Document
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
FOR THE TRANSITION PERIOD FROM                                         TO                                      
 
Commission File Number 1-13265
______________________
CENTERPOINT ENERGY RESOURCES CORP.
(Exact name of registrant as specified in its charter)
Delaware
76-0511406
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
1111 Louisiana
 
Houston, Texas 77002
(713) 207-1111
(Address and zip code of principal executive offices)
(Registrant’s telephone number, including area code)
______________________

CenterPoint Energy Resources Corp. meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No o
  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
Yes þ No o
  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
      Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
Smaller reporting company o
Emerging growth company o
 
 
(Do not check if a smaller reporting company)
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o  No þ

As of April 24, 2018, all 1,000 shares of CenterPoint Energy Resources Corp. common stock were held by Utility Holding, LLC, a wholly-owned subsidiary of CenterPoint Energy, Inc.
 




CENTERPOINT ENERGY RESOURCES CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2018

TABLE OF CONTENTS

PART I.
FINANCIAL INFORMATION
 
 
 
Page
Item 1.
Financial Statements
 
 
 
 
Condensed Statements of Consolidated Income
 
 
Three Months Ended March 31, 2018 and 2017 (unaudited)
 
 
 
 
Condensed Statements of Consolidated Comprehensive Income
 
 
Three Months Ended March 31, 2018 and 2017 (unaudited)
 
 
 
 
Condensed Consolidated Balance Sheets
 
 
March 31, 2018 and December 31, 2017 (unaudited)
 
 
 
 
Condensed Statements of Consolidated Cash Flows
 
 
Three Months Ended March 31, 2018 and 2017 (unaudited)
 
 
 
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
Item 2.
Management’s Narrative Analysis of Results of Operations
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
Exhibits


i



GLOSSARY
AEM
 
Atmos Energy Marketing, LLC, previously a wholly-owned subsidiary of Atmos Energy Holdings, Inc., a wholly-owned subsidiary of Atmos Energy Corporation
AMA
 
Asset Management Agreement
APSC
 
Arkansas Public Service Commission
ARP
 
Alternative revenue program
ASC
 
Accounting Standards Codification
ASU
 
Accounting Standards Update
Bcf
 
Billion cubic feet
CenterPoint Energy
 
CenterPoint Energy, Inc., and its subsidiaries
CERC Corp.
 
CenterPoint Energy Resources Corp.
CERC
 
CERC Corp., together with its subsidiaries
CES
 
CenterPoint Energy Services, Inc., a wholly-owned subsidiary of CERC Corp.
CIP
 
Conservation Improvement Program
Continuum
 
The retail energy services business of Continuum Retail Energy Services, LLC, including its wholly-owned subsidiary Lakeshore Energy Services, LLC and the natural gas wholesale assets of Continuum Energy Services, LLC
EDIT
 
Excess deferred income taxes
EECR
 
Energy Efficiency Cost Recovery
Enable
 
Enable Midstream Partners, LP
EPA
 
Environmental Protection Agency
FERC
 
Federal Energy Regulatory Commission
Fitch
 
Fitch, Inc.
Form 10-Q
 
Quarterly Report on Form 10-Q
FRP
 
Formula Rate Plan
GenOn
 
GenOn Energy, Inc.
GRIP
 
Gas Reliability Infrastructure Program
Houston Electric
 
CenterPoint Energy Houston Electric, LLC and its subsidiaries
Interim Condensed Financial Statements
 
Unaudited condensed consolidated interim financial statements and notes
IRS
 
Internal Revenue Service
LIBOR
 
London Interbank Offered Rate
MGP
 
Manufactured gas plant
MLP
 
Master Limited Partnership
MMBtu
 
One million British thermal units
Moody’s
 
Moody’s Investors Service, Inc.
MPSC
 
Mississippi Public Service Commission
MPUC
 
Minnesota Public Utilities Commission
NGD
 
Natural gas distribution business
NGLs
 
Natural gas liquids
NOPR
 
Notice of Proposed Rulemaking
NRG
 
NRG Energy, Inc.
NYSE
 
New York Stock Exchange
OCC
 
Oklahoma Corporation Commission
OGE
 
OGE Energy Corp.
PBRC
 
Performance Based Rate Change
PRP
 
Potentially responsible party
Railroad Commission
 
Railroad Commission of Texas
Reliant Energy
 
Reliant Energy, Incorporated

ii



GLOSSARY
Revised Policy Statement
 
Revised Policy Statement on Treatment of Income Taxes
ROE
 
Return on equity
RRA
 
Rate Regulation Adjustment
RRI
 
Reliant Resources, Inc.
RSP
 
Rate Stabilization Plan
SEC
 
Securities and Exchange Commission
S&P
 
Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies
TBD
 
To be determined
TCJA
 
Tax reform legislation informally called the Tax Cuts and Jobs Act of 2017
Transition Agreements
 
Services Agreement, Employee Transition Agreement, Transitional Seconding Agreement and other agreements entered into in connection with the formation of Enable
Vectren
 
Vectren Corporation, an Indiana corporation
VIE
 
Variable interest entity
2017 Form 10-K
 
Annual Report on Form 10-K for the year ended December 31, 2017


iii



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

From time to time we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied by these statements. You can generally identify our forward-looking statements by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “plan,” “potential,” “predict,” “projection,” “should,” “target,” “will” or other similar words.

We have based our forward-looking statements on our management’s beliefs and assumptions based on information reasonably available to our management at the time the statements are made. We caution you that assumptions, beliefs, expectations, intentions and projections about future events may and often do vary materially from actual results. Therefore, we cannot assure you that actual results will not differ materially from those expressed or implied by our forward-looking statements.

The following are some of the factors that could cause actual results to differ from those expressed or implied by our forward-looking statements:

the performance of Enable, the amount of cash distributions we receive from Enable, and the value of our interest in Enable, and factors that may have a material impact on such performance, cash distributions and value, including factors such as:
competitive conditions in the midstream industry, and actions taken by Enable’s customers and competitors, including the extent and timing of the entry of additional competition in the markets served by Enable;

the timing and extent of changes in the supply of natural gas and associated commodity prices, particularly prices of natural gas and NGLs, the competitive effects of the available pipeline capacity in the regions served by Enable, and the effects of geographic and seasonal commodity price differentials, including the effects of these circumstances on re-contracting available capacity on Enable’s interstate pipelines;

the demand for crude oil, natural gas, NGLs and transportation and storage services;

environmental and other governmental regulations, including the availability of drilling permits and the regulation of hydraulic fracturing;

recording of non-cash goodwill, long-lived asset or other than temporary impairment charges by or related to Enable;

changes in tax status;

access to debt and equity capital; and

the availability and prices of raw materials and services for current and future construction projects;

industrial, commercial and residential growth in our service territories and changes in market demand, including the effects of energy efficiency measures and demographic patterns;
timely and appropriate rate actions that allow recovery of costs and a reasonable return on investment;
future economic conditions in regional and national markets and their effect on sales, prices and costs;
weather variations and other natural phenomena, including the impact of severe weather events on operations and capital;
state and federal legislative and regulatory actions or developments affecting various aspects of our businesses (including the businesses of Enable), including, among others, energy deregulation or re-regulation, pipeline integrity and safety and changes in regulation and legislation pertaining to trade, health care, finance and actions regarding the rates charged by our regulated businesses;
tax reform and legislation, including the effects of the TCJA and uncertainties involving state commissions’ and local municipalities’ regulatory requirements and determinations regarding the treatment of EDIT and our rates;
our ability to mitigate weather impacts through normalization or rate mechanisms, and the effectiveness of such mechanisms;

iv



the timing and extent of changes in commodity prices, particularly natural gas, and the effects of geographic and seasonal commodity price differentials;
actions by credit rating agencies;
changes in interest rates and their impact on our costs of borrowing;
problems with regulatory approval, construction, implementation of necessary technology or other issues with respect to major capital projects that result in delays or in cost overruns that cannot be recouped in rates;
local, state and federal legislative and regulatory actions or developments relating to the environment, including those related to global climate change;
the impact of unplanned facility outages;
any direct or indirect effects on our or Enable’s facilities, operations and financial condition resulting from terrorism, cyber-attacks, data security breaches or other attempts to disrupt our businesses or the businesses of third parties, or other catastrophic events such as fires, earthquakes, explosions, leaks, floods, droughts, hurricanes, pandemic health events or other occurrences;
our ability to invest planned capital and the timely recovery of our investment in capital;
our ability to control operation and maintenance costs;
the sufficiency of our insurance coverage, including availability, cost, coverage and terms;
the investment performance of CenterPoint Energy, Inc.’s pension and postretirement benefit plans;
commercial bank and financial market conditions, our access to capital, the cost of such capital, and the results of our financing and refinancing efforts, including availability of funds in the debt capital markets;
changes in rates of inflation;
inability of various counterparties to meet their obligations to us;
non-payment for our services due to financial distress of our customers;
the extent and effectiveness of our risk management and hedging activities, including, but not limited to, our financial and weather hedges;
timely and appropriate regulatory actions allowing recovery of costs associated with any future hurricanes or natural disasters, including costs associated with Hurricane Harvey;
our or Enable’s potential business strategies and strategic initiatives, including restructurings, joint ventures and acquisitions or dispositions of assets or businesses (including a reduction of our interests in Enable, if any, whether through our decision to sell all or a portion of the Enable common units we own in the public equity markets or otherwise, subject to certain limitations), which we cannot assure you will be completed or will have the anticipated benefits to us or Enable;
acquisition and merger activities involving us or our competitors, including the ability to successfully complete merger, acquisition and divestiture plans;
our or Enable’s ability to recruit, effectively transition and retain management and key employees and maintain good labor relations;
the outcome of litigation;
the ability of GenOn (formerly known as RRI Energy, Inc., Reliant Energy and RRI), a wholly-owned subsidiary of NRG, and its subsidiaries, currently the subject of bankruptcy proceedings, to satisfy their obligations to us, including indemnity obligations;
the timing and outcome of any audits, disputes and other proceedings related to taxes;
the effect of changes in and application of accounting standards and pronouncements; and

v



other factors we discuss in “Risk Factors” in Item 1A of Part I of our 2017 Form 10-K, which is incorporated herein by reference, and other reports we file from time to time with the SEC.
You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to update or revise any forward-looking statements. 

