are payable to or receivable from CenterPoint Energy.





(i) Accounts Receivable and Allowance for Doubtful Accounts





Accounts and notes receivable are net of an allowance for doubtful accounts of less than $1 million at both December 31, 2009 and 2010. The provision for doubtful accounts in CenterPoint Houston’s Statements of Consolidated Income for 2008, 2009 and 2010 was $2 million, $1 million and less than $1 million, respectively.





(j) Inventory





Inventory consists principally of materials and supplies and is valued at the lower of average cost or market.





(k) Statements of Consolidated Cash Flows





For purposes of reporting cash flows, CenterPoint Houston 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 and system restoration bonds, CenterPoint Houston 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 and are not included in cash and cash equivalents. These restricted cash accounts of $34 million and $39 million at December 31, 2009 and 2010, respectively, are included in other current assets in CenterPoint Houston's Consolidated Balance Sheets. For additional information regarding transition and system restoration bonds, see Notes 4(b), 4(c) and 8. Cash and cash equivalents includes $151 million and $198 million at December 31, 2009 and 2010, respectively, that is held by CenterPoint Houston’s transition and system restoration bond subsidiaries solely to support servicing the transition and system restoration bonds.





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(l) New Accounting Pronouncements





In June 2009, the Financial Accounting Standards Board (FASB) issued new accounting guidance on consolidation of variable interest entities (VIEs) that changes how a reporting entity determines a primary beneficiary that would consolidate the VIE from a quantitative risk and rewards approach to a qualitative approach based on which variable interest holder has the power to direct the economic performance related activities of the VIE as well as the obligation to absorb losses or right to receive benefits that could potentially be significant to the VIE. This new guidance requires the primary beneficiary assessment to be performed on an ongoing basis and also requires enhanced disclosures that will provide more transparency about a company’s involvement in a VIE. This new guidance was effective for a reporting entity’s first annual reporting period beginning after November 15, 2009. CenterPoint Houston’s adoption of this new guidance did not have a material impact on its financial position, results of operations or cash flows. As of December 31, 2010, CenterPoint Houston has four VIEs consisting of transition and system restoration bond companies which it consolidates. The consolidated VIEs are wholly-owned bankruptcy remote special purpose entities that were formed specifically for the purpose of securitizing transition and system restoration related property. Creditors of CenterPoint Houston have no recourse to any assets or revenues of the transition and system restoration bond companies. The bonds issued by these VIEs are payable only from and secured by transition and system restoration property and the bond holders have no recourse to the general credit of CenterPoint Houston.





In January 2010, the FASB issued new accounting guidance to require additional fair value related disclosures. It also clarified existing fair value disclosure guidance about the level of disaggregation and about inputs and valuation techniques. This new guidance was effective for the first reporting period beginning after December 15, 2009 except for certain disclosure requirements effective for the first reporting period beginning after December 15, 2010. The adoption of this new guidance did not have a material impact on CenterPoint Houston’s financial position, results of operation or cash flows. See Note 6 for the required disclosures. CenterPoint Houston expects that the adoption of certain disclosure requirements effective in 2011 will not have a material impact on its financial position, results of operation or cash flows.





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





(m) Other Current Liabilities





Included in other current liabilities in the Consolidated Balance Sheets at December 31, 2009 and 2010 was $16 million and $22 million, respectively, of customer deposits.





(3)       Property, Plant and Equipment





(a) Property, Plant and Equipment





Property, plant and equipment includes the following:





Weighted Average Useful


December 31,Lives (Years)


2009


2010(in millions)Transmission

38


$
1,561


$
1,632Distribution

24



4,971



5,149Other

20



793



805Total





7,325



7,586Accumulated depreciation





2,737



2,805Property, plant and equipment, net




$
4,588


$
4,781








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(b) Depreciation and Amortization





The following table presents depreciation and amortization expense for 2008, 2009 and 2010:





Year Ended December 31,2008


2009


2010(in millions)Depreciation expense

$
256


$
259


$
273Amortization of securitized regulatory assets


183



203



289Other amortization


21



18



20Total depreciation and amortization

$
460


$
480


$
582





(c) Asset Retirement Obligations





A reconciliation of the changes in the asset retirement obligation (ARO) liability is as follows (in millions):





December 31,2009


2010Beginning balance

$
17


$
22Accretion expense


2



1Revisions in estimates of cash flows


3



3Ending balance

$
22


$
26





The increase of $3 million in the ARO from the revision of estimate in 2009 and 2010 is primarily attributable to the decrease in the credit-adjusted risk-free rate used to value the liability as of the end of the periods.  There were no material additions or settlements during the years ended December 31, 2009 and 2010.





(4)       Regulatory Matters





(a) Regulatory Assets and Liabilities





The following is a list of regulatory assets/liabilities reflected on CenterPoint Houston’s Consolidated Balance Sheets as of December 31, 2009 and 2010:





December 31,2009


2010(in millions)Securitized regulatory asset

$
2,886


$
2,597Unrecognized equity return


(232
)


(216
)Unamortized loss on reacquired debt


67



61Pension and postretirement-related regulatory asset (1)


83



133Other long-term regulatory assets


81



100Total regulatory assets (1)


2,885



2,675Estimated removal costs


308



323Other long-term regulatory liabilities


74



94Total regulatory liabilities


382



417Total regulatory assets and liabilities, net

$
2,503


$
2,258


____________


(1)
CenterPoint Houston’s actuarially determined pension expense for 2009 and 2010 in excess of the 2007 base year amount is being deferred for rate making purposes and is being addressed in its current rate application pursuant to Texas law. CenterPoint Houston deferred as a regulatory asset $32 million and $26 million in pension and other postemployment expenses during the years ended December 31, 2009 and 2010, respectively.  Deferred pension expense of $32 million and $58 million at December 31, 2009 and 2010, respectively, is not earning a return. Other regulatory assets that are not earning a return were not material at December 31, 2009 and 2010.




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(b) Recovery of True-Up Balance





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





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





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





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





•
affirmed the True-Up Order in all other respects.





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





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





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





•
reversed the district court’s judgment to the extent it upheld the Texas Utility Commission’s decision to allow CenterPoint Houston to recover EMCs paid to its former affiliate Reliant Energy, Inc.  (Reliant Energy, Inc., formerly known as Reliant Resources, Inc., changed its name in 2009 to “RRI Energy, Inc.” in connection with the sale of its Texas retail electric business, and again in December 2010 to “GenOn Energy, Inc.” in connection with the merger of one of its wholly owned subsidiaries with Mirant Corporation.  For convenience, we refer to this company as “RRI” in the context of discussing transactions relating to our formation, our pending true-up appeal and other historical matters, and as “GenOn” in the present and future context, unless stated otherwise.);





•
ordered that the tax normalization issue described below be remanded to the Texas Utility Commission as requested by the Texas Utility Commission; and





•
affirmed the district court’s judgment in all other respects.





