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, 2008or£
            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 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 oAccelerated
filer oNon-accelerated
filer þSmaller
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, 2008: None







Table of Contents





TABLE OF CONTENTS




PagePART IItem
      1.
                                  Business
                                  1Item
      1A.
                                  Risk Factors
                                  12Item
      1B.
                                  Unresolved Staff Comments
                                  19Item
      2.
                                  Properties
                                  19Item
      3.
                                  Legal Proceedings
                                  19Item
      4.
                                  Submission of Matters to a Vote of Security
      Holders
                                  19PART IIItem
      5.
                                  Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
                                  20Item
      6.
                                  Selected Financial Data
                                  20Item
      7.
                                  Management’s Narrative Analysis of Results of
      Operations
                                  20Item
      7A.
                                  Quantitative and Qualitative Disclosures About Market
      Risk
                                  31Item
      8.
                                  Financial Statements and Supplementary
    Data
                                  32Item
      9.
                                  Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
                                  56Item
      9A(T).
                                  Controls and Procedures
                                  56Item
      9B.
                                  Other Information
                                  56PART IIIItem
      10.
                                  Directors, Executive Officers and Corporate
      Governance
                                  56Item
      11.
                                  Executive Compensation
                                  56Item
      12.
                                  Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
                                  56Item
      13.
                                  Certain Relationships and Related Transactions, and Director
      Independence
                                  56Item
      14.
                                  Principal Accounting Fees and Services
                                  57PART IVItem
      15.
                                  Exhibits and Financial Statement
    Schedules
                                  57Ex.
      12
                                  Computation of Ratios of Earnings to Fixed
      ChargesEx.
      23
                                  Consent of Deloitte & Touche LLPEx.
      31.1
                                  Rule 13a-14(a)/15d-14(a) Certification of David M.
      McClanahanEx.
      31.2
                                  Rule 13a-14(a)/15d-14(a) Certification of Gary L.
      WhitlockEx.
      32.1
                                  Section 1350 Certification of David M.
      McClanahanEx.
      32.2
                                  Section 1350 Certification of Gary L.
    Whitlock


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 4 (Submission
of Matters to a Vote of Security Holders), 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 2006, 2007 and
2008.





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
5.6 million people and includes 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 continue to be 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 are 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 sales of electric energy at retail or wholesale, 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
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
electric transmission and 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 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
73,000 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 Council (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 amended 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
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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 Reliant Energy,
      Inc. (RRI);





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





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





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





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





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





3
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appeal to
the Texas Supreme Court, we can provide no assurance as to the ultimate court
rulings on the issues to be considered in the appeal or with respect to the
ultimate decision by the Texas Utility Commission on the tax normalization issue
described below.




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




In the
True-Up Order, the Texas Utility Commission reduced our stranded cost recovery
by approximately $146 million, which was included in the extraordinary loss
discussed above, for the present value of certain deferred tax benefits
associated with 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, in the petitions for review or briefs filed with
the Texas Supreme Court, has challenged that order by the court of appeals,
though the Texas Supreme Court, if it grants review, will have authority to
consider all aspects of the rulings above, not just those challenged
specifically by the appellants. We and CenterPoint Energy will continue to
pursue a favorable resolution of this issue through the appellate or
administrative process. Although the Texas Utility Commission has not previously
required a company subject to its jurisdiction to take action that would result
in a normalization violation, no prediction can be made as to the ultimate
action the Texas Utility Commission may take on this issue on
remand.




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 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





4
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$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.





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
the Rider RCE the costs (approximately $5 million) for a panel appointed by
the Texas Utility Commission in connection with the valuation of electric
generation assets. Finally, the district court accepted the contention of one
party that the CTC should not be allocated to retail customers that have
switched to new on-site generation. 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 of the
appellants have requested further review from the Texas Supreme
Court.  In March 2009, the Texas Supreme Court requested the parties
to file briefs on the merits in their appeals.  Review by the Texas
Supreme Court is discretionary with that court, and there is no deadline for its
action on the appeals. 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 years ended December 31, 2006, 2007 and 2008, we recognized
approximately $55 million, $42 million and $5 million,
respectively, in operating income from the CTC. Additionally, during the years
ended December 31, 2006, 2007 and 2008, we recognized approximately
$13 million, $14 million and $13 million, respectively, of the
allowed equity return not previously recognized. As of December 31, 2008,
we have not recognized an allowed equity return of $207 million on our
true-up balance because such return will be recognized as it is recovered in
rates.





During
the 2007 legislative session, the Texas legislature amended statutes prescribing
the types 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.





Hurricane
Ike





Our
electric delivery system suffered substantial damage as a result of Hurricane
Ike, which struck the upper Texas coast early Saturday, September 13,
2008.





The
strong Category 2 storm initially left more than 90% of our more than
2 million metered customers without power, the largest outage in
CenterPoint Energy’s 130-year history. Most of the widespread power outages were
due to power lines damaged by downed trees and debris blown by Hurricane Ike’s
winds. In addition, on Galveston Island and along the coastal areas of the Gulf
of Mexico and Galveston Bay, the storm surge and flooding from rains
accompanying the storm caused significant damage or destruction of houses and
businesses served by us.





We
estimate that total costs to restore the electric delivery facilities damaged as
a result of Hurricane Ike will be in the range of $600 million to
$650 million. 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





5
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not
covered by property insurance, but office buildings and warehouses and their
contents and substations are covered by insurance that provides for a maximum
deductible of $10 million. Current estimates are that total losses to
property covered by this insurance were approximately
$17 million.





In
addition to storm restoration costs, we lost approximately $17 million in
revenue through December 31, 2008. Within the first 18 days after the storm, we
had restored power to all customers capable of receiving it.





We have
deferred the uninsured storm restoration costs as management believes it is
probable that such costs will be recovered through the regulatory process. As a
result, storm restoration costs did not affect our reported net income for 2008.
As of December 31, 2008, we recorded an increase of $145 million in
construction work in progress and $435 million in regulatory assets for
restoration costs incurred through December 31, 2008.  Approximately
$73 million of these costs are based on estimates and are included in
accounts payable as of December 31, 2008.  Additional restoration
costs will continue to be incurred in 2009.





Assuming
necessary enabling legislation is enacted by the Texas Legislature in the
session that began in January 2009, we expect to seek a financing order
from the Texas Utility Commission to obtain recovery of our storm restoration
costs through the issuance of non-recourse securitization bonds similar to the
storm recovery bonds issued by another Texas utility following the hurricanes
that affected that utility’s service territories in 2005. Assuming those bonds
are issued, we will recover the amount of storm restoration costs determined by
the Texas Utility Commission to have been prudently incurred out of the bond
proceeds, with the bonds being repaid over time through a charge imposed on
customers. Alternatively, if securitization is not available, recovery of those
costs would be sought through traditional regulatory mechanisms. Under our 2006
rate case settlement, we are entitled to seek an adjustment to rates in this
situation, even though in most instances our rates are frozen until
2010.





Customers





We serve
nearly all of the Houston/Galveston metropolitan area. Our customers consist of
79 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 minimal creditworthiness criteria established by,
the Texas Utility Commission. Two of the REPs in our service area are
subsidiaries of RRI. Sales to subsidiaries of RRI represented approximately 56%,
51% and 48% of our transmission and distribution revenues in 2006, 2007 and
2008, respectively. Our billed receivables balance from REPs as of
December 31, 2008 was $141 million. Approximately 46% of this amount
was owed by subsidiaries of RRI. In March 2009, RRI announced that it had
reached an agreement to sell its Texas retail business to NRG Energy, Inc. 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, beginning in February
2009, will be $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 possible 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 we have the potential to provide a significant
improvement in grid planning, operations and maintenance of our distribution
system. These improvements would be expected to contribute to fewer and shorter
outages, better customer service, improved operations costs, improved security
and more effective use of our workforce. Texas





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Utility
Commission approval and appropriate rate treatment would be sought in connection
with any actual deployment of this technology.





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





Properties





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





All 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, 2008, we had outstanding approximately $2.6 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, $600 million
securing borrowings under a credit facility which was unutilized and
approximately $229 million held in trust to secure pollution control bonds
for which 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
$1.8 billion of additional first mortgage bonds and general mortgage bonds
in the aggregate could be issued on the basis of retired bonds and 70% of
property additions as of December 31, 2008. However, we have contractually
agreed that we will not issue additional first mortgage bonds, subject to
certain exceptions.  In January 2009, we issued $500 million
aggregate principal amount of general mortgage bonds in a public
offering.





Electric Lines —
Overhead.  As of December 31, 2008, we owned 27,603 pole
miles of overhead distribution lines and 3,727 circuit miles of overhead
transmission lines, including 423 circuit miles operated at 69,000 volts, 2,088
circuit miles operated at 138,000 volts and 1,216 circuit miles operated at
345,000 volts.





Electric Lines —
Underground.  As of December 31, 2008, we owned 19,690
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, 2008, we owned 229 major substation sites having a total
installed rated transformer capacity of 51,400 megavolt amperes.





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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 oversight of the FERC, 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 the
standards. The FERC has approved the delegation by the NERC of authority for
reliability in ERCOT to the TRE. We do not anticipate that the reliability
standards proposed by the NERC and approved by the FERC will have a material
adverse impact on our operations. To the extent that we are required to make
additional expenditures to comply with these standards, it is anticipated that
we will seek to recover those costs through the transmission charges that are
imposed on all distribution service providers within ERCOT for electric
transmission provided.





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, 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 make allocations to public utilities regulated by the FERC under
the Federal Power Act. Although CenterPoint Energy provides services to its
subsidiaries through a service company, its service company is not subject to
the FERC’s service company rules.





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 based on
amounts of energy delivered, whereas distribution rates for a majority of
commercial and industrial customers are based on peak demand. All REPs in our
service area pay the same rates and other charges for the same transmission and
distribution services. 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. This regulated delivery charge includes the transmission
and distribution rate (which includes municipal franchise fees), a system
benefit fund fee





8
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imposed
by the Texas electric restructuring law, a nuclear decommissioning charge
associated with decommissioning the South Texas nuclear generating facility and
transition charges associated with securitization of regulatory assets and
securitization of stranded costs.





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.





Interim Transmission Costs of
Service Update.In September 2008, we filed an application with the Texas
Utility Commission requesting an interim update to our wholesale transmission
rate. The filing resulted in a revenue requirement increase of
$22.5 million over rates then in effect.  Approximately 74% will be
paid by distribution companies other than us.  The remaining 26% represents
our share, which cannot be included in rates until 2010 under the terms of the
rate freeze implemented in the settlement of our 2006 rate proceeding described
below. In November 2008, the Texas Utility Commission approved our
request.  The interim rates became effective for service on and after
November 5, 2008.





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.





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





9
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liability
for costs required to clean up and restore sites where hazardous substances have
been disposed or otherwise released. Moreover, it is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the release of hazardous
substances or other waste products into the environment.





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





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





Global
Climate Change





In recent years, there has been
increasing public debate regarding the potential impact on global climate change
by various “greenhouse gases” such as carbon dioxide, a byproduct of burning
fossil fuels, and methane. 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
requiring 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.  While there is growing consensus
that some form of global climate change program will be adopted, it is too early
to determine when, and in what form, a regulatory scheme regarding greenhouse
gas emissions will be adopted or what specific impacts a new regulatory scheme
might have on us. Our electric transmission and distribution business, unlike
most 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 are in the business of generating
electricity.  Nevertheless, our revenues could be adversely affected
to the extent any resulting regulatory scheme has the effect of reducing
consumption of electricity by ultimate consumers within our service
territory.





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, and
the requirements are not expected to be any more burdensome to us than to other
similarly situated companies.




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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 United States Environmental Protection Agency (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 or us. CenterPoint Energy anticipates
that additional claims like those received may be asserted in the future. In
2004, CenterPoint Energy sold its generating business, to which most of these
claims relate, to Texas Genco LLC, which is now known as NRG Texas
LP.  Under the terms of the arrangements regarding separation of the
generating business from CenterPoint Energy and its sale to NRG Texas LP,
ultimate financial responsibility for uninsured losses from claims relating to
the generating business has been assumed by NRG Texas LP, but CenterPoint Energy
has agreed to continue to defend such claims to the extent they are covered by
insurance maintained by CenterPoint Energy, subject to reimbursement of the
costs of such defense from the purchaser. Although their ultimate outcome cannot
be predicted at this time, CenterPoint Energy intends to continue vigorously
contesting claims that it does not consider to have merit and we do not expect,
based on our experience to date, these matters, either individually or in the
aggregate, to have a material adverse effect on our financial condition, results
of operations or cash flows.





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





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EMPLOYEES




As of
December 31, 2008, we had 2,858 full-time employees, of which
approximately 43% are subject to collective bargaining agreements.





