CenterPoint Energy, Inc.
CENTERPOINT ENERGY INC (Form: 10-Q, Received: 08/03/2017 06:28:02)
 
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 JUNE 30, 2017
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, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
      Large accelerated filer  þ
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  o
Emerging growth company o
 
 
(Do not check if a smaller reporting company)
 
 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o   No  þ
 
As of July 27, 2017 , CenterPoint Energy, Inc. had 431,024,401 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, 2017

TABLE OF CONTENTS

PART I.
 
FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
Three and Six Months Ended June 30, 2017 and 2016 (unaudited)
 
 
 
 
 
 
 
 
 
Three and Six Months Ended June 30, 2017 and 2016 (unaudited)
 
 
 
 
 
 
 
 
 
June 30, 2017 and December 31, 2016 (unaudited)
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017 and 2016 (unaudited)
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
PART II.
 
OTHER INFORMATION
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.
 


i


GLOSSARY
AEM
 
Atmos Energy Marketing, LLC, previously a wholly-owned subsidiary of Atmos Energy Holdings, Inc., a wholly-owned subsidiary of Atmos Energy Corporation
AMAs
 
Asset Management Agreements
AMS
 
Advanced Metering System
APSC
 
Arkansas Public Service Commission
ASU
 
Accounting Standards Update
AT&T
 
AT&T Inc.
AT&T Common
 
AT&T common stock
Bcf
 
Billion cubic feet
BDA
 
Billing Determinant Adjustment, which is a revenue stabilization mechanism used to adjust revenues impacted by declines in natural gas consumption which occurred after the most recent rate case
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
CenterPoint Energy
 
CenterPoint Energy, Inc., and its subsidiaries
CERC Corp.
 
CenterPoint Energy Resources Corp.
CERC
 
CERC Corp., together with its subsidiaries
CES
 
CenterPoint Energy Services, Inc., a wholly-owned subsidiary of CERC Corp.
Charter Common
 
Charter Communications, Inc. common stock
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 previously owned by Continuum Energy Services, LLC
DCRF
 
Distribution Cost Recovery Factor
EECR
 
Energy Efficiency Cost Recovery
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
FRP
 
Formula Rate Plan
Gas Daily
 
Platt’s gas daily indices
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
MLP
 
Master Limited Partnership
MMBtu
 
One million British thermal units
Moody’s
 
Moody’s Investors Service, Inc.
MPSC
 
Mississippi Public Service Commission

ii


GLOSSARY (cont.)
MPUC
 
Minnesota Public Utilities Commission
NECA
 
National Electrical Contractors Association
NGD
 
Natural gas distribution business
NGLs
 
Natural gas liquids
NRG
 
NRG Energy, Inc.
NYMEX
 
New York Mercantile Exchange
OCC
 
Oklahoma Corporation Commission
OGE
 
OGE Energy Corp.
PBRC
 
Performance Based Rate Change
PRPs
 
Potentially responsible parties
PUCT
 
Public Utility Commission of Texas
Railroad Commission
 
Railroad Commission of Texas
Reliant Energy
 
Reliant Energy, Incorporated
REP
 
Retail electric provider
ROE
 
Return on equity
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
 
10% Series A Fixed-to-Floating Non-Cumulative Redeemable Perpetual Preferred Units representing limited partner interests in Enable
S&P
 
Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies
TBD
 
To be determined
TCEH Corp.
 
Formerly Texas Competitive Electric Holdings Company LLC, predecessor to Vistra Energy Corp. whose major subsidiaries include Luminant and TXU Energy
TCOS
 
Transmission Cost of Service
TDU
 
Transmission and distribution utility
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
TW Securities
 
