CenterPoint Energy, Inc.
CENTERPOINT ENERGY RESOURCES CORP (Form: 10-Q, Received: 11/05/2015 07:32:45)

 

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 SEPTEMBER 30, 2015
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, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting 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
 
 
(Do not check if a smaller reporting company)
 
  
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 October 23, 2015 , 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 SEPTEMBER 30, 2015

TABLE OF CONTENTS

PART I.
FINANCIAL INFORMATION
 
 
 
Page
Item 1.
Financial Statements
 
 
 
 
Condensed Statements of Consolidated Income
 
 
Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)
 
 
 
 
Condensed Statements of Consolidated Comprehensive Income
 
 
Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)
 
 
 
 
Condensed Consolidated Balance Sheets
 
 
September 30, 2015 and December 31, 2014 (unaudited)
 
 
 
 
Condensed Statements of Consolidated Cash Flows
 
 
Nine Months Ended September 30, 2015 and 2014 (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



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,” “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 Midstream Partners, LP (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 natural gas liquids (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 growth capital; and

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

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, health care reform, financial reform, tax legislation and actions regarding the rates charged by our regulated businesses;
timely and appropriate rate actions that allow recovery of costs and a reasonable return on investment;
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;
industrial, commercial and residential growth in our service territories and changes in market demand, including the effects of energy efficiency measures and demographic patterns;
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;
our ability to mitigate weather impacts through normalization or rate mechanisms, and the effectiveness of such mechanisms;

ii



the timing and extent of changes in commodity prices, particularly natural gas, and the effects of geographic and seasonal commodity price differentials;
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 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;
our ability to invest planned 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 interest rates or rates of inflation;
actions by credit rating agencies;
inability of various counterparties to meet their obligations to us;
non-payment for our services due to financial distress of our customers;
our potential business strategies, including restructurings, joint ventures and acquisitions or dispositions of assets or businesses, which we cannot assure you will be completed or will have the anticipated benefits to us;
acquisition and merger activities involving us or our competitors;
our or Enable’s ability to recruit, effectively transition and retain management and key employees and maintain good labor relations;
the ability of GenOn Energy, Inc. (formerly known as RRI Energy, Inc., Reliant Energy, Inc. and Reliant Resources, Inc.), a wholly-owned subsidiary of NRG Energy, Inc., and its subsidiaries to satisfy their obligations to us, including indemnity obligations, or obligations in connection with the contractual arrangements pursuant to which we are their guarantor;
the outcome of litigation;
the timing and outcome of any audits, disputes and other proceedings related to taxes;
effectiveness of our risk management activities;
the effect of changes in and application of accounting standards and pronouncements; and

other factors we discuss in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2014 , which is incorporated herein by reference, and other reports we file from time to time with the Securities and Exchange Commission.
You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement.



 

iii



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 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Revenues
$
799

 
$
964

 
$
3,440

 
$
4,678

 
 
 
 
 
 
 
 
Expenses:
 

 
 

 
 

 
 

Natural gas
527

 
702

 
2,410

 
3,625

Operation and maintenance
165

 
184

 
541

 
562

Depreciation and amortization
57

 
53

 
169

 
153

Taxes other than income taxes
32

 
28

 
115

 
114

Total
781

 
967

 
3,235

 
4,454

Operating Income (Loss)
18

 
(3
)
 
205

 
224

 
 
 
 
 
 
 
 
Other Income (Expense):
 

 
 

 
 

 
 

Interest and other finance charges
(34
)
 
(36
)
 
(103
)
 
(105
)
Equity in earnings (losses) of unconsolidated affiliates, net
(794
)
 
79

 
(699
)
 
241

Other, net
2

 
3

 
3

 
7

Total
(826
)
 
46

 
(799
)
 
143

Income (Loss) Before Income Taxes
(808
)
 
43

 
(594
)
 
367

Income tax expense (benefit)
(300
)
 
15

 
(217
)
 
139

Net Income (Loss)
$
(508
)
 
$
28

 
$
(377
)
 
$
228





See Notes to the Interim 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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Net income (loss)
$
(508
)
 
$
28

 
$
(377
)
 
$
228

Other comprehensive income, net of tax:
 

 
 
 
 

 
 

Adjustment to pension and other postretirement plans (net of tax)

 

 

 

Other comprehensive income

 

 

 

Comprehensive income (loss)
$
(508
)
 
$
28

 
$
(377
)
 
$
228



See Notes to the Interim 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
 
September 30,
2015
 
December 31, 2014
Current Assets :
 
 
 
Cash and cash equivalents
$
1

 
$
2

Accounts receivable, less bad debt reserve of $18 and $23, respectively
261

 
595

Accrued unbilled revenue
68

 
262

Accounts and notes receivable–affiliated companies
75

 
18

Materials and supplies
49

 
41

Natural gas inventory
168

 
211

Non-trading derivative assets
78

 
99

Deferred income tax assets

 
1

Prepaid expenses and other current assets
41

 
90

Total current assets
741

 
1,319

 
 
 
 
Property, Plant and Equipment:
 
 
 
Property, plant and equipment
5,720

 
5,364

Less: accumulated depreciation and amortization
1,634

 
1,554

Property, plant and equipment, net
4,086

 
3,810

 
 
 
 
Other Assets:
 

 
 

Goodwill
840

 
840

Non-trading derivative assets
39

 
32

Investment in unconsolidated affiliates
3,604

 
4,521

Notes receivable from unconsolidated affiliates
363

 
363

Other
150

 
160

Total other assets
4,996

 
5,916

 
 
 
 
Total Assets
$
9,823

 
$
11,045



See Notes to the Interim 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

 
September 30,
2015
 
December 31, 2014
Current Liabilities:
 

 
 

Short-term borrowings
$
49

 
$
53

Current portion of long-term debt
325

 

Accounts payable
226

 
528

Accounts and notes payable–affiliated companies
33

 
228

Taxes accrued
60

 
67

Interest accrued
40

 
36

Customer deposits
78

 
80

Non-trading derivative liabilities
12

 
19

Other
164

 
137

Total current liabilities
987

 
1,148

 
 
 
 
Other Liabilities:
 

 
 

Deferred income taxes, net
2,078

 
2,252

Non-trading derivative liabilities
5

 
1

Benefit obligations
110

 
111

Regulatory liabilities
703

 
669

Other
199

 
194

Total other liabilities
3,095

 
3,227

 
 
 
 
