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UNITED STATES SECUXUTES AM) EXCFUNGE COMMISSION
Washington, D.C. 20549
Form 10°K
(Mark One)
R ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF TIIE SECURITIES EXCIIANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31,2009
OR
f. TRANSITION REPORT P W U A N T TO SECTION I 3 OR 15(d) OF THE SECURITIES EXCHANGE ACC OF I934
FOR TIIE TRANSITION PERIOD FROM . .. . . . . TO
Commission File Number 1-132G5
Centerpoint Energy Resources Corp.
m e oJrcg&rnd asspccificdfn its chaii'cr)
Dclaware 76-051 I406
(Sfufc ur otherjirrisdic!ion o incorporalioii or organizdan)
f (I.RS. Employer Idenf$caliotr No.)
1111 Louisiana
Houston, Texas 77002 (713) 207-1111
(Address and zip code o principal cxccufive oflccs)
f (Rcgisfrunt's fclephancnumber, incliiding area code)
Sccurities regisfcred pursuant to Section 1 p of fhe Act:
2)
Titlc of Each Class Name of Each Exchange On Which Rcgistcrcd
6.625% Senior Noles due 2037 Ncw York Sock Exchangc
Sccuritics r q k t e m l pursuant to Section lZ(g) o f the Act:
None
Indiate by chcck rnxk irthc rcgistimt Eawcll-known seasonal issuer. as dcfincd in RuIc 405 ofthe Smrritics AcL Ycs € No R
Indicate by chcck mmk irthc r e g i s m t IS rcquired to file r c p o n s p m a n ~ Scction 13 or Section I q d ) orthc Act Y a f No R
no1 LO
Indimtc by chcck mark whethcr Ihc re~isu;ulc[I) h a Cilcd nlt =pons fcquircd LO be iilcd by Section 13 or tS(d) or lhc Sccuritics Exchm)y Act o r 1934 dunng Ihc prccEding
days YESR No E
12 m o n k (or for sucb shorter pcriod h a t the rcgtsimnt wm rcquircd lo file such reports). and (2) hm bcen subject to such fiting requirements for thc p~qi90
Indicate by chcck matk whelher fhe rcgislr;mt Ius submitted elcctranidly and posted on ils corpontc Web sile, if my. wery Intendive Dab File Fcquired to bc rubmittcd and
postcd pursuant Io Rule 405 of Rcgulalion S-T (5 232.405 o f this chaptcr) during Ihc prcccding 1 m o n k (or for such shonfr pcriod that thc rcgisuant was requtrcd to submit and
1
pos~such fila). Ycs f No f
Indicatc by check matk if discIosure oTdelinqucnl filcrs punuani IO Ilrm 405 oTRcgulation $4 is nol conlaincd bercin and will not k contained. lo the bcst of thc rcgisbmt's
howlcdgc. in dcfinitivc proxy or infoma!ion sfatcmcnts incorponkd by rcfcrencc in P x l I11 ofthisFom IO-K or my mcndmcnt to this Farm IO-K. R
indicate by chcck mark whclhct the rcg8strant is a Iiugc acccIcntcd film, an accelcfa!cd filcr, a non-accclmkd fitcr, or a smaller tcprting company See dcfinitiom or%uge
accelmkd filer". "accclentcd filer" and *smalIer rcponingurmluny" in Rule 13-2 d t h c Exehangchct (Check om):
Lmgc accctcntcd fitcr f3 Accclcnlcd filer Non-accclcmtcd film Ei Smallcr tcpotting campmy 0
@n noi check irpsmatler mponinE company)
Indicstc by chcck mark whcher Ihc rcgistmnl is a shell company (as defincd by Rule 1 1 M of the Exchangc Act1 Ycs L No R
The a w c p t c mmket value o f h c common q u i t y held by non-aTlintcs as ofJune 30,2009: Nonc
TABLE OF CONTENTS
PART I
Item I. Business 1
Item IA. Risk Factors 13
Item IB. Unresolved Staff Comments 20
Item 2. Properties 20
Item 3. Legal Prowdings 21
Item 4. Rwewed 21
PART 1 1
Item 5
. Market for Registrant’s Common Equity,RcIatcd StockhoIder Matters and Issuer
Purchases ofEquity Securities 21
Itcm 6. Sclectcd Financial Data 21
Item 7. Management’s NarrativeAnalysis of ResuIts of Opcmtions 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 36
Item 8. Financia1 Statcmtnts and Suppiemcntay Data 38
Ttem 9 . Changes in and Disagreernenfs with Accountants on Accounting and Finailcia1Disclosurc 70
- 1 . .:. .
’
70
Controls and Procedures I I I .
Item 9ACT).
I
Itcrn 9B. Other Information 70
PARTIII
Item 1 .
0 Directors, Executive Ofi&rs ihd Corporate Governance 70
Itcm 11. Executive Compensation 70
Item 1 .
2 of
Securily,<Ownephip Certain Beneficial Owners and Management and
ReIated Stockholder Matters 70
Item 13. Certain Relationships and Rclatcd Transactions, and Director Independence 70
Item 14. Prhcipal Accounting Fms and Services 71
PART W
Item 15. Exhibits and Financial Statement Schedules 71
i
Tabie o Cottipnu
f
W c mcct thc conditions spccified in General Instruction I(l)(a) and (b) of Form 10-K and arc thcrcby pcrmittcd to usc thc rcduccd
disclosure format for whoIIy owncd subsidiarics of rcporting companies spccified therein. Accordingly, we have omitted from this report the
information caIlcd for by Ttcm 10 (Directors, Executive O f c r , and Corporate Governance), Item I I (Executive Compensation), Item 1
fies 2
(Sccurity Ownership of Certain Beneficial Owners and Managcmcnt and Rclatcd Stockholder Mattcrs) and Itcm 13 (Certain Relationships and
aa
RcIatcd Transactions, and Dircctor Independence) of Form 10-K. lieu of thc information callcd for by Itcm 6 (Sclcctcd Financial D t ) and
In
Itcm 7 (Managcment's Discussion and Analysis of Financial: Condition and Rcsults of Opcrations) of Form lO-K, wc havc incIudcd, undcr Itcm
7, Managcmcnt's Narntivc Analysis of Rcsults of Opcrations to explain the reasons for material changes in the amount of w e n u c and cxpcnsc
itcms bchvccn 2007,2008 and 2009.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
From timc to timc wc makc statements concerning our expectations, bcIicfs, pIans. objcctivcs, goals, stralcgia, futurc cvcnls or pcrfomancc
and undcrIying assumptions and othcr statcmcnts that are not historical facts. These statements are "forward-Iooking slatcmcnfs" within ihc
mcaning ofthc Privatc Sccuritics Litigation Rcform Act of 199s. Actual results may diffcr matcrialIy from thosc cxprcsscd or implicd by thcsc
n
statcmcnts. You w gcncmlIy idcntifjr our forward-looking statements by the words "anticipalq" "bclicvc; “continue," %ouId," ucstimalc,"
"cxpcct," "forccasf" "goal," Hintcnd,n"may,""objective," "plan," ''potential? "predict,* "projection," "should," Wll"or othcr similar words.
Wc haw based our forward-looking slatcmcnfs on our managcmcnt's bclicfs and assumptions bascd on information availablc to our
rnanagcmcnt at the time he statemcnts arc madc. Wc caulion you that assumptions, bclicfs, expectations, intentions and pmjcctions about futurc
cvcnts may and often do vary materially from actual rcsufts. Thcrcforc, wc cannot assurc you that actual rcsuIts wilI not diffcr matcn'dly from
thosc cxprcsscd or implicd by our forward-looking statemcnts.
Some of thc faclots that couId causc actual rcsults to differ from those expressed or impIied by our fonvard-hoking stalcments are dcscribcd
under 'Risk Factors" in Itcm 1A of this rcport
You should not placc undue rcliancc on fonvard-looking statements. Each forwadlooking statemcnt spcaks only a of thc datc of thc
s
particular statcrncnt.
ii
PART I
OUR BUSMESS
Overview
We own and opcrate natural gas distribution systems in six states. Subsidiaries of ours own intcrstatc natural gas pipdims and gas
gathering syskms and providc various mcilIary sewiccs. A wholIy owncd subsidiary of ours offcrs variabIc and fNcd-piicc physiul natura1 gas
supplics primarily to commcrcial: and industrial customers and clectric and gas utiIitics. Rcfcrcnccs to ‘ ,“m,” “our” mcan CcntcrPoint
k ” and
E n e w Resources Corp. (CERC Corp., togcther wirh our subsidiaries, CERC). We are an indirect wholIy owncd subsidiary of CcntcrPoint
Energy, Inc. (CcntcrPoint Encrgf), a public utiIity holding company.
Our rcpombIc busincss scgmcnls arc Natura1 Gas Distribution, Compctitivc Natural Gas SaIcs and Scrviccs, Intcrstatc Pipclincs, Field
Services and Othcr Operations. From lime to lime, wc considcr thc acquisition or thc disposition ofasscts or busincsscs.
Our principd cxecutivc o f i c a arc locatcd at 1 1 1I Louisiana, Houston, Tcxas 77002 (tclephonc numbcr: 713-207-1 I I 1).
Wc makc awiIablc frcc of chargc on our parent company’s Intcmct wcbsite our annuaI report on Form 10-K, quarterIy reports on Form 10-
Q, currcnt rcports on Form 8-K and amcndmcnts to thosc rcports fiIcd or furnishcd pursuant to Section 13(a) or 15(d) of thc Sccuritics Exchangc
Act of 1934 a soon as rcasonably pncticrtble aflcr wc clcctronicaIly filc such reports with, or furnish them to, rhc Sccudics and Exchangc
s
Commission (SEC). Our parcnt company’s wcbsilc addras is ~ v ~ ~ ~ v . c c ~ ~ ~ ~ . Exccptc to thc cxtcnt cxpIicitIy stated herein,
o i n r n c r c ~ ~
documents and information on our parent company’s wcbsitc arc not incorporatcd by rcfcrcncc hcrcin.
Nafitral Gar Disrribution
Our natunl gas distribution busincss (Gas Opcrations) cngagcs in rcguIatcd intmstatc natural gas salcs to, and natural gas transportation for,
approxirnatcIy 32 miilion rcsidcntiaI, commcrcial and industria1 customcrs in Arkmas, Louisiana, Minncsota, Mississippi, Oklahoma and
.
Tcxas. Thc Iargst mclropofitan arws scrvcd in cach state by Gas Opcntions arc Houston, Tcxas; Minnapolis, Minncsotq Little Rock,
Arkansas; Shrcvcport, Louisimq Biloxi, Mississippi; and Lawton, OkIahoma. In 2009, approximalcIy 43% of Gas Opcntions’ totaI throughput
w s to midcntial: customers and approximately 57% was to commercial and industrial customers.
a
Gas Opcntions also providcs unrcguIatcd scwica consisting of hcating, vcntilating and air conditioning ( W A C ) cquipmcnt and appIiancc
rcpair, and safcs oTHVAC, hcarth and walcr hcating cquipmcnt in Minncsota.
Thc dcmand for inlrastatc natud gas salcs to, and natural gas transportation for, rcsidcntia1, commcrcial and industrial customcrs is
swsonaI. In 2009, approximatcIy 70% of thc tohl throughput of Gas Opcntions’busincss occurred in thc first and fourth quaricrs. Thcsc
paltcms rcffcct ihc highcr dcmand for natural gas for hcating purposcs during thosc periods.
ea ca
Gas Opcntions suffcrcd somc damagc to its systcrn in Houston, T x s and in other portions of ifs scrvicc territory across T x s and
Louisiana as a rcsult of Humcanc Ikc, which struck thc uppcr Tcxas coast in Scptcmbcr 2008. As of Dccernber 31,2009, Gas Opcntions has
dcfcrrcd approximatciy 53 million of costs rclatcd to Humcanc Ikc for rccovcry as part of natural gas distribution rate procccding.
Supply and Tramportarion. In 2009, Gas Opcrations purchascd virtually all of its natural gas suppIy pursuant to conhack with rcmaining
tcrms varying from a fcw months to four ycars. Major suppIicrs in 2009 includcd BP Canada Encrjg Markcting Corp. (20.5% of supply
volumcs), C o d E n c w Rtxouma (S3%),Tcniska Markcting Vcntura (82%), Kindcr Morgan (KO%), ConocoPhiIlips Company (7.4%), and
Cargill, Inc. (5.7%). Numerous othcr suppliers providcd ihc remaining 41.9% of Gas Opcntions’ natural gas supply rcquircrncnts. Gas
Opcrations transports its natura1 gas supplitx through various intrastate and intcrstatc pipclincs, including thosc owtcd by our
1
Table o/Conrctits
othcr subsidiarics, undcr conmcts with remaining terms, including extensions, varying from onc to fiftccn ycars. Gas Operations anticipatcs that
thcsc gas supply and transportation contracts will bc rcncwcd or rcplaccd prior to their expiration.
W activcly cngagc in commodity price stabilization pursuant to annual gas supply plans pmcntcd to andlor filed with wch of our statc
e
rcguIatory authorhim. Thesc pricc stabilization activities includc W C of storage gas, conlnctualIy cstablishing fixcd prices with our physical gas
suppIicrs and utiIizing financia1 dcrivativc instruments to achieve a variety of pricing structures (tag.,fixcd pricc, costlcss coIlars and caps). Our
gas supply p1ms gcncrally cal1 for 25-50% ofwintcr supplics to bc hcdgcd in some fashion.
GcncnIly, thc rcgulations of thc states in which Gas Opcrations opcmtcs alIow it to pass through changcs in thc cost of nalunl gas.
inchding gains and Iosscs on financial derivatives associated with the indcx-priccd physicaI supply, t its customers under purchascd gas
a
adjusmcnt provisions in its tariffs. Dcpcnding upon the jurisdiction, the purchascd gas adjustmcnt factors are updatcd periodically, ranging from
monthly to scmi-annuaIly, using cstimatcd gas costs. Thc changcs in the cost of gas bilfcd to customcrs arc subject to rwicw by thc appIicablc
rcguratory bodies.
Gas Opemtions WE. various third-party storagc services or owned natunl g s stomgc faciIitics to mcct p a - d a y rcquircrncnts and to
a
managc Ihc daify changcs in dcmand duc to changcs in wather and may also supptcmcnt contractcd supplics and storagc f o tirnc to timc with
rm
storcd Iiquciicd natura1 g s and propaneair pIant production.
a
Gas Operations owns and opcntcs an undcrground natural gas stomp faciIity with a wpacily of 7.0 billion cubic fcct (Bcf). It has a
working capacity of 2.0 Bcf wailablc for use during a normal heating season and a maximum daily withdmwaI mtc of 50 miIlion cubic fcct
(MMcf). It also owns ninc propancair plank with a totaI production ratc of 200 Dekathems (DTH)pet day and on-sitc storagc facilitics for
12 million gallons of propanc (1.0 Bcf natural gas cquivalcnt). It owns a liquefied natural gas plant facility wt a 12 milIion-gallon Iiqucficd
ih
natura1 gas stomgc tank (I .O Bcf natural gas cquivalcnt) and a production ratc of 72 DTIl per day.
On an ongoing basis, Gas Opcntions cntw into confmcts i o providc sufficicnt supplics and pipeline capacity to mcet its custorncr
rcquircmcnts. Howcvcr, it is possibIc for limited service disruptions to occur from timc to timc duc to wmlhcr conditions, transpartation
conshints and othcr cvcnts. As ; resuIt of these factors, supplics of natunl gas may bccomc unavailable from timc to timc. or priccs may
1
incrcasc rapidly in rcsponsc to tcrnponry supp1y constraints or other factors.
Gas Opcnlions has cntcrcd into various assct managemcnt agrccrncnts associated with its utility distribution sewicc in Arkansas, Louisiana,
Mississippi, Oklahoma and Tcxas. GcncnIly, thcsc asset managcmcnt agrccments are contracts bctwccn G s Opcrations and an assct managcr
a
that arc intcndcd to tnnsfcr thc working capital obligation and maxirnizc the utiIization of thc assets. In these agrcernents, Gas Opcrations agrccd
to rcfcasc transporntion and stomgc crtpacity to othcr partics to rnanagc gas stomgc, suppIy and dclivery arrangcmcnts for Gas Opcrations and to
usc fhc rclcascd capacity for othcr purposcs whcn i t is not needed for Gas Operations. Gas Operations i compensated by thc asset managcr
s
through paymcnts madc ovcr thc life of thc agrccments bascd in part on the rcs9ts of thc assct optimization. Gas Opcrations has rcccivcd
approvaI from thc state rcgulalory commissions in Arkansas, Louisiana, Mississippi and Oklahoma to retain a share of the assct managcmcnt
agrccmcnt procccds, although thc perccntagc of payments ta be retained by Gas Operations varies based on the jurisdiction, with thc majority of
tho paymcnts to bcnctit custorncrs. Thc agrccmcnts h a w varying tcrms, thc longest of which expircs in 2016 .
As of Dcccmbcr 3 1,2009, Gas Opcnlions owncd apptoximatcly 70,700 linmr mile, of natunl gas distribution mains, varying in sizc from
onc-half inch to 24 i n c h in diarnetcr. Gencrally, in each of the cities, towns and rural arcas served by Gas Opcrations, it owns Ihc undcrground
gas mains and scrvicc h c s , metcring and regulating equipment located on customers’ premises and the district regulating equipmcnt ncccssary
for prcssurc rnaintcnancc. With a fcw cxceptions. thc rncasuring stations at which Gas Operations rcccivcs gas arc owncd, opcntcd and
mainmincd by othcrs, and its distribution facilitics bcgin at thc outlct of thc mcasuring cquipmcnt. Thcsc facilitics, inchding odorizing
cquipmcnt, arc usuaIly lacatcd on thc land owncd by suppIicrs.
2
Tublc o Cortknts
f
Conipeiilion
Gas Opcntions compclcs primarily with altcrnatc cncrgy sourccs such as clcctricity and othcr fueI sources. In somc arms, i n m t a t c
pipclincs, othcr gas disuibutors and markctcrs aIso compcte directIy for gas sal:= to end-users. Tn addition, as a rcsult of fedcral rcgulations
affccting intcrstatc pipclina, naluml gas markctcrs operating on these pipclines may be able to bypass Gas Opcrations' facilitics and market and
sclI andlor transport natud gas dircctly to commcrcial and industrial customers.
CampefitiveNdurai Gar S a h andScrvicm
Wc offcr variabIc and ftcd-priccd physical natural gas supplics primarily to commcrciaf and industrial: customers and clcctric and gas
utilitics through CcntcrPoint Enera Scrviccs, Inc. (CES)and its subsidiary, CcntcrPoint E n c w Intrastate Pipclincs, LLC (CEIP).
In 2009, CES markctcd appmximatcIy 504 Bcf of natura1 gas, rclated energy services and transporlation to approxirnatcly 11,100 customers
(including approximatcly 3 Bcf to amliates). CES customers vary in size f o ma11 commercia1 customcrs to large utility cornpanics in thc
rm
c c n h i and castcrn tcgions of Lhc Unitcd Sbtcs. The business has three operational:divisions: wholcsaIc, retail and intrastate pipelincs, which arc
furthcr dacribcd bclow.
W!~olcsdc Division. CES offcrs a portfolio of physical delivery services and financial products dcsigncd to mcct wholesak customcrs'
supply and pricc risk managcmcnt nccds. Thesc customcrs arc sewed directly through interconnects with various inkrstak and intrrlshtc
pipclinc cornpanics, and includc gas utilities, Iargc industrial customers and electric gencration custorncrs. This division indudcs thc suppIy
function for thc procurcment of natura1 gas and thc rnanagcmcnt and optimization oftransportation and stomgc ass& for CES.
Refail Division. CES offcrs a varicty of natural gas rnanagcrncnt scrviccs to smaIlcr comrncrcial and industrial cusstomcrs, municipaIitics,
cducatianal institulions and hospitals, whosc facilitics arc typically focatcd downstrum of natural gas distribution ulilily city gatc stations. Thcsc
scrviccs includc load forcasting, supply acquisition, daiIy swing voIumc managcmcnc, invoicc consoIidation, stomge asset mattagcmcnf fr im
and intcrruptibfc lransporiation administration and fornard pricc management. CES manages transporktion contracts and cncrgy supply for
rclail cuslomcrs in 18 statu.
Itilrmfatc Pipeline Division CEIP providcs transportation serviccs to shippcrs and end-uscrs and contracts out approxirnatcly 23 Bcf o
. f
storagc at its Picrce Junction facility in T x s
ea.
CES currcntly transports natura1 gas on over 41 interstate and intrastate p i p d i n s within statcs Iocatcd throughout thc ccntni and eastcrn
Unikd Statcs. CES maintains a portfolio of natural gas supply contracts and firm transporktion and stomgc agrccmcnts to mcct thc natural gas
rcquircmcnts of its custorncrs. CES aggregates suppIy f o various producing rcgions and offcrs contracts to b natunl gas with tcms ranging
rm y
from onc monlh to ovcr fwc ycars. In addition, CES activeIy participates in thc spot natural gas rnarkcts in an cKort to balancc daily and monthly
purchascs and salcs obIigations. Natura1 gas supply and transportation apabilities arc levcngcd through contracts for anciIlary scwices
including physical:storage and othcr balancing armngerncnts.
As dcscribcd above, CES offcrs its custorncrs a varicty of Ioad folhwing scrviccs. In providing thcse scwiccs, CES uscs its customers'
purchasc cornrnitmcnts to forccast and a m g c its own supply purchascs. stomgc and tnnspomtion scrviccs to scrvc customers' natural gas
rcquircmcnts. As i rcsult of the variancc bctwccn this forccast activity and thc actual monhIy activity, CES will cithcr havc too much supply or
l
too Iittlc supply rcIativc to its cusLomcTs' purchasc cummilmenls. Thcsc supply imbalanccs arisc cach monlh a customcrs' natural gas
s
rcquircrncnts are schcdulcd and corrcsponding natura1 gas supplies are norninatcd by CES for deIivcry to thosc customers. CES' proccsscs and
risk con~rofcnvironmcnt arc designcd to mcasurc and vaIue imbalanccs on a =I-time basis to cnsurc h a t CES' cxposurc to commodity pricc
risk is kcpt to a minimum. Thc vaIuc assigncd to thcsc imbalanccs is dculatcd daiIy and is known as the aggrcgatc Value at Risk (VaRR). In
2009, CES' VaR avcraged $0.6 million with a high of SI .G million.
Our risk control: policy, govcmcd by aur Risk Uvcrsight Committee, dcfincs authorizcd and prohibitcd trading instruments and trading
limits. CES is a physical markctcr of natural gas and uscs a varicly of tools, incIuding pipclinc and storage capacity, financial insttumcnls and
physical commodity purchasc contracts to support its salcs.
3
Tuble ojConicnis
The CES busincss oplirnizcs its usc of these varbus tools to minimize its suppIy costs and dots not cngagc in pmpn'ctary or spcculativc
commodity trading. The VaR limits, $4 miIlion maximum, within which CES operatcs arc consistent with its opcntionaf objcctivc of matching
its aggmgate saIes obligations (inchding thc swing associatcd with Ioad following scrviccs) with its suppIy portrolio in a manncr that minimizcs
its total cost of supply.
CEIP owns and operaks approximatcly 230 m i l a of intmtatc pipcline in Louisiana and Tcxas and holds storage facilities of approxirnaldy
2.3 Bcf in Tcxas undcr long-tcm Icases. In addition, CES I c transportation capacity of approximatdy 0.8 Bcf pcr day on various intcrslate
ws
and intrastatc pipcIincs and approximately 12.5 Bcf of storagc to scwicc ils customcr basc.
C o n p i i fion
CES compcta with rcgional and national wholcsalc and retail gas marketers induding the marketing divisions of natural gas produccrs and
utilitics. In addition, CES compctcs with intrastate pipches for customers and services in its markct arcas.
IttfentatePipdines
Our pipclincs businm operates interstate natural gas pipcIincs with gas transmission Iincs primarily located in Arkansas, IlIinois, Louisiana,
Missouri, OkIahorna and T x s Our interstatc pipclinc opcntions arc primarily conductcd by two wholly owncd subsidiarics that providc gas
ea.
kinsportation and storagc scrviccs primarily to industrial customers and loml dislribulion companics:
- CcntcrPoint Encrgy Gas Transmission Company (CEGT) is an interstatc pipclinc that prwidcs natural gas transpartation. natural gas
stongc and pipclinc scrvicw to custorncrs principalIy in Arkansas, Louisiana, Oklahoma and T x s and
ca;
CcntcrPoint Encrgy-Mississippi River Transmission Corpodon (MRT) is an intcrstatc pipclinc that providcs natural gas
tramporlation, natumI gas storage and pipclinc scrviccs to customers principally in Arkansas and Missouri.
Thc rata chargcd by CEGT and MRT for interstate transportation and storage services arc rcgulatcd by thc Fcdctal Encrm Regulatory
Commission (FERC). Our interstate pipeIincs business operations may bc affcckd by changcs in thc dcmand for natunl gas, thc availablc supply
and rcIativc pricc of natural gas in thc Mid-continent and GuIf Coast natural gas suppIy regions and gencml cconornic conditions,
In 2009, approximatdy 16% of CEGT and MRT's total opcnting rwcnuc was attributabb to services providcd to Gas Opcrations, an
afiliatc, and approximatcIy 7% was attributablc to scrviecs provided to Laclcdc G s Company PacIcdc), an unafiliatcd distribution company,
a
that providcs natural gas utility service to thc gcatcr S. Louis mctropolitan a m in Illinois and Missouri. Scwiccs to Gas Opcntions and
t
Laclcdc arc providcd undcr several: long-tcm fr storagc and transportation agrccmcnts. Thc primary tcnn of MRT's f r transporntion and
im im
storagc contracts with Laclcdc will cxpire in 2013. Thc primary term of CEGT's agreements for firm transporntion, "no noticc" fransporlation
scruiec and storagc scruiccs in certain of Gas Operations' servicc a m s (Akmm, Louisiana, Oklahoma and Tcxas) will cxpirc in 2012.
C a r h g c la Pcrtyviile. I n Fcbruary 2010, CEGT complctcd the expansion of the capacity of its Carlhagc to PcrryviIlc pipeIinc to
approximately 1.9 Bcf pct day. The cxpansion includcs ncw comprcssor units at two of CEGT's cxisting shtions.
Sorillms~ Szpply ficadcr, LLC. CcnterPoint Soulheastcrn Pipelines Holding, LLC, our wholIy-owned subsidiary, owns a 50% intcrcst in
Southcast SuppIy Headcr, LLC (SESH).SESH owns a 1.0 Bcf pcr day, 274-milc intcrshtc pipcIinc that runs from Ihc Pcrtyviflc Hub in
Louisiana to Codcn, AIabama. Thc pipeline was placcd into scwice in Scptembcr 200s. Thc rates chargcd by SBSIl Tor intcrshtc tnnsporiation
scrviccs arc rcgulatcd by thc FERC. A whoIly-owned, indirect subsidiary of Spcclra E n e w C o p . owns thc rcmaining 50% intcrcst in SESH.
4
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f
Our intcrstatc pipclincs busincss currcntly o m and opcrates appmximatciy 8,000 m i l a of natural gas transmission lines primarily located
in Arkansas, IIIinois, Louisianq Missouri, Oklahoma and Tcxas. Our intcrstatc pipclinc busincss also owns and opcntcs six natural: gas storage
ficlds with a cornbincd daiIy dcIivctabiIity of approximatcIy 1.2 Bcf and a combincd working gas capacity of approximatcly 59 Bcf. Our
intcrstatc pipclirtc busincss also owns a 10% intcrcst in thc Bistincau stomp faciIily Iocatcd in BicnviIlc Parish, Louisiana, wt thc rcrnaining
ih
intcrcst owncd and opcratcd by Gulf Soulh Pipcfinc Company, LP. Our intcrstatc pipclinc busincss’storagc capacity in thc Bistinmu faciIity is
ot
8 Bcf of working gas with 100 MMcf pcr day ofdcIivcmbiIity. M s storage opcmtions arc in north Louisiana and Oklahoma
Competition
Our intcrshte pipclincs busincss cornpetcs wt othcr intcrstatc and intrastatc pipclincs in thc tmnsportation and storage of natural gas. The
ih
principal clcrncnts of compctition among pipclincs arc rata, tcrms of scrvicc, and flcxibility and reIiability of scrvice. Our intcrshtc pipclincs
busincss compctcs indircctIy wilh othcr forms of cncrgy, including clcctricity, c o d and fucl oiIs. Thc primary compctitivc factor is price, but
rcccntly, cnvironmcntal considcntions h a w gown in impormcc whcn consumcrs considcr othcr forms of cncrp. Changcs in thc availability of
c n c w and pipclinc capacity, the IwcI of business activity, conservation and govcrnmcntal regulations, thc mpabilily to convcrt to altcmativc
fucls, and othcr factors, including weather, affect the dcmand for natural gas in areas we scwe and thc IcveI of wmpctition for transportation and
stongc scrviccs.
EeIdScrvica
Our ficId scrviccs busincss opcratcs gas gathering, treating and proccssing facilitics and also providcs opcnting and tcchnid scrviccs and
rcmotc d a h monitoringand communication scwices.
Our ficld scrviccs opcntions arc conductcd by a wholly owned subsidiary, CcnlcrPoint Encrm FicId ScTviccs, he. (CEFS).CEFS pmvidcs
natural gas gathcring and proccssing services for certain natural gas ficlds in thc Mid-contincnt rcgion of thc Unitcd Stattcs that intcrconncct with
CEGT’s and MRT’s pipclincs, as wcll as othcr inlcrstatc and intrastate pipclincs. CEFS galhcrs approximatcIy 1.4 Bcf per day of natural gas
and, cilhcr dircctly or through its 50% intcrcst in a joint vcnlurc, proccsscs in cxccss of 250 MMcf per day of natural gas along its gathcring
systcm. CBFS,through its ScwiccStar opcmting division, provides remolc data monitoring and communications scrviccs to affiIiatcs and third
partits.
Our ficld scrviccs busincss operations may be affected by changes in the dcmand for natunl gas and natura1 gas liquids (NGLs), thc
availablc suppIy and rclativc pricc of natural gas and NGLs in thc Mid-contincnt and GuIf Coast natural gas supply regions and gcncnI
cconomic conditions.
Long-Term Gas Gatliering and Treating Agrremcnfs. In Seplcmbcr 2009, CEFS cntcrcd inta long-lcm agccmcnts with an indircct wholIy-
owncd subsidiary of EnCana Corporalion (EnCana) and an indirccr wholly-owncd subsidiary of Rayal Dutch ShclI plc (ShcII) to providc
gathering and trcating scrviccs for thcir natural gas production from ccrlain HaynaviIlc ShaIc and Bossicr Shalc formations in Louisiana. CEFS
aIso acquircd jointly-owncd gathering facilitics from EnCana and Shcll in Dc Solo and Rcd Rivcr parish= in northwest Louisiana. Each of thc
a c c m c n k includcs acrmgc dcdimtion and voIurne commitments for which CEFS has rights to @cr Shcll’s and EnCana’s natural: gas
produclion from thc dcdicatcd arus.
In conncction with thc agreements, CEFS commenced pathering and treating scwiccs utilizing thc acquircd facilitics. CEFS is cxpanding thc
acquircd facilitics in ordcr lo gathcr and trcat up to 700 MMcf pcr day of natural gas. If EnCana or ShclI clcct, CEFS wil1 rurthcr expand rhc
facilitics in ordcr to galhcr and trcat additional fulurc voIumcs. Thc construction ncecssary to rmch thc contnctuaI capacity of 700 MMcf pcr
day includcs morc than 200 milcs of gathcringlints, nmrly 25,500 horscpowcr of compression and ovcc 800 MMcf per day of b a t i n g wpacity,
CEFS cslimaks h a t thc purchase of existing facilitics and conslruction to gathcr 700 MMcf pcr day will cost up to $325 million. If EnCana
and Shcll dcct cxpansion of thc project to gathcr and proccss additional futurc volumcs of up to 1 Bcf pcr day, CEFS estimates that the
cxpmsion wouId cost its much as an additionaI$300 million and EnCana and Shell would providc incremental voIumc cornmilmcnfs. Funds for
construction arc being pravidcd from
5
Tublc o Conlcirls
f
anticipatcd cash flows from operations, lincs of crcdit, proceeds from the sale of debt securities or capital contributions. As of Dcccrnbcr 31,
2009, approximatcly SI76 million has been spent on h i s projcct, incIuding the purchase of existing faciIities.
IYaskum G s Processing Company CcntcrPoint E n c w Gas Processing Company, our wholly-owncd, indircct subsidiary (CEGP), owns a
a
50% gcncnI partncrship interest in Waskom Gas Proccssing Company (Waskom). Waskom owns a gas procasing pIant located in East Tcxas.
Tho plant is capablc of processing approximatcly 285 MMcf per day ofnatura1 gas.
/Isseis
Our ficld scrvices busincss owns and opcratcs approximately 3,700 mil- of gathcring Iincs and processing plants that coIlcct, m a t and
proccss natural gas from approximatcIy 140 separate systems Iowtcd in major producing ficlds in Arkansas, Louisiana, Oklahoma and Tcxas.
Competition
Our ficld scrvices business compctcs with othcr companies in the natural gas gathering, trcating and proccssing busincss. TIic principal:
cIcmcnts of cornpctition arc ratcs. tcrms of scrvicc and rcliabiIity of scrvicm. Our ficld scrviccs busincss compcta indircctly with othcr forms of
c n c w , inchding elcctricily, c o d and fucl oib. The primary competitivc factor is pricc, but recently, cnvironmcntal considerations have grown
in importancc whcn consumcrs consider othcr forms of encra. Changes in thc availability of cncrgy and pipclinc capacity, thc IwcI of busincss
activity, conservation and govcmmcntal rcgulations, thc capability to convert to altcrnativc fucls, and ohcr factors, including wcathcr, affcct thc
dcmand for natura1 gas in arcas wc scwc and thc Icvcl of competition for gathcring, trcating, and procasing scrviccs. In addition, cornpctition
among forms of cncrgy is affected by commodily pricing Icvcls and influcnccs the level of driIling activity and dcmand for aur galhering
opcntions.
Other Operations
Our Othcr Opcntions busincss scgrncnt incIuda unallocated corporate costs and intcr-scgmcnt cIiminations.
Financial I nforntation About Segments
For financial information about our scgrncnts, see Note 12 to our consolidakd financia1 statcmcnts. which notc is incorpontcd hcrcin by
refcrencc.
REGULATION
W arc subject to rcgulalion by various fcdcnl, statc and Iocal governmental agencies, incIuding the regulations dcscribcd bcIow.
c
Fcdcral Energy Rcgutatory Commission
The FERC hasjurisdiction undcr thc Natural Gas Act and the Natural Gas Policy Act of 1978, a amcndcd, to rcplalc tho bansporktion of
s
natural gas in intcrstate commcrce and natunl gas salcs for male in interstate commerce that arc not first sales. The PERC regulatcs, among
ohcr things, thc consmction of pipclinc and rclated facilitics used in the transporntion and storage of natural gas in intcrstatc commcrcc,
incIuding thc cxtcnsion, cxpansion or abandonrncnt of thcsc faciIitics. Thc rates chargcd by intcrstatc pipcIincs for intcrstatc transporntion and
stomgc scrviccs arc also rcguhtcd by thc FERC.Thc Encrm PoIicy Act of 2005 (Encw Act) cxpandcd thc FERC's auhority to prohibit rnarkct
manipulation in conncction with FERGrcgulated transactions and gavc rhc FERC additional authority to irnposc significant civil and criminal
pcnaIties for statutory violalions and violations of thc FERC's rules or orders and also cxpmnded criminal pcnaItics for such violations. Our
competitive natura1 gas salts and scwiccs subsidiary rnarkcts natural gas in interstate commerce pursuant to blanket authority grantcd by the
FERC.
Our natural gas pipclinc subsidiarks may p c r i o d i d y file applications with the FERC for changes in thcir gcncralIy wailabblc maximum
m t a and chargcs designcd to allow ihcm to rccovcr thcir costs of providing scrvicc to
6
customcrs (to thc cxtcnt allowcd by prcvaihg market conditions), incIuding a reasonabIc ratc of rcturn. Thcsc rata arc normally allowed to
bceomc cffcetivc aftcr a suspension pcriod and, in somc cases, are subject to refund under applicable Iaw until such timc as thc FERC issucs an
ordcr on the alhwable Icvcl of rates.
Undcr thc Public Utility Holding Company Act of 2005 (PuIlCA ZOOS), the FERC has authorily lo rcquirc holding cornpanics and their
subsidiaries to maintain certain books and rccords and makc them availabIe for review by rhc FERC and statc rcgulatory authoritics in certain
circurnstanccs. In Dcccmbcr 2005, thc FERC issucd rulcs impIcrncnting PWCA 2005. Pursuant to those mIcs, in Junc 2006, CcnterPoint
ih
Encrgy fiIcd wt h c FERC thc rcquircd notification of its status as a pubIic utility hoIding company. In Octobcr 2006 and Dcccrnbcr 2009, thc
FERC adopted additiona1 mlcs rcgarding mainlcnancc of books and rccords by utility holding cornpanics and additional rcporting and
accounting rcquircmcnts for ccnmlizcd scwicc companies that providc non-powcr goods and scntices to pubIic utilities, natura1 gas companies
or both, in thc samc holding company systcm.
State and Local Rc@ation
In almost all communities in which Gas Opcrations provides natural gas disfribution scwiccs, it opcmtcs undcr franchiscs, ccdificatcs or
liccnscs obtaincd from state and Iocal authorities. The original tcrms of the franchiscs, with various cxpintion dam, typically range from I O to
3 O y m , ahhough fnnchiscs in Arkansas arc perpctud. Gas Opcrations cxpccts to bc abIc to rcnew cxpiring franchiscs. T most casts,
n
franchiscs to providc natural gas utility scrvices are not cxclusivc.
Subshntially a11 of Gas Opcrations is subject to cost-of-stmice regulation by thc rclcvant statc pubIic utility commissions and, in Tcxas, by
thc RaiImad Commission of Tcxas (Railroad Commission) and those municipalities sewcd by Gas Opcntions that h w c rctaincd original
jurisdiction.
Tarn. In March 2008, Gas Operations filed a rcqucst to changc its mta with thc Railroad Commission and the 47 citics in i Tcxa Coast
k
servicc tcm'toiy, an artxi consisting of approximatcly 230,000 customcrs in citics and comrnunitk on thc oulskirts of Houston. In 2008, Gas
Opcntions irnplcmcntcd rata increasing annual revenues by approximakly $35 million. Thc implcmcntcd mtcs wcrc contcstcd by ninc ciLics
in an appcaI to thc 353rd District Court in Travis County, Texas. In January 2010, that court rcvcrscd thc Railroad Commission's ordcr in p ~ t
and rcmandcd thc rnattcr to thc RaiIroad Commission. T h c court concluded that thc RaiIroad Commission did not Iiavc statutory aulhority to
irnposc on thc complaining citics Lhc cost of scrvicc adjustment mechanism which the Railroad Commission had approvcd in its ordcr. Ccrtain
partics iilcd a motion to modify thc district court's judgmcnt and a final dccision is not expected until April 20 IO. Wc do not cxpcct thc outwmc
Is
of this mattcr lo havc a matcn'al advcrsc impact on our financia1 condition. mt of opcralions or cash flows.