vi



PART I. FINANCIAL INFORMATION


Item 1.  FINANCIAL STATEMENTS

CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Millions of Dollars)
(Unaudited)

 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
 
Revenues:
 
 
 
Utility revenues
$
1,143

 
$
907

Non-utility revenues
1,257

 
1,186

Total
2,400

 
2,093

 
 
 
 
Expenses:
 

 
 

Utility natural gas
637

 
450

Non-utility natural gas
1,273

 
1,129

Operation and maintenance
238

 
215

Depreciation and amortization
73

 
66

Taxes other than income taxes
48

 
34

Total
2,269

 
1,894

Operating Income
131

 
199

 
 
 
 
Other Income (Expense):
 

 
 

Interest and other finance charges
(29
)
 
(29
)
Equity in earnings of unconsolidated affiliate, net
69

 
72

Other, net
(4
)
 
(5
)
Total
36

 
38

Income Before Income Taxes
167

 
237

Income tax expense
37

 
90

Net Income
$
130

 
$
147





See Notes to Unaudited Condensed Consolidated Financial Statements


1



CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Millions of Dollars)
(Unaudited)

 
Three Months Ended
 
March 31,
 
2018
 
2017
 
 
 
 
Net income
$
130

 
$
147

Comprehensive income
$
130

 
$
147



See Notes to Unaudited Condensed Consolidated Financial Statements


2



CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
(Unaudited)
 
ASSETS
 
March 31,
2018
 
December 31, 2017
Current Assets:
 
 
 
Cash and cash equivalents
$
27

 
$
12

Accounts receivable, less bad debt reserve of $22 and $18, respectively
780

 
713

Accrued unbilled revenues
179

 
307

Accounts and notes receivable–affiliated companies
8

 
6

Materials and supplies
61

 
56

Natural gas inventory
81

 
222

Non-trading derivative assets
84

 
110

Prepaid expenses and other current assets
94

 
166

Total current assets
1,314

 
1,592

 
 
 
 
Property, Plant and Equipment:
 
 
 
Property, plant and equipment
6,978

 
6,888

Less: accumulated depreciation and amortization
2,094

 
2,036

Property, plant and equipment, net
4,884

 
4,852

 
 
 
 
Other Assets:
 

 
 

Goodwill
867

 
867

Non-trading derivative assets
52

 
44

Investment in unconsolidated affiliate
2,467

 
2,472

Other
271

 
285

Total other assets
3,657

 
3,668

 
 
 
 
Total Assets
$
9,855

 
$
10,112



See Notes to Unaudited Condensed Consolidated Financial Statements


















3




CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
(Unaudited)
 
LIABILITIES AND STOCKHOLDER’S EQUITY

 
March 31,
2018
 
December 31, 2017
Current Liabilities:
 

 
 

Short-term borrowings
$

 
$
39

Accounts payable
479

 
669

Accounts and notes payable–affiliated companies
39

 
611

Taxes accrued
75

 
75

Interest accrued
19

 
32

Customer deposits
77

 
76

Non-trading derivative liabilities
21

 
20

Other
137

 
137

Total current liabilities
847

 
1,659

 
 
 
 
Other Liabilities:
 

 
 

Deferred income taxes, net
1,323

 
1,289

Non-trading derivative liabilities
12

 
4

Benefit obligations
97

 
97

Regulatory liabilities
1,240

 
1,201

Other
303

 
297

Total other liabilities
2,975

 
2,888

 
 
 
 
Long-Term Debt
2,882

 
2,457

 
 
 
 
Commitments and Contingencies (Note 12)


 


 
 
 
 
Stockholder’s Equity:
 
 
 
Common stock

 

Paid-in capital
2,527

 
2,528

Retained earnings
618

 
574

Accumulated other comprehensive income
6

 
6

Total stockholder’s equity
3,151

 
3,108

 
 
 
 
Total Liabilities and Stockholder’s Equity
$
9,855

 
$
10,112



See Notes to Unaudited Condensed Consolidated Financial Statements


4



CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF CENTERPOINT ENERGY, INC.)
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Millions of Dollars)
(Unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
Cash Flows from Operating Activities:
 
 
 
Net income
$
130

 
$
147

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
73

 
66

Amortization of deferred financing costs
2

 
2

Deferred income taxes
34

 
88

Write-down of natural gas inventory
1

 

Equity in earnings of unconsolidated affiliate, net of distributions
(9
)
 
(72
)
Changes in other assets and liabilities, excluding acquisitions:
 

 
 

Accounts receivable and unbilled revenues, net
29

 
94

Accounts receivable/payable–affiliated companies
(4
)
 
(5
)
Inventory
135

 
70

Accounts payable
(173
)
 
(148
)
Fuel cost recovery
64

 
(6
)
Interest and taxes accrued
(13
)
 
(4
)
Non-trading derivatives, net
60

 
(32
)
Margin deposits, net
(28
)
 
(46
)
Net regulatory assets and liabilities
55

 

Other current assets
3

 
4

Other current liabilities
19

 
(11
)
Other assets
3

 
13

Other liabilities
4

 
18

Other, net
1

 
2

Net cash provided by operating activities
386

 
180

Cash Flows from Investing Activities:
 

 
 

Capital expenditures
(114
)
 
(98
)
Distributions from unconsolidated affiliate in excess of cumulative earnings
14

 
74

Acquisitions, net of cash acquired

 
(132
)
Other, net
3

 

Net cash used in investing activities
(97
)
 
(156
)
Cash Flows from Financing Activities:
 

 
 

Decrease in short-term borrowings, net
(39
)
 
(35
)
Proceeds from (payments of) commercial paper, net
(172
)
 
30

Proceeds from long-term debt
599

 

Dividends to parent
(86
)
 
(108
)
Debt issuance costs
(4
)
 

Increase (decrease) in notes payable–affiliated companies
(570
)
 
52

Contribution from parent

 
38

Other, net
(2
)
 

Net cash used in financing activities
(274
)
 
(23
)
Net Increase in Cash and Cash Equivalents
15

 
1

Cash and Cash Equivalents at Beginning of Period
12

 
1

Cash and Cash Equivalents at End of Period
$
27

 
$
2


See Notes to Unaudited Condensed Consolidated Financial Statements

5



CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Background and Basis of Presentation

General. Included in this Form 10-Q are the Interim Condensed Financial Statements of CERC. The Interim Condensed Financial Statements are unaudited, omit certain financial statement disclosures and should be read with the 2017 Form 10-K.

Background. CERC Corp. is an indirect, wholly-owned subsidiary of CenterPoint Energy, a public utility holding company. CERC Corp.’s operating subsidiaries own and operate natural gas distribution facilities, supply natural gas to commercial and industrial customers and electric and natural gas utilities and own interests in Enable as described in Note 8. CERC Corp.’s operating subsidiaries and divisions include:

NGD, which owns and operates natural gas distribution systems in six states; and

CES, which obtains and offers competitive variable and fixed-price physical natural gas supplies and services primarily to commercial and industrial customers and electric and natural gas utilities in 33 states.

As of March 31, 2018, CERC Corp. also owned approximately 54.0% of the common units representing limited partner interests in Enable, which owns, operates and develops natural gas and crude oil infrastructure assets.

Basis of Presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

CERC’s Interim Condensed Financial Statements reflect all normal recurring adjustments that are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the respective periods. Amounts reported in CERC’s Condensed Statements of Consolidated Income are not necessarily indicative of amounts expected for a full-year period due to the effects of, among other things, (a) seasonal fluctuations in demand for energy and energy services, (b) changes in energy commodity prices, (c) timing of maintenance and other expenditures and (d) acquisitions and dispositions of businesses, assets and other interests.

For a description of CERC’s reportable business segments, see Note 14.