Item 1A.Risk
Factors





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




Risk
Factors Affecting Our Business





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





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





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





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





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





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





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





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





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





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





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





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





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





In June
2008, we petitioned the Texas Supreme Court for review of the court of appeals
decision. In our petition, we seek reversal of the parts of the court of appeals
decision that (i) denied recovery of EMCs paid to RRI, (ii) denied recovery of
the capacity auction true-up amounts allowed by the district court, (iii)
affirmed the Texas Utility





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





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





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





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





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





13
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challenged
specifically by the appellants. We and CenterPoint Energy will continue to
pursue a favorable resolution of this issue through the appellate or
administrative process. Although the Texas Utility Commission has not previously
required a company subject to its jurisdiction to take action that would result
in a normalization violation, no prediction can be made as to the ultimate
action the Texas Utility Commission may take on this issue on
remand.





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





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





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





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





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





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





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




14
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In this
regard, pursuant to the Stipulation and Settlement Agreement approved by the
Texas Utility Commission in September 2006, until June 30, 2010 we are
limited in our ability to request retail rate relief. For more information on
the Stipulation and Settlement Agreement, please read “Business —
Regulation — State and Local Regulation — Electric
Transmission & Distribution — Rate Agreement” in Item 1 of
this report.





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





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





Our
revenues and results of operations are seasonal.





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





Risk
Factors Associated with Our Consolidated Financial Condition





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





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





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





•
            our
      recovery of costs arising from Hurricane
Ike;





•
            general
      economic and capital market
conditions;





•
            credit
      availability from financial institutions and other
  lenders;





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





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





•
            market
      expectations regarding our future earnings and cash
  flows;





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





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





•
            provisions
      of relevant tax and securities
laws.





As of
December 31, 2008, we had outstanding approximately $2.6 billion
aggregate principal amount of general mortgage bonds, including approximately
$527 million held in trust to secure pollution control bonds for which
CenterPoint Energy is obligated, $600 million securing borrowings under a
credit facility which was unutilized and approximately $229 million held in
trust to secure pollution control bonds for which CenterPoint Energy is
obligated. Additionally, we had outstanding approximately $253 million
aggregate principal amount of first





15
 Table of Contents





mortgage
bonds, including approximately $151 million held in trust to secure certain
pollution control bonds for which we are obligated. We may issue additional
general mortgage bonds on the basis of retired bonds, 70% of property additions
or cash deposited with the trustee. Approximately $1.8 billion of
additional first mortgage bonds and general mortgage bonds in the aggregate
could be issued on the basis of retired bonds and 70% of property additions as
of December 31, 2008. However, we have contractually agreed that we will not
issue additional first mortgage bonds, subject to certain exceptions. In January
2009, we issued $500 million aggregate principal amount of general mortgage
bonds in a public offering.





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




The financial condition and liquidity of our parent company could affect
our access to
capital, our credit standing and our financial condition.




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




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





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





•
            our
      payment of dividends;





•
            decisions
      on our financings and our capital raising
  activities;





•
            mergers
      or other business combinations; and





•
            our
      acquisition or disposition of
assets.





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





Other
Risks





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





Our
operations are subject to stringent and complex laws and regulations pertaining
to health, safety and the environment as described in “Business
— Environmental Matters” in Item 1 of this Form 10-K. As an owner
or operator of electric transmission and distribution systems, we must comply
with these laws and regulations at the





16
 Table of Contents





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.





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





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





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




17
 Table of Contents





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





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





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





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





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





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





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





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




18
 Table of Contents





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





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





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





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





Item 1B. Unresolved Staff
Comments




Not
applicable.





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. Submission of Matters
to a Vote of Security Holders




The
information called for by Item 4 is omitted pursuant to Instruction I(2) to Form
10-K (Omission of Information by Certain Wholly Owned
Subsidiaries).




19
 Table of Contents





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 2006,
2007 and 2008, we paid dividends on our common shares of $100 million, $100
million and $640 million, respectively, to Utility Holding, LLC.





Our
revolving credit facility limits our debt (excluding transition and other
securitization 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).  The ratio of earnings to fixed charges as calculated
pursuant to Securities and Exchange Commission rules was 2.20, 1.99, 2.62, 2.61,
and 2.33 for the years ended December 31, 2004, 2005, 2006, 2007 and 2008,
respectively.





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 over 2 million metered customers in a
5,000-square-mile area of the Texas Gulf Coast that has a population of
approximately 5.6 million people and includes Houston.





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





EXECUTIVE
SUMMARY




Significant
Events in 2008 and
2009




Hurricane
Ike





Our
electric delivery system suffered substantial damage as a result of Hurricane
Ike, which struck the upper Texas coast early Saturday, September 13,
2008.





The
strong Category 2 storm initially left more than 90% of our more than
2 million metered customers without power, the largest outage in
CenterPoint Energy’s 130-year history. Most of the widespread power outages were
due to power lines damaged by downed trees and debris blown by Hurricane Ike’s
winds. In addition, on Galveston Island and along the coastal areas of the Gulf
of Mexico and Galveston Bay, the storm surge and flooding from rains
accompanying the storm caused significant damage or destruction of houses and
businesses served by us.




20
 Table of Contents





We
estimate that total costs to restore the electric delivery facilities damaged as
a result of Hurricane Ike will be in the range of $600 million to
$650 million. As is common with electric utilities serving coastal regions,
the poles, towers, wires, street lights and pole mounted equipment that comprise
our transmission and distribution system are not covered by property insurance,
but office buildings and warehouses and their contents and substations are
covered by insurance that provides for a maximum deductible of $10 million.
Current estimates are that total losses to property covered by this insurance
were approximately $17 million.





In
addition to storm restoration costs, we lost approximately $17 million in
revenue through December 31, 2008. Within the first 18 days after the storm, we
had restored power to all customers capable of receiving it.





We have
deferred the uninsured storm restoration costs as management believes it is
probable that such costs will be recovered through the regulatory process. As a
result, storm restoration costs did not affect our reported net income for 2008.
As of December 31, 2008, we recorded an increase of $145 million in
construction work in progress and $435 million in regulatory assets for
restoration costs incurred through December 31, 2008.  Approximately
$73 million of these costs are based on estimates and are included in
accounts payable as of December 31, 2008.  Additional restoration
costs will continue to be incurred in 2009.





Assuming
necessary enabling legislation is enacted by the Texas Legislature in the
session that began in January 2009, we expect to seek a financing order
from the Texas Utility Commission to obtain recovery of our storm restoration
costs through the issuance of non-recourse securitization bonds similar to the
storm recovery bonds issued by another Texas utility following the hurricanes
that affected that utility’s service territories in 2005. Assuming those bonds
are issued, we will recover the amount of storm restoration costs determined by
the Texas Utility Commission to have been prudently incurred out of the bond
proceeds, with the bonds being repaid over time through a charge imposed on
customers. Alternatively, if securitization is not available, recovery of those
costs would be sought through traditional regulatory mechanisms. Under our 2006
rate case settlement, we are entitled to seek an adjustment to rates in this
situation, even though in most instances our rates are frozen until
2010.





Debt
Financing Transactions





Pursuant
to a financing order issued by the Texas Utility Commission in September 2007,
in February 2008 a subsidiary of ours issued approximately $488 million in
transition bonds in two tranches with interest rates of 4.192% and 5.234% and
final maturity dates in February 2020 and February 2023, respectively. Scheduled
final payment dates are February 2017 and February 2020. Through issuance of the
transition bonds, we securitized transition property of approximately
$483 million representing the remaining balance of the competition
transition charge (CTC) adjusted to refund certain unspent environmental
retrofit costs and to recover the amount of the fuel reconciliation
settlement.





In
November 2008, we entered into a $600 million 364-day credit facility.
The credit facility will terminate if bonds are issued to securitize the costs
incurred as a result of Hurricane Ike and if those bonds are issued prior to the
November 24, 2009 expiration of the facility. We expect to seek legislative
and regulatory approval for the issuance of such bonds during 2009.





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 from the money pool, capital expenditures and storm restoration
costs associated with Hurricane Ike.





Outlook





During
2008, economic conditions in the United States declined significantly, with
several large bank failures and consolidations, large declines in the values of
securities, disruptions in the capital markets, which made it difficult to raise
debt and equity, and increased costs for capital when it was available. 
Many of the factors that led to the economic decline are continuing into 2009,
but it is impossible to predict the impacts such events may have in the
future.  Although our business and the areas in which we serve have, to
date, not been as significantly affected as some others, in 2008, CenterPoint
Energy experienced substantial declines in the value of the assets of its
pension plan, in which we participate, as a result of the stock market
declines.  Disruptions in the bank and capital markets





21
 Table of Contents





during
the last two quarters of 2008 have led to higher borrowing costs and greater
uncertainty regarding the ability to execute transactions in these
markets.





Although
we cannot predict future performance, the decline in the value of CenterPoint
Energy’s pension plan assets that occurred during 2008 will result in increased
charges to pension plan expense in 2009, which will adversely impact earnings,
and may also result in the need for CenterPoint Energy to make significant cash
contributions to its pension plan subsequent to 2009.  We also expect
to experience higher borrowing costs and greater uncertainty in executing
capital markets transactions if conditions in financial markets do not improve
from their current state.





To the
extent the adverse economic conditions affect our suppliers and customers,
results from our energy delivery business 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.  These factors may lead to reduced earnings during 2009,
compared to 2008, if they continue significantly into 2009 or if the magnitude
of the economic downturn increases beyond the impacts experienced in
2008.





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





•
            state
      and federal legislative and regulatory actions or developments, including
      deregulation, re-regulation, environmental regulations, including
      regulations related to global climate change, and changes in or
      application of laws or regulations applicable to the various aspects of
      our business;





•
            timely
      and appropriate legislative and regulatory actions allowing securitization
      or other recovery of costs associated with Hurricane
  Ike;





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





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





•
            weather
      variations and other natural
phenomena;





•
            changes
      in interest rates or rates of
inflation;





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





•
            actions
      by rating agencies;





•
            non-payment
      for our services due to financial distress of our customers, including
      Reliant Energy, Inc. (RRI);





•
            the
      ability of RRI and its subsidiaries to satisfy their other obligations to
      us, including indemnity
obligations;





•
            the
      outcome of litigation brought by or against
us;





22
 Table of Contents





•
            our
      ability to control costs;





•
            the
      investment performance of CenterPoint Energy’s employee benefit
      plans;





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





The
following table sets forth selected financial data for the years ended
December 31, 2006, 2007 and 2008, 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 31,2006
                    
                    
                    2007
                    
                    
                    2008(In
      millions,
                      except
      throughput and customer data)Revenues:Electric
      transmission and distribution utility
                    
                    $
                    1,516
                    
                    
                    $
                    1,560
                    
                    
                    $
                    1,593Transition
      bond companies
                    
                    
                    265
                    
                    
                    
                    277
                    
                    
                    
                    323Total
      Revenues
                    
                    
                    1,781
                    
                    
                    
                    1,837
                    
                    
                    
                    1,916Expenses:Operation
      and maintenance, excluding transition bond companies
                    
                    
                    611
                    
                    
                    
                    652
                    
                    
                    
                    703Depreciation
      and amortization, excluding transition bond companies
                    
                    
                    243
                    
                    
                    
                    243
                    
                    
                    
                    277Taxes
      other than income taxes
                    
                    
                    212
                    
                    
                    
                    223
                    
                    
                    
                    201Transition
      bond companies
                    
                    
                    139
                    
                    
                    
                    158
                    
                    
                    
                    190Total
      Expenses
                    
                    
                    1,205
                    
                    
                    
                    1,276
                    
                    
                    
                    1,371Operating
      Income
                    
                    
                    576
                    
                    
                    
                    561
                    
                    
                    
                    545Interest
      and other finance charges
                    
                    
                    (110
                    )
                    
                    
                    (107
                    )
                    
                    
                    (109
                    )Interest
      on transition bonds (1)
                    
                    
                    (130
                    )
                    
                    
                    (123
                    )
                    
                    
                    (136
                    )Other
      Income, net
                    
                    
                    67
                    
                    
                    
                    68
                    
                    
                    
                    43Income
      Before Income Taxes
                    
                    
                    403
                    
                    
                    
                    399
                    
                    
                    
                    343Income
      Tax Expense
                    
                    
                    (132
                    )
                    
                    
                    (126
                    )
                    
                    
                    (121
                    )Net
      Income
                    
                    $
                    271
                    
                    
                    $
                    273
                    
                    
                    $
                    222Throughput
      (in gigawatt-hours (GWh)):Residential
                    
                    
                    23,955
                    
                    
                    
                    23,999
                    
                    
                    
                    24,258Total
                    
                    
                    75,877
                    
                    
                    
                    76,291
                    
                    
                    
                    74,840Average
      number of metered customers:Residential
                    
                    
                    1,743,963
                    
                    
                    
                    1,793,600
                    
                    
                    
                    1,821,267Total
                    
                    
                    1,980,960
                    
                    
                    
                    2,034,074
                    
                    
                    
                    2,064,854
 ____________
 (1)     Represents
the amount necessary to pay interest on the transition
bonds.