In July 2009, Gas Opcmtions filcd a rcqucst to changc its rates with thc Railroad Commission and ihc 29 eitics in its Houston scwice
territory, consisting ofappmximatcly 940,000 customers in and around Houston. Thc rcqucst sccks to cstabIish uniform rata, charges and tcrms
and conditions of scrvicc for thc citics and cnvirons of the Houston sewicc territory. As iinalfy submittcd to thc Railroad Commission and thc
citics, thc pmposcd ncw n t c s would rcsult in an overaII incrcasc in annuaI revcnue of $20.4 million, cxcluding carrying costs on gas inventory of
approximatcly $2 milIion. In January 2010, G s Operations withdrew its rcquest for an annual cost of scwicc adjustmcnt mcchanism due to thc
a
unccrtainty causcd by thc court's ruling in thc abovc-mentioned Tcxas Coast appeal. In Fcbruary 2030, thc Railroad Commission issued its
dccision authorizing a rcvcnuc incrcasc of $5.1 million annuaIly, reflecting rcduccd dcprcciation mta of $12 million. Thc Railroad
urcn
Commissionalso approvcd a surchargc of $0.9 million pcrycar to rccover H r i a e Ikc costs over thrce years.
Mnncsufa In Novcmbcr 2006, thc Minncsota PubIic Utilitics Commission (MPUC)dcnicd a rcquest filed by Gas Opcntions for a waivcr
of MPUC rulcs in ordcr to d10w Gas Opcmtions to rccovcr approximately S21 miIlion in unrccovcrcd purchascd gas costs rclatcd to pcriods
prior to July 1, 2004. Thosc unrccovercd gas costs werc identified as a w u l t of revisions to prcviowly appmvcd cdculations of unrccovcrcd
purchascd gas costs. FoIIowing that dcnid, Gas Opcmtions rccorded a $21 rnilIion adjustmcnt lo rcducc prc-tax camings in thc fourth quartcr of
2006 and rcduccd Ihc rcgulatory assct rcIatcd to thcsc costs by an equal amount.In March 2007, folIowing thc MPUC's dcnial of rcconsidcmfion
of its ruling, Gas Opcmtions pctitioncd thc Minncsota Court of Appmls for review of thc MPUC's dccision, and in May 2008 that court rulcd
that Lhc MFUC had bccn arbitmry and capricious in dcnying Gas Operations a waivcr. Thc MPUC sought futthcr rcvicw of thc court of appeals
dccision from thc Minncsota Suprcrnc Court. In July 2009, thc Minnesota Suprcmc Court rcvcrscd thc dccision of thc Minncsota
7
Table o Contcnis
f
Court of Appcrls and upheld thc MPUC’s decision to dcny the requestedvariance. The court’s dccision had no ncgative impact on our financial
condition, rcsuIts of opcrations or a s h ff ows, as thc costs at issuc wcrc writtcn of€at thc timc t h q wcrc disalhwcd.
In Novcmbcr 2008, Gas Opcmtions filed a request with the MPUC to increasc its rata for utility distribution scrvicc by $59.8 milIion
annually. In addition, Gas Opcmtions sought an adjustment mechanism that would annuaIly adjust rates to rcflcct changcs in usc pcr customcr.
In Dcccmbcr ZOOS, thc MPUC acccpted thc case and approved an interim rate incrcasc of $51.2 milfion, which bccamc cffcctivc on January 2,
2009, subject to rcfund. In January 2010, thc MPUC issucd its dccision authorizing a rwenue incrwse of $41 rniIlion per ycar, with w overall
ratc of rclum of 8.09% (1024% rctum on equity). The difference between the rates approvcd by h c MPUC and amounts collcctcd undcr thc
interim ratcs, $1 0 miflion as of Dcccmbcr 3 1,2009, is rccordcd in other current liabilities and will: be rcfundcd to customcrs. Thc MPUC also
authorized Gas Opcntions to impIcmcnt a pilot program for rcsidentia1 and small volume commercia1 customcrs that is intcndcd to dccouptc gas
rcvcnucs from cusLomcrs’ naluml gas usage. In February 2010, we fiIed a request for rehearing of the order by thc MPUC. No othcr party to thc
casc filed such a rcqucst. Wc do not cxpcct a find ordcr to bc issued in this proceeding until spring 2010.
Ms5is5ippi In July 2009, Gas Opcmtions filcd a request to increase its rates for uti& distribution servicc with thc Mississippi Public
Sewicc Commission (MPSC). In Novcrnbcr 2009, as part of a settlement agmmcnt in which thc MPSC approvcd Gas Opcntions’ rctcntion of
fhc compcnsation paid undcr thc tcrms of an assct managcmcnt agreement, Gas Opetations withdrcw its rate request.
Dcparfment of Transportation
In Dcccmbcr 2006, Congrcss cnactcd the PipeIine Inspection, Protection, Enforccmcnt and Safcly Act of 2006 (2006 Act), which
rcauthorizcd thc programs adoptcd undcr thc PipcIinc Safcty Trnpmvcment Act of 2002 (2002 Act). Thesc programs includcd sevcral
rcquirements rclatcd to cnsuring pipclinc safety, and a rcquirernent to assess the integrity of pipclinc transmission faciIitics in arcas of high
population concentration. Undcr thc Icgislation, rcmcdiation activities arc to be performed over a IO-year period. Our pipeIinc subsidiarics arc on
schcdulc to comply with the tirncframc mandatcd for complction of intcgrity assessment and rerncdiation.
Pursuant to thc 2002 Act, and thcn thc 2006 Act, thc PipcIinc and H z r o s Materials Safety Adrninistntion (PI-IMSA) of the U.S.
aadu
Departmcnt of Transportation (DOT) has adopted a number ofrulcs concerning, among ohcr things, distinguishing bctwccn gathcring Iincs and
transmission facifitics, rcquiring ccrtain dcsign and construction features in new and repIaced lines to reduce corrosion and rcquiring pipclinc
opcntors to amcnd mistingwrittcn opcntions and rnaintcnance procedurcs and operator qualification programs.
We anticipatc that compliancc with thcsc rcgulations and pcrformance of thc remediationactivitics by our intcrstatc and intrashtc pipclincs,
both capital cxpcnditum and opcmting costs. The Ievcl of cxpcnditurcs wil1
and natural gas distribution cornpanics will rcquirc: incrcasa in
dcpcnd upon sevcral factors, including ngc, Iocalion and opcnting p w u r c s of thc facilitics. Bascd on our intcrprctation of thc rulcs writtcn to
datc and prcIirninary technical: rcviews, w c beIicvc compliancc will rcquirc annual cxpcnditurcs (apital and opcnting costs combincd) of
I
approximatcIy $16 million to S 8 milIion during thc next three ycaars.
ENVIRONMENTAL MATTERS
Our opcntians arc subjcct to stringcnt and complcx Iaws and regulations pcrlaining to heaIth, sllfcly and thc cnvironmcnt. As an awncr or
opcmtor of natuml gas pipclincs and disln’bution systcrns, gas gathcring and processing ~ s t c r n s ,wc must comply wt thcsc Iaws and
ih
rcgulations at tIic fodcnl, statc and local Icvcls. Thcsc I w and rcgulations can restrict or impact our business activities in many ways, such a :
as s
- restricting thc way wc u handIc or disposc of wastcs;
n
limiting or prohibiting construction activities in scnsitive a l a s such as wetlands, coastal regions or areas inhabitcd by cndangcrcd
spccics;
rcquiring rcmcdial action to mitigatc pollution conditions causcd by our opcmtions or attributablcto former operations; and
Table o Conlcnts
f
enjoining thc opcrations of facilitics dccmcd in non-compliance with pcrmits issucd pursuant to such cnvironmcntal laws and
.
rcgulatio ns
In ordcr to comply with thcsc rcquircments, w may need to spcnd substantial amounts and dcvotc other mourccs f o timc to tirnc to:
e rm
construct or acquirc nmv cquipmcnc
- acquire permits for facility opcrations;
- modify or rcplacc: cxisting and proposd cquipment; and
clcan up or dcwmmission waste disposal areas,fuel storage and managcmcnt facilitics and othcr Iocations and faditics.
Failurc to comply with thcsc Iaws and regulations may trigger a varicty of administratiw, civil and criminal cnforecmcnt mcasurcs,
including rhc asscssment of rnonctary pcnaItics, thc imposition of rcrncdiaI actions and thc issuancc of ordcrs enjoining rulurc opcrations. Ccttain
cnvironmcnhl statutcs irnposc strict, joint and scvcnI liability for cosfs rcquircd to cfmn up and rcstorc sitcs whcre hmrdous substances havc
been disposed or othcnvisc rcicascd. Morcovcr, it is not uncommon for ncighboring landowners and other third parties to filc claims for personal
injury and propcriy damagc allcgcdly caused by the rdease of hazardous substances or othcr wastc products into thc cnvironmcnt.
Thc trcnd in cnvironmcnhl rcgulation is to place more restrictions and Iirnitations on activitics that may affcct thc cnvironmcnt, and thus
thcrc can be no assurance as to thc amount or timing of futurc cxpcnditurcs for cnvironmcnhl complimcc or rcmcdiation, and actual futurc
cxpcnditurcs m y bc diffcrcnt from thc amounts we currentry anticipak. Wc try to anticipate fhturc rcgulatory rcquircmcnts that might bc
imposcd and plan accordingIy to remain in compliancc with changing cnvironmcntal laws and rcgulations and to minimizc thc costs of such
compIiancc.
Bascd on current rcgulatory rcquircrncnts and interpretations, wc do not bclicvc that compIiancc with fcdcnl, stalc or low1 cnvironmcntal
laws and rcgulations will have a material adverse effect on our businas, financial position, rcsuIts of opcrations or cash flows. In addition, we
bcIicvc that our currcnt cnvironmenta1 remediation activitics will not matcriaIIy i n t m p t or diminish our opcrational ability. Wc m n o t assurc
you, howwcr, that futurc cvents, such as changes in existing laws, thc promulgation of ncw Iaws, or thc dcvclopmcnt or discovcry of ncw facts
or conditions will not causc us to incur significant costs. Thc folIowing is a discussion of all material cnvironmcntal and safcty Iaws and
rcgulations that d a t e to our opcrations. Wc bcIicvc h a t wc arc in substantial compliancc wilh a11 of thcsc environmcnhl Iaws and rcguIations.
Global Climate Chnngc
In rcccnt ycars, thcrc has been incrasing public dcbak rcgarding thc potcntial impact on global clirnatc cliangc by various "greenhouse
gasts'' such as mrbon dioxide, a byproduct of burning fossi1 hcls, and mcthanc, thc principal componcnt of thc natumI gas that wc transport and
dclivcr to cuslomcrs. Legislation to regulate crnissions of greenhouse g s s has bccn introduccd i Congress, and thcrc has bccn a widc-ranging
ae n
policy dcbak, both nationalIy and intcmationally, rcgarding thc impact of thcsc gas= and possiblc mans for thcir rcguIation. Somc of thc
proposals would rcquirc industries such as the utility industry to mect stringcnt new standards that wouId rcquirc substantial rsductions in carbon
crnissions. Those reductions could bc costly and difficult to implcmcnt. Somc proposds would providc far crcdits to thosc who rcducc crnissions
bclaw ccrtain lcvcls and would alIow hose credits to be tradcd and/or sold to others. In addition, cfforts h a w bccn madc and continuc to be
madc in thc intcrnationd community toward thc adoption of international trcaties or probcoIs that would addrcss globaI climate chmge issues,
..
such as thc Unitcd Nations Climate Changc Conference i Copcnhagcn in 2009. Also, thc U S Environmcntal Protcction Agcncy (EPA)has
n
undcrlakcn ncw cffork to collcct information rcgarding gcenhousc gas emissions and their cffects. Recently, the EPA declarcd that ccrtain
grccnhousc gascs rcprcscnt an cndangermcnt to human health and proposcd to expand its regulations d a t i n g to thosc missions.
9
Table o Contcnfs
f
It is too carIy to detcrminc whcthcr, or in what form, furlher rcguIatory action rcgarding gmnhousc gas crnissions wiIl bc adoptcd or what
spccific impacts a ncw regulatory action might h a w on us and our subsidiarics. Howvcver, as a distributor and tmnsportcr of natural gas and
consumer of natural gas in our pipclinc and gathering businmcs, our revcnues, opcrating cos& and capita1 rcquircments could bc advcrscly
affcctcd as a m I t of any regulatory action that would require installation of new contmI technoIogics or a modification of our opcntions or
would havc thc effect of rcducing thc consumption of natud gass. Likcwisc, incentives to C O ~ S C ~ Y cncrgy or wc cncrgy sources othcr than
C
natunI gas couId result in a dccrcasc in dcmand for our scwica. Convcrscly, regulatory actions that cffcctivcIy promote thc consumption o f
namal gas bccausc of its lowcr emission chamctcristics, wouId bc expcctcd to bcncficidly affcct us. At this point in tirnc, howcvcr, it would bc
spcculativc to try to quantify thc magnitudc of thc impacts fmm possiblc new regulatory actions rcIatcd to grecnhouse gas cmissions, cithcr
positivc or ncgativc, on our businesses.
To thc cxtcnt clirnatc changcs occur, our businam may bc adverseIy impactcd, though wc bclicvc any such irnpacls arc Iikcly to occurvcry
gradualIy and hcnce wouId bc dificuIt to quanti@ with spccificity. To t t ~ c cxtcnt global cIimalc changc rcsuIts in warmcr tcrnpcraturcs in our
servicc tcrritorics, financial rcsults from our natural gas distribution busincsscs could be advcrscly affcctcd through Iowcr gas salcs, and our gas
transmission and fieId sciviccs b u s i n m a could cxpcriencc lowcr rwcnucs. Anothcr possiblc climatc changc that has bccn widdy discusscd in
rcccnt yars is the possibiliky of morc ficqucnt and more scvcre wuthcr wvents, such as hurricanes or tornadoes. Sin= many of our facilitics arc
locatcd along or ncar fhc GuIf Coast, incrcascd or morc severc humcams or tornadoes can incrcasc our costs to rcpair damagcd faciiities and
rcstorc servicc to our custamcrs. Whcn wc cannot deliver nattuaf gas to customers or our customcrs cannot rcccivc our scrviccs, our financial
rcsults can be impacted by Iost rcvcnucs, and wc gcncnlly must scck approvaI from rcyIators to rccovcr mloration costs. To thc cxtcnt wc arc
unabIc to rccovct thosc costs. or if h i g h rates resulting from our rccovcry of such costs resuIt in rcduccd dcmand for our scrviccs, our futurc
financial rcsuIts may bc advcrscIy impactcd.
Air Emissions
Our opcrations arc subjcct to thc fcdcral Clcan Air Act and companbIc statc laws and rcgulations. These laws and rcylations rcgulatc
emissions of air pollutants from various industrial sourcm, inchding our procasing pIants and comprcssor stations, and also imposc various
monitoring and reporting rcquircmcnls. Such laws and regulations may rcquirc that wc obtain prc-approval for the construction or modification
of ccrhin projccts or facifitics cxpcctcd to producc air emissions or w u f t in thc incrcasc of cxisting air emissions, obhin and striclIy comply
wilh air pcmits containing various emissions and opcmtional limitations, or utilize spcciiic cmissiao control tcchnoIogies to h i t emissions.
Our failurc to comply with thcsc rcquircments could subjcct us to monctary pcnalties, injunctions, conditions or restrictions on opcntions, and
polcntially criminal cnforcemcnt actions. We may bc rcquircd to incur cerhin c a p i d cxpcndilura in thc futurc for air polIution conlrol
equipmcnt in connection wilh obtaining and maintaining operating pcrmits and approvals for air emissions. In rcccnt ycars thc EPA has adoptcd
amcndmcnfs to its rcgulatians rcgarding maximum achievable control tcchnoIogy for stationary internal combustion cngincs (somctimcs rcfcrrcd
to as thc RICE MACT ruIc) and continua to consider additional amcndmcnts. Compressors used by our Pipelincs and Ficld Scrviccs scgmcnts
arc affcctcd by thcsc rulcs. Whilc thc final: structure and cffcctivc d a t a of thcse rcviscd rulcs arc still unccrtain, wc currcntly bcliwc thc ruIcs, if
adopted in lhcir currcnt form and on the anticipated schcduh, could rcquirc cxpcnditurcs over thc ncxt three years of Icss than $100 miIlian in
ordcr to cnsurc our compliance with the reviscd mlcs. W c bcIicvc, howcvcr, that our operations will not bc malcrinlIy advcrscly affcctcd by
such rcquircmcnts.
W a t c r Dischnrgcs
Our opcrations arc subject to thc Pcdcnl Watcr Pollution ControI Act of 1972, as amcndcd, also known as h c CIan Watcr Act, and
analogous s t a k laws and rcgulations. These Iaws and rcguufalionsimposc dctailed rcquircmcnts and strict controls r c g d i n g thc dischargc of
polluhnts into watcrs orthc Unilcd Stat=. Thc unpcmittcd dischargc orpofhtank, including dischagcs resulting from a spill or Icak incident,
is prohibitcd. Thc Clcan Walcr Act and rcgulations irnplcmented lhcrcundcr also prohibit discharges ofdrcdgcd and fill matcrial in wctlands and
othcr watcrs of thc Unitcd Skit= unfess atturhorizcd by an appropn'atdy issucd permit. Any unpcrmittcd rcIcasc of pctrolcum or othcr poIlutants
from our pipclincs or facilitics could result in fin= or pcnaltics a wcIl a significant rcrncdial obIigalions.
s s
IO
IIazardous Waste
Our opcntions gcncntc wastes, including some hazardous wastes, that are subjcct to the f c d e d Resource Conservation and Rccovcry Act
(RCRA), and compmblc state Iaws, which imposc detailed requircmcnts for thc handIing, storagc, fratmcnt and disposal of hazardous and solid
wastc. RCRA cumntly cxcmpts many natural gas gathering and ficld proccssing wastcs from classification as hazardous wastc. Spccificdly,
RCRA cxcludcs from thc dcfinition of hazardous waste watm produccd and ohcr wastcs associatcd wt thc cxpIoration, dcvclopmcnt or
ih
production of crudc oil: and natura1 gas. Howcvcr, thcsc oil and gas cxplomtion and production waslcs arc still rcgulatcd undcr shlc Iaw and thc
lcss stringent nom-haimdous w s e requirements of RCRA. Morcover, ordinary industrialwaststcs such a paint wastcs, watt solvcnk, laboratory
at s
wastcs and wastc comprcssor oiIs may bc rcgulatcd a hmrdous w t c . Thc bansportation of natunl gas in pipclincs may also gcncratc somc
s
hamrdous wastcs that would bc subject to RCRA or comparablc statc law rcquircments.
Liability Tor Remcdiation
Thc Comprchcnsivc Environmcntal Rcsponsc, Compensation and Liability Act of 1980, a amendcd (CERCLA), also known as
s
"Supcrfund," and compmblc sblc laws imposc Iiability, without regard to fault or the legality of the original: conduct, on certain classcs of
pcrsons rcsponsibIc for thc rclcasc of hamdous substanca into thc cnvironmcnt. Such cIasses of pcrsons includc thc currcnt and past owntrs or
opcrators of sites ivhcre a hazardous substancc was rcIwscd and cornpanics that disposcd or arrangccd for thc disposal of hazardous subsmnccs at
offsitc Ioutions such a IandfiIIs. Although pctrolcum, a well a natural gas, i excluded from CERCLA's dcfinition of a "hazardous
s s s s
substancc," in thc COU~SCof our ordinary opcntions wc gcncratc wastes that may fa11 within the definition of a"hmrdous substance." CERCLA
autharizcs thc EPA and, in somc cas=, third pariics to take action in rcsponse to threats to the public hcdh or h c cnvimnmcnt and to seck to
rccovcr f o the rcsponsiblc classes of persons thc costs thcy incur. Undcr CERCLA,wc could bc subjcct to joint and scvcra1 IiabbiIiLy for thc
rm
costs of clcaning up and restoring sites whcrc h d o u s substances haw bcen rclcascd, for damagcs to natural mourccs, and for thc costs of
ccrtain halth studics.
Liability ror Precxisting Conditions
Manidacfurcd Gar Plant Silts. Wc and our predccessors operatcd manuiacturcd gas plank (MGPs) in the past. In Minncsota, wc haw
compIcted rcmcdiation on two sites, othcr than ongoing monitoring and watcr trcatmcnt. Thcre arc fivc rcrnaining silcs in our Minncsota scwicc
territory. Wc beIicve that we havc no Iiability with respect to two of thcse sites.
At Deccmbcr 31, 2009, we had accrued 514 milIion for rcrnediation of thcsc Minnesota sit= and the estimated rangc of possiblc
rcmcdiation costs for thcse sit= was $4 miIIion to $35 million based on remcdiation continuing for 30 to 50 yeas. The cost cstimatcs arc bascd
on studics of a sitc or industry avcragc costs for remediation of sitcs of sirniIar size. The actual remcdiation costs will bc dcpcndcnt upon thc
numbcr of sitcs to bc rcmcdiatcd, thc participalion ofothcr potcntialIy responsiblc parties (PRPs), if any, and h e rcmcdiation mcthods uscd, Wc
h w c utilizcd an cnvironmcnbl expense tracker mechanism in our rates in Minncsota to recover cstimatcd costs in cxcess of insunncc rcwvcry.
As OF Dcccmbcr31, 2009, wc had coIlccted $13 miIlion from insurance cornpanics and rate paycrs to bc used Tor futurc cnvironmcntal
rcmcdiation. In January 2010, as part of our Minnesota mtc casc dccision, thc MFUC cIiminatcd the environmental cxpcnsc mckcr mcchanism
and ordcrcd amounts previously coIlected from ratcpaycrs and related carrying costs refundcd to customcrs. As of Dcccmbcr 31, 2009, thc
balancc in thc cnvironmcntaI cxpcnsc tmcker account was $8.7 milIion. Thc MPUC providcd for thc inclusion in ntcs of approximatcIy
$285,000 annually to fund noma1 on-going rcrncdiation costs. Wc wcrc not rquircd to rcfund to customcrs thc amount collcctcd from
insurance cornpanics, $ . rnilIion at Dcccmbcr 3 1,2009, to bc uscd to mitigatc futurc cnvimnmcntd cosls. Thc MPUC furthcr gilvc il~surance
46
that any rmsonabIc and ptudcnt cnvironmcnbl clan-up costs wc incur in thc futurc will: bc nlcrccovcrablc undcr normal tcgulalory principIcs
and proccdum. This provision had no effcct on earning.
In addition to thc Minncsola sitcs, thc EPA and olher regulators havc invcstigatcd M G P sit= that wcrc owncd or opcrakd by us or may havc
bccn owncd by one orour former aflifiates. Wc have been named as a defendant in a lawsuit filcd in thc United Statcs District Coutt, District of
Mainc, undcr which contribution is sought by privatc partics for the cost to rcmcdiate former MGP sitcs b x c d on thc prcvious owncrship of such
sites by formcr affiIiatcs of ours or our divisions. Wc havc aIso bcen idcntificd as a PRP by thc Shtc of Maim for a site that is thc subjcct of
Table o Conicnts
f
thc Iawsuit. In June 2006, thc rcdcral district court in Mainc ruled that thc currcnt owncr of thc sitc is responsibIc for site remcdiation but that an
additional evidcntiary hcaring wouId be rcquired to determine if other potcntiaIly rcsponsiblc partics, including us, wouId hrrvc to contributc to
that rcrncdiation. In Scptcrnbcr 2009, the fcdera1 district court granted our motion for summaryjudgncnt in thc pmcccding. AIhovgh it is likcly
that thc pIaintiff wiIl pursuc an appcal from that dismissa1, furthcr action will: not bc takcn unti1 thc district court disposcs of claims against athcr
defendants in thc cast. Wc bclicvc wc arc not liable a a formcr owncc or opcntor of thc sitc undw CERCLA and applicabfc shtc statulcs, and
s
are vigomusIy contcsting thc suit and our dcsignation as a PRP. Wc do not cxpcct thc uItimatc outcomc to havc a materia1 adversc impact on our
financial condition, results of opcrations or cash ffows.
Mercuty Confuminarion Our pipeline and distribution operations haw in thc past unpIoycd clcmcnkd mcrcury in mcasuring and rcgulating
cquipmcnt. It is possible that smdl amounts of mcrcury may havc bccn spiIlcd in thc coutsc of normal maintcnancc and rcplaccment operations
and that thcse spiIls may hwe conhminatcd thc immcdiatc arm wilh clcrncntal mcrcury. Wc havc found this typc of contarnination at somc sitcs
in thc past, and wc haw conducted remediation at thcsc sitcs. It is possiblc that olhcr contaminated sit= may mist and that remediation costs
may bc incurrcd for these sites. Although fhc total amount of thcsc costs is not known at this tirnc, bascd on our cxperiencc and that of olhcrs in
thc natural gas industry to date and on the currcnt rcylations rcgarding rcmcdiation of thcsc sitcs, wc beIicvc that the costs of any rcmediation of
thcsc sitcs will not bc matcrial to our financial condition, results of opcntions or cash flows.
Asbcsfar. Sornc faciIities fomcrfy owncd by our prcdcccssors havc containcd asbrstos insulation and othcr asbestos-containing matcrials.
Wc or our prcdcccssor cornpanics have bccn narncd, along with numcrous olhcrs, as a dcfcndant in lawsuits filcd by ccrhin individuals who
claim injury duc to cxposurc to asbestos during work at such formcrfy owncd facilitics. Wc antieipatc that additionai claims Iikc thosc reccived
may bc asscrled in thc future. AIthough thcir dtimate outcomc cannot bc prcdickd at this time, wc intcnd to continuc vigornusly wntcsting
claims that arc not considcrcd to havc mcrit and do not cxpcct, bascd on our cxpcrience to date, these mattcrs, cifhcr individually or in thc
awcgatc, to havc a rnatctiaI advcrsc effcct on our financial condition, results of operations or cash flows.
GrurmdvurcrCunranriita!ionLifigafionPredcccssor entities of ours, along wilh scvcral othcr cntitics. arc dcfcndants in Iitigation, Sf. Michcf
f ,
Pianfarion,LLC, cf aI, v. White, et a . pcnding in civil district court in OrIcans Parish, Louisiana. In thc lawsuit, the plaintiffs a k g c that thcir
propcdy in Tcrrcbonnc Parish, Louisiana suffered salt wafcr contamination 3 w u l t of oil and gas drilling activitics conducted by thc
dcfcndants. AIthough a predccessor of oum hcld an intcmt in two oil and gas lcascs on a portion of the property at issuc, neilhcr wc nor any
othcr cntitics of ours drilIcd or conducted orher oil and gas opcntions on thasc Icascs. In January 2009, wc and the plaintiffs rcachcd agrccrncnt
on thc terms of a settlement that, if uftimatcly appravcd by thc Louisiana Dcpartmcnt ofNatural Rcsourccs, is cxpcctcd to rcsolve this litigation.
Wc do not cxpect the outcomc ofthis litigation to havc a matcrid advcrsc impact on our financia1 condition, rcsuIts of operations or cash flows.
Olher Environmental. From limc to timc wc h a ~ c rcccivcd notices from rcgulatory authoritics or othcrs rcgarding our status as a PRP in
conncction with sites found to rcquirc rcmcdiation duc lo h c prcscncc of cnvironmcntal contaminants. In addition, wc h a w bccn narncd from
timc to timc as a dcfcndant in liligation relatcd to such sitcs. AIlhaugh thc ultimatc outcomc ofsuch rnattcrs mannot bc prcdictcd at this h c , we
do not cxpcct, bascd on our cxpericnce to date, thcsc mamrs, cithcr individuaily or in thc aggrcgalc, to havc a matcrial advcrsc cffcct on our
financia1 condition, rcsults of opcntions or cash flows.
12
Table oJCorttcitis
EMPLOYEES
As of Dcccmbcr 31, 2009, wc had 4,678 MI-tirnc cmployca. Thc foIlowing tablc scts forth thc numbcr of our cmployccs by busincss
scgmcnt:
h’umbcr
Rcprtrentcd
by Unions o r
Other CaIIidivc
Number krp,Antng Gmqu
Natural Gas Distribution 3,618 1,384
Compctitivc Natural Gas Salcs and Seiviccs 130 -
Interstate Eipclincs‘
Ficld Scrvices
689
24 1
, -
-
Total ,. i , .I . . 4 . I .14.678 4 1 . . 1384 1
As of Dcccmbcr 31,2009, approximatcly 30% of our employccs arc subjcct to colIcctive bargaining agrccrncnts.
Item 1A. R k k Factors
Thc folIowing, dong w i h any additionaf IcgaI proceedings idcntificd or incorpontcd by rcfcrcncc in Itcm 3 of this rcport, summarim the
principal risk factors associatcd with our busincss.
Risk Factors Affccting Our Busincsscs
Rate rcgiilafion o our business may dday or deny our a i i y to earn a reasonable rerum andfUrry recaper our costs.
f blt
Our raks for Gas Opcrations arc rcyIatcd by ccrtain municipaIitia and sbtc commissions, and for our intcrstatc pipclincs by thc FERC,
bascd on an analysis of our invested =pita1 and our expenses in a test yar. Thus, thc rata that we arc allowcd to chagc may not match our
cxpcnscs at any given time. The regulatory process in which rata are determincd may not allways rcsuIt in mtcs that will producc full rccovcry of
our costs and cnablc us to cam a reasonablc rchlm on our invcstcdcapital.
Our businass m s t compete wifh alfcrnate energy sourca, w h i d wtdd resuIt in our marketing ICSS natitral g s and our interstate
a,
pipdines attdfleid scrvices busitmsm must compeie directly wifh others iii the transporfation,storage, gathering, frcdittg asdprocessitig
o natural g s which could lend S lower p r k i and reduced vdumes, eilher o which could have an advcrse i n p d OII our raid& 01
f a, o f
opera!ions,financiaI cotiditiotr atid cashflows.
Wc compctc primarily wilh altcmatc cncrgy s o u m such a clccm’city and oihcr fucl sourccs. In some arcas, intnstatc pipelines, ohcr
s
natural g x distributors and markclcrs also compctc directly with us for natura1 gas salcs to cnd-uscrs. In addition, as a rcsuIt of fcdcral regulatory
changw affccting intcrstatc pipcfincs, natural gas markctcrs opcmting on thcsc pipclincs may bc ablc to bypass our facilitics and market, sell
andlor tnnspart natural gas dircctly to comrncrcial and industrial custorncrs. Any rcduction in thc amount of natura1 gas markctcd, sold or
transpodcd by us a a rcsuIt of cornpctition may haw an advcrsc impact on our rcsuIts of opcrations, financial condition and cash flows.
s
Our two intcrshtc pipcIincs and our gathcring systems mmpctc with othcr intcrstatc and intmtatc pipclincs and gathcring systcms in thc
aa
transportalion and stomp of natuml gas. Thc principaf ctcmcnts of compctition arc r t , tcrms of scrvicc, and flcxibility and reliability of
servicc. Wc also compctc indircctly with othcr forms of cncrgy, including CIcctricity, coal and fucI ails. Thc primary cornpctitivc factor is pricc,
but recently, environmcnta1 considcrations havc grown in importance whcn consumcrs considcr olhcr farms of cncrpy. TItc actions of our
compctitoa could lcad to lowcr pn’ccs, which may have an advcrse impact on our results of opcrations, financial: condition and cash flows.
Additionally. any rcduction in thc volumc of natural gas transportcd or storcd may havc an advcrsc impact on our results ofopcrations, financial
condition and cash flows.
I3
Table oJConlcnis
O w iiairrrnI g s disrribudon and conrpditive nalurai gm s a h and services businesses arc su6ject S Jucfuations it1 natrrraI g s p r i m ,
a o a
which codd a#cd the abiIity o our siippliers and cusiamcrs lo meet fhcir obtigdims or olhenvise adverse+ afficf o w Iiqrtidio and rad&
f
of opma~iutrs.
W arc subjcct to risk associated with changes in the price of natural gas. Increases in natural gas priccs might affcct our ability to calIcct
c
bdances duc from our customcrs and, for Gas Opcraiions, could create thc poicntial for uncollcctiblc accounts expcnsc to cxcccd thc rccovcrabIc
lcvels buiIt into our tariff rates. In addition, a suslaincd pcriod of high natural gas priccs couId (i) apply downward dcrnand pressure on natura1
gas consumption in thc arms in which wc opcntc thcrcby resulting in decreased sales volumes and revenues and (ii) i n c w c thc risk that our
suppIicrs or customers hi1 or arc unable to meet rhcir obligations. An incrcasc in natural gas prices wouId also incrcasc our working capital
rcquircmcnts by incrcasing the investment that must bc madc in ordcr to maintain natunl gas inventory IcvcIs. Additionally, a dccrcasc in
natural gas p r i m couId i n m c the amount of colhteral that we must provide undcr our hcdging mgcrncnts.
A decIinr iit our credit rating cordd result i our having ia provide caIIalerd in order io purchase natura[ gas or under our shipping or
n
hedging arratigemenh
I f our crcdit nting wcrc to dcclinc, wc might be rcquircd to post cash collateral in ordcr to purchase natural gas or under our shipping or
hedging amgcmcnls. If a credit nting d o m g n d c and thc resuItant cash collateral rcquirement were to occur at a tirnc whcn wc wcrc
expcricncing significantworking capital rcquircmcnts or othcnvisc Iackcd liquidity, our rcsults of opcrations, financial condition and cash flows
couId bc advcrscly affcclcd.
The rmmues and pipdiner aiidfdd scrvicci businma arc sidjjcct Saf7ucftmtiom in the suppiy attd
o operatioits o o m iniersfafe
f f
price of natural g s and naiural g s tiquit&*
a a
Our intcrstate pipelines and ficld serviccs busincssm largcly rcly on natural gas sourccd in thc various suppIy basins Iocatcd in thc Mid-
continent region of the Unitcd Stat=. Thc lcvcl of drilling and production activity in thesc rcgions is dcpcndcnt on cconornic and busincss
factors bcyond our control. The primary factor affccting both thc Icvcl of drilling activity and production voIumcs is natural gas pricing. A
sustained dcclinc in natural gas priccs could result in a dccrcasc in cxplomtion and dcvclopmcnt activitics in thc rcgions scrvcd by our gathcring
and pipclinc transportation systcms and our natural gas treating and processing activities. A sustaincd dcclinc could also lcad produccrs to shut in
production from thcir cxisting wcIls. Othcr factors that impact production decisions include thc level: of production costs rclativc to othcr
avaiIablc production, produccrs' acccss to nccded apital and the cost of that capital, the abilily of producers to obtain ncccssary drilling and
orher govcrnrncntal pcrmits, acccss to driIling rigs and tcgulatory changcs. Bccausc of thesc factors, cvcn if ncw natural gas rcscrvcs arc
discovcrcd in arcas scrvcd by our asscts. produccrs may choosc not to dcvcIop those mcrves or to shut in production from cxisting TCSCWCS. To
h c cxtcnt rhc availability of this suppIy is substantialIy rcduccd, it could hmc an advcrse cffcct on our rcsults of opcntions, financial condition
and cash ffows.
Our rcvcnucs from thcsc busincsscs arc also affcctcd by thc pn'ccs of natura1 gas and natural gas liquids (NGL). NGL p r i m gcncnIly
ffuctuatc on a basis that corrcfatcs to fluctuations in crudc oiI priccs. In thc past, thc priccs of natud gas and crudc oi1 haw bccn cxtrcrncly
volatilc, and wc cxpcct this volatiIity to continuc. T h c markcts and priccs for natural gas, NGLs and crudc oil dcpcnd upon factors bcyond our
control. Thcsc factors incIudc supply af and dcrnand for thesc commodities, which fluctuatc with changcs in markct and cwnornic conditions
and othcr factors.
Our revcnrm atid residts o operatiotrs are seasonal.
f
A substantia1 portion of our revenuw is derived f o natural gas safes and transportation. Thus, our revenues and rcsults of operalions are
rm
subjcct to scasonality, wcathcr conditions and othcr changcs in natura1 gas usagc, with rcvcnucs bcing highcr during rhc wintcr rnonrhs.
14
Table o Contcnts
f
future pipdine, galheriiig and trealing system and related contprcssionfauiities llrrry be
The actual cost o pipditm under consfri;dioni
f
sigtiijicady fiighcr than we Itadplanncd
Our subsidiaries h a w becn recentIy involved in significant pipeIine construction projects and, dcpcnding on avaiIabIc opportunitics, may,
f o timc to time, be involved in additional: significant pipclinc constnrction and gathcring and treating systcm projccts in thc futurc. Thc
rm
consmction of new pipclincs, gathering and treating systcrns and related comprcssion facilitics may rcquirc thc cxpcnditurc o f significant
amounts of apihI, which may cxcccd our cstimatcs. Thcsc projccts may not bc complcicd at thc planncd cost, on schcdulc or at dl. The
construction of ncw pipclinq gathcring, trmting or comprcssion faeilitics is subjcct to construction cost O V C ~ N duc to Iabbar costs, costs of
cquipmcnt and matcriaIs such a stccl and nickcl, labor shortages or delays, wurhcr delays, inflation or orher factors, which couId bc matcn'a1. In
s
addition, thc construction of fhcsc facilitics is t y p i d y subjcct to thc rcccipt of approvaIs and permits f o various rcgdatory agcncics. Thosc
rm
agcncics may not approvc thc projccfs in a timcly manner or may imposc rcstrictions or conditions on thc projects that could potcntially prcvcnt
a pmjcct from procceding, Icngthen its cxpccted completion schcduIe andlor increase its anticipated cast. As a result, thcrc is the risk that thc
ncw facilitics m y not bc able to achicvc our expccted invesfment return, which wuId advcrseIy affect our financial condition, resuIts of
opcntians or cash flows.
The stata itt which we provide rqdLttcd local g s diitributioti mayi either through lcghIa.!ion or rides, adopt rmIricfiottssimiiar i or
a o
broader than ihose undrr the Public UtXfyIroIding C O W ~ Q I ~o 1935 rqarditig o ~ u n i ~ f i o t t , ~ t t and ~ t i ~ tramactions thai
Act J
f a n affiliaf~
could have sigttificant adverse impacis on our abiIify to operaie.
Thc Public Utility Holding Company Act of 1935, to which CentcrPoint Energy and its subsidiarics wcrc subjcct prior to its r c p d in thc
Encrgy Act, providcd a comprchcnsivc rcguIatory structurc govcming thc organiation, capital slructurc, intracompany rclationships and lines o f
busincss that couId bc pursucd by rcgistcrcd hoIding cornpanics and thcir mcmbcr cornpanics. FolIowing rcpcal of that Act, somc statcs in which
wc do busincss havc sought to cxpand thcir own rcyIatory fmmcworks to givc thcir rcgulatory aulhoritics incrwcd jurisdiction and scrutiny
ovcr sirniIar aspccts of h e utilitics that operate in thcir statcs. Some of thcsc fmeworks attempt to rcylatc financing activitics, acquisitions and
divcstiturcs, and arnngcmcnts bctwecn thc ulilitics and thcir alfiliaks, and to rcslrict thc IcvcI of non-utility busincss that can bc conduclcd
within thc holding company structurc. Additionally thcy may imposc rccord kccping, rccord a c c m , employec mining and reporting
h
rcquircmcnts rclatcd to affdiatc transactions and reporting in the went ofcertain downgrading of Lc utiIity's bond rating.
Thcsc rcgulatory framcworks could have advcrsc cffccts on our ability to conduct our utiIity opcratbns, to financc our business and to
providc cost-cffcctivc utility scrvice. In addition, if mom than onc shtc adopts rcstrictions on simiIar activitics, it may bc difficult for us to
comply wilh competing regulatory rcquircmcnts.