(2) New Accounting Pronouncements

The following table provides an overview of recently adopted or issued accounting pronouncements applicable to CERC.
Recently Adopted Accounting Standards
ASU Number and Name
 
Description
 
Date of Adoption
 
Financial Statement Impact
upon Adoption
ASU 2014-09- Revenue from Contracts with Customers (Topic 606) and related amendments
 
This standard provides a comprehensive new revenue recognition model that requires revenue to be recognized in a manner that depicts the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services.
Transition method: modified retrospective
 
January 1, 2018
 
CERC added a revenue recognition footnote (Note 3) to address the disclosure requirements, and it did not identify significant changes to revenue recognition. A substantial amount of CERC’s revenues are tariff and derivative based, which were not significantly impacted by these ASUs.
ASU 2017-05- Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
 
This standard clarifies when and how to apply ASC 610-20, which was issued as part of ASU 2014-09. It amends or supersedes the guidance in ASC 350 and ASC 360 on determining a gain or loss recognized upon the derecognition of nonfinancial assets.
Transition method: modified retrospective
 
January 1, 2018
 
ASU 2017-05 eliminates industry specific guidance, including ASC 360-20 Property, Plant, and Equipment - Real Estate Sales, for the recognition of gains or losses upon the sale of in-substance real estate. CERC elected to apply the practical expedient upon adoption to only evaluate transactions that were not determined to be complete as of the date of adoption. Subsequent to adoption, gains or losses on sales or dilution events in CERC’s investment in Enable may result in gains or losses recognized in earnings. See Note 8 for further discussion.


6



Recently Adopted Accounting Standards
ASU Number and Name
 
Description
 
Date of Adoption
 
Financial Statement Impact
upon Adoption
ASU 2016-01- Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

ASU 2018-03-Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
 
This standard requires equity investments that do not result in consolidation and are not accounted for under the equity method to be measured at fair value and to recognize any changes in fair value in net income unless the investments qualify for the new practicability exception. It does not change the guidance for classifying and measuring investments in debt securities and loans. It also changes certain disclosure requirements and other aspects related to recognition and measurement of financial assets and financial liabilities.
Transition method: cumulative-effect adjustment to beginning retained earnings, and two features prospective
 
January 1, 2018
 
The adoption of this standard did not a have an impact on CERC’s financial position, results of operations, cash flows or disclosures. CERC elected the practicability exception for investments without a readily determinable fair value to be measured at cost. See Note 8 for further discussion.
ASU 2016-15- Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
 
This standard provides clarifying guidance on the classification of certain cash receipts and payments in the statement of cash flows and eliminates the variation in practice related to such classifications.
Transition method: retrospective
 
January 1, 2018
 
The adoption did not have a material impact on CERC’s financial position, results of operations, cash flows or disclosures.
ASU 2016-18- Statement of Cash Flows (Topic 230): Restricted Cash
 
This standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. As a result, the statement of cash flows will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet.
Transition method: retrospective
 
January 1, 2018
 
The adoption of this standard did not have an impact on CERC’s financial position, results of operations, cash flows or disclosures.
ASU 2017-01- Business Combinations (Topic 805): Clarifying the Definition of a Business
 
This standard revises the definition of a business. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, then under ASU 2017-01, the asset or group of assets is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs to be more closely aligned with how outputs are described in ASC 606.
Transition method: prospective
 
January 1, 2018
 
The adoption of this revised definition will reduce the number of transactions that are accounted for as a business combination, and therefore may have a potential impact on CERC’s accounting for future acquisitions.
ASU 2017-04- Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
 
This standard eliminates Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
Transition method: prospective
 
January 1, 2018
 
The adoption of this standard will have an impact on CERC’s future calculation of goodwill impairments if an impairment is identified.
ASU 2017-07- Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
 
This standard requires an employer to report the service cost component of the net periodic pension cost and postretirement benefit cost in the same line item(s) as other employee compensation costs arising from services rendered during the period; all other components will be presented separately from the line item(s) that includes the service cost and outside of any subtotal of operating income. In addition, only the service cost component will be eligible for capitalization in assets.
Transition method: retrospective for the presentation of the service cost component and other components; prospective for the capitalization of the service cost component
 
January 1, 2018
 
The adoption of this standard did not have a material impact on CERC’s financial position, results of operations, cash flows or disclosures; however, it resulted in an increase to operating income and a corresponding decrease to other income of $4 million and $5 million as of March 31, 2018 and 2017, respectively. Other components previously capitalized in assets will be recorded as regulatory assets in CERC’s rate-regulated businesses, prospectively.


7



Issued, Not Yet Effective Accounting Standards
ASU Number and Name
 
Description
 
Date of Adoption
 
Financial Statement Impact
upon Adoption
ASU 2016-02- Leases (Topic 842) and related amendments




ASU 2018-01- Leases (Topic 842) Land Easement Practical Expedient for Transition to Topic 842
 
ASU 2016-02 provides a comprehensive new lease model that requires lessees to recognize assets and liabilities for most leases and would change certain aspects of lessor accounting.
Transition method: modified retrospective

ASU 2018-01 allows entities to elect not to assess whether existing land easements that were not previously accounted for in accordance with ASC 840 Leases under ASC 842 Leases when transitioning to the new leasing standard.
 
January 1, 2019 Early adoption is permitted
 
CERC will elect the practical expedient on existing easements provided by ASU 2018-01 and is evaluating other available transitional practical expedients. CERC is in the process of reviewing contracts to identify leases as defined in ASU 2016-02 and expects to recognize on the statements of financial position right-of-use assets and lease liabilities for the majority of its leases that are currently classified as operating leases. CERC is continuing to assess the impact that adoption of these standards will have on its financial position, results of operations, cash flows and disclosures.
ASU 2017-12- Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
 
This standard expands an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness, eases certain documentation and assessment requirements, and updates the presentation and disclosure requirements.
Transition method: cumulative-effect adjustment for elimination of the separate measurement of ineffectiveness; prospective for presentation and disclosure
 
January 1, 2019 Early adoption is permitted
 
CERC is currently assessing the impact that adoption of this standard will have on its financial position, results of operations, cash flows and disclosures.
ASU 2018-02-Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
 
This standard allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA and requires entities to provide certain disclosures regarding stranded tax effects.
Transition method: either in the period of adoption or retrospective
 
January 1, 2019
Early adoption is permitted
 
The adoption of this standard will allow CERC to reclass stranded deferred tax adjustments primarily related to benefit plans from other comprehensive income to retained earnings. CERC is currently assessing the impact that adoption of this standard will have on its financial position and disclosures.

Management believes that other recently adopted standards and recently issued standards that are not yet effective will not have a material impact on CERC’s financial position, results of operations or cash flows upon adoption.

(3) Revenue Recognition

CERC adopted ASC 606 and all related amendments on January 1, 2018 using the modified retrospective method for those contracts that were not completed as of the date of adoption. Application of the new revenue standard did not result in a cumulative effect adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The adoption of the new standard did not have a material impact on CERC’s financial position, results of operations or cash flows.

In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which CERC expects to be entitled to receive in exchange for these goods or services. Contract assets and liabilities are not material.

The following tables disaggregate revenues by major source:
 
 
Three Months Ended March 31, 2018
 
 
Natural Gas Distribution (1)
 
Energy
 Services (2)
 
Other Operations (2)
 
Total
 
 
(in millions)
Revenue from contracts
 
$
1,186

 
$
178

 
$

 
$
1,364

Derivatives income
 

 
1,107

 

 
1,107

Other (3)
 
(33
)
 

 

 
(33
)
Eliminations
 
(10
)
 
(28
)
 

 
(38
)
Total revenues
 
$
1,143

 
$
1,257

 
$

 
$
2,400



8



 
 
Three Months Ended March 31, 2017
 
 
Natural Gas Distribution (1)
 
Energy
 Services (2)
 
Other Operations (2)
 
Total
 
 
(in millions)
Revenue from contracts
 
$
925

 
$
142

 
$

 
$
1,067

Derivatives income
 

 
1,054

 

 
1,054

Other (3)
 
(9
)
 

 
1

 
(8
)
Eliminations
 
(9
)
 
(11
)
 

 
(20
)
Total revenues
 
$
907

 
$
1,185

 
$
1

 
$
2,093


(1)
Reflected in Utility revenues in the Condensed Statements of Consolidated Income.

(2)
Reflected in Non-utility revenues in the Condensed Statements of Consolidated Income.

(3)
Primarily consists of income from ARPs and leases. ARPs are contracts between the utility and its regulators, not between the utility and a customer. CERC recognizes ARP revenue as other revenues when the regulator-specified conditions for recognition have been met. Upon recovery of ARP revenue through incorporation in rates charged for utility service to customers, ARP revenue is reversed and recorded as revenue from contracts with customers. The recognition of ARP revenues and the reversal of ARP revenues upon recovery through rates charged for utility service may not occur in the same period.

Revenues from Contracts with Customers

Natural Gas Distribution. CERC distributes and transports natural gas to customers over time, and customers consume the natural gas when delivered. Revenue, consisting of both volumetric and fixed tariff rates set by the state governing agency for that service area, is recognized as natural gas is delivered and represents amounts both billed and unbilled. Discretionary services requested by the customer are satisfied at a point in time and revenue is recognized upon completion of service and the tariff rates set by the applicable state regulator. Payments of natural gas distribution, transportation and discretionary services are aggregated and received on a monthly basis.

Energy Services. The majority of CES natural gas sales contracts are considered a derivative, as the contracts typically have a stated minimum or contractual volume of delivery.