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





In June 2008, CenterPoint Houston petitioned the Texas Supreme Court for review of the court of appeals decision. In its petition, CenterPoint Houston seeks reversal of the parts of the court of appeals decision that (i) denied recovery of EMCs paid to RRI, (ii) denied recovery of the capacity auction true-up amounts allowed by the district court, (iii) affirmed the Texas Utility Commission’s rulings that denied recovery of approximately $378 million related to depreciation and (iv) affirmed the Texas Utility Commission’s refusal to permit CenterPoint Houston to utilize the partial stock valuation methodology for determining the market value of its former generation assets. Two other petitions for review were filed with the Texas Supreme Court by other parties to the appeal. In those petitions, parties contend that (i) the Texas Utility Commission was without authority to fashion the methodology it used for valuing the former generation assets after it had determined that CenterPoint Houston could not use the partial stock valuation method, (ii) in fashioning the method it used for valuing the former generating





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





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





To reflect the impact of the True-Up Order, in 2004 and 2005, CenterPoint Houston recorded a net after-tax extraordinary loss of $947 million. No amounts related to the district court’s judgment or the decision of the court of appeals have been recorded in CenterPoint Houston’s consolidated financial statements. However, if the court of appeals decision is not reversed or modified as a result of further review by the Texas Supreme Court, CenterPoint Houston anticipates that it would be required to record an additional loss to reflect the court of appeals decision. The amount of that loss would depend on several factors, including ultimate resolution of the tax normalization issue described below, but could range from $190 million to $440 million (pre-tax) plus interest subsequent to December 31, 2010.





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





If the Texas Utility Commission’s order relating to the ADITC reduction is not reversed or otherwise modified on remand so as to eliminate the normalization violation, the IRS could require CenterPoint Energy to pay an amount equal to CenterPoint Houston’s unamortized ADITC balance as of the date that the normalization violation is deemed to have occurred. In addition, the IRS could deny CenterPoint Houston the ability to elect accelerated tax depreciation benefits beginning in the taxable year that the normalization violation is deemed to have occurred. Such treatment, if required by the IRS, could have a material adverse impact on CenterPoint Houston’s results of operations, financial condition and cash flows in addition to any potential loss resulting from final resolution of the True-Up Order. Following the adoption by the IRS of the final regulations described above, the Texas Utility Commission requested, and the court of appeals ordered, that this issue be remanded to that commission for further consideration. 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 and administrative process. Although the Texas Utility Commission has requested that this issue be remanded to it by the courts and has not previously required a company subject to its jurisdiction to take action that would result in a normalization violation, no prediction can be made as to the ultimate action the Texas Utility Commission may take on this issue on remand.





The Texas electric restructuring law allowed the amounts awarded to CenterPoint Houston in the Texas Utility Commission’s True-Up Order to be recovered either through securitization or through implementation of a





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 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 the true-up balance determined in the True-Up Order plus interest through the date on which the bonds were issued.





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





Certain parties appealed the CTC Order to a district court in Travis County. In May 2006, the district court issued a judgment reversing the CTC Order in three respects. First, the court ruled that the Texas Utility Commission had improperly relied on provisions of its rule dealing with the interest rate applicable to CTC amounts. The district court reached that conclusion based on its belief that the Texas Supreme Court had previously invalidated that entire section of the rule. The 11.075% interest rate in question was applicable from the implementation of the CTC Order on September 13, 2005 until August 1, 2006, the effective date of the implementation of a new CTC in compliance with the revised rule discussed above. Second, the district court reversed the Texas Utility Commission’s ruling that allows CenterPoint Houston to recover through Rider RCE the costs (approximately $5 million) for a panel appointed by the Texas Utility Commission in connection with the valuation of electric generation assets. Finally, the district court accepted the contention of one party that the CTC should not be allocated to retail customers that have switched to new on-site generation. The Texas Utility Commission and CenterPoint Houston appealed the district court’s judgment to the Texas Third Court of Appeals, and in July 2008, the court of appeals reversed the district court’s judgment in all respects and affirmed the Texas Utility Commission’s order. Two parties appealed the court of appeals decision to the Texas Supreme Court and on October 22, 2010, the Texas Supreme Court issued an opinion affirming the judgment of the court of appeals.  The Texas Supreme Court’s decision did not have an impact on CenterPoint Energy’s or CenterPoint Houston’s financial position, results of operations or cash flows.





During the 2007 legislative session, the Texas legislature amended statutes prescribing the types of true-up balances that can be securitized by utilities and authorized the issuance of transition bonds to recover the balance of the CTC. In June 2007, CenterPoint Houston filed a request with the Texas Utility Commission for a financing order that would allow the securitization of the remaining balance of the CTC, adjusted to refund certain unspent environmental retrofit costs and to recover the amount of the final fuel reconciliation settlement. CenterPoint Houston reached substantial agreement with other parties to this proceeding, and a financing order was approved by the Texas Utility Commission in September 2007. In February 2008, pursuant to the financing order, a new special purpose subsidiary of CenterPoint Houston issued approximately $488 million of transition bonds in two tranches with interest rates of 4.192% and 5.234% and final maturity dates of February 2020 and February 2023, respectively. Contemporaneously with the issuance of those bonds, the CTC was terminated and a transition charge was implemented. During the year ended December 31, 2008, CenterPoint Houston recognized approximately $5 million in operating income from the CTC.





As of December 31, 2010, CenterPoint Houston has not recognized an allowed equity return of $178 million on its true-up balance because such return will be recognized as it is recovered in rates. During the years ended December 31, 2008, 2009 and 2010, CenterPoint Houston recognized approximately $13 million, $13 million and $15 million, respectively, of the allowed equity return.




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(c) 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. CenterPoint Houston deferred the 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 Houston’s reported operating income for 2008 or 2009.





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 reached 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 carryingcosts from September 1, 2009 until system restoration bonds were issued. The Texas Utility Commission issued an order in August 2009 approving 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 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.





In accordance with the financing 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 accumulated deferred federal income taxes (ADFIT) associated with the storm restoration costs (including a carrying charge of 11.075%). The beginning balance of the ADFIT related to storm restoration costs was approximately $207 million and will decline over the life of the system restoration bonds as taxes are paid on the system restoration tariffs. The ADFIT Credit reduced operating income in 2010 by approximately $23 million.





In accordance with the orders discussed above, as of December 31, 2010, CenterPoint Houston has recorded $604 million associated with distribution-related storm restoration costs as a securitized regulatory asset. During the year ended December 31, 2009, CenterPoint Houston recognized a return of borrowing costs of $23 million that is included in other income in CenterPoint Energy’s Statements of Consolidated Income.





As of December 31, 2010, CenterPoint Houston has not recognized an allowed equity return of $38 million on CenterPoint Houston’s allowed system restoration costs because such return will be recognized as it is recovered in rates. During the years ended December 31, 2009 and 2010, CenterPoint Houston recognized less than $1 million and $1 million, respectively, of the allowed equity return.





(d) Rate Proceedings





Texas - June 2010 Rate Proceeding. As required under the final order in its 2006 rate proceeding, in June 2010 CenterPoint Houston filed an application to change rates with the Texas Utility Commission and the cities in its service area, including cost data and other information supporting an annual increase of $106 million for delivery charges to the REPs that sell electricity to end-use customers in CenterPoint Houston’s service territory that was offset by a reduction of other utility revenues, resulting in a $92 million requested annual revenue increase. The rate filing package also supported an annual increase of $18 million for wholesale transmission customers.





In the filing, CenterPoint Houston also requested reconciliation of its AMS costs incurred as of March 31, 2010, and revision of the estimated costs to complete the AMS project in order to reflect $150 million in funds from the





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 $200 million DOE stimulus grant awarded to CenterPoint Houston and updated cost information. The reconciliation plan also requested that the duration of the residential AMS surcharge be shortened by six years from the original 12-year plan.