Long-Term Debt
1,917

 
2,469

 
 
 
 
Commitments and Contingencies (Note 10)


 


 
 
 
 
Stockholder’s Equity:
 
 
 
Common stock

 

Paid-in capital
2,417

 
2,417

Retained earnings
1,406

 
1,783

Accumulated other comprehensive income
1

 
1

Total stockholder’s equity
3,824

 
4,201

 
 
 
 
Total Liabilities and Stockholder’s Equity
$
9,823

 
$
11,045



See Notes to the Interim 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)
 
Nine Months Ended September 30,
 
2015
 
2014
Cash Flows from Operating Activities:
 
 
 
Net income (loss)
$
(377
)
 
$
228

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Depreciation and amortization
169

 
153

Amortization of deferred financing costs
7

 
7

Deferred income taxes
(162
)
 
132

Write-down of natural gas inventory
4

 
2

Equity in (earnings) losses of unconsolidated affiliates, net of distributions
843

 
(6
)
Changes in other assets and liabilities:
 

 
 

Accounts receivable and unbilled revenues, net
532

 
444

Accounts receivable/payable–affiliated companies
(64
)
 
7

Inventory
31

 
(118
)
Taxes receivable

 
18

Accounts payable
(302
)
 
(220
)
Fuel cost recovery
71

 
(57
)
Interest and taxes accrued
(3
)
 
(15
)
Non-trading derivatives, net
(6
)
 
(25
)
Margin deposits, net
20

 
(13
)
Other current assets
13

 
18

Other current liabilities
(12
)
 
(8
)
Other assets
11

 
8

Other liabilities
(9
)
 
22

Other, net

 
5

Net cash provided by operating activities
766

 
582

Cash Flows from Investing Activities:
 

 
 

Capital expenditures
(420
)
 
(376
)
Distribution of unconsolidated affiliates in excess of cumulative earnings
74

 

Increase in notes receivable–affiliated companies

 
(83
)
Other, net
3

 
(2
)
Net cash used in investing activities
(343
)
 
(461
)
Cash Flows from Financing Activities:
 

 
 

Increase (decrease) in short-term borrowings, net
(4
)
 
37

Payments of commercial paper, net
(232
)
 
(118
)
Decrease in notes payable–affiliated companies
(188
)
 
(38
)
Other, net

 
1

Net cash used in financing activities
(424
)
 
(118
)
 
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents
(1
)
 
3

Cash and Cash Equivalents at Beginning of Period
2

 
1

Cash and Cash Equivalents at End of Period
$
1

 
$
4

 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 

 
 

Cash Payments:
 

 
 

Interest, net of capitalized interest
$
90

 
$
91

     Income taxes (refunds), net
7

 
(1
)
Non-cash transactions:
 

 
 

Accounts payable related to capital expenditures
$
37

 
$
25

     Exercise of SESH put to Enable
1

 
196


See Notes to the Interim 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 Quarterly Report on Form 10-Q (Form 10-Q) of CenterPoint Energy Resources Corp. (CERC Corp.) are the condensed consolidated interim financial statements and notes (Interim Condensed Financial Statements) of CenterPoint Energy Resources Corp. and its subsidiaries (collectively, CERC).  The Interim Condensed Financial Statements are unaudited, omit certain financial statement disclosures and should be read with the Annual Report on Form 10-K of CERC Corp. for the year ended December 31, 2014 .

Background. CERC owns and operates natural gas distribution systems and owns interests in Enable Midstream Partners, LP (Enable) as described in Note 6 . A wholly-owned subsidiary of CERC Corp. offers variable and fixed-price physical natural gas supplies primarily to commercial and industrial customers and electric and gas utilities. As of September 30, 2015 , CERC Corp. also owned approximately 55.4% of the limited partner interests in Enable, which owns, operates and develops natural gas and crude oil infrastructure assets.

CERC Corp. is an indirect, wholly-owned subsidiary of CenterPoint Energy, Inc. (CenterPoint Energy), a public utility holding company.

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 12 .

(2) New Accounting Pronouncements

In February 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2015-02,  Consolidation (Topic 810): Amendments to the Consolidation Analysis (ASU 2015-02). ASU 2015 -02 changes the analysis that reporting organizations must perform to evaluate whether they should consolidate certain legal entities, such as limited partnerships.  The changes include, among others, modification of the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities and elimination of the presumption that a general partner should consolidate a limited partnership. ASU 2015-02 does not amend the related party guidance for situations in which power is shared between two or more entities that hold interests in a VIE. ASU 2015 -02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. CERC will adopt ASU 2015-02 on January 1, 2016 and is currently assessing the impact, if any, that this standard will have on its financial position, results of operations, cash flows and disclosures.

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Cost (ASU 2015-03) . ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03. CERC will adopt ASU 2015-03 retrospectively on January 1, 2016, which will result in a reduction of both other long-term assets and long-term debt on its Condensed Consolidated Balance Sheets. CERC had debt issuance costs of $16 million and $18 million included in other long-term assets on its Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014 , respectively.

In April 2015, the FASB issued Accounting Standards Update No. 2015-05, Intangibles-Goodwill and Other-Internal-Use Software ( Subtopic 350-40 ) (ASU 2015-05).  ASU 2015-05 provides guidance to customers about whether a cloud computing

6



arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change a customer’s accounting for service contracts.  ASU 2015-05 is effective for fiscal years, and interim periods within the fiscal years, beginning after December 15, 2015 and may be adopted either prospectively or retrospectively.  CERC will adopt ASU 2015-05 on January 1, 2016 and is currently assessing the impact that this standard will have on its financial position, results of operations, cash flows and disclosures.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which supersedes most current revenue recognition guidance. ASU 2014-09 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. ASU 2014-09 was initially effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is not permitted, and entities have the option of using either a full retrospective or a modified retrospective adoption approach. In August 2015, the FASB issued Accounting Standard Update No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date , which delays the effective date of ASU 2014-09 by one year.  CERC is currently evaluating the impact that ASU 2014-09 will have on its financial position, results of operations, cash flows and disclosures, and may adopt ASU 2014-09 on January 1, 2018 as permitted by the new guidance.

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Inventory (Topic 330) Simplifying the Measurement of Inventory (ASU 2015-11). ASU 2015-11 changes the subsequent measurement guidance for inventory accounted for using methods other than the last in, first out (LIFO) and Retail Inventory methods. Companies will subsequently measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. ASU 2015-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. CERC does not believe that ASU 2015-11 will have a material impact on its financial position, results of operations, cash flows and disclosures.

