CenterPoint Energy, Inc.
CENTERPOINT ENERGY RESOURCES CORP (Form: 10-Q, Received: 11/04/2016 06:38:02)
 

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, 2016
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 21, 2016 , 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, 2016

TABLE OF CONTENTS

PART I.
FINANCIAL INFORMATION
 
 
 
Page
Item 1.
Financial Statements
 
 
 
 
Condensed Statements of Consolidated Income
 
 
Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
 
 
 
 
Condensed Statements of Consolidated Comprehensive Income
 
 
Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
 
 
 
 
Condensed Consolidated Balance Sheets
 
 
September 30, 2016 and December 31, 2015 (unaudited)
 
 
 
 
Condensed Statements of Consolidated Cash Flows
 
 
Nine Months Ended September 30, 2016 and 2015 (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
 
 
 
ArcLight
 
ArcLight Capital Partners, LLC
APSC
 
Arkansas Public Service Commission
ASU
 
Accounting Standards Update
Atmos Energy Marketing
 
Atmos Energy Marketing, LLC, a wholly-owned subsidiary of Atmos Energy Holdings, Inc., a wholly-owned subsidiary of Atmos Energy Corporation
Bcf
 
Billion cubic feet
BDA
 
Billing Determinant Adjustment
CenterPoint Energy
 
CenterPoint Energy, Inc., and its subsidiaries
CECL
 
Current expected credit losses
CERC Corp.
 
CenterPoint Energy Resources Corp.
CERC
 
CERC Corp., together with its subsidiaries
CES
 
CenterPoint Energy Services, Inc.
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
Enable
 
Enable Midstream Partners, LP
EECR
 
Energy Efficiency Cost Recovery
FASB
 
Financial Accounting Standards Board
Fitch
 
Fitch, Inc.
Form 10-Q
 
Quarterly Report on Form 10-Q
GenOn
 
GenOn Energy, Inc.
GRIP
 
Gas Reliability Infrastructure Program
Houston Electric
 
CenterPoint Energy Houston Electric, LLC and its subsidiaries
Interim Condensed Financial Statements
 
Condensed consolidated interim financial statements and notes
IRS
 
Internal Revenue Service
LIBOR
 
London Interbank Offered Rate
LPSC
 
Louisiana Public Service Commission
MGPs
 
Manufactured gas plants
Moody’s
 
Moody’s Investors Service, Inc.
MPSC
 
Mississippi Public Service Commission
MPUC
 
Minnesota Public Utilities Commission
NAV
 
Net asset value
NGD
 
Natural gas distribution business
NGLs
 
Natural gas liquids
NRG
 
NRG Energy, Inc.
OCC
 
Oklahoma Corporation Commission
OGE
 
OGE Energy Corp.
PBRC
 
Performance Based Rate Change
PHMSA
 
Pipeline and Hazardous Materials Safety Administration
Private Placement
 
CenterPoint Energy’s agreement with Enable to purchase an aggregate of 14,520,000 Series A Preferred Units
PRPs
 
Potentially responsible parties
Reliant Energy
 
Reliant Energy, Incorporated
ROE
 
Return on equity
RRA
 
Rate Regulation Adjustment
RRI
 
Reliant Resources, Inc.

ii



GLOSSARY (cont.)
 
 
 
RSP
 
Rate Stabilization Plan
SEC
 
Securities and Exchange Commission
Series A Preferred Units
 
Enable’s 10% Series A Fixed-to-Floating Non-Cumulative Redeemable Perpetual Preferred Units
S&P
 
Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies
Transition Agreements
 
Services Agreement, Employee Transition Agreement, Transitional Seconding Agreement and other agreements entered into in connection with the formation of Enable
VIE
 
Variable interest entity
2015 Form 10-K
 
Annual Report on Form 10-K for the year ended December 31, 2015

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,” “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;

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;
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;
the timing and extent of changes in commodity prices, particularly natural gas, and the effects of geographic and seasonal commodity price differentials;

iv



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 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;
actions by credit rating agencies;
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;
inability of various counterparties to meet their obligations to us;
non-payment for our services due to financial distress of our customers;
effectiveness of our risk management activities;
our potential business strategies and strategic initiatives, 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 (formerly known as RRI Energy, Inc., Reliant Energy and RRI), a wholly-owned subsidiary of NRG, 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;
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 2015 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.