2008 Compared to
2007.We reported operating income of $545 million for
2008, consisting of $407 million from our regulated electric transmission
and distribution utility operations (TDU), exclusive of an additional
$5 million from the competition transition charge (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 due to
customer growth, with over 30,000 metered customers added in 2008
($23 million), increased usage ($15 million) in part caused by
favorable weather experienced in 2008, increased transmission-related
revenues





23
 Table of Contents





($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 State Franchise Tax
Law (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 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
margin tax which was reported as an operating expense prior to 2008 and is now
being reported as an income tax.





2007 Compared to
2006.  We reported operating income of $561 million for
2007, consisting of $400 million from the TDU, exclusive of an additional
$42 million from the CTC, and $119 million related to transition bond
companies. For 2006, operating income totaled $576 million, consisting of
$395 million from the TDU, exclusive of an additional $55 million from
the CTC, and $126 million related to transition bond companies. Revenues
increased due to growth ($22 million), with over 53,000 metered customers
added in 2007, higher transmission-related revenues ($22 million),
increased miscellaneous service charges ($15 million), increased demand
($7 million), interest on settlement of the final fuel reconciliation
($4 million) and a one-time charge in the second quarter of 2006 related to
the resolution of the unbundled cost of service order ($32 million). These
increases were partially offset by the rate reduction resulting from the 2006
rate case settlement that was implemented in October 2006 ($41 million) and
lower CTC return resulting from the reduction in the allowed interest rate on
the unrecovered CTC balance from 11.07% to 8.06% in 2006 ($13 million).
Operation and maintenance expense increased primarily due to higher transmission
costs ($25 million), the absence of a gain on the sale of property in 2006
($13 million), and increased expenses, primarily related to low income and
energy efficiency programs as required by the 2006 rate case settlement
($8 million), partially offset by settlement of the final fuel
reconciliation ($13 million).





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 2009
include approximately $422 million of capital expenditures and
$208 million of scheduled principal payments on transition
bonds.





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





Capital Requirements. The
following table sets forth our capital expenditures for 2008 and estimates of
our capital requirements for 2009 through 2013 (in millions):





2008
                    
                    $
                    4812009
                    
                    
                    4222010
                    
                    
                    5912011
                    
                    
                    5792012
                    
                    
                    5042013
                    
                    
                    506




24
 Table of Contents





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





Contractual
      Obligations
                
                Total
                
                
                2009
                
                
                
                2010-2011
                
                
                
                2012-2013
                
                
                2014
      and
                  thereafterTransition
      bond debt(1)
                
                $
                2,589
                
                
                $
                208
                
                
                $
                461
                
                
                $
                546
                
                
                $
                1,374Other
      long-term debt
                
                
                1,842
                
                
                
                —
                
                
                
                —
                
                
                
                746
                
                
                
                1,096Interest
      payments - transition bond debt (1) (2)
                
                
                794
                
                
                
                140
                
                
                
                227
                
                
                
                177
                
                
                
                250Interest
      payments - other long-term debt (2)
                
                
                1,319
                
                
                
                118
                
                
                
                261
                
                
                
                246
                
                
                
                694Capital
      leases
                
                
                1
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1Benefit
      obligations (3)
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Income
      taxes (4)
                
                
                3
                
                
                
                3
                
                
                
                —
                
                
                
                —
                
                
                
                —Total
      contractual cash obligations
                
                $
                6,548
                
                
                $
                469
                
                
                $
                949
                
                
                $
                1,715
                
                
                $
                3,415


____________


(1)
            Transition
      charges are adjusted at least annually to cover debt service on transition
      bonds.




(2)
            We
      calculated estimated interest payments for long-term debt as follows: for
      fixed-rate debt and term debt, we calculated interest based on the
      applicable rates and payment dates; for variable-rate debt and/or non-term
      debt, we used interest rates in place as of December 31, 2008. We
      typically expect to settle such interest payments with cash flows from
      operations and
short-term borrowings.




(3)
            We
      expect to contribute approximately $8 million to our postretirement
      benefits plan in 2009 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)
            Represents
      estimated income tax liability for settled positions for tax years under
      examination. In addition, as of December 31, 2008, the liability for
      uncertain income tax positions was $123 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 these
      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.Pursuant to a financing order
issued by the Texas Utility Commission in September 2007, in February 2008 a
subsidiary of ours issued approximately $488 million in transition bonds in
two tranches with interest rates of 4.192% and 5.234% and final maturity dates
in February 2020 and February 2023, respectively. Scheduled final payment dates
are February 2017 and February 2020. Through issuance of the transition bonds,
we securitized transition property of approximately $483 million
representing the remaining balance of the CTC, adjusted to refund certain
unspent environmental retrofit costs and to recover the amount of the fuel
reconciliation settlement.





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.




Credit Facilities.In November 2008, we entered into a
$600 million 364-day credit facility. The credit facility will terminate if
bonds are issued to securitize the costs incurred as a result of Hurricane Ike
and if those bonds are issued prior to the November 24, 2009 expiration of
the facility. We expect to seek legislative and regulatory approval for the
issuance of such bonds during 2009.




25
 Table of Contents





The
364-day credit facility is secured by a pledge of $600 million of general
mortgage bonds issued by us. Borrowing costs for London Interbank Offered Rate
(LIBOR)-based loans will be at a margin of 2.25 percent above LIBOR rates,
based on our current ratings. In addition, we will pay lenders, based on current
ratings, a per annum commitment fee of 0.5 percent for their commitments
under the facility and a quarterly duration fee of 0.75 percent on the
average amount of outstanding borrowings during the quarter. The spread to LIBOR
and the commitment fee fluctuate based on the borrower’s credit rating. The
facility contains covenants, including a debt (excluding transition and other
securitization bonds) to total capitalization covenant.





Our
$289 million credit facility’s first drawn cost is LIBOR plus 45 basis
points based on our current credit ratings. The facility contains a debt
(excluding transition and other securitization bonds) to total capitalization
covenant. 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 facilities are subject to customary terms and conditions.
However, there is no requirement that we make representations prior to
borrowings as to the absence of material adverse changes or litigation that
could be expected to have a material adverse effect. Borrowings under our credit
facilities are subject to acceleration upon the occurrence of events of default
that we consider customary.  We are currently in compliance with the
various business and financial covenants contained in our credit
facilities.





As of
February 13, 2009, we had the following facilities (in millions):
 Date
      Executed
                                
                                Type
      of Facility
                                
                                Size
      of Facility
                                
                                Amount
      Utilized at
                                  February
      13, 2009
                                
                                Termination
      DateJune
      29, 2007
                                
                                Revolver
                                
                                $
                                289
                                
                                $
                                4
                                (1)
                                June
      29, 2012November
      25, 2008
                                
                                Revolver
                                
                                
                                600
                                
                                
                                —
                                
                                November
      24, 2009
 (1)
                Includes
      $4 million of outstanding letters of
  credit.
  Securities
Registered with the SEC. In October 2008, we and CenterPoint Energy
jointly registered indeterminate principal amounts of our general mortgage bonds
and CenterPoint Energy’s senior debt securities and junior subordinated
debt securities and an indeterminate number of CenterPoint Energy’s shares of
common stock, shares of preferred stock, as well as stock purchase contracts and
equity units.




Temporary Investments.As of February 13, 2009, we had no
external temporary investments.





Money Pool.  We
participate in a money pool through which we and certain of our affiliates can
borrow or invest on a short-term basis. Funding needs are aggregated and
external borrowing or investing is based on the net cash position. The net
funding requirements of the money pool are expected to be met with borrowings
under CenterPoint Energy’s revolving credit facility or the sale of CenterPoint
Energy’s commercial paper. At February 13, 2009, we had $103 million
invested in the money pool. The money pool may not provide sufficient funds to
meet our cash needs.




26
 Table of Contents





Long-term
Debt.  Our long-term debt consists of our obligations and the
obligations of our subsidiaries, including transition 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 bonds issued by our subsidiaries, CenterPoint
Energy Transition Bond Company, LLC (Bond Company), CenterPoint Energy
Transition Bond Company II, LLC (Bond Company II) and CenterPoint Energy
Transition Bond Company III, LLC (Bond Company III), as of December 31,
2008. Amounts are expressed in millions.





Year
                  
                  Third-Party
                  
                  
                  Affiliate
                  
                  
                  Sub-Total
                  
                  
                  Transition
      Bonds
                  
                  
                  Total2009
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  208
                  
                  
                  $
                  2082010
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  221
                  
                  
                  
                  2212011
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  240
                  
                  
                  
                  2402012
                  
                  
                  297
                  
                  
                  
                  —
                  
                  
                  
                  297
                  
                  
                  
                  262
                  
                  
                  
                  5592013
                  
                  
                  450
                  
                  
                  
                  —
                  
                  
                  
                  450
                  
                  
                  
                  283
                  
                  
                  
                  7332014
                  
                  
                  300
                  
                  
                  
                  —
                  
                  
                  
                  300
                  
                  
                  
                  188
                  
                  
                  
                  4882015
                  
                  
                  —
                  
                  
                  
                  151
                  
                  
                  
                  151
                  
                  
                  
                  201
                  
                  
                  
                  3522016
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  215
                  
                  
                  
                  2152017
                  
                  
                  127
                  
                  
                  
                  —
                  
                  
                  
                  127
                  
                  
                  
                  231
                  
                  
                  
                  3582018
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  247
                  
                  
                  
                  2472019
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  264
                  
                  
                  
                  2642020
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  29
                  
                  
                  
                  292021
                  
                  
                  102
                  
                  
                  
                  —
                  
                  
                  
                  102
                  
                  
                  
                  —
                  
                  
                  
                  1022023
                  
                  
                  200
                  
                  
                  
                  —
                  
                  
                  
                  200
                  
                  
                  
                  —
                  
                  
                  
                  2002027
                  
                  
                  56
                  
                  
                  
                  —
                  
                  
                  
                  56
                  
                  
                  
                  —
                  
                  
                  
                  562033
                  
                  
                  312
                  
                  
                  
                  —
                  
                  
                  
                  312
                  
                  
                  
                  —
                  
                  
                  
                  312Total
                  
                  $
                  1,844
                  
                  
                  $
                  151
                  
                  
                  $
                  1,995
                  
                  
                  $
                  2,589
                  
                  
                  $
                  4,584





As of
December 31, 2008, outstanding first mortgage bonds and general mortgage
bonds aggregated approximately $2.9 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
                      
                      
                      1,262
                      
                      
                      
                      829
                      
                      
                      
                      527
                      
                      
                      
                      2,618Total
                      
                      $
                      1,364
                      
                      
                      $
                      829
                      
                      
                      $
                      678
                      
                      
                      $
                      2,871





The lien
of the general mortgage indenture is junior to that of the mortgage, pursuant to
which the first mortgage bonds are issued. We may issue additional general
mortgage bonds on the basis of retired bonds, 70% of property additions or cash
deposited with the trustee.  Approximately $1.8 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,
2008. However, we are contractually prohibited, subject to certain exceptions,
from issuing additional first mortgage bonds.





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
                    
                    
                    
                    2002020
                    
                    
                    —
                    
                    
                    
                    90
                    
                    
                    
                    902026
                    
                    
                    —
                    
                    
                    
                    100
                    
                    
                    
                    1002028
                    
                    
                    —
                    
                    
                    
                    68
                    
                    
                    
                    68Total
                    
                    $
                    151
                    
                    
                    $
                    527
                    
                    
                    $
                    678





27
 Table of Contents





At
December 31, 2008, Bond Company had $449 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, 2008, Bond Company II had $1.65 billion aggregate
principal amount of outstanding transition bonds that were issued in 2005 in
accordance with the Texas electric restructuring law. At December 31, 2008,
Bond Company III had $488 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. The transition bonds are secured by
“transition property,” as defined in the Texas electric restructuring law, which
includes the irrevocable right to recover, through non-bypassable transition
charges payable by retail electric customers, qualified costs provided in the
Texas electric restructuring law. The transition bonds are reported as our
long-term debt, although the holders of the transition bonds have no recourse to
any of our assets or revenues, and our creditors have no recourse to any assets
or revenues (including, without limitation, the transition charges) of the bond
companies. We have no payment obligations with respect to the transition bonds
except to remit collections of transition charges as set forth in a servicing
agreement between us and the 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 13, 2009, Moody’s Investors
Service, Inc. (Moody’s), Standard & Poor’s Ratings Services, a division of
The McGraw Hill Companies (S&P), and Fitch, Inc. (Fitch) had assigned the
following credit ratings to our senior debt.