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

(3) Employee Benefit Plans

CERC’s employees participate in CenterPoint Energy’s postretirement benefit plan. CERC’s net periodic cost includes the following components relating to postretirement benefits:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Service cost
$
1

 
$
1

 
$
1

 
$
1

Interest cost on accumulated benefit obligation
2

 
1

 
$
4

 
$
4

Expected return on plan assets
(1
)
 
(1
)
 
(1
)
 
(1
)
Amortization of loss

 
1

 
1

 
1

Net periodic cost
$
2

 
$
2

 
$
5

 
$
5


CERC expects to contribute approximately $7 million to its postretirement benefit plan in 2015 , of which $1 million and $4 million were contributed during the three and nine months ended September 30, 2015 , respectively.

(4) 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 and weather 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 sale if the intent is to physically receive or deliver the product for use or sale in the normal course of business.


7



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 risk management policies, 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 manage physical commodity price risk and does not engage in proprietary or speculative commodity trading.  These 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 its natural gas distribution business (NGD) in Arkansas, Louisiana, Mississippi, Minnesota and Oklahoma. NGD in Texas does not have such mechanisms. As a result, fluctuations from normal weather may have a positive or negative effect on NGD’s results in Texas.
 
CERC has historically entered into heating-degree day swaps for certain NGD jurisdictions to mitigate the effect of fluctuations from normal weather on its results of operations and cash flows for the winter heating season, which contained a bilateral dollar cap of $16 million in both 2013–2014 and 2014–2015. However, NGD did not enter into heating-degree day swaps for the 2015–2016 winter season as a result of NGD’s Minnesota division implementing a full decoupling pilot in July 2015. The swaps are based on ten -year normal weather. During both the three months ended September 30, 2015 and 2014 , CERC recognized no losses related to these swaps. During the nine months ended September 30, 2015 and 2014 , CERC recognized losses of $4 million and $7 million , respectively, related to these swaps. Weather hedge gains and losses are included in revenues in the Condensed Statements of Consolidated Income.

(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 as of September 30, 2015 and December 31, 2014 , while the last two tables provide a breakdown of the related income statement impacts for the three and nine months ended September 30, 2015 and 2014 .
Fair Value of Derivative Instruments
 
 
 
 
September 30, 2015
Total derivatives not designated
as hedging instruments
 
Balance Sheet
Location
 
Derivative
Assets
Fair Value
 
Derivative
Liabilities
Fair Value
 
 
 
 
(in millions)
Natural gas derivatives (1) (2)
 
Current Assets: Non-trading derivative assets
 
$
80

 
$
2

Natural gas derivatives (1) (2)
 
Other Assets: Non-trading derivative assets
 
39

 

Natural gas derivatives (1) (2)
 
Current Liabilities: Non-trading derivative liabilities
 
16

 
59

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

 
24

Total                                                                          
 
$
138

 
$
85


(1)
The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 776  billion cubic feet (Bcf) or a net 77  Bcf long position.  Of the net long position, basis swaps constitute 128  Bcf.

(2)
Natural gas contracts are presented on a net basis in the Condensed Consolidated Balance Sheets. Natural gas contracts 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 derivative assets and liabilities was a $100 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 offset by collateral netting of $47 million .

8



Offsetting of Natural Gas Derivative Assets and Liabilities
 
 
September 30, 2015
 
 
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
 
$
96

 
$
(18
)
 
$
78

Other Assets: Non-trading derivative assets
 
42

 
(3
)
 
39

Current Liabilities: Non-trading derivative liabilities
 
(61
)
 
49

 
(12
)
Other Liabilities: Non-trading derivative liabilities
 
(24
)
 
19

 
(5
)
Total
 
$
53

 
$
47

 
$
100


(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.
Fair Value of Derivative Instruments
 
 
 
 
December 31, 2014
Total derivatives not designated
as hedging instruments
 
Balance Sheet
Location
 
Derivative
Assets
Fair Value
 
Derivative
Liabilities
Fair Value
 
 
 
 
(in millions)
Natural gas derivatives (1) (2)
 
Current Assets: Non-trading derivative assets
 
$
101

 
$
1

Natural gas derivatives (1) (2)
 
Other Assets: Non-trading derivative assets
 
32

 

Natural gas derivatives (1) (2)
 
Current Liabilities: Non-trading derivative liabilities
 
14

 
83

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

 
18

Total
 
$
149

 
$
102


(1)
The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 804  Bcf or a net 60  Bcf long position.  Of the net long position, basis swaps constitute 127  Bcf.

(2)
Natural gas contracts are presented on a net basis in the Condensed Consolidated Balance Sheets. Natural gas contracts 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 derivative assets and liabilities was a $111 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, offset by collateral netting of $64 million .
Offsetting of Natural Gas Derivative Assets and Liabilities
 
 
December 31, 2014
 
 
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
 
$
115

 
$
(16
)
 
$
99

Other Assets: Non-trading derivative assets
 
34

 
(2
)
 
32

Current Liabilities: Non-trading derivative liabilities
 
(84
)
 
65

 
(19
)
Other Liabilities: Non-trading derivative liabilities
 
(18
)
 
17

 
(1
)
Total
 
$
47

 
$
64

 
$
111


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


9



(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 derivatives are recognized in the Condensed Statements of Consolidated Income as revenue for retail sales derivative contracts and as natural gas expense for financial natural gas derivatives and non-retail related physical natural gas derivatives.
Income Statement Impact of Derivative Activity
 
 
 
 
Three Months Ended September 30,
Total derivatives not designated
as hedging instruments
 
Income Statement Location
 
2015
 
2014
 
 
 
 
(in millions)
Natural gas derivatives
 
Gains (Losses) in Revenue
 
$
39

 
$
22

Natural gas derivatives (1)
 
Gains (Losses) in Expense: Natural Gas
 
(30
)
 
(4
)
Total
 
$
9

 
$
18


(1)
The Gains (Losses) in Expense: Natural Gas includes $-0- during each of the three months ended September 30, 2015 and 2014 , related to physical forwards purchased from Enable.
Income Statement Impact of Derivative Activity
 
 
 
 
Nine Months Ended September 30,
Total derivatives not designated
as hedging instruments
 
Income Statement Location
 
2015
 
2014
 
 
 
 
(in millions)
Natural gas derivatives
 
Gains (Losses) in Revenue
 
$
88

 
$
(74
)
Natural gas derivatives (1)
 
Gains (Losses) in Expense: Natural Gas
 
(72
)
 
110

Total
 
$
16

 
$
36

 
(1)
The Gains (Losses) in Expense: Natural Gas includes $-0- and $2 million during the nine months ended September 30, 2015 and 2014 , respectively, related to physical forwards purchased from Enable.

