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, 2009OR£
            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 £  No R





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 £  No R





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





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




Indicate
by check mark 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. R





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 £  No R





The
aggregate market value of the common equity held by non-affiliates as of June
30, 2009: None
















TABLE OF CONTENTS





PagePART IItem
      1.
            Business
            1Item
      1A.
            Risk Factors
            13Item
      1B.
            Unresolved Staff Comments
            20Item
      2.
            Properties
            21Item
      3.
            Legal Proceedings
            21Item
      4.
            Reserved
            21PART IIItem
      5.
            Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
            21Item
      6.
            Selected Financial Data
            21Item
      7.
            Management’s Narrative Analysis of Results of
      Operations
            21Item
      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
            58Item
      9A(T).
            Controls and Procedures
            58Item
      9B.
            Other Information
            59PART IIIItem
      10.
            Directors, Executive Officers and Corporate
      Governance
            59Item
      11.
            Executive Compensation
            59Item
      12.
            Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
            59Item
      13.
            Certain Relationships and Related Transactions, and
      Director Independence
            59Item
      14.
            Principal Accounting Fees and Services
            59PART IVItem
      15.
            Exhibits and Financial Statement
    Schedules
            60









i
 Table of Contents


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 2007, 2008 and
2009.





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 of this report.





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






ii
 Table of Contents





PART I





Item 1. Business





OUR
BUSINESS





Overview





We
provide electric transmission and distribution services to retail electric
providers (REPs) serving over 2 million metered customers in a 5,000-square
mile area of the Texas Gulf Coast that has a population of approximately
5.7 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
the only business of CenterPoint Energy that continues to engage in electric
utility operations. 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 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.




1
 Table of Contents





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 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 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 includes an aggregate net generating capacity of
approximately 76,000 megawatts (MW). 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





2
 Table of Contents
 
 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.





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





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





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





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





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





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





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





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





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





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





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





In June
2008, 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
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.





3
 Table of Contents





To
reflect the impact of the True-Up Order, in 2004 and 2005, we recorded a net
after-tax extraordinary loss of $947 million. No amounts related to the
district court’s judgment or the decision of the court of appeals have been
recorded in our consolidated financial statements. However, if the court of
appeals decision is not reversed or modified as a result of further review by
the Texas Supreme Court, we anticipate that we would be required to record an
additional loss to reflect the court of appeals decision. The amount of that
loss would depend on several factors, including ultimate resolution of the tax
normalization issue described below and the calculation of interest on any
amounts we ultimately are authorized to recover or are required to refund beyond
the amounts recorded based on the True-Up Order, but could range from $180
million to $410 million (pre-tax) plus interest subsequent to December 31,
2009.





In the
True-Up Order, the Texas Utility Commission reduced our stranded cost recovery
by approximately $146 million, which was included in the extraordinary loss
discussed above, for the present value of certain deferred tax benefits
associated with 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. In its opinion, the court of appeals
ordered that this issue be remanded to the Texas Utility Commission, as that
commission requested. No party has challenged that order by the court of appeals
although the Texas Supreme Court has the authority to consider all aspects of
the rulings above, not just those challenged specifically by the appellants. 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 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 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.





4
 Table of Contents





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, which heard oral argument in
October 2009. The ultimate outcome of this matter cannot be predicted at this
time. However, we do not expect the disposition of this matter to have a
material adverse effect on our financial condition, results of operations or
cash flows.





During
the 2007 legislative session, the Texas legislature amended statutes prescribing
the types of true-up balances that can be securitized by utilities and
authorized the issuance of transition bonds to recover the balance of the CTC.
In June 2007, 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 years ended December 31, 2007 and 2008, we
recognized approximately $42 million and $5 million, respectively, in
operating income from the CTC.





As of
December 31, 2009, we have not recognized an allowed equity return of $193
million on our true-up balance because such return will be recognized as it is
recovered in rates. Additionally, during the years ended December 31, 2007,
2008 and 2009, we recognized approximately $14 million, $13 million
and $13 million, respectively, of the allowed equity return not previously
recognized.





Hurricane
Ike





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





As is
common with electric utilities serving coastal regions, the poles, towers,
wires, street lights and pole mounted equipment that comprise our transmission
and distribution system are not covered by property insurance, but office
buildings and warehouses and their contents and substations are covered by
insurance that provides for a maximum deductible of $10 million. Current
estimates are that total losses to property covered by this insurance were
approximately $30 million.





We
deferred the uninsured system restoration costs as management believed it was
probable that such costs would be recovered through the regulatory process. As a
result, system restoration costs did not affect our reported operating income
for 2008 or 2009.





Legislation
enacted by the Texas Legislature in April 2009 authorized the Texas Utility
Commission to conduct proceedings to determine the amount of system restoration
costs and related costs associated with hurricanes or other major storms that
utilities are entitled to recover, and to issue financing orders that would
permit a utility like us to recover the distribution portion of those costs and
related carrying costs through the issuance of non-recourse system restoration
bonds similar to the securitization bonds issued previously.  The
legislation also allowed such a





5
 Table of Contents
 
 utility
to recover, or defer for future recovery, the transmission portion of its system
restoration costs through the existing mechanisms established to recover
transmission costs.





Pursuant
to such legislation, 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 announced 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 our application and
the settlement agreement and authorizing recovery of $663 million, of which
$643 million was attributable to distribution service and eligible for
securitization and the remaining $20 million was attributable to
transmission service and eligible for recovery through the existing mechanisms
established to recover transmission costs.





In July
2009, we filed with the Texas Utility Commission our application for a financing
order to recover the portion of approved costs related to distribution service
through the issuance of system restoration bonds.   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 will reduce operating income in 2010 by approximately
$24 million.





In
accordance with the orders discussed above, as of December 31, 2009, we have
recorded $651 million associated with distribution-related storm
restoration costs as a net regulatory asset and $20 million associated with
transmission-related storm restoration costs, of which $18 million is recorded
in property, plant and equipment and $2 million of related carrying costs is
recorded in regulatory assets.  These amounts reflect carrying costs of
$60 million related to distribution and $2 million related to
transmission through December 31, 2009, based on the 11.075% cost of
capital approved by the Texas Utility Commission.  The carrying costs have
been bifurcated into two components: (i) return of borrowing costs and (ii) an
allowance for earnings on shareholders’ investment.  During the year ended
December 31, 2009, the component representing a return of borrowing costs of
$23 million has been recognized and is included in other income in our
Statements of Consolidated Income.  The component representing an allowance
for earnings on shareholders’ investment of $39 million is being deferred
and will be recognized as it is collected through rates.





Customers





We serve
nearly all of the Houston/Galveston metropolitan area. Our customers consist of
approximately 80 REPs, which sell electricity to over 2 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 (formerly subsidiaries of RRI) represented
approximately 51%, 48% and 44% of our transmission and distribution revenues in
2007, 2008 and 2009, respectively. Sales to REPs that are subsidiaries of TXU
Energy Retail Company LLC (TXU Energy) represented approximately 10%, 11% and
12% of our transmission and distribution revenues in 2007, 2008 and 2009,
respectively.  Our billed receivables balance from REPs as of
December 31, 2009 was $139 million. Approximately 41% of this amount
was owed by





6
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 subsidiaries
of NRG Retail LLC and 13% of this amount was owed by subsidiaries of TXU Energy.
We do not have long-term contracts with any of our customers. We operate on a
continuous billing cycle, with meter readings being conducted and invoices being
distributed to REPs each business day.





Advanced
Metering System and Distribution 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 will recover 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, is $3.24 per month; thereafter, the surcharge is scheduled to be 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 project capital expenditures of
approximately $640 million for the installation of the advanced meters and
corresponding communication and data management systems over the five-year
deployment period.





We are
also pursuing deployment of an electric distribution grid automation strategy
that involves the implementation of an “Intelligent Grid” 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 advanced metering system and
intelligent grid projects.  The award is contingent on successful
completion of negotiations with the DOE. We applied for the grant in August 2009
to obtain $150 million in funding to accelerate completion of our current
deployment of advanced meters by 2012, instead of 2014 as originally
scheduled.  In addition, the grant request included $50 million to
begin building the intelligent grid.  At this time, we cannot predict the
schedule for completion of negotiations with the DOE or the final terms of any
grant we ultimately receive.





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.




7
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All real
and tangible properties of ours, 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, 2009, we had outstanding approximately $2.5 billion
aggregate principal amount of general mortgage bonds 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 outstanding approximately $253 million
aggregate principal amount of first mortgage bonds 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 $2.1 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, 2009. 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, 2009, we owned 27,726 pole
miles of overhead distribution lines and 3,729 circuit miles of overhead
transmission lines, including 423 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.





Electric Lines —
Underground.  As of December 31, 2009, we owned 20,080
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, 2009, we owned 230 major substation sites having a total
installed rated transformer capacity of 51,557 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 impose fines
and other sanctions on Electric Entities that fail to comply with approved
standards and audit compliance with approved standards. The FERC has approved
the delegation by the NERC of authority





8
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 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.





Under the
Public Utility Holding Company Act of 2005 (PUHCA 2005), the FERC has authority
to require holding companies and their subsidiaries to maintain certain books
and records and make them available for review by the FERC and state regulatory
authorities in certain circumstances. In December 2005, the FERC issued rules
implementing PUHCA 2005. Pursuant to those rules, in June 2006, CenterPoint
Energy filed with the FERC the required notification of its status as a public
utility holding company. In October 2006 and December 2009, the FERC adopted
additional rules regarding maintenance of books and records by utility holding
companies and additional reporting and accounting requirements for centralized
service companies that provide non-power goods and services to public utilities,
natural gas companies or both, in the same holding company system.





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 the same
transmission and distribution 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, 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.





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, plus carrying costs, but refused
to permit us to recover a performance bonus of $2 million on approximately $10
million in 2008 energy efficiency costs expended pursuant to the terms of a
settlement agreement reached in our 2006 rate proceeding.  We have
appealed the denial of the full 2008 performance bonus to the district court in
Travis County, Texas, where the case remains pending.





