CenterPoint Energy, Inc.
CENTERPOINT ENERGY INC (Form: 10-Q, Received: 08/05/2016 06:34:05)
 
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 JUNE 30, 2016
OR
o
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 1-31447
_____________________________________
CenterPoint Energy, Inc.
(Exact name of registrant as specified in its charter)

Texas
74-0694415
(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 )
_____________________________________

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  þ
Accelerated filer  o
Non-accelerated filer  o
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 July 29, 2016 , CenterPoint Energy, Inc. had 430,681,744 shares of common stock outstanding, excluding 166 shares held as treasury stock.
 



CENTERPOINT ENERGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2016

TABLE OF CONTENTS

PART I.
 
FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
Three and Six Months Ended June 30, 2016 and 2015 (unaudited)
 
 
 
 
 
 
 
 
 
Three and Six Months Ended June 30, 2016 and 2015 (unaudited)
 
 
 
 
 
 
 
 
 
June 30, 2016 and December 31, 2015 (unaudited)
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016 and 2015 (unaudited)
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
PART II.
 
OTHER INFORMATION
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.
 


i


`
GLOSSARY
 
 
 
AOL
 
AOL Inc.
APSC
 
Arkansas Public Service Commission
ArcLight
 
ArcLight Capital Partners, LLC
ASU
 
Accounting Standards Update
Bcf
 
Billion cubic feet
BDA
 
Billing Determinant Adjustment
Bond Companies
 
Transition and system restoration bond companies
Brazos Valley Connection
 
A portion of the Houston region transmission project between Houston Electric’s Zenith substation and the Gibbons Creek substation owned by the Texas Municipal Power Agency
CECL
 
Current expected credit losses
CenterPoint Energy
 
CenterPoint Energy, Inc., and its subsidiaries
CERC Corp.
 
CenterPoint Energy Resources Corp.
CERC
 
CERC Corp., together with its subsidiaries
CES
 
CenterPoint Energy Services, Inc.
Charter
 
Charter Communications, Inc.
Charter Common
 
Charter common stock
Choice customers
 
Residential and small commercial customers who have the option to choose a natural gas supplier as governed by the local distribution company’s filed transportation tariffs
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
DCRF
 
Distribution Cost Recovery Factor
Dodd-Frank
 
Dodd-Frank Wall Street Reform and Consumer Protection Act
EECRF
 
Energy Efficiency Cost Recovery Factor
Enable
 
Enable Midstream Partners, LP
ERCOT
 
Electric Reliability Council of Texas
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
GWh
 
Gigawatt-hours
Houston Electric
 
CenterPoint Energy Houston Electric, LLC and its subsidiaries
IBEW
 
International Brotherhood of Electrical Workers
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
NECA
 
National Electrical Contractors Association
NGD
 
Natural gas distribution business

ii


GLOSSARY (cont.)
 
 
 
NGLs
 
Natural gas liquids
NRG
 
NRG Energy, Inc.
OGE
 
OGE Energy Corp.
PBRC
 
Performance Based Rate Change
PHMSA
 
Pipeline and Hazardous Materials Safety Administration
Private Placement
 
An agreement with Enable to purchase an aggregate of 14,520,000 Series A Preferred Units
PRPs
 
Potentially responsible parties
Reliant Energy
 
Reliant Energy, Incorporated
REP
 
Retail electric provider
ROE
 
Return on equity
ROR
 
Return on revenue
RRA
 
Rate Regulation Adjustment
RRI
 
Reliant Resources, Inc.
RSP
 
Rate Stabilization Plan
SEC
 
Securities and Exchange Commission
Securitization Bonds
 
Transition and system restoration bonds
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
TCOS
 
Transmission Cost of Service
TDU
 
Transmission and distribution utility
Texas Utility Commission
 
Public Utility Commission of Texas
Time Common
 
Time Inc. common stock
Transition Agreements
 
Services Agreement, Employee Transition Agreement, Transitional Seconding Agreement and other agreements entered into in connection with the formation of Enable
TW
 
Time Warner Inc.
TW Common
 
TW common stock
TWC
 
Time Warner Cable Inc.
TWC Common
 
TWC common stock
TW Securities
 
Charter Common, Time Common and TW Common
Verizon
 
Verizon Communications, Inc.
VIE
 
Variable interest entity
ZENS
 
2.0% Zero-Premium Exchangeable Subordinated Notes due 2029
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, Enable’s ability to redeem the Series A Preferred Units in certain circumstances 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 ;

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;

iv



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 our 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;

timely and appropriate regulatory actions allowing securitization or other recovery of costs associated with any future hurricanes or natural disasters;

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 ability of REPs, including REP affiliates of NRG and Energy Future Holdings Corp., to satisfy their obligations to us and our subsidiaries;

changes in technology, particularly with respect to efficient battery storage or the emergence or growth of new, developing or alternative sources of generation;

the timing and outcome of any audits, disputes and other proceedings related to taxes;

the effective tax rates;

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

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.     FINANCIAL STATEMENTS

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(In Millions, Except Per Share Amounts)
(Unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Revenues
$
1,574