Charter Common, Time Common and TW Common
VIE
 
Variable interest entity
ZENS
 
2.0% Zero-Premium Exchangeable Subordinated Notes due 2029
2016 Form 10-K
 
Annual Report on Form 10-K for the year ended December 31, 2016


iii


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

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

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

the performance of Enable, the amount of cash distributions we receive from Enable, 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;

industrial, commercial and residential growth in our service territories and changes in market demand, including the effects of energy efficiency measures and demographic patterns;

timely and appropriate rate actions that allow recovery of costs and a reasonable return on investment;

future economic conditions in regional and national markets and their effect on sales, prices and costs;

weather variations and other natural phenomena, including the impact of severe weather events on operations and capital;

state and federal legislative and regulatory actions or developments affecting various aspects of our businesses (including the businesses of Enable), including, among others, energy deregulation or re-regulation, pipeline integrity and safety and changes in regulation and legislation pertaining to trade, health care, finance and actions regarding the rates charged by our regulated businesses;

tax reform and legislation;

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;


iv


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 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;

the extent and effectiveness of our risk management and hedging activities, including, but not limited to, our financial hedges and weather hedges;

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

our or Enable’s potential business strategies and strategic initiatives, including restructurings, joint ventures and acquisitions or dispositions of assets or businesses (including a reduction of our interests in Enable, whether through our election to sell the common units we own in the public equity markets or otherwise, subject to certain limitations), which we cannot assure you will be completed or will have the anticipated benefits to us or Enable;

acquisition and merger activities involving us or our competitors;

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, currently the subject of bankruptcy proceedings, to satisfy their obligations to us, including indemnity obligations;

the outcome of litigation;

the ability of REPs, including REP affiliates of NRG and Vistra Energy Corp., formerly known as TCEH 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 2016 Form 10-K, which is incorporated herein by reference, and other reports we file from time to time with the SEC.

You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to update or revise any forward-looking statements.

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,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Utility revenues
$
1,222

 
$
1,177

 
$
2,768

 
$
2,725

Non-utility revenues
921

 
397

 
2,110

 
833

Total
2,143

 
1,574

 
4,878

 
3,558

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Utility natural gas
150

 
126

 
600

 
564

Non-utility natural gas
882

 
370

 
2,011

 
784

Operation and maintenance
535

 
513

 
1,095

 
1,034

Depreciation and amortization
254

 
289

 
480

 
549

Taxes other than income taxes
99

 
94

 
195

 
195

Total
1,920

 
1,392

 
4,381

 
3,126

Operating Income
223

 
182

 
497

 
432

 
 
 
 
 
 
 
 
Other Income (Expense):
 
 
 
 
 
 
 
Gain on marketable securities
23

 
20

 
67

 
110

Loss on indexed debt securities
(13
)
 
(130
)
 
(23
)
 
(186
)
Interest and other finance charges
(77
)
 
(86
)
 
(155
)
 
(173
)
Interest on securitization bonds
(20
)
 
(23
)
 
(40
)
 
(47
)
Equity in earnings of unconsolidated affiliate, net
59

 
31

 
131

 
91

Other, net
16

 
14

 
33

 
21

Total
(12
)
 
(174
)
 
13

 
(184
)
 
 
 
 
 
 
 
 
Income Before Income Taxes
211

 
8

 
510

 
248

Income tax expense
76

 
10

 
183

 
96

Net Income (Loss)
$
135

 
$
(2
)
 
$
327

 
$
152

 
 
 
 
 
 
 
 
Basic Earnings (Loss) Per Share
$
0.31

 
$
(0.01
)
 
$
0.76

 
$
0.35

 
 
 
 
 
 
 
 
Diluted Earnings (Loss) Per Share
$
0.31

 
$
(0.01
)
 
$
0.75

 
$
0.35

 
 
 
 
 
 
 
 
Dividends Declared Per Share
$
0.2675

 
$
0.2575

 
$
0.5350

 
$
0.5150

 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding, Basic
431

 
431

 
431

 
431

 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding, Diluted
434

 
431

 
434

 
433


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,
 
2017
 
2016
 
2017
 
2016
Net income (loss)
$
135

 
$
(2
)
 
$
327

 
$
152

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

 
(1
)
 
2

 

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

 
(1
)
 
(1
)
 
(1
)
Total
1

 
(2
)
 
1

 
(1
)
Comprehensive income (loss)
$
136

 
$
(4
)
 