Rate
Agreement.  Our transmission and distribution rates are subject
to the terms of a Settlement Agreement effective in October 2006. The Settlement
Agreement provides that, until June 30, 2010, we will not seek to increase
our base rates and the other parties will not petition to decrease those rates.
The rate freeze is subject to adjustment for certain limited matters, including
the results of the appeals of the True-Up Order, the implementation of charges
associated with securitizations, the impact of severe weather such as hurricanes
and certain other force majeure events. We must make a new base rate filing not
later than June 30, 2010, based on a test year ended December 31, 2009,
unless the staff of the Texas Utility Commission and certain cities notify us
that such a filing is unnecessary.




9
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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;





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





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





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





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





•
            construct
      or acquire new equipment;





•
            acquire
      permits for facility operations;





•
            modify
      or replace existing and proposed equipment;
and





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





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





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.




10
 Table of Contents





Global
Climate Change





In recent
years, there has been increasing public debate regarding the potential impact on
global climate change by various “greenhouse gases” such as carbon dioxide, a
byproduct of burning fossil fuels. Legislation to regulate emissions of
greenhouse gases 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 industries such as the utility industry to meet
stringent new standards that would require substantial reductions in carbon
emissions. Those reductions could be costly and difficult to implement. Some
proposals would provide for credits to those who reduce emissions below certain
levels and would allow those credits to be traded and/or sold to
others.  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 greenhouse gas emissions and their effects. Recently, the
EPA declared that certain greenhouse gases represent an endangerment to human
health and proposed to expand its regulations relating to those
emissions.





It is too
early to determine whether, or in what form, further regulatory action regarding
greenhouse gas emissions will be adopted or what specific impacts a new
regulatory action might have on us. 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 greenhouse gas
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
electric service territory may increase our revenues from transmission and
distribution through increased demand for electricity for
cooling.  Another possible climate change that has been widely
discussed in recent years is the possibility of 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.




11
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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.





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, intends 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





12
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 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, 2009, we had 2,843 full-time employees, of which
approximately 44% are subject to a collective bargaining
agreement.  Our collective bargaining agreement with International
Brotherhood of Electrical Workers Union Local No. 66 is scheduled to expire in
May 2010.  We have a good relationship with this bargaining unit and
expect to negotiate a new agreement in 2010.





Item 1A.Risk
Factors





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




Risk
Factors Affecting Our Business





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





In March
2004, we filed our true-up application with the Texas Utility Commission,
requesting recovery of $3.7 billion, excluding interest, as allowed under
the Texas electric restructuring law. In December 2004, the Texas Utility
Commission issued 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:





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





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





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





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





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





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





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





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





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





13
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In April
2008, the court of appeals denied all motions for rehearing and reissued
substantially the same opinion as it had rendered in December 2007.





In June
2008, 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
rulings on the issues to be considered in the appeal or with respect to the
ultimate decision by the Texas Utility Commission on the tax normalization issue
described below.





To
reflect the impact of the True-Up Order, in 2004 and 2005, we recorded a net
after-tax extraordinary loss of $947 million. No amounts related to the
district court’s judgment or the decision of the court of appeals have been
recorded in our consolidated financial statements. However, if the court of
appeals decision is not reversed or modified as a result of further review by
the Texas Supreme Court, we anticipate that we would be required to record an
additional loss to reflect the court of appeals decision. The amount of that
loss would depend on several factors, including ultimate resolution of the tax
normalization issue described below and the calculation of interest on any
amounts we ultimately are authorized to recover or are required to refund beyond
the amounts recorded based on the True-Up Order, but could range from $180
million to $410 million (pre-tax) plus interest subsequent to December 31,
2009.





In the
True-Up Order, the Texas Utility Commission reduced our stranded cost recovery
by approximately $146 million, which was included in the extraordinary loss
discussed above, for the present value of certain deferred tax benefits
associated with 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. In its opinion, the court of appeals
ordered that this issue be remanded to the Texas Utility Commission, as that
commission requested. No party has challenged that order by the court of appeals
although the Texas Supreme Court has the authority to consider all aspects of
the rulings above,





14
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 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 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,
2009, we did business with approximately 80 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 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. Although 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, significant bad debts may be realized and unpaid amounts may
not be timely recovered. A subsidiary of NRG Energy, Inc., NRG Retail LLC,
acquired the Texas retail business of RRI, and its subsidiaries are together
considered the largest REP in our service territory. Approximately 41% of our
$139 million in billed receivables from REPs at December 31, 2009 was owed by
subsidiaries of NRG Retail LLC and 13% of this amount was owed by subsidiaries
of TXU Energy. Any delay or default in payment by REPs could adversely affect
our cash flows, financial condition and results of operations.  If any
of these REPs were unable to meet its obligations, it could consider, among
various options, restructuring under the bankruptcy laws, in which event any
such 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.





In this
regard, pursuant to the Stipulation and Settlement Agreement approved by the
Texas Utility Commission in September 2006, until June 30, 2010 we are limited
in our ability to request retail rate relief. For more information on the
Stipulation and Settlement Agreement, please read “Business — Regulation — State
and Local Regulation —Rate Agreement” in Item 1 of this Form 10-K.





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.




15
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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, 2009, we had $5.1 billion of outstanding indebtedness on
a consolidated basis, which includes $3.0 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;





•
            market
      expectations regarding our future earnings and cash
  flows;





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





•
            our
      exposure to RRI 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, 2009, we had outstanding approximately $2.5 billion
aggregate principal amount of general mortgage bonds, including approximately
$527 million held in trust to secure pollution control bonds for which
CenterPoint Energy is obligated and approximately $229 million held in
trust to secure pollution control bonds for which we are obligated.
Additionally, we had outstanding approximately $253 million aggregate
principal amount of first mortgage bonds, including approximately
$151 million held in trust to secure certain pollution control bonds for
which 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 $2.1 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, 2009. 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 — 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.




16
 Table of Contents





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, 2009, CenterPoint
Energy and its subsidiaries other than us have approximately $1.1 billion
principal amount of debt required to be paid through 2012.  This
amount excludes amounts related to indexed debt securities obligations, but
includes $290 million of pollution control bonds issued on CenterPoint Energy’s
behalf which CenterPoint Energy purchased in January 2010 (and which may be
remarketed) and $45 million of debentures redeemed in January
2010.  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, 2009 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, 2009,
we had invested $289 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:





•
            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" 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;




17
 Table of Contents




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





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





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





•
            construct
      or acquire new equipment;





•
            acquire
      permits for facility operations;





•
            modify
      or replace existing and proposed equipment;
and





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





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





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





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





In common
with other companies in our line of business that serve coastal regions, we do
not have insurance covering our transmission and distribution system, 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.


18
 Table of Contents




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





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





On May 1,
2009, RRI sold its Texas retail business to NRG Retail LLC, a subsidiary of
NRG Energy, Inc. In connection with the sale, RRI changed its name to RRI
Energy, Inc. and no longer provides service as a REP in our service territory.
The sale does not alter RRI’s contractual obligations to indemnify CenterPoint
Energy and its subsidiaries, including us, for certain liabilities, including
their indemnification regarding certain litigation.





Reliant
Energy and RRI 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 RRI, claims against Reliant Energy have
been made on grounds that include liability of Reliant Energy as a controlling
shareholder of RRI. 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 RRI were determined to be
unavailable or if RRI were unable to satisfy indemnification obligations owed
with respect to those claims.





In
connection with the organization and capitalization of Texas Genco, 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.





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 Table of Contents


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





The
recent credit crisis and 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 also reflected in significant reductions in equity
market valuations in 2008, which significantly reduced the value of assets of
CenterPoint Energy’s pension plan, in which we participate. These reductions
increased pension cost in 2009.





In
addition to the credit and financial market issues, a recurrence of 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.





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





Legislation
to regulate emissions of greenhouse gases 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 greenhouse gas
emissions and their effects. Recently, the EPA declared that certain greenhouse
gases represent an endangerment to human health and proposed to expand its
regulations relating to those emissions.  It is too early to determine
whether, or in what form, further regulatory action regarding greenhouse gas
emissions will be adopted or what specific impacts a new regulatory action might
have on us. 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 and warmer
temperatures which could adversely 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
that has been widely discussed in recent years is the possibility of 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.


20
 Table of Contents




Item 2. Properties





Character
of Ownership





We own or
lease our principal properties in fee. 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
3 and 8(b) to our consolidated financial statements, which information is
incorporated herein by reference.





Item 4. Reserved





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 2007,
2008 and 2009, we paid dividends on our common shares of $100 million,
$640 million 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 5.7 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).





21
 Table of Contents


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.





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 to weather on an adjusted basis. During
2009, we continued to see evidence that customers are seeking to conserve in
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 existing credit facilities
and prudent refinancing of existing debt. We expect to experience higher
borrowing costs and greater uncertainty in executing capital markets
transactions given the current uncertainties in the financial
markets.





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 will defer until our next rate proceeding before the
Texas Utility Commission the amount of pension expense that differs from the
level of pension expense included in our 2007 base rates.





Significant
Events





Hurricane
Ike





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









22
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 but
office buildings and warehouses and their contents and substations are covered
by insurance that provides for a maximum deductible of $10 million. Current
estimates are that total losses to property covered by this insurance were
approximately $30 million.





We
deferred the uninsured system restoration costs as management believed it was
probable that such costs would be recovered through the regulatory process. As a
result, system restoration costs did not affect our reported operating income
for 2008 or 2009.





Legislation
enacted by the Texas Legislature in April 2009 authorized the Texas Utility
Commission to conduct proceedings to determine the amount of system restoration
costs and related costs associated with hurricanes or other major storms that
utilities are entitled to recover, and to issue financing orders that would
permit a utility like us to recover the distribution portion of those costs and
related carrying costs through the issuance of non-recourse system restoration
bonds similar to the securitization bonds issued previously.  The
legislation also allowed such a utility to recover, or defer for future
recovery, the transmission portion of its system restoration costs through the
existing mechanisms established to recover transmission costs.