 
$
1,532

 
$
3,558

 
$
3,965

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Natural gas
496

 
529

 
1,348

 
1,883

Operation and maintenance
513

 
488

 
1,034

 
986

Depreciation and amortization
289

 
239

 
549

 
456

Taxes other than income taxes
94

 
90

 
195

 
198

Total
1,392

 
1,346

 
3,126

 
3,523

Operating Income
182

 
186

 
432

 
442

 
 
 
 
 
 
 
 
Other Income (Expense):
 
 
 
 
 
 
 
Gain on marketable securities
20

 
79

 
110

 
62

Loss on indexed debt securities
(130
)
 
(91
)
 
(186
)
 
(67
)
Interest and other finance charges
(86
)
 
(89
)
 
(173
)
 
(178
)
Interest on securitization bonds
(23
)
 
(27
)
 
(47
)
 
(55
)
Equity in earnings of unconsolidated affiliate, net
31

 
43

 
91

 
95

Other, net
14

 
13

 
21

 
24

Total
(174
)
 
(72
)
 
(184
)
 
(119
)
 
 
 
 
 
 
 
 
Income Before Income Taxes
8

 
114

 
248

 
323

Income tax expense
10

 
37

 
96

 
115

Net Income (Loss)
$
(2
)
 
$
77

 
$
152

 
$
208

 
 
 
 
 
 
 
 
Basic Earnings (Loss) Per Share
$
(0.01
)
 
$
0.18

 
$
0.35

 
$
0.48

 
 
 
 
 
 
 
 
Diluted Earnings (Loss) Per Share
$
(0.01
)
 
$
0.18

 
$
0.35

 
$
0.48

 
 
 
 
 
 
 
 
Dividends Declared Per Share
$
0.2575

 
$
0.2475

 
$
0.5150

 
$
0.4950

 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding, Basic
431

 
430

 
431

 
430

 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding, Diluted
431

 
432

 
433

 
432


See Notes to Interim Condensed Consolidated Financial Statements

1

Table of Contents

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(In Millions)
(Unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
(2
)
 
$
77

 
$
152

 
$
208

Other comprehensive income (loss):
 
 
 
 
 
 
 
Adjustment related to pension and other postretirement plans (net of tax of $2, $-0-, $1 and $2)
(1
)
 
2

 

 
4

Net deferred loss from cash flow hedges (net of tax of $1, $-0-, $1, $-0-)
(1
)
 

 
(1
)
 

Total
(2
)
 
2

 
(1
)
 
4

Comprehensive income (loss)
$
(4
)
 
$
79

 
$
151

 
$
212


See Notes to Interim Condensed Consolidated Financial Statements


2

Table of Contents


CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions)
(Unaudited)

ASSETS

 
June 30,
2016
 
December 31,
2015
Current Assets:
 
 
 
Cash and cash equivalents ($246 and $264 related to VIEs, respectively)
$
271

 
$
264

Investment in marketable securities
737

 
805

Accounts receivable ($92 and $64 related to VIEs, respectively), less bad debt reserve of $24 and $20, respectively
605

 
593

Accrued unbilled revenues
178

 
279

Natural gas inventory
96

 
168

Materials and supplies
187

 
179

Non-trading derivative assets
47

 
89

Taxes receivable
16

 
172

Prepaid expenses and other current assets ($37 and $35 related to VIEs, respectively)
135

 
140

Total current assets
2,272

 
2,689

 
 
 
 
Property, Plant and Equipment:
 
 
 
Property, plant and equipment
17,218

 
16,650

Less: accumulated depreciation and amortization
5,320

 
5,113

Property, plant and equipment, net
11,898

 
11,537

 
 
 
 
Other Assets:
 
 
 
Goodwill
861

 
840

Regulatory assets ($2,156 and $2,373 related to VIEs, respectively)
2,913

 
3,129

Notes receivable – unconsolidated affiliate

 
363

Non-trading derivative assets
22

 
36

Investment in unconsolidated affiliate
2,536

 
2,594

Preferred units – unconsolidated affiliate
363

 

Other
147

 
102

Total other assets
6,842

 
7,064

 
 
 
 
Total Assets
$
21,012

 
$
21,290


See Notes to Interim Condensed Consolidated Financial Statements

3

Table of Contents

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS – (continued)
(In Millions, except share amounts)
(Unaudited)

LIABILITIES AND SHAREHOLDERS’ EQUITY

 
June 30,
2016
 
December 31,
2015
Current Liabilities:
 
 
 
Short-term borrowings
$
17

 
$
40

Current portion of VIE securitization bonds long-term debt
402

 
391

Indexed debt
111

 
145

Current portion of other long-term debt
250

 
328

Indexed debt securities derivative
490

 
442

Accounts payable
407

 
483

Taxes accrued
92

 
158

Interest accrued
119

 
117

Non-trading derivative liabilities
19

 
11

Other
334

 
343

Total current liabilities
2,241

 
2,458

 
 
 
 
Other Liabilities:
 

 
 

Deferred income taxes, net
5,121

 
5,047

Non-trading derivative liabilities
6

 
5

Benefit obligations
904

 
904

Regulatory liabilities
1,284

 
1,276

Other
279

 
273

Total other liabilities
7,594

 
7,505

 
 
 
 
Long-term Debt:
 

 
 