The rcvettiim and resulk o operdiom o our ittiersfate pipefitics atid f d d sefyica businesses codd be adverse@ impacted by itmv
f f
ciivirottmmtul regdatiotrs govcrtiing the withdrawal, storage and use o surface water or groutidwafer necessaryfor hydrauiicfracfmittg
f
o rvch atrdlhepro!ection o ivntcr supplies in the areas in arid aroundshdcflcidk.
f f
Our intcrstatc pipclincs and field scwiccs busincsses IargcIy rcIy on natural gas sourccd in thc various supply basins loakd in thc Mid-
contincnt mgion of thc Unitcd States. To cxxtmct natural gas from the shaIc ficlds in this m a , pmduccrs have historically used a proccss cailed
hydraulic f-acturing. Rcccntly, ncw cnvironmcntal rcgulations govcming thc withdrawal, storagc and u of surfacc watcr or groundwater
c
ncccssary for hydnuIic frnciun'ng of wclls and thc protcction of watcr supplics in rhc arcas in and around thc shfc ficlds havc bccn considcrcd
by thc f c d c d govcrnmcnt. If cnactcd, such rcgulations could incrwc opcntiog costs of thc producers in thcsc rcgions or causc ddays,
inlcrmptions or tcrmination of driIIing opcntions, all of which could rcsult in a dccrmc in dcmand for fhc scwiccs providcd by our intcrstatc
pipclincs and field scrvices busincsses in thc shale fiehis, which could have an adverse effcct on our results of operations, financial condition and
cash ffows.
Table OJConfcnfs
Risk Factors k o c i a t e d with Our Consolidated Financial Condition
v w e are un~ble arrangefufurefinancings on acceptable term, our abilifyio refinance &sting indcbfcdtzm could be limited
io
As of Dcccmbcr31, 2009, w e had $3.3 biIlion of outstanding indebtedness on a consolidatcd basis. As of Deccmbet31, 2009,
appmximatcly $649 million principal amount of this dcbt is rcquircd to bc paid through 2012, including S45 million of dcbcnturcs rcdecmcd in
2010, but cxcluding $432 million borrowcd from the money pool. Our futurc financing activities may be significantly affcctcd by, among othcr
thing:
gcncd rxonornic and capita1 market conditions;
crcdit availability from financia1 institutions and athcr lcndcrs;
invcstor confidence in us and rhc markcts in which we opcratc;
maintcnancc of acceptable credit ratings by us and CcnterPoint Encrgr;
markct cxpcctations rcgarding our future earnings and cash flows;
capital rnarkch on tcasonabIc tcrms;
market pcrceptions of our and CcntcrPoint Encrgy’s abiIity to ~ C C C S S
our cxposure to ih
M in cunncciion wt its indcmnification obIigations arising
I in conncction with its scpantion from CcntcrPoint
Encrgy; and
provisions of relevant tax and sccuritia laws.
Our current crcdit d n g s arc discusscd in “Managcmcnt’s Narrative AnaIysis of ResuIts of O p c m t i o n e Liquidity - Impact on Liquidity
afa Downgradc in Credit Rating” in Itcm 7 ofthis rcport. Thcsc crcdit mtings may not rcrnain in effect for any givcn pcriod of timc and anc or
marc of these mtings may bc Iowcrcd or withdmwn cntircIy by a rating agency. We note that thcsc crcdit ntings arc not rccommcndations to
buy, scIl or hoId our sccuritics. Each rating should bc cvaIuatcd indcpendently of any other rating. Any ruturc rcduction or withdrawal of onc or
mort of our crcdit ratings couId h 3 ~ c matcrial advcrsc impact on our ability to ~ C C C S S
a capital on acccptable terms.
The credihvorlhinm and liquidity o ourparent company and our QfJIinfa cotdd affect our creditworthinessand liquifq.
f
Our crcdit ratings and liquidity may bc impactcd by thc crcditwofiincss and Iiquidity of our parcnt company and our affiliates. As of
Dcccmbcr 31.2009, CcntcrPoint Encrgy and its subsidian’cs othcr than us h a w approximatcly $562 mi1lion principai amount ofdebt rcquircd to
bc paid through 20 12. This amount cxcludes amounts rdated to capih1 lcascs, principal rcpaymcnts of approximatcly $83 I million on transition
and systcm rcstontian bonds and indued dcbt securities obIigations, but i n c h d B $290 million ofpollution controI bonds issucd an CcntcrPoint
Encw’s bchalf which CcntcrPoint Encrgy purchased in January 2010 (and which may bc rcmarkctcd). If CcnlcrPoint E n c r g wcrc to
wpcricnce a dctcriomtion in its crcditworihincss or Iiquidity, our crcditworthincss and Iiquidily muld be adversdy affectcd. In addition, from
t m to time wc and othcr affiliates invcst or borrow finds in thc money pool maintained by CenterPoint Energy. If CcnlcrPoint Encrgy or h e
ic
affiIiatcs that borrow any funds that wc might invcst from timc to timc in thc moncy pool wcrc to cxpcricncc a dctcrioration in Lhcir
crcditworthincss or liquidity, our crcditworthiness, Iiquidity and thc rcpaymcnt of n o l a rcccivablc from CcntcrPoint E n c r a and out afiliatcs
undcr thc money pool could be advcrscIy impactcd.
16
Tob1c o Canmtts
f
Wc are an itdirect witoily aiviiedsuhsidiary o CenterPoitti Enera. CcntcrPoirrt Energy can exercisesubstattiid conirol over our dividend
f
poIicy arid busitiess and operalions and could do so in R munner that h adverse fa our infers&.
Wc arc managcd by officcrs and cmpIoyees of Centerpoint Encrgy. Our rnanagemcnt will makc dctcnninations with rcspect to thc
following:
our payrncnt of dividcnds;
dccisions on our financing and our capital raising activities;
mcrgcrs or othcr busincss combinations; and
our acquisition or disposition of asscts .
Othcr than thc financial covcnants containcd in our crcdit facilily and rcccivablcs facilily (dcscribcd undcr “Liquidily” in Itcm 7 of this
rcport), which could h a w thc practical cmcct of limiling thc paymcnt of dividcnds under certain circumstanccs, them arc no contractual
rcstn’ctions on our abiliky to pay dividcnds to CcnkrPoint Encrgy, Our managemcnt could decide to increasc our dividends to CcntcrPoint
Encrgy to suppofl its cash nccds. This could adversely affect our liquidiiy. However, under our crcdit facility and our receivabIes facility, our
ability to pay dividcnds is rcstrictcd by a covcnant that debt as a pcrccnhgc of tobl capitalization may not cxceed 65%.
The use o dcrivnlive coniracls by us mid our srtbxidiaries iit the normal caurse o busines.F couId resrrIi in fittuitcial Iosses that couId
f f
ncgahdy impad our rerulk o operatiom attd those o oursubsidiarics.
f f
Wc and our subsidiaries usc dcrivative instruments, such as swaps, options, futurcs and fonmrds, to rnanagc our commodity, wcather and
financial markct risks. Wc and our subsidiarics could rccognize financial losses as a result ofvolatiIity in thc markct valucs of ihcse contracts, or
should a countcrparly h i 1 to pcrform. In thc abscnce of actively quoted markct prices and pricing information from cxtcma1 sources, the
vduatian of thcsc financia1 insmmcnts can involve management’s judgment or usc of estimates. As a result, changcs in thc undcrfying
assumplions or use of altcrnative valuation mcthods could affcct thc rcportcd fair value of thcse contracts.
We derive a suhstaitiialporlion o o w operating iiiconiefrom subsidiaris through wSticli we hotd a srtbstmiiialporiion o o m msets.
f f
Wc dcrivc a substanlid porlion of our o p c n h g incomc fmm, and hold a subshtiaf porlion of our a c t s fhrough, o w subsidian’cs. As a
rcsule wc dcpcnd on distributions from our subsidiaries in order to meet our payment obIigatbns. In gcncral, rhesc subsidiarics arc s c p m t c and
distinct Itgal cntitics and havc no obfigation to provide us with funds for our paymcnt obligations, whchcr by dividcnds, distributions, loans or
othcnvise. In addition, provisions of applicabIc law, such as thosc limiting thc legal sources of dividends, limit our subsidiaries’ abifity to makc
paymcnts or olhcr distributions to us,and our subsidiaries coufd agrec to contractual restrictions on their ability to make distributions.
Our right to receive any asscts of any subsidiary, and thereforc the right of our creditors to participatc in rhosc mck, wil1 bc cffcctivcly
subordinatcd ta thc cIaims of Bat subsidiary’s crcdiLors, inchding tradc creditors. In addition, cvcn if wc werc a crcditor of any subsidiary, our
righk a a crcditar waufd bc subordinalcd to any sccurity intercst in the assck of that subsidiary and any indcbtcdncss of thc subsidiary scnior to
s
that hcld by us.
Other Risks
We arc stdijceci lo operational attdJinaiicia1risk aitd Iiahiiificsarhingfrom ettvironntctttd laws attd regulations.
Our opcrations arc subjcct to stringcnt and compIcx laws and regulations pcrhining to hcalth, safcty and thc cnvironment. As an owner or
opcntor of natural gas pipclincs and distribution syskms, and gas gathering and
17
Table o Contcnis
f
praccssing systcms, wc must comply wirh thcsc laws and rcgulations at the fcdeml, statc and local: levels. These Iaws and rcgdations can rcstrict
or impact our busincss activities in many ways, such a :
s
- restricting thc way wc can handIe or dispose of wastes;
limiting or prohibiting construction activities in scnsitivc arcils such as wetlands, coastal regions, or a r w inhabitcd by cndangcrcd
spccics;
requiring rcmcdiai action to mitigate polhtion conditions causcd by our opcrations, or attributablcto former opcrations; and
- enjoining thc opcmtions of facilities decmcd in non-compliancc with pcmits issucd pursuant to such cnvironmcntal laws and
rcgulations.
In ordcr to comply with thesc requiremcnfs, we may nccd to spcnd substantia1 amounts and devote other resources rmm timc to timc to:
. consmct or aequirc ncw equipment;
9
acquire pcrmits for facility opcmtions;
- modify or rcpIacc misting and proposed equipmcnt; and
clcan up or dccomrnission wastc disposal arcas, fi~cl
storage and rnanagcment facilitiesand othcr lowtions and faciIitics.
Failurc to comply with thcsc Iaws and reguIations may friggcr a vmk'cly of adminiskativc, civil and crimina1 cnforccmcnt mcasurcs,
including thc asscssrncnt of monetary penaldes, thc imposition of rcmcdial actions, and the issuancc of orders cnjoining future opcrations.
Ccrhin cnvironmcntd statulcs imposc strict, joint and several liabihy for costs rcquircd to clcan up and rcstorc s i t u whcrc hazardous subshnccs
havc bccn disposed or othcnvisc released. Moreover, it is not uncommon for ncighboring landowners and othcr third partics to file claims for
persona1 injury and propcdy damage aIlcgcdIy causcd by the release ofhazardous substanccs or othcr waslc products into thc cnvironrncnt
Our iiisurance coverage muy not be suflcient Insufficient itmrance coverage and increased imurance costs couId adverse& inyac! our
rauILF o operaths,Jwancid cotidition and cmhflows.
f
We currcntly havc g c n c d liabiIity and propcdy insurance in placc to cover ccmin of our faciIitics in amounts that wc mnsidcr appropriatc.
Such policics arc subjcct to ccrhin Iirnits and deductibIes and do not includc busincss intcmrplion covct;lgc. Insumncc covcngc may not bc
avaihblc in thc ruturc at currcnt casts or on commcrcidly reasonable terms, and the insurance procccds reccivcd for any Ioss of, or any damagc
to, any of our faciliLics may not bc suficicnt to restore the Ioss or damage without negative impact on our rcsults ofopcntians, financia1
condition and cash fIows.
We and CenferPuinf Etierm couM ittar liabilities msuuded with business and asels fhat we have frafisfcrred io others.
Undcr somc circurnstanccs, w e and CcntcrPoint Enctgy could incur liabilitics associatcd with asscts and busincsscs wc and CcntcrPoint
Encw no Iangcr own.
In conncction with tItc organization and mpitalization oFRRI, RRI and its subsidiarics assumcd Iiabifitics associatcd wt various ~SSSCIS
ih and
busincsscs RcIiant Encrm fransfcrrcd to thcrn. RRI ako agrecd to indemnify, and a w c thc applicable transfcree subsidiarics to indcmnify,
CcntcrPoint Energy and its subsidiarics, inchding us, with rcspcct to IiabiIitics associated with thc transfcrrcd asscts and busincsscs. Thcsc
indcrnnity provisions wcrc intcndcd to placc solc financial rcsponsibiIity on RRI and its subsidiarh for a11 IiabiIitia associatcd with tIw cumnt
and hislorical busincsscs and opcrations of RRT, regardIess of thc time those Iiabilities arose. If RRI wcrc unabfc to satisfy a liability that has
bccn SD assurncd in circumstances in which Refiant Energy and its subsidiarics wcrc not
Tuble o Corttcnls
f
r c l w c d from thc liability in conncetion wilh thc tmnsfcr, wc and CentcrPoint Energy could bc rcsponsiblc for satisfying thc IiabiIity.
Prior to CcntcrPoint Encrgy’s distribution of its owncrship in RRI to its shareholders, wc had yanntccd ccttain contractual:obligations of
what bccamc RRI’s trading subsidiary. When the companies separakd, RKI agrccd to sceurc us against obligations undcr thc gumntics RRI had
bccn unablc to cxtinyish by thc timc of scparation. Pursuant to such agrecmcnl, as amcndod in Dcccmbcr 2007, RRI has qyccd to providc to us
cash or lcttcrs of credit as sccurity against our obligations under our remaining y a m t i c s for dcrnand chargcs undcr cemin gas tiamportation
agrccmcnts if and to the cxtcnt ehangcs in markct conditions cxpose us to a risk of loss on thosc guuarantics. Thc prescnt vduc of fhc dcmand
chargcs undcr thcsc transportation contracts, which will be effective until 2018, was approximatcly $96 million as of Dcccmbcr 31,2009. As of
Dcccrnbcr 3 1,2009, RRI was not rcquirod to providc security to us. If RRT should fail: to pcrform thc contractual obligations, wc could hwc to
honor our g u m t c c and, in such wcnf eoIlatcm1 provided as sccurity may bc imulficicnt to satisfy our obligations.
RRl’s unsccurcd dcbt ratings an: cutrcntly bclow invcstrncnt gmdc. If RRI wcrc unabIe to mect its obligalions. it wouId nccd to considcr,
among vatious options, rcslructuring undcr thc bankruptcy laws, in which cvcnt RRI might not honor its indcmnification obligations and claims
by RRI’s crcditors might bc madc against CcntcrPoint Energy as its former owner.
On May 1,2009, RR?sold its Tcxas rctail busincss to NRG Retail LLC, a subsidiary of NRG Encra, I n a In conncction with thc salc, Iw
changcd its namc to RRI Encrgy, Inc. Thc saIc docs not a h RRI’s contractual obIigations to indcmnify CcntcrPoint Encrjg and its subsidiarics,
including us, Tor ccmin I i a b i l i h , incIuding thcir indcmnificatian rcgarding ccrtain litigation, nor does it affcct thc tcrms of cxisting guaranty
arrangcmcnts for ccrlain RRI gas transporntion conmcls discusscd above.
RcIiant Encrgy and RRI arc namcd a dcfendants in a number of lawsuits arising out of s a l s of natura1 gas in CaIifornia and othcr markcts.
s
Allhough thcsc mattes rcIatc to thc busincss and operations of M , I claims against Rcliant Encrgy haw bccn made on grounds that incIude
Iiabitity of RcIiant Encrw a a controIling sharcholdcr of RRI. W c and CcnterPoint Encrgy could incur liability if cIairns in onc or mort: of thcsc
s
Iawsuits wcrc succcssfulIy asserted against CIS and CcntcrPoint Encrw and indcrnnification from RRI wcrc dctctmincd to bc unavailable or if
RRT wcrc unablc to satisfy indemnification obfigalions owed with rcspcet to thosc claims.
The uiisettled conllitioits iti the gIobal jilraticia! sysiem may bove inqmci% or1 our busirtm, Iiquirlfy and finandal conditioti that we
currently cannot prcdicL
TIic rccent crcdit crisis and unsettfcd conditions in thc gIobaI financial systcrn may h a w an impact on our busincss, Iiquidity and financial
condition. Our ability to access thc capita1 markcts may bc scvcrcly rcslrictcd at a time whcn we wouId likc, or nccd, to acccss those markcts,
which could h a w an impact on our liquidity and flcxibilily to rcact to changing txonomic and busincss conditions. In addition, thc cost of dcbt
financing may bc matcrialiy adversdy impactcd by thcsc rnarkct conditions.Defaults of lcndcrs in our crcdit facilitics, should thcy furlhcr occur,
couId adversely affcct our liquidiky. Capihl rnarkct turmoil was aIso reflccted in significant rcductions in cquity rnarkct vahations in 2008.
which significantIy rcduced thc vahe of assets of CcntcrPoint Encrgy’s pcnsion plan. Thesc rcductions incrcascd pcnsion cxpcnsc in 2005).
In addition to the crcdit and financial: market issucs, a rccumncc of nationaI and Iocal rcccssionary conditions may impact our busincss in a
varicly of ways. Thcsc includq among othcr thing, rcduced customcr usqc, incrcacd custorncr dcfauh ratcs and widc swings in commodity
priccs.
Ciintafcchatigc IegtkIation and replatog initiatives could result itt increased apmating cos& and rcdiiced demandfor our smica,
Lcgislation to rcgulatc cmissions of grcenhouse gascs has bccn introduccd in Congrcss, and lhcre h a s bccn a widc-ranging policy dcbatc,
both nationaIly and internationally, rcgarding thc impact of thcsc gases and possibk m a n s for thcir rcgulation. In addition, cffoorts h a w bccn
madc and continuc to be made in thc intcrnational community toward the adoption ofinternational trcalics or protocols that would addrcss globaI
clirnatc changc issucs, such a thc Unitcd Nations Climatc Change Confcrence in Copcnhagcn in 2009. Also, thc EPA has u n d c d c n ncw
s
cfforts to collcct information rcgarding grccnhausc gas cmissions and thcir cffccts. RccentIy, the
19
Table oJConietis
EPA dcclarcd that certain grecnhousc gascs rcprcscnt an cndangcrmcnt to human health and proposod to cxpand its regulations rclating to those
crnissions. It is too marly to determinc whchcr, or in what form, furthcr regulatory action regarding grecnhousc gas crnissions will bc adoptcd or
what spccific impacts a ncw rcguIatary action might have on us and our subsidiarics, Howcvcr, as a distributor and transporter of natural gas and
consumcr of natura1 gas in our pipclinc and galhcring busincsscs, our rcvenucs, operating costs and wpital rcquircmcnts could bc advcFscIy
affcctcd as a rcsdt of any regulatory a c h n that would rcquirc instaIlation of ncw control tcchnoIogies or a modification of our opcmtions or
would havc thc cffcct of reducing the consumption of natura1 &as. Likcwisc, incentives to conserve encrgy or use enerw sourccs olhcr than
natural gas could rcsuIt in a d c c r w c in dcmand for our swviccs.
Cliniate changes could residt in more frequent severe weather evcnls and warmer iempcratures which codd adversely aflecf fhe r a d & of
operufioitsa our businesses.
f
o
T thc cxtcnt clirnatc changes occur, our busincsscs may bc advcrscIy impactcd, though we bclicve any such impacts are Iikely to occurvcry
gradually and hcncc would be dificult to quantify with spccifieity. To the cxtcnt global climate change rcsuIts in warmcr tempetalurcs in our
scrvicc tcmtorics, financial resuIts from our natural gas distribution busincsscs couId be adversely affected through Iower gaii salcs, and our gas
transmission and field services businas= couId cxpcricncc lowcr revenues. Another possible cIimatc changc that has bccn widcfy discussed in
rcccnt y m is the possibility of mom frcqucnt and mom scvcre weather events, such as hurricanes or tornadoes. Sincc many of our facilitics arc
hurricanes or tomadocs can incrcasc our cos& to rcpair damagcd facilitics and
locatd a b n g or n u r thc Gulf Coast, incrcascd or more s e ~ c r e
rcstorc scrviu: to our customers. Whcn wc cannot dclivcr natural gas to customers or our customers cannot receive our scwiccs, our financia1
o
rcsults can bc impacted by lost rcvcnucs, and wc gcncrally must seck approval from regulators to rccovcr restoration costs. T thc cxtcnt wc arc
unablc to CCCOYCT thosc costs, or if highcr rata resulting from our recovery of such cosfs rmdt in rcduccd demand for our scrviccs. aur futurc
financial rcsults may bc adverscly impactcd.
.
It em 1B Unredved S h f Comnie;its
f
Not appfimblc.
Itcm 2. Propertics
Chawctcr of Ownership
Wc own our principal propcrtics in fcc. Most of our gas mains arc locakd, pursuant to easerncnts and other rights, on pubIic mads or on land
owncd by othcrs.
Natural Gas Distribution
For informalion rcgarding L c propcrtics of aur Natural Gas Distribution business scgrncnt, plcasc rcad “Busincss - Our Busincss -
h
Natural Gas Distribution -Asscts” in Itcm I of t i rcporf which information is incorpontcd hcrcin by rcfcrencc.
hs
Campctitivc Natural Gas Salts and Services
For information rcgarding thc propcrtics of our CompetitiveNatural Gas Salcs and Scwices business scgment, plcasc rwd “Busincss -Our
Busincss - Compclitivc Natural Gas SaIcs and Scrviccs - Asscts” in Item 1 of this report, which information is incorporatcd hcrcin by
rcfcrcncc.
Intcrstatc Pipelines
For information rcgarding tho propcrtics of our Tnterstatc Pipclincs busincss scgmcnt, plcasc m d “Busincss - Our Businas - Intcrstatc
Pipclines -Asscts” in Item 1 of this rcpott, which information is incorpomtcd hcrcin by rcfcrcncc.
20
Table o Conlcnts
f
For information regarding thc propertics of our FicId Scwiccs busincss scgmcnf plcasc r a d "Busincss - Our Business - Picld Sciviccs
-Assets" in Item I of this rcport, which information is incorpomtcd hcrcin by tcfcrcncc.
Item 3. LegaI Proceedrigs
For a discussion of matcrial Icgal and rcguIatory procccdings affecting us, pIcase read "Business - Regulation" and "Busincss -
Environmcntal Mattcrs" in Item 1 of this rcport and N o t a 3 and 9(c) to our consolidatcd financial statcrnents, which inrormation is incorpontcd
hcrcin by rcfcrcncc.
Item 4. Reserved
PART I1
Item 5. Markelfor Regirtrant s
' Equity, RehtedSCockholder Matters and Issuer Purchases o
Convll~n f Eqitity Securities
All of thc 1,000 outstanding shares of CERC Corp.'~ common stock arc hcld by UtiIicy HoIding, LLC, a wholly owned s u b s i d i q of
CcntcrPoint E n e w .
In cach of 2007,2008 and 2009, wc paid dividcnds on our common stock of SI00 million to Utility Holding, LLC.
Our revolving crcdit facility and our rcccivablcs faciIily Iimit our dcbt a a pcrccntagc of total aapitaIhtion to 65%. Thcsc covcnanls couId
s
rcstrict our ability to distribute dividends.
Itcm 6 Seieded financial D R ~ R
.
Thc information callcd for by Itcm 6 is omittcd pursuant to Instruction I(2) to Form IO-K (Omission of Information by Ccrtain WhoIly
Owned Subsidiaries).
Itcm 7. Maitagcment's NarrativeAnalysis o ResuIts o OperaiiOns
f f
stamtents uttd nofer conrained i Ilcm 8 0
Thefoilawing narrative analysis shorild be read in combilialion with our conrolida~cdfittanciai n 1
/his rcpotl.
Background
Wc own and opcntc nalum1 gx distribution systcms in six statcs. Our subsidiarics own intcrskitc natutal gas pipclincs and gas gathering
systcms and pmvidc various ancillaty scrviccs. A wholly owncd subsidiary of ours offcrs variabk and fixcd-prim physiuI natural gas supplics
prirnariIy to commercial: and industrial customcrs and clcctric and gas utilitis. Wc arc an indircct whoIly owned subsidiary of CcntcrPoint
Encrgy, Inc. (CcnkrPoint Encrgy).
Busincss Sgrncnts
Bccausc wc am an indircct wholly owncd subsidiary of Centerpoint Enerpy, our dctcrmination af rcportablc scgmcnts considcrs Lhc
stratcgic opcmting units undcr which CcntcrPoint Encrgy manages sales, allocates resources and asscsscs pctformancc of various produck and
scrviccs to whofcsaIc or rclail customcrs in diffcring regulatory cnvironments. In this scclion, we discuss our rcsults an a consoIidatcd basis and
individually for cach of our business scgmcnts. Wc also discuss our liquidity, capita1 resources and critical: accounting policics. Thc rcsults of
our busincss opcntions arc significantly irnpactcd by wwthcr, customer growth, economic conditions, cost managcrncnf mtc p r o c e d i n g bcforc
regdatory agcncies and olher actions of thc various rcguIatory agencics to which we are subject. Our natural gas distribution scrviccs and
interstate pipelines businm scgmcnts arc subjcct to rate rcgdation. A summary of our rcportablc busincss scgmcnts as of Dcccrnbcr 31, 2009 is
set forth bcf ow:
21
Natural Gar Disfrihutiun
Wc own and opcratc our regulated natural gas distribution busincss (Gas Opcntions), which cngagcs in intrastate natural gas sales to, and
natural gas transportation for, approximatdy 3 2 million midentid, commercial and industrial customcrs in Arkansas, Louisiana, Minncsota,
Mississippi, Oklahoma and Tcxas.
Competitive Natural Gas Sales andsenices
Our opcrations also indude non-ratc rcylatcd rcfail and wholcsdc natural gas salcs to, and transportation scrvicfs for, commcrcial and
industria1 customers in 18 states in fhc ccnml and mstcrn rcgions of the Unitcd S a c .
tts
Inhmtafe Pipelines
Our interstate pipelincs busincss owns and opcratcs approximatdy 8,000 miles of natural gas transmission lincs primarily loutcd in
Arkansas, Illinois, Louisiana, Missouri, Oklahama and Tcxas. It also owns and operates six natura1 gas storagc fields wih a cornbincd daiIy
dclivcrability of approximatcly 1.2 billion cubic fcct (Bcf) and a cornbincd working gas capacity of approximately 59 Bcf. It also owns a 10%
intcrcst in an SO Bcf Bistinuu storagc facility Iacatcd in BicnviIlc Parish,Louisiana, with the remaining intcrest owncd and opcratcd by Gulf
South PipcIinc Company, LP. Most slomgc opcntions arc in norlh Louisiana and Oklahoma
Our ficld scrviccs businas owns and opcrates approximately 3,700 rniIes of gathering pipclincs and proccssing plants h a t collcct, trmt and
process natunl gas fmm approximatdy I40 scpmtc systems locatcd in major producing ficlds in Arkansas, Louisiana, Oklahoma and Texas.
Ollter Opetations
Our olhcr opcralians busincss scgmcnt indudcs unallocatcd corporate costs and inter-segment eIiminations.
EXECUTIVE SUMMARY
Factors Influencing Our Business
We arc an cncrgy dcIivcty company. ?hc majority of our rcvcnucs arc gencntcd from thc gathcring, prnccssing, transporhtion and saIe of
natural gas by our subsidiarics. To asscss our financial pcrformancc, our managcmcnt primarily monitors opcrating income and cash flows from
our four busincss scgmcnts. Wilhin thcsc broadcr financial mcasurcs, wc monitor margins, opcmtion and maintcnancc cxpcnsc, intcrcst cxpcnsc,
capita1 spcnding and working capihl rcquircmcnts, In addition to rhcsc financial mcasurcs wc also monitor a numbcr of variabIcs that
rnanagcment considcrs important to the opcration of our busincss scgmcnts, inchding thc numbcr of cuslomcrs, Lhroughpuf usc pcr customcr,
commodity priccs and hcating degrec days. We a h monitor system reliability, safety factors and customer satisfaction to gaugc our
pcrformancc.
To ihc cxtcnt thc advcrsc cconomic conditions affcct our supplicrs and customcrs, results from our cncrgy dclivcry busincsscs may
suffcr. Rcduccd dcmand and lowcr cncrjg p i c a couId Imd to financial prcssure on somc of our customcm who opcratc within thc cncrgy
industry. Also, advcrsc cconomic conditions, couplcd with mnccms for protccting thc cnvironmcnt, may cmsc consumcrs to usc lcss cncrgy or
avoid cxpansions of thcir facilitics, raulting in Icss dcmand for our scrviccs.
Pcrformancc of our Natura1 Gas Distribution busin- scgmcnt is signifimntIy inff ucnccd by thc numbcr of customcrs and cncrgy usagc pcr
custorncr. Wmthcr conditions a n havc a signifimnt impact on encrgy usagc, and we comparc our rcsults to wcathcr on an adjustcd basis. During
2009, wc eontinucd to scc cvidcncc that customcrs arc sceking to conserve in thcir encrgy consumption, prtrticuIarly during pcriods of high
cncrgr priccs or in tirncs of economic distress. That conservation can have adversc cffecls on our results. I n many of our scrvicc arcas,
particularly in thc Hauston arm and in Minncsota, wc havc bcncfitcd fmm customcr growth that tcnds to mitigatc thc cffccts of rcduccd
consumption. Wc anticipatc that this growth wil1 continuc dcspitc rcccnt cconomic downturns, though that growth may bc lowcr than wc havc
rcccntfy cxpcn'cnccd in thcsc arcs. In addition, thc
22
Table aJContcnls
profitability of thesc busincsscs is influenced significantly by the regulatory treatmentw receive from h c various stale and local rcgulalors who
e
sct our gas distribution rates. In our rcccnt Gas Opcmtions ratc filings, we have sought mtc mcchanisms that hclp to dccouplc our rcsults f o rm
thc impacts ofweathcr and conservation, but such rate mechanisms have not yet bcen approved in 3 1jurisdictions. Wc pIan to conlinuc to putsuc
1
such dccoupling mcchanisms in our ratc filing.
Our Ficld Scrviccs and Intcrstatc Pipdincs busincss scgncnls arc currcntly bcnciiting fiom thcir proximity to ncw natunl gas producing
rcgions in Texas, Arkansas, Oklahoma and Louisiana, Our Interstate Pipclines business segmcnt bcncfitcd from ncw projccts pfaccd into scrvicc
in 2001) on our Carthagc to Perryvillc linc. In our FicId Scrviccs busincss scgmcnf strong drilIing activity in thc ncw shaIc producing rcgions
has helpcd offsct dcclincs in drilling activity in tmditionat producing rcgions duc to the cffccts of thc cconornic downturn and significantly Iowcr
commodity priccs in 2009. In monitoring pcrfonnancc of thc scgmcnts, wc focus on throughput of the pipclincs and gathcring systcms, and in
thc cast of Ficld Scwiccs, on wcll-conncck.
Our CompctitivcNatural Gas SaIcs and Scrviccs busincss scgmcnt contracts with customcrs for transportation, stongc and salcs of natural
gas an an unrcgulakd basis. I& opmtions scwc customcrs in thc ccntraI and ustcrn rcgions of thc Unitcd Stales. T h c scgmcnt bcncfits from
favonbfc pricc diffcrcnlials, cirhcr on a geographic basis or on a seasonal basis. While it utilizes financial: derivativcs to h c d p ik cxposurc to
pricc movcmcnts, it docs not engagc in spcculative or proprietary trading and maintains a low value at risk lcvcl or VaK to avoid significant
financial cxposurcs. Lowcr commodity priccs and low price diffcrcntiaIs during 2009 advcrsefy affccted rcsuIfs for this busincss scgtncnt.
The naturc of our busincsses rcquircs significant amounts o f capital invesment, and we rcIy on intcrnaIly gcncrated wsh, borrowings undcr
our credit facilities, issuitnccs of debt in thc capital markets and capital contributions fmm our parent to satisfy rhcsc wpihl nccds. Wc strivc to
maintain invcstmcnt gndc ratings for our sccurities in ordcr to acccss thc capital markcts on tcms wc considcr rcasonablc. Our goal: is to
improvc our crcdit mting ovcr time. A reduction in our ratings generally would increase out borrowing wsls Tor nMy issuances of dcbt, as wcll
as borrowing costs undcr our cxisting revoIving credit facility. Disruptions in the financia1 rnarkels, such as occumd i thc last half of 2008 and
n
continucd during 2009, can also affcct thc avaiIabiIity of ncw capital on t c m s \ye considcr attmctivc. In thosc circumstances cornpanics likc us
may not bc able to obtain certain types ofcxtemal financing or may be rcquircd lo accept terms less favonbfc than thcy wouId ohcnvisc acccpt.
For that w o n , wc scek to maintain adcquatc liquidity for our businesses through our existing crcdit facility and prudent rcfinancing of cxisting
dcbt. Wc cxpect to cxpcriencc higher borrowing costs and grcatcr unceminty in executing capita1 markcts transactions givcn thc currcnt
unccrhintics in thc financial m r e s
akt.
As it did with many busincsscs, thc sharp dcclinc in stock markct vaIucs during thc lattct part of ZOOS had a significant advcrsc impact on
thc vaIuc of CcntcrPoint Enew's pcnsion plan asscts. W h i b that impact did not rcquirc us to makc additionai contributions to thc pcmion plan,
it significantly incrcascd thc pension expense wc recognized during 2009 and expect to recognize in 20 I O for a11 our busincss scgmcnts, and wc
may nccd to make signifimt cash contributions to CcntcrPoint Enerpy's pension plan subscqucnt to 2010.
Significant Evcnts
Gas Opcntions suffcrcd some damagc to its system in Houston, Tmas and in othcr portions of its scwicc territory across Tcxas and
Louisiana a a rcsult of H r i a e Ikc, which shuck the upper T x s coast in September 2008. As oTDcccmbcr 31,2009, Gas O p c d o n s has
s urcn ea
dcfcrrcd approximatdy $3 milIion of costs rclatcd to Hurrimnc Ikc for rccovcry as part of natura1 gas distribution n t c procecding.
Long-Term Gas Gathering and Treattwit Agreemenls
In Scptcmbcr 2009, CentcrPoint Energy Ficld Sewiccs, Tnc. (CEFS),our wholIy-owned natunl gas gahcn'ng and trmling subsidiary,
cntcrcd into Iong-tcnn agrcmcnts with an indircct wholly-owned subsidiary of EnCana Corporation (EnCana) and M indircct whoily-owncd
subsidiary of Royal: Dutch ShclI PIC (Shell) to provide gathcring and treating scrvices for thcir natural gas production from ccrhin HayncsviIlc
ShaIc and Bossicr Shalc formations in Louisiana.CEFS also acquircdjointIy-ownd gathcting facililics from EnCana and Shcil in D Sot0c
23
Table o Cantcnts
f
and Rcd Rivcr parishcs in northwest Louisiana. Each of fhe agrccmcnts indudcs acrcagc dedication and volume commitmcnts for which CEFS
has rights to gathcr Sbll's and E n h a ' s natural gas production f o thc dcdicatcd arw.
rm
In conncction with thc agreements, CEFS commcnccd gathcring and trmting scrvices utilizing the acquircd facilitics. CEFS is cxpanding thc
acquircd facilitics in order to gather and treat up to 700 million cubic fcct WMcf) pcr day of natural gas. If EnCana or ShclI cIcct, CEFS wiIl
furthcr cxpand thc facilities in order to gather and trmt additional futurc volurna. Thc construction nccessaty to rcach thc contractual capacity
of 700 MMcf pcr day incIudcs mom than 200 mifes of gathcrirtg Iincs, nearly 25,500 horscpowcr of compression and w c r 800 MMcf pcr day of
trcating capacity.
CEFS cstimatcs that thc purchasc of existing facilitiesand construction to galhcr 700 MMcf pcr day wiIl cost up to $325 miIlion. If EnCana
and Shcll clcct cxpansion of the project to gathcr and process additional futurc volumcs of up to I Bcf pcr day, CEFS cslimalcs that thc
cxpansion would cost as much as an additional $300 million and EnCana and Shell would providc incrcmcntal volumc commitmcnts. Funds for
construction arc bcing providcd from anlicipatcd cash flows f o opcmtions, Iincs of credit, proceeds from thc saIc ofdcbt sccuritics or capital
rm
contributions from our parent. As of Deccmbcr 31, 2009, $176 million had bccn spent on the projcct, induding thc purchasc of misting
facilities.
Dcbt Finanung Trumadions
In August 2009, Southcast Supply Header, LLC (SESH) cIoscd on a private dcbt offcring in thc m o u n t of $375 million. Also during 2009,
wc madc a capita1 contribution to SESH in thc amount of%137 miIlion. Using $186 minion of its proceeds from rhc dcbt offcring and thc capital
contribution, SESH rcpaid the nok rcccivable it owed to us, which nolc had a principal balance of $323 minion at the timc of the rcpaymcnt W c
uscd thc procccds to rcpay borrowing undcr CBRC Corp.'s ercdit facility.
In Octobcr 2009, thc s i x of CERC Corp.'s rcvohing credit M I i t y was rcduccd from $950 million to $915 milIion through rcmoval of
Lchman Brothcrs Bank,FSB (Lchrnan) as a lender. Prior to ils rcmovd, Lchman had a $35 rniIlion commitment to Iend. AI1 crcdit facility loans
to CERC Corp. that wwc fundcd by Lchrnan wcrc rcpaid in Scpkmbcr 2009.
In Octobcr 2009, wc amcndcd our rcccivablcs facility to extend thc tcmination datc to Oclobcr 8. 2010. AvaiIabiIity undcr our 364day
meivabfes facility ranges from f 150 milIion to $375 rniIlbn, rcflecting seasonal changes in rcccivabIcs balanccs.
In January 2010, wc rcdccmcd $45 milIion of our outstanding 6% convcrtibIc subordinatcd dcbcnturcs duc 2012 at 100% of thc principal
amount pIus accrucd and unpaid intcrcst to thc rcdcmption datc.
Ass& Mattagcmeirt Agreeme&
In 2009, Gas Opcntions cntcrcd into various asset management agrccmcnts associakd with its utility distribution scwicc in Arkansas,
Louisiana, Mississippi, Oklahoma and Texas. Generally, these asset managcrncnt agrccmcnts arc contracts bchvccn Gas Opcmtions and an w e t
mattagcr that arc intcndcd to transfcr thc working capihl obligation and maximizc thc utilization of thc asscts. In thcse agreements, Gas
Opcntions q p x d to rclcasc transportation and storagc mpacity lo othcr partics to managc gas storagc,suppIy and delivcry arranpmcnts Tor Gas
Opcnlions and to USC thc rclcased capacity for other p u p o m whcn it is not nccdcd for Gas Opcmtions. Gas Opcmtions is compcnsated by thc
assct managcr through paymcnts madc over thc Iirc of thc agccrncnts bawd in part on thc rcsults of thc asset optimization. Gas Opcntions has
rcccivcd approva1 fmm thc statc regulatory commissions in Arkansas, Louisianq Mississippi and OkIahoma to rctain a sharc of thc assct
managcrncnt agrccmcnt pracccds, although thc pcrccnhge of paymcnts to bc rclaincd by Gas Opcntions varics bascd on tIic jurisdiction, with
thc majority of thc paymcnts to bcncfit customers. The agrcerncnfs havc wrying tcrms, thc longest of which cxpircs in 2016.