$
328

 
$
151


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,
2017
 
December 31,
2016
Current Assets:
 
 
 
Cash and cash equivalents ($245 and $340 related to VIEs, respectively)
$
248

 
$
341

Investment in marketable securities
1,020

 
953

Accounts receivable ($58 and $52 related to VIEs, respectively), less bad debt reserve of $19 and $15, respectively
762

 
740

Accrued unbilled revenues
191

 
335

Natural gas inventory
218

 
131

Materials and supplies
192

 
181

Non-trading derivative assets
67

 
51

Taxes receivable

 
30

Prepaid expenses and other current assets ($31 and $40 related to VIEs, respectively)
167

 
161

Total current assets
2,865

 
2,923

 
 
 
 
Property, Plant and Equipment:
 
 
 
Property, plant and equipment
18,374

 
17,831

Less: accumulated depreciation and amortization
5,730

 
5,524

Property, plant and equipment, net
12,644

 
12,307

 
 
 
 
Other Assets:
 
 
 
Goodwill
867

 
862

Regulatory assets ($1,786 and $1,919 related to VIEs, respectively)
2,566

 
2,677

Non-trading derivative assets
46

 
19

Investment in unconsolidated affiliate
2,487

 
2,505

Preferred units – unconsolidated affiliate
363

 
363

Other
207

 
173

Total other assets
6,536

 
6,599

 
 
 
 
Total Assets
$
22,045

 
$
21,829


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,
2017
 
December 31,
2016
Current Liabilities:
 
 
 
Short-term borrowings
$
24

 
$
35

Current portion of VIE securitization bonds long-term debt
422

 
411

Indexed debt, net
118

 
114

Current portion of other long-term debt
550

 
500

Indexed debt securities derivative
740

 
717

Accounts payable
631

 
657

Taxes accrued
153

 
172

Interest accrued
110

 
108

Non-trading derivative liabilities
21

 
41

Other
269

 
325

Total current liabilities
3,038

 
3,080

 
 
 
 
Other Liabilities:
 

 
 

Deferred income taxes, net
5,364

 
5,263

Non-trading derivative liabilities
4

 
5

Benefit obligations
908

 
913

Regulatory liabilities
1,289

 
1,298

Other
292

 
278

Total other liabilities
7,857

 
7,757

 
 
 
 
Long-term Debt:
 

 
 

VIE securitization bonds, net
1,638

 
1,867

Other long-term debt, net
5,949

 
5,665

Total long-term debt, net
7,587

 
7,532

 
 
 
 
Commitments and Contingencies (Note 13)


 


 
 
 
 
Shareholders’ Equity:
 

 
 

Cumulative preferred stock, $0.01 par value, 20,000,000 shares authorized, none issued or outstanding

 

Common stock, $0.01 par value, 1,000,000,000 shares authorized, 431,021,192 shares and 430,682,504 shares outstanding, respectively
4

 
4

Additional paid-in capital
4,200

 
4,195

Accumulated deficit
(571
)
 
(668
)
Accumulated other comprehensive loss
(70
)
 
(71
)
Total shareholders’ equity
3,563

 
3,460

 
 
 
 
Total Liabilities and Shareholders’ Equity
$
22,045

 
$
21,829


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,
 
2017
 
2016
Cash Flows from Operating Activities:
 
 
 
Net income
$
327

 
$
152

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
480

 
549

Amortization of deferred financing costs
12

 
13

Deferred income taxes
95

 
69

Unrealized gain on marketable securities
(67
)
 
(110
)
Loss on indexed debt securities
23

 
186

Write-down of natural gas inventory

 
1

Equity in earnings of unconsolidated affiliate, net of distributions
(131
)
 
(91
)
Pension contributions
(18
)
 
(5
)
Changes in other assets and liabilities, excluding acquisitions:
 
 
 
Accounts receivable and unbilled revenues, net
234

 
147

Inventory
(20
)
 
63

Taxes receivable
30

 
156

Accounts payable
(158
)
 
(109
)
Fuel cost recovery
(12
)
 
(17
)
Non-trading derivatives, net
(49
)
 