(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 Standard & Poor’s Ratings Services or Moody’s Investors Service, Inc. 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 at September 30, 2015 and December 31, 2014 was $3 million and $2 million , respectively.  CERC posted no assets as collateral towards derivative instruments that contain credit risk contingent features at either September 30, 2015 or December 31, 2014 .  If all derivative contracts (in a net liability position) containing credit risk contingent features were triggered at September 30, 2015 and December 31, 2014 , $3 million and $2 million , respectively, of additional assets would be required to be posted as collateral.

(5) 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.

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

10



CERC’s own data. A market approach is utilized to value CERC’s Level 3 assets or liabilities. At September 30, 2015 , CERC’s Level 3 assets and liabilities are comprised of physical forward contracts and options. Level 3 physical forward contracts are valued using a discounted cash flow model which includes illiquid forward price curve locations (ranging from $1.17 to $3.78 per one million British thermal units) as an unobservable input. Level 3 options are valued through Black-Scholes (including forward start) option models which include option volatilities (ranging from 0% to 76% ) as an unobservable input.  CERC’s Level 3 derivative assets and liabilities consist of both long and short positions (forwards and options) and their fair value is sensitive to forward prices and volatilities.  If forward prices decrease, CERC’s long forwards lose value whereas its short forwards gain in value.  If volatility decreases, CERC’s long options lose value whereas its short 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 nine months ended September 30, 2015 , 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 as of September 30, 2015 and December 31, 2014 , 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 September 30, 2015
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
Corporate equities
$
2

 
$

 
$

 
$

 
$
2

Investments, including money
market funds (2)
11

 

 

 

 
11

Natural gas derivatives
5

 
111

 
22

 
(21
)
 
117

Total assets
$
18

 
$
111

 
$
22

 
$
(21
)
 
$
130

Liabilities
 

 
 

 
 

 
 

 
 

Natural gas derivatives
$
14

 
$
63

 
$
8

 
$
(68
)
 
$
17

Total liabilities
$
14

 
$
63

 
$
8

 
$
(68
)
 
$
17


(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 $47 million posted with the same counterparties.
 
(2)
Amounts are included in Prepaid Expenses and Other Current Assets in the Condensed Consolidated Balance Sheets.
 
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, 2014
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
Corporate equities
$
2

 
$

 
$

 
$

 
$
2

Investments, including money
market funds (2)
11

 

 

 

 
11

Natural gas derivatives
7

 
122

 
20

 
(18
)
 
131

Total assets
$
20

 
$
122

 
$
20

 
$
(18
)
 
$
144

Liabilities
 

 
 

 
 

 
 

 
 

Natural gas derivatives
$
22

 
$
77

 
$
3

 
$
(82
)
 
$
20

Total liabilities
$
22

 
$
77

 
$
3

 
$
(82
)
 
$
20


(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 $64 million posted with the same counterparties.


11



(2)
Amounts are included in Prepaid Expenses and Other Current Assets in the Condensed Consolidated Balance Sheets.
 
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 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Beginning balance
$
10

 
$
4

 
$
17

 
$
3

Total gains
5

 
6

 
5

 
6

Total settlements
(2
)
 
(1
)
 
(8
)
 
1

Transfers into Level 3
1

 

 
1

 
(1
)
Transfers out of Level 3

 

 
(1
)
 

Ending balance (1)
$
14

 
$
9

 
$
14

 
$
9

The amount of total gains for the period included
in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date
$
6

 
$
6

 
$
7

 
$
7


(1)
CERC did not have significant Level 3 purchases or sales during either of the three or nine months ended September 30, 2015 or 2014 .

Items Measured at Fair Value on a Nonrecurring Basis

Based on the sustained low Enable common unit price and further declines in such price during the three months ended September 30, 2015 as well as the market outlook for continued depressed crude oil and natural gas prices impacting the midstream oil and gas industry, CERC determined in connection with its preparation of financial statements for the three months ended September 30, 2015, that an other than temporary decrease in the value of its investment in Enable had occurred. The impairment analysis compared the estimated fair value of CERC’s investment in Enable to its carrying value. The fair value of the investment was determined using multiple valuation methodologies under both the market and income approaches. Both of these approaches incorporate significant estimates and assumptions, including:

Market Approach

quoted price of Enable’s common units;

recent market transactions of comparable companies; and

EBITDA to total enterprise multiples for comparable companies.

Income Approach

Enable’s forecasted cash distributions;

projected cash flows of incentive distribution rights;

forecasted growth rate of Enable’s cash distributions; and

determination of the cost of equity, including market risk premiums.

Weighting of the different approaches

Significant unobservable inputs used include the growth rate applied to the projected cash distributions beyond 2020 and the discount rate used to determine the present value of the estimated future cash flows. Based on the significant unobservable estimates and assumptions required, CERC concluded that the fair value estimate should be classified as a Level 3 measurement within the

12



fair value hierarchy. As a result of the analysis, CERC recorded an other than temporary impairment on its investment in Enable of $250 million , reducing the fair value of the investment to $3.6 billion . See Note 6 for further discussion of the impairment. As of December 31, 2014, there were no significant assets or liabilities measured at fair value on a nonrecurring basis.

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. 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 the market price. These assets and 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 1 or Level 2 in the fair value hierarchy.
 
September 30, 2015
 
December 31, 2014
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
(in millions)
Financial assets:
 
 
 
 
 
 
 
Notes receivable from unconsolidated affiliates
$
363

 
$
362

 
$
363

 
$
362

Financial liabilities:
 
 
 
 
 
 
 
Long-term debt
$
2,242

 
$
2,460

 
$
2,469

 
$
2,772


(6) Unconsolidated Affiliates

On May 1, 2013 (the Closing Date) CERC Corp., OGE Energy Corp. (OGE) and ArcLight Capital Partners, LLC closed on the formation of Enable. CERC has the ability to significantly influence the operating and financial policies of Enable and, accordingly, accounts for its investment in Enable using the equity method of accounting.