 

v



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,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Revenues
$
978

 
$
799

 
$
3,105

 
$
3,440

 
 
 
 
 
 
 
 
Expenses:
 

 
 

 
 

 
 

Natural gas
683

 
527

 
2,031

 
2,410

Operation and maintenance
175

 
165

 
571

 
541

Depreciation and amortization
62

 
57

 
185

 
169

Taxes other than income taxes
32

 
32

 
108

 
115

Total
952

 
781

 
2,895

 
3,235

Operating Income
26

 
18

 
210

 
205

 
 
 
 
 
 
 
 
Other Income (Expense):
 

 
 

 
 

 
 

Interest and other finance charges
(29
)
 
(34
)
 
(93
)
 
(103
)
Equity in earnings (losses) of unconsolidated affiliate, net
73

 
(794
)
 
164

 
(699
)
Other, net
(1
)
 
2

 
1

 
3

Total
43

 
(826
)
 
72

 
(799
)
Income (Loss) Before Income Taxes
69

 
(808
)
 
282

 
(594
)
Income tax expense (benefit)
26

 
(300
)
 
113

 
(217
)
Net Income (Loss)
$
43

 
$
(508
)
 
$
169

 
$
(377
)




See Notes to 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,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net income (loss)
$
43

 
$
(508
)
 
$
169

 
$
(377
)
Other comprehensive income, net of tax:
 

 
 
 
 

 
 

Adjustment to pension and other postretirement plans (net of tax of $1, $-0-, $-0- and $-0-)
1

 

 
2

 

Other comprehensive income
1

 

 
2

 

Comprehensive income (loss)
$
44

 
$
(508
)
 
$
171

 
$
(377
)


See Notes to 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,
2016
 
December 31, 2015
Current Assets :
 
 
 
Cash and cash equivalents
$

 
$

Accounts receivable, less bad debt reserve of $17 and $19, respectively
326

 
350

Accrued unbilled revenues
69

 
183

Accounts and notes receivable–affiliated companies
5

 
8

Materials and supplies
53

 
45

Natural gas inventory
160

 
168

Non-trading derivative assets
49

 
89

Prepaid expenses and other current assets
75

 
61

Total current assets
737

 
904

 
 
 
 
Property, Plant and Equipment:
 
 
 
Property, plant and equipment
6,228

 
5,898

Less: accumulated depreciation and amortization
1,751

 
1,640

Property, plant and equipment, net
4,477

 
4,258

 
 
 
 
Other Assets:
 

 
 

Goodwill
862

 
840

Non-trading derivative assets
24

 
36

Notes receivable–unconsolidated affiliate

 
363

Investment in unconsolidated affiliate
2,535

 
2,594

Other
191

 
146

Total other assets
3,612

 
3,979

 
 
 
 
Total Assets
$
8,826

 
$
9,141



See Notes to 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,
2016
 
December 31, 2015
Current Liabilities:
 

 
 

Short-term borrowings
$
43

 
$
40

Current portion of long-term debt

 
325

Accounts payable
266

 
307

Accounts and notes payable–affiliated companies
31

 
39

Taxes accrued
60

 
63

Interest accrued
31

 
36

Customer deposits
79

 
80

Non-trading derivative liabilities
19

 
11

Other
153

 
158

Total current liabilities
682

 
1,059

 
 
 
 
Other Liabilities:
 

 
 

Deferred income taxes, net
1,881

 
1,774

Non-trading derivative liabilities
4

 
5

Benefit obligations
94

 
89

Regulatory liabilities
759

 
734

Other
217

 
210

Total other liabilities
2,955

 
2,812

 
 
 
 
Long-Term Debt
2,263

 
2,016

 
 
 
 
Commitments and Contingencies (Note 11)


 


 
 
 
 
Stockholder’s Equity:
 
 
 
Common stock

 

Paid-in capital
2,489

 
2,417

Retained earnings
430

 
828

Accumulated other comprehensive income
7

 
9

Total stockholder’s equity
2,926

 
3,254

 
 
 
 
Total Liabilities and Stockholder’s Equity
$
8,826

 
$
9,141



See Notes to 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,
 
2016
 
2015
Cash Flows from Operating Activities:
 
 
 
Net income (loss)
$
169

 
$
(377
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Depreciation and amortization
185

 
169

Amortization of deferred financing costs
7

 
7

Deferred income taxes
108

 
(162
)
Write-down of natural gas inventory
1

 
4

Equity in (earnings) losses of unconsolidated affiliate, net of distributions
(164
)
 
843

Changes in other assets and liabilities, excluding acquisitions:
 

 
 

Accounts receivable and unbilled revenues, net
220

 
532

Accounts receivable/payable–affiliated companies
(5
)
 
(64
)
Inventory
(1
)
 
31

Accounts payable
(85
)
 
(302
)
Fuel cost recovery
(43
)
 
71

Interest and taxes accrued
(8
)
 
(3
)
Non-trading derivatives, net
23

 
(6
)
Margin deposits, net
65

 
20

Other current assets
(11
)
 
13

Other current liabilities
15

 
(12
)
Other assets
(5
)
 
11

Other liabilities
1

 
(9
)
Other, net
1

 

Net cash provided by operating activities
473

 
766

Cash Flows from Investing Activities:
 

 
 

Capital expenditures
(378
)
 
(420
)
Distribution from unconsolidated affiliate in excess of cumulative earnings
223

 
74

Decrease in notes receivable–unconsolidated affiliate
363

 

Acquisitions, net of cash acquired
(102
)
 

Other, net
(1
)
 
3

Net cash provided by (used in) investing activities
105

 
(343
)
Cash Flows from Financing Activities:
 