24
Tablc o Canmtts
f
CERTAIN FACTORS AFFECTING FUTURE EARNINGS
Our past camings and rcsults of operalions arc not n e c m a i l y indicative of o w future m i n g s and results of operations. The magnitude of
our future carnings and results of our opcmtions will depend on or be affcctcd by numcmw factors including:
state and fcdcml Icgislativc and regulatory actions or dcvclopmcnts, including dcrcgulation, rcrcgulation, hcalth carc rcform, and
changes in or application of Iaws or tcgulations appliwblc to thc various aspccfs of our busincss;
statc and f c d c d lqislativc and rcyIatoty actions, dcvclopmcnts or regulations relating to thc environmcnt, inchding thosc rclatcd la
global climatc changc;
timcly and approprialc n t c actions and incrwsa, a h w i n g recovery of costs and a reasonabIe return on investment;
cast o v m n s on major capital projccts that cannot bc rccoupcd in prices;
industrial, commercial and rcsidcnlial growlh in our scwicc territory and changcs in markct demand and demographic patterns;
Lhc timing and cxtcnt of changes in commodity prices, particularly natural gas and natural gas liquids;
- he timing and extent of changes in the supply of natura1 gas, including suppIies avaiIabIe for gathering by our fidd scrvices busincss;
thc timing and cxtcnt of changcs in natura1 gas basis diffcrcntials;
weather variations and othcr natural phenomena;
- changcs in inter& rates or mtcs of inflation;
commercial bank and financial markct conditions, our access to apita1, the cost of such capital, and the results of our financing and
refinancing eflorts, including availability of funds in the debt capita1 markets;
- actions by rating agencies;
cffcctivcncss of our risk managcemcnt activities;
- inability ofvarious counterpartics to meet their obligations io us;
- non-payment for our sewiccs duc to financial distress of our customers;
thc abiIity of RRI Encrgy, Inc. (RRI)(fomcrly known as Rcliant Encrgy, Inc. and Rcliant Rcsourca, Inc.) and its subsidiarics to satisfy
fhcir obligations to us, including indcmnity obligations, or in conncction with thc contraclual amngcmcnfs pursuant to which wc arc
fhcir guarantor;
. thc outcome of Iitigation brought by or against us;
. our ability to conk01 costs;
thc invcstmcnt pcrfomancc of CcntcrPoint Energy's cmploycc bcnclit plans;
our potcntial busincss stmtcgics, incIuding acquisitions or dispositions of asscts or busincsscs, which wc cannot assurc will be
eomplctcd or will havc thc anticipalcd bcncfits to us;
9
acquisition and mcrgcr activilics involving our parcnt or our compctitors; and
25
Table o Conrcm
f
other factors wc discuss under "Risk Factors" in Ttcm 1A of this report and in orher rcporfs wc filc from timc to timc with thc Sccuritics
and Exchangc Commission.
CONSOLTDATED KESULTS OF OPERATIONS
Our results of operations arc affcclcd by scasonal: fluctuations in thc dcmand for natural gas and price movcmcnfs of cncrgy commodities a s
we11 as natural gas basis diffcrcntials. Our resuIts ofopcmtions are also affected by, among olhcr things, the actions ofvarious fcdcnI and state
governrncntal authoritics havingjurisdiction ovcr rata wc charge, competition in our various busincss operations, dcbt sctvicc costs and income
tax expcnsc.
The folhwing tabb scts forth selected financial data (in millions) for the years cndcd Dcccmbcr 31, 2007, 2OOX and 2009, foIlowcd by a
discussion of our consolidalcd rcsults of opcratiom bascd on opcmting income. We have providcd a meonciliation of consoIidated opctating
incomc to nct incomc bclow.
Y a r Badul Dccembcr31,
2007 2008 200'1
Revenucs s 7,776 $ 94395- $ : 6,257
Expcnscs:
Natural gas: ,?,,I
.I 5,995 7,466 * 4,371
Opcntion and maintcnmcc 800 828 922
Dcpreciation and amortization 21s 218 229
T x s othcr lhm incornc taxa
ae 140 166
... lclG
.__
Total:. -
Optrating Incomc
Intcrcstandothcr financechargcs
Equity in camings of unconsolidatcdaffiliates
Ohcr incornc, nct 5 3, 5
Incomc Bcforc Incomc T x s
ae 460 57 1 376
IncomcTax Expcnsc (173) J228- 6 )
(14 1
Nct Tncomc $ 287 $ 343 s 230
2009 Compared lo 2008. Wc rcportcd nct incornc of $230 milfion for 2009 compared lo $343 million for 2008. Thc dccrcasc in nct
I
income of S 13 million was primady due to a $148 miflion dccrcasc in opcrating incomc fiorn our business scgmcnfs as discusscd bclow, ;1
S36milIion dccrcasc in equity in mrnings of unconsolidatcd affiliates and a %7milIion incrwsc in inlcrcst cxpcnsc, partidly offsct by an
$82 m i l h n dccrmsc in incomc tax cxpense due to Iower mrnings.
Income Tar Expense. Our 2009 cffective tax rate or38.8% diffcrcd from thc 2008 cffectivc tax rate of40.0% primarily duc to a Eduction
in state incomc taxes rclatcd lo adjustmcntsin prior ycars' state cstimates in 2009. For marc information, 5cc Notc 8 to our consofidatcd financial
statements.
ZOO8 Compwcdio 2007. W reportcd nct incomc of $343 milIion for 2008 compared lo $287 million for 2007. Thc incrmsc in nct incomc
c
ofS56 million was prirnady due to a $91 milIion incrcase in opcrating income from our business scgmcnls a discusscd bclaw and a S35 million
s
incrcasc in quity in awnings of unconsolidated amIiatcs rcIatcd primarily to SESH, partiaIly offsct by a $55 milIion incrcasc in incomc tax
cxpcnsc duc to highcr carnings and a $19 milIion incrcasc in intcrcst cxpcnsc.
Inconic Tux Erpanse. Our 2008 cffcctivc tax mtc of 40.0% differed from the 2007 cffcctivc tax tatc of 37.6% primarily duc to the
scttlcrncnt in 2007 of our prior-yur stale incomc tax rcturn examinations.
26
Tubic of Conlcnts
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
The folhwing tablc prcscnts opcmting incomc (in millions) for cach of our business segments for 2007, 2008 and 2009. Included in
rcvenucs arc intcacgmcnt saIcs. Wc account for intcrscgmcnt salcs as ifthc salcs were to third parties, that is, at current market prim.
Opcrating Incomc (Loss) by Businrss S e p c n t
Yur Ended flcccrnbcr 31.
2007 2008 2009
Natural Gas Distribution $ 218 $ 215 $ 204
Compctitivc Natura1 Gas Salts and Scrviccs 75 62 . . 21
Interslate PipcIines ' 3
27 I ' 233 2%
Ficld Scrviccs 99 147 94
Othcr Opcm lions (31 . ' ,I
- L 03
T t l Consoiidatcd Opcmting Incomc
oa s 626 S 717 S 569
Natural Gas Distribution
The following h b b providcs summary data of our Natural Gas Distribution busincss segment for 2007,2008 and 2009 (in milIions, cxccpt
rhroughput and customcr data):
Year E n d d Dmmber 31.
2007 2008 2009
Revcnucs s 3,753 s 4,226 . $ - ' 3384
Expcnscs:
Natural gas 2,683 ' ' 3,124 . ?t=r
Opcration and maintcnancc 579 589 639
Dcprcciation and amortization I55 a 157 ' ' 161
Taxcs othcr than incornc taxa I 24 141 129
Total expenst5 3,541 4.01 I 3,180
Opcrating Incomc s 218 S 215 S 204
I
Throughput (in Bcf):
Rcsidcnlial I 72 175 173
Cornmcrcial a i d industrial
. . 232
< .
236 * 233
Tola1 Throughput 404 411 406
Number of customcrs at cnd of pcriod: , .
Residcntial 2 9 1 f 10
,6, 5987,222 3,002,I 14
Commcrcial and industrial 249,877 24 8,476 244,101
Told 3210.917 3,235,638 3,246,215
2009 Cumpurcd 10 2008. Our Natural Gas Distribution busincss scgmcnt rcportcd opcmling incomc of $204 milIion for 2009 comparcd to
5215 milIion for 2008. Opmting income declincd ($1 I million) primarily as a r a u l t of incrcascd pcnsion cxpensc ($37million) and higher
labor and othcr bcncfit costs ($16 milIion), partidly offsct by incrwcd rwcnucs from rak increases ($36 m i l h n ) and lowcr bad dcbt cxpcnsc
($15rniilion). Revcnues rcIatcd to both cncrgy-cficicncy costs and gross rcceipts taxcs arc substantially offsct by thc rcIatcd cxpcnscs.
Dcprcciation and amortiration cxpcnse incrcascd $4 million primady due to higher plant balanccs. Taxa othcr than incomc taxes. nct of thc
dccrcasc in gross reccipts W s ($16 million), i n c w c d $4 million also prirnady duc to higher plant balanccs.
c
2008 Conrpredfo 21107. Our Natural Gas Disrribution business segment rcportcd opcmting incomc of $215 milIion for 2008 comparcd to
$21 8 milIion for 2007. Opcnting incomc dcclincd in 2008 duc to a combination of non-wcathcr-rclatcd usagc ($13 million), duc in part to highcr
gas pn'ccs, highcr customer-related and support scrviccs costs ($9million), higher bad debts and colIcctbn costs ($4 miIlion), i n c w c d cas& of
matcrials and supplics ($4 milIion), and an incrcasc in dcprcciation and amortization and taxa othcr than incomc t x ($3 million) rcsuIling
aa
from incrlrscd investment in property, plant and cquipmcnt. The adverse impacts on operating incornc wcrc partially offsct by thc nct impact of
ratc incrcascs ($11 million). lowcr labor and bencfits costs ($14rnilIian), and customcr growlh from the addition of approximately
25,000 customcrs in 2008 ($6miIlion).
27
Toblc o/Conrcnrs
Campctitive Natural Gas Salcs and Services
Thc foIlowing tabIc providcs summary data of our Compctitivc Natural Gas S a l s and Scrvim busincss segmcnt for 2007,2008 and 2009
(in miIIions, cxccpt throughput and customcr data):
Y a r E n d d Dercmber31,
2007 2008 2007
Revenues. - . . . .. . .
, $ 3.579 $ 4.528 $ 21230
Expenses:
Natura1 gas 3,467 4,423 .. '2,165
Opcration and maintcnancc 31 .. . 39 .
-3 ' 39
Depreciation and amortization 5 ' I ' . + 4
Taxa other ihan incomc taxa I 1 I
TotaI expenses' .
' , .. 3.504 '4.466 ' ' 2,209
Opcnting Incornc $ 75 $ 62 $ 21
Throughput (in Bcf) 522 528 SO4
Nurnbcr of customcis at cnd of period 7,139 9,77I 11,168
2009 compared l o 2008. Our CompctitivcNatura1 Gas Sales and Scrviecs busin= segment reported opcrating incomc of $21 million for
2009 cornparcd to $62 milIion for 2008. Thc dccrcasc in operating incomc of $41 million was due to the unfavorablc impact of thc mark-tw
markct valuation for non-trading financia1 dcrivatives for 2009 of $23 miIlion versus a favorabfc impact of $13 million for the samc pcriod in
2008. A furlhcr $28 million dccrcasc in margin is attributable to reduccd basis spmds on pipeIine transport opportunitics and an absence of
summer stomgc spreads. Thcsc dcacases in operating incornc were partially offsct by a $6 million write-down of natural gas invcntory to thc
lowcr of cost or markct for 2009 compared to a $30 milIion write-down in tho samc pcriod 1st year. Our Cornpctitivc Natural Gas Sal= and
Scrviccs busincss scgmcnt purchases and stores natural gas to meet cerhin future sal- rcquircmcnts and cntcrs into dcrivativc conmcts to hcdgc
thc cconornic value of thc futurc salcs.
2008 Compared to 2007. Our Competitive Natural Gas Sales and Services busincss scgmcnt rcportcd opcrating incomc of $62million for
thc ycar cndcd Decembcr 3 1,2008 compared to $75 million for thc year endcd Decembcr 31,2007. T h e dccrcasc in operating income in 2008
of $13 million prirnady rcsuItcd from lowcr gains on saIG of gas f o prcviously writtcn down inventory ($24 miIlion) and h i g h opcration
rm
and maintcnancc costs ($6 million), which wcrc partialIy offset by improved margin as basis and summerlwintersprcads incrcascd ($12 million).
In addition, 2008 incIudcd a gain fmm mark-to-markct accounting ($13milfion) and a writedown of natura1 gas invcntoty to thc lowcr of
avcrage cost ormarkct ($30 million), comparcd to a chargc to income from mark-to-rnarkct accounting for non-trading dcrimtivcs ($10 million)
and a write-down of natural gas invcntory to the lowcr of avcmgc cost or market ($1 1 miIlion) for 2007.
2s
Table oJContciik
Interstatc Pipclincs
Thc following hblc pmvidcs summay d a h of ow Intcrstatc Pipclincs busincss scgmcnt for 2007, 2008 and 2009 (in millions. cxecpt
throughput data):
Y u r Eudrd D~.embcr31.
2007 2008 2009
Rwcnucs 1 . ., 3 500 $ 650 $ . 538
Expcnscs:
Natural g x ' . 83 155 ., 97
Opctation and maintenance 125 133 . .
166
Dcprcciation and amortization 44 ,... . .46 .. , 48
Taxa olhcr than incomc taxcs 11 23 31
" k expenses: .
-,OI
' , 263 357 .. : 342
Opcnting Incornc S 237 s 293 3 256
. . t . -
Ttansporhtion throughput (in Bcf) 1,216 1,538 1,592
2009 Compared l 2008. Our Interstatc PipeIine business segment reported operating incornc of $256 million for 2009 comparcd to
o
$293 million for 2008. Margins (rcvcnucs lcss natura1 gas costs) increascd S6 million primarily due to rhe Carthagc to Perryviltc pipclinc
($28 miIlion) and ncw contracts with powcr generation customcrs ($20 rnilhn), partially offsct by rcduccd other transportation margins and
ancillary scwiccs ($42 million) primarily duc to thc decIine in commodity priccs from the sigtificmtly highcr IcveIs in 2008. Opcratiom and
maintcnancc cxpcnscs incrcascd duc to a gain on thc salc of two stomgc dcvchpment projccts in 2008 ($18 milIion) and costs associatcd with
incrcmental faciIitics ($12 million) and incrmcd pcnsion cxpcnscs (S9million). Thcsc cxpcmcs wcrc partialIy o f k t by a write-down
associatd with pipdinc assets rcrnovcd from service in thc third quartcr of 2008 ($7 rniIlion). Dcprcciation and amortization c x p c n s ~
increased
$2 milIion and taxcs othcr than incomc taxes incrcascd by $8 milIion, $2 miIlion of which was duc to 2008 Iax rcfunds.
2008 Canpored to 2007. Our Intcrshtc Pipcline business segment rcportcd operating income of $2113 rniIlion for 2008 comparcd to
$237 million for 2007. The incrcase in opcrating income in 2008 was primarily drivcn by incrcascd margins (rcvcnucs lcss natural gas costs) on
a
tIic Carthagc to Pcrryvillc pipclinc that went into service in M y 2007 ($51 milIion), incrcascd tmnsporhation and anciIlary services
(!D7 million), and a gain on thc saIe of two storage devchpment pmjccts ($1 8 million). T h a c incrwcs wcrc partiaily offsct by highcr opcration
and mainlcnancc cxpcnses ($19 miIlion), a write-down associated with pipcIinc asscts rcrnovcd from scrvicc ($7 million), incrcascd dcpreciation
cxpcnsc ($2 miflion), and highcr taxes othcr than incornc hxcs ($12 milhn), largcly due to tax rcfunds in 2007.
IQuity Earnings. In addition, this busincss scgmcnt rccordcd cquity incomc of $6 miIlion, $36 million and $7 million in thc ycars cndcd
Deccmbcr 3 I, 2007,2008 and 2009, rcspcdvcly, from its 50% intcrcst in SESH,a jointIy-owned pipeline. Thc 2007 and 2008 ymr-end rcsults
includc $15million and $33 million of prcopcnting d D W a n C C for funds uscd during conslruction, respectivdy. Thc 2009 rEu1ts includc a non-
cash prc-tax chatgc of $16 million to reflcct SESH's decision to discontinue thc USC of guidancc for accounting for rcgulatcd opcrations, which
was partially offsct by thc rcccipt of a onc-limc paymcnt rclated to the construction of the pipeline and a rcduction in cstimated properly taxes, of
which our 50% sham was $5 million. Excluding the effect of thcsc adjustmcnts, cquity camings from normal opcrations was $3 million and
$18 rniIIian in 2008 and 2009, rcspcctive1y. Thcse amounts arc induded in Equity in Earnings of Unconsolidatcd AffiIiatcs undcr thc Othcr
lncornc (Expcnsc) uption.
29
Table o Contcnls
f
Fidd Scrviccs
Thc following tablc prwidcs summary data of our Field Scwiccs busincss segmcnt for 2007,2008 and 2009 (in milIions, exccpt throughput
data):
Yur Eudcd DrcunLcr31,
ZOO7 ZOOS 2009
Rcycnucs $ 175 E 252 $ - 241
Expcnscs:
Natural ias (41 21’ ’ 51
Opcmtion and mainknancc 66 69 77
Depreciation and amortization 11 12 15
Taxa othcr than incomc mcs 3 3 4
Totalccxpenses ’ . . . . . 76 105 147
Opcnting Tnmrnc $ 99 s I 47 5 94
Gathering throughput (in Bcf) 398 42 1 426
2009 Compared to 2008. Our Ficld Scnticcs business segmcnt rcporlcd opcmting income of $84million for 2009 cornparcd to
$147 rnilIion for 2008. Opcnting margin from new projccts and cocc gathering scrviccs incrascd approximatcly $24 million for 2009 whcn
cornparcd to thc samc period in 2008 primarily duc to continued devdopmcnt in thc shalc plays. This incrcase was offset primariIy by thc cffcct
of a dcclinc in commodity prices of approximatcIy $54 million from the significantly highcr priccs cxpcrienced in 2008. Opcrating incomc far
2009 dso indudcd h i g h costs associatcdwilh incrcmcntal fadities ($4 milfion) and incrcascd pcnsion cost ($2 rniIlion). Operating incomc for
ZOOS bcncfitcd from a one-timc gain ($1 1 million) rcIatcd to a settrement and contract buyout of onc of our custorncrs and a gain on saIc of
asscts ($G million).
ZOO8 Compared lo 2007. Our Ficld Scrviecs business segment rcportcd opcrating incomc of $147rnillion for 2008 cornparcd to
$99 miIlion for 2007. The incrcasc in opcnting incornc of $48 rni1Iion rcsultcd from highcr margins (rcvcnue lcss natural g a costs) from p i
galhcring, ancilrary serviccs and highcr commodity priccs (S34 million) and a one-timc gain rclatcd to a scttlcmcnt and contract buyout of one of
our custorncrs (S 1 I milIion). Opcrating cxpcnscs i n c m c d from 2007 to 2008 duc to highcr cxpcnscs moeiatcd with ncw asscts and gccnenl
cost incrcasa, partially offset by a gain rclatcd to thc saIc of asscts in 2008 ($6million).
h l r i l y Eurnings. In addition, this busincss scgmcnt rccordcd equity income of $10 milIion, $15 million and $8 milIion for thc ycars cndcd
Dccembcr31,2007, 2008 and 2009, rcspcctivdy, from its 50% intcrcst in a jointly-owncd gas proccssing pIant. Thc d e c m c is driven by a
dccrcasc in natunl gas liquid priccs. Thcsc amounts arc indudcd in Equily in mrnings of unconsolidatcd affiliates undcr he Othct Incomc
(Expcnse) caption.
FIuctuations in Commodity Priccs and Derivative Ynstrurncnfs
For information rcgarding our cxposurc to risk as a rauIt of fluctuations in commodity priccs and dcrivativc instrumcnts, plcasc rcad
“Quantifativc and QuaIihtivc Disclosurcs About Markct Risk” in Itcm 7A of this repoR
LIQUIDITV
Our liquidity and capita1 rcquircmcnts arc affcctcd primarily by our rcsults of opcrations, capital cxpcnditurcs, dcbt scrvicc rcquircmcnts,
tax paymcnts, working capihI nccds, various regulatory actions and appeals relating to such actions. Our principaI anlicipatcd a s h rcquircmcnts
for 2010 include approxirnatcly $613 milIion of capita1 cxpenditures and S45 milIion for our January 2010 rcdcrnption of dcbcnturcs.
W c cxpcct that bornwings undcr our crcdit facility, advanca undcr our rcceivablcs facility, anticipated cash flows from opcntions and
intcrcompany borrowings will bc sufficient to mcet our anticipatcd a h nccds in 2010. Cash nccds or discretionary financing or rcfinancing may
rcsuft in thc issuancc of dcbt sccuritics in thc wpital markcts or thc anangcmcnt of additionai crcdit faciIitics. Issuanccs of dcbt in (hc capila1
markcts and additional. crcdit facililics may not, howcvcr, be avaiIable to us on acceptablc tcrms.
30
TobIc OfCOnrEnrS
Thc following tabIc scls forlh our capital cxpenditurcs for 2009 and cstimatcs of our capital tcquircmcnts for 2010 ihtough 2014 (in
millions):
20011 m a zati 2012 2013 Z[lU
Natural Gas Distribution s 165 $ 210 s 237 $ 241 $ 259 $ 248
Compctitivc Natural Gas Salcs and
Scrviccs 2 6 4 16 5 5
- .
Inlcrstab5Pipcline.s ' 176 171 132 245 164 94
Ficld Scrvic& 348 226 I63 I26 95 85
..
Total - $ 691 $ GI3 $ 536 S 628 $ 523 3 432
Thc folIowing tablc scb forth cstimalcs of our contractuaI obligations, incIuding payrncnts duc by pcriod (in millions):
2015 and
CoI i dual 0 b l i p t T [LF
I n o TohI 2010 2011-fO12 2013-zo14 f h ~ ~ l c r
Long-krm dcbt : . . $ 2,786 S 44 $ 550 $ 924 ' $. . 1,268
-
Interest paymcnts long-tcrm dcbt( 1) I, 4
44 191 319 203 731
Short-tcnn borrowings 55 55 I I I
Openting Icasscs(2) 51 12 22 IO 7
Bcncfit obligations(3) I - I
Purchasc obIigalions(4) . . 9 9 , , . .
I
Nori-tradin8 dcriyativc Iiabilitics 93 '51' .
..I
-42', I -
. .....*
Olhcr commodily commifmcnls(5) 2,558 439 917 653 543
Incomctaxcs(a, , ,I
,, I I I
.
, -
I.
-
s
~
Total conlracluaf cash obligations so1 $ 1,850 $ 1.796 s 2349
(1) Wc calculatcd cstimakd intcrwt paymcnk for Iong-tcrm dcbt as follows: for fixcd-mtc dcbt and tcrm dcbt, wc calculatcd intcrcst bascd
on thc appIimbIc rates and payment dates; for variable-ntc dcbt and/or non-tcrm dcbf wc usod intcrcst r t in plact: a of
aa s
Dcccmbcr 3 1,2009. Wc t y p i d y expcct to scttle such intcrcst payrncnts wilh cash ff ows from opcrations and short-tcrm borrowings.
(2) For a discussion of operating Icascs, plcasc r a d Nok 9(c) to our consoIidatcd financial shtcments.
(3) Wc cxpcct to contributc approximatcly $9 million to our postrctircmcnt bcnctits plan in 20 10 to fund a portion of our obligations in
accordancc with ratc ordcts or to fund pay-as-you-go costs associated with thc plan.
(4) Rcprcscnts capital commitmcnts for matcrial in connection with our Interstatc Pipclincs busincss scgmcnt.
(5) For ;discussion of othcr commodily commitments, please read Note 9(a) to our consolidatcd financial statcrncnts.
I
(G) As of Dcccmbcr 31, 2009, the liability for uncertain incornc tax positions was $6 million. Howcvcr, duc to thc high dcgrcc of
unccminty rcgarding thc timing of potcntial fulurc cash flows associated with thcsc liabilities, we arc unabb to makc a rcasonably
rcIiablc cstimatc of thc m o u n t and pcriod in which any such liabilities might bc paid.
Ofl-Bdance Sheet Arrangcmen/s. Othcr than opcrating leas= and the guaranties dcscribcd bclow, wc have no off-balancc shcct
arranpmcnts.
Prior to CcntcrPoint Energy's distribution of its ownership in RRI to its shxcholdcrs, wc had gumntccd ccmin conmctual obligations of
what bccamc RRI's tndiog subsidiary. Whcn the companies scparatcd, RRT agrccd to sccurc us against obIigations under thc parantics IUZI had
bccn unablc to cxtinyish by thc iimc of scparation. Pursuant to such agrccrncnf as amcndcd in Dcccmbcr 2007, RRI has grccd to providc to us
cash or Icttcrs of credit as sccuriky against our obligations undcr our rcmaining y a n n t i e s for demand charges undcr ccrtain gas transportation
agrccmcnts if and to thc cxtcnt changcs in markct conditions cxpose us to a risk of loss on thosc guanntics. Thc prcscnt value ofthc dcmend
chatga undcr these transportation contracts, which w i l be effcctive until 2018, was approximatcly $96 million a of Dcccmbcr 31,2009. As of
Dcccmbcr 3 1,2009, RRI was not
31
Tublc oJConrcm
rcquircd to providc sccurity to us. If RRI shouId fail to pcrform thc contractual obligations, wc could have to honor our guamntcc and, in such
evcnt, colIatcm1 providcd as security may bc insufficient to satisfjr our obligations.
Debt Fitzattcing Transoc!ions . On August 13,2009, SESH issued 5375 milfion of 4.85% scnior notes duc 2014. SESH uscd onc-half of the
proceeds of thc nota to rcpay a construction loan to us in thc amount of %186miIIion. Wc uscd the procceds from thc construction loan
rcpaymcnt to rcpay borrowings under CERC Corp.3 crcdit facility.
In January 2010, wc rcdccmcd $45 miIlion of our outstanding 6% convertible subordinatcd debcntures due 2012 at 100% of thc principal:
amount pIus accrued and unpaid intcrcst to the redemption datc.
Crc& and Rcceivabfes Fmililies. In Octobcr 2009, the sizc of CERC Corp.'s revolving credit facility was roduccd from $950 million to
$915 milIion through rcmoval of Lchman as a Icnder. Prior to its removal, Lchmm had a $35 million commitment to Icnd. All crcdit facility
Ioans to CERC Corp.that wcrc funded by Lcliman wcrc rcpaid in September 2009.
In Octabcr 2009, wc amended our rcccivablcs facility to extend thc tcrmination date to Octobcr 8, 201 0. haifability undcr our 364-day
rcccivabIcs facilily ranges from $150 million to $375 million, reflecting seasonal changcs in rcccivabIcs balances.
As of Fcbruary 15,2010, wc had Ihc folIowing facilitics (in mil1ions):
Amount
Ulithcd at
Typed SL o r February 15.
nale E m x l i d Fadlily Facility 2010 Terminitinn Date
Junc 29,2007 . RevoIvet s . 915. S ' JUC 29,2012
Octobcr 9,2009 RcccimbIcs 375 - Oclobcr 8,20 10
CERC Corp.'~ $915 million credit facilily's first drawn cost is the London Interbank Offcrcd Ratc (LIBOR) pIus 45 basis points bascd on
our current crcdit ntings. Thc facility contains covenants, including a dcbt to total capitahtion covenant.
Undcr thc crcdit faciIity, an additional utilization fee of 5 basis paints appIics to borrowings any time more ihan 50% of thc facility is
utilizcd. Thc s p m d to LIBOR and thc utilimtion fee fluctuate bascd on our e d i t rating. Borrowings under thc facility arc subjcct lo custornaq
terms and conditions. IJowcver, thcrc is no rcquircment that wc makc rcpracntations prior to borrowings as to thc abbscncc of matcrid advcrsc
changes or litigation h a t cauId bc cxpcctcd to have a material advctsc cffcct. Borrowings undcr the edit facifily arc subjcct to accclcntion
upon thc occurrence of events of dcfauIt that wc considcr customary.
Wc arc currcntly in compIiancc with the various busincss and financial eovcnants conhincd in thc respectivc reccivablcs and crcdit
facilitia.
CERE C o p ' s $915 milIion crcdit facility backstops a S915 milIion comrncrcial papcr program undcr which wc bcgan issuing commcrcia1
papcr in Pcbruary 2008. Our cornmcrcid papcr i s ratcd "P-3" by Moody's Investors Scrvicc, Inc. (Moody's), "A-3" by Standard & Poor's Rating
Services, a division of Thc McGraw Hill Companies (S&P), and "F2" by Fitch, Jnc. pitch). As a r m I t of the credit ratings on out commcrciaf
papcr program, wc do not cxpcct to bc ablc to rcly on thc salc of commercial: paper LO fund all of our short-tcnn borrowing rcquircments. We
cannot assure you that thac ratings, or thc crcdit ratings set forth below in " Impact on Liquidity of a Downgradc in Credit Ratings," wilf
-
rcmain in cffcct for any given period of timc or that otic ar morc of thcsc ratings will not bc lowcrcd or wilhdmwn cntircly by a nting agcnq.
Wc nolc that thcsc crcdit n t i n g arc not rccommcndations to buy. scll or hold our sccuritics and may be rcvised or withdrawn at any tirnc by thc
nting agcncy. Each mting should bc cvahatcd indcpcndcntiy of any othcr rating. Any future reduction or wilhdmwal of onc or more of our
edit rating could haw a matcrial advcrsc impact on our abiliky to o h i n short- and hog-tcm financing, thc cost of such financings and thc
cxccution ofour commcrcia1 stmtcgics.
Sccwitics Rcgisfcredwifh h SEC. At Dccernber 31,2009, we had a shcff rcgismtion statcmcnt covcring $500 rnilIion principal amount
~ r
of senior dcbt sccuritia.
32
Tubfc o Contcnts
f
Tcmporoty Investmcnls. As of Fcbruay 15,2010, wc had no cxtcrnal temporary invcstmcnls.
Money Pool. Wc participatc in a rnoncy pool through which wc and c mn of our afiliatcs wn borrow or invat on a short-tcrrn basis.
c i
Funding nccds arc aggrcgatcd and cxtcmaI borrowing or invcsting is bascd on thc nct msh position. Thc nct funding rquircmcnts of thc moncy
pool arc cxpcctcd to bc rnct wt borrowings by CcntcrPoint E c undcr its revolving crcdit racilily or thc salc by CcntcrPoint Enncrgy of its
ih nm
commcrcia1 papcr. At Fcbruary 15,201 0, wc had borrowing of $238 million from thc moncy pool. Thc moncy pool may not providc sufficient
funds to mcct our cash nccds.
Inrpact on Liquidity o a Downgrade in Credit Ratings. As of February 15, 2010, Moody's, S&P and Fitch had asssigncd thc fdlowing
f
crcdit ratings to our senior unsccurcd dcbt:
(I) A Moody's rating outIook is an opinion regarding thc IikcIy dircction of a rating ovcc thc rncdium tcrm.
(2) An S%P rating outlook asscsscs the potcntial dircction of a long-tcrm crcdit rating ovcc thc intcrmcdiatc to longcr tcrm.
(3) A "stablc" outIook from Fitch encompassrr a oneto-twoycar horizon as to the Iikcly ratings dircction.
A dccIinc in tficsc crcdit ratings couId incmsc borrowing cos& undcr our 591Smillion crcdit facilily. If our cradit ratings had bccn
downgradcd onc notch by each of thc threc principal crcdit rating agcncics f o thc ratings that cxisted at Dcccmbcr 31,2003, thc impact on thc
rm
borrowing costs under our crcdit facility would have bccn imrnatcrial. A dccIinc in crcdit ntings would also incrcasc ihc intcrcst n t c on long-
term dcbt to bc issued in thc capilal markcts and could ncgativcly impact our abiIity to cornplctc capital markct ~ransactions.AdditiondIy, a
dcdinc in crcdit ratings could incrasc a s h eollatcn1 rcquircmcnfs and rcducc carnings of our Natunl Gas Distribution and Compctitivc Natural
Gas Salcs and Scwica busincss scgmcnls.
Wc and our slrbsidiarics purchasc natura1 gas from our largest supplicr undcr supply agrccments that cunkiin an aErcgatc crcdit thrcshold of
$120 million bxcd on CERC Corp.'s S&P scnior unsccured long-krm dcbt rating of BBB, Undcr thcsc agrccmcnts, wc may nccd to pmvidc
collatcnl if thc agrcgatc thrcshoId i cxcccdcd. Upgradcs and downgradcs f o this BI3B nting will incrasc and dccrcac thc aggrcgatc crcdit
s rm
thrcshold accordingly.
CcntcrPoint Encra Scrviccs, Inc. (CES), our wholly owncd subsidiary opcrating in our Compctitivc Natura1 Gas SaIcs and Scwiccs
busincss scgrncnt, providcs comprchcnsivc natural gas salts and scrviecs primarily to carnmcreial and industrial custorncrs and cIcctric and gas
utiIitics throughout thc ccntml and castcrn Unitcd Statcs. In ordcr to cconomicalIy hcdgc its cxposurc to natura1 gas priccs, CES uscs dcrivativcs
with provisions standard for thc industry, induding thosc pcrlaining to crcdit thrcsholds. TypicaIly, thc crcdit thrtrhold ncgotiatcd with mch
countcrpay dcfincs thc amount of unsccurcd crcdit that such countcrparty will cxtcnd lo CES. To thc cxtcnt that thc crcdit cxposurc that a
countcrparty has io CES at a particular timc docs not cxcccd that crcdit thrcshold. CES is not obIigatcd to providc collatcral. Mark-io-markct
wposurc in cxccss of thc crcdit thrcshold is routincfy collateralizcd by CES. As of Dcccmbcr 3 1, 2009, thc amount postcd as colIatcn1
aurcgatcd appmximatcIy S114 million ($B4 million of which is associated with pricc stabiIization acrivitics of our Natura1 Gas Distribution
busincss scgment). Should the crcdit ratings of CERC Corp. (as the crcdit support providcr for CES) fall bclow ccrlain ICYCIS, C W would bc
rcquircd to providc additional colIatcral up to thc mount of its prcviously unsccurcd crcdit limit. Wc cstirnatc that ;is of Dcccmbcr 3 I , 2009,
unsccurcd crcdit limits atcndcd to CES by countcrpartics aggrcgatc 5241 million; howcvw, utiIizcd credit capacity was $67 million.
Pipclinc tariffs and contracts typicalIy pmvidc that if thc crcdit mtings of a shippcr or thc shippcr's guarantor drop bcIow a threshold level,
which is gcncnIly invcstmcnt gndc ratings from both Moody's and S&P, a s h or othcr colIatcnl may be dcmandcd from thc shippcr in an
mount cqual to thc sum of thrcc months' charga for pipclinc scruiccs pIus thc unrccoupcdcost of any IatcraI built for such shipper. If thc crcdit
ratings of CERC Cop. dcclinc bdow thc applicabIc thrcshold levcls, we might nccd to providc cash or othcr collatcnl of as much a s
$188 mi1lion as of Deccrnbcr 31,2009. The amount of collatcral will depcnd on scasonaI variations in transportation Iwcls.
33
Table o Cuntcnts
f
Crms Drfmk Undcr CcntcrPoint Enew's rcvolving ctcdit facility, a paymcnt dcfault on, or a non-payment dcfauIt that pcrmits
accclcmtion of, any indebiednw cxcccding $50 million by us will causc a dcfault. In addition, four outstanding scrics of CcnterPoint Encrm's
scniar nota, aggregating $950 milIion in principal amount as of Fcbruary 15, 2010, providc that a payment dcfauIt by US in rcspect o , or anf
acccIcntion of, borrowcd r n o n g and ccriain ofhcr spccificd typcs of obligations, in thc aggregate principal amount of $50 rnilIion, will cause a
defauIt A dcfauIt by CcntcrPoint Energy would not lriggcr a dcfauIt under our debt instrumcnls or bank crcdit fadities.
Possible Acquisitions, Divmlilures and Joint Vcnltires , From timc to time, we consider tho acquisition or fhc disposition of ~ c t or s
businesses or passibIc joint vcnturrs or other joint owncrship arrangements with rcspcct to mcts or busincsses. Any detcmination to iakc any
action in this rcgard wil1 be bascd on mmket conditions and opportunities existing at rhc timc, and accordingIy, the timing, sizc or s u c a s of any
ih
cfforts and thc assoeiatcd potcntial capita1 commilmcnts arc unprcdictable. W e may scck to fund all or part of any such cfforts wt procccds
from dcbt issuanccs. Debt financing may not, howcvcr, bc avaiIable to us at that timc duc to a variety of cvents, including, among othcrs,
maintcnancc of out crcdit ratings, industry conditions, gcncral cconomic conditions, markct conditionsand market perceptions.
Oihcr Factars [ I I ~ !Coidd Afccf Cash Requiremen&. In addition to the abovc factors, our liquidity and capital rcsourccs could bc affcctcd
cash coIIatcn1 rcquircmcnk that couId cxist in conncction with ceriain conhack, inchding gas purchases, gas pricc and wcathcr
hedging and gas stomgc activities of ourNalural Gas Distributionand CompctitiveNaturaI Gas S a l s and Scrvica busincss scgments;
accclcration of paymcnt d a t a on ccrtain gas wpp1y contracts undcr ccrtain cireurnstanccs, as a result of i n c r a c d gas priccs and
conccnbtion of natural gas supplicrs;
incrcascd costs rclatcd to thc acquisition of natura1gas;
incrcascs in interest expcnsc in conncction with dcbt refinancings and borrowings undcr crcdit facilitics;
various rcgulatory actions;
incrcased capita1 cxpcnditurcs rcquircd for ncw gas pipeline or fieId s c d c c s projects:
Ihc ability of our cuslomers to fuIfilI thcir payrncnt abligations to us;
tlic ability of RRI and its subsidiarics to satisfy thcir obligations in respect of RRI's indemnity obligations to us and our subsidiarics or
in conncction with thc contraclua1 obligations to a third party pursuant to which wc are their guarantor,
slawcr customcr paymcofs and incmscd wvritc-offs ofreceivablcs duc to highcr gas priccs or changing cconomic conditions;
thc outcome of litigation brought by and against us;
rcstoration costs and rwenuc losscs raulting from natural disastcrs such as hurricanes and thc timing of rccavcry of such rcstonlion
costs; and
various oher risks idcntiftcd in "Risk Factors" in Jtcrn I A of this report
Ccrlain Conlrocliial Limits on O w Ability to Isme Securities and Borrow Money. Our rcvolving crcdit facilily and our rcccivablcs facility
limit our debt a a perccntagc of our tala1 capitahtion to 65%.
s
Rehtionship v i t h CenterPoint Ever@. Wc arc an indircct wholIy owned subsidiary of CcntcrPoint Encra. As a rcsuIt of this rclationship,
the financial condilion and liquidity of our parent company could affect our acccss to capitd, our crcdit standing and our financial condition.