Moody’s
              
              S&P
              
              FitchInstrument
              
              Rating
              
              Outlook(1)
              
              Rating
              
              Outlook(2)
              
              Rating
              
              Outlook(3)Senior
      Secured Debt (First Mortgage Bonds)
              
              Baa2
              
              Stable
              
              BBB+
              
              Stable
              
              A-
              
              StableSenior
      Secured Debt (General Mortgage Bonds)
              
              Baa2
              
              Stable
              
              BBB+
              
              Stable
              
              BBB+
              
              Stable


__________


(1)
            A
      “stable” outlook from Moody’s indicates that Moody’s does not expect to
      put the rating on review for an upgrade or downgrade within 18 months from
      when the outlook was assigned or last
affirmed.





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





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





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





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





Cross Defaults. Under
CenterPoint Energy’s 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 13, 2009, provide that a payment default by us,
in respect of, or an acceleration of, borrowed money and certain other specified
types of obligations, in the aggregate principal amount of $50 million,
will cause a default. A default by CenterPoint Energy would not trigger a
default under our debt instruments or bank credit facilities.





Other Factors that Could 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 our credit facilities;





28
 Table of Contents





•
            various
      regulatory actions;





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





•
            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 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 facilities limit
our debt (excluding transition and other securitization bonds) as a percentage
of our total capitalization to 65%. Additionally, we have contractually agreed
that we will not issue additional first mortgage bonds, subject to certain
exceptions.





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





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 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




Statement
of Financial Accounting Standards (SFAS) No. 71, “Accounting for the
Effects of Certain Types of Regulation” (SFAS No. 71), 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 SFAS No. 71, therefore, 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, as defined in SFAS No. 5,
“Accounting for Contingencies” (SFAS No. 5), 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





29
 Table of Contents





these
regulatory assets and liabilities.  At December 31, 2008, we had
recorded regulatory assets of $2.8 billion and regulatory liabilities of
$313 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.





Asset
Retirement Obligations




We
account for our long-lived assets under SFAS No. 143, “Accounting for Asset
Retirement Obligations” (SFAS No. 143), and Financial Accounting Standards
Board (FASB)Interpretation No.
(FIN) 47, “Accounting for Conditional Asset Retirement Obligations ─ An
Interpretation of SFAS No. 143” (FIN 47).  SFAS No. 143
and FIN 47 require that an asset retirement obligation be recorded at fair
value in the period in which it is incurred if a reasonable estimate of fair
value can be made. In the same period, the associated asset retirement costs are
capitalized as part of the carrying amount of the related long-lived asset.
Rate-regulated entities may recognize regulatory assets or liabilities as a
result of timing differences between the recognition of costs as recorded in
accordance with SFAS No. 143 and FIN 47, and costs recovered through
the ratemaking process.





We
estimate the fair value of asset retirement obligations by calculating the
discounted cash flows that are dependent upon the following
components:





•
            Inflation adjustment -
      The estimated cash flows are adjusted for inflation estimates for labor,
      equipment, materials, and other disposal
costs;





•
            Discount rate - The
      estimated cash flows include contingency factors that were used as a proxy
      for the market risk premium; and





•
            Third party markup
      adjustments - Internal labor costs included in the cash flow
      calculation were adjusted for costs that a third party would incur in
      performing the tasks necessary to retire the
  asset.





Changes
in these factors could materially affect the obligation recorded to reflect the
ultimate cost associated with retiring the assets under SFAS No. 143 and
FIN 47. For example, if the inflation adjustment increased 25 basis
points, this would increase the balance for asset retirement obligations by
approximately 2%. Similarly, an increase in the discount rate by
25 basis points would decrease asset retirement obligations by
approximately the same percentage. At December 31, 2008, our estimated cost
of retiring these assets was approximately $17 million.





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.





30
 Table of Contents





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.





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. Pension expense for 2009 is expected to be
$44 million, of which we expect $28 million to impact pre-tax
earnings, based on an expected return on plan assets of 8.00% and a discount
rate of 6.90% as of December 31, 2008. We recorded pension income of $3
million for the year ended December 31, 2008. The increase in pension
expense in 2009 is primarily the result of a decline in 2008 in plan assets
of the CenterPoint Energy pension plan, in which we participate. Future changes
in plan asset returns, assumed discount rates and various other factors related
to the pension plan will impact our future pension expense and liabilities. We
cannot predict with certainty what these factors will be in the
future.





Item 7A. Quantitative and Qualitative
Disclosures About Market Risk




As of
December 31, 2008, we had outstanding long-term debt, bank loans, lease
obligations and money pool borrowings from affiliates that subject us to the
risk of loss associated with movements in market interest rates.





We had
floating rate obligations of $97 million and $259 million at
December 31, 2007 and 2008, respectively.  If the floating
interest rates were to increase by 10% from December 31, 2008 rates, our
combined interest expense would increase by less than $1 million
annually.





At
December 31, 2007 and 2008, we had outstanding fixed-rate debt aggregating
$4.0 billion and $4.3 billion in principal amount and having a fair
value of approximately $4.0 billion and $4.2 billion in 2007 and 2008,
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 $137 million if
interest rates were to decline by 10% from their levels at December 31,
2008. 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.




31
 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, 2008 and 2007, 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, 2008.  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, 2008 and 2007, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2008, in conformity with accounting principles generally accepted in the
United States of America.








DELOITTE
& TOUCHE LLP




Houston,
Texas


March 11,
2009









32
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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, 2008.





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 11,
2009





33
 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 31,2006
                      
                      
                      2007
                      
                      
                      2008(In
      Millions)Revenues
                      
                      $
                      1,781
                      
                      
                      $
                      1,837
                      
                      
                      $
                      1,916Expenses:Operation
      and maintenance
                      
                      
                      614
                      
                      
                      
                      655
                      
                      
                      
                      709Depreciation
      and amortization
                      
                      
                      379
                      
                      
                      
                      398
                      
                      
                      
                      460Taxes
      other than income taxes
                      
                      
                      212
                      
                      
                      
                      223
                      
                      
                      
                      202Total
                      
                      
                      1,205
                      
                      
                      
                      1,276
                      
                      
                      
                      1,371Operating
      Income
                      
                      
                      576
                      
                      
                      
                      561
                      
                      
                      
                      545Other
      Income (Expense):Interest
      and other finance charges
                      
                      
                      (110
                      )
                      
                      
                      (107
                      )
                      
                      
                      (109
                      )Interest
      on transition bonds
                      
                      
                      (130
                      )
                      
                      
                      (123
                      )
                      
                      
                      (136
                      )Other,
      net
                      
                      
                      67
                      
                      
                      
                      68
                      
                      
                      
                      43Total
                      
                      
                      (173
                      )
                      
                      
                      (162
                      )
                      
                      
                      (202
                      )Income
      Before Income Taxes
                      
                      
                      403
                      
                      
                      
                      399
                      
                      
                      
                      343Income
      tax expense
                      
                      
                      (132
                      )
                      
                      
                      (126
                      )
                      
                      
                      (121
                      )Net
      Income
                      
                      $
                      271
                      
                      
                      $
                      273
                      
                      
                      $
                      222




See Notes
to the Company’s Consolidated Financial Statements





34
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CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND
SUBSIDIARIES


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





CONSOLIDATED
BALANCE SHEETS





December 31,2007
                          
                          
                          2008(In
      Millions)ASSETSCurrent
      Assets:Cash
      and cash equivalents
                          
                          $
                          128
                          
                          
                          $
                          166Accounts
      and notes receivable, net
                          
                          
                          172
                          
                          
                          
                          227Accounts
      and notes receivable—affiliated companies
                          
                          
                          25
                          
                          
                          
                          30Accrued
      unbilled revenues
                          
                          
                          102
                          
                          
                          
                          60Inventory
                          
                          
                          60
                          
                          
                          
                          74Taxes
      receivable
                          
                          
                          3
                          
                          
                          
                          8Deferred
      tax asset
                          
                          
                          —
                          
                          
                          
                          1Other
                          
                          
                          70
                          
                          
                          
                          82Total
      current assets
                          
                          
                          560
                          
                          
                          
                          648Property,
      Plant and Equipment, net
                          
                          
                          4,391
                          
                          
                          
                          4,604Other
      Assets:Regulatory
      assets
                          
                          
                          2,621
                          
                          
                          
                          2,832Notes
      receivable—affiliated companies
                          
                          
                          750
                          
                          
                          
                          750Other
                          
                          
                          36
                          
                          
                          
                          48Total
      other assets
                          
                          
                          3,407
                          
                          
                          
                          3,630Total
      Assets
                          
                          $
                          8,358
                          
                          
                          $
                          8,882LIABILITIES
      AND MEMBER’S EQUITYCurrent
      Liabilities:Current
      portion of long-term debt
                          
                          $
                          159
                          
                          
                          $
                          208Accounts
      payable
                          
                          
                          47
                          
                          
                          
                          150Accounts
      and notes payable—affiliated companies
                          
                          
                          75
                          
                          
                          
                          36Taxes
      accrued
                          
                          
                          87
                          
                          
                          
                          87Interest
      accrued
                          
                          
                          83
                          
                          
                          
                          100Other
                          
                          
                          74
                          
                          
                          
                          89Total
      current liabilities
                          
                          
                          525
                          
                          
                          
                          670Other
      Liabilities:Accumulated
      deferred income taxes, net
                          
                          
                          1,189
                          
                          
                          
                          1,506Unamortized
      investment tax credits
                          
                          
                          28
                          
                          
                          
                          21Benefit
      obligations
                          
                          
                          176
                          
                          
                          
                          187Regulatory
      liabilities
                          
                          
                          354
                          
                          
                          
                          313Notes
      payable—affiliated companies
                          
                          
                          151
                          
                          
                          
                          151Other
                          
                          
                          134
                          
                          
                          
                          170Total
      other liabilities
                          
                          
                          2,032
                          
                          
                          
                          2,348Long-Term
      Debt
                          
                          
                          3,743
                          
                          
                          
                          4,224Commitments
      And Contingencies (Note 8)Member’s
      Equity
                          
                          
                          2,058
                          
                          
                          
                          1,640Total
      Liabilities and Member’s Equity
                          
                          $
                          8,358
                          
                          
                          $
                          8,882




See Notes
to the Company’s Consolidated Financial Statements





35
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CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND
SUBSIDIARIES


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





STATEMENTS
OF CONSOLIDATED CASH FLOWS





Year
      Ended December 31,2006
                        
                        
                        2007
                        
                        
                        2008(In
      Millions)Cash
      Flows from Operating Activities:Net
      income
                        
                        $
                        271
                        
                        
                        $
                        273
                        
                        
                        $
                        222Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                        
                        
                        379
                        
                        
                        
                        398
                        
                        
                        
                        460Deferred
      income taxes
                        
                        
                        (76
                        )
                        
                        
                        (73
                        )
                        
                        
                        347Amortization
      of deferred financing costs
                        
                        
                        12
                        
                        
                        
                        11
                        
                        
                        
                        13Changes
      in other assets and liabilities:Accounts
      and notes receivable, net
                        
                        
                        14
                        
                        
                        
                        (14
                        )
                        
                        
                        (13
                        )Accounts
      receivable/payable, affiliates
                        
                        
                        (36
                        )
                        
                        
                        23
                        
                        
                        
                        (5
                        )Taxes
      receivable
                        
                        
                        (6
                        )
                        
                        
                        31
                        
                        
                        
                        (5
                        )Inventory
                        
                        
                        (3
                        )
                        
                        
                        3
                        
                        
                        
                        (14
                        )Accounts
      payable
                        
                        
                        8
                        
                        
                        
                        (24
                        )
                        
                        
                        21Interest
      and taxes accrued
                        
                        
                        1
                        
                        
                        
                        (20
                        )
                        
                        
                        17Net
      regulatory assets and liabilities
                        
                        
                        56
                        
                        
                        
                        67
                        
                        
                        
                        (376
                        )Other
      current assets
                        
                        
                        (2
                        )
                        
                        
                        —
                        
                        
                        
                        (2
                        )Other
      current liabilities
                        
                        
                        17
                        
                        
                        
                        7
                        
                        
                        
                        13Other
      assets
                        
                        
                        9
                        
                        
                        
                        (1
                        )
                        
                        
                        1Other
      liabilities
                        
                        
                        17
                        
                        
                        
                        (18
                        )
                        
                        
                        (5
                        )Other,
      net
                        
                        
                        (6
                        )
                        
                        
                        1
                        
                        
                        
                        (9
                        )Net
      cash provided by operating activities
                        
                        
                        655
                        
                        
                        
                        664
                        
                        
                        
                        665Cash
      Flows from Investing Activities:Capital
      expenditures
                        
                        
                        (381
                        )
                        
                        
                        (402
                        )
                        
                        
                        (462
                        )Increase
      in restricted cash of transition bond companies
                        
                        
                        (32
                        )
                        
                        
                        (1
                        )
                        
                        
                        (11
                        )Other,
      net
                        
                        
                        1
                        
                        
                        
                        12
                        
                        
                        
                        14Net
      cash used in investing activities
                        
                        
                        (412
                        )
                        
                        
                        (391
                        )
                        
                        
                        (459
                        )Cash
      Flows from Financing Activities:Long-term
      revolving credit facility, net
                        