 
 

Increase (decrease) in short-term borrowings, net
3

 
(4
)
Proceeds from (payments of) commercial paper, net
240

 
(232
)
Payments of long-term debt
(325
)
 

Dividends to parent
(567
)
 

Debt issuance costs
(1
)
 

Decrease in notes payable–affiliated companies

 
(188
)
Contribution from parent
73

 

Other, net
(1
)
 

Net cash used in financing activities
(578
)
 
(424
)
Net Decrease in Cash and Cash Equivalents

 
(1
)
Cash and Cash Equivalents at Beginning of Period

 
2

Cash and Cash Equivalents at End of Period
$

 
$
1

Supplemental Disclosure of Cash Flow Information:
 

 
 

Cash Payments:
 

 
 

Interest, net of capitalized interest
$
90

 
$
90

Income taxes, net
3

 
7

Non-cash transactions:
 

 
 

Accounts payable related to capital expenditures
$
32

 
$
37


See Notes to 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 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 2015 Form 10-K.

Background. CERC owns and operates natural gas distribution systems and owns interests in Enable as described in Note 7 . 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 natural gas utilities. As of September 30, 2016 , 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., 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 13 .

(2) New Accounting Pronouncements

In February 2015, the FASB issued ASU 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 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. CERC adopted ASU 2015-02 on January 1, 2016, which CERC determined did not have a material impact on its financial position, results of operations, cash flows and disclosures.

In April 2015, the FASB issued ASU 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 adopted ASU 2015-03 retrospectively on January 1, 2016, which resulted in a reduction of other long-term assets and total long-term debt on its Condensed Consolidated Balance Sheets. CERC had debt issuance costs, excluding amounts related to credit facility arrangements, of $11 million and $12 million as of September 30, 2016 and December 31, 2015, respectively.

In May 2015, the FASB issued ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (ASU 2015-07). ASU 2015-07 removes the requirement to categorize within the fair value hierarchy investments for which fair values are measured at NAV using the practical expedient. Entities will be required to disclose the fair value of investments measured using the NAV practical expedient so that financial statement users can reconcile amounts reported in the fair value hierarchy table to amounts reported on the balance sheet. CERC adopted ASU 2015-07 on January 1, 2016, which will have an impact on its employee benefit plan disclosures, beginning with its annual report on Form 10-K for the year ended December 31, 2016. This standard did not have an impact on CERC’s financial position, results of operations or cash flows.


6



In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (ASU 2015-16). ASU 2015-16 eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, an acquirer would recognize a measurement-period adjustment during the period in which the amount of the adjustment is determined. CERC adopted ASU 2015-16 on January 1, 2016, which did not have an impact on its financial position, results of operations or cash flows.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). ASU 2016-01 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. ASU 2016-01 also changes certain disclosure requirements and other aspects related to recognition and measurement of financial assets and financial liabilities. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. CERC is currently assessing the impact that this standard will have on its financial position, results of operations, cash flows and disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). 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. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. CERC is currently assessing the impact that this standard will have on its financial position, results of operations, cash flows and disclosures.

In March 2016, the FASB issued ASU No. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novation on Existing Hedge Accounting Relationships (ASU 2016-05). ASU 2016-05 clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument in an existing hedging relationship would not, in and of itself, be considered a termination of the derivative instrument or a change in a critical term of the hedging relationship. This clarification applies to both cash flow and fair value hedging relationships. CERC adopted ASU 2016-05 prospectively in the first quarter of 2016, which did not have an impact on its financial position, results of operations, cash flows and disclosures.

In March, April, and May 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (ASU 2016-08), ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (ASU 2016-10), and ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (ASU 2016-12), respectively. ASU 2016-08, ASU 2016-10, and ASU 2016-12 clarify certain aspects of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which supersedes most current revenue recognition guidance. CERC is currently evaluating the impact that ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2014-09 will have on its financial position, results of operations, cash flows and disclosures and expects to adopt these ASUs on January 1, 2018.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 requires a new model called the CECL model to estimate credit losses for financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures. This includes loans, held-to-maturity debt securities, loan commitments, financial guarantees, and net investments in leases, as well as reinsurance and trade receivables. Upon initial recognition of the exposure, the CECL model requires an entity to estimate the credit losses expected over the life of an exposure based on historical information, current information and reasonable and supportable forecasts, including estimates of prepayments. The update also amends the other-than-temporary impairment model for debt securities classified as available-for-sale. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted beginning after December 15, 2018. CERC is currently assessing the impact that this standard will have on its financial position, results of operations, cash flows and disclosures.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230)-Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). ASU 2016-15 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. ASU 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. CERC is currently assessing the impact that this standard will have on its statement of cash flows.

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.


7



(3) Acquisition

On April 1, 2016, CES, a wholly-owned subsidiary of CERC, closed the previously announced agreement to acquire the retail energy services business and natural gas wholesale assets of Continuum for a preliminary purchase price of $98 million , including working capital. After working capital adjustments, the final purchase price was $102 million and allocated to identifiable assets acquired and liabilities assumed based on their estimated fair values on the acquisition date.