In its rate filing, CenterPoint Houston sought a return on equity of 11.25% and proposed that rates be based on a capital structure of 50% equity and 50% long-term debt.





Hearings concerning the rate filing concluded in October 2010, and a Proposal for Decision was issued by the presiding Administrative Law Judges.  On February 3, 2011, the Texas Utility Commission voted on the various contested issues presented by the rate filing.  The Texas Utility Commission has not yet issued a formal order implementing its decisions, and the order, once issued, will be subject to revision based on motions for rehearing by the parties to the proceeding and could be appealed to the Texas courts.





Based on the public deliberations and votes by the Commissioners, CenterPoint Houston anticipates that the order of the Texas Utility Commission will provide for a base rate increase of approximately $14.7 million per year for delivery charges to the REPs and a decrease to charges to wholesale transmission customers of $12.3 million per year.  Further, the order is expected to provide a mechanism to track amounts for uncertain tax positions and provide for ultimate recovery of those costs.





The order is expected to be based on an authorized return on equity for CenterPoint Houston of 10%, a cost of debt of ­6.74­%, a capital structure comprised of 55% debt and 45% common equity, and an overall rate of return of 8.21%.  The decision also will implement CenterPoint Houston’s request to reconcile costs incurred for the AMS project and to shorten the period for collecting the AMS surcharge from twelve to six years for residential customers in order to reflect the funds received from the DOE.





Based on its understanding of the Texas Utility Commission’s votes, CenterPoint Houston anticipates that annual operating income will be reduced by approximately $30 million from 2010 levels as a result of the Texas Utility Commission’s decision. CenterPoint Houston expects that revised rates based on the Texas Utility Commission’s decision will be implemented during the second quarter of 2011.





Texas - Other.In May 2009, CenterPoint Houston filed an application at the Texas Utility Commission seeking approval of certain estimated 2010 energy efficiency program costs, an energy efficiency performance bonus for 2008 programs, and carrying costs totaling approximately $10 million. The application sought to begin recovery of these costs through a surcharge effective July 1, 2010. In October 2009, the Texas Utility Commission issued its order approving recovery of the 2010 energy efficiency program costs and a partial performance bonus of approximately $8 million, plus carrying costs, but disallowed a recovery of a performance bonus of $2 million on approximately $10 million in 2008 energy efficiency costs expended pursuant to the terms of a settlement agreement in a prior rate case.  CenterPoint Houston began collecting the approved amounts in July 2010.  CenterPoint Houston appealed the denial of the full 2008 performance bonus to the 98th district court in Travis County, Texas.  In October 2010, the district court upheld the Texas Utility Commission’s decision.  In February 2011, CenterPoint Houston appealed the district court’s judgment to the Texas 3rd Court of Appeals at Austin, Texas, where the case remains pending.





In April 2010, CenterPoint Houston filed an application with the Texas Utility Commission seeking approval of certain estimated 2011 energy efficiency programs, an energy efficiency performance bonus for 2009 programs, and recovery of revenue losses related to the implementation of the 2009 energy efficiency program totaling approximately $14.4 million. The application sought to begin recovery of these costs through a surcharge beginning in January 2011.  In November 2010, the Texas Utility Commission issued its order approving recovery of the 2011 energy efficiency program costs and a partial performance bonus of approximately $11 million, but disallowed recovery of a performance bonus of $2 million on the 2009 energy efficiency costs expended pursuant to the terms of the settlement agreement referenced above. The Texas Utility Commission further concluded that it does not have statutory authority to permit recovery of the approximately $1.4 million in lost revenue associated with 2009 energy efficiency programs. CenterPoint Houston began collecting the approved amounts in January 2011, but has appealed the denial of the full 2009 performance bonus and lost revenue to the 201st district court in Travis County, Texas, where the case remains pending.





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Rulemaking Proceedings.In January 2010, the Texas Utility Commission published proposed amendments to its energy efficiency rule.  During the statutory comment period, CenterPoint Houston urged the adoption of a lost revenue recovery mechanism as part of the rule amendments to keep whole the utilities participating in the required energy efficiency programs.  In July 2010, the Texas Utility Commission adopted amendments to its energy efficiency program rules, but concluded it did not have the statutory authority to permit recovery of lost revenue associated with energy efficiency programs.  CenterPoint Houston has appealed the rule to the Texas 3rd Court of Appeals at Austin, Texas on the basis it is invalid as amended because it does not permit lost revenue recovery.





In October 2010, amended rules of the Texas Utility Commission relating to the Transmission Cost Recovery Factor (TCRF) became effective.  The amended rules permit a distribution service provider (DSP) such as CenterPoint Houston to defer for future recovery increases in transmission costs that are charged to the DSP by transmission service providers (TSPs) during the interim period before the DSP is authorized to request an adjustment to its TCRF.  The TCRF permits a DSP to recover from REPs approved changes in transmission charges from TSPs, but the TCRF can be changed by the DSP only twice per year on application to the Texas Utility Commission.  The revised rules permit DSPs to obtain full recovery of the increased transmission charges.





(5)       Employee Benefit Plans





(a) Pension Plans





Substantially all of CenterPoint Houston’s employees participate in CenterPoint Energy’s non-contributory qualified defined benefit plan. Under the cash balance formula, participants accumulate a retirement benefit based upon 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.





CenterPoint Energy’s funding policy is to review amounts annually in accordance with applicable regulations in order to achieve adequate funding of projected benefit obligations. Pension expense is allocated to CenterPoint Houston based on covered employees. This calculation is intended to allocate pension costs in the same manner as a separate employer plan. Assets of the plan are not segregated or restricted by CenterPoint Energy’s participating subsidiaries. CenterPoint Houston recognized pension income of $4 million, pension expense of $43 million and $31 million for the years ended December 31, 2008, 2009 and 2010, respectively.  CenterPoint Houston deferred as a regulatory asset $32 million and $26 million in pension and other postemployment expenses during the years ended December 31, 2009 and 2010, respectively.





In addition to the pension plan, CenterPoint Houston participates in CenterPoint Energy’s non-qualified benefit restoration plans, which allow participants to receive the benefits to which they would have been entitled under the 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 expense associated with the non-qualified pension plan was less than $1 million for each of the years ended December 31, 2008, 2009 and 2010.





(b) Savings Plan





CenterPoint Houston participates in CenterPoint Energy’s qualified savings plan, which 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 50%, which increased from 16% in prior years, of compensation. CenterPoint Houston matches 100% of the first 6% of each employee’s compensation contributed. The matching contributions are fully vested at all times. CenterPoint Energy allocates to CenterPoint Houston the savings plan benefit expense related to CenterPoint Houston’s employees.  Savings plan benefit expense was $14 million, $11 million and $12 million for the years ended December 31, 2008, 2009 and 2010, respectively.




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(c) Postretirement Benefits





CenterPoint Houston’s employees participate in CenterPoint Energy’s benefit plans which provide 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.





