Letter to Shareholders

2011 was another excellent year for your company. Our businesses turned in solid operational and financial performances, and we finally resolved the true-up issues remaining from the 1999 law that restructured the Texas electric industry. As a result, we recovered nearly $1.7 billion in January 2012. The company is now in a stronger financial position than ever, and we are excited about the opportunities ahead.

We reported record net income in 2011 of nearly $1.4 billion or $3.17 per diluted share. These results include net income of $811 million, or $1.89 per diluted share, from the true-up resolution. Excluding this impact, net income was $546 million or $1.27 per diluted share, compared to $442 million or $1.07 in 2010.

For our shareholders, 2011 was also a banner year. Our solid operating performance, the resolution of the true-up proceeding and renewed investor enthusiasm for the regulated utility sector combined to produce the best financial results since we became a stand-alone company. Total shareholder returns last year, which included stock price appreciation and annual dividends, was 33.5 percent. This significantly exceeded the S&P 500 Utilities Index return of 19.9 percent and the S&P 500 Index, where returns were 2.1 percent last year.

Shareholder returns over the long term have been equally impressive. In November, the Edison Electric Institute presented us with the EEI Index Award for achieving the highest total shareholder return among large-cap utilities over the past five years. As shown in the long-term investment performance chart, our total returns (assuming reinvestment of all dividends) for the past three years, five years and since our inception in October 2002 were 86.8, 55.3 and 281.5 percent respectively. This compares favorably to 41.6, 20.0 and 179.2 percent for the S&P 500 Utilities Index and the 48.6, -1.2 and 85.6 percent for the S&P 500 Index over the same time periods.

We believe our success can be attributed, in large part, to three key elements:

  • Our outstanding workforce. We have dedicated employees committed to serving our customers and taking our company to the next level. We continue to invest in employee and leadership development and intend to remain an employer of choice. This approach is yielding results. In a 2011 Towers Watson employee survey, CenterPoint Energy ranked higher than the utility benchmark in every category measured.
  • Our diversified businesses. Our geographic, economic and regulatory diversity, along with our balanced portfolio of electric and natural gas businesses, provide us with a strong foundation for success under a variety of market conditions.
  • Our consistent strategy. We have stayed true to our vision “to be recognized as America’s leading energy delivery company... and more,” and to our investment thesis of providing our shareholders with a secure, competitive dividend with growth.

Delivering Results

Our electric transmission and distribution business had its best financial year ever. Core operating income for the year was $496 million, compared to $427 million in 2010. Weather was a major factor, with Texas’ record-breaking drought and heat contributing to a summer in which electric usage was above historic norms each month. Customer growth contributed as well, as we added more than 45,000 new customers.

We have nearly completed our smart meter initiative, with more than 2 million meters having been installed in the greater Houston area. We are also deploying a system of new, remote-control sensors and automated switches that we call the “intelligent grid.” Once completed in the middle of this decade, the intelligent grid will work with our smart meters to quickly identify outage locations, reroute power around trouble spots and notify repair crews.

Our natural gas distribution business had another outstanding year in 2011, achieving operating income of $226 million, which was shy of the record $231 million achieved in 2010. Our service areas continued to grow with more than 19,000 customer additions last year. We focused on improving operations, enhancing customer service and managing delinquent accounts. Rate designs providing for periodic rate adjustments, together with traditional rate recovery, helped bolster our revenues. After years of diligent effort, this business is now earning at or near its authorized rate of return.

System safety, reliability and automation remain significant business priorities. We invested nearly $300 million in capital improvements during 2011, well above our past levels. We plan to further increase capital spending to nearly $350 million this year, with a significant portion devoted to system upgrades.

Our interstate pipelines business turned in a solid performance last year. Operating income for 2011 was $248 million, compared to $270 million in 2010. Our focus continues to be on pipeline safety and integrity, maintaining and acquiring customers and investing in state-of-the-art automation to more efficiently manage our assets. Over the next five years, system maintenance and pipeline integrity will require between $80 and $100 million in capital annually, and we anticipate additional spending to meet new environmental regulations.

In response to the growing needs of natural gas-fired power plants connected to our system, we have developed swing-load services. We have also implemented system control tools to provide better service to our customers and capture new business opportunities.

Thanks to our investment in new gathering systems in the Fayetteville and Haynesville shales, operating income for our field services business increased from $151 million in 2010 to $189 million in 2011. Total throughput increased nearly 30 percent with total gathered volumes rising to 2.6 Bcf per day by year end, compared to 2.0 Bcf in 2010.

Now that we have substantially completed our planned gathering systems in the Haynesville Shale, we are actively pursuing opportunities both within and outside our traditional gathering areas. With increased demand for natural gas expected in the future, gas infrastructure development will likely be needed in a number of existing and new producing regions.

Our competitive natural gas sales and services business struggled in 2011. Operating income for the year was $6 million, compared to $16 million in 2010. Very low seasonal and geographic natural gas price differentials caused some of our pipeline and storage contracts to be uneconomic. A number of these contracts have expired or will terminate over the next 12 to 18 months. Our principal focus remains on serving commercial and industrial customers across our 21-state footprint and improving the overall profitability of this business.

Pursuing Opportunities

We remain confident about our future. Our electric utility serves one of the most attractive and vibrant service territories in the nation. As the first major metropolitan area to recover from the economic downturn, Houston should remain a leader in economic growth and job creation. We are building the electric infrastructure to meet these new demands while continuing to lead the nation in the deployment of smart meters and intelligent grid technologies. This will ultimately create a more reliable and efficient grid to better serve our customers.

Natural gas is one of the fastest growing fuels in the nation’s energy mix. The abundance of this resource is undisputed given the recent technological breakthroughs in developing and producing natural gas from shale formations. Because it is inherently cleaner than any other fossil fuel, the use of natural gas in power generation as well as home and industrial use is expected to increase in the years to come. Our various natural gas segments are poised to be a part of this resurgence. The regulated gas distribution business, which spans six states, is ready to invest in new infrastructure. Not only are we building to serve growing demand, but we are also accelerating the replacement of aging pipelines.

Our midstream business, which includes interstate pipelines and the field services unit, will compete for the infrastructure projects that will be required to get the new sources of natural gas to end-use consumers. In the near term, our interstate pipelines will be focused on serving new power plant loads and industrial customers located near our core system. It is unlikely that any new, large interstate pipelines will be needed in our current footprint over the next few years. However, we expect new laterals and significant gathering and processing facilities will be required, and we will actively pursue these new opportunities, both within and outside the areas where we currently operate. Of course, our competitive energy services business will be there to serve the growing natural gas needs of commercial and industrial customers.

In short, we believe we have the financial strength, the right assets, the right employees and the right capabilities to pursue these strategic opportunities.

In January 2012, our Board of Directors raised our quarterly dividend from 19.75 cents per share to 20.25 cents per share. This marks the seventh consecutive year the CenterPoint Energy dividend has been increased, showing the confidence the Board has in our ability to deliver sustainable earnings and cash flow. We hope you share this confidence.

Thank you for your continued support and investment in CenterPoint Energy.

Milton Carroll

Milton Carroll
Chairman

David M. McClanahan

David M. McClanahan
President & CEO



Long-term Investment Performance

Total return in percent*