The following table summarizes the final purchase price allocation and the fair value amounts recognized for the assets acquired and liabilities assumed related to the acquisition:
 
 
(in millions)
Total purchase price consideration
 
$
102

Receivables
 
$
76

Derivative assets
 
38

Property and equipment
 
1

Identifiable intangibles
 
38

Total assets acquired
 
153

Accounts payable
 
49

Derivative liabilities
 
24

Total liabilities assumed
 
73

Identifiable net assets acquired
 
80

Goodwill
 
22

Net assets acquired
 
$
102


The goodwill of $22 million resulting from the acquisition reflects the excess of the purchase price over the fair value of the net identifiable assets acquired. The goodwill recorded as part of the acquisition primarily reflects the value of th e complementary operational and geographic footprints, along with the scale, geographic reach and expanded capabilities.

Identifiable intangible assets were recorded at estimated fair value as determined by management based on available information, which includes a valuation prepared by an independent third party. The significant assumptions used in arriving at the estimated identifiable intangible asset values included management’s estimates of future cash flows, the discount rate which is based on the weighted average cost of capital for comparable publicly traded guideline companies and projected customer attrition rates. The useful lives for the identifiable intangible assets were determined using methods that approximate the pattern of economic benefit provided by the utilization of the assets.

The estimated fair value of the identifiable intangible assets and related useful lives as included in the final purchase price allocation include:
 
 
Estimate Fair Value
 
Estimate Useful Life
 
 
(in millions)
 
(in years)
Customer relationships
 
$
34

 
15
Covenants not to compete
 
4

 
4
  Total identifiable intangibles
 
$
38

 
 

Amortization expense related to the above identifiable intangible assets was $1 million and $2 million for the three and nine months ended September 30, 2016 , respectively.

Revenues of approximately $170 million and $270 million , respectively, and operating income of approximately $2 million and $2 million , respectively, attributable to the acquisition are included in CERC’s Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2016 .

As Continuum was a non-public company that did not prepare interim financial information and the acquisition included the purchase of both businesses and assets, the historical financial information for the businesses and assets acquired was impracticable to obtain. As a result, pro forma results of the acquired businesses and assets are not presented.

8




(4) 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,
 
2016
 
2015
 
2016
 
2015
 
(in millions)
Service cost
$
1

 
$
1

 
$
1

 
$
1

Interest cost on accumulated benefit obligation
1

 
2

 
3

 
4

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

 

 

 
1

Net periodic cost
$
1

 
$
2

 
$
3

 
$
5


CERC expects to contribute approximately $6 million to its postretirement benefit plan in 2016 , of which approximately $1 million and $4 million were contributed during the three and nine months ended September 30, 2016 , respectively.

(5) 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.

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 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 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 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 10 -year normal weather. During both the three months ended September 30, 2016 and 2015 , CERC recognized no gains or losses related to these swaps. During the nine months ended September 30, 2016 and 2015 , CERC recognized losses of $-0- and $4 million , respectively, related to these swaps. Weather hedge gains and losses are included in revenues in the Condensed Statements of Consolidated Income.


9



(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, 2016 and December 31, 2015 , while the last two tables provide a breakdown of the related income statement impacts for the three and nine months ended September 30, 2016 and 2015 .
Fair Value of Derivative Instruments
 
 
 
 
September 30, 2016
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) (3)
 
Current Assets: Non-trading derivative assets
 
$
51

 
$
2

Natural gas derivatives (1) (2) (3)
 
Other Assets: Non-trading derivative assets
 
24

 

Natural gas derivatives (1) (2) (3)
 
Current Liabilities: Non-trading derivative liabilities
 
19

 
41

Natural gas derivatives (1) (2) (3)
 
Other Liabilities: Non-trading derivative liabilities
 
4

 
11

Total                                                                          
 
$
98

 
$
54


(1)
The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 1,080  Bcf or a net 16  Bcf short position.  Of the net short position, basis swaps constitute a net 128  Bcf long position.

(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 $50 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 $6 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
 
 
September 30, 2016
 
 
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
 
$
70

 
$
(21
)
 
$
49

Other Assets: Non-trading derivative assets
 
28

 
(4
)
 
24

Current Liabilities: Non-trading derivative liabilities
 
(43
)
 
24

 
(19
)
Other Liabilities: Non-trading derivative liabilities
 
(11
)
 
7

 
(4
)
Total
 
$
44

 
$
6

 
$
50


(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.

10



Fair Value of Derivative Instruments
 
 
 
 
December 31, 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) (3)
 
Current Assets: Non-trading derivative assets
 
$
90

 
$
2

Natural gas derivatives (1) (2) (3)
 
Other Assets: Non-trading derivative assets
 
36

 

Natural gas derivatives (1) (2) (3)
 
Current Liabilities: Non-trading derivative liabilities
 
10

 
60

Natural gas derivatives (1) (2) (3)
 
Other Liabilities: Non-trading derivative liabilities
 
4

 
25

Total
 
$
140

 
$
87


(1)
The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 767  Bcf or a net 112  Bcf long position.  Of the net long position, basis swaps constitute 133  Bcf.