CenterPoint Houston is required to fund a portion of its obligations in accordance with rate orders. The net postretirement benefit cost includes the following components:





Year Ended December 31,2008


2009


2010(in millions)Service cost— benefits earned during the period

$
1


$
—


$
—Interest cost on accumulated benefit obligation


17



18



16Expected return on plan assets


(11
)


(8
)


(9
)Amortization of transition obligation


6



6



6Net postretirement benefit cost

$
13


$
16


$
13





CenterPoint Houston used the following assumptions to determine net postretirement benefit costs:





Year Ended December 31,2008


2009


2010Discount rate


6.40
%


6.90
%


5.70
%Expected return on plan assets


8.00
%


7.50
%


7.50
%





In determining net periodic benefits cost, CenterPoint Houston uses fair value, as of the beginning of the year, as its basis for determining expected return on plan assets.








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Following are reconciliations of CenterPoint Houston’s beginning and ending balances of its postretirement benefit plan’s benefit obligation, plan assets and funded status for 2009 and 2010.  The measurement dates for plan assets and obligations were December 31, 2009 and 2010.





Year Ended December 31,2009


2010(in millions)Change in Benefit ObligationAccumulated benefit obligation, beginning of year

$
272


$
288Interest cost


18



16Benefits paid


(18
)


(24
)Participant contributions


1



2Medicare drug reimbursement


—



1Actuarial loss


15



23Accumulated benefit obligation, end of year

$
288


$
306Change in Plan AssetsPlan assets, beginning of year

$
115


$
124Benefits paid


(18
)


(24
)Employer contributions


9



9Participant contributions


1



2Actual investment return


17



11Plan assets, end of year

$
124


$
122Amounts Recognized in Balance SheetsOther liabilities-benefit obligations

$
(164
)

$
(184
)Net liability, end of year

$
(164
)

$
(184
)Actuarial AssumptionsDiscount rate


5.70
%


5.20
%Expected long-term return on assets


7.50
%


7.50
%Healthcare cost trend rate assumed for the next year


7.50
%


8.50
%Prescription drug cost trend rate assumed for the next year


8.00
%


8.50
%Rate to which the cost trend rate is assumed to decline (ultimate trend rate)


5.50
%


5.50
%Year that the healthcare rate reaches the ultimate trend rate


2014



2017Year that the prescription drug rate reaches the ultimate trend rate


2015



2017





The discount rate assumption was determined by matching the accrued cash flows of CenterPoint Energy’s plans against a hypothetical yield curve of high-quality corporate bonds represented by a series of annualized individual discount rates from one-half to thirty years.





The expected rate of return assumption was developed by a weighted-average return analysis of the targeted asset allocation of CenterPoint Energy’s plans and the expected real return for each asset class, based on the long-term capital market assumptions, adjusted for investment fees and diversification effects, in addition to expected inflation.





For measurement purposes, healthcare and prescription drug costs are assumed to increase 8.50% during 2011, after which this rate decreases until reaching the ultimate rate of 5.50% in 2017, except for the 2013 rate which is expected to increase to 9.00% in anticipation of the healthcare exchanges being introduced to the market in 2014.





CenterPoint Houston does not have amounts recognized in accumulated other comprehensive income related to its postretirement benefit plans as of December 31, 2009 and 2010.  Unrecognized costs were recorded as a regulatory asset because CenterPoint Houston historically and currently recovers postretirement expenses in rates.




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Assumed healthcare cost trend rates have a significant effect on the reported amounts for CenterPoint Houston’s postretirement benefit plans. A 1% change in the assumed healthcare cost trend rate would have the following effects:





1%

Increase


1%

Decrease(in millions)Effect on the postretirement benefit obligation

$
13


$
(12
)Effect on total of service and interest cost


1



(1
)





In managing the investments associated with the postretirement benefit plan, CenterPoint Houston’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, CenterPoint Houston adopted and maintained the following asset allocation ranges for its postretirement benefit plans:





Domestic equity securities
13-23
%International equity securities
3-13
%Debt securities
68-78
%Cash
0-2
%





The following tables present by level, within the fair value hierarchy, the CenterPoint Houston’s postretirement plan assets as of December 31, 2009 and 2010, by asset category 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)Mutual funds (1)

$
124


$
124


$
—


$
—Total

$
124


$
124


$
—


$
—





(1)
60% of the amount invested in mutual funds is in fixed income securities; 30% is in U.S. equities and 10% is in international equities.





Fair Value Measurements at December 31, 2010

(in millions)Total


Quoted Prices in

Active Markets

for Identical

Assets

(Level 1)

Significant

Observable

Inputs

(Level 2)


Significant

Unobservable

Inputs

(Level 3)Mutual funds (1)

$
122


$
122


$
—


$
—Total

$
122


$
122


$
—


$
—





(1)
74% of the amount invested in mutual funds is in fixed income securities; 18% is in U.S. equities and 8% is in international equities.




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CenterPoint Houston expects to contribute $8 million to its postretirement benefits plan in 2011. The following benefit payments are expected to be paid by the postretirement benefit plan (in millions):




Postretirement Benefit PlanBenefit

Payments


Medicare

Subsidy Receipts2011


20



(2
)2012


20



(2
)2013


23



(3
)2014


24



(3
)2015


25



(3
)2016-2020


137



(19
)





(d) Postemployment Benefits





CenterPoint Houston participates in CenterPoint Energy’s plan which provides postemployment benefits for former or inactive employees, their beneficiaries and covered dependents, after employment but before retirement (primarily health care and life insurance benefits for participants in the long-term disability plan). CenterPoint Houston recorded postemployment income of $1 million, expense of $-0- and $-0- for the years ended December 31, 2008, 2009 and 2010, respectively. Amounts relating to postemployment obligations included in “Benefit Obligations” in the accompanying Consolidated Balance Sheets at December 31, 2009 and 2010 were $13 million and $13 million, respectively.





(e) Other Non-Qualified Plans





CenterPoint Houston participates in CenterPoint Energy’s deferred compensation plans that provide benefits payable to directors, officers and certain key employees or their designated beneficiaries at specified future dates, upon termination, retirement or death. Benefit payments are made from the general assets of CenterPoint Houston. CenterPoint Houston recorded benefit expense relating to these programs of $1 million in each of the years ended December 31, 2008, 2009 and 2010. Amounts relating to deferred compensation plans included in “Benefit Obligations” in the accompanying Consolidated Balance Sheets at December 31, 2009 and 2010 were $14 million and $14 million, respectively.





(f) Other Employee Matters





As of December 31, 2010, CenterPoint Houston had 2,813 full-time employees, of which approximately 45% are subject to collective bargaining agreements.





(6)       Fair Value Measurements





Assets and liabilities are recorded at fair value in the Consolidated Balance Sheets and 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 are investments listed in active markets.  At December 31, 2009 and 2010, CenterPoint Houston held Level 1 investments of $31 million and $36 million, respectively, which were primarily money market funds.





Level 2:  Inputs, other than quoted prices included in Level 1, are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability. CenterPoint Houston had no Level 2 assets or liabilities at both December 31, 2009 and 2010.





Level 3: Inputs are unobservable for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. These inputs reflect management’s best estimate of the assumptions





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 market participants would use in determining fair value.  CenterPoint Houston had no Level 3 assets or liabilities at both December 31, 2009 and 2010.





