CenterPoint Energy 2010 Annual Report Download - page 86

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64
Interest Rate Risk
As of December 31, 2010, we had outstanding long-term debt, bank loans, lease obligations and obligations under
our ZENS that subject us to the risk of loss associated with movements in market interest rates.
We have no material floating rate obligations.
As of December 31, 2009 and 2010, we had outstanding fixed-rate debt (excluding indexed debt securities)
aggregating $9.9 billion and $9.1 billion, respectively, in principal amount and having a fair value of $10.4 billion
and $9.9 billion, respectively. Because these instruments are fixed-rate, they do not expose us to the risk of loss in
earnings due to changes in market interest rates (please read Note 11 to our consolidated financial statements).
However, the fair value of these instruments would increase by approximately $209 million if interest rates were to
decline by 10% from their levels at December 31, 2010. In general, such an increase in fair value would impact
earnings and cash flows only if we were to reacquire all or a portion of these instruments in the open market prior to
their maturity.
As discussed in Note 9 to our consolidated financial statements, the ZENS obligation is bifurcated into a debt
component and a derivative component. The debt component of $126 million at December 31, 2010 was a fixed-rate
obligation and, therefore, did not expose us to the risk of loss in earnings due to changes in market interest rates.
However, the fair value of the debt component would increase by approximately $21 million if interest rates were to
decline by 10% from levels at December 31, 2010. Changes in the fair value of the derivative component, a
$232 million recorded liability at December 31, 2010, are recorded in our Statements of Consolidated Income and,
therefore, we are exposed to changes in the fair value of the derivative component as a result of changes in the
underlying risk-free interest rate. If the risk-free interest rate were to increase by 10% from December 31, 2010
levels, the fair value of the derivative component liability would increase by approximately $5 million, which would
be recorded as an unrealized loss in our Statements of Consolidated Income.
Equity Market Value Risk
We are exposed to equity market value risk through our ownership of 7.2 million shares of TW Common,
1.8 million shares of TWC Common and 0.7 million shares of AOL Common, which we hold to facilitate our ability
to meet our obligations under the ZENS. Please read Note 9 to our consolidated financial statements for a discussion
of our ZENS obligation. A decrease of 10% from the December 31, 2010 aggregate market value of these shares
would result in a net loss of approximately $7 million, which would be recorded as an unrealized loss in our
Statements of Consolidated Income.
Commodity Price Risk From Non-Trading Activities
We use derivative instruments as economic hedges to offset the commodity price exposure inherent in our
businesses. The stand-alone commodity risk created by these instruments, without regard to the offsetting effect of
the underlying exposure these instruments are intended to hedge, is described below. We measure the commodity
risk of our non-trading energy derivatives using a sensitivity analysis. The sensitivity analysis performed on our
non-trading energy derivatives measures the potential loss in fair value based on a hypothetical 10% movement in
energy prices. At December 31, 2010, the recorded fair value of our non-trading energy derivatives was a net
liability of $99 million (before collateral). The net liability consisted of a net liability of $123 million associated
with price stabilization activities of our Natural Gas Distribution business segment and a net asset of $24 million
related to our Competitive Natural Gas Sales and Services business segment. Net assets or liabilities related to the
price stabilization activities correspond directly with net over/under recovered gas cost liabilities or assets on the
balance sheet. A decrease of 10% in the market prices of energy commodities from their December 31, 2010 levels
would have increased the fair value of our non-trading energy derivatives net liability by $2 million. This increase in
net liabilities consists of a $12 million increase to net liabilities associated with price stabilization activities of our
Natural Gas Distribution business segment and a $10 million decrease to net liabilities related to our Competitive
Natural Gas Sales and Services business segment.
The above analysis of the non-trading energy derivatives utilized for commodity price risk management purposes
does not include the favorable impact that the same hypothetical price movement would have on our physical