34
CRITICAL ACCOUNTING POLICIES
A critid accounting poliey is onc that is both important to fhc prcscntation of our financia1 condition and results of opcrations and rcquircs
rnanagcmcnt to makc difficuIt, subjcctivc or complex accounting estimates. An accounting cstimatc is an approximation madc by managcrncnt
of a financial sfatcmcnt clcmcnt, itcm or account in ihc financial statements. Accounting cstirnatcs in our historical consoIidatcd financial
statements rnmurc thc cffccts of past busincss bansactions or cvents, or the present status of an asset or Iiability. Thc accounting cstimaks
dcscribed bclow rcquirc us to makc assumptions about mattcrs that arc highIy uncertain at the timc the cstimatc is madc. Additionally, diffcrcnt
cstimatcs that wc couId have used or changes in an accounting cstimatc that arc masonably likcly to occur couId hwc a matcrial impact on thc
prcsenhtion of our financial condition or rcsults of opcmtions. Thc circumstartccs that makc thescjudgmcnts difficult, subjcctivc andlor compIcx
have t do with the nccd to makc cstimatcs about thc cffcct of mattcrs that arc inhcrentIy uncertain. Esrimates and assumptions about futurc
o
cvcnk and thcir cKects cannot bc predictcd with certainty. Wc bast our cstimatcs on historical cxpcricncc and on various othcr assumptions that
wc belicvc to bc rcasonabIc undcr thc circumstanccs, the rcsults of which form thc basis for making judgmcnts. Thac cstimatcs may changc as
ncw cvcnts occur, as morc cxpcricncc is acquired, as additional information is obtaincd and a our opcrating cnvironmcnt changcs. Our
s
significant accounting poficics arc discussed in Note 2 to our wnsolidatcd financia1 statcmcnts. Wc bcliwc thc folIowing accounting poIicics
involvc thc application of critical accounting cstirnatcs. AcwrdingIy, thcsc accounting atimalcs havc bccn rcvicwcd and discussed with fhc
audit committcc of thc board of dircctors of CcntcrPoint Encrgy.
Accounting ior Katc Regulation
Accountingguidancc for rcgulatcd opcmtions provides that ratc-regulatcd entitics account for and rcport asscts and Iiabilitics consistent with
thc rccovcry of thosc incurrcd costs in rat- if the rata estabIishcd arc dcsigncd to cecovcr thc costs of providing thc rcguIatcd scrvicc and if thc
eornpctitivc cnvironmcnt makcs it probabh that such rates can be charged and cokcted. Our Natura1 Gas Distribution busincss scgmcnt and
portions of our Intcrstate Pipelincs busincss scgmcnt apply this accounting guidancc. Ccrhin cxpcnss and rcvcnucs subjcct to utility rcgulation
or
or r k dctcrmination normalIy rcflectcd in income arc dcfcmcd on thc balancc shcct as rcgulatory i~~sscfs Iiabilitics and arc rccognizcd in
a
incomc as thc tclatcd mounls arc includcd in scrvicc ntcs and rccovcrcd from or refundpd to customcrs. Rcylatory asscts and Iiabilitics are
rccordcd whcn it i probablc that these items will: be r c w v m d or rcflectcd in fihm mtcs. Dctcrmining probabiIiLy rcquircs sigtifiant judgmcnt
s
on thc part of mmagcmcnt and incfudcs, but is not Iimited to, considcration of testimony prcsented in regulatory hcarings, proposcd rcgulatory
dccisions, find rcgutatory ordcrs and the strength or status of apphations for rehearing or statc court appcals. If cvents wcrc to occur that would
makc fhc rccovcry of thcsc assets and Iiabilitics no Iongcr pmbabIe, wc woutd bc rcquircd to writc off or writc down thcsc rcguhtory a c t s and
liabilitics. A t Dcccmbcr 31,2009, we had recorded r c y h t o r y asscts of $61 rniIlion and rcgulatory Iiabilitics of$539 rnilIion.
Tmpairmcnt of Long-Livcd k c t s and Intangibles
Wc rcvicw thc carrying vaIuc of our long-livcd =CIS, inchding goodwill: and idcntifiablc intangiblcs, whmwcr cvcnts or changcs in
circumstanccs indiutc that such carrying vaIues may not be rccovcrabte, and at Icast annulIy for goodwiIl as rcquircd by accounting guidancc
w
for goodwifl and othcr inmngiblc asscts. No impairment of goodwiIl w indiwted based on our annual analysis at July I, 2009. Unforeseen
cvcnk and changcs in circumsmnc= and markct conditions and material diffcrcnces in thc vaIue of long-Iivcd asscts and intangibles due to
changes in cstimatcs of future cash flows, intcrcst ratcs,regulatory matters and operating costs could ncgativcly affect thc fair vduc of our asscts
and rcsult in an impairmcnt chargc.
Fair vduc is thc amount at which thc a s c t could bc bought or sold in a currcnt tnnsaction bctwccn wiIling partics and may bc cslimatcd
using a numbcr oftcchniqucs, inchding quoted markct prices or valuations by third parties, prcscnt valuc tcchniqucs bascd on cstirnntcs of cash
flows, or mulliplcs of c m i n g s or revcnuc performance mcasurcs. The fair vahe of the a s c t could bc diffcrcnt using diffcrcnt cstimatcs and
assumptions in hcsc vduation tcchniqucs.
Unbillcd Energy Revcnucs
Rcvcnucs rclatcd to natural gas s a h and scrvices are gcnemIly rccognizcd upon dclivcry to customcrs. Howwcr, thc dctcrmination of
delivcrics to individual customcts is based on thc rcading of thcir meters, which is pcrfomcd
35
Table o Cantcnts
f
on a systcrnatic basis fhroughout thc month. At thc cnd of cach month, dclivcris to customers sin= lhc datc of h e last mctcr reading arc
estimated and the corresponding unbiIlcd revenue is atimatcd. Unbilkd natuml gas saIcs arc cstimatcd bascd on cstimatcd purchased gas
voIumcs, cstimatcd Iost and unacmunted for gas and tariffcd rata in effccL As additional infomation bccomcs available, or actual amounts arc
dctcrminablc, the recordcd cstimatcs arc revised. ConsequcntIy, operating results can bc affected by revisions to prior accounting cstimatcs.
NEW ACCOUNTMGPRONOUNCEMENTS
SccNotc 2(n) to thc consoIidatcd financia1 shtcmcnts, incorporated hercin by rcfcrcncc, for a discussion ofncw accounting pronounccmcnts
that affect us.
OTHER SIGNIFICANT MATTERS
Pension P!an.s, As discusscd in Note 2(0) to our consolidatcd financial slatcmcnts, we participatc in CcntcrPoint Enew's qualificd and non-
qualificd pension plans covcring substantiaIly all cmployccs. Thc cxpccted pcnsion cost for 2010 is $35 milIion, of which wc expect $28 milIion
to impact prc-trur earnings, bascd on an expectcd rctum on plan assets of S.OO% and a discount n t e of 5.70% as of Deccmbcr 31, 2009. Wc
rccordcd pcnsion expcnsc of $47 million for thc ycar cndcd Deccmbcr 31, 2009. Future changes in plan assct rctums, assumed discount ntcs
and various othcr factors rclatcd to thc pcnsion plans wilI impact our futurc pcnsion cxpcnse. W cannot prcdict with ccrhinry whal thcsc factors
e
wilI bc in the futurc.
Ttcm 7A. and QuahYathc Dkdosures Abaut Markef Risk
Qtiatttifa~ve
Impact of Changes in Tntcrcst Rates anti Energy Commodity Prices
Wc arc cxposed to various rnarkct risks. Thcse risks arisc from transactions entcrcd into in thc norma1coursc orbusinas and arc inhcrcnt in
our consoIidatcd financial statcrncnts. Most of rhc rcvcnucs and income f o our busincss activitics are impactcd by markct risks. Catcgorics of
rm
markct risk includc cxposurc to commodity prices lhrough non-trading activities, intcrcst rata and cquity priccs. A dcscriptian of cach markct
risk is sct forth bdow:
Commodity pricc risk results from exposures to changcs in spot priccs, f o m r d priccs and pricc volatilities of commoditics, such as
natuml gas, natural gas liquids and othcr cncrgy cornmodilics.
Intcrtst mtc risk primady results from cxposurcs to changcs in thc Icvcl of borrowings and changes in inlcrmt rata.
9
Equily pricc risk mults f o cxposurcs lo changes in prices of individual cquity sccuritics.
rm
Managccmcnt bas cstablishcd comprchcnsivc risk management policics to monitor and manage thcse markct risks. Wc managc thcse risk
cxxposures hmugh Ihc impIcrncntationofour risk managcmcnt policies and fmmcwork. Wc manage our commodity prim risk cxposurcs through
thc USC of dcrivativc financia1 instrumcnh and dcrivativc commodity insmmcnt contracts. During thc normal COUTSC of busin=, wc rcview our
hedging stmtcgics and dctcrmine thc hcdging approach wc deem approprialc bascd upon thc circurnshnccs of u c h situation.
Dcrivativc instrumcnts such as futurts, forward contracts, swaps and options dcrive thcir value from undcrIying asssck, indica, rcfcrcncc
rates or a combination of these factors. Thcsc dcrivativc instruments includc ncgotiatcd contracts, which arc rcfcrrcd to as ovcr-the-counter
dcrivativa, and instrumcnts that arc Iistcd and tradcd on an cxchangc.
Dcrivativc transactions arc cntcrcd into in our non-trading opcntians to manage and hcdge certain cxposurcs, such as cxposurc to changcs
in nalunl gas priccs. Wc believe that thc moeiatcd market r s of thesc insfrumcnfs can b a t bc understood relativc to thc undcrlying asscts or
ik
risk being hcdgcd.
Interest Rate Risk
As of Dcccmbcr 3 1, 2009, wc had oubtmding long-term debt and bank loans f o affiliates that subjcct us to thc
rm risk of loss wociatcd
with movtmcnts in rnarkct interest ratcs.
36
Tablc o Contcnts
f
Our floatingrate obligations aggregated $1.0 billion and $432million at Dccember 31, 2008 and 2009, respcclivcly. Tf he floating inlcrcst
rata wcrc to incrcasc by 10% from Dcccmbcr 31,2009 rata, our cornbincd interest cxpcnse would increase by less than SI million annually.
At both Dcccrnbcr 31, 2008 and 2009, we had outstanding fixed-ratc debt aggregating $2.8 bilIion in principai amount and having a fair
valuc of $2.6 biIlion and $ . bilIion, rcspcctivcIy. Thac instrurncnts arc fixcd-mtc and, thcrcforc, do not cxposc us to thc risk of Ioss in
30
caming duc to changcs in markct intcrcst r a t s (please rcad Notc 7 to our consolidatcd financial statcments). Howcvcr, Lhc h i r vaIuc of these
instrumcnts wouId incrcasc by approximatdy $79 million if i n k r a t mlcs wcrc to dccIinc by 10% from lhcir lcvcls at Dcccmbcr 31, 2009. In
gencnI, such an inacasc in fair vaIuc would impact camings and cash fIows only if wc wcrc to rcacquirc all or a portion of thcsc instrurncnts in
thc open markct prior to thcir maturity.
Commodity Pricc Risk From Non-Trading Activities
Wc USC dcriwtivc instruments as economic hedges to offset thc commodity price exposure inherent in our busincsscs. Thc stand-atonc
commodity risk crated by thcse instrurncnts, without regard to the offsetting effect of the underlying exposure these instrumcnts are intcndcd to
hcdgc, is dcscribcd bclow. We mmurc thc commodity risk of our non-trading energy derivatives using 3 sensitivity analysis. The scnsitivily
andysis pcrformcd on our non-frading cncrm derivatives m e a ~ u r e ~ potentia1 loss in fair valuc based on a hypothcliml 10% movcmcnt in
the
cncrgy prices. At Dcccmbcr 31, 2009, thc rccordcd fair vaIuc of our non-trading encrgy dcrivativcs was a nct IiabiIily of $134 million (bcforc
colfatcial). The nct Iiabiiity consistcd of a net IiabiIity of $143 rniIlion associated with price stabiliwtion activiries of our Natural Gas
Distribution busincss s g m c n t and a net msct of $9 milIion related to our Competitive Natura1 Gas Sales and Scwiccs busincss scgmcnt Nct
assets or liabilitics rclated to the price stabiliation activitics correspond directly with net ovedunder rccovered gas cost IiabiIitics or assscts on thc
balancc sIicct. A dccrcasc of 10% in the markct p i c a of cncrgy comrnoditics from thcir Dcccmbcr 3 1,2009 Icvcls would havc increased thc fair
valuc of our non-trading cncrgy dcrivativcs nct Iiability by $31 million. Howcvcr, the consolidatcd incomc statcrnent impact ofthis samc 10%
dcctcasc in markct p r i m wouId bc an incrwsc in incomc of $3 miIlion.
Thc above anaIysis of he non-trading energy derivatives utiIized for commodity price risk managcment purposcs docs not indudc thc
favorablc impact that thc samc hypothctid pricc rnovcmcnt wouId havc on our physical purchases and sales of natural gas to which the hcdgcs
relatc. Furthcmorc, thc non-trading cncrgy dcrivative portfoIio is managed to compkment the physicaI transaction portfolio, rcducing ovcrall
risks wilhin Iirnits. Thcrcforc, thc advcrsc impact to thc fair vaIue of thc portfolio of non-trading encrm dcrivatives hcld for hcdging purposcs
associatcd wilIt thc hypothctid changcs in commodity p r i m rcfcrcnccd abovc is cxpcctcd to bc substantially offset by a favorabIe impact on
thc undcrlying hcdgcd physical transactions.
37
Table oJContcnh
Item 8. fitiancid StalemrrrrS and SupplementmyData
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FiRM
o
T thc Stockholdcr of
CcntcrPoint Energy Resources Corp.
Houston, Tcxas
We have audited fhc accompanying mnsolidatcd balance shccts of CcntcrPoint Energy Rcsourccs Corp. and subsidiarks (the "Company", an
indirect whofly awncd subsidiary of Centerpoint Energy, Inc.) as of December 3 1, 2009 and 2008, and thc relatcd statements of consofidalcd
income, comprchcnsive income, cash flows and stockholder's equity for each of thc thrcc ycars in thc pcriod ended Decembcr 31,2009. Thcsc
financial statcmcnts are the responsibility of thc Company's management. Our rcsponsibility is to cxprcss an opinion on thcsc financial
statemcnts bascd on our audits.
W conductcd our audits in accordance wilh thc standards of the PubIic Company Accounting Ovcrsight Board (United States). Thosc shndards
e
rcquire that wc plan and pcrform the audit to obtain reasonable assurance about whcthcr tllc financial staterncnts arc frcc of matcria1
misstatcmcnt. Thc Company i not requircd to haw, nor wcrc wc engaged to pcrform, an audit of its internal control ovcr financial rcporting.
s
Our audits includcd considcmtion of internal control ovcr financial rcporting as a basis for designing audit proccdurrs that are approprialc in ihc
circumstances, but not for thc purpose of expressing an opinion on thc cffcctivencss of the Company's internal control ovcr financial rcporting.
AceordingIy, we cxprcss no such apinion. An audit a t o includcs cxamining, on a test basis, evidence supporting thc amounts and disclosum in
h e financial statcmcnts, assessing the accounting principles used and significant cstimatcs madc by managcrnent, as well as cvaluating thc
ovcnIl financia1 statcrnent prcsentation, Wc bclicve that our audits provide a rcasonable basis for our opinion.
In our opinion, such consolidatcd financial statemenls prescnt fairIy, in all matcrial rcspccts, the financial posidon of CcntcrPoint E n c w
Raources Corp. and subsidiaries at December 31,2009 and 2008, and thc results of their operations and thcir cash ffows for cach of thc threc
ycars in thc pcriod cndcd Dcccrnbcr 3 1,2009, in conformity with accountingprinciples g e n e d y accepicd in thc United S l a t s of Amcrica.
/s/DELOITE & TOUCI.IELLP
Houston, Tcxas
March I I, 2010
38
Tuble o Conlcnts
f
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
Our managcmcnt is rcsponsibIc for cstablishing and maintaining adcquatc intcmaI confrol over financial reporting. Internal controt: ovcr
financhl rcporting is dcfincd in Rulc 13a-l5(f) or 15d-I5(f) promuIgatcd undcr thc Sccuritics Exchangc Act of 1934 as a proccss designcd by, or
undcr thc supcrvision of, thc company's principal cxccutive and principal financial oficcrs and cffcctcd by thc company's board of dircctors,
managcmcnt and olher pcrsonncl, to providc rcasonabk assurance rcgarding thc rcliability of financial reporting and the preparation of financial
statcrncnts for cxtcrnal purposes in accordancc wilh gcncrally acccpted accounting principlcs and includcs thosc policics and proccdurcs that:
Pcmin to the maintcnancc of rccords that in rwsonabIe detail accuratcly and fairly rcff cct thc transactions and dispositiow of h e asscts
of he company;
Providc m o n a b l c assurancc that transactions arc rccotdcd as ncccssary to permit prcparation of financial statcrncnts in accordancc
with genenlly acccptcd accounting pn'nciplcs, and that rcceipts and cxpcnditurcs of thc company arc bcing rnadc only in accordancc
wt authorizations of managcmcnt and dircctors ofthe company; and
ih
- Providc rcasonabIc ~ s s u m c rcgarding prcvention or timely dctection of unauthorized acquisition, usc or disposition of thc company's
c
ass& that could havc a matcrial effcct on thc financial statcrncnts.
Managcrncnt has dcsipcd its intcma1 contmI over financial rcporting to p m i d c m o n a b l c assurancc regarding ihc reliability of financial
rcporting and the prepantion of financial shtcrncnts in accordancc wirh accounting principles gcncralIy acccptcd in thc Unitcd Statcs of
Amcrica. Managcmcnl's assessment indudmi revicw and tcsting of both Ihc dcsign cflcctivcncss and operating effcctivcness of controls ovcr all
rclcvant asscrtians rclatcd to a11 significant accounts and disclosurcs in thc financial statcments.
AI1 intcmal control systcms, no matkr how we11 dcsigncd, havc inhercnt Iirnitations. Thcrcfotc, wcn thosc systcms dctcrmincd to be
cffcctivc u n providc onIy rcasonablc assurancc with respcct to financia1 sfatcmcnt prcparation and prcsenhtion. Projcctions of any cvaluation of
cffcctivcncss to fulurc pcriods arc subjcct to the risk that controls may bewrnc inadquatc bccausc of changcs in conditions, or that the dcgrcc of
compiianct: with rhc policies or procedurcs may dctcriomtc.
ih
Under Lhc supcrvision and w t thc participation of our management, inchding our principa1 cxccutivc oficcr and principaf financial
officcr, wc conductcd an cvduation of the cffectivencss of our internal control ovcr financial rcporting b a c d on thc framework in Internal
Control - Intcgratcd Fnmework issued by the Committcc of Sponsoring Organizations of thc Trmdwq Commission. Based on our cvaluation
undcr thc f m c w o r k in Intcrnal Control - Integntcd Fmmcwork, our managcmcnt has conchdcd that our intcrnal control over financial
rcporting was cffcctivc a of Dccernber 3 1,2009.
s
This annual: rcport docs not incIudc an attatation rcport of our rcgistercd public accounting firm regarding internal control ovcr financial
rcporhg. Managcmcnt's rcport was not subjcct to attcstation by our tcgistcrcd public accounting firm pursuant to tcmponry mlcs of the
Sccuritics and Exchangc Commission that permit us to providc only managcmcnt's rcport in this annual report.
/SI DAVID M. MCCLANAHAN
Prcsidcnt and Chicf Exccutive Officcr
/5/ GARY L. WHITLOCK
Exccutive Vicc Prcsidcnt and Chicf
Financial Officcr
March 11,2010
39
Tublc n/Conrcnts
CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDMRIES
(An Indirect Wholty Owned Subsidiary of CenterPoint Energy, I w )
STATEMENTS OF CONSOLIDATED INCOME
Yrar E n d d ~ n r m b c r 3 t .
2007 2008 20011
nn MiIlIolul
Rcvywes ! $ 7.776 $. 9395 $ 6.257
Expenses:
Natural gas 5,995 7,466 4,371
Operation and maintenance 800 828 I * ' I' 922
Deprecialion and amortization 215 218 229
Taxes ohm,than income t x aa 140 I66 I66
Total 7,150 8,678 5,ma
Operating Income ' ' ' 626" ' ' 717
. .. ' --_
569
Other Incornc (Expense):
ch
Tnterest and'other ii nance. arges (187) (206) ' ' ' '(z'i3)
Equity in earnings of unconsolidated amliatcs I6 51 15
Oihcr, net 5 9 5
Total (166) 146) (I931
TncorncBcfore Income T s e s 460 571 376
Income tax cxpense
Net Income
See Notes to Consolidated Financial Statcments
40
Table o Conrenls
f
CENTERPOMT ENERGY RESOURCES CORP. AND smsmrmm
(An Indirect Wholly Owned Subsidiary of Centerpoint Energy, Inc.)
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
Yur Ended D-berJI.
2007 2008 2009
(In Millions) ._
Net income . *' - Y $ 287 S 343 $' 'fi0
Other comprehensive income (loss), net oftax:
Adjustment to pension and other posbetirerncntplans (net oftax of
$6, $3 and $3) 13 . (131. !-. - _ .(2)
Net deferred gain from cash ffow hedges (nct oftax of 36,s-0- and
$-&) 12 - -
Rccfassification ofnet deferred gain fern cash flowhedges
realized in net incomc (net oftax'oF$20, %3-andSO-) ( 3
3 ) (5) 1
-
Other comprehensive Ioss (8) 1 2
18 2
Comprehensive income ' % 279 $ ' 325' $1 228
Sec Nota to ConsoIidatcdFinancial Statcments
41
Table o Conmts
f
CENTERPOMT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(An Indirect Wholly Owned Subsidiary o f CcnterPoint Energy, In&)
CONSOLTDATED BALANCE SHEETS
Dccunbcr 31.
2008 20011
uti Mitliams)
ASSETS
Current Assets :
Csh and cash cquivaIents $ ‘ 1 $ 1
Accounts reccivable, nct 774 593
Accrued unbillcd revenue 480 ’ 421
Accounts and n o t a rcceivabfc -ai3Iiatcd companies 9 13
lnvcntory ’ I ’ 495 258
Non-trading dcrivativc asscts I18 . . 39
Taxa rcceivabre
.
-
,I
47
Dcfcrrod incornc tax assets 25 16
Prepaid cxp‘enscs ahd other currcnt assets ’327’- ~~
”. 144
Total current assch 2.229 1,532
, c
Property, PIa’ntand Eq uiprn en t N t 5,363* I , 5,875
Othcr Assets:
GoodwilI ’ 1,GlG _.. 1,696
Non-tmding dcrivativc assets 20 I5
lnvcstmcnt in unconsoIidatcdafiliatcs . I 345 463
Nota rcccivablc h r n unconsolidatcdafiliatcs 323 -
Othcr . ,235.. , - 203
Total other assets ZGI!, 2377
Totd +cts $ ro.2rr ’ $ ’ ‘9,784
LIABILITIES AND STOCKHOLDER’S EQUITY
Currcnt Liabililics:
Short-tcm borrowings . $ 153 . % 55
Currcnt portion of Iong-tcrm debt 7 44
Accounts payable 722 , 563
Accounts and n o t a payabIe -affdiated cornpanics 33 472
Taxesaccmcd . . 33 ’ I . 67
Intercst accrucd 54 52
Cusbmer deposits ’ < 5 9 ”. 70
Non-trading dcrivalivc liabilitics 87 51
Ohr
tc ! . 302 , 282
~ o t currcnt liaiif itics
a ~ 1.516 1.656
Othcr LiabiIilies:
Accumulatcd dcfcrrcd incornc taxes, nct 8G4 ’ 1,080
Non-trading dcrivativc liabilities 47 42
Benefit obligations f 14 113
Regulatory liabilitics - ’ SOX’ ’. 539
Other 101 135
. .
Total other liabilitim ‘ .
1,634-*- . I909
hng-Term Dcbt 3.712 2742
- m .
Commitments and Contingenciw (Notc 9) . -
I .
Stockholdcr’s Equity .4
339 3.477
,TotalLiabititiF,And Stockholger’s Equity
. - ~ $ 10,211--, $ 9.784
Sce Notes to Consolidated Financial Statcmcnts
42
CENTERPOINT ENERGY RESOURCES CORP. AND SUBSTDIARLES
(An Indirect WhoIty Owncd Subsidiary of CcntcrRoint Energy, InL]
STATEMENTS OF CONSOLIDATED CASH FLOWS
Cash Fiows from Operating Activities:
Net incomc 'S 287 S 343 %, , 230
Adjustmcnts to reconcilc nct incornc to nct cash providcd by operatingactivities:
Dcprcciation and amortization 215
.Dcfcrrcd incometaxes 64
Amortization of dcfcrrcd financing a s k 8
. Write-down of natura1 gas inventory ' li'
Equity in mrnings of unconsolidatcd affiliates, net of distributions (13)
Changcs in othciasscls and liabilities:
Accounts rcccivable and unbillcd revcnuw, net
Accounts rcccivabfdpayablc, afiliatcs
Invcntory
- Taxes rcccivablc
Accounts payablc
Fuel cost recovery
Tntcrcst and taxes accnrcd
Nct non-fradinb derivativeassscts and liabilities
Margin dcposits, nct
Oher cumnt &sets
Ohcr cuncnt Iiabilitics
Othcrasscts : '
Othcr liabilitics
Olhcr, nct
Net cash provided by operating activities
Cash H o w from TnvcstingActivitics:
Capihl expcnditures
(Incrwc) dccicasc-in notes rccCivabIc fiom unconsolidatcd aftiliatcs
Invcstmcnt in unconsolidatcd afiliatcs
Otlicr, nct +
Nct a s h uscd in invating activitics
Chh Rows from Financing Activities:
Incrcase (decrcasc) in short-term borrowing, nct
RcvoIving crcditfaiility, net
Paymcnts of long-tcnn dcbt
Procccds fiom lon&rn debt -
Incrcasc (dccrcase) in note with affiliatcs, net
Dividcnds to p m n t
Dcbt issuancc costs
Othcr, nct
Nct cash prohdcd by (used in) financing activitics
Net Deercase in Cadi and Cash EquivaIents
Cash and Cash Equivalcnls at Beginning ofthc Year
Cash and Cash Equ\&nts atTEnd'of theycar I
Supplcrncntal Disdosurc of Cash FIow Information:
Cash Paymcnts: . ,_ . ..
. ~ b 1
Intcrcst, nct of capitalized intercst s 167 S 210 s 203
Income taxes (rcrunds) 106 I45 . (31)
Now cash tnnsactians: . --
Accounts piyablh rcIatcd to capital cxpcnditurcs S'" ' 51 S ' 52" $: '53
SCCNota to Consolidatcd Financial Stalcrncnfs
43
Table ojConrenis
CENTERPOMT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(An Indirect WhalIy Owned Subsidiary of CenterPoint Encrgy, me,)
STATEMENTS OF CONSOLIDATEDSTOCKHOLDER'S EQUITY
2007 2008 2009
Sham Amount Sham Amount Sham Amount
(In miIlions, except share amounts)
Common Stock
Balanm, beginning'olycar , * . . . 1.000 . S'. - . ' r;ooo $ : *. 2 ' .' ' 1.000. $ * -
Balana; cnd o f yfar 1.000 - 1.000 - 1.000 -
Additional Paid-in-Capital
Bulmcc. beginning d y w & I
03 2406 2.416
OthCr 3 IO
Bdancc. cnd of y w 2406 2416 2.416
ItthinEd l%rnings
Ballnncc, bcginninE of y w 5 OS 692 935
Nct income 287 343 230
Dividcnd to p m t ( 0 )
1 0 l o
r o ) (100)
Ddmcc, cnd ofycar 692 935 1.065
Accumuiatcd Othcr Comprchensivc Income
(Lo=)
Balanu; cnd o f y w
Nct Jcfurrcd gain h m cash flow hcdgcs
, . :
,-
-
Adjustmcnl to pcnsion nnd poshlircmmt plans (2)
Total accurndatcd otlicr comprchcnsivc income
(res), md o r y w 16 (2 )
Total StockholddsEquity
. . _ s 3.1'14 , L- :.. .$ 3349 . I
See Notcs to Consolidated Financial Statements
44
CENTERPOINT ENEKGY RESOURCES CORP. AND SUBSIDIARIES
(An Tndircct \l%oIly Owncd Subsidiary of CcntcrPoint Encrg; Inc)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(I) Background
CcntcrFoint Encrgy Rcsourccs Cop. (CERC Corp., and, togcthcr wiih its subsidiarics, CERC). owns and opcratcs natural gas distribution
systcrns in six statcs. Subsidiarics of CERC Corp. own intctstalc natura1 gas pipefines and gas galhcn'ng syslcms and providc various ancilIary
scrviccs. A wholly owncd subsidiary of CBRC offcrs variablc and fixcd-pricc physical natura1 gas supplia primarily to commcrcial and
induslrial customcrs and cfcctric and gas utifitics. CERC Coy, is a Dclawarc corporation,
CBRC COT,is an indircct wholIy own& subsidiary of CcnterPoint Enerw, Inc. (CcnterPoint Enera), a public ulilily hoIding company.
For n dcscription of CERC's rcpottablc blrsincss scgmcnts, SCC Nolc 12.
[)
Z Summary of Significant Accounting Policics
(a) Use o Eslimates
f
Thc prcpantion of financial shtcmcnls in conformity with gcncraliy acccplcd accounting principIcs rcquircs managcmcnt to makc cstirnatcs
and assumptions that affcct thc rcpartcd amounts of u c t s and liabilitics. disclosurc of contingcnt asscts and Iiabilitics at thc datc of thc financia1
statcmcnts, and thc rcported amounts of revcnucs and expcnses during the reporting pcriod. Actual r s l s could differ from tliosc cstirnatcs.
cut
fi) Principk o Consolidation
f
The accounts of CERC Corp. and its w h d y owned and majority owned subsidiarics arc incfudcd in CERCs consalidatcd financial:
statcmcnts. AI1 intcrcompany transactions and balanccs arc diminatcd in consolidation. CERC uses thc equity method of accounting for
invcstmcnts in cntitics in which CERC has an owncrship intcrcst bctwecn 20% and 50% and cxerciscs significant influcncc. CERC's
invcstmcnts in unconsoIidatcd afiliatcs includc a 50% owncrship interest in Southeast Supply Header, LLC (SESH) which owns and opcntcs a
270-milc interstatc natural gas pipclinc and a 50% intcrcst in Waskorn Gas Processing Company, a T x s gcneral partnership, which owns and
ea
opcmtes a natural gas processing pIant. Othcr investments, excluding marketable securititr, are carried at cost During 2009, CERC invcsted
$137 milIion in SEW and received a capital distribution of $23 milIion from SESH.
( ) Revenues
c
CERC rcwrds rcvcnuc for natura1 gas salcs and scrviccs under the accrual rncrhod and these cevenucs arc rccognizcd upon dclivcry to
customcrs. Natuml gas salcs not billed by month-cnd arc accrued based upon cstimatcd purchased gas volumes, cslimated lost and unaccountcd
for gas and currently cffcetivc tariff mtcs. Thc Intcrstatc Pipclines and Ficld Scrviccs business segments record rcvenucs as transportation and
processing scwiccs are providcd.
45
CERC rccords pmpcrfy, plant and cquipmcnt at historical cost. CERC wpcnscs repair and maintcnancc costs as incurrcd. Pmpcrty, plant
and cquipmcnt indudcs the folIowing:
Natura1 Gas Dislribution 31 $ . 3,266 i% ' 3,436
._. - -
Compctitivc Natura1 Gas Safcs and Sewiccs 26 67 69
Infirstalc Pipelines 5s v34 2324
FicId Scrvices SI 60 1 93 1
Othcrproperty , > , > I .. ... 3 .
1 45 ' , 27
Total 6,313 6,987
Accumulated dcprcciation and runortizition: . I L, I t,
Natural Gas Dislribution 708 825
Cornpctitivc.Natura1Gas SaIes and Services , ' . I
i'l 11 .I_ L . 13
Intcrstatc Pipclincs 182 223
Ficld Scmiccs , . . '>. - 1 28 L 27
Orhcr propcdy 21 24
Total accurnulatcd dcprcciation and amortimiion 950 1.112
Property, plant and cquipmcnt, nct $ 5,363 $ 5,875
Goodwilf by rcporhblc busincss scgment as of Dcccmbcr 3 I, 2008 and ZOO!, is as follows (in millions):
Natura1 Gas Distribution ' s 746
Intcrshtc PipeIincs 579
Competitive Nalural Gas Sales and Scrviccs 335
FicId Sewiccs 25
Other Operations - 11
Total s 1.696
CERE performs ils goodwill impaimcnt tats at least annually and cvvalualcs goodwill when evcnts or changcs in circumstanccs indicatc
that thc carrying valuc of thcsc assets may not be rccoverabIc. T h c impairment evaluation for goodwill i pcrfomcd by using a two-stcp process.
s
ih
In thc first step, thc fair vaIue of a c h rcporting unit is comparcd wt the carrying amount of the rcporting unit, incIuding goadwil1. The
cstimatcd fair vafue of thc rcporting unit is gcncmlIy detennincd on ihc basis of discounlcd futurc cash flows. I f thc estimated fair wluc of thc
rcporting unit is Icss than thc carrying amount of thc reporting unit, fhcn a sccond step m s bc cornpfctcd in ordcr to dctcrminc thc amount af
ut
the goodwilI impairment that shouId bc rccordcd. In thc sccond step, thc implied fair valuc of tho tcporting unit's goodwiIl is dctcrmined by
al1ocahg thc rcporting unit's fair value to a 1 orits m c l s and IiabiIities othcr than goodwill (including any unrccognizcd inkngibIc asscts) in a
1
manncr simiIar to a purchasc pricc a I l o d o n . The rtz,ulting irnpIicd fairvaluc of thc goodwil1 that rcsults from thc appIication of this sccond step
is then comparcd to thc carrying amount of the goodwiII and an impairment chargc is rccordcd for thc diffcrcncc.
CBRC pcrfomcd the test at July I, 2009, its annual impaimcnt testing datc, and dctermined that no impaimcnt chargc for goodwiIl w s
a
requircd.
CERC periodically cvduatcs long-livcd sscts, including pmpcrty, plant and equiprncnt, and spccificalIy idcntifiabb intangibles, whcn
evcnls or changcs in circumstanccs indicate that tho carrying valuc of thcsc asscts may not bc rccovcrabIc. Thc delcrminatian of whcthcr an
impainncnt has occurrcd is bascd on M cstirnatc of undiscounted cash flows attribntabIe 10 Lc asscts, as comparcd to thc carrying valuc ofthc
h
aSSCtS.
46
Table oJ Contcrits
( ) Regulaioy Ass@&
c and Liabilities
CERC appiics tho guidancc for accounting for tcylatcd apctations to thc Natura1 Gas Distribution busincss scgmcnt and to portions of thc
Intcrstatc Pipcfincs busincss scgmcnt
Thc following is a Iist of regulatory assctsniabi1ities rcflccted on CERC's ConsoIidatcd Balancc Shccts as of Dcecrnbcr 3 1,2008 and 2009:
~ccunber31.
2008 2009
(In mill1onr)
Rcgulatory asscts in bthcr Iong-tcnn asscls' (I] $ 53 $ . l ' 61
Rcgulatory Iiabilitics (508) 1539)
Ne1 , .
$ (455) *$ ' , (478)
-~. . .- . -
.
(I) Rqulalory asscts that arc not mrning a return wcre not material at Dccembcr 31,2008 and 2009.
CERC's nk-rcgufatcd busincsscs rccognizc removal costs as a component of depreciation cxpense in accordancc with regulatory trufmcnt.
As of Dcccmbcr 3 1,200s and 2009, these removal cosfs of $478 million and SS 10 million, rcspectivcly, are classificd as regulatory liabilitics in
rhc Consolidatcd Balance Shccts. A portion of thc amount of removal costs that relatc to assct retircrnent obligations has bccn rcdassificd from
a rcgulatory liability to m asset retirement IiabiIily in accordance with accounting guidancc for conditional assct rctircment obIigations. At
Dcccmber 31, 2008 and 2009, C R ' asset rctircment obIigations wcre 546 rniIlion and SGO million, respcctivcly. Thc i n c m c in a s c t
ECs
rctirement obligations in 2009 of $14 rniIlion is primarily attributable to thc decrease in thc crcdit-adjustcd risk-frce ratc uscd to valuc thc a s c t
rctircmcnt obligations as of the cnd ofthe pcriod.
# Depreciation und Amortimtim m c n s c
Dcprcciation is computcd using thc straight-line method based on economic livcs or a rcylatory-mandatcd recovery pcriod. Amorlimtion
cxpcnse indudcs amortimtion of rcgulatory asscts and oher intangiblcs.
I
T E following hblc prcscnts dcprcciation and amortization a p c n s c for 2007,2008 and 2009:
Year E u d d Dcccntbcr3l.
2007 2008 2009
(la rnilIkat)
Dcprcciation cxpcnsc $ 193 $ 200 s 211
Amortization cxpcnsc 22 I8 18
.Total dcprcciationmd amorlintion cxpcnsc . . -.
>
, .*. $ - ,215 $ < 218 S . 229
() CapitaIizafiono I n k r a t arid Allmvance for Fun& Used Daring Comtriiction
g f
AIIowancc for funds uscd during construction (AFUnC) represents the approximate nct cornpositc intcrcst cost of borrowcd funds and a
rcasonabb rcturn on h c cquity funds uscd for construction. Although AFUDC increases both utility plant and carning, it is rmIizcd in cash
whcn thc asscls arc incfudcd in rata for subsidiarics that apply guidancc for accounting for rcgufatcd opcrations. Tntcrest and AFUDC are
wpitalizcd as a cornponcnt of projccts undcr construction and will bc arnortizcd ovcr tha asscts' cstirnatcd uscful Iivcs. During 2007,2008 and
2009, CERC upitalizcd intcrcst and AFUDC of $12 million, $5 million and $2 million, rcspcctivcly.
(h) Iitconte Taxes
CERC is incIuded in thc consolidatcd income t x returns of CenterPoint Encrm. CERC calculates its incomc tax provision on a scpantc
a
rctum basis undcr il tax sharing agrccrnent with CenterPoint E n e w . CERC uses thc asset and IiabiIity mcthod of accounting for dcfcrrcd incornc
taxa in accordancc with accounting guidance for incornc taxa. Defcrrcd incomc tax assets and IiabiIitics are rccognizcd for fhc futurc tax
conscqucnccs attribuhblc to diffcrences between the financial statement carrying amounts of misting assets and Iiabifitics and thcir tcspcctivc
47
T d l e o/Cunrcnrs
tax bxcs. A valuation alIowancc is cstabIished against dcfcmd tax asscts for which management bclimrcs mlimtion is not cansidcrcd mom
likcly than not. Currcnt fcderal and ccrtain state incomc taxa arc payabk to or rcccivablc from CcnterPoint Encrgy. CERC rccogttizcs intcrcst
and pcnahics as a component of incomc tax expcnse. For mom information, scc Note 8 to our consolidatcd financial statcments.
fi) Accounts Reccivuble und Allowancefor Dmbtful Ac~ortnts
Accounts rcmivable arc nct of an allowance for doubtful accounts of $33 million and $23 miIlion at Dcccmbcr31, 2008 and 2009,
rcspcctivcly. Thc provision for doubtful accounts in CERC's Statemcnfs of ConsoIidated Incomc for 2007, 2008 and 2009 was S42 milIion,
$53 million and S35 milIion, rcspcctivcly.
On Octobcr 9, 2009, CERC amended its rcccivablcs faciIity to extend thc tcrmination date to Octobcr 8, 2010. AvaiIabiIily undcr CERC's
364-day rcccivablcs facility mgcs from $150 million to $375 rnilIion, reflecting scasonal changes in rcccivabk balances. At Dcccmbcr 31,
200s and 2009, thc facifity s i x was $128 miIlion and $150 milIion, respectivcly. As of Deccrnber 31, 2008 and 2009, advanccs undcr thc
reccivablcs faciliticswcrc $78 milIion and $-O-, rcspcctivcIy.