Estimated Fair Value of Financial Instruments





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





December 31, 2009


December 31, 2010Carrying

Amount


Fair

Value


Carrying

Amount


Fair

Value(in millions)Financial liabilities:Long-term debt (including $151 million of long-term notes payable to parent)

$
5,288


$
5,591


$
5,048


$
5,499





(7)       Related Party Transactions and Major Customers





(a) Related Party Transactions





CenterPoint Houston participates in a money pool through which it can borrow or invest on a short-term basis. Funding needs are aggregated and external borrowing or investing is based on the net cash position. The net funding requirements of the money pool are expected to be met with borrowings under CenterPoint Energy’s revolving credit facility or the sale of CenterPoint Energy’s commercial paper.CenterPoint Houston had investments in the money pool of $289 million and $899 million at December 31, 2009 and 2010, which are included in accounts and notes receivable-affiliated companies in the Consolidated Balance Sheets.  At December 31, 2010, CenterPoint Houston’s money pool investment bore interest of 0.17%.





At December 31, 2009 and 2010,CenterPoint Houston had a $750 million note receivable from its parent, which bears interest at the prime rate, 3.25% at December 31, 2010.





For the years ended December 31, 2008, 2009 and 2010, CenterPoint Houston had net interest income related to affiliate borrowings of $31 million, $19 million and $19 million, respectively.





CenterPoint Energy provides some corporate services to CenterPoint Houston. The costs of services have been charged directly to CenterPoint Houston using methods that management believes are reasonable. These methods include negotiated usage rates, dedicated asset assignment and proportionate corporate formulas based on operating expenses, assets, gross margin, employees and a composite of assets, gross margin and employees. These charges are not necessarily indicative of what would have been incurred had CenterPoint Houston not been an affiliate. Amounts charged to CenterPoint Houston for these services were $116 million, $126 million and $132 million in 2008, 2009 and 2010, respectively, and are included primarily in operation and maintenance expenses.





In 2008, 2009 and 2010, CenterPoint Houston paid a dividend of $640 million, $-0- and $-0-, respectively.





(b) Major Customers





During 2008, 2009 and 2010, revenues derived from energy delivery charges provided by CenterPoint Houston to REPs that were formerly subsidiaries of RRI and are currently subsidiaries of NRG Energy, Inc. totaled $635 million, $634 million and $583 million, respectively.  During 2008, 2009 and 2010, revenues derived from energy delivery charges provided by CenterPoint Houston to REPs that are subsidiaries of TXU Energy Retail Company LLC totaled $151 million, $182 million and $185 million, respectively.




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





December 31, 2009


December 31, 2010Long-Term


Current(1)


Long-Term


Current(1)(in millions)Long-term debt:First mortgage bonds 9.15% due 2021(2)

$
102


$
—


$
102


$
—General mortgage bonds 5.60% to 7.00% due

2013 to 2033(2)


1,762



—



1,762



—Pollution control bonds 3.625% to 5.60% due

2012 to 2027(3)


229



—



229



—System restoration bonds 1.833% to 4.243% due

2010 to 2022


645



20



601



43Transition bonds 4.192% to 5.63% due 2010 to

2020


2,160



221



1,921



240Other


(1
)


—



(1
)


—Total long-term debt

$
4,897


$
241


$
4,614


$
283
 ____________


(1)
Includes amounts due or scheduled to be paid within one year of the date noted.





(2)
Excludes $151 million of first mortgage bonds and $527 million of general mortgage bonds that CenterPoint Houston had issued as collateral for long-term debt of CenterPoint Energy, and general mortgage bonds that CenterPoint Houston had issued as collateral for its debt aggregating $229 million at both December 31, 2009 and 2010. Debt issued as collateral is excluded from the financial statements because of the contingent nature of the obligation.





(3)
These series of debt are secured by CenterPoint Houston’s general mortgage bonds.





Long-term Debt





Revolving Credit Facility.CenterPoint Houston’s$289 million credit facility’s first drawn cost is the London Interbank Offered Rate (LIBOR) plus 45 basis points based on CenterPoint Houston’s current credit ratings. The facility contains a debt (excluding transition and system restoration bonds) to total capitalization covenant, limiting debt to 65% of its capitalization. Under the 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, 2009 and 2010, CenterPoint Houston had no borrowings under this credit facility. In addition, as of both December 31, 2009 and 2010, CenterPoint Houston had approximately $4 million of outstanding letters of credit under this credit facility. CenterPoint Houston was in compliance with all debt covenants as of December 31, 2010.





Maturities.  CenterPoint Houston’s maturities of long-term debt and scheduled payments on transition and system restoration bonds are $283 million in 2011, $353 million in 2012, $780 million in 2013, $1.0 billion in 2014 and $249 million in 2015.





Liens.  As of December 31, 2010, 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 requirements for 2008, 2009 and 2010 have been satisfied by certification of property additions. The replacement fund requirement to be satisfied in 2011 is approximately $180 million, and the sinking fund requirement to be satisfied in 2011 is approximately $3 million. CenterPoint Houston expects to meet these 2011 obligations by certification of property additions. As of December 31, 2010, CenterPoint Houston’s assets were also subject to liens securing approximately $2.5 billion of general mortgage bonds which are junior to the liens of the first mortgage bonds.




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(9)       Income Taxes





The components of CenterPoint Houston’s income tax expense were as follows:





Year Ended December 31,2008


2009


2010(in millions)Current income tax expense (benefit):Federal

$
(236
)

$
70


$
105State


10



16



17Total current expense (benefit)


(226
)


86



122Deferred income tax expense (benefit):Federal


345



17



(5
)State


2



(1
)


(1
)Total deferred expense (benefit)


347



16



(6
)Total income tax expense

$
121


$
102


$
116





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 31,2008


2009


2010(in millions)Income before income taxes

$
343


$
310


$
316Federal statutory income tax rate


35
%


35
%


35
%Expected federal income tax expense


120



108



111Increase (decrease) in tax expense resulting from:State income tax expense, net of federal income tax


8



10



10Amortization of investment tax credit


(7
)


(7
)


(7
)Increase (decrease) in settled and uncertain tax positions


7



(2
)


9Other, net


(7
)


(7
)


(7
)Total


1



(6
)


5Total income tax expense

$
121


$
102


$
116Effective tax rate


35.4
%


32.9
%


36.7
%





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





Due to CenterPoint Energy’s settlement with the IRS for tax years 2004 and 2005, CenterPoint Houston recorded an income tax benefit of approximately $9 million in 2009 related to a reduction in the liability for uncertain tax positions of approximately $39 million.




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The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities were as follows:





December 31,2009


2010(in millions)Deferred tax assets:Current:Allowance for doubtful accounts

$
1


$
1Other


—



2Total current deferred tax assets


1



3Non-current:Employee benefits


85



91Other


20



5Total non-current deferred tax assets


105



96Total deferred tax assets


106



99Deferred tax liabilities:Non-current:Depreciation


712



668Regulatory assets, net


862



856Total deferred tax liabilities


1,574



1,524Accumulated deferred income taxes, net

$
1,468


$
1,425





CenterPoint Houston is included in the consolidated income tax returns of CenterPoint Energy. CenterPoint Houston calculates its income tax provision on a separate return basis under a tax sharing agreement with CenterPoint Energy.