VIE securitization bonds
2,059

 
2,276

Other long-term debt
5,721

 
5,590

Total long-term debt
7,780

 
7,866

 
 
 
 
Commitments and Contingencies (Note 14)


 


 
 
 
 
Shareholders’ Equity:
 

 
 

Common stock (430,681,491 shares and 430,262,703 shares outstanding, respectively)
4

 
4

Additional paid-in capital
4,186

 
4,180

Accumulated deficit
(726
)
 
(657
)
Accumulated other comprehensive loss
(67
)
 
(66
)
Total shareholders’ equity
3,397

 
3,461

 
 
 
 
Total Liabilities and Shareholders’ Equity
$
21,012

 
$
21,290


See Notes to Interim Condensed Consolidated Financial Statements

4

Table of Contents

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Millions)
(Unaudited)
 
Six Months Ended June 30,
 
2016
 
2015
Cash Flows from Operating Activities:
 
 
 
Net income
$
152

 
$
208

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
549

 
456

Amortization of deferred financing costs
13

 
14

Deferred income taxes
69

 
4

Unrealized gain on marketable securities
(110
)
 
(62
)
Loss on indexed debt securities
186

 
67

Write-down of natural gas inventory
1

 
2

Equity in (earnings) losses of unconsolidated affiliate, net of distributions
(91
)
 
50

Pension contributions
(5
)
 
(25
)
Changes in other assets and liabilities, excluding acquisitions:
 
 
 
Accounts receivable and unbilled revenues, net
147

 
367

Inventory
63

 
103

Taxes receivable
156

 
152

Accounts payable
(109
)
 
(327
)
Fuel cost recovery
(17
)
 
86

Non-trading derivatives, net
22

 
2

Margin deposits, net
65

 
25

Interest and taxes accrued
(64
)
 
(66
)
Net regulatory assets and liabilities
(21
)
 
78

Other current assets
4

 
23

Other current liabilities
21

 
(38
)
Other liabilities
17

 
(3
)
Other, net
10

 
6

Net cash provided by operating activities
1,058

 
1,122

Cash Flows from Investing Activities:
 
 
 
Capital expenditures
(682
)
 
(712
)
Acquisitions, net of cash acquired
(98
)
 

Decrease in notes receivable – unconsolidated affiliate
363

 

Investment in preferred units – unconsolidated affiliate
(363
)
 

Distributions from unconsolidated affiliate in excess of cumulative earnings
149

 

Decrease (increase) in restricted cash of Bond Companies
(2
)
 
13

Proceeds from sale of marketable securities
178

 
32

Other, net
(12
)
 
(4
)
Net cash used in investing activities
(467
)
 
(671
)
Cash Flows from Financing Activities:
 
 
 
Decrease in short-term borrowings, net
(23
)
 
(29
)
Proceeds of commercial paper, net
278

 
137

Proceeds from long-term debt
300

 

Payments of long-term debt
(735
)
 
(400
)
Debt issuance costs
(7
)
 

Payment of common stock dividends
(221
)
 
(213
)
Distribution to ZENS note holders
(178
)
 

Other, net
2

 
1

Net cash used in financing activities
(584
)
 
(504
)
Net Increase (Decrease) in Cash and Cash Equivalents
7

 
(53
)
Cash and Cash Equivalents at Beginning of Period
264

 
298

Cash and Cash Equivalents at End of Period
$
271

 
$
245

Supplemental Disclosure of Cash Flow Information:
 
 
 
Cash Payments:
 
 
 
Interest, net of capitalized interest
$
200

 
$
209

Income tax refunds, net
(126
)
 
(38
)
Non-cash transactions:
 
 
 
Accounts payable related to capital expenditures
79

 
81


See Notes to Interim Condensed Consolidated Financial Statements

5

Table of Contents

CENTERPOINT ENERGY, INC. 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 CenterPoint Energy. The Interim Condensed Financial Statements are unaudited, omit certain financial statement disclosures and should be read with the 2015 Form 10-K.

Background. CenterPoint Energy, Inc. is a public utility holding company. CenterPoint Energy’s operating subsidiaries own and operate electric transmission and distribution facilities and natural gas distribution facilities, and both CenterPoint Energy and its operating subsidiaries own interests in Enable as described in Note 8 . As of June 30, 2016 , CenterPoint Energy’s indirect, wholly-owned subsidiaries included:

Houston Electric, which engages in the electric transmission and distribution business in the Texas Gulf Coast area that includes the city of Houston; and

CERC Corp. (together with its subsidiaries), which owns and operates natural gas distribution systems. 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 June 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.

As of June 30, 2016 , CenterPoint Energy had VIEs consisting of Bond Companies, which it consolidates. The consolidated VIEs are wholly-owned, bankruptcy-remote, special purpose entities that were formed specifically for the purpose of securitizing transition and system restoration-related property. Creditors of CenterPoint Energy have no recourse to any assets or revenues of Bond Companies. The bonds issued by these VIEs are payable only from and secured by transition and system restoration property, and the bondholders have no recourse to the general credit of CenterPoint Energy.

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.

CenterPoint Energy’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 CenterPoint Energy’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 CenterPoint Energy’s reportable business segments, see Note 16 .