22

Margin deposits, net
(43
)
 
65

Interest and taxes accrued
(17
)
 
(64
)
Net regulatory assets and liabilities
(34
)
 
(21
)
Other current assets
13

 
4

Other current liabilities
(29
)
 
21

Other assets
(1
)
 

Other liabilities
27

 
17

Other, net
18

 
13

Net cash provided by operating activities
680

 
1,061

Cash Flows from Investing Activities:
 
 
 
Capital expenditures
(649
)
 
(682
)
Acquisitions, net of cash acquired
(132
)
 
(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

 
149

Decrease (increase) in restricted cash of Bond Companies
8

 
(2
)
Proceeds from sale of marketable securities

 
178

Other, net
(11
)
 
(12
)
Net cash used in investing activities
(635
)
 
(467
)
Cash Flows from Financing Activities:
 
 
 
Decrease in short-term borrowings, net
(11
)
 
(23
)
Proceeds from commercial paper, net
284

 
278

Proceeds from long-term debt, net
298

 
300

Payments of long-term debt
(469
)
 
(735
)
Debt issuance costs
(6
)
 
(7
)
Payment of dividends on common stock
(230
)
 
(221
)
Distribution to ZENS note holders

 
(178
)
Other, net
(4
)
 
(1
)
Net cash used in financing activities
(138
)
 
(587
)
Net Increase (Decrease) in Cash and Cash Equivalents
(93
)
 
7

Cash and Cash Equivalents at Beginning of Period
341

 
264

Cash and Cash Equivalents at End of Period
$
248

 
$
271

Supplemental Disclosure of Cash Flow Information:
 
 
 
Cash Payments/Receipts:
 
 
 
Interest, net of capitalized interest
$
182

 
$
200

Income taxes (refunds), net
11

 
(126
)
Non-cash transactions:
 
 
 
Accounts payable related to capital expenditures
106

 
79


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 2016 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 and natural gas distribution facilities, supply natural gas to commercial and industrial customers and electric and natural gas utilities and own interests in Enable as described below. CenterPoint Energy’s indirect, wholly-owned subsidiaries include:

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

CERC Corp., which owns and operates natural gas distribution systems in six states; and

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

As of June 30, 2017 , CenterPoint Energy also owned an aggregate of 14,520,000 Series A Preferred Units in Enable, which owns, operates and develops natural gas and crude oil infrastructure assets, and CERC Corp. owned approximately 54.1% of the common and subordinated units representing limited partner interests in Enable.

As of June 30, 2017 , CenterPoint Energy had VIEs consisting of the 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 the 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 15 .

(2) New Accounting Pronouncements

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. As of the first reporting period in which the guidance is adopted, a cumulative-effect adjustment to beginning retained earnings will be made, with two features that will be adopted prospectively. CenterPoint Energy does not believe this standard will have a material impact on its financial position, results of operations, cash flows and disclosures.


6


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. A modified retrospective adoption approach is required. 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. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09).  The new guidance simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. CenterPoint Energy adopted this standard as of January 1, 2017. The adoption did not have a material impact on CenterPoint Energy’s financial position or results of operations.  However, CenterPoint Energy’s statement of cash flows reflects a decrease in financing activity and a corresponding increase in operating activity of $4 million and $3 million as of June 30, 2017 and June 30, 2016 , respectively, due to the retrospective application of the requirement that cash paid to a tax authority when shares are withheld to satisfy statutory income tax withholding obligations should be presented as a financing rather than as an operating activity.

In 2016, the FASB issued ASUs which amended ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) . ASU 2014-09, as amended, provides a comprehensive new revenue recognition model that requires revenue to be recognized in a manner that depicts the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. Early adoption is permitted, and entities have the option of using either a full retrospective or a modified retrospective adoption approach. CenterPoint Energy is currently evaluating its revenue streams under these ASUs and has not yet identified any significant changes as the result of these new standards. A substantial amount of CenterPoint Energy’s revenues are tariff and derivative based, which we do not anticipate will be significantly impacted by these ASUs. CenterPoint Energy expects to adopt these ASUs on January 1, 2018 using the modified retrospective adoption approach.