Uncertain Income Tax Positions. The following table reconciles the beginning and ending balance of CenterPoint Houston’s unrecognized tax benefits:




December 31,2008


2009


2010(in millions)Balance, beginning of year

$
92


$
123


$
175Tax Positions related to prior years:Additions


16



38



10Reductions


(1
)


(24
)


(3
)Tax Positions related to current year:Additions


16



53



50Settlements


—



(15
)


—Balance, end of year

$
123


$
175


$
232




The net increase in the total amount of unrecognized tax benefits during 2010 is primarily related to the tax normalization issue described in Note 4(b) to our consolidated financial statements. This uncertain income tax position is a temporary difference and, therefore, any increase or decrease in the balance of unrecognized tax benefits related thereto would not affect the effective tax rate. It is reasonably possible that the total amount of unrecognized tax benefits could decrease by an amount between $31 million and $220 million over the next 12 months primarily as a result of the tax normalization issue, a temporary difference, and the anticipated resolution of CenterPoint Energy’s administrative appeal associated with an IRS examination described below.





CenterPoint Houston has approximately $11 million, $9 million and $14 million of unrecognized tax benefits that, if recognized, would reduce the effective income tax rate for 2008, 2009 and 2010, respectively. CenterPoint Houston recognizes interest and penalties as a component of income tax expense. CenterPoint Houston recognized approximately $7 million of income tax expense, $5 million of income tax benefit and $8 million of income tax expense related to interest on uncertain income tax positions during 2008, 2009 and 2010, respectively. CenterPoint





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 Houston had approximately $9 million and $17 million of interest on uncertain income tax positions accrued at December 31, 2009 and 2010, respectively.





Tax Audits and Settlements.  CenterPoint Energy’s consolidated federal income tax returns have been audited and settled through the 2005 tax year. As further described in the following paragraph, CenterPoint Energy has an administrative appeal pending before the IRS’s Appeals Division related to tax years 2006 and 2007. In January 2011, the IRS commenced its examination of CenterPoint Energy’s 2008 and 2009 consolidated federal income tax returns.





In July 2010, the IRS issued a report outlining proposed adjustments with respect to its examination of CenterPoint Energy’s 2006 and 2007 federal income tax returns. The most significant adjustment proposed by the IRS relates to the disallowance of CenterPoint Houston’s casualty loss deduction totaling $603 million associated with the damage caused by Hurricane Ike. Pursuant to an election made by CenterPoint Houston, the casualty loss deduction was taken in the taxable year preceding the taxable year in which the hurricane occurred. CenterPoint Energy has filed an administrative appeal with the IRS’s Appeals Division and intends to vigorously defend its reporting of the casualty loss. CenterPoint Houston has considered the effects of the proposed disallowance of the casualty loss deduction by the IRS in its accrual for uncertain income tax positions as of December 31, 2010. Additionally, the casualty loss deduction is a temporary difference and, therefore, any increase or decrease in the balance of unrecognized tax benefits related thereto would not affect the effective tax rate.





(10)           Commitments and Contingencies





(a) Lease Commitments





CenterPoint Houston currently has no obligations under non-cancelable long-term operating leases for the years 2011 to 2015. Total lease expense for all operating leases was approximately $5 million for the year ended December 31, 2008 and less than $1 million for both the years ended December 31, 2009 and 2010.





(b) Legal and Environmental Matters





Legal Matters





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





A large number of lawsuits were filed against numerous gas market participants in a number of federal and western state courts in connection with the operation of the natural gas markets in 2000-2002. CenterPoint Energy’s former affiliate, RRI, was a participant in gas trading in the California and Western markets. These lawsuits, many of which have been filed as class actions, allege violations of state and federal antitrust laws. Plaintiffs in these lawsuits are seeking a variety of forms of relief, including, among others, recovery of compensatory damages (in some cases in excess of $1 billion), a trebling of compensatory damages, full consideration damages and attorneys’ fees. CenterPoint Energy and/or Reliant Energy were named in approximately 30 of these lawsuits, which were instituted between 2003 and 2009. CenterPoint Energy and its affiliates have been released or dismissed from all but two of such cases. CenterPoint Energy Services, Inc. (CES), an indirect subsidiary of CenterPoint Energy, is a defendant in a case now pending in federal court in Nevada alleging a conspiracy to inflate Wisconsin natural gas prices in 2000-2002. Additionally, CenterPoint Energy was a defendant in a lawsuit filed in state court in Nevada that was dismissed in 2007, but in March 2010 the plaintiffs appealed the dismissal to the Nevada Supreme Court.





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 CenterPoint Energy believes that neither it nor CES is a proper defendant in these remaining cases and will continue to pursue dismissal from those cases. CenterPoint Houston does not expect the ultimate outcome of these remaining matters to have a material impact on its financial condition, results of operations or cash flows.





Environmental Matters





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





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





Other Proceedings





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





(11)           Unaudited Quarterly Information





Summarized quarterly financial data is as follows:





Year Ended December 31, 2009First

Quarter


Second

Quarter


Third

Quarter


Fourth

Quarter(in millions)Revenues

$
412


$
521


$
608


$
473Operating income


70



162



218



96Net income


2



67



118



21





59
 Table of Contents




Year Ended December 31, 2010First

Quarter


Second

Quarter


Third

Quarter


Fourth

Quarter(in millions)Revenues

$
488


$
562


$
655


$
506Operating income


113



158



212



90Net income


30



60



92



18





Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure





None.





Item 9A.Controls and Procedures





Disclosure Controls and Procedures





In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2010 to provide assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure.





There has been no change in our internal controls over financial reporting that occurred during the three months ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.





Management’s Annual Report on Internal Control over Financial Reporting





See report set forth above in Item 8, “Financial Statements and Supplementary Data.”





Item 9B.Other Information





The ratio of earnings to fixed charges as calculated pursuant to Securities and Exchange Commission rules was 2.62, 2.61, 2.32, 2.05 and 2.07 for the years ended December 31, 2006, 2007, 2008, 2009 and 2010, respectively.





PART III





Item 10. Directors, Executive Officers and Corporate Governance





The information called for by Item 10 is omitted pursuant to Instruction I(2) to Form 10-K (Omission of Information by Certain Wholly Owned Subsidiaries).





Item 11. Executive Compensation





The information called for by Item 11 is omitted pursuant to Instruction I(2) to Form 10-K (Omission of Information by Certain Wholly Owned Subsidiaries).





Item 12.Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters





The information called for by Item 12 is omitted pursuant to Instruction I(2) to Form 10-K (Omission of Information by Certain Wholly Owned Subsidiaries).





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Item 13. Certain Relationships and Related Transactions, and Director Independence





The information called for by Item 13 is omitted pursuant to Instruction I(2) to Form 10-K (Omission of Information by Certain Wholly Owned Subsidiaries).





Item 14. Principal Accounting Fees and Services





Aggregate fees billed to CenterPoint Houston during the fiscal years ending December 31, 2009 and 2010 by its principal accounting firm, Deloitte & Touche LLP, are set forth below.





Year Ended December 31,2009


2010Audit fees (1)

$
660,840


$
502,243Audit-related fees (2)


256,000



283,000Total audit and audit-related fees


916,840



785,243Tax fees


—



—All other fees


—



—Total fees

$
916,840


$
785,243
 ____________


(1)
For 2010 and 2009, amounts include fees for services provided by the principal accounting firm relating to the integrated audit of financial statements and internal control over financial reporting, statutory audits, attest services, and regulatory filings.





(2)
For 2010 and 2009, includes fees for consultations concerning financial accounting and reporting standards and various agreed-upon or expanded procedures related to accounting records to comply with financial accounting or regulatory reporting matters.





CenterPoint Houston is not required to have, and does not have, an audit committee.