                        
                        —
                        
                        
                        
                        50
                        
                        
                        
                        201Proceeds
      from long-term debt
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        488Payments
      of long-term debt
                        
                        
                        (74
                        )
                        
                        
                        (147
                        )
                        
                        
                        (159
                        )Increase
      (decrease) in short-term notes payable with affiliates
                        
                        
                        49
                        
                        
                        
                        (70
                        )
                        
                        
                        (39
                        )Debt
      issuance costs
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (19
                        )Contribution
      to parent
                        
                        
                        (36
                        )
                        
                        
                        —
                        
                        
                        
                        —Dividend
      to parent
                        
                        
                        (100
                        )
                        
                        
                        (100
                        )
                        
                        
                        (640
                        )Net
      cash used in financing activities
                        
                        
                        (161
                        )
                        
                        
                        (267
                        )
                        
                        
                        (168
                        )Net
      Increase in Cash and Cash Equivalents
                        
                        
                        82
                        
                        
                        
                        6
                        
                        
                        
                        38Cash
      and Cash Equivalents at Beginning of the Year
                        
                        
                        40
                        
                        
                        
                        122
                        
                        
                        
                        128Cash
      and Cash Equivalents at End of the Year
                        
                        $
                        122
                        
                        
                        $
                        128
                        
                        
                        $
                        166Supplemental
      Disclosure of Cash Flow Information:Cash
      Payments:Interest,
      net of capitalized interest
                        
                        $
                        198
                        
                        
                        $
                        221
                        
                        
                        $
                        235Income
      taxes (refunds), net
                        
                        
                        304
                        
                        
                        
                        180
                        
                        
                        
                        (231
                        )Non-cash
      transactions:Accounts
      payable related to capital expenditures
                        
                        $
                        23
                        
                        
                        $
                        23
                        
                        
                        $
                        42




See Notes
to the Company’s Consolidated Financial Statements





36
 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





2006
                    
                    
                    2007
                    
                    
                    2008Shares
                    
                    
                    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
                    
                    
                    
                    
                    
                    
                    1,719
                    
                    
                    
                    
                    
                    
                    
                    1,712
                    
                    
                    
                    
                    
                    
                    
                    1,712Contribution
      to parent
                    
                    
                    
                    
                    
                    
                    (8
                    )
                    
                    
                    
                    
                    
                    
                    —
                    
                    
                    
                    
                    
                    
                    
                    —Dividend
      to parent
                    
                    
                    
                    
                    
                    
                    —
                    
                    
                    
                    
                    
                    
                    
                    —
                    
                    
                    
                    
                    
                    
                    
                    (482
                    )Other
                    
                    
                    
                    
                    
                    
                    1
                    
                    
                    
                    
                    
                    
                    
                    —
                    
                    
                    
                    
                    
                    
                    
                    —Balance,
      end of year
                    
                    
                    
                    
                    
                    
                    1,712
                    
                    
                    
                    
                    
                    
                    
                    1,712
                    
                    
                    
                    
                    
                    
                    
                    1,230Retained
      Earnings (Deficit)Balance,
      beginning of year
                    
                    
                    
                    
                    
                    
                    (1
                    )
                    
                    
                    
                    
                    
                    
                    170
                    
                    
                    
                    
                    
                    
                    
                    346Net
      income
                    
                    
                    
                    
                    
                    
                    271
                    
                    
                    
                    
                    
                    
                    
                    273
                    
                    
                    
                    
                    
                    
                    
                    222Dividend
      to parent
                    
                    
                    
                    
                    
                    
                    (100
                    )
                    
                    
                    
                    
                    
                    
                    (100
                    )
                    
                    
                    
                    
                    
                    
                    (158
                    )Cumulative
      effect of uncertain tax positions standard
                    
                    
                    
                    
                    
                    
                    —
                    
                    
                    
                    
                    
                    
                    
                    3
                    
                    
                    
                    
                    
                    
                    
                    —Balance,
      end of year
                    
                    
                    
                    
                    
                    
                    170
                    
                    
                    
                    
                    
                    
                    
                    346
                    
                    
                    
                    
                    
                    
                    
                    410Total
      Member’s Equity
                    
                    
                    
                    
                    
                    $
                    1,882
                    
                    
                    
                    
                    
                    
                    $
                    2,058
                    
                    
                    
                    
                    
                    
                    $
                    1,640




See Notes
to the Company’s Consolidated Financial Statements








37
 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 or the Company) engages in the
electric transmission and distribution business in a 5,000-square mile area of
the Texas Gulf Coast that includes Houston.  The Company is an
indirect wholly owned subsidiary of CenterPoint Energy, Inc. (CenterPoint
Energy), a public utility holding company.  At December 31, 2008,
the Company had three subsidiaries, CenterPoint Energy Transition Bond Company,
LLC, CenterPoint Energy Transition Bond Company II, LLC and CenterPoint Energy
Transition Bond Company III, LLC (collectively, the transition bond
companies).  Each is a special purpose Delaware limited liability
company formed for the principal purpose of purchasing and owning transition
property, issuing transition bonds and performing activities incidental
thereto.  For further discussion of the transition bond companies, see
Notes 2(e), 2(f), 3(a) and 5.





(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 the Company and its wholly owned subsidiaries are included in the
Company’s consolidated financial statements. All intercompany transactions and
balances are eliminated in consolidation.





(c)
            Revenues





The
Company 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





The
Company records property, plant and equipment at historical cost. The Company
expenses repair and maintenance costs as incurred. Property, plant and equipment
includes the following:





Weighted
      Average Useful
                
                
                December 31,Lives
      (Years)
                
                
                2007
                
                
                2008(In
      millions)Transmission
                
                
                38
                
                
                $
                1,456
                
                
                $
                1,597Distribution
                
                
                26
                
                
                
                4,757
                
                
                
                4,853Other
                
                
                17
                
                
                
                780
                
                
                
                806Total
                
                
                
                
                
                
                6,993
                
                
                
                7,256Accumulated
      depreciation
                
                
                
                
                
                
                2,602
                
                
                
                2,652Property,
      plant and equipment, net
                
                
                
                
                
                $
                4,391
                
                
                $
                4,604





The
Company periodically evaluates long-lived assets, including property, plant and
equipment, and specifically identifiable intangibles, when events or changes in
circumstances indicate that the carrying value of these assets may not be
recoverable. The determination of whether an impairment has occurred is based on
an estimate of undiscounted cash flows attributable to the assets, as compared
to the carrying value of the assets.




38
 Table of Contents





At
December 31, 2007 and 2008, the Company’s asset retirement obligations were
$19 million and $17 million, respectively.  The decrease in asset
retirement obligations in 2008 of $2 million is primarily attributable to
the increase in the credit-adjusted risk-free rate used to value the asset
retirement obligations as of the end of the period.  The decrease in asset
retirement obligations results in an increase in removal cost regulatory
liabilities as discussed in Note 2(e).





(e)
            Regulatory
      Assets and Liabilities





The
Company applies the accounting policies established in Statement of Financial
Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types
of Regulation” (SFAS No. 71). The following is a list of regulatory
assets/liabilities reflected on the Company’s Consolidated Balance Sheets as of
December 31, 2007 and 2008:





December 31,2007
                
                
                2008(In
      millions)Electric
      generation-related regulatory assets (1)
                
                $
                545
                
                
                $
                3Securitized
      regulatory asset (1)
                
                
                2,131
                
                
                
                2,430Unrecognized
      equity return
                
                
                (220
                )
                
                
                (207
                )Unamortized
      loss on reacquired debt
                
                
                79
                
                
                
                73Hurricane
      Ike restoration cost (2)
                
                
                —
                
                
                
                435Postretirement-related
      regulatory asset (3)
                
                
                39
                
                
                
                50Other
      long-term regulatory assets
                
                
                47
                
                
                
                48Total
      regulatory assets (2)
                
                
                2,621
                
                
                
                2,832Electric
      generation-related regulatory liabilities (1)
                
                
                44
                
                
                
                —Estimated
      removal costs
                
                
                290
                
                
                
                301Other
      long-term regulatory liabilities
                
                
                20
                
                
                
                12Total
      regulatory liabilities
                
                
                354
                
                
                
                313Total
      regulatory assets and liabilities, net
                
                $
                2,267
                
                
                $
                2,519


____________


(1)
            As
      discussed in Note 6(b), the Company securitized approximately
      $483 million of electric generation-related regulatory assets, net,
      in February 2008.





(2)
            Pending
      review and approval by the Public Utility Commission of Texas (Texas
      Utility Commission), the Company is not recording a return on its
      Hurricane Ike restoration costs, see Note 3(a).  Other
      regulatory assets that are not earning a return were not material at
      December 31, 2007 and 2008.





(3)
            The
      Company has recorded a regulatory asset for the unrecognized costs of its
      postretirement plans because it has historically recovered and currently
      recovers postretirement expenses in
rates.





The
Company recognizes removal costs as a component of depreciation expense in
accordance with regulatory treatment. As of December 31, 2007 and 2008,
these removal costs of $290 million and $301 million, respectively,
are classified as regulatory liabilities in the Company’s Consolidated Balance
Sheets. A portion of the amount of removal costs that relate to asset
retirement obligations have been reclassified from a regulatory liability to an
asset retirement liability in accordance with Financial Accounting Standards
Board (FASB) Interpretation No. (FIN) 47, “Accounting for Conditional Asset
Retirement Obligations” (FIN 47).





(f)
            Depreciation
      and Amortization Expense





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




39
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The
following table presents depreciation and amortization expense for 2006, 2007
and 2008:





Year
      Ended December 31,2006
                  
                  
                  2007
                  
                  
                  2008(In millions)Depreciation
      expense
                  
                  $
                  245
                  
                  
                  $
                  251
                  
                  
                  $
                  256Amortization
      of securitized regulatory assets
                  
                  
                  135
                  
                  
                  
                  155
                  
                  
                  
                  183Other
      amortization
                  
                  
                  (1
                  )
                  
                  
                  (8
                  )
                  
                  
                  21Total
      depreciation and amortization
                  
                  $
                  379
                  
                  
                  $
                  398
                  
                  
                  $
                  460





(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 2006, 2007 and 2008, the Company
capitalized AFUDC of $4 million, $10 million and $7 million,
respectively.





(h)
            Income
      Taxes





The
Company is included in the consolidated income tax returns of CenterPoint
Energy. The Company calculates its income tax provision on a separate return
basis under a tax sharing agreement with CenterPoint Energy. Pursuant to the tax
sharing agreement with CenterPoint Energy, in 2006, the Company received an
allocation of CenterPoint Energy’s tax expenses totaling
$8 million.





The
Company uses the asset and liability method of accounting for deferred income
taxes in accordance with SFAS No. 109, “Accounting for 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. A valuation
allowance is established against deferred tax assets for which management
believes realization is not considered more likely than not. Investment tax
credits were deferred and are being amortized over the estimated lives of the
related property. Current federal and certain state income taxes are payable to
or receivable from CenterPoint Energy.





Prior to
2007, the Company evaluated uncertain income tax positions and recorded a tax
liability for those positions that management believed were probable of an
unfavorable outcome and could be reasonably estimated. Effective January 1,
2007, the Company accounts for the tax effects of uncertain income tax positions
in accordance with FIN 48, “Accounting for Uncertainty in Income Taxes – an
Interpretation of FASB Statement No. 109” (FIN 48). The Company recognizes
interest and penalties as a component of income tax expense.  For
additional information regarding income taxes, see Note 7.





(i)
            Accounts
      Receivable and Allowance for Doubtful
Accounts





Accounts
and notes receivable, net, are net of an allowance for doubtful accounts of
$1 million and $2 million at December 31, 2007 and 2008, respectively.
The provision for doubtful accounts in the Company’s Statements of Consolidated
Income for 2006, 2007 and 2008 was $(2) million, $1 million and
$2 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, the Company 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, the Company 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. Cash and cash
equivalents does not





40
 Table of Contents





include
restricted cash of $49 million and $60 million at December 31, 2007
and 2008, respectively, which is included in other current assets in the
Company’s Consolidated Balance Sheets. For additional information regarding
transition bonds, see Notes 3(b) and 6. Cash and cash equivalents includes
$128 million and $166 million at December 31, 2007 and 2008,
respectively, that is held by the Company’s transition bond subsidiaries solely
to support servicing the transition bonds.





(l)
            New
      Accounting Pronouncements





In
February 2007, the FASB issued Statement of Financial Accounting Standard
(SFAS) No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of FASB Statement No. 115”
(SFAS No. 159). SFAS No. 159 permits the Company to choose,
at specified election dates, to measure eligible items at fair value (the “fair
value option”). The Company would report unrealized gains and losses on items
for which the fair value option has been elected in earnings at each subsequent
reporting period. This accounting standard is effective as of the beginning of
the first fiscal year that begins after November 15, 2007 but is not
required to be applied. The Company currently has no plans to apply SFAS No.
159.





