CenterPoint Energy 2010 Annual Report Download - page 120

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98
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 these contracts are recorded as net regulatory assets. Realized and
unrealized gains and losses on other derivatives are recognized in the Statements of Consolidated Income as revenue
for retail sales derivative contracts and as natural gas expense for financial natural gas derivatives and non-retail
related physical natural gas derivatives. Unrealized gains and losses on indexed debt securities are recorded as Other
Income (Expense) in the Statements of Consolidated Income.
Income Statement Impact of Derivative Activity
Year Ended December 31,
Total derivatives not designated
as hedging instruments
Income Statement Location
2009
2010
(in millions)
Natural gas contracts ..........................
Gains (Losses) in Revenue
$ 102
$ 90
Natural gas contracts (1) .....................
Gains (Losses) in Expense: Natural Gas
(255)
(165)
Indexed debt securities derivative ......
Gains (Losses) in Other Income (Expense)
(68)
(31)
Total ........................................................................................................................
$ (221)
$ (106)
__________
(1) The Gains (Losses) in Expense: Natural Gas includes $(181) million and $(115) million of costs in 2009 and
2010, respectively, 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 could require CenterPoint Energy to post additional collateral if the Standard & Poor’s Rating
Services or Moody’s Investors Service, Inc. credit ratings of CenterPoint Energy, Inc. or its subsidiaries are
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 and 2010 was $140 million and $107 million, respectively. The
aggregate fair value of assets that are already posted as collateral was $65 million and $31 million, respectively, at
December 31, 2009 and 2010. If all derivative contracts (in a net liability position) containing credit risk contingent
features were triggered at December 31, 2009 and 2010, $75 million and $76 million, respectively, 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, 2009 and 2010 (in millions):
December 31, 2009
December 31, 2010
Investment
Grade(1)
Total
Investment
Grade(1)
Total
Energy marketers ........................................................................................................
$ 6
$ 6
$ 5
$ 8
Financial institutions ...................................................................................................
2
4
1
1
Retail end users (2) ......................................................................................................
1
44
—
60
Total ........................................................................................................................
$ 9
$ 54
$ 6
$ 69
__________
(1) ―Investment grade‖ is primarily determined using publicly available credit ratings and considering credit
support (such as parent company guaranties) and collateral, which encompass cash and standby letters of
credit. For unrated counterparties, CenterPoint Energy determines a synthetic credit rating by performing
financial statement analysis and considering contractual rights and restrictions and collateral.
(2) Retail end users represent customers who have contracted to fix the price of a portion of their physical gas
requirements for future periods.