(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 $109 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 $56 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, 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
 
$
100

 
$
(11
)
 
$
89

Other Assets: Non-trading derivative assets
 
40

 
(4
)
 
36

Current Liabilities: Non-trading derivative liabilities
 
(62
)
 
51

 
(11
)
Other Liabilities: Non-trading derivative liabilities
 
(25
)
 
20

 
(5
)
Total
 
$
53

 
$
56

 
$
109


(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 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
 
2016
 
2015
 
 
 
 
(in millions)
Natural gas derivatives
 
Gains (Losses) in Revenues
 
$
31

 
$
39

Natural gas derivatives
 
Gains (Losses) in Expenses: Natural Gas
 
(13
)
 
(30
)
Total
 
$
18

 
$
9



11



Income Statement Impact of Derivative Activity
 
 
 
 
Nine Months Ended September 30,
Total derivatives not designated
as hedging instruments
 
Income Statement Location
 
2016
 
2015
 
 
 
 
(in millions)
Natural gas derivatives
 
Gains (Losses) in Revenues
 
$
1

 
$
88

Natural gas derivatives
 
Gains (Losses) in Expenses: Natural Gas
 
35

 
(72
)
Total
 
$
36

 
$
16

 
(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 September 30, 2016 and December 31, 2015 was $2 million and $3 million , respectively.  CERC posted no assets as collateral towards derivative instruments that contain credit risk contingent features as of both September 30, 2016 and December 31, 2015 .  If all derivative contracts (in a net liability position) containing credit risk contingent features were triggered as of both September 30, 2016 and December 31, 2015 , $2 million of additional assets would be required to be posted as collateral.

(6) 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 CERC’s own data. A market approach is utilized to value CERC’s Level 3 assets or liabilities. As of September 30, 2016 , 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 $0.77 to $7.90 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 73% ) 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, 2016 , 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.


12



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, 2016 and December 31, 2015 , 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, 2016
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
Corporate equities
$
2

 
$

 
$

 
$

 
$
2

Investments, including money
market funds (2)
10

 

 

 

 
10

Natural gas derivatives (3)
4

 
72

 
22

 
(25
)
 
73

Total assets
$
16

 
$
72

 
$
22

 
$
(25
)
 
$
85

Liabilities
 

 
 

 
 

 
 

 
 

Natural gas derivatives (3)
$
5

 
$
44

 
$
5

 
$
(31
)
 
$
23

Total liabilities
$
5

 
$
44

 
$
5

 
$
(31
)
 
$
23


(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 $6 million posted with the same counterparties.
 
(2)
Amounts are included in Prepaid Expenses and Other Current 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, 2015
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
Corporate equities
$
2

 
$

 
$

 
$

 
$
2

Investments, including money
market funds (2)
11

 

 

 

 
11

Natural gas derivatives (3)
4

 
115

 
21

 
(15
)
 
125

Total assets
$
17

 
$
115

 
$
21

 
$
(15
)
 
$
138

Liabilities
 

 
 

 
 

 
 

 
 

Natural gas derivatives (3)
$
13

 
$
65

 
$
9

 
$
(71
)
 
$
16

Total liabilities
$
13

 
$
65

 
$
9

 
$
(71
)
 
$
16


(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 $56 million posted with the same counterparties.

(2)
Amounts are included in Prepaid Expenses and Other Current Assets in the Condensed Consolidated Balance Sheets.

(3)
Natural gas derivatives include no material amounts related to physical forward transactions with Enable.
 

13



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,
 
2016
 
2015
 
2016
 
2015
 
(in millions)
Beginning balance
$
16

 
$
10

 
$
12

 
$
17

Purchases

 

 
12

 

Total gains
9

 
5

 
13

 
5

Total settlements
(8
)
 
(2
)
 
(24
)
 
(8
)
Transfers into Level 3

 
1

 
5

 
1

Transfers out of Level 3

 

 
(1
)
 
(1
)
Ending balance (1)
$
17

 
$
14

 
$
17

 
$
14

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

 
$
14

 
$
7


(1)
CERC did not have significant Level 3 sales during either of the three or nine months ended September 30, 2016 or 2015 .

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 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, 2016
 
December 31, 2015
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
(in millions)
Financial assets:
 
 
 
 
 
 
 
Notes receivable–unconsolidated affiliate
$

 
$

 
$
363

 
$
356

Financial liabilities:
 
 
 
 
 
 
 
Long-term debt
$
2,263

 
$
2,500

 
$
2,341

 
$
2,539


(7) Unconsolidated Affiliate

On May 1, 2013 (the Formation Date) CERC Corp., OGE and ArcLight 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’s common and subordinated units 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 Sheets as of September 30, 2016 , the guarantees discussed in Note 11 , and outstanding current accounts receivable from Enable. In connection with the Private Placement, Enable redeemed $363 million of notes owed to a wholly-owned subsidiary of CERC Corp., which bore interest at an annual rate of 2.10% to 2.45% . CERC recorded interest income of $-0- and $2 million during the three months ended September 30, 2016 and 2015 , respectively, and $1 million and $6 million during the nine months ended September 30, 2016 and 2015 , respectively, and had interest receivable from Enable of $-0- and $4 million as of September 30, 2016 and December 31, 2015 , respectively, on its notes receivable.