Pursuant
to such legislation, 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 announced 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 our application and
the settlement agreement and authorizing recovery of $663 million, of which
$643 million was attributable to distribution service and eligible for
securitization and the remaining $20 million was attributable to
transmission service and eligible for recovery through the existing mechanisms
established to recover transmission costs.





In July
2009, we filed with the Texas Utility Commission our application for a financing
order to recover the portion of approved costs related to distribution service
through the issuance of system restoration bonds.   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 will reduce operating income in 2010 by approximately
$24 million.





In
accordance with the orders discussed above, as of December 31, 2009, we have
recorded $651 million associated with distribution-related storm
restoration costs as a net regulatory asset and $20 million associated with
transmission-related storm restoration costs, of which $18 million is recorded
in property, plant and equipment and $2 million of related carrying costs is
recorded in regulatory assets.  These amounts reflect carrying costs of
$60 million related to distribution and $2 million related to
transmission through December 31, 2009, based on the 11.075% cost of
capital approved by the Texas Utility Commission.  The carrying costs have
been bifurcated into two components: (i) return of borrowing costs and (ii) an
allowance for earnings on shareholders’ investment.  During the year ended
December 31, 2009, the component representing a return of borrowing costs of
$23 million has been recognized and is included in other income in our
Statements of Consolidated Income.  The component





23
 Table of Contents
 
 representing
an allowance for earnings on shareholders’ investment of $39 million is
being deferred and will be recognized as it is collected through
rates.





Debt
Financing Transactions





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





In
October 2009, we terminated our $600 million 364-day secured credit
facility which had been arranged in November 2008 following Hurricane
Ike.





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, including
      deregulation, re-regulation, health care reform, and changes in or
      application of laws or regulations applicable to the various aspects of
      our business;





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





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





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





•
            industrial,
      commercial and residential growth in our service territory and changes in
      market demand and demographic
patterns;





•
            weather
      variations and other natural
phenomena;





•
            changes
      in interest rates or rates of
inflation;





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





•
            actions
      by rating agencies;





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





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





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




•
              the
      outcome of litigation brought by or against
us;


24
 Table of Contents




•
            our
      ability to control costs;





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





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





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





•
            other
      factors we discuss 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.





The
following table sets forth selected financial data for the years ended
December 31, 2007, 2008 and 2009, 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 31,2007
            
            
            2008
            
            
            2009(In
      millions,
              except
      throughput and customer data)Revenues:Electric
      transmission and distribution utility
            
            $
            1,560
            
            
            $
            1,593
            
            
            $
            1,674Transition
      and system restoration bond companies
            
            
            277
            
            
            
            323
            
            
            
            340Total
      Revenues
            
            
            1,837
            
            
            
            1,916
            
            
            
            2,014Expenses:Operation
      and maintenance, excluding transition and system restoration bond
      companies
            
            
            652
            
            
            
            703
            
            
            
            774Depreciation
      and amortization, excluding transition and system restoration bond
      companies
            
            
            243
            
            
            
            277
            
            
            
            277Taxes
      other than income taxes
            
            
            223
            
            
            
            201
            
            
            
            208Transition
      and system restoration bond companies
            
            
            158
            
            
            
            190
            
            
            
            209Total
      Expenses
            
            
            1,276
            
            
            
            1,371
            
            
            
            1,468Operating
      Income
            
            
            561
            
            
            
            545
            
            
            
            546Interest
      and other finance charges
            
            
            (107
            )
            
            
            (109
            )
            
            
            (158
            )Interest
      on transition and system restoration bonds
            
            
            (123
            )
            
            
            (136
            )
            
            
            (131
            )Other
      income, net
            
            
            68
            
            
            
            43
            
            
            
            53Income
      Before Income Taxes
            
            
            399
            
            
            
            343
            
            
            
            310Income
      Tax Expense
            
            
            (126
            )
            
            
            (121
            )
            
            
            (102
            )Net
      Income
            
            $
            273
            
            
            $
            222
            
            
            $
            208Throughput
      (in gigawatt-hours (GWh)):Residential
            
            
            23,999
            
            
            
            24,258
            
            
            
            24,815Total
            
            
            76,291
            
            
            
            74,840
            
            
            
            74,579Number
      of metered customers at end of period:Residential
            
            
            1,793,600
            
            
            
            1,821,267
            
            
            
            1,849,019Total
            
            
            2,034,074
            
            
            
            2,064,854
            
            
            
            2,094,210




2009 Compared to
2008.We reported operating income of $546 million for
2009, consisting of $415 million from our regulated electric transmission
and distribution utility operations (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


25
 Table of Contents
 
 $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 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 are being deferred until our next general
rate case 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 of our federal income tax return
examinations for tax years 2004 and 2005. For more information, see Note 7 to
our consolidated financial statements.





2008 Compared to
2007.We reported operating income of $545 million for
2008, consisting of $407 million from the TDU, exclusive of an additional
$5 million from the CTC, and $133 million related to transition bond
companies. For 2007, operating income totaled $561 million, consisting of
$400 million from the TDU, exclusive of an additional $42 million from
the CTC, and $119 million related to transition bond companies. Revenues
for the TDU increased in 2008 due to customer growth, with over
30,000 metered customers added ($23 million), increased usage
($15 million) in part caused by favorable weather experienced, increased
transmission-related revenues ($21 million) and increased revenues from
ancillary services ($5 million), partially offset by reduced revenues due
to Hurricane Ike ($17 million) and the settlement of the final fuel
reconciliation in 2007 ($5 million). Operation and maintenance expense
increased primarily due to higher transmission costs ($43 million), the
settlement of the final fuel reconciliation in 2007 ($13 million) and
increased support services ($13 million), partially offset by a gain on
sale of land ($9 million) and normal operating and maintenance expenses
that were postponed as a result of Hurricane Ike restoration efforts
($10 million). Depreciation and amortization increased $34 million
primarily due to amounts related to the CTC ($30 million), which were
offset by similar amounts in revenues. Taxes other than income taxes declined
$21 million primarily as a result of the Texas margin tax being classified
as an income tax for financial reporting purposes in 2008 ($19 million) and
a refund of prior years’ state franchise taxes ($5 million).





Income Tax Expense.  Our
2008 effective tax rate of 35.4% differed from the 2007 effective tax rate of
31.6% primarily as a result of revisions to the Texas Franchise Tax Law (Texas
margin tax) which was reported as an operating expense prior to 2008 and is now
being reported as an income tax.





LIQUIDITY





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 2010
include approximately $557 million of capital expenditures and
$241 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 2010. 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.





26
 Table of Contents





Capital Requirements. The
following table sets forth our capital expenditures for 2009 and estimates of
our capital requirements for 2010 through 2014 (in millions):





2009
            $
            4282010
            
            5572011
            
            5632012
            
            4882013
            
            5032014
            
            484





The table
above includes expenditures of $94 million in 2009 and capital requirements of
$181 million, $172 million, $49 million, $38 million and $34 million in 2010
through 2014, respectively, related to AMS and Intelligent Grid, net of a $200
million grant by the U.S. Department of Energy (DOE).  The award is
contingent on successful completion of negotiations with the DOE.





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





Contractual
      Obligations
            
            Total
            
            
            2010
            
            
            
            2011-2012
            
            
            
            2013-2014
            
            
            2015
      and
              thereafterTransition
      and system restoration bond debt(1)
            
            $
            3,046
            
            
            $
            241
            
            
            $
            590
            
            
            $
            565
            
            
            $
            1,650Other
      long-term debt
            
            
            2,092
            
            
            
            —
            
            
            
            46
            
            
            
            1,250
            
            
            
            796Interest
      payments - transition and system restoration bond debt (1)
    (2)
            
            
            834
            
            
            
            135
            
            
            
            245
            
            
            
            187
            
            
            
            267Interest
      payments - other long-term debt (2)
            
            
            1,188
            
            
            
            118
            
            
            
            259
            
            
            
            193
            
            
            
            618Capital
      leases
            
            
            1
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1Benefit
      obligations (3)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Income
      taxes (4)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
      contractual cash obligations
            
            $
            7,161
            
            
            $
            494
            
            
            $
            1,140
            
            
            $
            2,195
            
            
            $
            3,332


_________


(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 $7 million to our postretirement
      benefits plan in 2010 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, 2009, the liability for uncertain income tax positions was
      $175 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.





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





System Restoration
Bonds.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





27
 Table of Contents
 
 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.





Credit
Facilities.In October 2009, we terminated our
$600 million 364-day secured credit facility which had been arranged in
November 2008 following Hurricane Ike.





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. 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, 2010, we had the following facility (in millions):





Date
      Executed
            
            Type
      of
              Facility
            
            Size
      of
              Facility
            
            Amount
      Utilized at
              February
      15, 2010
            
            
            Termination
      DateJune
      29, 2007
            
            Revolver
            
            $
            289
            
            $
            4
            (1)
            
            June
      29, 2012


_________


(1)
              Represents
      outstanding letters of credit.


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





Temporary
Investments.As of February 15, 2010, we had external
temporary investments of $450 million.





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, 2010, we had $379 million
invested in the money pool. The money pool may not provide sufficient funds to
meet our cash needs.




28
 Table of Contents





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, 2009. Amounts are expressed in
millions.





Year
            
            Third-Party
            
            
            Affiliate
            
            
            Sub-Total
            
            
            Transition
      and
              System
              Restoration
      Bonds
            
            
            Total2010
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            241
            
            
            $
            2412011
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            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
            
            
            $
            3,046
            
            
            $
            5,290





As of
December 31, 2009, 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
              (1)
              
              
              2,518Total
              
              $
              1,864
              
              
              $
              229
              
              
              $
              678
              
              
              $
              2,771


_________
 (1)
                Of
      such amount, $290 million collateralizes bonds purchased by CenterPoint
      Energy in January 2010, which may be remarketed by CenterPoint
      Energy.


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 $2.1 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,
2009. However, we are contractually prohibited, subject to certain exceptions,
from issuing additional first mortgage bonds.