PART IV





Item 15. Exhibits and Financial Statement Schedules





(a)(1) Financial Statements.Report of Independent Registered Public Accounting Firm
34Statements of Consolidated Income for the Three Years Ended December 31, 2010
36Consolidated Balance Sheets at December 31, 2009 and 2010
37Statements of Consolidated Cash Flows for the Three Years Ended December 31, 2010
38Statements of Consolidated Member’s Equity for the Three Years Ended December 31, 2010
39Notes to Consolidated Financial Statements
40(a)(2) Financial Statement Schedules for the Three Years Ended December 31, 2010.Report of Independent Registered Public Accounting Firm
62II—Valuation and Qualifying Accounts
63





The following schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements:





I, III, IV and V.





(a)(3) Exhibits.





See Index of Exhibitsbeginning on page 65.





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 Table of Contents








REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the Member of


CenterPoint Energy Houston Electric, LLC


Houston, Texas





We have audited the consolidated financial statements of CenterPoint Energy Houston Electric, LLC and subsidiaries (the “Company”, an indirect wholly owned subsidiary of CenterPoint Energy, Inc.) as of December 31, 2010 and 2009, and for each of the three years in the period ended December 31, 2010, and have issued our report thereon dated March 10, 2011; such report is included elsewhere in this Form 10-K.  Our audits also included the consolidated financial statement schedule of the Company listed in the index at Item 15(a)(2).  This consolidated financial statement schedule is the responsibility of the Company’s management.  Our responsibility is to express an opinion based on our audits.  In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.




/s/ DELOITTE & TOUCHE LLP




Houston, Texas


March 10, 2011










62
 Table of Contents





CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES


(An Indirect Wholly Owned Subsidiary of CenterPoint Energy, Inc.)





SCHEDULE II —VALUATION AND QUALIFYING ACCOUNTS


For the Three Years Ended December 31, 2010


(in millions)





Column A

Column B


Column C


Column D


Column EDescription

Balance At

Beginning

of Period


Additions

Charged

to Income


Deductions

From

Reserves(1)


Balance At

End Of

PeriodYear Ended December 31, 2010:Accumulated provisions:Uncollectible accounts receivable

$
—


$
—


$
—


$
—Year Ended December 31, 2009:Accumulated provisions:Uncollectible accounts receivable

$
2


$
1


$
3


$
—Year Ended December 31, 2008:Accumulated provisions:Uncollectible accounts receivable

$
1


$
2


$
1


$
2 __________


(1)
Deductions from reserves represent losses or expenses for which the respective reserves were created. In the case of the uncollectible accounts reserve, such deductions are net of recoveries of amounts previously written off.











63
 Table of Contents








SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, the State of Texas, on the 10th day of March, 2011.





CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC(Registrant)By:
/s/ DAVID M. MCCLANAHANDavid M. McClanahanManager





Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 10, 2011.





Signature

Title/s/ DAVID M. MCCLANAHAN

Manager and Chairman(David M. McClanahan)

(Principal Executive Officer)/s/ GARY L. WHITLOCK

Executive Vice President and Chief Financial Officer(Gary L. Whitlock)

(Principal Financial Officer)/s/ WALTER L. FITZGERALD

Senior Vice President and Chief Accounting Officer(Walter L. Fitzgerald)

(Principal Accounting Officer)












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 Table of Contents




CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC





EXHIBITS TO THE ANNUAL REPORT ON FORM 10-K


For Fiscal Year Ended December 31, 2010





INDEX OF EXHIBITS





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





Exhibit

Number

Description

Report or Registration Statement

SEC File or

Registration

Number

Exhibit

Reference3(a)

Articles of Conversion of REI

Form 8-K dated August 31, 2002 filed with the SEC on September 3, 2002

1-3187

3(a)3(b)

Articles of Organization of CenterPoint Energy Houston Electric, LLC (“CenterPoint Houston”)

Form 8-K dated August 31, 2002 filed with the SEC on September 3, 2002

1-3187

3(b)3(c)

Limited Liability Company Regulations of CenterPoint Houston

Form 8-K dated August 31, 2002 Filed with the SEC on September 3, 2002

1-3187

3(c)4(a)(1)

Mortgage and Deed of Trust, dated November 1, 1944 between Houston Lighting and Power Company (“HL&P”) and Chase Bank of Texas, National Association (formerly, South Texas Commercial National Bank of Houston), as Trustee, as amended and supplemented by 20 Supplemental Indentures thereto

HL&P’s Form S-7 filed on August 25, 1977

2-59748

2(b)4(a)(2)

Twenty-First through Fiftieth Supplemental Indentures to Exhibit 4(a)(1)

HL&P’s Form 10-K for the year ended December 31, 1989

1-3187

4(a)(2)4(a)(3)

Fifty-First Supplemental Indenture to Exhibit 4(a)(1) dated as of March 25, 1991

HL&P’s Form 10-Q for the quarter ended June 30, 1991

1-3187

4(a)4(a)(4)

Fifty-Second through Fifty-Fifth Supplemental Indentures to Exhibit 4(a)(1) each dated as of March 1, 1992

HL&P’s Form 10-Q for the quarter ended March 31, 1992

1-3187

44(a)(5)

Fifty-Sixth and Fifty-Seventh Supplemental Indentures to Exhibit 4(a)(1) each dated as of October 1, 1992

HL&P’s Form 10-Q for the quarter ended September 30, 1992

1-3187

44(a)(6)

Fifty-Eighth and Fifty-Ninth Supplemental Indentures to Exhibit 4(a)(1) each dated as of March 1, 1993

HL&P’s Form 10-Q for the quarter ended March 31, 1993

1-3187

44(a)(7)

Sixtieth Supplemental Indenture to Exhibit 4(a)(1) dated as of July 1, 1993

HL&P’s Form 10-Q for the quarter ended June 30, 1993

1-3187

44(a)(8)

Sixty-First through Sixty-Third Supplemental Indentures to Exhibit 4(a)(1) each dated as of December 1, 1993

HL&P’s Form 10-K for the year ended December 31, 1993

1-3187

4(a)(8)
 
 65
 Table of Contents


Exhibit

Number

Description

Report or Registration Statement

SEC File or

Registration

Number

Exhibit

Reference4(a)(9)

Sixty-Fourth and Sixty-Fifth Supplemental Indentures to Exhibit 4(a)(1) each dated as of July 1, 1995

HL&P’s Form 10-K for the year ended December 31, 1995

1-3187

4(a)(9)4(b)(1)

General Mortgage Indenture, dated as of October 10, 2002, between CenterPoint Energy Houston Electric, LLC and JPMorgan Chase Bank, as Trustee

Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002

1-3187

4(j)(1)4(b)(2)

Second Supplemental Indenture to Exhibit 4(b)(1), dated as of October 10, 2002

Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002

1-3187

4(j)(3)4(b)(3)

Third Supplemental Indenture to Exhibit 4(b)(1), dated as of October 10, 2002

Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002

1-3187

4(j)(4)4(b)(4)

Fourth Supplemental Indenture to Exhibit 4(b)(1), dated as of October 10, 2002

Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002

1-3187

4(j)(5)4(b)(5)

Fifth Supplemental Indenture to Exhibit 4(b)(1), dated as of October 10, 2002

Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002

1-3187

4(j)(6)4(b)(6)

Sixth Supplemental Indenture to Exhibit 4(b)(1), dated as of October 10, 2002

Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002

1-3187

4(j)(7)4(b)(7)

