CenterPoint Energy 2009 Annual Report Download - page 142

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CENTERPOINT ENERGY, INC.
SCHEDULE I — NOTES TO CONDENSED FINANCIAL INFORMATION (PARENT COMPANY)
(1) Background. The condensed parent company financial statements and notes should be read in conjunction
with the consolidated financial statements and notes of CenterPoint Energy, Inc. (CenterPoint Energy) appearing in
the Annual Report on Form 10-K. Bank facilities at CenterPoint Energy Houston Electric, LLC and CenterPoint
Energy Resources Corp., indirect wholly owned subsidiaries of CenterPoint Energy, limit debt, excluding transition
and system restoration bonds, as a percentage of their total capitalization to 65%. These covenants could restrict the
ability of these subsidiaries to distribute dividends to CenterPoint Energy.
(2) New Accounting Pronouncements. Effective January 1, 2009, CenterPoint Energy adopted new accounting
guidance for convertible debt instruments that may be settled in cash upon conversion (including partial cash
settlement) which changed the accounting treatment for convertible securities that the issuer may settle fully or
partially in cash and which required retrospective application to all periods presented. Under this new guidance, cash
settled convertible securities are separated into their debt and equity components. The value assigned to the debt
component is the estimated fair value, as of the issuance date, of a similar debt instrument without the conversion
feature, and the difference between the proceeds for the convertible debt and the amount reflected as a debt liability
is recorded as additional paid-in capital. As a result, the debt is recorded at a discount reflecting its below-market
coupon interest rate. The debt is then subsequently accreted to its par value over its expected life, with the rate of
interest that reflects the market rate at issuance being reflected on the income statement. CenterPoint Energy
currently has no convertible debt that is within the scope of this new guidance, but did during prior periods
presented. The required retrospective implementation of this new guidance had a non-cash effect on net income for
prior periods and the Consolidated Balance Sheets when CenterPoint Energy had contingently convertible debt
outstanding. The effect on net income for the years ended December 31, 2007 and 2008 was a decrease in net
income of $4 million, or $0.02 per basic and diluted share, and $1 million, or $0.01 per basic share and no change
per diluted share, respectively. The implementation effect on the Consolidated Balance Sheet as of December 31,
2008 increased Additional Paid-In-Capital and Accumulated Deficit by $23 million.
Effective January 1, 2008, CenterPoint Energy adopted new guidance on accounting for deferred compensation
and postretirement benefit aspects of endorsement split-dollar life insurance arrangements which required
CenterPoint Energy to recognize the effect of implementation through a cumulative effect adjustment to retained
earnings or other components of equity as of the beginning of the year of adoption. CenterPoint Energy calculated
the impact as negligible at the time of adoption on January 1, 2008. During 2009, CenterPoint Energy determined
that its adoption calculation had omitted the impact that increasing future premium costs would have on the liability
and, therefore, it recorded as a cumulative effect adjustment a $15 million correction to decrease investment in
subsidiaries and increase accumulated deficit as of January 1, 2008. The effect of the correction is not material to
CenterPoint Energy’s previously issued financial statements and did not affect CenterPoint Energy’s results of
operations or cash flows.
(3) Derivatives. In December 2007 and January 2008, CenterPoint Energy entered into treasury rate lock
derivative instruments (treasury rate locks) having an aggregate notional amount of $300 million and a weighted-
average locked U.S. treasury rate on ten-year debt of 4.05%. These treasury rate locks were executed to hedge the
ten-year U.S. treasury rate expected to be used in pricing $300 million of fixed-rate debt CenterPoint Energy
planned to issue in 2008, because changes in the U.S treasury rate would cause variability in CenterPoint Energy’s
forecasted interest payments. These treasury rate lock derivatives were designated as cash flow hedges. Accordingly,
unrealized gains and losses associated with the treasury rate lock derivative instruments were recorded as a
component of accumulated other comprehensive income. In May 2008, CenterPoint Energy settled its treasury rate
locks for a payment of $7 million. The $7 million loss recognized upon settlement of the treasury rate locks was
recorded as a component of accumulated other comprehensive loss and will be recognized as a component of
interest expense over the ten-year life of the related $300 million senior notes issued in May 2008. Amortization of
amounts deferred in accumulated other comprehensive loss for the years ended December 31, 2008 and 2009 was
less than $1 million. During the years ended December 31, 2007 and 2008, CenterPoint Energy recognized a loss of
$2 million and $5 million, respectively, for these treasury rate locks in accumulated other comprehensive loss.
Ineffectiveness for the treasury rate locks was not material during the years ended December 31, 2007 and 2008.