)
0 r~lv~ttoty
Inventory consists pn'ncipdIy of materials and supplics and natural gas. Malcrials and supp!ics arc valucd at thc lowcr of avcmgc cost or
markct Natural gas inventories of CERC's Competitivc Natural Gas Salcs and Scrviccs busin- scgmcnt arc also primarily vaIucd at Ihc lower
of wcragc cost or markct Natural gas invcntork of CERC's Natuml Gas Disln'bution blrsincss scgmcnt arc primarily vaIucd at wcighted
avcmgc cost. During 2008 and 2009, CERC rccordcd $30 million and $6 million, rcspcctiveIy, in writc-downs of natural gas invcnlory to thc
Iower of avcmgc cost or market.
D~cmher31.
zoos 2009
(In millions)
MatcriaIsandmppIies.
__ ' 3 * ' ' % - . 54%. C9
Natural gas 441 I89
Total inventory
.. $ 435 s 258
6)Derivniivc Isinrnwn&
CERC is cxposcd to various market risks. Tbcsc risks arise from transactions cnlcrcd into in thc norma1 coursc of busincss. CERC utilizes
dcrivativc instruments such a physical fonvard contracts, swaps and options to mitigatc lhc impact of changes in commodity p r i m and wcather
s
on its operating results and cash flows. Such derivatives arc rccognizcd in CERC's Consolidatcd Balancc Shcets at their fair valuc unlcss CERC
clccts thc normal purchasc and salcs cxcrnption for qualified physical transactions. A dcrivalivc may bo dcsignated as a normal purchasc or
norma1 saIc if thc intcnt i s to physically rcecivc or dcIiver the product for me or salc in the normal coursc of busincss.
CcntcrPoint Hnctgy has a Risk Ovcrsighht Commillcc composed of corporatc and busincss scgmcnt off~ccrs that ovcrsccs a11 commodity
pricc, wcathcr and crcdit risk activitics, including CERC's marketing, risk rnanagcmcnt scwiccs and Iicdging activities. Thc cornmilkc's dutics
arc to cstabIish CERC's commodity risk pohies, allocatc board-approved commercial risk limits, approve USC of new pmducts and commoditie,
monitor positions and cnmrc compliance with CERCs risk rnanagcmcnt policies and proccdurcs and Iirnits cstablishcd by CcntcrPoint Encrgr's
board of dircctors.
CERC's policics prohibit thc usc of Icvcngcd financial instruments. A Icvcragcd financial instrurncnt, for this purposc, is a fmnsaclion
involving a dcrivativc whosc financia1 impact wifl bc bascd on an amount other than the notional amount or voIumc of thc instnrmcnt.
)
0 Etivirotimmtal Cos&
CERC cxpcnscs or capitalizcs environmcnlal cxpcndihlra, as appmpriatc, dcpcnding on thcir futurc cconomic bcnciit. CERC cxpcnsa
amounts that rclatc to an cxisting condition causcd by past apcntions that do not have
48
Tabic o Contcnts
f
future cconomic bcnefit. CERC rccords undiscounted IiabiIitics rclatcd to thcsc hturc costs whcn cnvironmenta1 asscssrncnts andlor rcmcdiation
activities arc pmbablc and thc costs can bc msonably cstimatcd.
(nd Sfatenrents o Consdidatcd Cush Raws
f
For purposcs of rcporting cash flows, CERC considers cash equivdents to be short-term, highly Iiquid investments with maturities of thrcc
months or lcss fmm thc datc of purchase.
Effcctivc January 1, 2009, CERC adoptcd new accounting guidanu: which rcquircs cnhanccd disclosures of dcrivativc instrurncnts and
hcdging activilics such a thc fairvaluc of dcrivativc instrumcnts and prcscntation of thcir gains or losscs in tabular format, as wclI a diselosurcs
s s
regarding crcdit risks and stratcgics and objcctivcs for using dcrivativc insmmcnts. Thcsc discIosurcs arc includcd a part of CERC‘s
s
Dcrivativcs Instrurncnts fooinotc (SCC Notc 5).
Effcclivc January 1, 2009, CERC adopted ncw accounting guidancc on emphycrs’ disclosures about postrctircrncnt bcncfit plan assets
which cxpands the discfosurcs about cmployers’ plan assets to include mote detailed disclosures about the crnphycrs’ invcstmcnt stratcgics,
major cakgorics of pIan ~ C L S concentrations of risk within plan assets and valuation tcchniqucs used to mcasurc the fair vaIuc of plan asscts.
,
SCCNok 2(0) below Tor the required disclosurcs.
Effcctivc Junc 30, 2009, CERC adoptcd ncw accounting guidance on intcrirn disclosum about fair valuc of financial instrumcnts which
cxpands thc fair vduc disdosum required for a11 financial: instrumcnts to intcrim pcriods. This ncw guidancc also rcquim cntitia to disclosc in
intcrim pcriods h c mcthods and significant assumptions wcd to cstimatc thc fair valuc of financial i s r m n s CERCs adoption of this ncw
ntuct.
guidancc did not haw a matcrial impact on its financial: position, rcsuIts of opcrations or cash flows.
Effcctivc Junc 30,2009, CERC adopted ncw accounting guidancc on subscqucnt cvcnts that cstablishcs gcncnl standards of accounting for
and disclosure of cvents h a t occur aner thc balance shcct datc but bcfore financial statcmcnts arc issucd or arc availablc to bc issucd. CERC’s
adoption orthis ncw guidancc did not havc a matcrial impact on its financial position, results of opcrations or a s h fIows.
Effcclivc July 1, 2009, CERC adoplcd ncw accounting guidancc on thc Financia1 Accounting Standards Board (FASB) Accounting
Standards Codification (Codifidon) md thc hicrarchy of gcnerally acccpted accounting principlcs. This new accounting guidancc cstabIishcs
thc Codification as the sourcc of authoritative U S gcncnlIy accepted accounting principlcs rccognizcd by thc FASB to be applicd by
..
nongovcrnmcnhl cntitics. Rulcs and interprctive rchscs of the Securities and Exchange Commission (SEC) under authority of fcdcral
securities Iaws arc aIso sources of authoritative U.S. g c n e d y acceptcd accounting principIes for SEC registrants. CERC’s adoption of lhis ncw
guidmcc did not have any impact on its financial position, rcsuits of operations or cash flows.
In Junc 2009, thc FASB issucd ncw accounting guidance on consolidation of variabb inlcrcst cntitics (VIES) that changcs how a rcporting
cntity dctcrmincs a primary beneficiary thnt would consolidate thc VIE from a quantitativc risk and rcivards approach to a qualihtivc approach
bascd on which vnriablc intcrest hoIder has the powcr to direct the economic performance rclated activities of the VIE as wcll a ihc obligation
s
to absorb losscs or right to rcccive benefits that could potcntially bc significant to the VIE. This new guidance rcquircs thc primary bcncficiary
asscssrncnt to bc pcrformcd on an ongoing basis and also rcquircs cnhanccd discfosurcs that will prwidc more transparency about a company’s
involvcmcnt in a VIE, This ncw yidmcc is e f f ~ t i v e a reporting entity’s first annual rcporting pcriod that b g i n s aflcr Novcmbcr 15,
for
2009. CERC cxpccts hat thc adoption of this ncw guidance wiIl not have a material impact on its financial: position, rcsuIts of opcrations or cash
flows.
In January 2010, thc FASB issucd ncw accounting guidancc to rcquirc additiond fair vaIuc rclatcd disclosurcs incIuding transfcrs into and
out of LcvcIs I and 2 and scpantc discIosurcs about purchases. saIcs, issuanccs, and scttlcrncnfs rcIating to Lcvcl 3 rncasurcrncnts. It also
clarifies misting fair vafuc disclosurc guidancc about thc Icvcl of disagegation and about inputs and valuation tcchniqucs. This ncw guidancc
is cffcclivc for thc first rcporting pcriod bginning aflcr Dcccmbcr 15,2009. Thc adoption of h i s nmv yidancc wiIl not havc a makrial impact
on CERC’s financial position, rcsuIts of opcration or cash flows.
49
TuMe o.Conrerris
Managcmcnt beIicvix thc impact of othcr rcccntly issued standards, which arc not yct effectivh will not havc a materia1 impact on CERC’s
consolidatcd financia1 position, rcsdts of operations or cash flows upon adoption.
(0) Employee Bmefir Plans
Pension PZans
Substantially all of CERC’sempfoyccsparticipate in CenterPoint Encrgy’s quaIified non-contributory dcfincd bencfit pcnsion pJan. Under
thc cash balance formula. participants accumulatc a rctircrnent benefit bxcd upon 5% of cligiblc arnings, which i n c m c d from 4% cffcctivc
January I, 2009, and a c m c d intcrcst. Prior to 1999, thc pension pIan accrucd bcncfits bascd on ycars of scwicc, finaI avcrage pay and covcrcd
cornpcnsation. Certain cmpIoyccs participating in thc plan a of December 31, I998 automatically receive thc grcatcr of thc accrucd bcncfil
s
calcufatcd undcr thc prior pIan formula through 2008 or thc a s h baIancc formula.
CcntcrPoint Encqg’s funding p o k y is to rcvicw amounts annually in accordance with applimblc rcguJations in ordcr to achicvc adcquatc
funding of projcctcd bcncfit obligations. Pcnsion cxpense is allomlcd to CERC based on covcrcd cmpIoyw. This calculation is intcndcd to
alIocatc pcnsion costs in the samc rnanncr as a scpamte empfoycr plan. Asscts of the plan arc not scgrcgatcd or restricted by CcntcrPoint
Enew’s participating subsidiark. CERC recognized pcnsion cxpcnsc of S5 rniIlion, income of $3 milIion and cxpcnsc of $45 million for thc
ycars cndcd Dcccmbcr 3 1,2007, ZOOS and 2009, mpcctively.
In addition to the plan, CERC participates in CentcrPoint Encra’s non-qualified bcncfit tcstomtion pIans, which allow participants to
rcceivc thc bcncfits to which thcy would havc becn entitled undcr CcntcrPoint Encw’s non-contribulory pcnsion plan cxccpt T r fcdcrally
o
mandatcd limits on qualified plan bcncfits or on the h e 1 of cornpcnsation on which qualificd pIan bcncfits may bc calculated. Thc cxpcnsc
associalcd with thc non-qualified pcnsion pJan was Icss than $1 miflion, lcss than $1 m i h n and $2 million far tIic ycars cndcd Dcccmbcr 31,
2007, ZOOS and 2009, rcspcctivcIy.
Saviiigs Nan
CERC parlicipatcs in CcnterPoint Energy’s qualificd savings pIan, which includcs a cash or dcfcrrcd arrangement undcr Scction 40l(k) of
thc IntcmaI Revcnuc Codc of 198G, as amendcd. Undcr thc plan, participating employccs m y contributc a portion of thcir cornpcnsation, on a
prc-tax or akr-tax basis, gcncdly up to a maximum of 5 0 % which increased from 16% in pn’orycm. of cornpcnsation. Effcctivc January 1,
2009, CERC rnatchcs 100% of Ihc first 6% of cach ernploycc’s cornpcnsation contributed. CERC prcviously matchcd 75% of thc first 6% of
cach cmploycc’s compensation contributcd w t the polntia1 for an additiond discrctionq match of up to 50% af thc first 6% or cach
ih
cmploycc’s compcnsation contributcd. Thc matching contributions arc fuIly vcstcd at all times. Centerhint Encrm allocates to CERC thc
saving plan bcncfit cxpense relalcd to CERC‘s cmployees. Savings plan bcncfit cxpcnsc was 517 milIion, %IS miflion and $15 miIlion for cach
of thc ymrs cndcd Dcccmbcr 3 1,2007, ZOOS, and 2009, rcspectivcly.
CERC’s cmployees participatc in CcntcrPoint Energy’s plans which providc ccrtain healtharc and lifc insumec bcncfits for rctircd
crnployccs on a contributory and non-contributory basis. Employees bccomc cligiblc for thcse bcnefits if they have mcl ccrtain agc and scrvicc
rcquiremcnls at rctircrncnf as dcfincd in thc plans. Under plan amcndmcnts cffcctivc in em1y 1999, healthcarc bcncfits for futurc rctirtxs wcrc
changcd to Iimit cmploycr contributions for medical coveragc. Such bcncfit costs arc accrucd ovcc rhc activc service pcriod of cmployccs. CERC
is rcquircd to fund a portion of its obIigations in accordance with rate orders. All orhcr obligations are fundcd on a pay-as-you-gobasis.
50
Table ojConrctits
Thc nct poskctircrncnt bcnciit cost incIudcs thc foIlowing components:
YarEadctl ~ccrmI1cr31.
2W7 zoos 2009
(In mitllons)
-
Service cost bcncfits m c d duringtho period $ 1 % 1 % 1
Intcrcst cost on projcctcd bcncfit obligation 7 7 8
Expcctcd rctum on plan asscts (1) (1) (11
Amortiption of prior s w i m cost 2 2 2
Net postrcti&mc{t bcncfit cdst
, . , L
% -
' 9 s . . . . - 9'-$' ,
10
CERC uscd thc following assumptions to detcrminc nct postrctircmcnt bcncfit costs:
Y a r E n d d ~counbcr31.
ma7 2008 ZIl09
Discount h t c , 58%
.5 ' ' 6.40% ' ^ 6.90%
Expcctcd rcturn on plan assscts 4.50% 4.50% 4.50%
In dctcrmining ncl pcriodic bcnelits cost, CERC uscs fair value, as of the beginning of thc year, as its basis for dctcrmining expectcd return
on plan assscts.
FoIlowing arc rcconciliations of CERC's bcginning and cnding bafanccs of ils postrctircmcnt bcncfit plan's bcncfit obligation, plan asscts
and fundcd shtus for 2008 and 2009. Thc mcasurcment dates for pIan assets and obligations wefe Dcccrnbcr31,2008 and 2009.
Change in Benefit Obligation
AccurnuIatcd bcncfitobIikatio6 bcginning ofycar
scrvicc cost
Interest cost . .
Benefits paid
Mcdiurc rcimbukcmcnt
Participant contributions
Acluariial loss
AccurnuIalcd bcncfit obIigation, cnd of ycar $ I20 $ 2
I1
Change in PIan Assets 5 . . .*
Plan asscts, bcginning ofycar $ 20 $ 20
Bcncfits paid . (19) . . 1 . ID)
Employer contributions 14 16
Participant contributions * 4 . I. 5
Mcdicarc reimburscmcnt rcccivcd 1 . . -
Actual investment rchm , '% -,, a '2
Plan ass&, cnd o f y a r $ 21
Amounts Rccognizcd in Balancc Shccts
Currcnt IiabiIities-othcr $
OthcrliabiIiti~-bcncfit obligations ,. - .-. - -
(8)
m)
2 -'
Nct liability, cnd of year J% 100
ActuariaI Assumptions
Discount ratc 6.90% 5.70%
Expcctcd long-tcm rcturn on assscls 4.50% 4.50%
Hcalthcart:cost trcnd ratc assurncd for thc ncxt year 65%
.0 7.50%
Prescription m s trmd ratc assumcd for thc next ycar
ot 12.00% S.OO%
Ratc to which thc cost trcnd ratc is assumcd to dcclinc (ultimatc trcnd ntc) 5.50% .0
55%
Y w that L e hcalthure ratc reachcs the uItimale trend rate 201 I 2014
Ycar that tho prcscription drug n t c ruchcs thc ultimatc trcnd mtc 2014 2015
51
Table o Conreno
f
Thc discount ratc assumption was dctcrmincd by matching thc awrucd cash flows of CentcrPoint EncrGy's plans against a hypothctical
yicId cuwc of high-qualily corporate bonds rcprcscntcd by a series of annualized individual discount rates fmm onchaIf to thirty years.
The cxpcctcd rate of rctum assumption w x dcvcloped by a wcightcd-average return maIysis of thc targckd a c t allocation of thc
CcntcrPoint Encrjg's plans and ihc cxpccted rcal rclurn for cach asset class, b a w l on thc Iong-ierm capital markct assumptions, adjustcd for
invcstment fccs and divcrsification cffcets, in addition to cxpcctcd inflation.
For mcasurcmcnt pucposcs, heallhcarc costs are assumed to increase 7.50% during 2010, after which this ntc dccrcascs until reaching thc
ultirnatc rate of5+5O% 2014. Prescription drug costs are assumcd to incrmc 8.00% in 2010, aflcr which this ratc dccrcascs until rcaching thc
in
ultirnatc rate of 5.50% in 2015.
Amounts recognnizcd in accumulated olhcr cornprehensivc Ioss consist of the following:
Ymr Hndul Dccernber31.
200s 2009
(In millions)
Unrecognized actuarial loss - . .. . . s 14 S 21
Unrccognized prior scrvicc cost IO 8
24 29
Lcss dcfcrrcd tax bencfit ( I ) (211 1
(25
Net amount rccognizcd in accurnulalcdo$er comprehcniivc Ioss . . .. $ 3 :% 4
(1) CERC's postrctircmcnt benefit obIigation is reduced by thc impact of non-taxable govcmrncnt subsidies under thc Mcdicarc
Prescription Drug Act. Bcwusc thc subsidics are non-taxabfc, thc temporary diffcrencc uscd in rnmsuring thc dcferrcd tax impact is
dctcrmined on thc unrccognizcd losscs cxduding such subsidics. Accordingly, the unrecognized fosscs uscd for dctcrmining dcfctrcd
taxa wcrc $54 milIion and $60 million as of Dcccmbcr 31, ZOOS and 2009, rcspcctively.
Thc changcs in plan assets and bcnefit obligations rccognized in othcr comprchcnsivc income during 2009 arc a follows:
s
Posl~lIrunur
t
IknClils
.. . ,
(Jn m~lllorts)
Net Ioss $ 7
A m o r b t i o n of prior scrvicc cost (2)
Total rccognized in othcr cornprchcnsiveincomc . . I .
s 5
Thc total cxpcnsc rccognized in nct pcriodic costs and other comprchcnsivc inwme w s $15 million for poshtircmcnt bcnciits for the ycar
a
cndcd Dcccrnbcr 31,2009.
The amounk in accumulated other comprchcnsivc incomc expected to bc rccopizcd a componcnts ornet periodic bcncfit cost during 2010
s
arc as foIlows:
(hmillions)
Unrccsgnized prior scrvicc cost , , . ' I 0 , ' 2
Amounts in olhcr comprchcnsivc incomc to bc rccognizcd as net periodic cost in 2010 $ 2
Assurncd hcaIthcarc cost trcnd ntcs havc a significant cffcct on thc reported amounts for CERC's postrctircmcnt bcncfit plans. A 1%
change in thc assumed hcatlhcarc cost trcnd rate would havc thc following cffects:
1'A
.. IY
E
I n m e Dcerrve
(lnrnillioas) ,,
Effcct on thc posktircment bcnefit obIigation ' $ 4 $' 4
Effcct on the tohl of scrvicc and intcrcst cost
52
In managing thc investments associatcd with the postrctiremcnt bcncfit plan, CERC's objective is to pmcwe and cnhancc thc vafuc of plan
asscts whib maintaining an acccptablc Icvcl of valatiIity, Thcsc objcctivcs arc cxpcctcd t bc achicvcd through an invatment stratcpy that
o
manages liquidity requircmcnts while rnainlaining a Iong-termhorizon in making invcstmcnt decisions and emcient and cffcctivc managcmcnt
of plan asscts.
As part of thc invcslmcnt stratcgy discussed above, CERC adopted and maintained the folIowing assct allocation mgcs for its
postrctircmcntbcnclit plan:
. . .,+ . , .,.. ..,. .
Dbm$tic iq&y secun'tics
I < , .
.. .. . &IO%
>
-
Dcbt s c c u r i h sa100%
Cash 0-2%
Thc fair valucs of CERC's postrctircmcntpIan asscfs at Dcccmbcr 3 1,2009, by assct mtcgory arc as foIlows:
Fair V d u e M~uarcmcnts at
necanber 31.2009
(in milliousl
QUO^^ rfi- in SIp!ifiual Signlfiwut
Active Markctt for Qbrcrvabte Uaolrswable
lrlartid k c l r Inputs
Mutual iunds(1) . . .. ,.
Total
(1) 9S%-ofthcamount investcd in mutual funds w s in fixed income securities and 5% was in U.S cquitics.
a
CERC cxpccb to contributc $9 milIion to its postrctircmcnt bcncfits plan in 201 0. The folIowing bcnefit payments arc cxpcctcd to bc paid
by Ihc postrctircmcnt bcnefit plan:
Posimtimcat Bmeiit Plan
Medimrc
2010
201 1
2012
2013
2014
20 15-20 1 9
Postemployment Beticfirs
CERC participates in CcnterPoint Encw's plan that providcs postcmpIoymcnt bcncfits for formcr or inactivc cmpIoyccs, thcir bcncficiaries
and covered depcndcnts, after employment but before rctircmcnt (primady healthcare and life insurancc bcncfik for participanb in thc Iong-
tcrm disabiIity plan). CERC rccorded postcmployment bencfit income of $2 miIIion, cxpcnsc of SI milIion, and $4 thc ycars cndcd
for
Dcccrnbcr 31, 2007, 200B and 2009, rcspcctivcIy. Amounts relating to postcmployment bcncfits included in -Bcnciit Obfigalions" in thc
accompanying Consolidalcd Balancc S h d s at Dcccmbcr 31,2008 and 2009, wcrc SI6 milIion and $14 million, rcspectivcly.
CERC participatcs in Centerpoint Enera's dcfcrred compcnsation plans that providc bcncfifs payabIc to directors, officcrs and ccrlain key
cmpfoyccs or thcir designatcd beneficiaries at spccificd ruiurc datts, upon tcrmination, rctircmcnt or dcath. Bcncfit payrncnts are madc from the
gcncnl mcts of CERC. During 2007, 2008 and 2009, h c bcncfit cxpcnsc rclating to thcsc programs was lcss than $1 million mch ymr.
Amounts rclating lo dcfcrrcd compcnsation plans incIudcd in "Bcncfit ObIigations" in thc accompanying ConsoIidatcd Balance Shccts at
Dcccmbcr 3 I , 2008 and 2009 wcrc $1 million and $2 million, rcspcctivcly.
53
Tuble o Contcnrs
f
Other EntpIoyce Mal lcrs
As of Dcccmbcr 3 1,20051, approximakIy 30% of CERC’sempfoyccs arc subjcct to collective bargaining agmcrncnts.
b) Other Curretit Ass& and Liabililies
IncIudcd in olhcr currcnt asscts on the Consofidatcd Balancc Shects at Dcccmbcr31, 2008 and 2009 was S42milIian and $19 rnilhn,
rcspcctivcly, of margin dcposits and $128 milIion and $80 miIlion, rcspectivcly ofundcr rccovcrcd gas cost Includd in ohcr currcnt IiabiIitics
on tfic Consolidatcd Balancc Shects at Deccmbcr 3 1,2008 and 2009 was $79 million and $70 milIion, respcctivdy, of ovcr rccovcrcd gas cost.
(3) Regulatory Mattcrs
(a) IIurricmte I h
CERC’s natura1 gas distribution buincss (Gas Opcrations) suffcrcd somc damage to its system in Houston, Tcxas and in othcr portions of
ils scwicc tcmtory across Tcxas and Louisiana as a rcsult of Hurriwnc Ikc, which struck the upper Tcxas coast in Scptembcr 2008. As o f
Dcccmbcr 31,2009, Gas Opcntions has dcfcrrcd approximately $3 million of costs rcIatcd to Hurrimnc Ikc for rccovcry as part of natura1 gas
distribution n t c procccdings.
@ Ratc Prorceditgs
)
Tarn, In March 2008, Gas Opcntions fiIcd a rcqucst to change its ntcs with thc Railroad Commission of Tcxas (Railroad Commission)
and the 47 cilics in ifs Tcxas Coast scwicc territory, an area consisting of approximatcly 230,000 customers in cities and cornmunitis on thc
outskirts of Houston. In 2008, Gas Opcrations implcmcntcd ntcs incrcasing annual rcvcnw by approximatcIy $ . million. The impIcmcntcd
35
mtcs wcrc contcstcd by 9 cities in 3n appcal to thc 353rd District Court in Travis County, Tcxas. In January 2010, that court rcvcrscd thc
RaiIroad Commission’s ordcr in part and remandcd thc maltcr to thc RaiIroad Cornmission. Thc court eoncIudcd that the Railroad Commission
did not havc statutory authority to imposc on thc complaining cities the cost of scwicc adjustment mcchanism which thc Railroad Commission
had approvcd in its ordcr. Ccrtain partics filcd a motion to modi& the district court’s judgncnt and a find dccision is not cxpccted until April
2010. CERC docs not cxpcct thc outcornc of this mattcr to havc a mabrial adverse impact on its financial condition, rcsults of operations or cash
flows.
In July 2009, Gas Opcrations filcd a rcqucst to change its rates with thc Railroad Commission and the 29 citics in its Houston scrvicc
territory, consisting of approxirnatdy 940,000 customers in and around Houston. The rcqucst sccks la cslabIish uniform rata, chargcs and tcrms
and condidons of scrvicc for thc citics and cnvirons of thc Houston service territory. As finally submittcd to thc Railroad Commission and the
citics, thc proposed ncw ntcs would rcsuIt in m ovcn11 incrmsc in annual rcvcnue ofS20.4 milIion, cxcluding wnying costs on gas invcnhy of
approximatdy $2 milIion. In January 2010, Gas Opcntions withdrcw its requcst for an annual cost of scwicc adjustment mcchanism duc to thc
uncertainty causcd by thc court’s ruling in thc abovc-rncntioned Texas Coast appwl. In Fcbruaty 2010, thc Railroad Commission issucd its
decision authorizing a rcvcnuc i n c m c of $5.1 miIlion annually, reflechg rcduccd dcprcciation nta of $1.2 mi1lion. The Railroad Commission
also approvcd a surcharge of $0.9 miIlion pcr ymr to rccovcr Humcanc Ikc cos& ovcc thrcc ycars.
Minnesota In Novcmbcr 2006, thc Minncsota Public Utilities Commission (MPUC)dcnicd a rcqucst filcd by Gas Opcrations for a waivcr
of MPUC rulcs in ordcr to allow Gas Opcntions to rccovcr approxirnateIy $21 miflion in unrccovcrcd purchascd gas casts rclatcd to pciods
prior to Jufy 1,2004. Thosc unrccovcrcd gas costs wccc idcntificd as a rrYuIt of revisions to prcviousfy approvcd calculations of unrccovcrcd
purchascd gas costs. Following that denial, G s Opcntions rccordcd a $21 milIion adjusfmcnt to rcducc prc-fax camings in thc fourth quarlcr of
2006 and rcduccd thc regulatory assct rclatcd to thcsc costs by an cquaI amount. In March 2007, foIlowing thc MPUC’sdcnial of rcconsidcntion
of its d i n g , Gas Opcrations pctitioncd thc Minncsota C u t of Appcals for rcvicw of thc MPUC’s decision, and in May 2008 that court ruled
or
that the MPUC had bccn arbitmy and capricious in denying Gas Opcntions a waivcr. Thc MPUC sought further review of the court of appmls
dccision from thc Minncsota Suprernc Coutt. In July 2009, thc Minnesota Supremc Court rcvcrscd fhc dccision of thc Minncsota. Court of
Appcals and uphcId thc MPUC’s dccision to dcny thc rcqucstcd variance. The court’s dccision had no
54
Table o Contcnts
f
ncgativc impacl on CERC’s financia1 condition, results of operations or cash flows, as thc cos& at issuc wcrc wn’ttcn o f fat llic tirnc thcy wcrc
disdIowcd.
In Novcrnbcr 2008, Gas Opcrations filcd a rcqucst with thc MPUC to inctcase its rat- for utility distribution service by $59.8 milIion
annualIy. In addition, Gas Opcrations sought an adjustmcnt mcchanism that wouId annually adjust rates to reff cct changcs in usc pcr customer.
In Dcccmber 2008, thc MPUC acccptcd thc case and approvcd 3n interim rate increase of $51 -2 million, which bccarnc cffcclive on January 2,
2009, subjcct to rcfund. In January 2010, thc MPUC issued its decision authorizing a rcvcnuc incrmsc of $41 milIion pcr y r wilh an ovcmlf
w,
rate of rctum of 8.09% (10.24% rctum on cquiry). Thc diffcrence bctween the rates appmvcd by thc MPUC and amounts collcctcd under thc
intcrim ntcs, $10 miIlion a orDccember 31,2009, is rccordcd in othcr currcnt liabilitis and wilI bc d u n d c d to custorncrs. Thc MPUC also
s
authorizcd Gas Opcntions to impkment a pilot program for rcsidcntial and mal1 volumc commcrcial custorncrs that is intcndcd lo dccouple gas
rcvcnucs from cwlomcrs’ natura1 gas usage. In February 2010, CERC filcd a rcqucst for rchcaring of thc ordcr by thc MPUC. No othcr party to
thc cast iilcd such 3 rcquest. CERC docs not cxpect a final ordcr to bc issucd in this procccding until spring 2010.
Mississippi. In July 2009, Gas Opcrations filed a request to incrcasc its rata for utility distribution scrvicc wilh thc Mississippi PubIic
Servicc Commission (MPSC).In Novcmbcr 2009, as part of a settlement agrccrncnt in which thc MPSC approvcd Gas Opcntions’ rctcntion of
thc compcnsation paid undcr Ihc tcrms of an asset management agrcement, Gas Opcrations withdrcw its mtc rcqucst.
(c) RcguIatory A ccounliltg
CERC has a 50% ownership intcrcst in SESH which owns and opcraks a 270-miIc interstate natural gas pipcline. In 2009, SESH
discontinucd thc usc of guidancc for accounting for reguhtcd opcmtions, which rcsuItcd in CERC rccording its share of thc cffccls of such write-
offs of SEW’S rcgulatory asscts through non-wsh pretax charges for the year ended Dcccrnbcr 31, 2009 of $IG milIion. Thcsc non-cash
c h a q p arc reflected in equity in a r n i n g of unconsoIidatcd afiIiata in thc Statcrncnts of Consalidatcd Incomc. Thc rdatcd tax bcncfits of
a
$6 milIion arc rcffcctod in thc Incomc T x Expcnsc lint in thc Statcmcnls of Consofidatcd Incomc.
(4) Related Party Transactions
CERC parlicipatcs in a “moncy pool” through which it mn borrow or invest on a short-tcrm basis. Funding nccds arc aggrcgalcd and
extcrna1 borrowing or investing is bascd on thc nct cash position. Thc nct funding rcquircmcnts of thc moncy pool arc cxpcclcd lo bc rnct with
borrowings undcr CcnterPoint EncrH’s revolving crcdit facility or the salc of CcntcrPoint Encra’s wmmcrcial papcr. CERC had rnoncy pooI
borrowings of $-0- and $432 rniIlion at Dcccrnbcr 31,2008 and 2009, rcspcclivcly, which arc includcd in accounls and nolcs payablc-afTiIialcd
compmim in thc Consolidatcd Balancc Sheets. At Dcccmbcr 31,2009, CERC’smoncy pooI borrowings had a wcightcd-avcmgc intcrcst mtc o f
0.18%.
CERC had nct intcrcst cxpcnsc rcIatcd to amIiatc borrowings of $3 million, $1 million and IES than $1 million for ihc ycars cndcd
Dcccmbcr 3 1,2007, ZOOS and 2009, rcspcctivcly.
CcntcrPoint Encrgy providcs snmc corpontc scwiccs to CBRC. Thc costs of scwices haw bccn chargcd dircctly to CERC using mcthods
that managcmcnt bclicws arc rcasonablc. These mcthods includc ncgohted usagc rates, dcdicatcd asset assignment and proportionate corporatc
formulas bascd on opcraling cxpenscs, asscts, gross margin, crnpIoyccs and a compositc of asscts, gross margin and crnpIoyccs. Thcsc charges
arc not ncccssariIy indicative of what would havc bccn incurrcd had CERC not been an affiliate. Amounts chargcd to CERC for thcsc scwiccs
wcrc $133 miIlion, $140 miIlion and 5154 milIion for 2007, 2008 and 2009, respcctivcly, and are inchdcd primarily in operation and
maintcnancc expcnscs.
In cach of 2007,2008 and 2009, CERC paid dividcnds of$100 million to its parcnt.
55
(5) Derivative Instruments
CBRC is cxposcd to various markct risks. Thesc risks arisc from transactions cntcrcd into in thc noma1 coursc of business. CERC utilizes
dcrivativc instrumcnts such as physical forward contracts, swaps and options to mitigate the impact of changcs in commodity priccs, wvcalhcr and
intcrcst rata on its opmting muIts and cash ff o s
w.
(a) Noti- TradingActivities
Derivativc instniments. CERC cntcrs into certain dcrivativc instruments to managc physical commodity pricc risks and docs not cngagc in
pmprictaq or spcculativc commodity trading. Thesc financial instruments do not qualify or arc not designnatcd as cash flow or fairvduc hcdgcs.
During thc ycar cndcd Dcccmbcr31, 2007, CERC recorded i n c m c d natural gas cxpcnsc from unrcalizcd nct losscs of
SIOmillion. During thc ycar cndcd December 31, 2008, CERC recordcd incrcascd natural gas rcvcnucs from u n r d z c d net gains of
$101 rniIlion and incruscd natural gas cxpensc from unralizcd net losscs of $88 million, a nct unrcalizcd gain of$13 million. During thc ycar
cndcd Deccmbcr 31, 2009, CERC recorded dccrcascd m e n u s from unrcaIizcd nct losses of $50 million and dccrcascd natural gas cxpcnsc
from unrdized nct p i n s of 557 million, a nct unrcalizcd loss of $23 million.
In prior ycars, CERC cntcrcd into ccrtain dcrivativc instrumcnts that were designated as cash flow hedges. Thc objcetivc of thcsc dcrivativc
instruments was to hedge thc pricc risk associatcd wilh natuml gas purchascs m safcs to rcduce cash flow variabiIity rcIatcd to rnccting C E R O
nd
wholcsalc and rchil customcr obIigations. In 2007, CERC discontinucd designating thcsc instruments as a s h flow hcdgccs. As of Dcccrnbcr 31,
2009, thmrc arc no rcmaining amounts dcfcrrcd in othcr cornprchcnsivc incomc d a t e d to tbcsc instrumcnts that had previously bccn dcsignatcd
a a s h flow hcdgcs.
s
Weather HedEa. CERC has wmther normalimtion or othcr rate mechanisms that mitigate thc impact of wcalhcr on its gas opcmtions in
Arkansas, Louisiana, Oklahoma and a portion of Texas. Thc rcrnaining Gas Opcmtions jurisdictions do not h a w such rncchanisms. As a rcsuIf.,
fluctuations f o normal wmthcr may havc a signifiant positivc or ncgativc cffcct on thc results of the gas opcntions in thc rcmaining
rm
jurisdictions.
In 2007, 2008 and 2009, CERC cntcrcd into hmting-dcgree day swaps to mitigatc thc cffect of fluctuations f o norma1 wcathw on its
rm
financia1 position and cash flows for thc rcspcctivc wintcr h a t i n g scasons. Thc swaps wcrc based on tcn-ymr normal wcathcr. During thc y c m
517
cndcd Dccembcr 31, 2007, 2008 and 2009, CBRC rccognizcd losses of $4, million and $6 million, rwpcctivcIy, rclatcd to thac
swaps. Thc fossa wcrc substantially offsct by increased rcvcnucs duc to coldcr than normal weather. Wmthcr hcdgc IOSSCS arc incIudcd in
rcycnucs in thc Smcmcnts of ConsoIidated Incomc.
3
( ) Derivniive Fair Values and Iiiconic Statemmi IttVacLs
Thc folIowing tabla prcscnt information about CERC's dcrivative insttumcnts and hcdEing activities. Thc first hblc providcs a baIancc
shcct ovewicw of CERC's Non-trading Derivative hsscts and Liabilitics as of Deccmbcr 3 1, 2009, whilc thc Iattcr tabIc providcs a bmkdown
ofthc rclatcd incomc shkmcnt impact for the ycar ended Dcccmbcr 3 I, 2009.
Fair Valttc o r Derivative h . m m c n l s
D K - I W ~ ~ ,20n9
Dcriva tive Dcrivafivc
T o t a l d e r i m l k a not dulgnated zs hcdglng BaLnre Shed k C k Liabililies
inrtrrrmutlr Lomilon Fair Value @) (31 Fair Value 0 )I.1)
(in miltiom)
Commodi&contracts ( I ) . . ..
. -GumcntAsscts s 46 $ (7)
Commodity conmcts (1) Othcr Asscts 16 (1)
Commodity contmcts (11 . . . . , Curient Liabilities 20 (123)
Cornmodit; conhack, j iI OLhcr Liabilitics 1 - (SG j
, . Total:
$ 83 %' ' ' (217)
56
Tablc oJCanrcrus
(1) Commodity conlncfs arc subjcct to master nctting arrangements and arc pracntcd on a nct basis in h c Consolidatcd Balancc Shcels.
This nctting cawcs dcrivativc assets (liabilitics) to bc uItimatcly prcscntcd nct in a liability (assct) account within thc Consolidatcd
Balancc Shccfs.
(2) Thc fair valuc shown for commodity contracts is comprised of dcrivativc gross voIumcs tolafing 674 bilIion cubic fcct (Bcl) or a nct
152 Bcf Iong position. Of the net long position, basis swaps constilute 71 Bcf and volumcs associatcd with price stabilization aclivities
ofthe Natural G s Distribution busincss scgmcnt comprise 51 Bcf.
a
(3) Thc nct of total: non-tmding dcrivativc a s and liabifitics is a $39 million Iiabiiity as shown on CERC's ConsoIidatcd Balancc Sheets,
s%
and is compriscd of thc commodity conkacts dcrivative assets and Iiabilities scparatcIy shown abovc offsct by colIatcral nctting of
$95 rniIlion.
For CERC's pricc stabilization activitics of thc Nahrnl Gas Distribulion busincss scgment, the scttlcd costs of dcriwtivcs are uILimately
rccovercd through purchased gas adjustmcnts. Accordingly, thc nct unrwlizcd gains and losses associatcd with interim pn'cc movcrncnts on
contracts that arc accountcd for as dcrivativcs and probabIc ofrecovery through purchascd gas adjwtmcnts arc rcardcd as nct rcgulaioty i~sscfs.
For thosc dcrivativcs that arc not indudcd in purchascd gas adjustments, unrealized gains and Iosscs and scttlcd amounts arc rccognizcd on thc
Statcmcnts of ConsoIidatcd Incomc a wcnuc for rclail sales dcrivativc contracts and as natural gas cxpcnsc for natunl g s dcrivaliva and non-
s a
rctail rclalcd physica1 gas dcrivativcs.
h m m c Shlanmt Irnprct oC Derivative Aclivity
Ycar
TOMderivnthra not desIgnalcd as hedging End4
ins t r um CILts TucomeStafanmt h a t i a n Dccmbcr31.2001
(in millions)
Commodity contracts .;: '-..I .. . . - .:, .. ...- L I -: , I - , in Rwcnuc .._. I : . ' , :
:Gains ( L O S S ~ ~ ) .I , .,.,.. I ,, I $ :, :' .
I,_ . IO2
Commodity contracts (1)
.
Gains (Losscs) in Expcnsc: Natural Gas
- . :. . . ,. : '..". :: : :. ': . .'.
A
Tola[ : . 'I ; : , ' > '
4 . :
, , ,,f : , ' I , . .,.' : , ' . . 1 , . , , , %
,'
- 153'
(
( I ) The Gains (Losses) in Expcnsc: Natural Gas incIudcs S 1SI) million of cosk associated with pricc stabiIization activitics or the Natural:
Gas Distribution b u s i m s scgmcnt that 4 1 bc uItimatcly recovered through purchascd gas adjustmcnts.