Seventh Supplemental Indenture to Exhibit 4(b)(1), dated as of October 10, 2002

Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002

1-3187

4(j)(8)4(b)(8)

Eighth Supplemental Indenture to Exhibit 4(b)(1), dated as of October 10, 2002

Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002

1-3187

4(j)(9)4(b)(9)

Officer’s Certificates dated October 10, 2002, setting forth the form, terms and provisions of the First through Eighth Series of General Mortgage Bonds

CenterPoint Energy, Inc.’s (“CNP’s”) Form 10-K for the year ended December 31, 2003

1-31447

4(c)(10)4(b)(10)

Ninth Supplemental Indenture to Exhibit 4(b)(1), dated as of November 12, 2002

CNP’s Form 10-K for the year ended December 31, 2002

1-31447

4(e)(10)4(b)(11)

Officer’s Certificate dated November 12, 2002 setting forth the form, terms and provisions of the Ninth Series of General Mortgage Bonds

CNP’s Form 10-K for the year ended December 31, 2003

1-31447

4(e)(12)4(b)(12)

Tenth Supplemental Indenture to Exhibit 4(b)(1), dated as of March 18, 2003

Form 8-K dated March 13, 2003

1-3187

4.14(b)(13)

Officer’s Certificate dated March 18, 2003 setting forth the form, terms and provisions of the Tenth Series and Eleventh Series of General Mortgage Bonds

Form 8-K dated March 13, 2003

1-3187

4.24(b)(14)

Eleventh Supplemental Indenture to Exhibit 4(b)(1), dated as of May 23, 2003

Form 8-K dated May 16, 2003

1-3187

4.1
  66
 Table of Contents
  Exhibit

Number

Description

Report or Registration Statement

SEC File or

Registration

Number

Exhibit

Reference4(b)(15)

Officer’s Certificate dated May 23, 2003 setting forth the form, terms and provisions of the Twelfth Series of General Mortgage Bonds

Form 8-K dated May 16, 2003

1-3187

4.24(b)(16)

Twelfth Supplemental Indenture to Exhibit 4(b)(1), dated as of September 9, 2003

Form 8-K dated September 9, 2003

1-3187

4.24(b)(17)

Officer’s Certificate dated September 9, 2003 setting forth the form, terms and provisions of the Thirteenth Series of General Mortgage Bonds

Form 8-K dated September 9, 2003

1-3187

4.34(b)(18)

Thirteenth Supplemental Indenture to Exhibit 4(b)(1), dated as of February 6, 2004

CNP’s Form 10-K for the year ended December 31, 2005

1-31447

4(e)(16)4(b)(19)

Officer’s Certificate dated February 6, 2004 setting forth the form, terms and provisions of the Fourteenth Series of General Mortgage Bonds

CNP’s Form 10-K for the year ended December 31, 2005

1-31447

4(e)(17)4(b)(20)

Fourteenth Supplemental Indenture to Exhibit 4(b)(1), dated as of February 11, 2004

CNP’s Form 10-K for the year ended December 31, 2005

1-31447

4(e)(18)4(b)(21)

Officer’s Certificate dated February 11, 2004 setting forth the form, terms and provisions of the Fifteenth Series of General Mortgage Bonds

CNP’s Form 10-K for the year ended December 31, 2005

1-31447

4(e)(19)4(b)(22)

Fifteenth Supplemental Indenture to Exhibit 4(b)(1), dated as of March 31, 2004

CNP’s Form 10-K for the year ended December 31, 2005

1-31447

4(e)(20)4(b)(23)

Officer’s Certificate dated March 31, 2004 setting forth the form, terms and provisions of the Sixteenth Series of General Mortgage Bonds

CNP’s Form 10-K for the year ended December 31, 2005

1-31447

4(e)(21)4(b)(24)

Sixteenth Supplemental Indenture to Exhibit 4(b)(1), dated as of March 31, 2004

CNP’s Form 10-K for the year ended December 31, 2005

1-31447

4(e)(22)4(b)(25)

Officer’s Certificate dated March 31, 2004 setting forth the form, terms and provisions of the Seventeenth Series of General Mortgage Bonds

CNP’s Form 10-K for the year ended December 31, 2005

1-31447

4(e)(23)4(b)(26)

Seventeenth Supplemental Indenture to Exhibit 4(b)(1), dated as of March 31, 2004

CNP’s Form 10-K for the year ended December 31, 2005

1-31447

4(e)(24)4(b)(27)

Officer’s Certificate dated March 31, 2004 setting forth the form, terms and provisions of the Eighteenth Series of General Mortgage Bonds

CNP’s Form 10-K for the year ended December 31, 2005

1-31447

4(e)(25)4(b)(28)

Nineteenth Supplemental Indenture to Exhibit 4(b)(1), dated as of November 26, 2008

CNP’s Form 8-K dated November 25, 2008

1-31447

4.2
 
 67
 Table of Contents
  Exhibit

Number

Description

Report or Registration Statement

SEC File or

Registration

Number

Exhibit

Reference4(b)(29)

Officer’s Certificate date November 26, 2008 setting forth the form, terms and provisions of the Twentieth Series of General Mortgage Bonds

CNP’s Form 8-K dated November 25, 2008

1-31447

4.34(b)(30)

Twentieth Supplemental Indenture to Exhibit 4(b)(1), dated as of December 9, 2008

Form 8-K dated January 6, 2009

1-3187

4.24(b)(31)

Twenty-First Supplemental Indenture to Exhibit 4(b)(1), dated as of January 9, 2009

CNP’s Form 10-K for the year ended December 31, 2008

1-31447

4(e)(31)4(b)(32)

Officer’s Certificate date January 20, 2009 setting forth the form, terms and provisions of the Twenty-First Series of General Mortgage Bonds

CNP’s Form 10-K for the year ended December 31, 2008

1-31447

4(e)(32)4(c)(1)

$300,000,000 Second Amended and Restated Credit Agreement dated as of June 29, 2007 among CenterPoint Houston, as Borrower, and the banks named therein

CNP’s Form 10-Q for the quarter ended June 30, 2007

1-31447

4.44(c)(2)

First Amendment to Exhibit 4(c)(1), dated as of November 18, 2008, among CenterPoint Houston, as Borrower, and the banks named therein

CNP’s Form 8-K dated November 18, 2008

1-31447

4.2
 
 Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, CenterPoint Houston has not filed as exhibits to this Form 10-K certain long-term debt instruments, including indentures, under which the total amount of securities authorized does not exceed 10% of the total assets of CenterPoint Houston and its subsidiaries on a consolidated basis. CenterPoint Houston hereby agrees to furnish a copy of any such instrument to the SEC upon request.
 
 Exhibit

Number

Description

Report or Registration Statement

SEC File or

Registration

Number

Exhibit

Reference10

City of Houston Franchise Ordinance

CNP’s Form 10-Q for the quarter ended June 30, 2005

1-31447

10.1+12

Computation of Ratios of Earnings to Fixed Charges+23

Consent of Deloitte & Touche LLP+31.1

Rule 13a-14(a)/15d-14(a) Certification of David M. McClanahan+31.2

Rule 13a-14(a)/15d-14(a) Certification of Gary L. Whitlock+32.1

Section 1350 Certification of David M. McClanahan+32.2

Section 1350 Certification of Gary L. Whitlock


68