(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. CenterPoint Energy adopted ASU 2015-02 on January 1, 2016, which CenterPoint Energy 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. CenterPoint Energy adopted ASU 2015-03 retrospectively on January 1, 2016, which resulted in a reduction of other long-term assets, indexed debt

6


and total long-term debt on its Condensed Consolidated Balance Sheets. CenterPoint Energy had debt issuance costs, excluding amounts related to credit facility arrangements, of $43 million and $44 million as of June 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. CenterPoint Energy 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 CenterPoint Energy’s financial position, results of operations or cash flows.

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. CenterPoint Energy 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. CenterPoint Energy 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. CenterPoint Energy 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. CenterPoint Energy 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. CenterPoint Energy 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 March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 will change the accounting for certain aspects of share-based payments to employees, including the recognition of income tax effects of vested or settled awards in the income statement, instead of within additional paid-in capital. It will also increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligations. ASU 2016-09 will allow companies to elect between two different methods to account for forfeitures of share-based payments. ASU 2016-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. CenterPoint Energy is currently assessing the impact that this standard will have on its financial position, results of operations, cash flows and disclosures.


7


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. CenterPoint Energy is currently assessing the impact that this standard will have 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 CenterPoint Energy’s consolidated financial position, results of operations or cash flows upon adoption.

(3) Acquisition

On April 1, 2016, CES, an indirect, wholly-owned subsidiary of CenterPoint Energy, closed the previously announced agreement to acquire the retail energy services business and natural gas wholesale assets of Continuum for $98 million . The purchase price was allocated to identifiable assets acquired and liabilities assumed based on their estimated fair values on the acquisition date. As additional information becomes available, the preliminary purchase price allocation may be revised during the remainder of the measurement period (which will not exceed 12 months from the acquisition date). Any such revisions or changes are not expected to be material.

The following table summarizes the total preliminary 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
 
$
98

Receivables
 
$
75

Derivative assets
 
38

Property and equipment
 
1

Identifiable intangibles
 
36

Total assets acquired
 
150

Accounts payable
 
49

Derivative liabilities
 
24

Total liabilities assumed
 
73

Identifiable net assets acquired
 
77

Goodwill
 
21

Net assets acquired
 
$
98


The goodwill of $21 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 provided, 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 preliminary 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.

8



The estimated fair value of the identifiable intangible assets and related useful lives as included in the preliminary purchase price allocation include:
 
 
Estimate Fair Value
 
Estimate Useful Life
 
 
(in millions)
 
(in years)
Customer relationships
 
$
32

 
15
Covenants not to compete
 
4

 
4
  Total identifiable intangibles
 
$
36

 


Amortization expense related to the above identifiable intangible assets was $1 million for the three and six months ended June 30, 2016 and is expected to be $2 million for 2016.

Revenues of $108 million and operating income of less than $1 million attributable to the acquisition are included in CenterPoint Energy’s Condensed Consolidated Statements of Income for the three and six months ended June 30, 2016.

As Continuum was a non-public company that did not prepare interim financial information, 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.

(4) Employee Benefit Plans

CenterPoint Energy’s net periodic cost includes the following components relating to pension and postretirement benefits:
 
Three Months Ended June 30,
 
2016
 
2015
 
Pension
Benefits (1)
 
Postretirement
Benefits (1)
 
Pension
Benefits (1)
 
Postretirement
Benefits (1)
 
(in millions)
Service cost
$
9

 
$

 
$
10

 
$

Interest cost
24

 
5

 
23

 
5

Expected return on plan assets
(25
)
 
(1
)
 
(30
)
 
(1
)
Amortization of prior service cost (credit)
2

 
(1
)
 
2

 
(1
)
Amortization of net loss
16

 

 
15

 
1

Curtailment gain (3)

 
(3
)
 

 

Net periodic cost
$
26

 
$

 
$
20

 
$
4

 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2016
 
2015
 
Pension
Benefits (1)
 
Postretirement
Benefits (1)
 
Pension
Benefits (1)
 
Postretirement
Benefits (1)
 
(in millions)
Service cost
$
18

 
$
1

 
$
20

 
$
1

Interest cost
47

 
9

 
46

 
10

Expected return on plan assets
(50
)
 
(3
)
 
(60
)
 
(3
)
Amortization of prior service cost (credit)
4

 
(1
)
 
5

 
(1
)
Amortization of net loss
32

 

 
29

 
2

Settlement cost (2)

 

 
9

 

Curtailment gain (3)

 
(3
)
 

 

Net periodic cost
$
51

 
$
3

 
$
49

 
$
9


(1)
Net periodic cost in these tables is before considering amounts subject to overhead allocations for capital expenditure projects or for amounts subject to deferral for regulatory purposes.  

(2)
A one-time, non-cash settlement charge is required when lump sum distributions or other settlements of plan benefit obligations during a plan year exceed the service cost and interest cost components of net periodic cost for that year.  Due to the amount of lump sum payment distributions from the non-qualified pension plan during the six months ended

9


June 30, 2015 , CenterPoint Energy recognized a non-cash settlement charge of $9 million .  This charge is an acceleration of costs that would otherwise be recognized in future periods. 