( ) Credit R M ConfingettiFeafims
c
CERC cntcrs into financial dcrivativc contracts containing materia1 advcrse change provisions. Thcsc provisions rcquirc CERC to post
additiona1coflateral: if the Standard & Poor's Rating Scrviccs or Moody's Invcstors Scrvicc, Inc. crcdit n h g of CERC is dawnpdcd. Thc tohI
fair valuc of thc dcrivalive instruments that contain credit risk contingcnt fcaturcs that arc in a nct liability position at Dcccmbcr 3 1, 2009 is
5140 milIion. Thc aggrcgatc fair value of assets that are already postcd as collatcd at Dcccmbcr31, 2009 is $65 million. If a11 dcrivativc
conhacks (in a nct Iiabilily position) containing crcdit risk contingcnt fcaturcs wcrc triggcrcd at Dcccmbcr 3 1. 2009, $75 milIion of additiond
asscts would bc rquircd to bc postcd a colIateral.
s
4
( Credit Qualify o Counterpartics
f
In addition ta thc risk associatcd with pricc movcmcnts, crcdit risk is also inherent in CERC's non-tnding dcrivativc adivitics. Crcdit risk
rclatcs to thcrisk of loss rcsulting f o non-pcrformancc of contractual: obligations by a wuntcrparty. Thc folIowing hblc shows thc
rm
camposition of countcrpattics to thc nowtrading derivative assets of CERC as of Dcccmbcr 3 1,2008 and 2009 (in millions):
Encrg markctcrs
Financial institutions 4 4 2 4
RctaiIbnduscrs(2) '. ' 5 125 1 . -- " 44
Total s 17 I 138 $ 9 % 54
57
Tubk o/Contcnts
( I ) “Invcstmcnt gmdc” is primarily dctermincd using publicly availabk crcdir ntings along with thc considcralion of crcdit support (such
as parcnt company gumtics) and colIatera1, which cncarnpass cash and standby Icttcrs of crcdit. For unratcd countcrpartics, CERC
pcrforms financial statement analysis, considcring contractual rights and ratn’clions and collatcral, to crcatc a synthetic crcdit ming.
(2) Rctaif cnd uscrs rcprcsent commercial and industria1 customers who h a w contmctcd to fix the pricc of a portion of thcir physical gas
rcquircmcnts for fhturc periods.
(6) Fair Value Measurwcnts
EfFcctivc January I, 2008, CERC adopicd new accounting guidancc on fair value mcasurcmcntswhich rcquircs additionai disclosures about
CERC’s financial asscls and liabilities that are measured at fair valuc.Effcctive January 1, 2009, CERC adoptcd this ncw guidancc for
nonfinancia1 asscls and liabilitics, which adoption had no impact on CERC’s financial position, results ofopcnlions or cash fIows. Beginning in
January 2008, asscts and Iiabilities rccordcd at fair vaIuc in the Consolidatcd Balancc Shects arc aategorizcd b a s d upon thc lcvcl orjudgncnt
associatcd with Ihc inputs uscd to measurc thcir Y~IUC. Hicrarchid levels, as dcfincd in this guidance and dircclIy rclatcd to thc amount of
subjcctiviry associalcd with thc inputs to fairvalualions of thcsc asscts and fiabilitits, arc as follows:
Level 1: Inplrls arc unadjusted quotcd priccs in activc markcts for identical m c l s or Iiabilitics at the mcasurcmcnt dalc. Thc typcs of m c t s
carricd at Lcvcl I fair vaIuc gcncraily are financial dcrivativcs, invdmcnts and cquiry sccurilia Iistcd in activc markcls.
LCYCI Inputs, othcr than quotcd priccs includcd in LcveI I, are obscrvablc for thc assct or IiabiIity, either dircctly or indircctIy. Lcvcl 2
2:
inputs includc quotcd priccs for similar instnrmcnts in activc markets, and inputs othcr than quotcd priccs that arc obscrvablc for thc assct or
IiabiIity. Fair vahc assets and fiabilitics that arc gcneraily includcd in this atcgory arc derivatives with fair valucs bascd on inputs from
activcly quolcd mxkcts.
Lcvel3: Inpub arc unobscrvabIe for thc assct or IinbiIity, and include situations whcrc Ihcrc is littlc, if any, markct acliviiy for thc a ~ s c or
t
IiabiIily. T ccmin caw, thc inputs used to mmurc fair valuc may fall into diffcrcnt lcvcls of thc fair valuc hicnrchy. In such wscs, thc
n
IwcI in thc fair valuc hicrarchy within which thc fair valuc mcasurcmcnt in its cntircty fdls has bccn dctcrmincd bascd on thc Iowcst IcvcI
input that is significant to thc fair vaIuc mwurcmcnt in its cntircty. Unobscrvable inputs reffcct CERC’sjudgmcnts about thc assumplions
markct participants would usc in pricing thc asset or Iiability sincc limitcd rnarkct data cxists. CERC dcvclops thcsc inputs bascd on Lc bcst
h
information available, including CERC’s own data. CERC’s Lcvcl 3 dcrivativc instrumcnts primarily consist of options that arc not tradcd
on rccognizcd exchanges and arc vducd wing option pricing modds.
Thc foflowing tabla prcscnt inrormation about CERC’s m c t s and Iiabilities (induding dcrivativa chat arc prcscnkd nct) mcasurcd at fair
valuc on a recurring basis as of Deccrnbcr 31,2008 and 2009, and indica& Ihc fair vaIuc hicrarchy of thc vduation tcchniqucs utilizcd by CERC
to dctcrminc such fair valuc.
ksets
Corpntc quiliEs
Invcstmcnis, including moncy
rnarkct fun&
Duivativc rlsscts 8 I55 49 (74) I38
Total w t
cs $ 20 s 155 $ 49 5 (74) s 150
Liabilities
ncrivntivc IiabiliticF s 14 s 244 s 107 (261 S I34
Total linbilitics s 4 4 s 244 s 107 S (261) S 134
Table ojConrcnrs
(I) Arnounb rcprcscnt thc impact of lcgally cnforccabfc master netting agreements that allow CERC to settle positive and negafivc positions
and aIso indude cash collateral:of SI87 mi1lion posted with thc samc counterpartits.
Qunftd P r i m in SignlCiclnt Other SlguiCiclni BabnEc
A c t h Mark& ObrEmbk Unobservahlc as o r
rorTdmlia1 h e t r Inputs Inputs h'ctting Dcccmlrv31.
( l a d 1) W C I 2) (Lcvd3) AdJustrncais0) zno9
(in mntions)
"1 - s I
( I ) hmounk rcprcscnt the impact of IegaIIy enforceable master netting agreements that allow CERC to settle positive and ncgativc
positions and ako indudc cash colIatenl of$% rnilIion postcd with thc samc countcrpartics.
Thc following tabtcs prcscnt additional information about asscts or liabilities, including dcriwtiva that arc mczurcd at fair valuc on a
recurring basis for which CERC has ukilizcd Lcvcl: 3 inputs to dclcrminc fair value:
Beginning balance
Total unrealiixd gains or (IOSSCS):
. Includcd in a m i n s .-. ':"I
' 1 *. . .
Included in regulatory asscts
Purchzsa, sales, other scttlcrncnts, net
Nct transfers into Lcvcl3
Ending balan'cc '. .$' s
: .. . . . .. (58)
The amount of total pins for the period included in earnings
attributable to thc change in unrulized gains or losscs rclating to
asscts still:hcld at thc rcporting datc $ 7 % 1
-
(i) Purchases, sdcs, othcr scltIcmcn&, nct includc a $41 million Ioss and a $66 milIion gain in 2008 and 2009, mpcctivcly, associatcd with
pricc stabilization activities of CERCs Natural Gas Distribution busincss segment.
59
Tublc oJConlcnts
(7) Short-tcnn Borrowings and Long-tcm Dcbt
Short-tcm borrowings;
CERC Corp. rcceivabfcs facility
Inventory finmcing - 75 + 55
Total short-tcrm borrowings ' - ** 153 ' - t
- ' . ' 55
Long-tcm dcbt:
Convertible subordinatcd dcbcntures 6.00%
due 2012(2) 4 . -1
' I 44
. I
7' ' - 44
Scnior notcs 5.95% to 7.875% due 201 I to 2037 &747 - 5747 -
Bank loans due 2012(3) 926' -. - - I
Unamortizeddiscount and premium(4) (s) - 15) -
Total: Idn$c& dcbt 3.712 .' 7 2742 ' 44,
Total dcbt $ 3.712 $ 160 $ 2,742 S 99
Includcs amounts due or c x c h ~ p a b l within onc ymr of thc datc notcd.
c
In January 2010, pursuant to a notice of rcdcmption dated Dcccmber 11,2009, CERC redccmed all of ifs outstanding 6% convcttiblc
subordinatcd dcbcntutcs duc in 2012.
Classificd as Ions-tcrm dcbt bccause the tcrmination datc of thc facility undcr which thc funds were borrowcd is rnorc than onc ycar
bcyond thc data refcrcnccd in thc fablc.
Dcbt aquircd in business acquisitions is adjusted to fair market valuc as of thc acquisition datc. Included in Iong-tcrm dcbt is additional:
unarnortizcd prcmiurn rcIated to fair wluc adjustments of long-tcrm dcbt of $3 million and $2 million, rcspectivcly, at Dcccmbcr 31,
ZOOS and 2009, which i s being amortizcd mcr the respcctivc rcmaining tern of thc relatcd long-tcrm debt.
(a) Shorf-ierntBorrowings
Rewivublcs Fuciiity. On Octobcr 9, 2009, CERC amendcd ifs rcccivables faciIity to cxtcnd thc tcrmination datc to Oclabcr 8, 2010.
Avaihbifily undcr CERC's 364-day rcccivablcs facility ranges from $150 million to $375 million, rcflccling scasonaI changcs in rcccivablcs
balances. At Dcccmbcr31, 2008 and 2009, thc facility size was SI28 milIion and $150 milIion, rcspcctivcfy. As of Deccmbcr 31, 2008 and
2009, adwnccs undcr thc rcccivabh facilities wcrc $78 m i l h n and S-O-,
rcspectivcly.
.
Imcnroly Fiitancitrg In Deccmbcr 2008, Gas Operations cntercd into an m c t rnanagcmcnt agrcemcnt whcreby it sold $ 1 IO miIlion of its
natum1gas in storagc and agrccd to repurchasc an cquivdcnt amount of natural gas during thc 2008-2009 wintcr hcating scason for paytncnfs
totaling $1 14 rniIlion. This transaction was accounted for a a financing and was paid in rulf during 2003.
T Octobcr 2009, Gas Opcrations cntcrcd into m c t managcmcnt agrccrncnts associatcd with its utiIity distribution servicc in Arkansas,
n
Louisiana and OkIahorna. Pursuant to thc provisions of the agrccments, Gas Opcntions soId $104 million of its natural gas in storage and a p e d
to rcpurchasc an cquivalcnt amount of n a t u d gas during the 2009-2010 wintcr h a t i n g season at thc s m c cost, PIUS a financing charge. This
transaction was accountcd for as a finmcing and, a of Dcccmber 3 1,2009, a principal obIigation ofSSS rniflion rcmaincd.
s
Also in Octobcr 2009, Gas Opcntions cntcred into assct managcmcnt agrccrncnts associatcd With ifs utilily distribution scwicc in Louisiana,
ea.
Mississippi and T x s In conncction with these assct managcmcnt agrecmcnts, Gas O p c d o n s cxchangcd natural gas in stomgc for thc right l o
reccivc an cquivalcnt amount of natural g s during thc 2009-2010 wintcr hwting swson. AIthough titlc to the natural g x in stomgc was
a
transfcrrcd to thc third party, thc natural gas continuts to bc accountcd for as inventory duc to thc right to rcceive an cquivalcnt amount of
natural gas during thc currcnt wintcr hcating scason. As of Dcccmbcr 31,2009, CcnterFoint Encrw's Consdidatcd Balance Shccts rcflcct 110
million in Invcntory rclated to I h ~ agrccmcnts.
e
60
Table o Cantents
f
( ) Long-fermDebf
3
Revolving C d i I Fuciiiiy. On Oetobcr 7, 2009, the sizc of thc CERC COT. revolving crcdit facility was rcducod from $950 milIion to
$915miIlion through removal of Lchman Brothcrs Bank, FSB (Lchman) a a lcndcr. Prior to its rcrnoval, Lchman had a $35miIIion
s
comrnilmcnt to Iend. AI1 crcdit facility loans to CERC Corp. that wcrc fundcd by Lehman wcrc rcpaid in Scptcrnber 2005). CERC Corp.'s
$915 million crcdit facility's first drawn cost i the London Interbank Offered Rate (LIBOR) plus 45 basis points based on CERE Corp.'s currcnt
s
credit ratings. Thc facility contains a dcbt to total capitalization covenant.
Undcr CERC Corp.'~$915 milIion crcdit ficility, an additional utiIization fcc of 5 basis points applics to borrowings any tirnc more than
50% of thc faciIity is utiIizcd. Thc spmd to LIBOR and thc utiliation fcc fluctuatc b a s d on CERC Corp.'s crcdit rating.
As of Dcccmbcr 31, 2008 and 2009, CERC C o p . had $926 milIion and $-0-, respectively, of borrowings under its $915 million crcdit
facility. Thcrc was no outstanding commercia1 papcr backstopped by CERC Corp.'s credit facility as of December 3 1,2008 and 2009. CERC
C o p was in compliancc with ail dcbt covenants as ofDeccrnbcr 3 I, 2009.
Mmriries. CERC's mnsolidatcd matwitics of Iong-tcm dcbt arc $44 milIion in 2010, $550 mi1lion in 201 1, E-O- in 2012, $764 million
in 2013 and SIGO million in 2014.
(8) Incamc Taxa
Thc cotnponcnk of CERC's incomc tax cxpcnsc wctc as follows:
Y a r E n d 4 Dccunber 31.
2007 2008 2009
(In millSoas)
a
Currcnt income t x cxpensc (benefit):
Fcderal s 81 s 118 S 1107)
Slatc 28 1s G
Total cupntcxpcnsc (bcncfit): 1 : .:.:
I * . ,' .. ' . ..:, <,: 109.: :. 1 ,136 , ,*::<': .. (101)
Dckrrcd incomc lax cxpcnsc:
Fcdcnl 58 GO 226
Slak 6 32 21
Tolaf dcferrcd cxpensc 64 32 247
Total income tax cxpensc s 173 S 22s $ 146
A rcconcilialion of the cxpcctcd fcdcral incomc tax cxpcnsc using rhc f c d c d statutory incomc t x ntc to ihc actual incomc tax cxpcnse and
a
rcsulting cffcctivc income tax n t c is as follows:
YarEndd ~ c m n b c ~ - 3 1 .
2007 2008 2009
(In millions)
Income before incomc taxcs $ 460 $ 571 $ 376
Fcdcnl statutory mtc ..
35% 35% 35%
l3p;ctr.d fcdcnl incimc trui apcnsc
i r . . 4 I '
161' . ' ' '200 ' ' 132'
Incrcasc (dccrcac) in tax cxpcnsc raulting from: . . , . . .
Stale incomc kixcs, nct Cf f c d iricomc ta;r '
dr 22 I . ' 32 +- -- ' . 18
- . .P?+.. , .,-. (1 1
Dccrmsc i settld and uncemin- tax positions
n . ,
- 1 . 1 .
:+ , . .. .
. . . , ,,...- , , - . ..: ~ ,,- @)..
- .
::O,thcr,'net: , . , ,
' , - . . .
..#I , . . ,. , ' . . -- ... , ,0.2 t (3-,.., - (3) I - '
Total 12 28 14
Totalincqme,tax exp,ense ., r i : ,,, .: :,. , I,; ,. :I 4 1 : ' > : - -,$, . -. - -173 , % - : , ,228.. .$ - ' .,, ; ,146, .
Effcctivc tax ratc 76
3.% 40.0% 38.8%
Thc sbtc incomc tax cxpcnsc of $1 8 million for 2009 includcs a bcnclit of approximatcly 58 million, nct of fcdcral incornc tax cffect,
rclatcd to adjustments in priorycaa' statc cstimatcs.
61
Table o Contents
f
The tax cffccts of temporary diffcrcnccs that give rise to significant portions of deferred tax asssck and liabilitics were as foflows:
Dceunbcr31,
zoos 2009
(In millions)
Dcfcrrcd tax asscts:
Current
AlIowancc far doubtful accounts s 13 S 9
Dcfcrred gas costs 12
-- 7
Total current dcfcmd tax assets 25 16
-
Non cumnt:
ErnpIoyee benefits so 83
Loss and credit carryfomds 8 12
Regulatory liabiIiti&, i e t a 4 1 '. ' - ' I2
Othcr
Totd npn-current deferral tax, +cts bqfoF vaIuation aljowancc
'
viuation alIowancc
T o h l non-currcnt dcfcrred tax assets, nct ofvaluation alIawance
Total dcfcrrcd tax asscfs, net of valuation allowance
Dcfcrrcd tax liabilitics:
NO~-CUITCIIC
. Dcprcciation 927.. . . 1,160
Othcr 42 37
TohI non-currcnt deferred tax liabilitics 1 ,
.. 969 ' .. . 1,197
Accumulatcd dcfcrrcd incomc taxes, net $ a39 s I. M
O
CERC is includcd in thc consolidatcd incomc tax rctums of CcntcrPoint Encrgy. CERC caIcufatcs ifs incomc tax provision on a scparate
rctum basis undcr a tax sharing agrccrncnt with Centerpoint Encrm.
Tar Allribitre Canyfonwrrdr arid Vatitation Alfoivanee. At Dcccmbcr 31. 2009, CERC has approximalcfy $213 milIion of statc nct
opcrating 10% canyfonvards which expirc in various ycars bchvccn 2010 and 2029. A valuation alIawancc has bccn cshblishcd for
approximately $49 million of thc shtc net operating loss mrryfonvards that may not be realized. CERC has approxirnatcly $244 million of statc
capiral loss unyfanvardswhich expire in 2017 for which a vahatian allowance has been establishcd.
.
UnccrlainIncome Tar Padions Thc following tablc reconcilcs Ihc bcginning and cnding balance of CERC's unrccognizcd h x bcncfits:
Balancc, beginningofycar
a
T x Positions rchtcd to prior yurs:
Additions
Rcductions
Settlements
T x Positions klatcd t currcnt ycar:
a o
Additions z
Settlcrncnts 121
.--I
BaIancc, cnd of ycar
CERC had approximately $1 miflion, SI miIlion and S O - of unrccognized tax benefits that, if recognized, would rcducc thc cffcctivc
incomc tax ntc for 2007,2008 and 2009, rcspcctivcly. CERC rccognizcs intemt and penalties as a component of incomc tax cxpcnsc. CERC
I
rccognizcd approximately $3 miIlion, $1 million and S million of benefit for interest on unccriain incomc lax positions during 2007, 2008 and
2009, rcspcctivcly. CERC had an accrued balancc of S4 million and $5 million of interest receivables on unccmin incomc tax posilions at
62
1
Table 0 Cutrfcnis
CERC docs not expect thc amount of unrccognizcd tax bcncfits la changc significantIy ovcr 81cnext
Dcccmbcr 3 I , 2008 and 2009, rcspccliveIyy.
12 months.
TaxllrrdilsundScttIcmen/x CcntcrPoint Energy's cansolidated fedcml incornc tax rctum ham bccn auditcd and settled through the 2005
tax ycar. CBRC is cumntly undcr a m i n a t i o n by thc IRS for tax ycars 2006 and 2007 and is at various stagcs of thc cxamination process.
CERE has considcrod thc cffccts of ?hac cxaminations in i t s accrual for scttled issucs and liability for unccrtain inmme t x positions as of
a
Dcccrnbcr 31,2009.
(9) Cornmitmcnts and Contingencies
(IT)Natural Gas Supply Commifments
Natura1 gas suppIy commitmcnts includc natunl gas contncfs rcIatcd to CERC's Natural Gas Dislribution and Competitivc Natural Gas
Salcs and Scrviccs businas scgmcnts, which have various quantity rcquircmcnfs and dumtions, that arc not classificd a non-trading derivative
s
ass& and liabilitics in CERC's Consolidated Balancc Shccts as of Dcccmbcr 31, ZOOS and 2009 as thcsc wntncts mcct h c cxccption to be
classificd as "normalpurchases contracts' or do not mcct thc dcfinition of a dcrivativc. Natural gas suppIy commitmcnts also incIudc natural gas
transportation contracts that do not mcct thc dcfinition of a dcrivativc. As of Dcccmbcr 3 1,2009, minimum paymcnt obIigations for natura1 gas
supply commitments arc appmximakIy 5439 million in 2010, $4490 miIlion in 201 1, $427 million in 2012, $390 mifIion in 2013, $269 million in
2014 and $543 milIion aftcr 2014.
Gas Opcrations has cntercd into assct management agreements associated with its utility distribution scrvicc in Arkansas, Louisiana,
Mississippi, OkIahoma and Tcxas. Gcncrally, thcsc assct managcmcnt agrecmcnts arc wnlracts between Gas Operations and an assct mmiigcr
that arc intcndcd to transfcr the working capital obligation and maximize the utilization of thc asscts. In thcsc agrccmcnfs, Gas Opcntions
agrccd to rcIcasc tnnsportation and storagc capacity to othcr partics to managc gas storagc, supply and delivery arrangements for Gas Opcntians
and to USC the rcleascd capacity for othcr purposcs when it is not needed for Gas Operations. Gas Opcntions is compcnsatd by thc assct
managcr through paymcnts made over thc Iifc of thc agreements based in part on thc mu1ts or the asset optimiiation. Undcr thc provisions of
hcse xsct managcmcnt agreements, Gas Operations has an obIigation to purchnse its winter stongc requircmcnts f o thc a c t managcr. Thc
rm
agrccmcnts havc varying tcrms, the long& ofwhich cxpircs in 2016.
(c) Lease Comnrilmcrrls
Thc following tablc sets forth information concerning CERC's obligations under non-canccIabtc long-tcm opcrating lcascs at Dcccmbcr 3 1,
2009, which primarily consist of rcntal agrecmcnts for building space, data processing cquipmcnt and vchiclcs, including major work cquipmcnt
(in milIions):
2010 $ 12
201 1 13
2012 I
9
2013 6
2014 4
2015 and beyond 7
Total s SI
Total rcnlal cxpcnsc for all opcnling lcascs was $43 million, $41 milIion and 936 million in 2007,2008 and 2009, rcspcctively.
63
Table o/Conlcnts
Long-Term Gus Galhering and TmatitigAgrcemcnfs. In Scptembcr 2009, CcnterPoint Encrgy Field Scwiccs, Tnc. (CEFS),a wholly-owncd
nallunI gas gathcring and h t i n g subsidiary of CERC Corp., cntcrcd into long-term agrccmcnts with an indircct wholly-owncd subsidiary of
EnCana Corporation (EnCana) and an indirect wholIy-owned subsidiary of RoyaI Dutch Shell PIC (Shcll) to providc gathering and trcating
scwiccs for thcir natura1 gas production from certain Haynesviflc Shalc and Bossicr Shale formations in Louisiana. CEFS also acquired jointIy-
owned gathcring f a d i t i s from EnCana and Shell in Dc Soto and Red Rivcr parishes in northwest Louisiana Each of thc agrccrncnts incfudcs
acrcagc dcdication and volume commitmcnts for which CEFS has rights to gahcr ShcII’s and EnCana’s natural gas production from t t ~ c
dcdicatcd arcas.
In conncction with thc agrccrnents, CEFS commenccd gathering and trcating serviccs utiIizing the acquircd facilitics. CEFS is cxpanding thc
acquired facilities in ordcr lo gathcr and mat up to 700 miIlion cubic fect (MMcf) per day of natural gas. If EnCana or ShclI clcct, CEFS will
furlhcr cxpand thc f a c i l i h in order to galhcr and treat additional: future voIumcs. The conswction neccssary lo rcach h c conmclual capacity
of 700 MMcf pcr day inctudcs more than 200 miles of gathering lines, ncarIy 25,500 horscpowcr of comprcssion and ovcr 800 MMcf pcr day of
treating capacity.
CEFS cstirnates that ihc purchasc of cxisting facilitics and construction to gather 700 MMcf per day wifl cost up to $325 million. If EnCana
and Shell cfcct cxpansion of thc projcct to gathcr and proccss additional future volumcs of up to I Bcf pcr day, CEFS cstimatcs that thc
cxpansion wouId cost as much as an additional $300 million and EnCana and ShcII would providc incremcntd voIumc cornmitmcnb. Funds for
construclion arc bcing providcd from anticipatcd a s h flows from operations, lines of credit, pmcccds from Ihc salc of dcbt sccuritics or capita1
contributions. As ofDcccmbcr 31,2009, approximately $176 million has bccn spcnt on this projcct, including thc purchasc of existing facilitics.
()
e L cgal, Eti virotlmetrtaland Other Matters
Legal Maftcrs
.
Gar Markct Manipulation Cares CcnterPoint Encrgy or its prcdcccssor, Reliant Encrgy, Incorporated (RcIiant Encrm), and certain of
thcir formcr subsidiariics arc namcd as dcfcndants in scvcral lawsuifs dcscribcd below. Undct a master scpmtion agrccmcnt bclwccn
CcntcrPoint E n c w and RRI (fomcrfy known as Rcliant Resources, Inc. and Rcliant Energy, he.), CcntcrPoint Encrgy and its subsidiaria arc
entilIcd to bc indcmnificd by RRI for any Iasscs, including attorngs’ fccs and other costs, arising out of thsc lawsuits. Pursuant to h e
indcmnification obligation, RRI is dcfcnding CcntcrPoint Energ. and its subsidiaries to rhc cxlcnt namcd in thcsc lawsuits. A largc numbcr of
lawsuits wcrc filcd against numcrous gas market participants in a nurnbcr of fcdcral and wwtcrn statc courls in mnncction with Ihc opcnlion of
thc natunl gas markcls in 2000-2002. CcntcrPoint Encrgy’s former afiliatc, RRI, was a participant in gas trading in thc California and Wcstcm
rnarkcts. Thcse lawsuits, many of which haw bccn filcd as class actions, aIlcgc violations of statc and fcdcral antitrust laws. Plaintiffs in tlicsc
Iawsuits arc sccking a varicty of forms of rclicf, including, among othcrs. rccovcry of compcnsatory damages (in somc mcs in cxccss of
I
S biIlion), a trcbling of compcnsatory damagcs, fuII considcmtion darnagcs and attomcys’ fees. CcntcrPoint Energy mdar RcIiant E n c w wcrc
namcd in approximatcly 30 of thcsc lawsuits, which wcrc institutcd bctwccn 2003 and 2009. CcntcrPoint E n c w and its afiliatcs havc bccn
rcIuscd or dismisscd from a11 but two of such cilscs. CcntcrPoint E n e w Scwiccs, Jnc. (CES),a subsidiary of CERC Cop, is a dcfcndant in a
casc now pcnding in fcdcnI court in Ncvada alIcging 3 conspiraw to inflatc Wisconsin natunl gas prices in 2000-2002. Additionally,
CcnterPoint Energy was a dcfcndant in a Iawsuit filed in state court in Nevada that was dismisscd in 2007, but Ihc plaintiffs h a w indicatcd that
thcy will appcal the dismissal. CcntcrPoint Encrjg bclieves that ncithcr it nor CES is a pmpcr defendant in thcsc rcrnaining casts and wi1l
continuc to pursuc dismissal from fhosc cases. CcntcrPoint E n e r a docs not cxpcct the uftimalc outcome of lhesc rcrnaining mattcrs to h m c a
matcrial impact on its financial condition, results of opcmtions or cash flows,
On May 1,2009, RRI soId its Tcxas rchi1 busincss to NRG R e t d LLC,a subsidiary of NRG Encrgr, Inc. In wnncction with thc salc, RRJ
changcd its n m c to RRI Enera, Inc. T h c sale docs not aflcr RRT’s contractual obligations to indcmnifjr CcnterPoint Encra and its subsidiaries
for ccrhin IiabiIitics, induding thcir indcrnnificalion tcgarding ccrtain litigation, nor does it affcct thc tcrms of existing guaranty mngcmcnts
for ccmin RRI gas transportation contracts discusscd bclow.
Table ojConrcnis
Nalriral Gar M C ~ S U H Lmumils. CERC Coy. and certain of its subsidiarics, along with 76 othcr natural gas pipclines, thcir subsidiaries
RI~~~
and afliliatcs, wcrc defendants in a lawsuit fiIcd in 1997 undcr thc FcdcraI Falsc CIaims Act alIcging mismcasurcmcnt of natural gas produccd
from fcdcnl and Indian lands. Thc suit sought undisclosed damages, along with statutory pcnaIties, intercst, costs and fees. This casc was
consofidatcd, togchcr with the other sirniIar False Qairns Act cases, in the fedcml district court in Chcycnnc, Wyoming. In Octobcr 200G, the
judgc considcring this mattcr p l e d thc dcfcndannts’ motion to dismiss the suit on the ground that the court lackcd subject maltcr jurisdiction
ovcr thc claims assertcd. Thc plaintiff sought rcvicw of h a t dismissal from the Tenth Circuit Court of Appeals, which atfimcd thc district
court’s dismissal in March 2009. Following dismissal of the phintiffs motion to h e Tcnth Circuit for rehearing, thc plaintiff sought rcvicw by
thc United States Suprcrnc Court, but his pctition for ccrtiod was dcnicd in October 2009.
In addition, CERC Corp. and certain o f its subsidiaries are dcfcndants in two mismwsurcmcnt Iawsuits brought against approximatdy 245
pipclinc cornpanics and thcir affiIiatcs pcnding in statc court in Stevcns County, Kansas. In onc cast (origindly filcd i May 1999 and amcndcd
n
four tirncs), thc plaintiffs purport to rcprcscnt a class of royalty owners who aIIege that thc defendants hwc cngagcd in systcmatic
mismcasurcmcnt of thc volumc of natural gas for rnorc than 25 ycars. Thc plaintiffs amcndcd thcir pctition in this suit in JuIy 2003 in rcsponsc to
an ordcr from tIic judgc dcnying ccrtifiution of thc plaintiffs’ alIcgcd class. In the amcndmcnt, thc plaintiffs dismisscd thcir cfaims against
ccrhin dcfcndants (including two CERC Corp. subsidiaries), Iimited the scope of the class of plaintiffs they purport to rcprcscnt and climinatcd
prcviously asscrtcd claims bascd on misrnmsurcrncnt of thc British thema1 unit (Btu) contcnt of thc gas. The s m c plaintiffs thcn fiIcd a sccond
lawsuit, again a rcprcscnmtivcs of a puhtivc class of royalty owners in which thcy assert their cIaims that the dcfcndants have cngagcd in
s
systcmatic mismcasurcmcnt ofthc Btu contcnt of natural gas for rnorc than 25 ymm. In both lawsuits, thc plaintiffs scck cornpcnsatory damages,
along wilh statutory pcnahics, trcbIe damages, intcrcst, costs and fccs. In Scptcrnber 2009, thc district court in Stevcns County, Kansas,dcnicd
plaintiffs’ rcqucst for class ccrtifiwtion of thcir cxc. The plaintiffs arc sccking reconsidcmtion of that dcniaI.
CERC bclicva that thcrc has bccn no systcmatic mismcasurcmcnt of gas and that thesc Iawsuils arc without mcrit. CERC docs not cxpcct
thc uItimatc outcomc of thc lawsuits to have a materid impact on ils financial condition, rcsdts of opmtions or cash f o s
lw.
Gus Cos! Recovey Lifigafion In Octobcr 2004, a Iawsuit was filcd by ccrtain CERC ntepaycrs in Tcxas and Arkansas in circuit court in
MiIlcr County, Arkansas against CcntcrPoint Encrgy, CERC Corp.. certain othcr subsidiarics of CcntcrPoint Encrgy and CERC Corp. and
various non-affiliatcd cornpanics allcging fraud, unjust cnrichmcnt and chi1 conspincy with rcspcct to r a t s chargcd to ccrhin consurncrs of
natural gas in Arkansas, Louisiana, Minncsora, Mississippi, Oklahoma and Tcxas. Alhough ihc plaintiffs in thc Miflcr County w c sought eIass
ccrtification, no class was ccrtificd. In Junc 2007, the Arkansas Suprcrnc Court dctcrmined that the Arkmas chirns wcrc within rhc solc and
or
cxclusivc jurisdiction of thc Arkansas PubIic Service Commission (APSC) and in February 2008, thc Arkansas Suprcmc C u t dircctcd fhc
Millcr County court to dismiss the entire case for lack ofjurisdiction.
In August 2007, he Arkarms plaintiff in thc MilIcr County litigation initiatcd a compIaint at thc APSC sccking a dccision conccrning the
cxtcnt of ihc APSC’s jurisdiction over the Milbr County casc and an investigation into thc rncrits of thc allcgations asscrted in his complaint
with rcspcct to CERC. In Fcbruary 2009, thc Arkansas plaintiff notificd thc APSC that hc would no longcr pursuc his cIaims, and in July 2009
Ihc complaint procceding was dismissed by the APSC. AI1 appclIatc dmdlincs a p i r c d without an appcaI of thc dismissal odcr.
In Junc 2007, CcntcrPoint Encrgy, CERC Corp., and othcr dcfcndants in h c Miller County casc filcd a pctition in a district court in Travis
County, Texas sccking a dctcrmination that thc Raifroad Commission has cxclusivc original jurisdiction ovcr ihc Tcxas claims ascrtcd in thc
MilIcr County c a s . In January 2009, thc district court entcrcd a final declaratory judgment ruling that thc Railroad Commission has cxctusivc
jurisdiction ovcr thc T c x s claims asscrtcd against CcntcrPoint Encrgy, and thc othcr dcfcndants in thc MiIlcr County casc.
En vironmetita~
Mattem
Maittducturcd Gas Plant Sires. CERC and its prcdcccssars opcmtcd manufaeturcd gas plants (MGPs) in thc past. In Minnesota, CERC has
cornplctcd rcmcdiation on two sitcs, othcr than ongoing monitoring and watcc trcatmcnt
65
Tablc o/Conrcim
Then: arc five rcmaining sit= in CERC's Minncsota scrvice territory. CERC believes that it has no liabilily with m p e c t to two of thcsc sitcs.
At Dcccmbcr3f, 2009, CERC had accrued SI4 mi1lion for rcmcdiation of thw Minnaota sites and thc estimatcd rangc of possible
rcrncdiation costs for thcsc sites was $4 million to $35 million based on rcmcdiation continuing for 30 to 50 ycm. Thc cost cstimatcs arc bascd
on studics of a sitc or industry avcngc costs for rcmcdiation of sit= of simiIar size. Thc actual rcmcdiation costs wilI bc dcpcndcnt upon the
numbcr of s i t u to bc remcdiatcd, thc participation of othcr potentially rcsponsiblc partics (PRP), if any, and thc rcmcdiation mclhods uscd.
CERC has utilimd an cnvironmcntal cxpcnsc tnckcr rncchanism in ils r a t s in Minncsoh to rccovcr cstimakd costs in cxccss of insurancc
rccovcry. As of Dcccmbcr 31, 2009, CERC had collcccted S13 million from insurancc cornpanics and nto paycrs to bc uscd for future
cnvironmcntal rcmcdiation. In January 2010, ;is part of its Minncsoki rate easc decision, Ihc MPUC climinatcd the cnvironmcntal cxpcnse
backer rncchanism and ordcrcd amounfs prcviousIy colfcctcd from ratepayers and d a t e d carrying costs rcfunded to cuslomcrs. As of Dcccrnbcr
31. 2009, thc bahncc in the environmcntd expensc trackcr account was SS.7 rniIlim. T h c MPUC providcd for thc incIusion in r a t a of
apptaximatcly $285,000 annually to fund normal on-going rcrncdiation costs. CERC was not rcquircd to d - n d to custorncrs thc amount
collcctcd from insurancc companies, $4.6 million at Decembcr 31, 2009, to bc uscd to mitigate fulurc cnvironmenta1 costs. Thc MPUC furthcr
gavc asssumcc that any r a o n a b l c and prudcnt cnvironmcntal clan-up costs CERC incurs in thc fulurc wil1 bc rate.-rccovcnblc undcr normal
rcgufalary principles and proccdures. This provision had no impact on camings.
In addition to the Minncsota sitcs, thc Ulnitcd Statcs EnvironmcnkI Protcction Agcncy and othcr rcgulators have invcstigtcd MGP s i t s that
wcrc owncd or opcntcd by CERC or may h a w bccn owncd by one of its former affiliates. CBRC has bccn namcd a a dcfcndant in a lawsuit
s
filcd in thc Unilcd States District Court, District of Mainc, undcr which contribution is sought by privatc padm for thc cost to rcmediatc formcr
MGP sitcs bascd on the prcvious owncrship of such sitcs by former affiliates of CERC or ils divisions. CERC has also bccn idcntificd as a PRP
by thc Statc of Mainc for a site that is thc subjcct of rhc lawsuit. In Junc 2006, thc federal: district court in Mainc ruIcd that thc currcnt owncr of
the sitc is raponsibre for sitc rcrnediation but that an additionaf cvidcntiary hearing would bc rcqquired to dctcrminc if othcr potentially
rcsponsibIc partics, including CERC, would have to contribute t that rcmcdiation. In Septcmbcr 2009- thc fcdcra1 district court gnnted CERC's
o
motion for summary judgment in thc procecding. AIthough it is IikcIy that thc plaintiff wiIl pursuc an a p p d from that disrnissa1, furthcr action
will: not bc &cn until thc district court disposcs of cIairns against othcr dcfcndants in the casc. CERC bclicves it is not Iiablc as a formcr owncr
or operator of thc sitc under thc Comptchcnsivc EnvironmcntaI, Rcsponsc, Compcnsation and Liability Act of 1980, as amcndcd, and applicablc
statc sblutcs, and is vigorously contcsting the suit and its designation as a PRP. CERC docs not cxpcct thc ultimatc outcomc l o havc a matcn'af
advcrsc impact on its financial condition, mults of opcmtions or cash ffows.
Mcrczny ContanriirafioiL CBRC's pipclinc and distribution opcnlions have in thc past cmploycd cIcmcntaI mcrmty in measuring and
regulating cquipmcnt It is possibIc that small amounts ofmcrcury may have becn spiIlcd in the murse af ttomd maintcnancc and rcplaccmcnt
opcmtions and that h a c spills may havc contaminated the immcdiatc arca with clcmcntal mcrcury. CERC has found this typc of contamination
at samc sitcs in thc past, and CERC hiis conducted rcmcdiation at h a c sitcs. It is possiblc that othcr wntaminalcd sitcs may mist and that
rcmcdiation costs may bo incurrcd for thcsc sitcs. AIthough thc total m o u n t of these costs is not known at this timc, bascd on CERC's
cxpcricncc and that of othcrs in thc natural g s industry to date and an thc currcnt regulations regarding rcmcdiation of thcsc silcs. CERC
a
bclicvcs &at thc costs of any rcmcdiation of thesc sitcs wilI not bc material to ils financia1 condition, results of opcrations or wsh flows.
Asbcsrur. Some faciIitics formcrly owned by CERC's prcdecessors h a w wntaincd asbcstos insulation and other asbcstos-conbining
materials. CERC or its ptcdcccssor cornpanics havc bccn named, along with numerous others, ils a dcfcndant in l ~ ~ u filed by ccrbini b
individuals who claim injury duc to cxposurc to asbcstos during work at such forrncdy owned faditics. CERC anticipates that additional cIaims
likc thosc rcccivcd may bc asscrted in thc future. Although thcir ultimate outcomc cannot bc prcdictcd at this timc, CERC intcnds to continuc
vigorously contcsting claims that it docs not considcr to have mcrit and docs not cxpect, bascd on its cxpcn'cncc to datc, thcsc mattcrs, eithcr
individudly or in thc aggrcgatc, to havc a matcrial adverse Effect on its financia1 condition, rcsults of opcntions or G I S ~flows.