CERC’s maximum exposure to loss related to Enable, a VIE in which CERC is not the primary beneficiary, is limited to its equity investment as presented in the Condensed Consolidated Balance Sheet at September 30, 2015 , CERC Corp.’s guarantee of collection of Enable’s $1.1 billion senior notes due 2019 and 2024 (Guaranteed Senior Notes) and other guarantees discussed in Note 10 , CERC Corp.’s $363 million notes receivable from Enable and outstanding current accounts receivable from Enable. The $363 million of notes receivable from Enable bears interest at an annual rate of 2.10% to 2.45% and matures in 2017. CERC recorded interest income of $2 million during each of the three months ended September 30, 2015 and 2014 , and $6 million during each of the nine months ended September 30, 2015 and 2014 , and had interest receivable from Enable of $2 million and $4 million as of September 30, 2015 and December 31, 2014 , respectively, on its notes receivable.

Effective on the Closing Date, CenterPoint Energy and Enable entered into a Services Agreement, Employee Transition Agreement, Transitional Seconding Agreement and other agreements (Transition Agreements). Under the Services Agreement, CERC agreed to provide certain support services to Enable such as accounting, legal, risk management and treasury functions for an initial term. The initial term of the Services Agreement ends on April 30, 2016, after which date such services continue on a year-to-year basis unless terminated by Enable with at least 90 days’ notice.  Enable may terminate the Services Agreement, or the provision of any services thereunder, upon approval by its board of directors and at least 180 days’ notice.

CERC provided seconded employees to Enable to support its operations for a term ending on December 31, 2014. Enable, at its discretion, had the right to select and offer employment to seconded employees from CERC. During the fourth quarter of 2014, Enable notified CERC that it provided employment offers to substantially all of the seconded employees from CERC. Substantially all of the seconded employees became employees of Enable effective January 1, 2015.

In accordance with the Enable formation agreements, CERC had certain put rights, and Enable had certain call rights, exercisable with respect to the 25.05% interest in Southeast Supply Header, LLC (SESH) retained by CERC on the Closing Date, under which CERC would contribute its retained interest in SESH, in exchange for a specified number of limited partner common units in Enable and a cash payment, payable either from CERC to Enable or from Enable to CERC, to the extent of changes in the value of SESH subject to certain restrictions. Specifically, the rights were exercisable with respect to (1) a 24.95% interest in SESH, which closed on May 30, 2014 and (2) a 0.1% interest in SESH, which closed on June 30, 2015 .

CERC billed Enable for reimbursement of transition services, including the costs of seconded employees, $3 million and $36 million during the three months ended September 30, 2015 and 2014 , respectively, and $10 million and $118 million during the nine months ended September 30, 2015 and 2014 , respectively, under the Transition Agreements. Actual transition services costs are

13



recorded net of reimbursements received from Enable. CERC had accounts receivable from Enable of $4 million and $28 million as of September 30, 2015 and December 31, 2014 , respectively, for amounts billed for transition services, including the cost of seconded employees.

CERC incurred natural gas expenses, including transportation and storage costs, of $23 million and $24 million during the three months ended September 30, 2015 and 2014 , respectively, and $87 million and $99 million during the nine months ended September 30, 2015 and 2014 , respectively, for transactions with Enable. CERC had accounts payable to Enable of $8 million and $23 million at September 30, 2015 and December 31, 2014 , respectively, from such transactions.

As of September 30, 2015 , CERC held an approximate 55.4% limited partner interest in Enable, consisting of 94,151,707 common units and 139,704,916 subordinated units. As of September 30, 2015, CERC and OGE each own a 50% management interest in the general partner of Enable and a 40% and 60% interest, respectively, in the incentive distribution rights held by the general partner.

CERC recognized a loss of $794 million from its investment in Enable for the three months ended September 30, 2015. This loss included impairment charges totaling $862 million composed of CERC’s impairment of its investment in Enable of $250 million and CERC’s share, $612 million , of impairment charges Enable recorded for goodwill and long-lived assets.

CERC evaluates its equity method investments for impairment when factors indicate that a decrease in the value of its investment has occurred and the carrying amount of its investment may not be recoverable. An impairment loss, based on the excess of the carrying value over estimated fair value of the investment, is recognized in earnings when an impairment is deemed to be other than temporary. Considerable judgment is used in determining if an impairment loss is other than temporary and the amount of any impairment. Based on the sustained low Enable common unit price and further declines in such price during the three months ended September 30, 2015 as well as the market outlook for continued depressed crude oil and natural gas prices impacting the midstream oil and gas industry, CERC determined in connection with its preparation of financial statements for the three months ended September 30, 2015, that an other than temporary decrease in the value of its investment in Enable had occurred. CERC wrote down the value of its investment in Enable to its estimated fair value of $3.6 billion which resulted in an impairment charge of $250 million as of September 30, 2015. Both the income approach and market approach were utilized to estimate the fair value of CERC’s total investment in Enable, which includes the limited partner common and subordinated units, general partner interest and incentive distribution rights held by CERC. The determination of fair value considered a number of relevant factors including Enable’s common unit price and forecasted results, recent comparable transactions and the limited float of Enable’s publicly traded common units. See Note 5 for further discussion of the determination of fair value of CERC’s investment in Enable.

Investment in Unconsolidated Affiliates:
 
 
September 30,
2015
 
December 31, 2014
 
 
(in millions)
Enable
 
$
3,604

 
$
4,520

SESH (1)
 

 
1

  Total
 
$
3,604

 
$
4,521


(1)
CERC disposed of its remaining interest in SESH on June 30, 2015.

Equity in Earnings (Losses) of Unconsolidated Affiliates, net:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in millions)
Enable
 
$
(794
)
 
$
79

 
$
(699
)
 
$
236

SESH (1)
 

 

 

 
5

  Total
 
$
(794
)
 
$
79

 
$
(699
)
 
$
241

(1)
CERC disposed of its remaining interest in SESH on June 30, 2015.