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, 2009, Bond Company had $376 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, 2009, Bond Company II had $1.6 billion aggregate
principal amount of outstanding transition bonds that were issued in 2005 in
accordance with the Texas electric restructuring law. At December 31, 2009,
Bond Company III had $455 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, 2009, Restoration
Bond Company had approximately $665 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.  As of February 15, 2010, 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
            
            Baa1
            
            Positive
            
            BBB+
            
            Negative
            
            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 not recommendations to
buy, sell or hold our securities and may be revised or withdrawn at any time by
the rating agency. Each rating should be evaluated independently of any other
rating. Any future reduction or withdrawal of




30
 Table of Contents
 
 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, 2009,
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, four outstanding
series of CenterPoint Energy’s senior notes, aggregating $950 million in
principal amount as of February 15, 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
      regulatory actions;





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





•
            the
      ability of REPs that are subsidiaries of NRG Retail LLC and TXU Energy,
      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 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 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




31
 Table of Contents
 
 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, 2009, we had recorded regulatory assets
of $2.9 billion and regulatory liabilities of
$382 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.





32
 Table of Contents
 
 OTHER
SIGNIFICANT MATTERS
  Pension Plans.As discussed
in Note 2(m) 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 $44 million for
the year ended December 31, 2009. Our actuarially determined pension and
other





Item 7A. Quantitative and Qualitative
Disclosures About Market Risk




As of
December 31, 2009, we had outstanding long-term debt and lease obligations
that subject us to the risk of loss associated with movements in market interest
rates.





We had
floating rate obligations of $259 million and $-0- at December 31,
2008 and 2009, respectively.





At
December 31, 2008 and 2009, we had outstanding fixed-rate debt aggregating
$4.3 billion and $5.3 billion in principal amount and having a fair
value of approximately $4.2 billion and $5.6 billion in 2008 and 2009,
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 6 to our consolidated financial statements). However, the fair value
of these instruments would increase by approximately $147 million if
interest rates were to decline by 10% from their levels at December 31,
2009. 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.






33
 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, 2009 and 2008, 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,
2009.  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, 2009 and 2008, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2009, in conformity with accounting principles generally accepted in the
United States of America.







/s/
DELOITTE & TOUCHE LLP




Houston,
Texas


March 10,
2010







34
 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, 2009.





This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary 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,
2010


35
 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 31,2007
            
            
            2008
            
            
            2009(In
      Millions)Revenues
            
            $
            1,837
            
            
            $
            1,916
            
            
            $
            2,014Expenses:Operation
      and maintenance
            
            
            655
            
            
            
            709
            
            
            
            780Depreciation
      and amortization
            
            
            398
            
            
            
            460
            
            
            
            480Taxes
      other than income taxes
            
            
            223
            
            
            
            202
            
            
            
            208Total
            
            
            1,276
            
            
            
            1,371
            
            
            
            1,468Operating
      Income
            
            
            561
            
            
            
            545
            
            
            
            546Other
      Income (Expense):Interest
      and other finance charges
            
            
            (107
            )
            
            
            (109
            )
            
            
            (158
            )Interest
      on transition and system restoration bonds
            
            
            (123
            )
            
            
            (136
            )
            
            
            (131
            )Other,
      net
            
            
            68
            
            
            
            43
            
            
            
            53Total
            
            
            (162
            )
            
            
            (202
            )
            
            
            (236
            )Income
      Before Income Taxes
            
            
            399
            
            
            
            343
            
            
            
            310Income
      tax expense
            
            
            (126
            )
            
            
            (121
            )
            
            
            (102
            )Net
      Income
            
            $
            273
            
            
            $
            222
            
            
            $
            208











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 31,2008
            
            
            2009(In
      Millions)ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            166
            
            
            $
            739Accounts
      and notes receivable, net
            
            
            227
            
            
            
            200Accounts
      and notes receivable—affiliated companies
            
            
            30
            
            
            
            303Accrued
      unbilled revenues
            
            
            60
            
            
            
            63Inventory
            
            
            74
            
            
            
            69Taxes
      receivable
            
            
            8
            
            
            
            54Deferred
      tax asset
            
            
            1
            
            
            
            1Other
            
            
            82
            
            
            
            58Total
      current assets
            
            
            648
            
            
            
            1,487Property,
      Plant and Equipment, net
            
            
            4,604
            
            
            
            4,588Other
      Assets:Regulatory
      assets
            
            
            2,832
            
            
            
            2,885Notes
      receivable—affiliated companies
            
            
            750
            
            
            
            750Other
            
            
            48
            
            
            
            45Total
      other assets
            
            
            3,630
            
            
            
            3,680Total
      Assets
            
            $
            8,882
            
            
            $
            9,755LIABILITIES
      AND MEMBER’S EQUITYCurrent
      Liabilities:Current
      portion of transition and system restoration bonds long-term
      debt
            
            $
            208
            
            
            $
            241Accounts
      payable
            
            
            150
            
            
            
            58Accounts
      and notes payable—affiliated companies
            
            
            36
            
            
            
            29Taxes
      accrued
            
            
            87
            
            
            
            89Interest
      accrued
            
            
            100
            
            
            
            100Other
            
            
            89
            
            
            
            61Total
      current liabilities
            
            
            670
            
            
            
            578Other
      Liabilities:Accumulated
      deferred income taxes, net
            
            
            1,506
            
            
            
            1,469Unamortized
      investment tax credits
            
            
            21
            
            
            
            14Benefit
      obligations
            
            
            187
            
            
            
            195Regulatory
      liabilities
            
            
            313
            
            
            
            382Notes
      payable—affiliated companies
            
            
            151
            
            
            
            151Other
            
            
            170
            
            
            
            221Total
      other liabilities
            
            
            2,348
            
            
            
            2,432Long-Term
      Debt:Transition
      and system restoration bonds
            
            
            2,381
            
            
            
            2,805Other
            
            
            1,843
            
            
            
            2,092Total
      long-term debt
            
            
            4,224
            
            
            
            4,897Commitments
      And Contingencies (Note 8)Member’s
      Equity
            
            
            1,640
            
            
            
            1,848Total
      Liabilities and Member’s Equity
            
            $
            8,882
            
            
            $
            9,755














See Notes
to Consolidated Financial Statements


37
 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 31,2007
            
            
            2008
            
            
            2009(In
      Millions)Cash
      Flows from Operating Activities:Net
      income
            
            $
            273
            
            
            $
            222
            
            
            $
            208Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
            
            
            398
            
            
            
            460
            
            
            
            480Deferred
      income taxes
            
            
            (73
            )
            
            
            347
            
            
            
            16Amortization
      of deferred financing costs
            
            
            11
            
            
            
            13
            
            
            
            23Changes
      in other assets and liabilities:Accounts
      and notes receivable, net
            
            
            (14
            )
            
            
            (13
            )
            
            
            44Accounts
      receivable/payable, affiliates
            
            
            23
            
            
            
            (5
            )
            
            
            17Taxes
      receivable
            
            
            31
            
            
            
            (5
            )
            
            
            (46
            )Inventory
            
            
            3
            
            
            
            (14
            )
            
            
            5Accounts
      payable
            
            
            (24
            )
            
            
            21
            
            
            
            (78
            )Interest
      and taxes accrued
            
            
            (20
            )
            
            
            17
            
            
            
            2Net
      regulatory assets and liabilities
            
            
            67
            
            
            
            (376
            )
            
            
            (63
            )Other
      current assets
            
            
            —
            
            
            
            (2
            )
            
            
            (2
            )Other
      current liabilities
            
            
            7
            
            
            
            13
            
            
            
            (28
            )Other
      assets
            
            
            (1
            )
            
            
            1
            
            
            
            (3
            )Other
      liabilities
            
            
            (18
            )
            
            
            (5
            )
            
            
            (13
            )Other,
      net
            
            
            1
            
            
            
            (9
            )
            
            
            —Net
      cash provided by operating activities
            
            
            664
            
            
            
            665
            
            
            
            562Cash
      Flows from Investing Activities:Capital
      expenditures
            
            
            (402
            )
            
            
            (462
            )
            
            
            (442
            )Increase
      in notes receivable from affiliates
            
            
            —
            
            
            
            —
            
            
            
            (289
            )Decrease
      (increase) in restricted cash of transition and system restoration bond
      companies
            
            
            (1
            )
            
            
            (11
            )
            
            
            26Other,
      net
            
            
            12
            
            
            
            14
            
            
            
            28Net
      cash used in investing activities
            
            
            (391
            )
            
            
            (459
            )
            
            
            (677
            )Cash
      Flows from Financing Activities:Revolving
      credit facility, net
            
            
            50
            
            
            
            201
            
            
            
            (251
            )Proceeds
      from long-term debt
            
            
            —
            
            
            
            488
            
            
            
            1,165Payments
      of long-term debt
            
            
            (147
            )
            
            
            (159
            )
            
            
            (208
            )Decrease
      in short-term notes payable with affiliates
            
            
            (70
            )
            
            
            (39
            )
            
            
            (8
            )Debt
      issuance costs
            
            
            —
            
            
            
            (19
            )
            
            
            (10
            )Dividend
      to parent
            
            
            (100
            )
            
            
            (640
            )
            
            
            —Net
      cash provided by (used in) financing activities
            
            
            (267
            )
            
            
            (168
            )
            
            
            688Net
      Increase in Cash and Cash Equivalents
            
            
            6
            
            
            
            38
            
            
            
            573Cash
      and Cash Equivalents at Beginning of the Year
            
            
            122
            
            
            
            128
            
            
            
            166Cash
      and Cash Equivalents at End of the Year
            
            $
            128
            
            
            $
            166
            
            
            
            739Supplemental
      Disclosure of Cash Flow Information:Cash
      Payments:Interest,
      net of capitalized interest
            
            $
            221
            
            
            $
            235
            
            
            $
            287Income
      taxes (refunds), net
            
            
            180
            
            
            
            (231
            )
            
            
            134Non-cash
      transactions:Accounts
      payable related to capital expenditures
            
            $
            23
            
            
            $
            42
            
            
            $
            28











See Notes
to Consolidated Financial Statements


38
 Table of Contents


CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND
SUBSIDIARIES


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





STATEMENTS
OF CONSOLIDATED MEMBER’S EQUITY





2007
            
            
            2008
            
            
            2009Shares
            
            
            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
            
            
            