For contracts in which CES delivers the full requirement of the natural gas needed by the customer and a volume is not stated, a contract as defined under ASC 606 is created upon the customer’s exercise of its option to take natural gas. CES supplies natural gas to retail customers over time as customers consume the natural gas when delivered. For wholesale customers, CES supplies natural gas at a point in time because the wholesale customer is presumed to have storage capabilities. Control is transferred to both types of customers upon delivery of natural gas. Revenue is recognized on a monthly basis based on the estimated volume of natural gas delivered and the price agreed upon with the customer. Payments are received on a monthly basis.

AMAs are natural gas sales contracts under which CES also assumes management of a customer’s physical storage and/or transportation capacity. AMAs have two distinct performance obligations, which consist of natural gas sales and natural gas delivery because delivery could occur separate from the sale of natural gas (e.g., from storage to customer premises). Most AMAs’ natural gas sales performance obligations are accounted for as embedded derivatives. The transaction price is allocated between the sale of natural gas and the delivery based on the stand-alone selling price as stated in the contract. CES performs natural gas delivery over time as customers take delivery of the natural gas and recognizes revenue on an aggregated monthly basis based on the volume of natural gas delivered and the fees stated within the contract. Payments are received on a monthly basis.

Practical Expedients and Exemption. Sales taxes and other similar taxes collected from customers are excluded from the transaction price.


9



(4) Employee Benefit Plans

CERC’s employees participate in CenterPoint Energy’s postretirement benefit plan. CERC’s net periodic cost, before considering amounts subject to overhead allocations for capital expenditure projects or for amounts subject to deferral for regulatory purposes, includes the following components relating to postretirement benefits:
 
Three Months Ended
 
March 31,
 
2018
 
2017
 
(in millions)
Interest cost (1)
$
1

 
$
1

Net periodic cost
$
1

 
$
1


(1)
Included in Other, net in the Condensed Statements of Consolidated Income.

CERC expects to contribute approximately $5 million to the postretirement benefit plan in 2018, of which approximately $1 million was contributed during the three months ended March 31, 2018.

(5) Regulatory Accounting

The following is a list of regulatory assets and liabilities reflected on CERC’s Condensed Consolidated Balance Sheets:
 
March 31,
2018
 
December 31, 2017
 
(in millions)
Regulatory Assets:
 
 
 
Current regulatory assets (1)
$
65

 
$
130

Non-current regulatory assets:
 
 
 
Hurricane Harvey restoration costs (2)
7

 
6

Regulatory assets related to TCJA (3)
15

 
15

Other long-term regulatory assets (4)
150

 
160

Total non-current regulatory assets (5)
172

 
181

Total regulatory assets
237

 
311

Regulatory Liabilities:
 
 
 
Current regulatory liabilities (6)
16

 
2

Non-current regulatory liabilities:
 
 
 
Regulatory liabilities related to TCJA (3)
499

 
492

Estimated removal costs
600

 
593

Other long-term regulatory liabilities
141

 
116

Total non-current regulatory liabilities
1,240

 
1,201

Total regulatory liabilities
1,256

 
1,203

Total regulatory assets and liabilities, net
$
(1,019
)
 
$
(892
)

(1)
Current regulatory assets are included in Prepaid expenses and other current assets in CERC’s Condensed Consolidated Balance Sheets.

(2)
CERC is not earning a return on its Hurricane Harvey restoration costs.

(3)
The EDIT and deferred revenues will be recovered or refunded to customers as required by tax and regulatory authorities.

(4)
Includes a portion of NGD’s actuarially determined pension and other postemployment expense in excess of the amount being recovered through rates that is being deferred for rate making purposes. Deferred pension and other postemployment expenses of $6 million and $7 million as of March 31, 2018 and December 31, 2017, respectively, were not earning a return. Other long-term regulatory assets that are not earning a return were not material as of March 31, 2018 and December 31, 2017.


10



(5)
Non-current regulatory assets are included in Other assets in CERC’s Condensed Consolidated Balance Sheets.

(6)
Current regulatory liabilities are included in Other current liabilities in CERC’s Condensed Consolidated Balance Sheets.

(6) Derivative Instruments

CERC is exposed to various market risks. These risks arise from transactions entered into in the normal course of business.  CERC utilizes derivative instruments such as physical forward contracts, swaps and options to mitigate the impact of changes in commodity prices, weather and interest rates on its operating results and cash flows. Such derivatives are recognized in CERC’s Condensed Consolidated Balance Sheets at their fair value unless CERC elects the normal purchase and sales exemption for qualified physical transactions. A derivative may be designated as a normal purchase or normal sale if the intent is to physically receive or deliver the product for use or sale in the normal course of business.

CenterPoint Energy has a Risk Oversight Committee composed of corporate and business segment officers that oversees commodity price, weather and credit risk activities, including CERC’s marketing, risk management services and hedging activities. The committee’s duties are to establish CERC’s commodity risk policies, allocate board-approved commercial risk limits, approve the use of new products and commodities, monitor positions and ensure compliance with CERC’s commercial risk management policy and procedures and limits established by CenterPoint Energy’s Board of Directors.

CERC’s policies prohibit the use of leveraged financial instruments. A leveraged financial instrument, for this purpose, is a transaction involving a derivative whose financial impact will be based on an amount other than the notional amount or volume of the instrument.

(a) Non-Trading Activities

Derivative Instruments. CERC enters into certain derivative instruments to mitigate the effects of commodity price movements. Certain financial instruments used to hedge portions of the natural gas inventory of the Energy Services business segment are designated as fair value hedges for accounting purposes. All other financial instruments do not qualify or are not designated as cash flow or fair value hedges.

Weather Hedges. CERC has weather normalization or other rate mechanisms that mitigate the impact of weather on NGD in Arkansas, Louisiana, Mississippi, Minnesota and Oklahoma. NGD in Texas does not have such mechanisms, although fixed customer charges are historically higher in Texas for NGD compared to CERC’s other jurisdictions. As a result, fluctuations from normal weather may have a positive or negative effect on NGD’s results in Texas.
 
CERC enters into winter season weather hedges from time to time for certain NGD jurisdictions to mitigate the effect of fluctuations from normal weather on its results of operations and cash flows. These weather hedges are based on heating degree days at 10-year normal weather.

The table below summarizes CERC’s current weather hedge activity:
 
 
 
 
 
 
Three Months Ended March 31,
Jurisdiction
 
Winter Season
 
Bilateral Cap
 
2018
 
2017
 
 
 
 
(in millions)
Certain NGD jurisdictions (1)
 
2017 – 2018
 
$
8

 
$

 
$


(1)
Weather hedge gains (losses) are recorded in Revenues in the Condensed Statements of Consolidated Income.

Hedging of Interest Expense for Future Debt Issuances. In March 2018, CERC Corp. entered into forward interest rate agreements with multiple counterparties, having an aggregate notional amount of $450 million. These agreements were executed to hedge, in part, volatility in the 5-year and 10-year U.S. treasury rates by reducing CERC Corp.’s exposure to variability in cash flows related to interest payments of CERC Corp.’s $600 million issuance of fixed rate debt in March 2018. These forward interest rate agreements were designated as cash flow hedges. Accordingly, the effective portion of realized losses associated with the forward interest rate agreements, which totaled less than $1 million, is a component of accumulated other comprehensive income in 2018 and will be amortized over the life of the fixed rate debt.


11



(b) Derivative Fair Values and Income Statement Impacts

The following tables present information about CERC’s derivative instruments and hedging activities. The first four tables provide a balance sheet overview of CERC’s Derivative Assets and Liabilities, while the last table provides a breakdown of the related income statement impacts.
Fair Value of Derivative Instruments
 
 
March 31, 2018
 
 
Balance Sheet Location
 
Derivative
Assets
Fair Value
 
Derivative
Liabilities
Fair Value
Derivatives designated as fair value hedges:
 
 
 
(in millions)
Natural gas derivatives (1) (2) (3)
 
Current Liabilities: Non-trading derivative liabilities
 
$
1

 
$
1

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Natural gas derivatives (1) (2) (3)
 
Current Assets: Non-trading derivative assets
 
86

 
2

Natural gas derivatives (1) (2) (3)
 
Other Assets: Non-trading derivative assets
 
52

 

Natural gas derivatives (1) (2) (3)
 
Current Liabilities: Non-trading derivative liabilities
 
18

 
70

Natural gas derivatives (1) (2) (3)
 
Other Liabilities: Non-trading derivative liabilities
 
9

 
42

Total
 
$
166

 
$
115


(1)
The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 1,735 Bcf or a net 437 Bcf long position.  Certain natural gas contracts hedge basis risk only and lack a fixed price exposure.

(2)
Natural gas contracts are presented on a net basis in the Condensed Consolidated Balance Sheets as they are subject to master netting arrangements. This netting applies to all undisputed amounts due or past due and causes derivative assets (liabilities) to be ultimately presented net in a liability (asset) account within the Condensed Consolidated Balance Sheets. The net of total non-trading natural gas derivative assets and liabilities was a $103 million asset as shown on CERC’s Condensed Consolidated Balance Sheets (and as detailed in the table below), and was comprised of the natural gas contracts derivative assets and liabilities separately shown above, impacted by collateral netting of $52 million.
 