Effective on the Formation Date, CenterPoint Energy and Enable entered into the Transition Agreements. Under the Services Agreement, CERC agreed to provide certain support services to Enable such as accounting, legal, risk management and treasury

14



functions for an initial term, which ended on April 30, 2016.  CERC is providing certain services to Enable on a year-to-year basis. Enable may terminate (i) the entire Services Agreement with at least 90 days’ notice prior to the end of any extension term, or (ii) either any service provided under the Services Agreement, or the entire Services Agreement, at any time upon approval by its board of directors and with at least 180 days’ notice.
 
CERC billed Enable for reimbursement of transition services of $1 million and $3 million during the three months ended September 30, 2016 and 2015 , respectively, and $6 million and $10 million during the nine months ended September 30, 2016 and 2015 , respectively, under the Transition Agreements. Actual transition services costs are recorded net of reimbursements received from Enable. CERC had accounts receivable from Enable of $2 million and $3 million as of September 30, 2016 and December 31, 2015 , respectively, for amounts billed for transition services.

CERC incurred natural gas expenses, including transportation and storage costs, of $22 million and $23 million during the three months ended September 30, 2016 and 2015 , respectively, and $79 million and $87 million during the nine months ended September 30, 2016 and 2015 , respectively, for transactions with Enable. CERC had accounts payable to Enable of $8 million and $11 million as of September 30, 2016 and December 31, 2015 , respectively, from such transactions.

As of September 30, 2016 , 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, 2016 , CERC and OGE each owned 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 evaluates its equity method investments for impairment when factors indicate that a decrease in 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 the best estimate of 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. As of September 30, 2016 , the carrying value of CERC’s equity method investment in Enable was $10.84 per unit, which includes limited partner common and subordinated units, a general partner interest and incentive distribution rights. On September 30, 2016 , Enable’s common unit price closed at $15.25 .

Summarized unaudited consolidated income information for Enable is as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in millions)
Operating revenues
 
$
620

 
$
646

 
$
1,658

 
$
1,852

Cost of sales, excluding depreciation and amortization
 
268

 
287

 
717

 
856

Impairment of goodwill and other long-lived assets
 
8

 
1,105

 
8

 
1,105

Operating income (loss)
 
139

 
(975
)
 
299

 
(778
)
Net income (loss) attributable to Enable
 
110

 
(985
)
 
231

 
(817
)
 
 
 
 
 
 
 
 
 
Reconciliation of Equity in Earnings (Losses), net:
 
 
 
 
 
 
 
 
CERC’s interest
 
$
61

 
$
(546
)
 
$
128

 
$
(453
)
Basis difference amortization (1)
 
12

 
2

 
36

 
4

Impairment of CERC’s equity method investment in Enable
 

 
(250
)
 

 
(250
)
CERC’s equity in earnings (losses), net (2)
 
$
73

 
$
(794
)
 
$
164

 
$
(699
)
(1)
Equity in earnings (losses) of unconsolidated affiliates includes CERC’s share of Enable’s earnings adjusted for the amortization of the basis difference of CERC’s original investment in Enable and its underlying equity in Enable’s net assets. The basis difference is amortized over approximately 33 years, the average life of the assets to which the basis difference is attributed.

(2)
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,

15



2015. This impairment is partially 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,
2016
 
December 31, 2015
 
 
(in millions)
Current assets
 
$
408

 
$
381

Non-current assets
 
10,833

 
10,845

Current liabilities
 
338

 
615

Non-current liabilities
 
3,174

 
3,080

Non-controlling interest
 
11

 
12

Preferred equity
 
362

 

Enable partners’ equity
 
7,356

 
7,519

 
 
 
 
 
Reconciliation of Equity Method Investment in Enable:
 
 
 
 
CERC’s ownership interest in Enable partners’ capital
 
$
4,073

 
$
4,163

CERC’s basis difference
 
(1,538
)
 
(1,569
)
CERC’s equity method investment in Enable
 
$
2,535

 
$
2,594


Distributions Received from Unconsolidated Affiliate:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in millions)
Enable
 
$
74

 
$
74

 
$
223

 
$
219

(8) Goodwill

Goodwill by reportable business segment as of December 31, 2015  and changes in the carrying amount of goodwill as of September 30, 2016 are as follows:
 
December 31, 2015
 
Continuum Acquisition (1)
 
September 30,
2016
 
(in millions)
Natural Gas Distribution
$
746

 
$

 
$
746

Energy Services
83

(2)
22

 
105

Other Operations
11

 

 
11

Total
$
840

 
$
22

 
$
862

(1)
See Note 3 .
(2)
Amount presented is net of the accumulated goodwill impairment charge of $252 million .