            
            
            
            
            1,712
            
            
            
            
            
            
            
            1,230Dividend
      to parent
            
            
            
            
            
            
            —
            
            
            
            
            
            
            
            (482
            )
            
            
            
            
            
            
            —Balance,
      end of year
            
            
            
            
            
            
            1,712
            
            
            
            
            
            
            
            1,230
            
            
            
            
            
            
            
            1,230Retained
      EarningsBalance,
      beginning of year
            
            
            
            
            
            
            170
            
            
            
            
            
            
            
            346
            
            
            
            
            
            
            
            410Net
      income
            
            
            
            
            
            
            273
            
            
            
            
            
            
            
            222
            
            
            
            
            
            
            
            208Dividend
      to parent
            
            
            
            
            
            
            (100
            )
            
            
            
            
            
            
            (158
            )
            
            
            
            
            
            
            —Cumulative
      effect of uncertain tax positions standard
            
            
            
            
            
            
            3
            
            
            
            
            
            
            
            —
            
            
            
            
            
            
            
            —Balance,
      end of year
            
            
            
            
            
            
            346
            
            
            
            
            
            
            
            410
            
            
            
            
            
            
            
            618Total
      Member’s Equity
            
            
            
            
            
            $
            2,058
            
            
            
            
            
            
            $
            1,640
            
            
            
            
            
            
            $
            1,848











See Notes
to Consolidated Financial Statements





39
 Table of Contents


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 a 5,000-square mile area of the Texas
Gulf Coast 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, 2009,
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 2(e), 2(f),
3(a), 3(b) and 6.





(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. Property, plant and
equipment includes the following:





Weighted
      Average Useful
            
            
            December 31,Lives
      (Years)
            
            
            2008
            
            
            2009(In
      millions)Transmission
            
            38
            
            
            $
            1,597
            
            
            $
            1,561Distribution
            
            25
            
            
            
            4,853
            
            
            
            4,971Other
            
            20
            
            
            
            806
            
            
            
            793Total
            
            
            
            
            
            7,256
            
            
            
            7,325Accumulated
      depreciation
            
            
            
            
            
            2,652
            
            
            
            2,737Property,
      plant and equipment, net
            
            
            
            
            $
            4,604
            
            
            $
            4,588





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





40
 Table of Contents
 
 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. The
following is a list of regulatory assets/liabilities reflected on CenterPoint
Houston’s Consolidated Balance Sheets as of December 31, 2008 and
2009:





December 31,2008
            
            
            2009(In
      millions)Securitized
      regulatory asset (1)
            
            $
            2,430
            
            
            $
            2,886Unrecognized
      equity return
            
            
            (207
            )
            
            
            (232
            )Unamortized
      loss on reacquired debt
            
            
            73
            
            
            
            67Hurricane
      Ike restoration cost (1)
            
            
            435
            
            
            
            2Pension
      and postretirement-related regulatory asset (2)
            
            
            50
            
            
            
            83Other
      long-term regulatory assets
            
            
            51
            
            
            
            79Total
      regulatory assets (1)
            
            
            2,832
            
            
            
            2,885Estimated
      removal costs
            
            
            301
            
            
            
            308Other
      long-term regulatory liabilities
            
            
            12
            
            
            
            74Total
      regulatory liabilities
            
            
            313
            
            
            
            382Total
      regulatory assets and liabilities, net
            
            $
            2,519
            
            
            $
            2,503


_________


(1)
            As
      discussed in Note 6(b), CenterPoint Houston securitized approximately
      $665 million of Hurricane Ike restoration costs in November
      2009.  CenterPoint Houston did not record a return on Hurricane
      Ike restoration costs until approval by the Public Utility Commission of
      Texas (Texas Utility Commission) was received in 2009.  Other
      regulatory assets that are not earning a return were not material at
      December 31, 2008 and 2009.





(2)
            CenterPoint
      Houston’s actuarially determined pension expense for 2009 in excess of the
      2007 base year amount is being deferred for rate making purposes until its
      next general rate case pursuant to Texas law.  CenterPoint
      Houston deferred as a regulatory asset $32 million in pension and other
      postemployment expenses during the year ended December 31,
      2009.





CenterPoint
Houston recognizes removal costs as a component of depreciation expense in
accordance with regulatory treatment. As of December 31, 2008 and 2009,
these removal costs of $301 million and $308 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 liability
to an asset retirement liability in accordance with accounting guidance for
conditional asset retirement obligations.  At December 31, 2008 and
2009, CenterPoint Houston’s asset retirement obligations were $17 million
and $22 million, respectively.  The increase in asset retirement
obligation in 2009 of $5 million is primarily attributable to the decrease in
the credit-adjusted risk-free rate used to value the asset retirement obligation
as of the end of the period.





(f)
      Depreciation and Amortization
Expense





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 years, 14 years, 12 years and 14 years,
respectively), 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.




41
 Table of Contents


The
following table presents depreciation and amortization expense for 2007, 2008
and 2009:





Year
      Ended December 31,2007
            
            
            2008
            
            
            2009(In millions)Depreciation
      expense
            
            $
            251
            
            
            $
            256
            
            
            $
            259Amortization
      of securitized regulatory assets
            
            
            155
            
            
            
            183
            
            
            
            203Other
      amortization
            
            
            (8
            )
            
            
            21
            
            
            
            18Total
      depreciation and amortization
            
            $
            398
            
            
            $
            460
            
            
            $
            480





(g)
      Allowance for Funds Used During
Construction





Allowance
for funds used during construction (AFUDC) represents the approximate net
composite interest cost of borrowed funds and a reasonable return on the equity
funds used for construction. Although AFUDC increases both utility plant and
earnings, it is realized in cash when the assets are included in rates. AFUDC is
capitalized as a component of projects under construction and will be amortized
over the assets’ estimated useful lives. During 2007, 2008 and 2009, CenterPoint
Houston capitalized AFUDC of $10 million, $7 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
$2 million and less than $1 million at December 31, 2008 and 2009,
respectively. The provision for doubtful accounts in CenterPoint Houston’s
Statements of Consolidated Income for 2007, 2008 and 2009 was $1 million,
$2 million and $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 in October 2001, December 2005 and February 2008 and system restoration
bonds in November 2009, 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 $60 million and
$34 million at December 31, 2008 and 2009, 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 3(a), 3(b) and 6. Cash and cash equivalents includes
$166 million and $151 million at December 31, 2008 and 2009,
respectively, that is held by CenterPoint Houston’s transition and system
restoration bond subsidiaries solely to support servicing the transition and
system restoration bonds.





42
 Table of Contents




(l)
      New Accounting Pronouncements





Effective
January 1, 2009, CenterPoint Houston adopted new accounting guidance on
employers’ disclosures about postretirement benefit plan assets which expands
the disclosures about employers’ plan assets to include more detailed
disclosures about the employers’ investment strategies, major categories of plan
assets, concentrations of risk within plan assets and valuation techniques used
to measure the fair value of plan assets. See Note 2(m) below for the required
disclosures.





Effective
June 30, 2009, CenterPoint Houston adopted new accounting guidance on interim
disclosures about fair value of financial instruments which expands the fair
value disclosures required for all financial instruments to interim periods.
This new guidance also requires entities to disclose in interim periods the
methods and significant assumptions used to estimate the fair value of financial
instruments. CenterPoint Houston’s adoption of this new guidance did not have a
material impact on its financial position, results of operations or cash
flows.





Effective
June 30, 2009, CenterPoint Houston adopted new accounting guidance on subsequent
events that establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. CenterPoint Houston’s adoption of this
new guidance did not have a material impact on its financial position, results
of operations or cash flows.





Effective
July 1, 2009, CenterPoint Energy adopted new accounting guidance on the
Financial Accounting Standards Board (FASB) Accounting Standards Codification
(Codification) and the hierarchy of generally accepted accounting
principles.  This new accounting guidance establishes the Codification
as the source of authoritative U.S. generally accepted accounting principles
recognized by the FASB to be applied by nongovernmental entities. 
Rules and interpretive releases of the Securities and Exchange Commission
(SEC) under authority of federal securities laws are also sources of
authoritative U.S. generally accepted accounting principles for SEC
registrants. CenterPoint Houston’s adoption of this new guidance did not
have any impact on its financial position, results of operations or cash
flows.





In June
2009, the FASB issued new accounting guidance on consolidation of variable
interest entities (VIEs) that changes how a reporting entity determines a
primary beneficiary that would consolidate the VIE from a quantitative risk and
rewards approach to a qualitative approach based on which variable interest
holder has the power to direct the economic performance related activities of
the VIE as well as the obligation to absorb losses or right to receive benefits
that could potentially be significant to the VIE. This new guidance requires the
primary beneficiary assessment to be performed on an ongoing basis and also
requires enhanced disclosures that will provide more transparency about a
company’s involvement in a VIE. This new guidance is effective for a reporting
entity’s first annual reporting period that begins after November 15,
2009. CenterPoint Houston expects that the adoption of this new guidance
will not have a material impact on its financial position, results of operations
or cash flows.





In
January 2010, the FASB issued new accounting guidance to require additional fair
value related disclosures including transfers into and out of Levels 1 and 2 and
separate disclosures about purchases, sales, issuances, and settlements relating
to Level 3 measurements. It also clarifies existing fair value disclosure
guidance about the level of disaggregation and about inputs and valuation
techniques. This new guidance is effective for the first reporting period
beginning after December 15, 2009. The adoption of this new guidance will not
have a material impact on CenterPoint Houston's 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)
      Employee Benefit Plans





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





43
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 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 expense of $1 million, pension income of
$4 million and pension expense of $43 million for the years ended
December 31, 2007, 2008 and 2009, respectively. CenterPoint Houston deferred as
a regulatory asset $32 million in pension and other postemployment expenses
during the year ended December 31, 2009.





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,
2007, 2008 and 2009.





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. Effective January 1, 2009, CenterPoint Houston
matches 100% of the first 6% of each employee’s compensation contributed.
CenterPoint Houston previously matched 75% of the first 6% of each employee’s
compensation contributed with the potential for an additional discretionary
match of up to 50% 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
$12 million, $14 million and $11 million for the years ended
December 31, 2007, 2008 and 2009, respectively.