In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),“Business Combinations”
(SFAS No. 141R). SFAS
No. 141R will significantly change the accounting for business combinations.
Under SFAS No. 141R, an acquiring entity will be required to recognize all the
assets acquired and liabilities assumed in a transaction at the acquisition date
fair value with limited exceptions. SFAS No. 141R also includes a substantial
number of new disclosure requirements and applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. As
the provisions of SFAS No. 141R are applied prospectively, the impact to the
Company cannot be determined until applicable transactions occur.





In
December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51” (SFAS No. 160).
SFAS No. 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. This accounting standard is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
The Company will adopt SFAS No. 160 as of January 1, 2009. The Company
expects that the adoption of SFAS No. 160 will not have a material impact on its
financial position, results of operations or cash flows.





(m)
            Employee
      Benefit Plans





Pension
Plans





Substantially
all of the Company’s employees participate in CenterPoint Energy’s
non-contributory qualified defined benefit plan. Under the cash balance formula,
participants accumulate a retirement benefit based upon 5% of eligible earnings,
which increased from 4% effective January 1, 2009, and accrued interest. Prior
to 1999, the pension plan accrued benefits based on years of service, final
average pay and covered compensation. Certain employees participating in the
plan as of December 31, 1998 automatically receive the greater of the
accrued benefit calculated under the prior plan formula through 2008 or the cash
balance formula.





CenterPoint
Energy’s funding policy is to review amounts annually in accordance with
applicable regulations in order to achieve adequate funding of projected benefit
obligations. Pension expense is allocated to the Company 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. The Company
recognized pension expense of $10 million and $1 million for the years
ended December 31, 2006, and 2007, respectively, and pension income of
$4 million for the year ended December 31, 2008.





In
addition to the pension plan, the Company 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, 2006, 2007 and
2008.





41
 Table of Contents





Savings
Plan





The
Company 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, the Company matches
100% of the first 6% of each employee’s compensation contributed. The Company
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 the
Company the savings plan benefit expense related to the Company’s
employees.  Savings plan benefit expense was $12 million for each
of the years ended December 31, 2006 and 2007, and $14 million for the year
ended December 31, 2008.





Postretirement
Benefits





The
Company’s employees participate in CenterPoint Energy’s 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.





The
Company 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 31,2006
                
                
                2007
                
                
                2008(In
      millions)Service
      cost— benefits earned during the period
                
                $
                1
                
                
                $
                1
                
                
                $
                1Interest
      cost on projected benefit obligation
                
                
                16
                
                
                
                17
                
                
                
                17Expected
      return on plan assets
                
                
                (11
                )
                
                
                (11
                )
                
                
                (11
                )Amortization
      of transition obligation
                
                
                6
                
                
                
                6
                
                
                
                6Net
      postretirement benefit cost
                
                $
                12
                
                
                $
                13
                
                
                $
                13





The
Company used the following assumptions to determine net postretirement benefit
costs:





Year
      Ended December 31,2006
                
                
                2007
                
                
                2008Discount
      rate
                
                
                5.70
                %
                
                
                5.85
                %
                
                
                6.40
                %Expected
      return on plan assets
                
                
                8.50
                %
                
                
                8.00
                %
                
                
                8.00
                %





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




42
 Table of Contents





Following
are reconciliations of the Company’s beginning and ending balances of its
postretirement benefit plan’s benefit obligation, plan assets and funded status
for 2007 and 2008.  The measurement dates for plan assets and
obligations were December 31, 2007 and 2008.





Year
      Ended December 31,2007
                
                
                2008(In
      millions)Change
      in Benefit ObligationAccumulated
      benefit obligation, beginning of year
                
                $
                294
                
                
                $
                281Service
      cost
                
                
                1
                
                
                
                1Interest
      cost
                
                
                17
                
                
                
                17Benefits
      paid
                
                
                (17
                )
                
                
                (18
                )Participant
      contributions
                
                
                1
                
                
                
                1Medicare
      drug reimbursement
                
                
                —
                
                
                
                2Actuarial
      gain
                
                
                (15
                )
                
                
                (12
                )Accumulated
      benefit obligation, end of year
                
                $
                281
                
                
                $
                272Change
      in Plan AssetsPlan
      assets, beginning of year
                
                $
                138
                
                
                $
                142Benefits
      paid
                
                
                (17
                )
                
                
                (18
                )Employer
      contributions
                
                
                9
                
                
                
                9Participant
      contributions
                
                
                1
                
                
                
                1Actual
      investment return (loss)
                
                
                11
                
                
                
                (19
                )Plan
      assets, end of year
                
                $
                142
                
                
                $
                115Amounts
      Recognized in Balance SheetsOther
      liabilities-benefit obligations
                
                $
                (139
                )
                
                $
                (157
                )Net
      liability, end of year
                
                $
                (139
                )
                
                $
                (157
                )Actuarial
      AssumptionsDiscount
      rate
                
                
                6.40
                %
                
                
                6.90
                %Expected
      long-term return on assets
                
                
                8.00
                %
                
                
                8.00
                %Healthcare
      cost trend rate assumed for the next year
                
                
                7.00
                %
                
                
                6.50
                %Prescription
      drug cost trend rate assumed for the next year
                
                
                13.00
                %
                
                
                12.00
                %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
                
                2012
                
                
                2011Year
      that the prescription drug rate reaches the ultimate trend
      rate
                
                2015
                
                
                2014





The
discount rate was determined by reviewing yields on high-quality bonds that
receive one of the two highest ratings given by a recognized rating agency and
expected duration of obligations specific to the characteristics of CenterPoint
Energy’s plans.





The
expected rate of return assumption was developed by reviewing the targeted asset
allocations and historical index performance of the applicable asset classes
over a 15-year period, adjusted for investment fees and diversification
effects.





For
measurement purposes, healthcare costs are assumed to increase 6.5% during 2009,
after which this rate decreases until reaching the ultimate rate of 5.5% in
2011. Prescription drug costs are assumed to increase 12% in 2009, after which
this rate decreases until reaching the ultimate rate of 5.5% in
2014.





The
Company does not have amounts recognized in accumulated other comprehensive
income related to its postretirement benefit plans as of December 31, 2007
and 2008.  Unrecognized costs were recorded as a regulatory asset,
because the Company historically and currently recovers postretirement expenses
in rates.




43
 Table of Contents





Assumed
health care cost trend rates have a significant effect on the reported amounts
for the Company’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
                
                $
                11
                
                
                $
                (9
                )Effect
      on total of service and interest cost
                
                
                1
                
                
                
                (1
                )





The
following table displays the weighted average asset allocations as of
December 31, 2007 and 2008 for the Company’s postretirement benefit
plans:





December 31,2007
                
                
                2008Domestic
      equity securities
                
                
                30
                %
                
                
                29
                %International
      equity securities
                
                
                11
                
                
                
                10Debt
      securities
                
                
                59
                
                
                
                61Total
                
                
                100
                %
                
                
                100
                %





In
managing the investments associated with the postretirement benefit plan, the
Company’s objective is to preserve and enhance the value of plan assets while
maintaining an acceptable level of volatility. These objectives are expected to
be achieved through an investment strategy, that manages liquidity requirements
while maintaining a long-term horizon in making investment decisions and
efficient and effective management of plan assets.





As part
of the investment strategy discussed above, the Company has adopted and
maintains 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
Company expects to contribute $8 million to its postretirement benefits
plan in 2009. The following benefit payments are expected to be paid by the
postretirement benefit plan (in millions):




Postretirement
      Benefit PlanBenefit
      Payments
                    
                    
                    Medicare
                      Subsidy
      Receipts2009
                    
                    $
                    20
                    
                    
                    $
                    (2
                    )2010
                    
                    
                    21
                    
                    
                    
                    (2
                    )2011
                    
                    
                    22
                    
                    
                    
                    (2
                    )2012
                    
                    
                    23
                    
                    
                    
                    (2
                    )2013
                    
                    
                    24
                    
                    
                    
                    (3
                    )2014-2018
                    
                    
                    132
                    
                    
                    
                    (16
                    )




Postemployment
      Benefits





The
Company 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). The
Company recorded postemployment benefit costs of $2 million in 2006 and
postemployment income of $1 million in each of the years ended December 31,
2007 and 2008.  Amounts relating to postemployment obligations
included in “Benefit Obligations” in the accompanying Consolidated Balance
Sheets at December 31, 2007 and 2008 were $18 million and
$14 million, respectively.




44
 Table of Contents





Other
Non-Qualified Plans





The
Company 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 the
Company. The Company recorded benefit expense relating to these programs of
$1 million in each of the years ended December 31, 2006, 2007 and 2008.
Amounts relating to deferred compensation plans included in “Benefit
Obligations” in the accompanying Consolidated Balance Sheets at
December 31, 2007 and 2008 were $17 million and $15 million,
respectively.





(n)
            Other
      Current Assets and Liabilities





Included
in other current assets in the Consolidated Balance Sheets at both
December 31, 2007 and 2008 was $49 million and $60 million,
respectively, of restricted cash related to the transition bond
companies.  Included in other current liabilities in the Consolidated
Balance Sheets at December 31, 2007 and 2008 was $37 million and
$45 million, respectively, of customer deposits.





(3)
            Regulatory
      Matters





(a)
            Hurricane
      Ike





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





The
strong Category 2 storm initially left more than 90% of the Company’s more than
2 million metered customers without power, the largest outage in
CenterPoint Energy’s 130-year history. Most of the widespread power outages were
due to power lines damaged by downed trees and debris blown by Hurricane Ike’s
winds. In addition, on Galveston Island and along the coastal areas of the Gulf
of Mexico and Galveston Bay, the storm surge and flooding from rains
accompanying the storm caused significant damage or destruction of houses and
businesses served by the Company.





The
Company estimates that total costs to restore the electric delivery facilities
damaged as a result of Hurricane Ike will be in the range of $600 million
to $650 million. As is common with electric utilities serving coastal
regions, the poles, towers, wires, street lights and pole-mounted equipment that
comprise the Company’s transmission and distribution system are not covered by
property insurance, but office buildings and warehouses and their contents and
substations are covered by insurance that provides for a maximum deductible of
$10 million. Current estimates are that total losses to property covered by
this insurance were approximately $17 million.





The
Company has deferred the uninsured storm restoration costs as management
believes it is probable that such costs will be recovered through the regulatory
process. As a result, storm restoration costs did not affect the Company’s
reported net income for 2008. As of December 31, 2008, the Company recorded an
increase of $145 million in construction work in progress and
$435 million in regulatory assets for restoration costs incurred through
December 31, 2008.  Approximately $73 million of these costs are
based on estimates and are included in accounts payable as of December 31,
2008.  Additional restoration costs will continue to be incurred in
2009.





Assuming
necessary enabling legislation is enacted by the Texas Legislature in the
session that began in January 2009, the Company expects to seek a financing
order from the Texas Utility Commission to obtain recovery of its storm
restoration costs through the issuance of non-recourse securitization bonds
similar to the storm recovery bonds issued by another Texas utility following
the hurricanes that affected that utility’s service territories in 2005.
Assuming those bonds are issued, the Company will recover the amount of storm
restoration costs determined by the Texas Utility Commission to have been
prudently incurred out of the bond proceeds, with the bonds being repaid over
time through a charge imposed on customers. Alternatively, if securitization is
not available, recovery of those costs would be sought through traditional
regulatory mechanisms. Under its 2006 rate case settlement, the Company is
entitled to seek an adjustment to rates in this situation, even though in most
instances its rates are frozen until 2010.





45
 Table of Contents





(b)
            Recovery
      of True-Up Balance





In March
2004, the Company 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 the Company 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.





The
Company 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 the Company 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 the Company’s initial request.





The
Company 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 the Company to recover EMCs paid to Reliant
      Energy, Inc. (RRI);





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





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





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





In June
2008, the Company petitioned the Texas Supreme Court for review of the court of
appeals decision. In its petition, the Company 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 the Company 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 the Company 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) the Company 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.





46
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Review by
the Texas Supreme Court of the court of appeals decision is at the discretion of
the court. In November 2008, the Texas Supreme Court requested the parties
to the Petitions for Review to submit briefs on the merits of the
issues raised.  Briefing at the Texas Supreme Court should be completed in
the second quarter of 2009.  Although the Texas Supreme Court has not
indicated whether it will grant review of the lower court’s decision,
its request for full briefing on the merits allowed the parties to more fully
explain their positions. There is no prescribed time in which the Texas
Supreme Court must determine whether to grant review or, if review is granted,
for a decision by that court. Although the Company and CenterPoint Energy
believe that the Company’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, the Company 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, the Company recorded
a net after-tax extraordinary loss of $947 million. No amounts related to
the district court’s judgment or the decision of the court of appeals have been
recorded in the Company’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, the Company 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 the Company ultimately is authorized to recover or is
required to refund beyond the amounts recorded based on the True-Up Order, but
could range from $170 million to $385 million (pre-tax) plus interest
subsequent to December 31, 2008.