CERC performs its 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 in order 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

16



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 impairment test in the third quarter of 2016 and determined, based on the results of the first step, that no impairment charge was required for any reportable segment.

(9) 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 no investments in the money pool as of both September 30, 2016 and December 31, 2015 , which are included in accounts and notes receivable–affiliated companies in the Condensed Consolidated Balance Sheets. Affiliate related net interest income (expense) was not material for either the three or nine months ended September 30, 2016 and 2015 .

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 from 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,
 
2016
 
2015
 
2016
 
2015
 
(in millions)
Corporate service charges
$
31

 
$
25

 
$
90

 
$
80

Charges from Houston Electric for services provided
4

 
5

 
11

 
12

Billings to Houston Electric for services provided
(2
)
 
(1
)
 
(5
)
 
(4
)
 
$
33

 
$
29

 
$
96

 
$
88


See Note 7 for related party transactions with Enable.

(10) 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 2019. 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 had an associated principal obligation of $43 million and $40 million as of September 30, 2016 and December 31, 2015 , respectively.

(b)
Long-term Debt

Debt Repayments. In May 2016, CERC retired approximately $325 million aggregate principal amount of its 6.15% senior notes at their maturity. The retirement of senior notes was financed by the issuance of commercial paper.

Revolving Credit Facility.   On March 4, 2016, CERC Corp. announced that it had refinanced its existing $600 million revolving credit facility, which would have expired in 2019, with a new $600 million five -year senior unsecured revolving credit facility. As of September 30, 2016 and December 31, 2015 , CERC Corp. had the following revolving credit facility and utilization of such facility:


17



 
 
September 30, 2016
 
December 31, 2015
 
Size of
Facility
 
Loans
 
Letters
of Credit
 
Commercial
Paper
 
Loans
 
Letters
of Credit
 
Commercial
Paper
 
(in millions)
$
600

 
$

 
$
3

 
$
459

(1)
$

 
$
2

 
$
219

(1)

(1)
Weighted average interest rate was 0.76% and 0.81% as of September 30, 2016 and December 31, 2015 , respectively.

CERC Corp.’s $600 million revolving credit facility, which is scheduled to terminate on March 3, 2021, can be drawn at LIBOR plus 1.25% 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. As of September 30, 2016 , CERC’s debt to capital ratio, as defined in its credit facility agreement, was 34.7% .

CERC Corp. was in compliance with all financial covenants as of September 30, 2016 .

(11) 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 September 30, 2016 and December 31, 2015 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, 2016 , minimum payment obligations for natural gas supply commitments are approximately $132 million for the remaining three months in 2016, $454 million in 2017, $455 million in 2018, $267 million in 2019, $124 million in 2020 and $133 million after 2020.

(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, 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 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. That ruling is subject to appeal. CenterPoint Energy and CES intend to continue vigorously defending against the plaintiffs’ claims. 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 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 September 30, 2016 , 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 $4 million to $29 million based on remediation continuing for 30 to 50 years. The cost estimates are based on

18



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 Environmental Protection Agency 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 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 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 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.

(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 $15 million as of September 30, 2016 . Based on market conditions in the fourth quarter of 2016 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. had also provided a guarantee of collection of $1.1 billion of Enable’s senior notes due 2019 and 2024. This guarantee was subordinated to all senior debt of CERC Corp. and was automatically released on May 1, 2016.

The fair value of these guarantees is not material.

(12) Income Taxes

The effective tax rate reported for the three months ended September 30, 2016 was 38% compared to 37% for the same period in 2015. The effective tax rate reported for the nine months ended September 30, 2016 was 40% compared to 37% for the same period in 2015. The higher effective tax rate for the nine months ended September 30, 2016 is due to a Louisiana state tax law change in the second quarter of 2016 resulting in an increase to CERC’s deferred tax liability.


19



CERC reported no uncertain tax liability as of September 30, 2016 and expects no significant change to the uncertain tax liability over the next twelve months. CenterPoint Energy’s consolidated federal income tax returns have been audited and settled through 2014. CenterPoint Energy is under examination by the IRS for 2015 and 2016.