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 31,2007
            
            
            2008
            
            
            2009(In
      millions)Service
      cost— benefits earned during the period
            
            $
            1
            
            
            $
            1
            
            
            $
            —Interest
      cost on projected benefit obligation
            
            
            17
            
            
            
            17
            
            
            
            18Expected
      return on plan assets
            
            
            (11
            )
            
            
            (11
            )
            
            
            (8
            )Amortization
      of transition obligation
            
            
            6
            
            
            
            6
            
            
            
            6Net
      postretirement benefit cost
            
            $
            13
            
            
            $
            13
            
            
            $
            16




44
 Table of Contents





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





Year
      Ended December 31,2007
            
            2008
            
            2009Discount
      rate
            5.85%
            
            6.40%
            
            6.90%Expected
      return on plan assets
            8.00%
            
            8.00%
            
            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.





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 2008 and 2009.  The measurement dates for plan assets and
obligations were December 31, 2008 and 2009.





Year
      Ended December 31,2008
            
            
            2009(In
      millions)Change
      in Benefit ObligationAccumulated
      benefit obligation, beginning of year
            
            $
            281
            
            
            $
            272Service
      cost
            
            
            1
            
            
            
            —Interest
      cost
            
            
            17
            
            
            
            18Benefits
      paid
            
            
            (18
            )
            
            
            (18
            )Participant
      contributions
            
            
            1
            
            
            
            1Medicare
      drug reimbursement
            
            
            2
            
            
            
            —Actuarial
      (gain) loss
            
            
            (12
            )
            
            
            15Accumulated
      benefit obligation, end of year
            
            $
            272
            
            
            $
            288Change
      in Plan AssetsPlan
      assets, beginning of year
            
            $
            142
            
            
            $
            115Benefits
      paid
            
            
            (18
            )
            
            
            (18
            )Employer
      contributions
            
            
            9
            
            
            
            9Participant
      contributions
            
            
            1
            
            
            
            1Actual
      investment return (loss)
            
            
            (19
            )
            
            
            17Plan
      assets, end of year
            
            $
            115
            
            
            $
            124Amounts
      Recognized in Balance SheetsOther
      liabilities-benefit obligations
            
            $
            (157
            )
            
            $
            (164
            )Net
      liability, end of year
            
            $
            (157
            )
            
            $
            (164
            )Actuarial
      AssumptionsDiscount
      rate
            
            
            6.90
            %
            
            
            5.70
            %Expected
      long-term return on assets
            
            
            7.50
            %
            
            
            7.50
            %Healthcare
      cost trend rate assumed for the next year
            
            
            6.50
            %
            
            
            7.50
            %Prescription
      drug cost trend rate assumed for the next year
            
            
            12.00
            %
            
            
            8.00
            %Rate
      to which the cost trend rate is assumed to decline (ultimate trend
      rate)
            
            
            5.50
            %
            
            
            5.50
            %Year
      that the healthcare rate reaches the ultimate trend rate
            
            
            2011
            
            
            
            2014Year
      that the prescription drug rate reaches the ultimate trend
      rate
            
            
            2014
            
            
            
            2015





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 the 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 costs are assumed to increase 7.50% during
2010, after which this rate decreases until reaching the ultimate rate of 5.50%
in 2014. Prescription drug costs are assumed to increase 8.00% in 2010, after
which this rate decreases until reaching the ultimate rate of 5.50% in
2015.





45
 Table of Contents





CenterPoint
Houston does not have amounts recognized in accumulated other comprehensive
income related to its postretirement benefit plans as of December 31, 2008
and 2009.  Unrecognized costs were recorded as a regulatory asset
because CenterPoint Houston historically and currently recovers postretirement
expenses in rates.





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
            
            $
            12
            
            
            $
            (10
            )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
            25-35%International
      equity securities
            5-15%Debt
      securities
            55-65%Cash
            0-2%





The fair
values of CenterPoint Houston’s postretirement plan assets at December 31, 2009,
by asset category are as follows:





Fair
      Value Measurements at December 31, 2009
              (in
      millions)Total
            
            
            Quoted
      Prices
              in
      Active
              Markets
      for
              Identical
              Assets
              (Level
      1)
            
            Significant
              Observable
              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.





CenterPoint
Houston expects to contribute $7 million to its postretirement benefits
plan in 2010. The following benefit payments are expected to be paid by the
postretirement benefit plan (in millions):





Postretirement
      Benefit PlanBenefit
              Payments
            
            
            Medicare
              Subsidy
      Receipts2010
            
            $
            19
            
            $
            (2
            )2011
            
            
            20
            
            
            (2
            )2012
            
            
            21
            
            
            (2
            )2013
            
            
            22
            
            
            (2
            )2014
            
            
            23
            
            
            (3
            )2015-2019
            
            
            128
            
            
            (17
            )




46
 Table of Contents





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, $1
million and expense of $-0- for the years ended December 31, 2007, 2008 and
2009, respectively.  Amounts relating to postemployment obligations
included in “Benefit Obligations” in the accompanying Consolidated Balance
Sheets at December 31, 2008 and 2009 were $14 million and $13 million,
respectively.





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, 2007,
2008 and 2009. Amounts relating to deferred compensation plans included in
“Benefit Obligations” in the accompanying Consolidated Balance Sheets at
December 31, 2008 and 2009 were $15 million and $14 million,
respectively.




Other Employee Matters
 
 As of
December 31, 2009, CenterPoint Houston had 2,843 full-time employees,
of which approximately 44% are subject to a collective bargaining agreement.
CenterPoint Houston’s collective bargaining agreement with International
Brotherhood of Electrical Workers Union Local No. 66 is scheduled to expire in
May 2010.  CenterPoint Houston has a good relationship with this
bargaining unit and expects to negotiate a new agreement in 2010.


(n)
      Other Current Assets and
Liabilities





Included
in other current assets in the Consolidated Balance Sheets at both
December 31, 2008 and 2009 was $60 million and $34 million,
respectively, of restricted cash related to the transition  and system
restoration bond companies.  Included in other current liabilities in
the Consolidated Balance Sheets at December 31, 2008 and 2009 was
$45 million and $16 million, respectively, of customer
deposits.





(3)
            Regulatory
      Matters





(a)
      Hurricane Ike





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





As is
common with electric utilities serving coastal regions, the poles, towers,
wires, street lights and pole mounted equipment that comprise CenterPoint
Houston’s transmission and distribution system are not covered by property
insurance, but office buildings and warehouses and their contents and
substations are covered by insurance that provides for a maximum deductible of
$10 million. Current estimates are that total losses to property covered by
this insurance were approximately $30 million.





CenterPoint
Houston deferred the uninsured system restoration costs as management believed
it was probable that such costs would be recovered through the regulatory
process. As a result, system restoration costs did not affect CenterPoint
Houston’s reported operating income for 2008 or 2009.





Legislation
enacted by the Texas Legislature in April 2009 authorized the Texas Utility
Commission to conduct proceedings to determine the amount of system restoration
costs and related costs associated with hurricanes or other major storms that
utilities are entitled to recover, and to issue financing orders that would
permit a utility like CenterPoint Houston to recover the distribution portion of
those costs and related carrying costs through the





47
 Table of Contents
 
 issuance
of non-recourse system restoration bonds similar to the securitization bonds
issued previously.  The legislation also allowed such a utility to
recover, or defer for future recovery, the transmission portion of its system
restoration costs through the existing mechanisms established to recover
transmission costs.
  Pursuant to such legislation, CenterPoint Houston filed with the Texas Utility
Commission an application for review and approval for recovery of approximately
$678 million, including approximately $608 million in system restoration
costs identified as of the end of February 2009, plus $2 million in
regulatory expenses, $13 million in certain debt issuance costs and
$55 million in incurred and projected carrying costs calculated through
August 2009. In July 2009, CenterPoint Houston announced a settlement
agreement with the parties to the proceeding.  Under that settlement
agreement, CenterPoint Houston was entitled to recover a total of
$663 million in costs relating to Hurricane Ike, along with carryingcosts from September 1,
2009 until system restoration bonds were issued. The Texas Utility Commission
issued an order in August 2009 approving CenterPoint Houston’s application and
the settlement agreement and authorizing recovery of $663 million, of which
$643 million was attributable to distribution service and eligible for
securitization and the remaining $20 million was attributable to
transmission service and eligible for recovery through the existing mechanisms
established to recover transmission costs.





In July
2009, CenterPoint Houston filed with the Texas Utility Commission its
application for a financing order to recover the portion of approved costs
related to distribution service through the issuance of system restoration
bonds.   In August 2009, the Texas Utility Commission issued a
financing order allowing CenterPoint Houston to securitize $643 million in
distribution service costs plus carrying charges from September 1, 2009
through the date the system restoration bonds were issued, as well as certain
up-front qualified costs capped at approximately $6 million.  In
November 2009, CenterPoint Houston issued approximately $665 million of system
restoration bonds through its CenterPoint Energy Restoration Bond Company, LLC
subsidiary with interest rates of 1.833% to 4.243% and final maturity dates
ranging from February 2016 to August 2023.  The bonds will be repaid
over time through a charge imposed on customers.





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 will reduce operating income in
2010 by approximately $24 million.





In
accordance with the orders discussed above, as of December 31, 2009, CenterPoint
Houston has recorded $651 million associated with distribution-related
storm restoration costs as a net regulatory asset and $20 million
associated with transmission-related storm restoration costs, of which $18
million is recorded in property, plant and equipment and $2 million of related
carrying costs is recorded in regulatory assets.   These amounts
reflect carrying costs of $60 million related to distribution and
$2 million related to transmission through December 31, 2009, based on
the 11.075% cost of capital approved by the Texas Utility Commission.  The
carrying costs have been bifurcated into two components: (i) return of borrowing
costs and (ii) an allowance for earnings on shareholders’ investment. 
During the year ended December 31, 2009, the component representing a return of
borrowing costs of $23 million has been recognized and is included in other
income in CenterPoint Energy’s Statements of Consolidated Income.  The
component representing an allowance for earnings on shareholders’ investment of
$39 million is being deferred and will be recognized as it is collected
through rates.