(3)
Derivative Assets and Derivative Liabilities include no material amounts related to physical forward transactions with Enable.
Offsetting of Natural Gas Derivative Assets and Liabilities
 
 
March 31, 2018
 
 
Gross Amounts Recognized (1)
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amount Presented in the Consolidated Balance Sheets (2)
 
 
(in millions)
Current Assets: Non-trading derivative assets
 
$
105

 
$
(21
)
 
$
84

Other Assets: Non-trading derivative assets
 
61

 
(9
)
 
52

Current Liabilities: Non-trading derivative liabilities
 
(73
)
 
52

 
(21
)
Other Liabilities: Non-trading derivative liabilities
 
(42
)
 
30

 
(12
)
Total
 
$
51

 
$
52

 
$
103


(1)
Gross amounts recognized include some derivative assets and liabilities that are not subject to master netting arrangements.

(2)
The derivative assets and liabilities on the Condensed Consolidated Balance Sheets exclude accounts receivable or accounts payable that, should they exist, could be used as offsets to these balances in the event of a default.

12



Fair Value of Derivative Instruments
 
 
December 31, 2017
 
 
Balance Sheet Location
 
Derivative
Assets
Fair Value
 
Derivative
Liabilities
Fair Value
Derivatives designated as fair value hedges:
 
 
 
(in millions)
Natural gas derivatives (1) (2) (3)
 
Current Liabilities: Non-trading derivative liabilities
 
$
13

 
$
1

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Natural gas derivatives (1) (2) (3)
 
Current Assets: Non-trading derivative assets
 
114

 
4

Natural gas derivatives (1) (2) (3)
 
Other Assets: Non-trading derivative assets
 
44

 

Natural gas derivatives (1) (2) (3)
 
Current Liabilities: Non-trading derivative liabilities
 
38

 
78

Natural gas derivatives (1) (2) (3)
 
Other Liabilities: Non-trading derivative liabilities
 
9

 
24

Total
 
$
218

 
$
107


(1)
The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 1,795 Bcf or a net 224 Bcf long position.  Certain natural gas contracts hedge basis risk only and lack a fixed price exposure.

(2)
Natural gas contracts are presented on a net basis in the Condensed Consolidated Balance Sheets as they are subject to master netting arrangements. This netting applies to all undisputed amounts due or past due and causes derivative assets (liabilities) to be ultimately presented net in a liability (asset) account within the Condensed Consolidated Balance Sheets. The net of total non-trading natural gas derivative assets and liabilities was a $130 million asset as shown on CERC’s Condensed Consolidated Balance Sheets (and as detailed in the table below), and was comprised of the natural gas contracts derivative assets and liabilities separately shown above, impacted by collateral netting of $19 million.
  
(3)
Derivative Assets and Derivative Liabilities include no material amounts related to physical forward transactions with Enable.
Offsetting of Natural Gas Derivative Assets and Liabilities
 
 
December 31, 2017
 
 
Gross Amounts Recognized (1)
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amount Presented in the Consolidated Balance Sheets (2)
 
 
(in millions)
Current Assets: Non-trading derivative assets
 
$
165

 
$
(55
)
 
$
110

Other Assets: Non-trading derivative assets
 
53

 
(9
)
 
44

Current Liabilities: Non-trading derivative liabilities
 
(83
)
 
63

 
(20
)
Other Liabilities: Non-trading derivative liabilities
 
(24
)
 
20

 
(4
)
Total
 
$
111

 
$
19

 
$
130


(1)
Gross amounts recognized include some derivative assets and liabilities that are not subject to master netting arrangements.

(2)
The derivative assets and liabilities on the Condensed Consolidated Balance Sheets exclude accounts receivable or accounts payable that, should they exist, could be used as offsets to these balances in the event of a default.

Realized and unrealized gains and losses on natural gas derivatives are recognized in the Condensed Statements of Consolidated Income as revenue for physical sales derivative contracts and as natural gas expense for financial natural gas derivatives and physical purchase natural gas derivatives.

Hedge ineffectiveness is recorded as a component of natural gas expense and primarily results from differences in the location of the derivative instrument and the hedged item. Basis ineffectiveness arises from natural gas market price differences between the locations of the hedged inventory and the delivery location specified in the hedge instruments.

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The impact of natural gas derivatives designated as fair value hedges, the related hedged item, and natural gas derivatives not designated as hedging instruments are presented in the table below.
 
 
 
 
 
 
 
Income Statement Impact of Derivative Activity
 
 
 
 
Three Months Ended March 31,
 
 
Income Statement Location
 
2018
 
2017
Derivatives designated as fair value hedges:
 
 
 
(in millions)
Natural gas derivatives
 
Gains (Losses) in Expenses: Natural Gas
 
$

 
$
3

Fair value adjustments for natural gas inventory designated as the hedged item
 
Gains (Losses) in Expenses: Natural Gas
 
(2
)
 
(4
)
Total increase in Expenses: Natural Gas (1)
 
$
(2
)
 
$
(1
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Natural gas derivatives
 
Gains (Losses) in Revenues
 
$
57

 
$
96

Natural gas derivatives
 
Gains (Losses) in Expenses: Natural Gas
 
(69
)
 
(67
)
Total - derivatives not designated as hedging instruments
 
$
(12
)
 
$
29


(1)
Hedge ineffectiveness results from the basis ineffectiveness discussed above, and excludes the impact to natural gas expense from timing ineffectiveness.  Timing ineffectiveness arises due to changes in the difference between the spot price and the futures price, as well as the difference between the timing of the settlement of the futures and the valuation of the underlying physical commodity.  As the commodity contract nears the settlement date, spot-to-forward price differences should converge, which should reduce or eliminate the impact of this ineffectiveness on natural gas expense.

(c) Credit Risk Contingent Features

CERC enters into financial derivative contracts containing material adverse change provisions. These provisions could require CERC to post additional collateral if the S&P or Moody’s credit ratings of CERC are downgraded. The total fair value of the derivative instruments that contain credit risk contingent features that are in a net liability position as of both March 31, 2018 and December 31, 2017 was $2 million.  CERC posted no assets as collateral toward derivative instruments that contain credit risk contingent features as of either March 31, 2018 or December 31, 2017. If all derivative contracts (in a net liability position) containing credit risk contingent features were triggered as of both March 31, 2018 and December 31, 2017, $2 million of additional assets would be required to be posted as collateral.

(7) Fair Value Measurements

Assets and liabilities that are recorded at fair value in the Condensed Consolidated Balance Sheets are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined below and directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, are as follows:

Level 1: Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets carried at Level 1 fair value generally are exchange-traded derivatives and equity securities, as well as natural gas inventory that has been designated as the hedged item in a fair value hedge.

Level 2: Inputs, other than quoted prices included in Level 1, are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability. Fair value assets and liabilities that are generally included in this category are derivatives with fair values based on inputs from actively quoted markets.  A market approach is utilized to value CERC’s Level 2 assets or liabilities.

Level 3: Inputs are unobservable for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. Unobservable inputs reflect CERC’s judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. CERC develops these inputs based on the best information available, including CERC’s own data. A market approach is utilized to value CERC’s Level 3 assets or liabilities. As of March 31, 2018, CERC’s Level 3 assets and liabilities are comprised of physical natural gas forward contracts and options. Level 3 physical natural gas forward contracts and options are valued using a discounted cash flow model which includes illiquid forward price curve locations (ranging from $1.36 to $3.26 per MMBtu) as an unobservable input. CERC’s Level 3 physical natural gas forward contracts and options derivative assets and liabilities consist of both long and short positions (forwards and options) and their fair value is sensitive to

14



forward prices.  If forward prices decrease, CERC’s long forwards and options lose value whereas its short forwards and options gain in value. 

CERC determines the appropriate level for each financial asset and liability on a quarterly basis and recognizes transfers between levels at the end of the reporting period.  For the three months ended March 31, 2018, there were no transfers between Level 1 and 2. CERC also recognizes purchases of Level 3 financial assets and liabilities at their fair market value at the end of the reporting period.

The following tables present information about CERC’s assets and liabilities (including derivatives that are presented net) measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by CERC to determine such fair value.
 
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Netting
Adjustments (1)
 
Balance as of March 31, 2018
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
Corporate equities
$
3

 
$

 
$

 
$

 
$
3

Investments, including money
market funds (2)
10

 

 

 

 
10

Natural gas derivatives (3)

 
147

 
19

 
(30
)
 
136

Total assets
$
13

 
$
147

 
$
19

 
$
(30
)
 
$
149

Liabilities
 

 
 

 
 

 
 

 
 

Natural gas derivatives (3)
$

 
$
108

 
$
7

 
$
(82
)
 
$
33

Hedged portion of natural gas inventory
8

 

 

 

 
8

Total liabilities
$
8


$
108


$
7


$
(82
)

$
41


(1)
Amounts represent the impact of legally enforceable master netting arrangements that allow CERC to settle positive and negative positions and also include cash collateral of $52 million posted with the same counterparties.
 
(2)
Amounts are included in Other assets in the Condensed Consolidated Balance Sheets.
 
(3)
Natural gas derivatives include no material amounts related to physical forward transactions with Enable.
 