(13) 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, 2016
 
Revenues from
External
Customers
 
Inter-segment
Revenues
 
Operating
Income (Loss)
 
(in millions)
Natural Gas Distribution
$
370

 
$
7

 
$
22

Energy Services
608

 
6

 
5

Midstream Investments (1)

 

 

Other Operations

 

 
(1
)
Reconciling Eliminations

 
(13
)
 

Consolidated
$
978

 
$

 
$
26


 
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




20



 
For the Nine Months Ended September 30, 2016
 
 

 
Revenues from
External
Customers
 
Inter-segment
Revenues
 
Operating
Income (Loss)
 
Total Assets as of September 30, 2016
 
(in millions)
Natural Gas Distribution
$
1,672

 
$
21

 
$
202

 
$
5,732

Energy Services
1,433

 
17

 
11

 
990

Midstream Investments (1)

 

 

 
2,535

Other Operations

 

 
(3
)
 
410

Reconciling Eliminations

 
(38
)
 

 
(841
)
Consolidated
$
3,105

 
$

 
$
210

 
$
8,826


 
For the Nine Months Ended September 30, 2015
 
 

 
Revenues from
External
Customers
 
Inter-segment
Revenues
 
Operating
Income
 
Total Assets as of December 31, 2015
 
(in millions)
Natural Gas Distribution
$
1,958

 
$
21

 
$
176

 
$
5,657

Energy Services
1,482

 
28

 
29

 
857

Midstream Investments (1)

 

 

 
2,594

Other Operations

 

 

 
777

Reconciling Eliminations

 
(49
)
 

 
(744
)
Consolidated
$
3,440

 
$

 
$
205

 
$
9,141


(1)
Midstream Investments’ equity earnings are as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in millions)
Enable (a)
 
$
73

 
$
(794
)
 
$
164

 
$
(699
)

(a)
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 partially offset by $68 million and $163 million of earnings for the three and nine months ended September 30, 2015, respectively.

Midstream Investments’ total assets are as follows:
 
 
September 30,
2016
 
December 31, 2015
 
 
(in millions)
Enable
 
$
2,535

 
$
2,594


(14) Other Current Assets and Liabilities

Included in other current assets on the Condensed Consolidated Balance Sheets at September 30, 2016 and December 31, 2015 were $16 million and $31 million , respectively, of margin deposits and $29 million and $12 million , respectively, of under-recovered gas cost. Included in other current liabilities on the Condensed Consolidated Balance Sheets at September 30, 2016 and December 31, 2015 were $28 million and $55 million , respectively, of over-recovered gas cost.

(15) Subsequent Events

On October 31, 2016 , CES, a wholly-owned subsidiary of CERC Corp., announced an agreement to acquire Atmos Energy Marketing for approximately $120 million , including estimated working capital of $80 million .  The transaction is conditioned upon

21



the receipt of certain third party consents and approvals, including expiration of any Hart-Scott-Rodino waiting period.  CERC expects the transaction to close in early 2017.

On November 1, 2016 , 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, 2016 . Accordingly, CERC Corp. expects to receive a cash distribution of approximately $74 million from Enable in the fourth quarter of 2016 to be made with respect to CERC Corp.’s investment in common and subordinated units in Enable for the third quarter of 2016.





22



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 this Form 10-Q and our 2015 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, 2016 and the three and nine months ended September 30, 2015 . Reference is made to “Management’s Narrative Analysis of Results of Operations” in Item 7 of our 2015 Form 10-K.

RECENT EVENTS

Houston, South Texas, Beaumont/East Texas and Texas Coast GRIP . NGD’s Houston, South Texas, Beaumont/East Texas and Texas Coast divisions each submitted annual GRIP filings in March 2016 representing an aggregate increase in revenue of $18.2 million based on incremental capital expenditures of $115.5 million. For each division, rates were approved and implemented by July 2016.

Arkansas Rate Case. In November 2015, NGD filed a general rate case with the APSC requesting an annual increase of $35.6 million along with approval of the new Formula Rate Plan Tariff.  The APSC order was issued in September 2016 authorizing a $14.2 million rate adjustment based on an ROE of 9.50% and approving the Formula Rate Plan Tariff. New rates were implemented in September 2016.

Minnesota CIP.   In May 2016, NGD filed a CIP request with the MPUC, seeking a $12.7 million financial incentive based on 2015 program performance.  In September, the MPUC issued its order approving the request.

Minnesota Decoupling. In September 2016, NGD filed its Decoupling Report and rate adjustment with the MPUC. The filing implements a $24.6 million decoupling adjustment reflecting revenue under recovery during the July 1, 2015 through June 30, 2016 period. The adjustment was effective September 1, 2016, subject to subsequent review and approval. Initial comments on the Decoupling Report are due November 1, 2016.

Mississippi RRA.   In July 2016, NGD filed an amended request with the MPSC for a $3.3 million RRA with an adjusted ROE of 9.47%.  After MPSC staff review and adjustments, a settlement was reached providing for a $2.7 million RRA, with an allowed ROE of 9.47%. The settlement was approved by the MPSC, and rates were implemented in October 2016.

Atmos Energy Marketing Acquisition. On October 31, 2016, CES, our wholly-owned subsidiary, announced an agreement to acquire Atmos Energy Marketing for approximately $120 million, including estimated working capital of $80 million.  The transaction is conditioned upon the receipt of certain third party consents and approvals, including expiration of any Hart-Scott-Rodino waiting period.  We expect the transaction to close in early 2017.





23



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 2015 Form 10-K.

The following table sets forth our consolidated results of operations for the three and nine months ended September 30, 2016 and 2015 , followed by a discussion of our consolidated results of operations.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(in millions)
Revenues