(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.




48
 Table of Contents
 CenterPoint
Houston and other parties filed appeals of the True-Up Order to a district court
in Travis County, Texas. In August 2005, that court issued its judgment on the
various appeals. In its judgment, the district court:
 
 •
                reversed
      the Texas Utility Commission’s ruling that had denied recovery of a
      portion of the capacity auction true-up
amounts;
 
 •
                reversed
      the Texas Utility Commission’s ruling that precluded CenterPoint Houston
      from recovering the interest component of the EMCs paid to retail electric
      providers (REPs); and


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





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





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





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





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





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





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





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





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





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




49
 Table of Contents





To
reflect the impact of the True-Up Order, in 2004 and 2005, CenterPoint Houston
recorded a net after-tax extraordinary loss of $947 million. No amounts
related to the district court’s judgment or the decision of the court of appeals
have been recorded in CenterPoint Houston’s consolidated financial statements.
However, if the court of appeals decision is not reversed or modified as a
result of further review by the Texas Supreme Court, CenterPoint Houston
anticipates that it would be required to record an additional loss to reflect
the court of appeals decision. The amount of that loss would depend on several
factors, including ultimate resolution of the tax normalization issue described
below and the calculation of interest on any amounts CenterPoint Houston
ultimately is authorized to recover or is required to refund beyond the amounts
recorded based on the True-Up Order, but could range from $180 million to
$410 million (pre-tax) plus interest subsequent to December 31,
2009.




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





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





The Texas
electric restructuring law allowed the amounts awarded to CenterPoint Houston in
the Texas Utility Commission’s True-Up Order to be recovered either through
securitization or through implementation of a competition transition charge
(CTC) or both. Pursuant to a financing order issued by the Texas Utility
Commission in March 2005 and affirmed by a Travis County district court, in
December 2005, a 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




50
 Table of Contents
 
 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 which heard oral argument in October 2009. The ultimate
outcome of this matter cannot be predicted at this time. However, CenterPoint
Energy does not expect the disposition of this matter to have a material adverse
effect on CenterPoint Energy’s or CenterPoint Houston’s financial condition,
results of operations or cash flows.





During
the 2007 legislative session, the Texas legislature amended statutes prescribing
the types of true-up balances that can be securitized by utilities and
authorized the issuance of transition bonds to recover the balance of the CTC.
In June 2007, CenterPoint Houston filed a request with the Texas Utility
Commission for a financing order that would allow the securitization of the
remaining balance of the CTC, adjusted to refund certain unspent environmental
retrofit costs and to recover the amount of the final fuel reconciliation
settlement. CenterPoint Houston reached substantial agreement with other parties
to this proceeding, and a financing order was approved by the Texas Utility
Commission in September 2007. In February 2008, pursuant to the financing order,
a new special purpose subsidiary of CenterPoint Houston issued approximately
$488 million of transition bonds in two tranches with interest rates of
4.192% and 5.234% and final maturity dates of February 2020 and February 2023,
respectively. Contemporaneously with the issuance of those bonds, the CTC was
terminated and a transition charge was implemented. During the years ended
December 31, 2007 and 2008, CenterPoint Houston recognized approximately
$42 million and $5 million, respectively, in operating income from the
CTC.





As of
December 31, 2009, CenterPoint Houston has not recognized an allowed equity
return of $193 million on its true-up balance because such return will be
recognized as it is recovered in rates. During the years ended December 31,
2007, 2008 and 2009, CenterPoint Houston recognized approximately
$14 million, $13 million and $13 million, respectively, of the
allowed equity return not previously recognized.





(c)
      Rate Proceedings





Texas. 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, plus carrying costs,
but refused to permit CenterPoint Houston to recover a performance bonus of $2
million on approximately $10 million in 2008 energy efficiency costs expended
pursuant to the terms of a settlement agreement reached in CenterPoint Houston’s
2006 rate proceeding.  CenterPoint Houston has appealed the denial of
the full 2008 performance bonus to the district court in Travis County, Texas,
where the case remains pending.






51
 Table of Contents
 
 (4)
                Fair
      Value Measurements
 
 Effective
January 1, 2008, CenterPoint Houston adopted new accounting guidance on
fair value measurements which requires additional disclosures about CenterPoint
Houston’s financial assets and liabilities that are measured
 
 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, CenterPoint Houston held Level 1 investments of $31 million, which
were primarily money market funds.





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





Level 3:
Inputs are unobservable for the asset or liability, and include situations where
there is little, if any, market activity for the asset or liability. These
inputs reflect management’s best estimate of the assumptions market participants
would use in determining fair value.  CenterPoint Houston had no Level
3 assets or liabilities at December 31, 2009.




(5)
            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 money pool borrowings of $8 million at December 31, 2008, which
are included in accounts and notes payable-affiliated companies in the
Consolidated Balance Sheets, and investments in the money pool of
$289 million at December 31, 2009, which are included in accounts and
notes receivable-affiliated companies in the Consolidated Balance
Sheets.  At December 31, 2009, CenterPoint Houston’s money pool
investment bore interest of 0.18%.





At
December 31, 2008 and 2009,CenterPoint Houston had a
$750 million note receivable from its parent, which bears interest at the
prime rate, 3.25% at December 31, 2009.





For the
years ended December 31, 2007, 2008 and 2009, CenterPoint Houston had net
interest income related to affiliate borrowings of $49 million,
$31 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 $103 million,
$116 million and $126 million in 2007, 2008 and 2009, respectively,
and are included primarily in operation and maintenance expenses.





In 2007,
2008 and 2009, CenterPoint Houston paid a dividend of $100 million,
$640 million and $-0-, respectively.






52
 Table of Contents




(b)
      Major Customers
 
 During
2007, 2008 and 2009, 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




(6)
            Short-term
      Borrowings and Long-term Debt





December 31,
      2008
            
            
            December 31,
      2009Long-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)
            
            
            1,262
            
            
            
            —
            
            
            
            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
            
            
            
            20Transition
      bonds 4.192% to 5.63% due 2010 to 2020
            
            
            2,381
            
            
            
            208
            
            
            
            2,160
            
            
            
            221Bank
      loans due 2012(4)
            
            
            251
            
            
            
            —
            
            
            
            —
            
            
            
            —Other
            
            
            (1
            )
            
            
            —
            
            
            
            (1
            )
            
            
            —Total
      long-term debt
            
            $
            4,224
            
            
            $
            208
            
            
            $
            4,897
            
            
            $
            241





(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, 2008 and 2009. 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.





(4)
            Classified
      as long-term debt because the termination date of the facility under which
      the funds were borrowed is more than one year beyond the dates referenced
      in the table.





(a)
      Short-term Borrowings





Revolving Credit Facility.On
October 6, 2009, CenterPoint Houston terminated its $600 million 364-day
credit facility which was secured by a pledge of $600 million of general
mortgage bonds issued by CenterPoint Houston.





(b)
      Long-term Debt





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





System Restoration Bonds.In
July 2009, CenterPoint Houston filed with the Texas Utility Commission its
application for a financing order to recover the portion of approved costs
related to distribution service through the issuance of system restoration
bonds. In August 2009, the Texas Utility Commission issued a financing order
allowing CenterPoint Houston to securitize $643 million in distribution
service costs plus carrying charges from




53
 Table of Contents
 
 September 1,
2009 through the date the system restoration bonds were issued, as well as
certain up-front qualified costs capped at approximately
$6 million.  In November 2009, CenterPoint Houston issued
approximately $665 million of system restoration bonds through its CenterPoint
Energy Restoration Bond Company, LLC subsidiary with interest rates of 1.833% to
4.243% and final maturity dates ranging from February 2016 to August
2023.  The bonds will be repaid over time through a charge imposed on
customers.
  Revolving Credit 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 other securitization bonds)
to total capitalization covenant. 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, 2008 and 2009, CenterPoint Houston had $251 million and
$-0- of borrowings, respectively, under this credit facility. In addition, as of
both December 31, 2008 and 2009, 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, 2009.





Maturities.  CenterPoint
Houston’s maturities of long-term debt and scheduled payments on transition and
system restoration bonds are $241 million in 2010, $283 million in
2011, $353 million in 2012, $780 million in 2013 and $1.0 billion
in 2014.





Liens.  As of
December 31, 2009, CenterPoint Houston’s assets were subject to liens
securing approximately $253 million of first mortgage bonds. Sinking or
improvement fund and replacement fund requirements on the first mortgage bonds
may be satisfied by certification of property additions. Sinking fund and
replacement fund requirements for 2007, 2008 and 2009 have been satisfied by
certification of property additions. The replacement fund requirement to be
satisfied in 2010 is approximately $172 million, and the sinking fund
requirement to be satisfied in 2010 is approximately $3 million.
CenterPoint Houston expects to meet these 2010 obligations by certification of
property additions. As of December 31, 2009, 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.