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Netting
Adjustments (1)
 
Balance as of December 31, 2017
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
Corporate equities
$
3

 
$

 
$

 
$

 
$
3

Investments, including money
market funds (2)
11

 

 

 

 
11

Natural gas derivatives (3)

 
161

 
57

 
(64
)
 
154

Hedged portion of natural gas inventory
14

 

 

 

 
14

Total assets
$
28

 
$
161

 
$
57

 
$
(64
)
 
$
182

Liabilities
 

 
 

 
 

 
 

 
 

Natural gas derivatives (3)
$

 
$
96

 
$
11

 
$
(83
)
 
$
24

Total liabilities
$

 
$
96

 
$
11

 
$
(83
)
 
$
24


(1)
Amounts represent the impact of legally enforceable master netting arrangements that allow CERC to settle positive and negative positions and also include cash collateral of $19 million posted with the same counterparties.

15



(2)
Amounts are included in Other assets in the Condensed Consolidated Balance Sheets.

(3)
Natural gas derivatives include no material amounts related to physical forward transactions with Enable.
 
The following table presents additional information about assets or liabilities, including derivatives that are measured at fair value on a recurring basis for which CERC has utilized Level 3 inputs to determine fair value:
 
Fair Value Measurements Using Significant
 Unobservable Inputs (Level 3)
 
Derivative assets and liabilities, net
 
Three Months Ended March 31,
 
2018
 
2017
 
(in millions)
Beginning balance
$
46

 
$
13

Total gains
2

 
16

Total settlements
(34
)
 
(4
)
Transfers into Level 3

 
1

Transfers out of Level 3
(2
)
 
1

Ending balance (1)
$
12

 
$
27

The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date
$
(4
)
 
$
15


(1)
CERC did not have significant Level 3 sales or purchases during either of the three months ended March 31, 2018 or 2017.

Estimated Fair Value of Financial Instruments

The fair values of cash and cash equivalents and short-term borrowings are estimated to be approximately equivalent to carrying amounts and have been excluded from the table below. The carrying amounts of non-trading derivative assets and liabilities are stated at fair value and are excluded from the table below. The fair value of each debt instrument is determined by multiplying the principal amount of each debt instrument by a combination of historical trading prices and comparable issue data. These liabilities, which are not measured at fair value in the Condensed Consolidated Balance Sheets, but for which the fair value is disclosed, would be classified as Level 2 in the fair value hierarchy.
 
March 31, 2018
 
December 31, 2017
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
(in millions)
Financial liabilities:
 
 
 
 
 
 
 
Long-term debt
$
2,882

 
$
3,078

 
$
2,457

 
$
2,708


(8) Unconsolidated Affiliate

CERC Corp. has the ability to significantly influence the operating and financial policies of Enable, a publicly traded MLP, and, accordingly, accounts for its investment in Enable’s common units using the equity method of accounting for in-substance real estate. Upon the adoption of ASU 2014-09 and ASU 2017-05 on January 1, 2018, CERC Corp. evaluated transactions in its investment in Enable that occurred prior to January 1, 2018 (the effective date) and concluded a cumulative effect adjustment to the opening balance of retained earnings was not required. See Note 2 for further discussion.

CERC Corp.’s maximum exposure to loss related to Enable, a VIE in which CERC Corp. is not the primary beneficiary, is limited to its equity investment and its outstanding current accounts receivable from Enable.


16



Limited Partner Interest and Units Held in Enable:
 
March 31, 2018
 
Limited Partner Interest
 
Common Units
CERC Corp.
54.0
%
 
233,856,623

OGE
25.6
%
 
110,982,805

Public unitholders
20.4
%
 
88,232,573

Total units outstanding
100.0
%
 
433,072,001


Generally, sales to any person or entity (including a series of sales to the same person or entity) of more than 5% of the aggregate of the common units CERC Corp. owns in Enable or sales to any person or entity (including a series of sales to the same person or entity) by OGE of more than 5% of the aggregate of the common units it owns in Enable are subject to mutual rights of first offer and first refusal set forth in Enable’s Agreement of Limited Partnership.

Enable is controlled jointly by CERC Corp. and OGE, and each own 50% of the management rights in the general partner of Enable. Sale of CERC Corp.’s or OGE’s ownership interests in Enable’s general partner to a third party is subject to mutual rights of first offer and first refusal, and CERC Corp. is not permitted to dispose of less than all of its interest in Enable’s general partner.

Distributions Received from Enable:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(in millions)
Investment in Enable common units
 
$
74

 
$
74

As of March 31, 2018, CERC Corp. and OGE also owned 40% and 60%, respectively, of the incentive distribution rights held by the general partner of Enable. Enable is expected to pay a minimum quarterly distribution of $0.2875 per common unit on its outstanding common units to the extent it has sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to its general partner and its affiliates, within 60 days after the end of each quarter. If cash distributions to Enable’s unitholders exceed $0.330625 per common unit in any quarter, the general partner will receive increasing percentages or incentive distributions rights, up to 50%, of the cash Enable distributes in excess of that amount. In certain circumstances the general partner of Enable will have the right to reset the minimum quarterly distribution and the target distribution levels at which the incentive distributions receive increasing percentages to higher levels based on Enable’s cash distributions at the time of the exercise of this reset election. To date, no incentive distributions have been made.

Transactions with Enable:
 
Three Months Ended March 31,
 
2018
 
2017
 
(in millions)
Reimbursement of transition services (1)
$
2

 
$
2

Natural gas expenses, including transportation and storage costs
37

 
33


(1)
Represents amounts billed under the Transition Agreements for certain support services provided to Enable. Actual transition services costs are recorded net of reimbursement.
 
March 31, 2018
 
December 31, 2017
 
(in millions)
Accounts receivable for amounts billed for transition services
$
1

 
$
1

Accounts payable for natural gas purchases from Enable
11

 
13




17



Summarized unaudited consolidated income information for Enable is as follows:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(in millions)
Operating revenues
 
$
748

 
$
666

Cost of sales, excluding depreciation and amortization
 
375

 
308

Operating income
 
139

 
140

Net income attributable to Enable
 
105

 
111

Reconciliation of Equity in Earnings, net:
 
 
 
 
CERC Corp.’s interest
 
$
57

 
$
60

Basis difference amortization (1)
 
12

 
12

CERC Corp.’s equity in earnings, net
 
$
69

 
$
72

(1)
Equity in earnings of unconsolidated affiliate includes CERC Corp.’s share of Enable’s earnings adjusted for the amortization of the basis difference of CERC Corp.’s original investment in Enable and its underlying equity in Enable’s net assets. The basis difference is amortized over approximately 31 years, the average life of the assets to which the basis difference is attributed.

Summarized unaudited consolidated balance sheet information for Enable is as follows:
 
 
March 31,
2018
 
December 31, 2017
 
 
(in millions)
Current assets
 
$
413

 
$
416

Non-current assets
 
11,274

 
11,177

Current liabilities
 
1,404

 
1,279

Non-current liabilities
 
2,664

 
2,660

Non-controlling interest
 
11

 
12

Preferred equity
 
362

 
362

Enable partners’ equity
 
7,246

 
7,280

Reconciliation of Investment in Enable:
 
 
 
 
CERC Corp.’s ownership interest in Enable partners’ equity
 
$
3,913

 
$
3,935

CERC Corp.’s basis difference
 
(1,446
)
 
(1,463
)
CERC Corp.’s equity method investment in Enable
 
$
2,467

 
$
2,472


(9) Goodwill and Other Intangibles

Goodwill by reportable business segment as of both March 31, 2018 and December 31, 2017 is as follows:
 
(in millions)
 
Natural Gas Distribution
$
746

 
Energy Services
110

(1)
Other Operations
11

 
Total
$
867

 
(1)
Amount presented is net of the accumulated goodwill impairment charge of $252 million recorded in 2012.


18



The tables below present information on CERC’s other intangible assets recorded in Other non-current assets on the Condensed Consolidated Balance Sheets.
 
 
 
March 31, 2018
 
December 31, 2017
 
Useful Lives
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Balance
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Balance
 
(in years)
 
(in millions)
 
 
 
 
 
 
Customer relationships
15
 
$
86

 
$
(23
)
 
$
63

 
$
86

 
$
(21
)
 
$
65

Covenants not to compete
4
 
4

 
(2
)
 
2

 
4

 
(2
)
 
2

Other
Various
 
15

 
(9
)
 
6

 
15

 
(8
)
 
7

Total
 
 
$
105

 
$
(34
)
 
$
71

 
$
105

 
$
(31
)
 
$
74

 
Three Months Ended March 31,
 
2018
 
2017
 
(in millions)
Amortization expense of intangible assets
$
3

 
$
2


(10) Related Party Transactions
CERC participates in a money pool through which it can borrow or invest on a short-term basis. Funding needs are aggregated and external borrowing or investing is based on the net cash position. The net funding requirements of the money pool are expected to be met with borrowings under CenterPoint Energy’s revolving credit facility or the sale of CenterPoint Energy’s commercial paper.

The table below summarizes CERC’s money pool activity:
 
March 31, 2018
 
December 31, 2017
 
(in millions)
Money pool investments (borrowings) (1)
$

 
$
(570
)
Weighted average interest rate
2.27
%
 
1.90
%

(1)
Included in Accounts and notes receivable (payable)–affiliated companies in the Condensed Consolidated Balance Sheets.

Affiliate related net interest income (expense) was not material for either the three months ended March 31, 2018 or 2017.