(3)
A curtailment gain or loss is required when the expected future services of a significant number of current employees are reduced or eliminated for the accrual of benefits. In May 2016, Houston Electric entered into a renegotiated collective bargaining agreement with the IBEW Local Union 66 that provides that for Houston Electric union employees covered under the agreement who retire on or after January 1, 2017, retiree medical and prescription drug coverage will be provided exclusively through the NECA/IBEW Family Medical Care Plan in exchange for the payment of monthly premiums as determined under the agreement. As a result, the accrued postretirement benefits related to such future Houston Electric union retirees were eliminated. Houston Electric recognized a curtailment gain of $3 million as an accelerated recognition of the prior service credit that would otherwise be recognized in future periods.

CenterPoint Energy’s changes in accumulated comprehensive loss related to defined benefit and postretirement plans are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
Pension and Postretirement Plans
 
Pension and Postretirement Plans
 
(in millions)
Beginning Balance
$
(64
)
 
$
(83
)
 
$
(65
)
 
$
(85
)
Other comprehensive income (loss) before reclassifications (1)
(4
)
 

 
(4
)
 

Amounts reclassified from accumulated other comprehensive loss:
 
 
 
 
 
 
 
Actuarial losses (2)
1

 
2

 
3

 
6

Tax benefit (expense)
2

 

 
1

 
(2
)
Net current period other comprehensive income (loss)
(1
)
 
2

 

 
4

Ending Balance
$
(65
)
 
$
(81
)
 
$
(65
)
 
$
(81
)

(1)
Total other comprehensive income (loss) related to the remeasurement of the postretirement plan.

(2)
These accumulated other comprehensive components are included in the computation of net periodic cost.

CenterPoint Energy expects to contribute a total of approximately $8 million to its pension plans in 2016 , of which approximately $2 million and $5 million were contributed during the three and six months ended June 30, 2016 , respectively.

CenterPoint Energy expects to contribute a total of approximately $16 million to its postretirement benefit plan in 2016 , of which approximately $4 million and $8 million were contributed during the three and six months ended June 30, 2016 , respectively.

(5) Regulatory Accounting

As of June 30, 2016 , Houston Electric has not recognized an allowed equity return of $363 million because such return will be recognized as it is recovered in rates. During the three months ended June 30, 2016 and 2015 , Houston Electric recognized approximately $17 million and $12 million , respectively, of the allowed equity return not previously recognized. During the six months ended June 30, 2016 and 2015 , Houston Electric recognized approximately $30 million and $21 million , respectively, of the allowed equity return not previously recognized.

(6) Derivative Instruments

CenterPoint Energy is exposed to various market risks. These risks arise from transactions entered into in the normal course of business.  CenterPoint Energy 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 CenterPoint Energy’s Condensed Consolidated Balance Sheets at their fair value unless CenterPoint Energy 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.


10


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

CenterPoint Energy’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. CenterPoint Energy 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. CenterPoint Energy has weather normalization or other rate mechanisms that mitigate the impact of weather on NGD in Arkansas, Louisiana, Mississippi, Minnesota and Oklahoma. NGD and electric operations in Texas do not have such mechanisms, although fixed customer charges are historically higher in Texas for NGD compared to CenterPoint Energy’s other jurisdictions. As a result, fluctuations from normal weather may have a positive or negative effect on NGD’s results in Texas and on Houston Electric’s results in its service territory.

CenterPoint Energy 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. CenterPoint Energy also entered into weather hedges for the Houston Electric service territory, which contained a bilateral dollar cap of $8 million for the 2014–2015 winter season and a bilateral dollar cap of $7 million for the 2015–2016 winter season. The swaps are based on 10 -year normal weather. During the three months ended June 30, 2016 and 2015 , CenterPoint Energy recognized gains of $-0- and $1 million , respectively, related to these swaps. During the six months ended June 30, 2016 and 2015 , CenterPoint Energy recognized gains of $3 million and losses of $9 million , respectively, related to these swaps. Weather hedge gains and losses are included in revenues in the Condensed Statements of Consolidated Income.

Hedging of Interest Expense for Future Debt Issuances. In April 2016, Houston Electric entered into forward interest rate agreements with several counterparties, having an aggregate notional amount of $150 million . These agreements were executed to hedge, in part, volatility in the 5-year U.S. treasury rate by reducing Houston Electric’s exposure to variability in cash flows related to interest payments of Houston Electric’s $300 million issuance of fixed rate debt in May 2016. These forward interest rate agreements were designated as cash flow hedges. Accordingly, the ineffective portion of unrealized gains and losses associated with the agreements was recorded in income and was immaterial.
  
In June and July 2016, Houston Electric entered into forward interest rate agreements with several counterparties, having an aggregate notional amount of $300 million . These agreements were executed to hedge, in part, volatility in the 10-year U.S. treasury rate by reducing Houston Electric’s exposure to variability in cash flows relating to interest payments on a forecasted issuance of fixed rate debt in 2016.  These forward interest rate agreements were designated as cash flow hedges.  As of June 30, 2016 , a $2 million current non-trading derivative liability was recorded on the Condensed Consolidated Balance Sheets related to these agreements. Accordingly, the effective portion of unrealized gains and losses associated with the agreements would be recorded as a component of accumulated other comprehensive income and the ineffective portion would be recorded in income.