(7)
              Income
      Taxes


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





Year
      Ended December 31,2007
            
            
            2008
            
            
            2009(In
      millions)Current
      income tax expense (benefit):Federal
            
            $
            199
            
            
            $
            (236
            )
            
            $
            70State
            
            
            —
            
            
            
            10
            
            
            
            16Total
      current expense (benefit)
            
            
            199
            
            
            
            (226
            )
            
            
            86Deferred
      income tax expense (benefit):Federal
            
            
            (73
            )
            
            
            345
            
            
            
            17State
            
            
            —
            
            
            
            2
            
            
            
            (1
            )Total
      deferred expense (benefit)
            
            
            (73
            )
            
            
            347
            
            
            
            16Total
      income tax expense
            
            $
            126
            
            
            $
            121
            
            
            $
            102




54
 Table of Contents


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 31,2007
              
              
              2008
              
              
              2009(In
      millions)Income
      before income taxes
              
              $
              399
              
              
              $
              343
              
              
              $
              310Federal
      statutory rate
              
              
              35
              %
              
              
              35
              %
              
              
              35
              %Expected
      federal income tax expense
              
              
              139
              
              
              
              120
              
              
              
              108Increase
      (decrease) in tax expense resulting from:State
      income tax expense, net of federal income tax
              
              
              —
              
              
              
              8
              
              
              
              10Amortization
      of investment tax credit
              
              
              (7
              )
              
              
              (7
              )
              
              
              (7
              )Increase (decrease) in settled and uncertain tax
positions
              
              
              (2
              )
              
              
              7
              
              
              
              (2
              )Other,
      net
              
              
              (4
              )
              
              
              (7
              )
              
              
              (7
              )Total
              
              
              (13
              )
              
              
              1
              
              
              
              (6
              )Total
      income tax expense
              
              $
              126
              
              
              $
              121
              
              
              $
              102Effective
      tax rate
              
              
              31.6
              %
              
              
              35.4
              %
              
              
              32.9
              %


As a
result of 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. Changes in the Texas State Franchise Tax
Law (Texas margin tax) resulted in classifying Texas margin tax of approximately
$8 million and $10 million, net of federal income tax effect, as income tax
expense in 2008 and 2009, respectively.





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





December 31,2008
            
            
            2009(In
      millions)Deferred
      tax assets:Current:Allowance
      for doubtful accounts
            
            $
            1
            
            
            $
            1Non-current:Employee
      benefits
            
            
            84
            
            
            
            85Other
            
            
            18
            
            
            
            20Total
      non-current deferred tax assets
            
            
            102
            
            
            
            105Total
      deferred tax assets
            
            
            103
            
            
            
            106Deferred
      tax liabilities:Non-current:Depreciation
            
            
            697
            
            
            
            712Regulatory
      assets, net
            
            
            910
            
            
            
            862Other
            
            
            1
            
            
            
            —Total
      deferred tax liabilities
            
            
            1,608
            
            
            
            1,574Accumulated
      deferred income taxes, net
            
            $
            1,505
            
            
            $
            1,468





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.




55
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Uncertain Income Tax
Positions. The following table reconciles the beginning and ending
balance of CenterPoint Houston’s unrecognized tax benefits:
 
 December 31,2007
              
              
              2008
              
              
              2009(In
      millions)Balance,
      beginning of year
              
              $
              70
              
              
              $
              92
              
              
              $
              123Tax
      Positions related to prior years:Additions
              
              
              30
              
              
              
              16
              
              
              
              38Reductions
              
              
              (12
              )
              
              
              (1
              )
              
              
              (24
              )Tax
      Positions related to current year:Additions
              
              
              4
              
              
              
              16
              
              
              
              53Settlements
              
              
              —
              
              
              
              —
              
              
              
              (15
              )Balance,
      end of year
              
              $
              92
              
              
              $
              123
              
              
              $
              175
 
 The net
increase in the total amount of unrecognized tax benefits during 2009 is
primarily related to the tax normalization issue described in Note 3(b) to our
consolidated financial statements, a change in tax accounting method for repairs
and maintenance of our network assets and a casualty loss deduction associated
with Hurricane Ike.  These three uncertain income tax positions are
temporary differences and therefore, any increase or decrease in the balance of
unrecognized tax benefits related thereto would not affect the effective tax
rate.  It is reasonably possible that the total amount of unrecognized
tax benefits could increase between $22 million and $65 million over the next 12
months primarily as a result of the tax normalization issue, a temporary
difference.


CenterPoint
Houston has approximately $8 million, $11 million and $9 million of
unrecognized tax benefits that, if recognized, would reduce the effective income
tax rate for 2007, 2008 and 2009, respectively. CenterPoint Houston recognizes
interest and penalties as a component of income tax expense. CenterPoint Houston
recognized approximately $5 million and $7 million of income tax expense and
$5 million of income tax benefit related to interest on uncertain income
tax positions during 2007, 2008 and 2009, respectively. CenterPoint Houston
accrued $14 million and $9 million of interest on uncertain income tax
positions at December 31, 2008 and 2009, respectively.





Tax Audits and
Settlements.  CenterPoint Energy’s consolidated federal income
tax returns have been audited and settled through the 2005 tax year. CenterPoint
Energy is currently under examination by the IRS for tax years 2006 and 2007 and
is at various stages of the examination process. CenterPoint Houston has
considered the effects of these examinations in its accrual for settled issues
and liability for uncertain income tax positions as of December 31,
2009.





(8)
            Commitments
      and Contingencies





(a)
      Lease Commitments





CenterPoint
Houston currently has no obligations under non-cancelable long-term operating
leases for the years 2010 to 2014. Total lease expense for all operating leases
was approximately $4 million, $5 million and less than $1 million
for the years ended December 31, 2007, 2008 and 2009,
respectively.





(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 several lawsuits described below.
Under a master separation agreement between CenterPoint Energy and RRI (formerly
known as Reliant Resources, Inc. and Reliant Energy, Inc.), CenterPoint Energy
and its subsidiaries are entitled to be indemnified by RRI for any losses,
including attorneys’ fees and other costs, arising out of these
lawsuits.  Pursuant to the indemnification obligation, RRI is
defending CenterPoint Energy and its subsidiaries to the extent named in these
lawsuits.  A large number of lawsuits were filed against numerous gas
market participants in a number of




56
 Table of Contents




On May 1,
2009, RRI sold its Texas retail business to NRG Retail LLC, a subsidiary of NRG
Energy, Inc.  In connection with the sale, RRI changed its name to RRI
Energy, Inc. and no longer provides service as a REP in CenterPoint Houston’s
service territory.  The sale does not alter RRI’s contractual
obligations to indemnify CenterPoint Energy and its subsidiaries, including
CenterPoint Houston, for certain liabilities, including their indemnification
regarding certain litigation.


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.




57
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(9)
              Estimated
      Fair Value of Financial Instruments
 
 The fair
values of cash and cash equivalents, short-term borrowings and the
$750 million notes receivable from CenterPoint Houston’s parent are
estimated to be equivalent to carrying amounts and have been excluded from the
table below. The fair value of each debt instrument is determined by multiplying
the principal amount of each debt instrument by the market price.
 
 December 31,
      2008
              
              
              December 31,
      2009Carrying
                Amount
              
              
              Fair
                Value
              
              
              Carrying
                Amount
              
              
              Fair
                Value(In
      millions)Financial
      liabilities:Long-term
      debt (including $151 million of long-term notes payable to
      parent)
              
              $
              4,582
              
              
              $
              4,424
              
              
              $
              5,288
              
              
              $
              5,591


(10)
            Unaudited
      Quarterly Information





Summarized
quarterly financial data is as follows:





Year
      Ended December 31, 2008First
              Quarter
            
            
            Second
              Quarter
            
            
            Third
              Quarter
            
            
            Fourth
              Quarter(In
      millions)Revenues
            
            $
            409
            
            
            $
            510
            
            
            $
            552
            
            
            $
            445Operating
      income
            
            
            91
            
            
            
            164
            
            
            
            202
            
            
            
            88Net
      income
            
            
            26
            
            
            
            72
            
            
            
            98
            
            
            
            26





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





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





None.





Item 9A(T).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, 2009 to provide assurance
that information required to be disclosed in our reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission’s rules and
forms and such information is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding disclosure.





There has
been no change in our internal controls over financial reporting that occurred
during the three months ended December 31, 2009 that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.




58
 Table of Contents


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 1.99, 2.62, 2.61, 2.32, and 2.05 for the years ended
December 31, 2005, 2006, 2007, 2008 and 2009,
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).





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, 2008 and 2009 by its principal accounting firm, Deloitte &
Touche LLP, are set forth below.





Year
      Ended December 31,2008
            
            
            2009Audit
      fees (1)
            
            $
            679,550
            
            
            $
            660,840Audit-related
      fees (2)
            
            
            105,000
            
            
            
            256,000Total
      audit and audit-related fees
            
            
            784,550
            
            
            
            916,840Tax
      fees
            
            
            —
            
            
            
            —All
      other fees
            
            
            —
            
            
            
            —Total
      fees
            
            $
            784,550
            
            
            $
            916,840


_________


(1)
            For
      2009 and 2008, 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
      2009 and 2008, 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.




59
 Table of Contents





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, 2009
            36Consolidated Balance Sheets at December 31, 2008
      and 2009
            37Statements of Consolidated Cash Flows for the Three Years
      Ended December 31, 2009
            38Statements of Consolidated Member’s Equity for the Three
      Years Ended December 31, 2009
            39Notes to Consolidated Financial Statements
            40(a)(2)
      Financial Statement Schedules for the Three Years Ended December 31,
      2009.Report
      of Independent Registered Public Accounting Firm
            61II— Valuation and Qualifying Accounts
            62





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 Exhibits beginning on page 64.





60
 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, 2009 and 2008, and
for each of the three years in the period ended December 31, 2009, and have
issued our report thereon dated March 10, 2010; 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,
2010







61
 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, 2009


(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, 2009:Accumulated
      provisions:Uncollectible
      accounts receivable
            
            $
            2
            
            
            $
            1
            
            
            $
            3
            
            
            $
            —Year
      Ended December 31, 2008:Accumulated
      provisions:Uncollectible
      accounts receivable
            
            $
            1
            
            
            $
            2
            
            
            $
            1
            
            
            $
            2Year
      Ended December 31, 2007:Accumulated
      provisions:Uncollectible
      accounts receivable
            
            $
            1
            
            
            $
            1
            
            
            $
            1
            
            
            $
            1


_________


(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.







62
 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, 2010.





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, 2010.





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)







63
 Table of Contents





CENTERPOINT
ENERGY HOUSTON ELECTRIC, LLC





EXHIBITS
TO THE ANNUAL REPORT ON FORM 10-K


For
Fiscal Year Ended December 31, 2009





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)
  64
 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
 
 65
 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
 
 66
 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
                
                4.24(d)
                
                $600,000,000
      Credit Agreement dated as of November 25, 2008, among CenterPoint
      Houston, as Borrower, and the banks named therein
                
                CNP’s
      Form 8-K dated November 25, 2008
                
                1-31447
                
                4.1
 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




67