CenterPoint Energy provides some corporate services to CERC. The costs of services have been charged directly to CERC using methods that management believes are reasonable. These methods include negotiated usage rates, dedicated asset assignment and proportionate corporate formulas based on operating expenses, assets, gross margin, employees and a composite of assets, gross margin and employees. Houston Electric provides a number of services to CERC. These services are billed at actual cost, either directly or as an allocation, and include fleet services, shop services, geographic services, surveying and right-of-way services, radio communications, data circuit management and field operations. Additionally, CERC provides certain services to Houston Electric. These services are billed at actual cost, either directly or as an allocation and include line locating and other miscellaneous services. These charges are not necessarily indicative of what would have been incurred had CERC not been an affiliate of CenterPoint Energy. Amounts charged to and by CERC for these services were as follows and are included primarily in operation and maintenance expenses:
 
Three Months Ended March 31,
 
2018
 
2017
 
(in millions)
Corporate service charges
$
34

 
$
31

Charges from Houston Electric for services provided
5

 
3

Billings to Houston Electric for services provided
(3
)
 
(2
)




19



CERC paid dividends on its shares of common stock to Utility Holding, LLC as follows:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(in millions)
Dividend to parent
 
$
86

 
$
108


See Note 8 for related party transactions with Enable.

(11) Short-term Borrowings and Long-term Debt

(a)Short-term Borrowings

Inventory Financing. NGD has AMAs associated with its utility distribution service in Arkansas, Louisiana, Mississippi, Oklahoma and Texas. In March 2018, NGD’s third party AMAs in Arkansas, Louisiana and Oklahoma expired, and NGD entered into new AMAs with CES effective April 1, 2018 in these states. The AMAs have varying terms, the longest of which expires in 2021. Pursuant to the provisions of the agreements, NGD sells natural gas and agrees to repurchase an equivalent amount of natural gas during the winter heating seasons at the same cost, plus a financing charge. These transactions are accounted for as an inventory financing and had an associated principal obligation of $-0- and $39 million as of March 31, 2018 and December 31, 2017, respectively.

(b)
Long-term Debt

Debt Issuances. During the three months ended March 31, 2018, CERC Corp. issued the following unsecured senior notes:
Issuance Date
 
Aggregate Principal Amount
 
Interest Rate
 
Maturity Date
 
 
(in millions)
 
 
 
 
March 2018
 
$
300

 
3.55%
 
2023
March 2018
 
300

 
4.00%
 
2028

The proceeds from the issuance of these unsecured senior notes were used for general corporate purposes, including to repay portions of outstanding commercial paper and borrowings under CenterPoint Energy, Inc.’s money pool.

Revolving Credit Facility. CERC Corp. had the following revolving credit facility and utilization of such facility:
 
 
March 31, 2018
 
December 31, 2017
 
Size of
Facility
 
Loans
 
Letters
of Credit
 
Commercial
Paper
 
Loans
 
Letters
of Credit
 
Commercial
Paper
 
(in millions)
 
$
900

 
$

 
$
1

 
$
726

(1)
$

 
$
1

 
$
898

(1)

(1)
Weighted average interest rate was 2.34% and 1.72% as of March 31, 2018 and December 31, 2017, respectively.
Execution Date
 
Size of
Facility
 
Draw Rate of LIBOR plus (1)
 
Financial Covenant Limit on Debt for Borrowed Money to Capital Ratio
 
Debt for Borrowed Money to Capital
Ratio as of March 31, 2018
 
Termination Date
 
 
(in millions)
 
 
 
 
 
 
 
 
March 3, 2016
 
$
900

 
1.25
%
 
65
%
 
38.7%
 
March 3, 2022

(1)
Based on current credit ratings.

CERC Corp. was in compliance with all financial debt covenants as of March 31, 2018.


20



(12) Commitments and Contingencies

(a) Natural Gas Supply Commitments

Natural gas supply commitments include natural gas contracts related to CERC’s Natural Gas Distribution and Energy Services business segments, which have various quantity requirements and durations, that are not classified as non-trading derivative assets and liabilities in CERC’s Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017 as these contracts meet an exception as “normal purchases contracts” or do not meet the definition of a derivative. Natural gas supply commitments also include natural gas transportation contracts that do not meet the definition of a derivative. As of March 31, 2018, minimum payment obligations for natural gas supply commitments are approximately:
 
(in millions)
Remaining nine months of 2018
$
289

2019
311

2020
170

2021
81

2022
51

2023 and beyond
125


(b) Legal, Environmental and Other Matters

Legal Matters

Gas Market Manipulation Cases.  CenterPoint Energy, Houston Electric or their predecessor, Reliant Energy, and certain of their former subsidiaries have been named as defendants in certain lawsuits described below. Under a master separation agreement between CenterPoint Energy and a former subsidiary, RRI, CenterPoint Energy and its subsidiaries are entitled to be indemnified by RRI and its successors for any losses, including certain attorneys’ fees and other costs, arising out of these lawsuits.  In May 2009, RRI sold its Texas retail business to a subsidiary of NRG and RRI changed its name to RRI Energy, Inc. In December 2010, Mirant Corporation merged with and became a wholly-owned subsidiary of RRI, and RRI changed its name to GenOn. In December 2012, NRG acquired GenOn through a merger in which GenOn became a wholly-owned subsidiary of NRG. None of the sale of the retail business, the merger with Mirant Corporation, or the acquisition of GenOn by NRG alters RRI’s (now GenOn’s) contractual obligations to indemnify CenterPoint Energy and its subsidiaries, including Houston Electric, for certain liabilities, including their indemnification obligations regarding the gas market manipulation litigation.

A large number of lawsuits were filed against numerous gas market participants in a number of federal and western state courts in connection with the operation of the natural gas markets in 2000–2002. CenterPoint Energy and its affiliates have since been released or dismissed from all such cases. CES, a subsidiary of CERC Corp., was a defendant in a case now pending in federal court in Nevada alleging a conspiracy to inflate Wisconsin natural gas prices in 2000–2002. On May 24, 2016, the district court granted CES’s motion for summary judgment, dismissing CES from the case. The plaintiffs have appealed that ruling. CenterPoint Energy and CES intend to continue vigorously defending against the plaintiffs’ claims. In June 2017, GenOn and various affiliates filed for protection under Chapter 11 of the U.S. Bankruptcy Code. In December 2017, GenOn received court approval of a restructuring plan and is expected to emerge from Chapter 11 in mid-2018. CenterPoint Energy, CERC, and CES submitted proofs of claim in the bankruptcy proceedings to protect their indemnity rights. If GenOn were unable to meet its indemnity obligations or satisfy a liability that has been assumed in the gas market manipulation litigation, then CERC, CenterPoint Energy or Houston Electric could incur liability and be responsible for satisfying the liability. CERC does not expect the ultimate outcome of the case against CES to have a material adverse effect on its financial condition, results of operations or cash flows.

Minnehaha Academy.  On August 2, 2017, a natural gas explosion occurred at the Minnehaha Academy in Minneapolis, Minnesota, resulting in the deaths of two school employees, serious injuries to others and significant property damage to the school.  CenterPoint Energy, certain of its subsidiaries, including CERC, and the contractor company working in the school have been named in litigation arising out of this incident.  Additionally, CenterPoint Energy is cooperating with the ongoing investigation conducted by the National Transportation Safety Board. Further, CenterPoint Energy is contesting approximately $200,000 in fines imposed by the Minnesota Office of Pipeline Safety. In early 2018, the Minnesota Occupational Safety and Health Administration concluded its investigation without any adverse findings against CenterPoint Energy. CenterPoint Energy’s general and excess liability insurance policies provide coverage for third party bodily injury and property damage claims. 


21



Environmental Matters

MGP Sites. CERC and its predecessors operated MGPs in the past. With respect to certain Minnesota MGP sites, CERC has completed state-ordered remediation and continues state-ordered monitoring and water treatment. As of March 31, 2018, CERC had a recorded liability of $7 million for continued monitoring and any future remediation required by regulators in Minnesota. The estimated range of possible remediation costs for the sites for which CERC believes it may have responsibility was $5 million to $30 million based on remediation continuing for 30 to 50 years. The cost estimates are based on studies of a site or industry average costs for remediation of sites of similar size. The actual remediation costs will depend on the number of sites to be remediated, the participation of other PRPs, if any, and the remediation methods used. 

In addition to the Minnesota sites, the EPA and other regulators have investigated MGP sites that were owned or operated by CERC or may have been owned by one of its former affiliates. CERC does not expect the ultimate outcome of these matters to have a material adverse effect on its financial condition, results of operations or cash flows.

Asbestos. Some facilities owned by CERC or its predecessors in interest contain or have contained asbestos insulation and other asbestos-containing materials. CERC and its predecessor companies are from time to time named, along with numerous others, as defendants in lawsuits filed by a number of individuals who claim injury due to exposure to asbestos, and CERC anticipates that additional claims may be asserted in the future.  Although their ultimate outcome cannot be predicted at this time, CERC does not expect these matters, either individually or in the aggregate, to have a material adverse effect on its financial condition, results of operations or cash flows.