11


(b)
Derivative Fair Values and Income Statement Impacts

The following tables present information about CenterPoint Energy’s derivative instruments and hedging activities. The first four tables provide a balance sheet overview of CenterPoint Energy’s Derivative Assets and Liabilities as of June 30, 2016 and December 31, 2015 , while the last table provides a breakdown of the related income statement impacts for the three and six months ended June 30, 2016 and 2015 .
Fair Value of Derivative Instruments
 
 
June 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
 
$
49

 
$
2

Natural gas derivatives (1) (2) (3)
 
Other Assets: Non-trading derivative assets
 
28

 
6

Natural gas derivatives (1) (2) (3)
 
Current Liabilities: Non-trading derivative liabilities
 
28

 
45

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

 
6

Indexed debt securities derivative
 
Current Liabilities
 

 
490

Total
 
$
105

 
$
549


(1)
The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 1,085  Bcf or a net 6  Bcf short position.  Of the net short position, basis swaps constitute a net 136  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 $46 million asset, excluding a $2 million interest rate derivative liability, as shown on CenterPoint Energy’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 less than $1 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
 
 
June 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
 
$
77

 
$
(30
)
 
$
47

Other Assets: Non-trading derivative assets
 
28

 
(6
)
 
22

Current Liabilities: Non-trading derivative liabilities
 
(47
)
 
30

 
(17
)
Other Liabilities: Non-trading derivative liabilities
 
(12
)
 
6

 
(6
)
Total
 
$
46

 
$

 
$
46


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

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

12


Fair Value of Derivative Instruments
 
 
December 31, 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

Indexed debt securities derivative
 
Current Liabilities
 

 
442

Total
 
$
140

 
$
529


(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 CenterPoint Energy’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.


13


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. Realized and unrealized gains and losses on indexed debt securities are recorded as Other Income (Expense) in the Condensed Statements of Consolidated Income.
 
Income Statement Impact of Derivative Activity
 
 
 
 
Three Months Ended June 30,
Total derivatives not designated
as hedging instruments
 
Income Statement Location
 
2016
 
2015
 
 
 
 
(in millions)
Natural gas derivatives
 
Gains (Losses) in Revenues
 
$
(50
)
 
$
7

Natural gas derivatives
 
Gains (Losses) in Expenses: Natural Gas
 
59

 
1

Indexed debt securities derivative
 
Gains (Losses) in Other Income (Expense)
 
(130
)
 
(91
)
Total
 
$
(121
)
 
$
(83
)
Income Statement Impact of Derivative Activity
 
 
 
 
Six Months Ended June 30,
Total derivatives not designated
as hedging instruments
 
Income Statement Location
 
2016
 
2015
 
 
 
 
(in millions)
Natural gas derivatives
 
Gains (Losses) in Revenues
 
$
(30
)
 
$
49

Natural gas derivatives
 
Gains (Losses) in Expenses: Natural Gas
 
48

 
(42
)
Indexed debt securities derivative
 
Gains (Losses) in Other Income (Expense)
 
(186
)
 
(67
)
Total
 
$
(168
)
 
$
(60
)

(c)
Credit Risk Contingent Features

CenterPoint Energy enters into financial derivative contracts containing material adverse change provisions.  These provisions could require CenterPoint Energy to post additional collateral if the S&P or Moody’s credit ratings of CenterPoint Energy, Inc. or its subsidiaries are downgraded.  The total fair value of the derivative instruments that contain credit risk contingent features that are in a net liability position as of both June 30, 2016 and December 31, 2015 was $3 million .  CenterPoint Energy posted no assets as collateral towards derivative instruments that contain credit risk contingent features as of either June 30, 2016 or December 31, 2015 .  If all derivative contracts (in a net liability position) containing credit risk contingent features were triggered as of both June 30, 2016 and December 31, 2015 , $2 million of additional assets would be required to be posted as collateral.

(7) Fair Value Measurements

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

Level 1: Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets carried at Level 1 fair value generally are exchange-traded derivatives and equity securities.

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 CenterPoint Energy’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 CenterPoint Energy’s judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. CenterPoint Energy develops these inputs based on the best information available, including CenterPoint Energy’s own data. A market approach is utilized to value CenterPoint Energy’s Level 3 assets or liabilities. As of June 30, 2016 , CenterPoint Energy’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 $1.92 to $3.72 per one million British thermal units) as an unobservable input. Level 3 options are valued through Black-Scholes (including forward start) option models which

14


include option volatilities (ranging from 0% to 85% ) as an unobservable input.  CenterPoint Energy’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, CenterPoint Energy’s long forwards lose value whereas its short forwards gain in value.  If volatility decreases, CenterPoint Energy’s long options lose value whereas its short options gain in value.