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





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





47
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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, the Company 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, the Company 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 the Company 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 the Company to collect approximately
$24 million of rate case expenses over three years without a return through
a separate tariff rider (Rider RCE). The Company 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 the Company’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 the Company to
recover through the Rider RCE the costs (approximately $5 million) for a
panel appointed by the Texas Utility Commission in connection with the valuation
of electric generation assets. Finally, the district court accepted the
contention of one party that the CTC should not be allocated to retail customers
that have switched to new on-site generation. The Texas Utility Commission and
the Company appealed the district court’s judgment to the Texas Third Court
of Appeals, and in July 2008, the court of appeals reversed the district court’s
judgment in all respects and affirmed the Texas Utility Commission’s order. Two
of the appellants have requested further review from the Texas Supreme
Court.  In March 2009, the Texas Supreme Court requested the parties
to file briefs on the merits in their appeals.  Review by the Texas
Supreme Court is discretionary with that court, and there is no deadline for its
action on the appeals.  The ultimate outcome of this matter cannot be
predicted at this time. However, the Company does not expect the disposition of
this matter to have a material adverse effect on its financial condition,
results of operations or cash flows.





During
the years ended December 31, 2006, 2007 and 2008, the Company recognized
approximately $55 million, $42 million and $5 million,
respectively, in operating income from the CTC. Additionally, during the years
ended December 31, 2006, 2007 and 2008, the Company recognized
approximately $13 million, $14 million and $13 million,
respectively, of the allowed equity return not previously recognized. As of
December 31, 2008, the Company had not recognized an allowed equity return
of $207 million on the Company’s true-up balance because such return will
be recognized as it is recovered in rates.





During
the 2007 legislative session, the Texas legislature amended statutes prescribing
the types 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, the Company 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. The Company
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 the Company 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.




48
 Table of Contents





(c)
            Rate
      Proceedings





In
September 2008, the Company filed an application with the Texas Utility
Commission requesting an interim update to its wholesale transmission rate. The
filing resulted in a revenue requirement increase of $22.5 million over
rates then in effect.  Approximately 74% will be paid by distribution
companies other than the Company.  The remaining 26% represents the
Company’s share, which cannot be included in rates until 2010 under the terms of
the rate freeze implemented in the settlement of the Company’s 2006 rate
proceeding. In November 2008, the Texas Utility Commission approved the
Company’s request.  The interim rates became effective for service on
and after November 5, 2008.





(4)
            Fair
      Value Measurements




Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value
Measurements” (SFAS No. 157), which requires additional disclosures about the
Company’s financial assets and liabilities that are measured at fair
value. FASB Staff Position No. FAS 157-2 delays the effective date for SFAS
No. 157 for nonfinancial assets and liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis, to fiscal years, and interim periods within those fiscal years, beginning
after November 15, 2008. The Company has elected to defer the adoption of SFAS
No. 157 for the measurement of asset retirement obligations until January 1,
2009, as permitted. Beginning in January 2008, assets and liabilities recorded
at fair value in the Consolidated Balance Sheet are categorized based upon the
level of judgment associated with the inputs used to measure their value.
Hierarchical levels, as defined in SFAS No. 157 and directly related to the
amount of subjectivity associated with the inputs to fair valuations of these
assets and liabilities, are as follows:





Level 1:
Inputs are unadjusted quoted prices in active markets for identical assets or
liabilities at the measurement date. The types of assets carried at Level 1
fair value are investments.  At December 31, 2008, the Company held
Level 1 investments of $59 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. The Company had no Level 2 assets or liabilities at December 31,
2008.





Level 3:
Inputs are unobservable for the asset or liability, and include situations where
there is little, if any, market activity for the asset or liability. In certain
cases, the inputs used to measure fair value may fall into different levels of
the fair value hierarchy. In such cases, the level in the fair value hierarchy
within which the fair value measurement in its entirety falls has been
determined based on the lowest level input that is significant to the fair value
measurement in its entirety. The Company’s assessment of the significance of a
particular input to the fair value measurement in its entirety requires
judgment, and considers factors specific to the asset. The Company had no
Level 3 assets or liabilities at December 31, 2008.





(5)
            Related
      Party Transactions and Major
Customers





(a)
            Related
      Party Transactions




The Company 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.The
Company had money pool borrowings of $47 million and $8 million at
December 31, 2007 and 2008, respectively, which are included in accounts
and notes payable—affiliated companies in the Consolidated Balance
Sheets.  At December 31, 2008, the Company’s money pool
borrowings had a weighted average interest rate of 1.541%.





At
December 31, 2007 and 2008,the Company had a
$750 million note receivable from its parent, which bears interest at the
prime rate, 3.25% at December 31, 2008.





49
 Table of Contents





For the years ended
December 31, 2006, 2007 and 2008, the Company had net interest income
related to affiliate borrowings of $50 million, $49 million and
$31 million, respectively.




CenterPoint Energy
provides some corporate services to the Company. The costs of services have been
charged directly to the Company 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 the Company not been an affiliate. Amounts charged to the Company
for these services were $112 million, $103 million and
$116 million in 2006, 2007 and 2008, respectively, and are included
primarily in operation and maintenance expenses.




Pursuant to the tax
sharing agreement with CenterPoint Energy, the Company received an allocation of
CenterPoint Energy’s tax expense of $8 million for 2006, which was recorded
in additional paid-in capital.




In 2006, 2007 and 2008,
the Company paid a dividend of $100 million, $100 million and $640 million,
respectively.





(b)
            Major
      Customers




During 2006, 2007 and
2008, revenues derived from energy delivery charges provided by the Company to
subsidiaries of RRI totaled $737 million, $661 million and
$635 million, respectively.




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





December 31,
      2007
                
                
                December 31,
      2008Long-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 6.95% due 2013 to 2033(2)
                
                
                1,262
                
                
                
                —
                
                
                
                1,262
                
                
                
                —Pollution
      control bonds 3.625% to 5.60% due 2012 to 2027(3)
                
                
                229
                
                
                
                —
                
                
                
                229
                
                
                
                —Transition
      Bonds 4.192% to 5.63% due 2008 to 2020
                
                
                2,101
                
                
                
                159
                
                
                
                2,381
                
                
                
                208Bank
      loans due 2012(4)
                
                
                50
                
                
                
                —
                
                
                
                251
                
                
                
                —Other
                
                
                (1
                )
                
                
                —
                
                
                
                (1
                )
                
                
                —Total
      long-term debt
                
                $
                3,743
                
                
                $
                159
                
                
                $
                4,224
                
                
                $
                208 __________


(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 the Company had issued as collateral for long-term
      debt of CenterPoint Energy, and general mortgage bonds that the Company
      had issued as collateral for its debt aggregating $229 million at
      both December 31, 2007 and 2008. 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 the Company’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.In November 2008, the Company entered into a $600 million
364-day credit facility. The credit facility will terminate if bonds are issued
to securitize the costs incurred as a result of Hurricane Ike and if those bonds
are issued prior to the November 24, 2009 expiration of the facility. The
Company expects to seek legislative and regulatory approval for the issuance of
such bonds during 2009.





50
 Table of Contents





The
364-day credit facility is secured by a pledge of $600 million of general
mortgage bonds issued by the Company. Borrowing costs for London Interbank
Offered Rate (LIBOR)-based loans will be at a margin of 2.25 percent above
LIBOR rates, based on the Company’s current ratings. In addition, the Company
will pay lenders, based on current ratings, a per annum commitment fee of
0.5 percent for their commitments under the facility and a quarterly
duration fee of 0.75 percent on the average amount of outstanding
borrowings during the quarter. The spread to LIBOR and the commitment fee
fluctuate based on the borrower’s credit rating. The facility contains
covenants, including a debt (excluding transition and other securitization
bonds) to total capitalization covenant. As of December 31, 2008, there were no
borrowings outstanding under the $600 million credit facility and the
Company was in compliance with all debt covenants.





(b)
            Long-term
      Debt





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





Revolving Credit Facility.The Company’s$289 million
credit facility’s first drawn cost is LIBOR plus 45 basis points based on the
Company’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, 2007 and 2008, the Company had $50 million and $251 million of
borrowings, respectively, under this credit facility. In addition, as of both
December 31, 2007 and 2008, the Company had approximately $4 million of
outstanding letters of credit under this credit facility. The Company was in
compliance with all debt covenants as of December 31, 2008.





Transition
Bonds.  Pursuant to a financing order issued by the Texas
Utility Commission in September 2007, in February 2008 a subsidiary of the
Company issued approximately $488 million in transition bonds in two
tranches with interest rates of 4.192% and 5.234% and final maturity dates of
February 2020 and February 2023, respectively. Scheduled final payment dates are
February 2017 and February 2020. Through issuance of the transition bonds, the
Company securitized transition property of approximately $483 million
representing the remaining balance of the CTC less an environmental refund as
reduced by the fuel reconciliation settlement amount.  See Note 3(b)
for further discussion.







Maturities.  The
Company’s maturities of long-term debt and scheduled payments on transition
bonds are $208 million in 2009, $221 million in 2010,
$240 million in 2011, $559 million in 2012 and $733 million in
2013.





Liens. As
of December 31, 2008, the Company’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 2006, 2007 and 2008 have been satisfied by certification
of property additions. The replacement fund requirement to be satisfied in 2009
is approximately $170 million, and the sinking fund requirement to be satisfied
in 2009 is approximately $3 million. The Company expects to meet these 2009
obligations by certification of property additions. As of December 31,
2008, the Company’s assets were also subject to liens securing approximately
$2.6 billion of general mortgage bonds which are junior to the liens of the
first mortgage bonds.




51
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(7)
            Income
      Taxes





The
components of the Company’s income tax expense (benefit) were as
follows:





Year
      Ended December 31,2006
                      
                      
                      2007
                      
                      
                      2008(In
      millions)Current:Federal
                      
                      $
                      208
                      
                      
                      $
                      199
                      
                      
                      $
                      (236
                      )State
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      10Total
      current
                      
                      
                      208
                      
                      
                      
                      199
                      
                      
                      
                      (226
                      )Deferred:Federal
                      
                      
                      (76
                      )
                      
                      
                      (73
                      )
                      
                      
                      345State
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      2Total
      deferred
                      
                      
                      (76
                      )
                      
                      
                      (73
                      )
                      
                      
                      347Income
      tax expense
                      
                      $
                      132
                      
                      
                      $
                      126
                      
                      
                      $
                      121





A
      reconciliation of the federal statutory income tax rate to the effective
      income tax rate is as follows:





Year
      Ended December 31,2006
                
                
                2007
                
                
                2008(In
      millions)Income
      before income taxes
                
                $
                403
                
                
                $
                399
                
                
                $
                343Federal
      statutory rate
                
                
                35
                %
                
                
                35
                %
                
                
                35
                %Income
      taxes at statutory rate
                
                
                141
                
                
                
                139
                
                
                
                120Net
      addition (reduction) in taxes resulting from:State
      income taxes (benefit), net of valuation allowance and federal income
      tax
                
                
                —
                
                
                
                —
                
                
                
                8Amortization
      of investment tax credit
                
                
                (7
                )
                
                
                (7
                )
                
                
                (7
                )Other,
      net
                
                
                (2
                )
                
                
                (6
                )
                
                
                —Total
                
                
                (9
                )
                
                
                (13
                )
                
                
                1Income
      tax expense
                
                $
                132
                
                
                $
                126
                
                
                $
                121Effective
      income tax rate
                
                
                32.7
                %
                
                
                31.6
                %
                
                
                35.4
                %





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





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





December 31,2007
                  
                  
                  2008(In
      millions)Deferred
      tax assets:Current:Allowance
      for doubtful accounts
                  
                  $
                  —
                  
                  
                  $
                  1Non-current:Employee
      benefits
                  
                  
                  74
                  
                  
                  
                  84Other
                  
                  
                  35
                  
                  
                  
                  18Total
      non-current deferred tax assets
                  
                  
                  109
                  
                  
                  
                  102Total
      deferred tax assets
                  
                  
                  109
                  
                  
                  
                  103Deferred
      tax liabilities:Non-current:Depreciation
                  
                  
                  463
                  
                  
                  
                  697Regulatory
      assets, net
                  
                  
                  826
                  
                  
                  
                  910Other
                  
                  
                  9
                  
                  
                  
                  1Total
      deferred tax liabilities
                  
                  
                  1,298
                  
                  
                  
                  1,608Accumulated
      deferred income taxes, net
                  
                  $
                  1,189
                  
                  
                  $
                  1,505





52
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The
Company is included in the consolidated income tax returns of CenterPoint
Energy. The Company calculates its income tax provision on a separate return
basis under a tax sharing agreement with CenterPoint Energy.