14



Summarized unaudited consolidated income information for Enable is as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in millions)
Operating revenues
 
$
646

 
$
804

 
$
1,852

 
$
2,632

Cost of sales, excluding depreciation and amortization
 
287

 
439

 
856

 
1,550

Impairment of goodwill and other long-lived assets
 
1,105

 
1

 
1,105

 
1

Operating income (loss)
 
(975
)
 
151

 
(778
)
 
452

Net income (loss) attributable to Enable
 
(985
)
 
139

 
(817
)
 
408

 
 
 
 
 
 
 
 
 
Reconciliation of Equity in Earnings (Losses), net:
 
 
 
 
 
 
 
 
CERC’s interest
 
$
(546
)
 
$
76

 
$
(453
)
 
$
230

Basis difference accretion
 
2

 
3

 
4

 
6

Impairment of CERC’s equity method investment in Enable
 
(250
)
 

 
(250
)
 

CERC’s equity in earnings (losses), net (1)
 
$
(794
)
 
$
79

 
$
(699
)
 
$
236

(1)
These amounts include CERC’s share of Enable’s impairment of goodwill and long-lived assets and the impairment of CERC’s equity method investment in Enable totaling $862 million during the three and nine months ended September 30, 2015. This impairment is offset by $68 million and $163 million of earnings for the three and nine months ended September 30, 2015, respectively.

Summarized unaudited consolidated balance sheet information for Enable is as follows:
 
 
September 30,
2015
 
December 31, 2014
 
 
(in millions)
Current assets
 
$
427

 
$
438

Non-current assets
 
10,774

 
11,399

Current liabilities
 
804

 
671

Non-current liabilities
 
2,786

 
2,343

Non-controlling interest
 
25

 
31

Enable partners’ capital
 
7,586

 
8,792

 
 
 
 
 
Reconciliation of Investment in Enable:
 
 
 
 
CERC’s ownership interest in Enable partners’ capital
 
$
4,200

 
$
4,869

CERC’s existing basis difference
 
(346
)
 
(349
)
Impairment of CERC’s equity method investment in Enable
 
(250
)
 

CERC’s investment in Enable
 
$
3,604

 
$
4,520


Distributions Received from Unconsolidated Affiliates:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in millions)
Enable
 
$
74

 
$
70

 
$
219

 
$
227

SESH (1)
 

 
1

 

 
8

  Total
 
$
74

 
$
71

 
$
219

 
$
235

(1)
CERC disposed of its remaining interest in SESH on June 30, 2015.

15




(7) Goodwill

Goodwill by reportable business segment as of both September 30, 2015 and December 31, 2014 is as follows:
 
 
(in millions)
Natural Gas Distribution
 
$
746

Energy Services
 
83

Other Operations
 
11

Total
 
$
840


CERC performs goodwill impairment tests at least annually and evaluates goodwill when events or changes in circumstances indicate that its carrying value may not be recoverable. The impairment evaluation for goodwill is performed by using a two-step process. In the first step, the fair value of each reporting unit is compared with the carrying amount of the reporting unit, including goodwill. The estimated fair value of the reporting unit is generally determined on the basis of discounted cash flows. If the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, then a second step must be completed to determine the amount of the goodwill impairment that should be recorded. In the second step, the implied fair value of the reporting unit’s goodwill is determined by allocating the reporting unit’s fair value to all of its assets and liabilities other than goodwill (including any unrecognized intangible assets) in a manner similar to a purchase price allocation. The resulting implied fair value of the goodwill that results from the application of this second step is then compared to the carrying amount of the goodwill and an impairment charge is recorded for the difference.

CERC performed its annual goodwill impairment test in the third quarter of 2015 and determined, based on the results of the first step, that no goodwill impairment charge was required for any reportable segment.

(8) 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. CERC had borrowings from the money pool of $-0- and $188 million at September 30, 2015 and December 31, 2014 , respectively, which are included in accounts and notes payable–affiliated companies in the Consolidated Balance Sheets. Net interest income (expense) related to accounts and notes payables–affiliated companies was not material for either the three or nine months ended September 30, 2015 or 2014 .

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. These charges are not necessarily indicative of what would have been incurred had CERC not been an affiliate of CenterPoint Energy. Amounts charged to CERC for these services were as follows and are included primarily in operation and maintenance expenses:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in millions)
Corporate service charges
 
$
29

 
$
34

 
$
88

 
$
93


See Note 6 for related party transactions with Enable.

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

(a) Short-term Borrowings

Inventory Financing . NGD has asset management agreements associated with its utility distribution service in Arkansas, north Louisiana and Oklahoma that extend through 2018. 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 a financing and they had an associated principal obligation of $49 million and $53 million as of September 30, 2015 and December 31, 2014 , respectively.

16




(b)
Long-term Debt

Revolving Credit Facility.   As of September 30, 2015 and December 31, 2014 , CERC had the following revolving credit facility and utilization of such facility:
 
 
September 30, 2015
 
December 31, 2014
Size of
Facility
 
Loans
 
Letters
of Credit
 
Commercial
Paper
 
Loans
 
Letters
of Credit
 
Commercial
Paper
(in millions)
$
600

 
$

 
$
2

 
$
109

 
$

 
$

 
$
341


CERC Corp.’s $600 million revolving credit facility, which is scheduled to terminate on September 9, 2019, can be drawn at the London Interbank Offered Rate plus 1.50% based on CERC Corp.’s current credit ratings. The revolving credit facility contains a financial covenant which limits CERC’s consolidated debt to an amount not to exceed 65% of CERC’s consolidated capitalization.

CERC Corp. was in compliance with all financial covenants as of September 30, 2015 .

(10) 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 Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014 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 September 30, 2015 , minimum payment obligations for natural gas supply commitments are approximately $159 million for the remaining three months in 2015, $489 million in 2016, $466 million in 2017, $413 million in 2018, $224 million in 2019 and $128 million after 2019.

(b) Legal, Environmental and Other Regulatory Matters

Legal Matters

Gas Market Manipulation Cases .  CenterPoint Energy, CenterPoint Energy Houston Electric, LLC (CenterPoint Houston) or their predecessor, Reliant Energy, Incorporated (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, Reliant Resources, Inc. (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 Energy, Inc. (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 CenterPoint Houston, for certain liabilities, including their indemnification obligations regarding the gas market manipulation litigation, nor does it affect the terms of existing guarantee arrangements for certain GenOn gas transportation contracts discussed below.

