CenterPoint Energy 2009 Annual Report Download - page 116

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94
For CenterPoint Energy’s price stabilization activities of the Natural Gas Distribution business segment, the
settled costs of derivatives are ultimately recovered through purchased gas adjustments. Accordingly, the net
unrealized gains and losses associated with interim price movements on contracts that are accounted for as
derivatives and probable of recovery through purchased gas adjustments are recorded as net regulatory assets. For
those derivatives that are not included in purchased gas adjustments, unrealized gains and losses and settled amounts
are recognized in the Statements of Consolidated Income as revenue for retail sales derivative contracts and as
natural gas expense for natural gas derivatives and non-retail related physical gas derivatives. Unrealized gains and
losses on indexed debt securities are recorded as Other Income (Expense) on the Statements of Consolidated
Income.
Income Statement Im
p
act of Derivative Activit
y
Total derivatives not designated as hedging
instruments Income Statement Location
Year
Ended
December 31, 2009
(in millions)
Commodity contracts ............................. Gains (Losses) in Revenue $ 102
Commodity contracts (1) ....................... Gains (Losses) in Expense: Natural Gas (255)
Indexed debt securities derivative ......... Gains (Losses) in Other Income (Expense) (68)
Total .......................................................................................................................... $ (221)
_________
(1) The Gains (Losses) in Expense: Natural Gas includes $(181) million of costs associated with price
stabilization activities of the Natural Gas Distribution business segment that will be ultimately recovered
through purchased gas adjustments.
(c) Credit Risk Contingent Features
CenterPoint Energy enters into financial derivative contracts containing material adverse change provisions.
These provisions require CenterPoint Energy to post additional collateral if the Standard & Poor’s Rating Services
or Moody’s Investors Service, Inc. credit rating of CenterPoint Energy is downgraded. The total fair value of the
derivative instruments that contain credit risk contingent features that are in a net liability position at December 31,
2009 is $140 million. The aggregate fair value of assets that are already posted as collateral at December 31, 2009 is
$65 million. If all derivative contracts (in a net liability position) containing credit risk contingent features were
triggered at December 31, 2009, a maximum of $75 million of additional assets would be required to be posted as
collateral.
(d) Credit Quality of Counterparties
In addition to the risk associated with price movements, credit risk is also inherent in CenterPoint Energy’s non-
trading derivative activities. Credit risk relates to the risk of loss resulting from non-performance of contractual
obligations by a counterparty. The following table shows the composition of counterparties to the non-trading
derivative assets of CenterPoint Energy as of December 31, 2008 and 2009 (in millions):
December 31, 2008 December 31, 2009
Investment
Grade(1) Total
Investment
Grade(1) Total
Energy marketers ............................................
.
$8 $9 $6 $ 6
Financial institutions .......................................
.
442 4
Retail end users (2) ..........................................
.
5 125 1 44
Total ............................................................
.
$ 17 $ 138 $ 9 $ 54
__________
(1) “Investment grade” is primarily determined using publicly available credit ratings along with the
consideration of credit support (such as parent company guaranties) and collateral, which encompass cash
and standby letters of credit. For unrated counterparties, CenterPoint Energy performs financial statement
analysis, considering contractual rights and restrictions and collateral, to create a synthetic credit rating.
(2) Retail end users represent commercial and industrial customers who have contracted to fix the price of a
portion of their physical gas requirements for future periods.