Other Environmental. From time to time, CERC identifies the presence of environmental contaminants during its operations or on property where its predecessor companies have conducted operations. Other such sites involving contaminants may be identified in the future.  CERC has and expects to continue to remediate any identified sites consistent with its state and federal legal obligations. From time to time CERC has received notices, and may receive notices in the future, from regulatory authorities or others regarding its status as a PRP in connection with sites found to require remediation due to the presence of environmental contaminants. In addition, CERC has been, or may be, named from time to time as a defendant in litigation related to such sites. Although the ultimate outcome of such matters cannot be predicted at this time, CERC does not expect these matters, either individually or in the aggregate, to have a material adverse effect on its financial condition, results of operations or cash flows.

Other Proceedings

CERC is involved in other legal, environmental, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies regarding matters arising in the ordinary course of business. From time to time, CERC is also a defendant in legal proceedings with respect to claims brought by various plaintiffs against broad groups of participants in the energy industry. Some of these proceedings involve substantial amounts. CERC regularly analyzes current information and, as necessary, provides accruals for probable and reasonably estimable liabilities on the eventual disposition of these matters. CERC does not expect the disposition of these matters to have a material adverse effect on its financial condition, results of operations or cash flows.

(13) Income Taxes

The effective tax rate reported for the three months ended March 31, 2018 was 22% compared to 38% for the same period in 2017. The lower effective tax rate for the three months ended March 31, 2018 was primarily due to the reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018 as prescribed by the TCJA.

CERC reported no uncertain tax liability as of March 31, 2018 and expects no significant changes to the uncertain tax liability over the next twelve months. Tax years through 2015 have been audited and settled with the IRS. For the 2016 through 2018 tax years, CenterPoint Energy is a participant in the IRS’s Compliance Assurance Process.

(14) Reportable Business Segments

CERC’s determination of reportable business segments considers the strategic operating units under which it manages sales, allocates resources and assesses performance of various products and services to wholesale or retail customers in differing regulatory environments. CERC uses operating income as the measure of profit or loss for its business segments other than Midstream Investments, where it uses equity in earnings.

CERC’s reportable business segments include the following: Natural Gas Distribution, Energy Services, Midstream Investments and Other Operations.  Natural Gas Distribution consists of intrastate natural gas sales to, and natural gas transportation and distribution

22



for, residential, commercial, industrial and institutional customers. Energy Services represents CERC’s non-rate regulated gas sales and services operations. Midstream Investments consists of CERC’s equity investment in Enable. The Other Operations business segment includes unallocated corporate costs and inter-segment eliminations.

Financial data for business segments is as follows:
 
For the Three Months Ended March 31, 2018
 
 

 
Revenues from
External
Customers
 
Inter-segment
Revenues
 
Operating
Income (Loss)
 
Total Assets as of March 31, 2018
 
(in millions)
Natural Gas Distribution
$
1,143

 
$
10

 
$
156

 
$
6,438

Energy Services
1,257

 
28

 
(26
)
 
1,329

Midstream Investments (1)

 

 

 
2,467

Other Operations

 

 
1

 
81

Reconciling Eliminations

 
(38
)
 

 
(460
)
Consolidated
$
2,400

 
$

 
$
131

 
$
9,855

 
For the Three Months Ended March 31, 2017
 
 

 
Revenues from
External
Customers
 
Inter-segment
Revenues
 
Operating
Income (Loss)
(2)
 
Total Assets as of December 31, 2017
 
(in millions)
Natural Gas Distribution
$
907

 
$
9

 
$
168

 
$
6,608

Energy Services
1,185

 
11

 
35

 
1,521

Midstream Investments (1)

 

 

 
2,472

Other Operations
1

 

 
(4
)
 
70

Reconciling Eliminations

 
(20
)
 

 
(559
)
Consolidated
$
2,093

 
$

 
$
199

 
$
10,112


(1)
Midstream Investments’ equity earnings, net are as follows:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(in millions)
Enable
 
$
69

 
$
72


(2)
Amounts for 2017 have been restated to reflect the adoption of ASU 2017-07.

(15) Supplemental Disclosure of Cash Flow Information

The table below provides supplemental disclosure of cash flow information:
 
Three Months Ended March 31,
 
2018
 
2017
 
(in millions)
Cash Payments:
 

 
 

Interest, net of capitalized interest
$
39

 
$
29

Non-cash transactions:
 

 
 

Accounts payable related to capital expenditures
$
39

 
$
28



23



(16) Subsequent Events

On May 1, 2018, Enable declared a quarterly cash distribution of $0.318 per unit on all of its outstanding common units for the quarter ended March 31, 2018. Accordingly, CERC Corp. expects to receive a cash distribution of approximately $74 million from Enable in the second quarter of 2018 to be made with respect to CERC Corp.’s investment in common units of Enable for the first quarter of 2018.

Item 2.  MANAGEMENTS NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS

The following narrative analysis should be read in combination with our Interim Condensed Financial Statements contained in this Form 10-Q and our 2017 Form 10-K.

We meet the conditions specified in General Instruction H(1)(a) and (b) to Form 10-Q and are therefore permitted to use the reduced disclosure format for wholly-owned subsidiaries of reporting companies. Accordingly, we have omitted from this report the information called for by Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and Item 3 (Quantitative and Qualitative Disclosures About Market Risk) of Part I and the following Part II items of Form 10-Q: Item 2 (Unregistered Sales of Equity Securities and Use of Proceeds), Item 3 (Defaults Upon Senior Securities) and Item 4 (Submission of Matters to a Vote of Security Holders). The following discussion explains material changes in our revenue and expense items between the three months ended March 31, 2018 and the three months ended March 31, 2017. Reference is made to “Management’s Narrative Analysis of Results of Operations” in Item 7 of our 2017 Form 10-K.

RECENT EVENTS

Regulatory Proceedings. For details related to our pending and completed regulatory proceedings and orders related to the TCJA to date in 2018, see “—Liquidity and Capital Resources —Regulatory Matters” below.

Debt Issuances. In March 2018, we issued $600 million aggregate principal amount of unsecured senior notes. For more information about our 2018 debt issuances, see Note 11 to our Interim Condensed Financial Statements.

CONSOLIDATED RESULTS OF OPERATIONS

Our results of operations are affected by seasonal fluctuations in the demand for natural gas and price movements of energy commodities as well as natural gas basis differentials. Our results of operations are also affected by, among other things, the actions of various federal, state and local governmental authorities having jurisdiction over rates we charge, competition in our various business operations, the effectiveness of our risk management activities, debt service costs and income tax expense. For more information regarding factors that may affect the future results of operations for our business, please read “Risk Factors” in Item 1A of Part I of our 2017 Form 10-K.
 
Three Months Ended March 31,
 
2018
 
2017
 
(in millions)
Revenues
$
2,400

 
$
2,093

Expenses:
 

 
 

Natural gas
1,910

 
1,579

Operation and maintenance
238

 
215

Depreciation and amortization
73

 
66

Taxes other than income taxes
48

 
34

Total
2,269

 
1,894

Operating Income
131

 
199

Interest and other finance charges
(29
)
 
(29
)
Equity in earnings of unconsolidated affiliate, net
69

 
72

Other expense, net
(4
)
 
(5
)
Income Before Income Taxes
167

 
237

Income tax expense
37

 
90

Net Income
$
130

 
$
147



24



Three months ended March 31, 2018 compared to three months ended March 31, 2017

We reported net income of $130 million for the three months ended March 31, 2018 compared to net income of $147 million for the three months ended March 31, 2017.  

The decrease in net income of $17 million was primarily due to the following key factors:

a $68 million decrease in operating income, discussed below by segment; and

a $3 million decrease in equity earnings from our investment in Enable, discussed further in Note 8 to our Interim Condensed Financial Statements.

These decreases were partially offset by a $53 million decrease in income tax expense due to lower net income and a reduction in the corporate income tax rate resulting from the TCJA.

Income Tax Expense

Our effective tax rate reported for the three months ended March 31, 2018 was 22% compared to 38% for the same period in 2017. The lower effective tax rate for the three months ended March 31, 2018 was primarily due to the reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018 as prescribed by the TCJA.

RESULTS OF OPERATIONS BY BUSINESS SEGMENT

The following table presents operating income (loss) for each of our business segments. Included in revenues are intersegment sales.  We account for intersegment sales as if the sales were to third parties at current market prices.
 
Three Months Ended March 31,
 
2018
 
2017
 
(in millions)
Natural Gas Distribution
$
156

 
$
168

Energy Services
(26
)
 
35

Other Operations
1

 
(4
)
Total Consolidated Operating Income
$
131

 
$
199


25



Natural Gas Distribution

For information regarding factors that may affect the future results of operations of our Natural Gas Distribution business segment, please read “Risk Factors — Risk Factors Associated with Our Consolidated Financial Condition,” “— Risk Factors Affecting Our Natural Gas Distribution and Energy Services Businesses” and “— Other Risk Factors Affecting Our Businesses or Our Interests in Enable Midstream Partners, LP” in Item 1A of Part I of our 2017 Form 10-K.The following table provides summary data of our Natural Gas Distribution business segment:
 
Three Months Ended March 31,
 
2018
 
2017
 
(in millions, except throughput and customer data)
Revenues
$
1,153

 
$
916

Expenses:
 
 
 
Natural gas
667

 
461

Operation and maintenance
213

 
189

Depreciation and amortization
68

 
63

Taxes other than income taxes
49

 
35

Total expenses
997