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 but one such case. CenterPoint Energy Services, Inc. (CES), a subsidiary of CERC Corp., is a defendant in a case now pending in federal court in Nevada alleging a conspiracy to inflate Wisconsin natural gas prices in 2000–2002.  In July 2011, the court issued an order dismissing the plaintiffs’ claims against other defendants in the case, each of whom had demonstrated Federal Energy Regulatory Commission jurisdictional sales for resale during the relevant period, based on federal preemption, and stayed the remainder of the case pending outcome of the appeals.  The plaintiffs appealed this ruling to the U.S. Court of Appeals for the Ninth Circuit, which reversed the trial court’s dismissal of the plaintiffs’ claims. The U.S. Supreme Court agreed to review the case, and on April 21, 2015, affirmed the Ninth Circuit’s ruling and remanded the case to the district court for further proceedings. CenterPoint Energy and CES intend to continue vigorously defending against the plaintiffs’ claims on

17



remand.  CERC does not expect the ultimate outcome of this matter to have a material adverse effect on its financial condition, results of operations or cash flows.

Environmental Matters

Manufactured Gas Plant Sites. CERC and its predecessors operated manufactured gas plants (MGPs) in the past.  There are seven MGP sites in CERC’s Minnesota service territory.  CERC believes it never owned or operated, and therefore has no liability with respect to, two of these sites.  With respect to two other sites, CERC has completed state-ordered remediation, other than ongoing monitoring and water treatment.

At September 30, 2015 , CERC had a recorded liability of $7 million for remediation of these five Minnesota sites. The estimated range of possible remediation costs for the sites for which CERC believes it may have responsibility was $4 million to $28 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 be dependent upon the number of sites to be remediated, the participation of other potentially responsible parties (PRPs), if any, and the remediation methods used.

In addition to the Minnesota sites, the U.S. Environmental Protection Agency and other regulators have investigated MGP sites that were owned or operated by CERC or that may have been owned by one of its former affiliates. CERC and CenterPoint Energy do not expect the ultimate outcome of these investigations to have a material adverse effect on the financial condition, results of operations or cash flows of either CenterPoint Energy or CERC.

Asbestos. Some facilities owned by CERC’s predecessors contain or have contained asbestos insulation and other asbestos-containing materials. CERC or its predecessor companies have been named, along with numerous others, as a defendant in lawsuits filed by a number of individuals who claim injury due to exposure to asbestos. Some of the claimants have worked at locations owned by CERC, but most existing claims relate to facilities previously owned by CERC’s subsidiaries. CERC anticipates that additional claims like those received may be asserted in the future.  Although their ultimate outcome cannot be predicted at this time, CERC intends to continue vigorously contesting claims that it does not consider to have merit and, based on its experience to date, 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 on property where it conducts or has conducted operations. Other such sites involving contaminants may be identified in the future.  CERC has and expects to continue to remediate identified sites consistent with its legal obligations. From time to time CERC has received notices 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 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, based on its experience to date, 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 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.

(c) Guarantees

Prior to the distribution of CenterPoint Energy’s ownership in RRI to its shareholders, CERC had guaranteed certain contractual obligations of what became RRI’s trading subsidiary.  When the companies separated, RRI agreed to secure CERC against obligations under the guarantees RRI had been unable to extinguish by the time of separation.  Pursuant to such agreement, as amended in December 2007, RRI (now GenOn) agreed to provide to CERC cash or letters of credit as security against CERC’s obligations under its remaining guarantees for demand charges under certain gas transportation agreements if and to the extent changes in market conditions expose CERC to a risk of loss on those guarantees based on an annual calculation, with any required collateral to be posted each December.  The undiscounted maximum potential payout of the demand charges under these transportation contracts, which will be in effect until 2018, was approximately $31 million as of September 30, 2015 .  Based on market conditions in the

18



fourth quarter of 2015 at the time the most recent annual calculation was made under the agreement, GenOn was not obligated to post any security. If GenOn should fail to perform the contractual obligations, CERC could have to honor its guarantee and, in such event, any collateral then provided as security may be insufficient to satisfy CERC’s obligations.

CERC Corp. has also provided a guarantee of collection of $1.1 billion of Enable’s Guaranteed Senior Notes. This guarantee is subordinated to all senior debt of CERC Corp. and is subject to automatic release on May 1, 2016.

The fair value of these guarantees is not material.

(11) Income Taxes

The effective tax rate reported for the three months ended September 30, 2015 was 37% compared to 35% for the same period in 2014. For the three months ended September 30, 2014, CERC recognized a tax benefit of $2 million based on the reversal of previously accrued taxes as a result of CenterPoint Energy’s filing of its 2013 consolidated federal income tax return. The effective tax rate reported for the nine months ended September 30, 2015 was 37% compared to 38% for the same period in 2014. The impairment loss reduced the deferred tax liability on CERC’s investment in Enable.

CERC reported no uncertain tax liability as of September 30, 2015 and expects no significant change to the uncertain tax liability over the twelve-month period ending September 30, 2016. Tax years through 2013 have been audited and settled with the Internal Revenue Service (IRS). For 2014 and 2015, CenterPoint Energy is a participant in the IRS’s Compliance Assurance Process.

(12) Reportable Business Segments

Because CERC is an indirect, wholly-owned subsidiary of CenterPoint Energy, CERC’s determination of reportable business segments considers the strategic operating units under which CenterPoint Energy 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.

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 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 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 September 30, 2015
 
Revenues from
External
Customers
 
Inter-segment
Revenues
 
Operating
Income
 
(in millions)
Natural Gas Distribution
$
353

 
$
6

 
$
11

Energy Services
446

 
6

 
7

Midstream Investments (1)

 

 

Other Operations

 

 

Reconciling Eliminations

 
(12
)
 

Consolidated
$
799

 
$

 
$
18


19



 
For the Three Months Ended September 30, 2014
 
Revenues from
External
Customers
 
Inter-segment
Revenues
 
Operating
Income
(Loss)
 
(in millions)
Natural Gas Distribution
$
375

 
$
7

 
$
(8
)
Energy Services
589

 
15

 
6

Midstream Investments (1)

 

 

Other Operations

 

 
(1
)
Reconciling Eliminations

 
(22
)
 

Consolidated
$
964

 
$

 
$
(3
)
 
For the Nine Months Ended September 30, 2015
 
 

 
Revenues from
External
Customers
 
Inter-segment
Revenues
 
Operating
Income
 
Total Assets as of September 30, 2015
 
(in millions)
Natural Gas Distribution
$
1,958

 
$
21

 
$
176

 
$
5,360

Energy Services
1,482

 
28

 
29

 
852

Midstream Investments (1)

 

 

 
3,604

Other Operations

 

 

 
759

Reconciling Eliminations

 
(49
)
 

 
(752
)
Consolidated
$
3,440

 
$

 
$
205

 
$
9,823

 
For the Nine Months Ended September 30, 2014
 
 