CenterPoint Energy 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 six months ended June 30, 2016 , there were no transfers between Level 1 and 2. CenterPoint Energy 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 CenterPoint Energy’s assets and liabilities (including derivatives that are presented net) measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015 , and indicate the fair value hierarchy of the valuation techniques utilized by CenterPoint Energy 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
June 30, 2016
 
 
 
 
 
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
Corporate equities
$
739

 
$

 
$

 
$

 
$
739

Investments, including money
market funds (2)
55

 

 

 

 
55

Natural gas derivatives (3)
7

 
77

 
21

 
(36
)
 
69

Total assets
$
801

 
$
77

 
$
21

 
$
(36
)
 
$
863

Liabilities
 

 
 

 
 

 
 

 
 

Indexed debt securities derivative
$

 
$
490

 
$

 
$

 
$
490

Interest rate derivatives

 
2

 

 

 
2

Natural gas derivatives (3)
5

 
49

 
5

 
(36
)
 
23

Total liabilities
$
5

 
$
541

 
$
5

 
$
(36
)
 
$
515

 
(1)
Amounts represent the impact of legally enforceable master netting arrangements that allow CenterPoint Energy to settle positive and negative positions and also include cash collateral of less than $1 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
$
807

 
$

 
$

 
$

 
$
807

Investments, including money
market funds (2)
53

 

 

 

 
53

Natural gas derivatives (3)
4

 
115

 
21

 
(15
)
 
125

Total assets
$
864

 
$
115

 
$
21

 
$
(15
)
 
$
985

Liabilities
 

 
 

 
 

 
 

 
 

Indexed debt securities derivative
$

 
$
442

 
$

 
$

 
$
442

Natural gas derivatives (3)
13

 
65

 
9

 
(71
)
 
16

Total liabilities
$
13

 
$
507

 
$
9

 
$
(71
)
 
$
458


(1)
Amounts represent the impact of legally enforceable master netting arrangements that allow CenterPoint Energy to settle positive and negative positions and also include cash collateral of $56 million posted with the same counterparties.

15



(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.

The following table presents additional information about assets or liabilities, including derivatives that are measured at fair value on a recurring basis for which CenterPoint Energy 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 June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in millions)
Beginning balance
$
15

 
$
13

 
$
12

 
$
17

Purchases
12

 

 
12

 

Total gains

 

 
4

 

Total settlements
(11
)
 
(3
)
 
(16
)
 
(6
)
Transfers into Level 3

 

 
5

 

Transfers out of Level 3

 

 
(1
)
 
(1
)
Ending balance (1)
$
16

 
$
10

 
$
16

 
$
10

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
$
3

 
$

 
$
11

 
$
2


(1)
CenterPoint Energy did not have significant Level 3 sales during either of the three or six months ended June 30, 2016 or 2015 .

Estimated Fair Value of Financial Instruments

The fair values of cash and cash equivalents, investments in debt and equity securities classified as “trading” 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 and CenterPoint Energy’s ZENS indexed debt securities derivative 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.
 
June 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
$
8,432

 
$
9,207

 
$
8,585

 
$
9,067


(8) Unconsolidated Affiliate

On May 1, 2013 (the Formation Date) CERC Corp., OGE and ArcLight closed on the formation of Enable. CenterPoint Energy 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.

CenterPoint Energy’s maximum exposure to loss related to Enable, a VIE in which CenterPoint Energy is not the primary beneficiary, is limited to its equity investment and preferred unit investment as presented in the Condensed Consolidated Balance Sheets as of June 30, 2016 , the guarantees discussed in Note 14 , and outstanding current accounts receivable from Enable. On February 18, 2016, CenterPoint Energy purchased in a Private Placement an aggregate of 14,520,000 Series A Preferred Units

16


from Enable for a total purchase price of $363 million , which is accounted for as a cost method investment. During the three months ended June 30, 2016, CenterPoint Energy received a cash distribution of approximately $4 million for the partial period from February 18, 2016 through March 31, 2016 with respect to its investment in Series A Preferred Units. 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% . CenterPoint Energy recorded interest income of $-0- and $2 million during the three months ended June 30, 2016 and 2015 , respectively, and $1 million and $4 million during the six months ended June 30, 2016 and 2015 , respectively, and had interest receivable from Enable of $-0- and $4 million as of June 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, CenterPoint Energy agreed to provide certain support services to Enable such as accounting, legal, risk management and treasury functions for an initial term, which ended on April 30, 2016.  CenterPoint Energy 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.

CenterPoint Energy billed Enable for reimbursement of transition services of $2 million during both the three months ended June 30, 2016 and 2015 , and $5 million and $7 million during the six months ended June 30, 2016 and 2015 , respectively, under the Transition Agreements. Actual transition services costs are recorded net of reimbursements received from Enable. CenterPoint Energy had accounts receivable from Enable of $1 million and $3 million as of June 30, 2016 and December 31, 2015 , respectively, for amounts billed for transition services.

CenterPoint Energy incurred natural gas expenses, including transportation and storage costs, of $24 million and $26 million during the three months ended June 30, 2016 and 2015 , respectively, and $57 million and $65 million during the six months ended June 30, 2016 and 2015 , respectively, for transactions with Enable. CenterPoint Energy had accounts payable to Enable of $8 million and $11 million as of June 30, 2016 and December 31, 2015 , respectively, from such transactions.

As of June 30, 2016 , CenterPoint Energy 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 June 30, 2016 , CenterPoint Energy 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. Additionally, as of June 30, 2016 , CenterPoint Energy held 14,520,000 Series A Preferred Units in Enable.

