CenterPoint Energy 2009 Annual Report Download - page 79

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CERC Corp. and its subsidiaries purchase natural gas from its largest supplier under supply agreements that
contain an aggregate credit threshold of $120 million based on CERC Corp.’s S&P senior unsecured long-term debt
rating of BBB. Under these agreements, CERC may need to provide collateral if the aggregate threshold is
exceeded. Upgrades and downgrades from this BBB rating will increase and decrease the aggregate credit threshold
accordingly.
CenterPoint Energy Services, Inc. (CES), a wholly owned subsidiary of CERC Corp. operating in our
Competitive Natural Gas Sales and Services business segment, provides comprehensive natural gas sales and
services primarily to commercial and industrial customers and electric and gas utilities throughout the central and
eastern United States. In order to economically hedge its exposure to natural gas prices, CES uses derivatives with
provisions standard for the industry, including those pertaining to credit thresholds. Typically, the credit threshold
negotiated with each counterparty defines the amount of unsecured credit that such counterparty will extend to CES.
To the extent that the credit exposure that a counterparty has to CES at a particular time does not exceed that credit
threshold, CES is not obligated to provide collateral. Mark-to-market exposure in excess of the credit threshold is
routinely collateralized by CES. As of December 31, 2009, the amount posted as collateral aggregated
approximately $114 million ($84 million of which is associated with price stabilization activities of our Natural Gas
Distribution business segment). Should the credit ratings of CERC Corp. (as the credit support provider for CES)
fall below certain levels, CES would be required to provide additional collateral up to the amount of its previously
unsecured credit limit. We estimate that as of December 31, 2009, unsecured credit limits extended to CES by
counterparties aggregate $241 million; however, utilized credit capacity was $67 million.
Pipeline tariffs and contracts typically provide that if the credit ratings of a shipper or the shipper’s guarantor drop
below a threshold level, which is generally investment grade ratings from both Moody’s and S&P, cash or other
collateral may be demanded from the shipper in an amount equal to the sum of three months’ charges for pipeline
services plus the unrecouped cost of any lateral built for such shipper. If the credit ratings of CERC Corp. decline
below the applicable threshold levels, CERC Corp. might need to provide cash or other collateral of as much as
$188 million as of December 31, 2009. The amount of collateral will depend on seasonal variations in
transportation levels.
In September 1999, we issued 2.0% Zero-Premium Exchangeable Subordinated Notes due 2029 (ZENS) having
an original principal amount of $1.0 billion of which $840 million remain outstanding at December 31, 2009. Each
ZENS note was originally exchangeable at the holder’s option at any time for an amount of cash equal to 95% of the
market value of the reference shares of Time Warner Inc. common stock (TW Common) attributable to such note.
The number and identity of the reference shares attributable to each ZENS note are adjusted for certain corporate
events. As of December 31, 2009, the reference shares for each ZENS note consisted of 0.5 share of TW Common,
0.125505 share of Time Warner Cable Inc. common stock (TWC Common) and 0.045455 share of AOL Inc.
common stock (AOL Common), which reflects adjustments resulting from the March 2009 distribution by Time
Warner Inc. of shares of TWC Common, Time Warner Inc.’s March 2009 reverse stock split and the December
2009 distribution by Time Warner Inc. of shares of AOL Common. If our creditworthiness were to drop such that
ZENS note holders thought our liquidity was adversely affected or the market for the ZENS notes were to become
illiquid, some ZENS note holders might decide to exchange their ZENS notes for cash. Funds for the payment of
cash upon exchange could be obtained from the sale of the shares of TW Common, TWC Common and AOL
Common that we own or from other sources. We own shares of TW Common, TWC Common and AOL Common
equal to approximately 100% of the reference shares used to calculate our obligation to the holders of the ZENS
notes. ZENS note exchanges result in a cash outflow because tax deferrals related to the ZENS notes and TW
Common, TWC Common and AOL Common shares would typically cease when ZENS notes are exchanged or
otherwise retired and TW Common, TWC Common and AOL Common shares are sold. The ultimate tax liability
related to the ZENS notes continues to increase by the amount of the tax benefit realized each year, and there could
be a significant cash outflow when the taxes are paid as a result of the retirement of the ZENS notes. The American
Recovery and Reinvestment Act of 2009 allows us to defer until 2014 taxes due as a result of the retirement of
ZENS notes that would have otherwise been payable in 2009 or 2010 and pay such taxes over the period from 2014
through 2018. Accordingly, if on December 31, 2009, all ZENS notes had been exchanged for cash, we could have
deferred taxes of approximately $379 million that would have otherwise been payable in 2009.
Cross Defaults. Under our revolving credit facility, a payment default on, or a non-payment default that permits
acceleration of, any indebtedness exceeding $50 million by us or any of our significant subsidiaries will cause a