 
Revenues from
External
Customers
 
Inter-segment
Revenues
 
Operating
Income
(Loss)
 
Total Assets as of December 31, 2014
 
(in millions)
Natural Gas Distribution
$
2,379

 
$
22

 
$
184

 
$
5,464

Energy Services
2,298

 
66

 
43

 
978

Midstream Investments (1)

 

 

 
4,521

Other Operations
1

 

 
(3
)
 
1,046

Reconciling Eliminations

 
(88
)
 

 
(964
)
Consolidated
$
4,678

 
$

 
$
224

 
$
11,045


(1)
Midstream Investments’ equity earnings (losses) are as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in millions)
Enable (1)
 
$
(794
)
 
$
79

 
$
(699
)
 
$
236

SESH
 

 

 

 
5

  Total
 
$
(794
)
 
$
79

 
$
(699
)
 
$
241


(1)
These amounts include CERC’s share of Enable’s impairment of goodwill and long-lived assets and the impairment of CERC’s equity method investment in Enable totaling $862 million during the three and nine months ended September 30, 2015. This impairment is offset by $68 million and $163 million of earnings for the three and nine months ended September 30, 2015, respectively.


20



Midstream Investments’ total assets are as follows:
 
 
September 30,
2015
 
December 31, 2014
 
 
(in millions)
Enable
 
$
3,604

 
$
4,520

SESH
 

 
1

  Total
 
$
3,604

 
$
4,521


(13) Other Current Assets and Liabilities

Included in other current assets on the Condensed Consolidated Balance Sheets at September 30, 2015 and December 31, 2014 were $16 million and $19 million , respectively, of margin deposits and $8 million and $45 million , respectively, of under-recovered gas cost. Included in other current liabilities on the Condensed Consolidated Balance Sheets at September 30, 2015 and December 31, 2014 were $78 million and $37 million , respectively, of over-recovered gas cost.

(14) Subsequent Events

On October 22, 2015 , Enable declared a quarterly cash distribution of $0.318 per unit on all of its outstanding common and subordinated units for the quarter ended September 30, 2015. Accordingly, CERC Corp. expects to receive a cash distribution of approximately $74 million from Enable in the fourth quarter of 2015 to be made with respect to CERC Corp.’s limited partner interest in Enable for the third quarter of 2015.



21



Item 2.  MANAGEMENT S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS

The following narrative analysis should be read in combination with our Interim Condensed Financial Statements contained in Item 1 of this report and our Annual Report on Form 10-K for the year ended December 31, 2014 (2014 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 and nine months ended September 30, 2015 and the three and nine months ended September 30, 2014 . Reference is made to “Management’s Narrative Analysis of Results of Operations” in Item 7 of our 2014 Form 10-K.

RECENT EVENTS
    
Impairment of Equity Investment. We recognized a loss of $794 million from our investment in Enable for the three months ended September 30, 2015. This loss included impairment charges totaling $862 million composed of the impairment of our investment in Enable of $250 million and our share, $612 million, of impairment charges Enable recorded for goodwill and long-lived assets. For further discussion of the impairment, see Note 6.

Texas Coast Rate Case. On March 27, 2015, our regulated natural gas distribution business (NGD) filed a Statement of Intent with each of the 49 cities and unincorporated areas within its Texas Coast service territory for a $6.8 million annual revenue increase. This increase was based on a rate base of $132.3 million and a return on equity (ROE) of 10.25%. On July 6, 2015, the parties agreed to a settlement providing for a $4.9 million annual increase to rates, an ROE of 10.0%, 54.5% equity and authorized overall rate of return of 8.23%. This settlement resolved six outstanding  cases on appeal: one on remand at the Railroad Commission of Texas (Railroad Commission) and five cost of service adjustment (COSA) appeals at the district court. The Railroad Commission unanimously approved the settlement on August 25, 2015. Rates were implemented in September 2015.
  
Minnesota Rate Case. In August 2015, NGD filed a general rate case with the Minnesota Public Utilities Commission (MPUC) requesting an increase of $54.1 million.  On September 10, 2015, the MPUC approved an interim increase of $47.8 million in revenues effective October 2, 2015, subject to a refund. The MPUC is expected to issue a final decision in mid-2016 with final rates effective by the end of 2016.

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 of our business, please read “Risk Factors” in Item 1A of Part I of our 2014 Form 10-K.


22



The following table sets forth our consolidated results of operations for the three and nine months ended September 30, 2015 and 2014 , followed by a discussion of our consolidated results of operations.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Revenues
$
799

 
$
964

 
$
3,440

 
$
4,678

Expenses:
 

 
 

 
 

 
 

Natural gas
527

 
702

 
2,410

 
3,625

Operation and maintenance
165

 
184

 
541

 
562

Depreciation and amortization
57

 
53

 
169

 
153

Taxes other than income taxes
32

 
28

 
115

 
114

Total
781

 
967

 
3,235

 
4,454

Operating Income (Loss)
18

 
(3
)
 
205

 
224

Interest and other finance charges
(34
)
 
(36
)
 
(103
)
 
(105
)
Equity in earnings (losses) of unconsolidated affiliates, net
(794
)
 
79

 
(699
)
 
241

Other expense, net
2

 
3

 
3

 
7

Income (Loss) Before Income Taxes
(808
)
 
43

 
(594
)
 
367

Income tax expense (benefit)
(300
)
 
15

 
(217
)
 
139

Net Income (Loss)
$
(508
)
 
$
28

 
$
(377
)
 
$
228


Three months ended September 30, 2015 compared to three months ended September 30, 2014

We reported a net loss of $508 million for the three months ended September 30, 2015 compared to net income of $28 million for the same period in 2014

The decrease in net income of $536 million was due to an $873 million decrease in equity earnings of unconsolidated affiliates, which included impairment charges of $862 million discussed further in Note 6.

This decrease in net income was partially offset by the following:

$315 decrease in income tax expense;

$21 million increase in operating income (discussed by segment below); and

$2 million decrease in interest expense.

Nine months ended September 30, 2015 compared to nine months ended September 30, 2014

We reported a net loss of $377 million for the nine months ended September 30, 2015 compared to net income of $228 million for the same period in 2014 .  

The decrease in net income of $605 million was due to the following key factors:

$940 million decrease in equity earnings of unconsolidated affiliates, which included impairment charges of $862 million discussed further in Note 6;

$19 million decrease in operating income (discussed by segment below); and

$4 million decrease in other income.