CenterPoint Energy evaluates its equity method investments and cost 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 June 30, 2016 , the carrying value of CenterPoint Energy’s equity method investment in Enable was $10.85 per unit, which includes limited partner common and subordinated units, a general partner interest and incentive distribution rights. On June 30, 2016 , Enable’s common unit price closed at $13.51 .

As there were no identified events or changes in circumstances that may have a significant adverse effect on the fair value of CenterPoint Energy’s cost method investment in Enable’s Series A Preferred Units as of June 30, 2016 , and the investment’s fair value is not readily determinable, an estimate of the fair value of the cost method investment was not performed.


17


Summarized unaudited consolidated income information for Enable is as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in millions)
Operating revenues
 
$
529

 
$
590

 
$
1,038

 
$
1,206

Cost of sales, excluding depreciation and amortization
 
254

 
277

 
449

 
569

Operating income
 
57

 
93

 
160

 
197

Net income attributable to Enable
 
35

 
77

 
121

 
168

 
 
 
 
 
 
 
 
 
Reconciliation of Equity in Earnings, net:
 
 
 
 
 
 
 
 
CenterPoint Energy’s interest
 
$
19

 
$
42

 
$
67

 
$
93

Basis difference amortization
 
12

 
1

 
24

 
2

CenterPoint Energy’s equity in earnings, net
 
$
31

 
$
43

 
$
91

 
$
95

Summarized unaudited consolidated balance sheet information for Enable is as follows:
 
 
June 30,
2016
 
December 31, 2015
 
 
(in millions)
Current assets
 
$
349

 
$
381

Non-current assets
 
10,851

 
10,857

Current liabilities
 
301

 
615

Non-current liabilities
 
3,150

 
3,092

Non-controlling interest
 
11

 
12

Preferred equity
 
362

 

Enable partners’ equity
 
7,376

 
7,519

 
 
 
 
 
Reconciliation of Equity Method Investment in Enable:
 
 
 
 
CenterPoint Energy’s ownership interest in Enable partners’ capital
 
$
4,084

 
$
4,163

CenterPoint Energy’s basis difference
 
(1,548
)
 
(1,569
)
CenterPoint Energy’s equity method investment in Enable
 
$
2,536

 
$
2,594


Distributions Received from Unconsolidated Affiliate:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in millions)
Enable
 
$
75

 
$
73

 
$
149

 
$
145


18


(9) Goodwill

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

 
$

 
$
746

Energy Services
83

(2)
21

 
104

Other Operations
11

 

 
11

Total
$
840

 
$
21

 
$
861

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

(10) Capital Stock

CenterPoint Energy, Inc. has 1,020,000,000 authorized shares of capital stock, comprised of 1,000,000,000  shares of $0.01 par value common stock and 20,000,000  shares of $0.01 par value cumulative preferred stock. As of June 30, 2016 , 430,681,657  shares of CenterPoint Energy, Inc. common stock were issued and 430,681,491 shares were outstanding. As of December 31, 2015 , 430,262,869  shares of CenterPoint Energy, Inc. common stock were issued and 430,262,703  shares were outstanding. Outstanding common shares exclude 166 treasury shares as of both June 30, 2016 and December 31, 2015 .

(11) Indexed Debt Securities (ZENS) and Securities Related to ZENS

(a) Investment in Securities Related to ZENS

In 1995, CenterPoint Energy sold a cable television subsidiary to TW and received TW securities as partial consideration. A subsidiary of CenterPoint Energy now holds 7.1 million shares of TW Common, 0.9 million shares of Time Common and 0.9 million shares of Charter Common, which are classified as trading securities and are expected to be held to facilitate CenterPoint Energy’s ability to meet its obligation under the ZENS. Unrealized gains and losses resulting from changes in the market value of the TW Securities are recorded in CenterPoint Energy’s Statements of Consolidated Income.

(b) ZENS

In September 1999, CenterPoint Energy issued ZENS having an original principal amount of $1 billion of which $828 million remain outstanding at June 30, 2016 . Each ZENS note was originally exchangeable at the holder’s option at any time for an amount of cash equal to 95% of the market value of the reference shares of TW Common attributable to such note. The number and identity of the reference shares attributable to each ZENS note are adjusted for certain corporate events. Prior to the merger described below, the reference shares for each ZENS note consisted of 0.5  share of TW Common, 0.125505  share of TWC Common and 0.0625 share of Time Common.

On May 26, 2015, Charter announced that it had entered into a definitive merger agreement with TWC. On September 21, 2015, Charter shareholders approved the announced transaction with TWC. Pursuant to the merger agreement, upon closing of the merger, TWC Common would be exchanged for cash and Charter Common and as a result, reference shares for the ZENS would consist of Charter Common, TW Common and Time Common. The merger closed on May 18, 2016. CenterPoint Energy received $100 and 0.4891 shares of Charter Common for each share of TWC Common held, resulting in cash proceeds of $178 million and 872,531 shares of Charter Common. In accordance with the terms of the ZENS, CenterPoint Energy remitted $178 million to ZENS note holders in June 2016, which reduced contingent principal.  As a result, CenterPoint Energy recorded the following:
 
 
(in millions)
Cash payment to ZENS note holders
 
$
178

Indexed debt – reduction