Uncertain Income Tax
Positions. The Company adopted the provisions of FIN 48 on January 1,
2007. As a result of the adoption of FIN 48, the Company recognized a decrease
of approximately $3 million in the liability for unrecognized tax benefits,
which was accounted for as an increase to the January 1, 2007 retained earnings.
A reconciliation of the change in unrecognized tax benefits for 2007 and 2008,
included in other long-term liabilities in the Consolidated Balance Sheets, is
as follows (in millions):





December 31,2007
                    
                    
                    2008Balance,
      beginning of year
                    
                    $
                    70
                    
                    
                    $
                    92Tax
      Positions related to prior years:Additions
                    
                    
                    30
                    
                    
                    
                    16Reductions
                    
                    
                    (12
                    )
                    
                    
                    (1
                    )Tax
      Positions related to current year:Additions
                    
                    
                    4
                    
                    
                    
                    16Balance,
      end of year
                    
                    $
                    92
                    
                    
                    $
                    123





The
Company has approximately $8 million and $11 million of unrecognized tax
benefits that, if recognized, would reduce the effective income tax rate for
2007 and 2008, respectively. The Company recognizes interest and penalties as a
component of income tax expense. The Company recognized approximately $5 million
and $7 million of interest on uncertain income tax positions during 2007
and 2008, respectively. The Company accrued $7 million and $14 million of
interest on uncertain income tax positions at December 31, 2007 and 2008,
respectively. The Company does not expect the amount of unrecognized tax
benefits to change significantly over the next 12 months.





Tax Audits and
Settlements. CenterPoint
Energy’s consolidated federal income tax returns have been audited and settled
through the 2003 tax year and the IRS is currently at various stages of the
examination process for tax years 2004 through 2007. The Company has considered
the effects of these examinations in its accrual for settled issues and
liability for uncertain income tax positions as of December 31,
2008.





(8)
            Commitments
      and Contingencies





(a)
            Lease
      Commitments





The
Company currently has no further obligations under non-cancelable long-term
operating leases for the years 2009 to 2013. Total lease expense for all
operating leases was approximately $5 million, $4 million and
$5 million for the years ended December 31, 2006, 2007 and 2008,
respectively.





(b)
            Legal
      and Environmental Matters





Legal
Matters





RRI
Indemnified Litigation





The
Company, CenterPoint Energy 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 Reliant Energy, Inc. (formerly Reliant
Resources, Inc.) (RRI), CenterPoint Energy  and its subsidiaries are
entitled to be indemnified by RRI for any losses, including attorneys’ fees and
other costs, arising out of the lawsuits described below under “Gas Market
Manipulation Cases” and “Electricity Market Manipulation Cases.” Pursuant to the
indemnification obligation, RRI is defending the Company and its subsidiaries to
the extent named in these lawsuits. Although the ultimate outcome of these
matters cannot be predicted at this time, the Company has not considered it
necessary to establish reserves related to this litigation.





53
 Table of Contents




Gas Market Manipulation
Cases. A large number of lawsuits were filed against numerous gas market
participants in a number of federal and western state courts in connection with
the operation of the natural gas markets in 2000-2001. CenterPoint Energy’s
former affiliate, RRI, was a participant in gas trading in the California and
Western markets. These lawsuits, many of which have been filed as class actions,
allege violations of state and federal antitrust laws. Plaintiffs in these
lawsuits are seeking a variety of forms of relief, including, among
others,  recovery of compensatory damages (in some cases in excess of
$1 billion), a trebling of compensatory damages, full consideration damages and
attorneys’ fees. CenterPoint Energy and/or Reliant Energy were named in
approximately 30 of these lawsuits, which were instituted between 2003 and 2007.
In October 2006, RRI reached a settlement of 11 class action natural gas cases
pending in state court in California. The court approved this settlement in June
2007. In the other gas cases consolidated in state court in California, the
Court of Appeals found that CenterPoint Energy was not a successor to the
liabilities of a subsidiary of RRI, and CenterPoint Energy was dismissed from
these suits in April 2008. In the Nevada federal litigation, three of the
complaints were dismissed based on defendants’ filed rate doctrine defense, but
the Ninth Circuit Court of Appeals reversed those dismissals and remanded the
cases back to the district court for further proceedings.  In July
2008, the plaintiffs in four of the federal court cases agreed to dismiss
CenterPoint Energy from those cases. In August 2008, the plaintiffs in five
additional cases also agreed to dismiss CenterPoint Energy from those cases, but
one of these plaintiffs has moved to amend its complaint to add CenterPoint
Energy Services, Inc., an indirect subsidiary of CenterPoint Energy, as a
defendant in that case.  As a result, CenterPoint Energy remains a
party in only two remaining gas market manipulation cases, one pending in Nevada
state court in Clark County and one in federal district court in
Nevada.  CenterPoint Energy believes it is not a proper defendant in
the remaining cases and will continue to pursue dismissal from those
cases.





Electricity Market Manipulation
Cases.A large number of lawsuits were filed against numerous market
participants in connection with the operation of the California electricity
markets in 2000-2001. CenterPoint Energy’s former affiliate, RRI, was a
participant in the California markets, owning generating plants in the state and
participating in both electricity and natural gas trading in that state and in
western power markets generally. CenterPoint Energy was named as a defendant in
certain of these suits. These lawsuits, many of which were filed as class
actions and which were based on a number of legal theories, have all been
resolved.  In August 2005, RRI reached a settlement with the Federal
Energy Regulatory Commission (FERC) enforcement staff, the states of California,
Washington and Oregon, California’s three largest investor-owned utilities,
classes of consumers from California and other western states, and a number of
California city and county government entities that resolves their claims
against RRI  related to the operation of the electricity markets in
California and certain other western states in 2000-2001, including the claims
made by plaintiffs in the suits against RRI naming CenterPoint
Energy.  The settlement was approved by the FERC, by the California
Public Utilities Commission and by the courts in which the electricity class
action cases were pending. An appeal by two parties to the California Court of
Appeals was denied with no further appeal sought.  A party in the FERC
proceedings sought review of the FERC’s order approving the settlement in the
Ninth Circuit Court of Appeals, but in December 2008, that party voluntarily
withdrew its petition for review, and the settlement is now
final.  The Company and CenterPoint Energy are not parties to the
settlement, but may rely on the settlement as a defense to any
claims.





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 the Company, 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 the Company, but most existing claims relate to facilities
previously owned by CenterPoint Energy or the Company. CenterPoint Energy
anticipates that additional claims like those received may be asserted in the
future. In 2004, CenterPoint Energy sold its generating business, to which most
of these claims relate, to Texas Genco LLC, which is now known as NRG Texas LP.
Under the terms of the arrangements regarding separation of the generating
business from CenterPoint Energy and its sale to NRG Texas LP, ultimate
financial responsibility for uninsured losses from claims relating to the
generating business has been assumed by NRG Texas LP, but CenterPoint Energy has
agreed to continue to defend such claims to the extent they are covered by
insurance maintained by CenterPoint Energy, subject to reimbursement of the
costs of such defense from the purchaser. Although their ultimate outcome cannot
be predicted at this time, CenterPoint Energy intends to continue vigorously
contesting claims that it does not consider to have merit and the Company does
not expect, based on its experience to date, these matters, either





54
 Table of Contents





individually
or in the aggregate, to have a material adverse effect on the Company’s
financial condition, results of operations or cash flows.





Other
Environmental.  From time to time the Company 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, the
Company has been named from time to time as a defendant in litigation related to
such sites. Although the ultimate outcome of such matters cannot be predicted at
this time, the Company does not expect, based on its experience to date, these
matters, either individually or in the aggregate, to have a material adverse
effect on the Company’s financial condition, results of operations or cash
flows.





Other
Proceedings





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





(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 the Company’s parent are estimated to be
equivalent to carrying amounts and have been excluded from the table
below.


December 31,
      2007
                                        
                                        December 31,
      2008Carrying
                                          Amount
                                        
                                        
                                        Fair
                                          Value
                                        
                                        Carrying
                                          Amount
                                        
                                        
                                        Fair
                                          Value(In
      millions)Financial
      liabilities:Long-term
      debt (including $151 million of long-term notes payable to
      parent)
                                        $
                                        4,052
                                        
                                        
                                        $
                                        4,083
                                        
                                        $
                                        4,582
                                        
                                        
                                        $
                                        4,424





(10)
            Unaudited
      Quarterly Information





Summarized
quarterly financial data is as follows:





Year
      Ended December 31, 2007First
                    Quarter
                  
                  
                  Second
                    Quarter
                  
                  
                  Third
                    Quarter
                  
                  
                  Fourth
                    Quarter(In
      millions)Revenues
                  
                  $
                  406
                  
                  
                  $
                  465
                  
                  
                  $
                  528
                  
                  
                  $
                  438Operating
      income
                  
                  
                  104
                  
                  
                  
                  157
                  
                  
                  
                  196
                  
                  
                  
                  104Net
      income
                  
                  
                  41
                  
                  
                  
                  77
                  
                  
                  
                  105
                  
                  
                  
                  50





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








55
 Table of Contents





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, 2008 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, 2008 that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.





Item 9B.Other
Information





None.


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).




56
 Table of Contents





Item 14.Principal
Accounting Fees and Services





Aggregate
fees billed to the Company during the fiscal years ending December 31, 2007
and 2008 by its principal accounting firm, Deloitte & Touche LLP, are set
forth below.





Year
      Ended December 31,2007
                                  
                                  
                                  2008Audit
      fees (1)
                                  
                                  $
                                  476,050
                                  
                                  
                                  $
                                  679,550Audit-related
      fees (2)
                                  
                                  
                                  96,000
                                  
                                  
                                  
                                  105,000Total
      audit and audit-related fees
                                  
                                  
                                  572,050
                                  
                                  
                                  
                                  784,550Tax
      fees
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —All
      other fees
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Total
      fees
                                  
                                  $
                                  572,050
                                  
                                  
                                  $
                                  784,550
 __________


(1)
              For
      2008 and 2007, 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
      2008 and 2007, 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.


The
Company is not required to have, and does not have, an audit
committee.





PART IV





Item 15.
Exhibits and Financial
Statement Schedules





(a)(1)
      Financial Statements.Report of Independent Registered Public Accounting
      Firm
              32Statements of Consolidated Income for the Three Years
      Ended December 31, 2008
              34Consolidated Balance Sheets at December 31, 2007 and
      2008
              35Statements of Consolidated Cash Flows for the Three Years
      Ended December 31, 2008
              36Statements of Consolidated Member’s Equity for the Three
      Years Ended December 31, 2008
              37Notes to Consolidated Financial
    Statements
              38(a)(2)
      Financial Statement Schedules for the Three Years Ended December 31,
      2008.Report of Independent Registered Public Accounting
      Firm
              58II— Qualifying Valuation Accounts
              59





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 61.




57
 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, 2008 and 2007, and for each of the three years in the period ended
December 31, 2008, and have issued our report thereon dated March 11, 2009; such
report is included elsewhere in this Form 10-K.  Our audits also included
the consolidated financial statement schedule of theCompany 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.




DELOITTE
& TOUCHE LLP




Houston,
Texas


March 11,
2009










58
 Table of Contents





CENTERPOINT
ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES


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





SCHEDULE II — QUALIFYING VALUATION ACCOUNTS


For
the Three Years Ended December 31, 2008


(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, 2008:Accumulated
      provisions:Uncollectible
      accounts receivable
                  
                  $
                  1
                  
                  
                  $
                  2
                  
                  
                  $
                  1
                  
                  
                  $
                  2Year
      Ended December 31, 2007:Accumulated
      provisions:Uncollectible
      accounts receivable
                  
                  $
                  1
                  
                  
                  $
                  1
                  
                  
                  $
                  1
                  
                  
                  $
                  1Year
      Ended December 31, 2006:Accumulated
      provisions:Uncollectible
      accounts receivable
                  
                  $
                  5
                  
                  
                  $
                  (2
                  )
                  
                  $
                  2
                  
                  
                  $
                  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.





59
 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 11th day of March, 2009.





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 11, 2009.





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)








60
 Table of Contents




CENTERPOINT
ENERGY HOUSTON ELECTRIC, LLC
 
 EXHIBITS
TO THE ANNUAL REPORT ON FORM 10-K
 For
Fiscal Year Ended December 31, 2008
 
 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)


61
 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
                      
                      4.1
 62
 Table of Contents


Exhibit
                      Number
                    
                    Description
                    
                    Report
      or Registration Statement
                    
                    SEC
      File or
                      Registration
                      Number
                    
                    Exhibit
                      Reference4(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
                    
                    4.14(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)


63
 Table of Contents




Exhibit
                      Number
                    
                    Description
                    
                    Report
      or Registration Statement
                    
                    SEC
      File or
                      Registration
                      Number
                    
                    Exhibit
                      Reference4(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
                    
                    4.24(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
 64
 Table of Contents
  Pursuant
to Item 601(b)(4)(iii)(A) of Regulation S-K, the Company 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 the Company and its subsidiaries on a
consolidated basis. The Company 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


65