Groundwrrler Confomino/iunLitigaliun. Prcdcccssor entities of CBRC, aIang with swcra1 othcr cntilics. arc dcfcndants in litigation. Sf.
1 ,
M c k l P h i t a h t t , LLC, et al, v. Whife,et a . pcnding in civil district court in Orlam
Parish, Louisiana In thc lawsuit, the plaintiffs aIIcgc that thcir propcrty in Tcrrcbonnc Parish, Louisiana suffcrcd salt m t c r contamination as a
rcsult of oil and gas drilIing activitics conductcd by tho dcfcndants. Although a predeccssor of CERC hcld an intcrcst i two oil and gas Imscs
n
on a portion of thc property at isuc, ncithcr it nor any othcr CERC cntitics drilled or conductcd othcr oil and gas opcntions on thosc Icascs. In
January 2009, CERC and thc plaintiffs rcachcd a c c m e n t on the terms of a scttlcmcnt that, if ukirnatcly approvcd by thc Louisiana Dcpartmcnt
ofNatural Rcsourccs, is cxpcctcd to rcsolvc this litigation. CERC does not expect thc oatcomc of this litigation lo havc a malctial advcrsc impact
on its financia1 condition, rcsults of opcntions or cash flows.
O h r Environmental. From timc to timc CERC has received notices from rcguIatory authoritis or othcrs tcgarding ifs slatus a a PRP in
s
connection with sitcs found to r q u i r c rcmcdiation due to the pmcncc of cnvironmcntal contaminants. In addition, CERC has bccn namcd from
timc to time as a dcfcndant in litigation d a t e d to such sites. AIthough the ultimatc outcomc of such matltcts cannot bc prcdictcd at this tirnc,
CERC docs not expect, bascd on its cxpcricncc to datc, thcse matters, either individually or in thc aggrcgatq to hrrvc a matcriaI advcrsc cffcct on
ils financial condition, rcsults of opcrations or cash flows.
Ut11erProceedings
CERC is involvcd in othcr Icpl, cnvironmcntal, tax and rculatory procccdings bcforc various courfs, regulatory commissions and
govcrnrncntal agcncics rcgarding mattes arising in thc ordinary MU~SC of busincss. Somc of thcsc procccdings involvc substantia1 amounts.
CERC regularly analyzcs currcnt information and, as ncccssary, provides accruals for probrlblc IiabiIitics on thc cvcntua1 disposition of thesc
mattcrs. CERC docs not mpcct thc disposition of thcsc matters to have a material advcrsc cffcct on its financia1 condition, rcsults of opcrations
or u s h flows.
fl Guaranfia
Prior to CcntcrPoint Encrjg's distribution of its ownership in N U to ifs sharchoIdcrs, CERC had guaranteed ccrlain wntractua1 obIigations
of what bccamc RRI's trading subsidiary. When thc cornpanics scparatcd, RRI agrccd to securc CBRC against obligations undcr thc guamtics
RRI had been unable to cxtinguish by thc timc of scpantion. Pursuant to such agreement, as amended in Dccernbcr 2007, RRI has agmd to
providc to CERC cash or lcttcrs of credit as sccurity against CERC's obIigations undcr its rcmaining guamtics for dcmand chargcs undcr
ccrtain gas transportation agrccrncnts if and to thc cxtcnt changcs in matkct conditions cxposc CBRC to 3 risk of loss on thosc guaranties. Thc
prcscnt valuc of thc dcmmd chargcs under thcsc transportation contracts, which wiI1 bc cffcctivc unlil2018, was approximatcIy $96 miflion as
of Dcccmbcr 31, 2009. As of Dcccmber31, 2009, RRl was not rcquircd to providc sccudy to CERC. If IZRI should fail to pcrform thc
contnctual obfigations, CERC could h a ~ to honor its guarantee and, in such cvcnt, colIatcml providcd as sccurity may bc insuficient to satisfy
c
CERC's obligations.
(10) Estimated Fair Valuc of Financial Instruments
Thc fair vaIucs of cash and cash equivalents and shorbterm borrowings arc cstirnatcd to be approximatcIy cquivalcnt to carrying amounts
and havc bccn cxcludcd from thc table below. Non-trading derivativc asscts and Iiabilitics arc statcd at fair valuc and arc cxcludcd from thc tablc
bclow. Thc fair vduc of tach dcbt instrumcnt is dckmined by multiplying thc principa1amount of cach dcbt instrumcnt by thc market pricc.
D-her 31.20DB Dc~unher31.2OOI
CarryiUz: Fair arrylw Fair
Amount Vatue Amount VaIue
(In m!tIioa)
Financial Iiabilitics:
Long-tcrm dcbt s 3,713 S 3,568 S 2,756 $ Z969
67
Tdlc oJContcnls
(I 1) Unauditcd Quarterly Infannation
Summarizcd quvtcrIy financial data is as foIlows:
YmrEndcd Dccembcr31.2008
Fint ScEond Third Fourth
Onartu Onartu Quaflcr QUlrtW
pn millions)
Revenues $ 8952 $ 2J57 $ 1,960' $ ! : 2,326
Opcmting incomc
.... 242 130 129 216
iz6
~
Nct income , 60
. 67 . 90
Y a r Ended Da~mbcr31.20DJ
First ScEond Third Fourth
Quart- Quarter Qlllr(W Quartcr
(In millions)
Rcvcnucs $ 231 $ 1,llG $ 965 $ 1,825
Opcmting incomc 214 89 64 202
Nct income 95 34 5 ' ' 96
(12) Reportable Business S e p c n f s
Becausc CERC is an indircct wholIy owned subsidiary of CcnterPoint Encrgy, CERC's dctcrmination of rcporiablc business scgmcnts
considcrs thc shalcgic operating mils undcr which CentcrPoint E n c w managgcs saIcs, alloaks ~csourccs ilsscsses pcrformancc of various
and
products and scrviccs to wholesaIe or rckil customers in diffcriog regulatory environrncnts. Thc accounting policics of the busincss scgmcnts arc
thc samc as thosc describcd in thc summary ofsignificant accounting policies except that somc cxccutive bencfit costs havc not becn allowtcd to
busincss scgmcnts. CERC uscs opcrating incomc as tha measure ofprofit or loss for its busincss scgments.
CERC's rcportablc busincss scgments incIudc thc following: Natura1 Gas Distribution, Compctitive Natunl Gas Salcs and Scwiccs,
Intcrstatc Pipclincs, Ficld Scrviccs and Olhcr Opcntions. Natural Gas Distribution consisfs of ratr+regulatcd intrastalc oatunl gas sales to, and
natural gas transportation and distribution for, residential, commercia1, industrial and institutiona1customers. Compctitivc Natural Gas Sales and
Scrviccs represcnts CERC's non-ntc rcguIatcd gas saIes and scwiccs opcrations, which consist of three opcmtional functions: whotcsalc, rctail
and intrastate pipchcs. Thc Intcrstatc Pipclincs business segmcnt includcs the interstalc natura1 gas pipclinc opcmtions. The Fidd Scrviccs
busincss scgment includes thc natural gas gathcring opcrations. Our O h c r Operations busincss scgrncnt incrudes unaIloutcd mporatc cosk and
intcr-scgmen t climinations.
Long-Iivcd asseB includc nct property, pfant and cquipment, nct goodwill and olhet inmgiblcs and equity invcslrncnls in unconsolidatcd
subsidiarics. Intcrscpcnt salcs are eliminatcd in consolidation.
Table oJContcn!s
Financial data for busincss scgmcnts and products and services arc as folIows (in millions):
h o f and for the y a r e n d 4
Dccembcr 31,200'1: __ - , -- -
Na!unJ. Gik Disfri6itiO1i - S . .. 3.749 s lo-' $ 15s I 218 s 4,332 s 191
CompctilivcNatural Gas Sal-
m Scrviccs
d
n 3334 45
Inkdatc ripclincs (1) 37
5 -143
Ficld scrviccs(2) 136 39
OlhcF , ,
-. . . . .. . I
Rccanciling EIiminaiions
ConsoIidakd . ,
AS orand rorthcyclrurth
DcEunbcr 31,2008:
N d u d Gas Distribution 5 4,217 s ' 9 s In s 215 S 4361 S ,-. , 214
CompclitivcNatud Gm Sda
and Scrvicrs 4.488 40 3 62 IjlS 8
InlcrsMc Pipclincs (1) 4n I73 46 293 . 3,578 , . I89
Field scrviccs (2) 213 39 12 147 826 122
Ohm - - I - 724 -
Reconciling Elirninaiions
ConsoIidakd " 1
1-
r\sofnndforthcyuraded:" I
- . , . ...
,
, > :
.- , , .. .- .>. 0. ,,..' . I . . ! - ., : . i .-.I I.
*.,
*;.
., -
-
I - , , 4 , . . ,
Dccember31,2008: , . L , - , ! .
: - , , ..... . . ...,
. I#. , I , .
, r
>
.
-
. . .
Natural Gas Distribulion 161 S 201 s 165
Gas,
CompciXyc,Natu@, S,$cs, L -:.:- I .
:~.
-
,~ .<.!., .-
.
- .... .. - . , , 1;: -,
. md %-vi& . 4
, I . . . ' 4.. , I. . I _
' 2 1 . 2
Inlcrshk Pipclincs (I) 48 176
Fic]dSir'vie-(2)',':' 1.1 ,! ' : :Is 1 # - . , - : > , - - - 1 .
' 3 s '
Olha -
,: ,
. - .i -'A,.
.
1
-:, , .- , I
< ' I
Consolidakd s 6257 S - s 229 s 569 S 9.784 s 691
(I) Intc&tc Pipclincs rccordcd q u i t y incamc of $6 million, $36 miIlion, and $7 million (including $6 million and $33 million rclatcd to
prc-operating aIIowmce for funds used during construction during 2007 and 2008, rapcctivcly) in thc ycars cndcd Dcccmbcr 31,2007,
2008 and 2009, rcspectivdy, from its 50% intcrcst in SEW, a jointly-owncd pipclinc. TItcsc amounts arc includcd in Equity in carnings
of unwnsolidatcd afiliatcs under the O h r Inmmc Gxpense) caption. Jntcrstatc PipcIincs' invcstmcnt in SESH was $58 million,
te
5307 milIion and $422 milIion as of Dccember 31,2007,2008 and 2009 and is includcd in Investmcnt in unwnsolidatcd aftiliatcs.
(2) Ficld Scrvices rccorded cquity incomc of $10 million, Sl5 million and $8 million for h c ycars cndcd Dcccrnbcr 31, 2007, 2008 and
2009, mpcctivcly, from its 50% intcwt in a jointly-o-owncdgas proccssing plant. Thcsc amounts arc includcd in Equity in taming of
unconsoIidatcd amliatcs undcr thc Other Incomc ( E x ~ c ~ s c )
caption. Field Scwices' invcstmcnt in thc jointly-owncd gas procwing
plant was $30 million, $38 million and S40 million as of Dcccmbcr 31, 2007, 2008 and 2009, respcctivefy, and i s includcd in
Invcstmcnt in unconsdidated affiliates.
Y u r Endcd Dmmbcr31.
Revenua by Pmdudsaad ServIca: 2007 2008 2009
Relaif gas salts $ 4,341 $ 6,216 $ 4,540
Wholaalc gas saIcs &19G 2,295 902
Gas tmnsport 532 756 691
E n e r a products and serviccs 107 128 124
Total S 7.776 $ 9,395 $ 6.257
69
Table oJCanrcnu
Item 9. Chartps in and Dbgreemenfi with Accounlanlson Accouttfing and FinanciaI Dkdmure
Nom.
Itcm 3Am. Controk mid Procedures.
Disclosure Controls and Procedurcs
In accordance with Exchange Act Rules 13a-IS and 15d-15, we w&cd out m cvahation, under thc supcrvision and with thc participation of
managcmcnt, incIuding our pn'ncipal executivc oficcr and principal financiaf officer, of the effcctivcncss of our disclosurc controls and
proccdum as of thc cnd of thc pcriod covered by this rcpoR Based on that evaluation, our principa1 cxccutivc officer and principd financial:
oficcr concludcd that our disclosum controls and proccdura wcrc effcctive as of Dcecmbcr 31, 2009 to provide murancc that information
required to bc disclosed in our rcports filcd or submitted undcr the Exchange Act is rccordcd, proctrsed, summatizcd and rcported within thc
timc pcriods spccificd in the Securilics and Exchange Commission's ruIcs and forms and such information is accumuIatcd and cornmunicatcd to
our managcmcnf including our principaI occcutive officer and principaI financial: ofliccr, as appropriatc to alIow timcly dcci~ians
rcgarding
dischsure.
Thcrc has becn no change in our internal controls ovcr financial reporting that occurred during thc thrcc months cnded Decembcr 31,2009
that has materidly affcctcd, or is reasonably IikcIy to materially affect, our intcrnal controIs over financial rcporting.
Managerncnt's Annual Report on TnternaI Control over Financial Reporting
See report sct forth abovc in Item 8, "Financial Statcrncnts and Suppfcrncntary Dah''
Ttcm 9B. Other Informutioit
The ratio of camings to fixed chagcs as caIculated pumuant to Sccuritics and Exchange Commission mlcs was 2d1, 264, 3.04, 3.30, and
2.63 for thc ycars cndcd Dcccmber 31,2005,2006,2007,2008 and 2009, respcclivcly.
PARTIII
Item 10. Direcfors,Ekecutive Oflcers and Corporate Goverttatm
Thc infannation called for by Itcrn 10 is omittcd pursuant lo Instruction l(2) to Form 10-K (Omission of Infomation by Ccrtain Wholly
Owncd Subsidiarics).
Itcm 1I. Erecutiw Canqmtsafion
Thc information called for by Ilcm f 1 is omittcd pursuant to Inslruclion I(2) to Form 1 0 4 (Omission of Information by Cerlrlin Wholly
Owncd Subsidiarics).
Itcm 12. Security Owtiership o Certain BeneJuaI Owners atid Management ond ReInierlSfockhoIder
f hfatfers
Thc information called far by Item 12 is omittcd pursuant to Instnrctian I(2) to Form 10-K (Omission of Information by Certain Wholly
Owncd Subsidian'cs).
Tt cm 13. Cerfah Relationships and Rehted Transacfions,and Director Irtdcpettclmce
The information callcd for by Itcm 13 is omittcd pursuant to Instruction 1(2) to Form IO-K (Omission of Information by Ccmin WhoIly
Omcd Subsidiarics).
70
Table u~contcnls
es
Ttcrn 14. PriiicipuI Accounting F e andservices
Aggregate fccs biIIcd to CERC during thc fism1 yars ending Dcccrnbcr 3 1, 2008 and 2009 by its ptincipaI accounting firm, Dcloittc t
Touche LLP, arc set forth below.
Yur End& Dcecmber31.
ZOOS 2009
Auditfees (1) $ 1,199,800 $ 1,105,310
hudit-rclatcd fees
(2) 86,869 f f 8,900
. Total audit and audit-Yekhed fc&' :
' ' ' 1,286,669 ' + 1,224,210
'
Tax fces - - --
AlI'othei fees ! ' " .-
,-.
-
r _ . ...
-
Total fees $ 1.256.669'S 1,224,210
( I ) For 2009 and 2008, amounts incIudc f a for sctviccs providcd by thc principal accounting firm rclating lo thc inlcgmtcd audit of
financia1 statcmcnts and internal control over financial reporting, statutory audits, attest services, and regulatory filings.
(2) For 2009 and 2008, includcs fccs for consultations conccming financial accounting and rcporting standards and various agrccd-upon or
cxpandcd proccdurcs rcIatcd to accounting records to compIy with financial accounting or regulatory rcporting mattccs.
CERC is not rcquircd to haw, and docs not haw, an audit committcc.
PAKT TY
(a)( I) Financial Shtcrncnts.
Report of Independent Registered PubIic Accounting Firm 33
Slatcments of Consolidated Income for the Three Years Ended December 31,2009.._.,
.+
, - . 40
-.
Statemenfs of Consolidated Cornprehcnsive Incomefor the Three Years Ended December 3 I, 2009 ' 43'
Consolidated BaIance Sheets at December 3 1,2008 and 2009 rr, , .r -. .. ... I
42
Sbterncnts of Co&olidatcd'C$h Fiowsfor h Threc<Y& Ended DcCcmber'3 i ,'2609!
e ! .L. :..', .43
Statcmcnts of Consolidatcd StockhoIdcr's Equity for thc Thrcc Ycars Endcd Dcccmbcr 3 1,2009 44
Noics to Consolidatcd Financial Statemcnts I - . I ,.45..
(a)@) Financial Statcrncnt Schcdulcs for the Thrcc Years Endcd Decernbcr3 1,2005).
Report of Independent Registered PubIic Accounling Finn ., ' -,! I. ~
: ' 72i
1- Valuation and Qualifying Accounts
1 73
The following schedules are omitted becausc of the absence of the conditions undcr which thcy arc rcquircd or bccawe thc rcquircd
information is includcd in thc financial statcmcnts:
V
I, 111, I and V.
(a)(3) Exhibits.
See lndcx of Exhibits bcginning on pagc 75.
71
REPORT OF TNDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To thc Stockholder of
CcntcrPoint Energy Resources Cop.
Houston, Texas
We have auditcd the consolidated financial statements of CenterPaint Energy Resources Corp. and subsidiaries (the “Company’,an indircct
wholly owncd subsidiary of CentcrPoint Energy,Inc.) as of December 31, 2009 and 2008, and for each of the three years i the period ettdcd
n
Dccernber 31,2009, and have issucd our rcport thereon dated March 1 I , 2010; such report is induded elsewhcrc in this Form IO-K.Our audits
a150 incIuded thc consolidated financial statement schcdule of the Company listed in the indcx at Item 15(a)(2). This consolidatcd financial
statement schedule is the responsibility of the Company’s management. Our rwponsibiIity is ta express an opinion based on our audits. In our
opinion, such consolidated financial statement scheduk, when considered i rclaiion to the basic consolidated financia1 statcments taken as a
n
whole, presents fairIy, in a11 materia1 rcspects, the information set forth therein.
/ d D E L O r n E & TOUCHE LLP
Houston, Texas
March I I, 2010
72
CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIAWES
(An Indircct Wholly Owned Subsidiary of CentcrRoint Energy, lnc.)
SCHEDULE TI -VALUATION AND Q U A L l M G ACCOUNTS
For the Three Ycars Endcd December 31,2009
Column A Column B Column C CoIamn D Colamn E
Additiam
BaIanee at c h a q t d to Dcdadnns B a t m a at
Beginning C€targcd Qthcr From Ead or
oCPuIod to Income Accounts (I 1 R M C W ~ ~ ~ Period
(In milIionr)
Ycar Endcd Dcccmbcr 3 1,2009:
Accumulatcd provisions:
Uncollectible accounts receivable §
! 33 45 3 23
Dckrrcd tax m c t valuation allowance 5 - 5
Year Endcd December 31,2008:
Accumulatcd provisions:
UncolIcctiblc accounts rcccivablc $ 37 s 60 $ I.. T' I33.
Dcfcrrcd tax assct valuation ailawmcc 1s - 5
Ycar Endcd Dcccmbcr 31,2007:
Accumulatcd provisions:
UncolIcctiblc accounts rcccivablc $ 32 37 $ 37
Dcfcrrcd tax a c t valuation aflowancc 22 - IS
( I ) Thc 2008 changc to the deferred tax asset valuation allowance charged to other accounts reptesenfs a reduction equaf to thc relatcd
dcfcrrcd tax s s c t rcductian in 2008 for rc-mcasurcmcnt of statc tax attributes. nct of fcdcnl tax bcncfit. A full valuation alhwance for
this dcfcrrcd tax asset was cstablishcd in prior pctiods.
(2) Dcductions from reSerYes represent losses or expenses for which the respective rescwes were crated. In thc case of thc uncoIlcctibIc
accounts ~ C I V C , such dcductions arc nct of rccovcrics of amounts prcviously writtcn off,
73
SIGNATURES
Pursuant to the requiremcnts of Section 13 or f5(d) of the Secun'ties Exchange Act of 1934, thc registrant has duIy caused this rcport to be
signcd on its behalf by the undersigned, thereunto duIy authorized, in the City of Houston, the State ofTexas, on the 1 Ith day of March, 2010.
CENTERPOINTENERGY RESOURCES CORP.
(Registrant)
By: fsl DAVID M. MCCLANAHAN
David M.McCJanahan
President and Chieffiecutive Oflcer
Pursuant to the requircrnents of the Sccurities Exchange Act of 1934, this rcport has been signcd below by the following persons on behalf
ofthe registrant and in thc capacitiesindicated on March I 1,2010.
/sl DAVID M. MCCLANAHAN Chairman, President and Chief Executive Oficer
(David M. McClanahan) (Principal Executive Officer and Director)
Is/ GARY L.WHITLOCK ExccutiveVice Presidcnt and Chief Financial Officer
(Gary L.WhitIack) (Principal Financial O!Xccr)
.
Is! WALTER L FITZGERALD Senior Vice Presidcnt and Chief Accounting Officer
(Walter L Fitzgemld)
. (PrincipaI Accounting Officcr)
74
CENTERPOW ENERGY RESOURCES CORP. AND SUBSIDIARIES
EXHIBlTS TO TIIE ANNUAL REPORT ON FORM IO-K
For FiscaI Year Ended Dcccmbcr 31,2009
INDEX OF EXIITBITS
Exhibits not incorporated by rcferencc to a prior fiIing arc dcsignated by a cross (+); all exhibits not so designated arc incorporated herein by
tcfcrcnce to a prior fiIing a indicatcd.
s
SEC File or
Exhibit Report or Rcgktntfon Exhibit
Number Dcren’plioe Rqistntion Statement Number Hcfcreure
W(
11 Agrccmcnt and Plan of Merger among CERC, Houston Industries’ I”HI’s’7 Form 8°K 1-7629
Houston Lighting and Powcr Company dated August 1I, 1966
(‘WL&P”), H Mcrgcr, Inc. and NmAm Energy
I
Corp. (‘WorAm’) dated August I I, 1996
Amcndment to Agrccmcnt and Plan af Mcrgcr Rcgistration Statement on Form S-4 333-1 1329
among CERC. HL&P, HI Mcrgcr, Inc. and
NorAm dakd August 1 1,1996
Agrccmcnt and Plan of Merger dated December Registration Statcmcnt on Form S-3 333-54526
29,2000 merging Reliant Resources Mcrgcr
Sub, Inc. with and into Reliant Energy Services,
hC.
Ccrtiliwtc of Incorporation of Rcliant Encrgy Form I O-K far ihc ycar cndcd 1-3187
Rwources Cop. (‘RERC Corp.”) Dcccmbcr 3 I, 1997
CcrtiGeatc of Mcrgcr mcrging former NorAm Form 1O-K for thc ycar cndcd 1-3187
Encra Corp. with and into H Mcrger, Tnc.
I Dcccmbcr 3 I, 1997
datcd August 6,1997
Certificate of Amendmcnt changing thc namc to Form 1O-K for fhc ywr cndcd 1-3187 3(a)(3)
Rcliant Encrgy Rcsourccs C o p December 3 I , 1998
Ccrtificatc of Amcndment chaqing the name to Form 10-Q for thc quartcr cndcd 1-13265 3(4(4)
CcnterPoint E n c w Resources Corp. Junc 30,2003
Bylaws orRBRC Corp. Form 1 O-K for thc ycar cndcd 1-3187 3(b)
December 3 I , 1997
Indcnture, datcd as of Fcbruary 1, 1998, Form 8-Kdatcd February 5,1998 1-13265 4.1
bctwccn RERC Corp. and Chasc Bank of Texas,
National Association, a Trustee
s
Supplcmcntal Indcntun: No. 1, dated as of Form 8-K dated February 5,1998 1-13265 4.2
Fcbruary 1, 1998, providing for thc issuancc of
RERC Corp.’s 6 1/2%
Dcbentures due February I, 2008
75
Tublc oJContctits
SEC Fik o r
ExhIblt Rrport o r Rqkslmtiaa Eshibll
Number Dacription RcgLstcithn Statmcnt h'umbtr Refcmee
W(3) SuppIemcnlaI Indcnture No. 2 datcd as of Form 8-Kdated Novcmber 9,1998 1-13265 4, I
November 1.1998, providing for the issuance of
RERC Corp.'s 6 3/8% Term Enhanccd
RcMarketabIc Sccuritics
SuppIcmental Indcnturc No. 3, dakd a ofs Registration Statement on Fom S-4 333-49162 4.2
July I, 2000, providing for thc issuance of
RERC Corp.'s 8.125% Nota duc 2005
Supplcmcntal Indenturn No.4, dated as of Form 8-K datcd February 21,2001 1- 13265 4.1
February 15.2001, providing far thc issuance of
RERC Carp.'s 7.75% Not= duc 201 I
SuppIemcntal Indcnture No. 5, datcd as of Form 8-K dated March 18,2003 1-13265 4.1
March 25,2003, providing for the issuancc of
CERC Corp.'s 7.875% Scnior Notes due 2013
Supplcmcntal Indenturn No. 6, datcd as of ~
F o 8-K datcd April 7,2003 1-13265 4.2
A p d 14,2003, providing for thc issuance of
CERC Carp.'s 7.875% Scnior Notes due 2013
SuppIcmenraI IndcnturcNo. 7, datcd as o f Form 8-K datcd Octobct 29,2003 1-13265 4.2
Novcrnber 3,2003, providing for thc issuancc of
CERC Corp.3 5 9 % Scnior Notes due 2014
.5
Supplcmcntal Indcnture No. 8. datcd a of
s CcntcrPoint Enew, Inc.'s (""P's'') 1-3 1447 4(f)(9)
Dcccmbcr 28,2005, providing for the issuancc Form IO-Kfor thc ycar cnded
of CERC Corp.'s 6 In% Dcbcntures due 2008 Dcccmber 3 1,2005
SupplcmcntaI Indenlurc No.9,dated as of CNP's Form IO-Qfor the quarter ended 1-31447 4.7
May 18,2006, providing for the issuancc of June 30,2006
CERC Corp.'s 6.15% Scnior Notes duc 2016
SuppIcmcntal Indcnturc No. 10, dated as of C W ' s Form 10°K for thc year ended 1-31447 4(f)( 1 I )
February 6,2007, providing for the issuancc of Dcccmber 3 1,2007
CERC Corp.'s 6.25% Senior N o t a due 2037
Supplcrncntal Indcnture No. I I datcd as of CNP's Form I 0-Q for quartcr cndcd 1-31447 4.3
Octobcr 23,2007, providing for thc issuance of Scptcmbcr 30,2007
CERC Corp.'s 6.125% ScniorNotes duc 2017
Supplemcnd Indcnturc No. 12 dated as of W ' s Form IO-Q for quarter ended f -3 1447 4.9
Octobcr 23,2007, providing for thc issuance of Scpternber 30,2007
CERC Corp.'s 6.625% Scnior Nota due 2037
Supplemental Indcnturc No. 13 dated as ofMay CNP's Form IO-Q for quartcr ended June 1-31447 4.9
15, ZOOX, providing for thc issuance of CERC 30,2008
Corp.'s (1.00% ScniorNotcs duc 201 8
76
SEC File or
Exhibit Rcpart o r RCgbtrali0n Exhibit
Number Dacription Regijtmtiaa Sbtcmcnt Number Relcrcace
4(b) $350,000,000 Second Amended and Restated CNP’s Form IO-Q for the quarter cndcd 1-31447 4.5
Crcdit Agreement dated as of June 29,2007, Junc 30,2007
among CERC Corp,, as Borrower, and the banks
named thcrcin
Thcrc have not been filed as exhibits to this Form IO-K ccrtain long-tcrm dcbt insmments, including indentures, undcr which thc totai
amount of securitics do not excccd 10% of thc total mcts of CERC. CERC hereby agrees to furnish a copy of any such instrument to the SEC
upon requcst.
SEC Pic o r
Exhibit Rcport o r Rqhtntioa Exhibit
Number DnClipti0n Regirtation Statunmt Number Rcfermu
.,
I oral Service Amcement by and betwccn Mississiaai Nadm’s Form 10-Kfor thc ycar cndcd -
1 13265 1020
Rivcr TGrnission torporntion and Ladcdc’ Dcccmbcr 3 1,1989
Gas Company dated August 22,1989
+I2 Computation of Ratios of Earnings to Fixed
Charges
+23 Consent of Dcloitte & Touche LLP
4-31.] RuIc 13a-14(a)/15d-I4(a) Cctlificationof David
M,McCIanahan
4-3 1.2 RuIe 13a-14(a)/15d-I4(a) Ccrtification of Gary
L Whitlock
.
t32.I Scctian 1350 Ccrtifimtion of David M.
McClanahan
+322 .
Section 1350 Ccrtifimtion of Gary L Whitlock
77
Exhibit 12
CENTERPOINTENERGY RESOURCES CORP. AND SUBSIDLARUG
(An Indirect Wholly Owned Subsidiary of CcntcrPoint Encrgy, Ync.)
COMPUTATION OF RATIOS OF EARNMGS TO FIXED CHARGES
(rniIlions o f doltats)
Ymr E n d 4 Dccember31,
2008 ZOO9
2005 2006 ZOK' (1) (1 1 (1)
Nct Income s 193 $ 207 $ 287 $ 343 E 230
Equity in mrnings of unconsolidated
affiliates, net of distributions
Income t a x a
Capitahcd intcmt
Pixcd charges, as defincd
Intcrest expcnse 176 167 187 206 213
Capitalized intcrcst 1 6 12 5 2
Interest component ofrentals chargcd
t opcmting cxpcnsc
o 11 17 14 13 I2
Total f i x 4 charga I88 t 90 213 224 227
Earnings, a defined
s s 490 $ 502 $ 648 $ 739 $ 598
Ratio of earnings to fixed charges 2.6 1 2-64 3.04 3.30 2.63
(1) Excludcd from thc computation of futed charges for the years ended Decembcr 31, 2007, 2008 and 2009 is intcrat incornc of $2
million, $1 million and $-0-, rcspcctivcly, which is includcd in income tax expensc.
Exhibit 23
CONSENT OF lNDEPENDENT REGISTERED PUBLKC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-153052 on Form S-3 of our reports
dated March 1 1, 20 1 0, relating to the consoIidated financial statements and consolidated financial statement schedule of
Centerpoint Energy Resources Corp. and subsidiaries appearing in this Annual Report on Form IO-K of Centerpoint
Energy Resources COT. for the year ended December 3 I , 2009.
/slDELUl7TE & TOUCHE LLP
Houston, Texas
March 11,2010
Exhibit 31.1
CERTIFICATIONS
I, David M. McCIanahan, ccrtify that:
1. I havc rcviewed this annual report on Form 10-Kof CentcrPoint Encra Rcsourm Corp.;
2. Bascd on my knowIcdgc, this rcport docs not contain any untruc statcmcnt of a matcrial fact or omit to statc a matcrial fact
necessary to make thc statemcnts made, in light of thc circurnstanccs undcr which such statcmcnts wcrc madc, not mislcading with rcspcct to thc
pcriod covercd by this report;
3. Based on my knowledgc, the financial statcmcnts, and othcr financial information indudcd in this rcport, fairly prcscnt in all
matcrial respccls the financial condition, rcsults of opcrations and a s h flows of the rcgistrant a of, and for, thc pcriods prcscntcd in this rcport;
s
4. Thc rcgistrant’s othcr ccrtifying aficcr(s) and 1 arc rcsponsiblc for cslablishing and maintaining disclosum controIs and
proccdura (as dcfined in Exchangc Act RuIcs 13a-l5(c) and ISd-lS(c)) and intcmal control ovcr financial rcparting (as dcfincd in Exchangc
Act Rulcs 13a-l5(f) and 15d-IS(fj) for thc rcgistrant and have:
Designcd such disdosure controls and pmcedurcs, or causcd such disctosurc controls and proccdurcs to bc dcsigncd under our
supcrvision, to cwurc that matcrial information rcIating to thc rcgisfmnt, including its consolidatcd subsidiarics, is rnadc
known to us by olhcrs within thosc cntitics, particularly during thc pcriod in which this rcport is bcing prcparcd;
Dcsigncd such intcmal control ovcc financial rcporling. or wuscd such intcmaI control ovcr financial rcporting to bc dcsigncd
undcr our supcrvision. to providc rcasonabIc asssumcc regarding thc tcliability of financial rcpotling and thc prcpmtion of
financial slatcmcnls for cxtcmal purposcs in accordancc with gencraIIy acccptcd accounting principlcs;
Evaluatcd Lhc cffcctivcncss of h c rcgismnt’s disclosurc controfs and proccdurcs and prcscntcd in this rcport our conclusions
about thc cffcctivcncss of ihc disclosum controls and proccdurcs, a of thc cnd of thc pcriod covcrcd by this rcport bascd on
s
such cvaluation; and
Discloscd in this rcport any changc in thc rcgismt’s intcmal control ovcr financial rcporting that occumd during h c
rcgisbant’s most rcccnt fiscal quattcr (the rcgiismnt’s fourth fiscal quartcr in thc caw of an annuaI rcport) that has matcrial1y
affcclcd. or i s rcasonably likcly to rnatcrially affccf thc rcgismnt’s inkma1 control ovcr financial rcporling: and
Thc rcgistrant’s othcr ccrtifying officcr(s) and I havc discloscd. bascd on our most rcccnt cvaluation of intcmal control ovcr
financial reporting, to the registrant’s auditors and the audit committee of the registmnt’s board of directors (or pcrsons performing thc
cquivalcnt functions):
(a) AI1 significant dcficicncics and matcrial wcakncsscs in thc dcsign or operation of intcrnal wntrol ovcr financia1 rcporting
which arc rcasonably likcly to advcrscly affcct thc rcgistrant’s abiIity to rccord, proms, surnmarizc and rcport financiat:
information; and
(b) Any fraud, whcthcr or not matcrial, that involva managcmcnt or othcr cmployccs who havc a significant mlc in thc
rcgislranl’s intcmal control ovcc financial rcporting.
Date: March 1 I, 2010
lsl David M.McClanahan
David M. McClanahan
President and Chief Exccutivc Officcr
Exhibit 31.2
CERTIFICATIONS
.
I, Gay L Whidock, ccrtify that:
1. I have revicwcd this annual rcport on Form 10-Kof CcntcrPoint Encrgy Rcsourccs Corp.;
2. Bascd on my knawlcdgc, this rcport docs not contain any untrue statcmcnt of a matcn‘aI fact or omit to statc a matcrial fact
ncccssary to makc thc statcrncnfs madc, in Iight of thc circumslanccs undcr which such statcmcnts wcrc madc, not mislmding with r q c c t to the
pcriod covcrcd by this rcport;
3. Based on my knowIcdgq thc financial statcmcnts, and othcr financial information includcd in this rcport, fairly prescnt in all
matcrial mpccts thc financial condition, raults of operations and a s h flows of ihc registrant as of, and for, thc periods prescntcd in this report;
4. Thc rcgismnt’s olhcr ccrtifying officcr(s) and I arc rcsponsiblc for cstablishing and maintaining disclosurc wntmls and
proccdurcs (as dcfincd in Exchangc Act R u b 13a-l5(c) and 15d-f5(c)) and intcrnal control ovcr financial rcporting (as dcfined in Exchange
Act Rulcs 13a-f5(f) and 15d-I5(f)) forthc rcgismnt and haw:
(a) Dcsigncd such disclosure controls and pmccdurq or caused such diseIosurc controIs and proccdurcs to bc dcsignned under our
supcrvision, to cnsurc that matcn‘al information rclating to thc registrant, including its consolidatcd subsidiarics, is made
known to us by othcrs wilhin fhosccnlitics, particularly during thc pct-iod in which this rcport is being prcparcd;
(b) Dcsigncd such intcrnaI control ovcr financial rcporting, or muscd such intcrnal control ovcr financia1 rcporting to bc dcsigncd
undcr our supcrvision, to provide rcasonablc assurancc rcgarding thc rcliabiIiLy of financial rcporiing and thc prcparation of
financia1 statcments for external purposes in accordance with generally acceptcd accounting principlcs;
(c) Evaluated the cffcctivencss of thc rcgistmnt’s disclosurc controls and procedures and prcscnted in this report our conclusions
about thc cffcctivcncss of thc disclosurc controls and proccdurcs, as of thc cnd of the pcriod covered by this rcport bascd on
such cvaluation; and
(d) DiscIoscd in this rcport any change in thc rcgistmnt’s intcrnaI conlroI ovcr financial rcporting that occurrcd during thc
registrant’s most recent fiscal quarter (the registrant’s fourth fiswl quartcr i fhc c x c of an annual rcport) that has rnatcrially
n
affcctcd, or is rmsonabiy likcly to rnatcrialIy affccf thc rcgismnt’s intcrnal contmI ovcr financia1 rcporting; and
5. Thc registrant’s other ccrtifying oficer(s) and I havc discIoscd, bascd on our most rcccnt cvaluation of intcrnaI control ovcr
financia1 rcporting, to thc registrant’s auditors and thc audit committee of thc rcgistmnt’s board of directors (or persons performing ihc
equivalcnt functions):
(a) All significant dcficicncics and rnatcrial wukncsscs in thc design or operation of intcmaI contro1 over financia1 rcporting
which arc rcasonably likely to advcrscly affcct t t ~ crcgistmnt’s ability to rccord, process, summarize and report financial
information; and
(b) Any fraud, whcthcr or not material, that involvcs manacmcnt or ohcr cmpfoyccs who havc a significant mIc in the
rcgistrant’s internal:control over financial reporting.
Datc: March 1 I, 2010
Is/ Gary L WhitIock
.
Gary L, Whitlock
ExccutivcVicc Prcsidcnt and Chicf Financial Officcr
Exhibit 32.1
CERTIFICATION PURSUANT TO
...
18 U S C SECTION 1350,
AS ADOPTED PURSUANT TO SECTfON 906
OF THE SARBANES-OXLEYACT OF 2002
In conncction with the Annual Report of Centerpoint Energy Resources Corp. (the “Company”) on Form 10°K for thc ycar
ended December 3 1,2009 (the “Report”), a filed with the Securities and Exchange Commission on the date hercof, I, David M.McClanahan,
s
Chief Executive Officer, certify, pursuant t I8 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to
o
the best of my knowledge, that
I. The Rcport fuIly complies with the requirements of section 13(a) or tS(d) of the Securities Exchange Act of 1934, as
amended; and
2. The information containcd in thc Report hirIy prcsents, in all material respects, the financial:condition and resufts of
operations of the Company.
/s/ David M.McClanahan
David M.McCIanahan
President and Chief Exccutive Officer
March If,20IO
Exhibit 32.2
CERTIFICATION PURSUANT TO
...
18 U S C SECTION 1350,
AS ADOPTED PURSUANT TO SECITON 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection With the Annual Report of CentcrPoint Energy Kcsources Coy. (the Tompany") on Form 10-K for theyear
ended Decembcr 3 1,2009 (the "Report"), as filed with the Securitics and Exchange Commission on the date hereof, I, Gary L. Whitlock, Chief
Financia1 Ofker, certify, pursuant to 18 U.S.C. Section 1350, a adopted pursuant to Section 906 ofthe Sahanes-Oxlcy Act of 2002, to the b a t
s
of my knowledge,that:
1. The Report fuIIy complies with the requircmcnts of scction 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
2. The information contained in the Report fairIy presents, i all material respects, the financial mndition and results of
n
operations of the Company.
lsl Gary L.Whitlock
Gary L.Whitlock
Exxchvc Vice President and Chief Financial Officer
March I I, 2010
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