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. A retrospective adoption approach is required. CenterPoint Energy is currently assessing the impact that this standard will have on its statement of cash flows.

In November 2016, the FASB issued ASU No. 2016-18 , Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. As a result, the statement of cash flows will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. ASU 2016-18 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. A retrospective adoption approach is required. CenterPoint Energy is currently assessing the impact that this standard will have on its statement of cash flows and disclosures.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01). ASU 2017-01 revises the definition of a business. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, then under ASU 2017-01, the asset or group of assets is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs to be more closely aligned with how outputs are described in ASC 606. ASU 2017-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted in certain circumstances. A prospective adoption approach is required. ASU 2017-01 could have a potential impact on CenterPoint Energy’s accounting for future acquisitions.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 eliminates Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. A prospective adoption approach is required. ASU 2017-04 will have an impact on CenterPoint Energy’s future calculation of goodwill impairments if an impairment is identified.


7


In February 2017, the FASB issued ASU No. 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (ASU 2017-05). ASU 2017-05 clarifies when and how to apply ASC 610-20 Gains and Losses from the Derecognition of Nonfinancial Assets , which was issued as part of ASU 2014-09 Revenue from Contracts with Customers (Topic 606). ASU 2017-05 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. Companies can elect a retrospective or modified retrospective approach to adoption. 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 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07). ASU 2017-07 requires an employer to report the service cost component of the net periodic pension cost and postretirement benefit cost in the same line item(s) as other employee compensation costs arising from services rendered during the period; all other components will be presented separately from the line item(s) that includes the service cost and outside of any subtotal of operating income. In addition, only the service cost component will be eligible for capitalization in assets. ASU 2017-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. ASU 2017-07 should be applied retrospectively for the presentation of the service cost component and the other components and prospectively for the capitalization of the service cost component. CenterPoint Energy is currently assessing the impact that this standard will have on its financial position, results of operations, cash flows and disclosures.

In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting (ASU 2017-09). ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. Entities will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. ASU 2017-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. ASU 2017-09 should be applied prospectively for awards modified on or after the adoption date. This standard will have an impact on CenterPoint Energy’s future treatment of changes to share-based payment awards.

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 January 3, 2017, CES, an indirect, wholly-owned subsidiary of CenterPoint Energy, completed its acquisition of AEM. After working capital adjustments, the final purchase price was $147 million and was allocated to identifiable assets acquired and liabilities assumed based on their estimated fair values on the acquisition date.


8


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
 
$
147

Cash
 
$
15

Receivables
 
140

Natural gas inventory
 
78

Derivative assets
 
35

Prepaid expenses and other current assets
 
5

Property and equipment
 
8

Identifiable intangibles
 
25

Total assets acquired
 
306

Accounts payable
 
113

Derivative liabilities
 
43

Other current liabilities
 
7

Other liabilities
 
1

Total liabilities assumed
 
164

Identifiable net assets acquired
 
142

Goodwill
 
5

Net assets acquired
 
$
147


The goodwill of $5 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 the complementary operational and geographic footprints, scale and expanded capabilities provided by the acquisition.

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.

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
 
$
25

 
15

Amortization expense related to the above identifiable intangible assets was $1 million for both the three and six months ended June 30, 2017 .

Revenues of approximately $319 million and $678 million , respectively, and operating income of approximately $8 million and $25 million , respectively, attributable to the AEM acquisition are reported in the Energy Services business segment and included in CenterPoint Energy’s Condensed Statements of Consolidated Income for the three and six months ended June 30, 2017 .

The following unaudited pro forma financial information reflects the consolidated results of operations of CenterPoint Energy, assuming the AEM acquisition had taken place on January 1, 2016. Adjustments to pro forma net income include intercompany sales, amortization of intangible assets, depreciation of fixed assets, interest expense associated with debt financing to fund the acquisition, and related income tax effects. The pro forma information does not include the mark-to-market impact of financial instruments designated as cash flow hedges of anticipated purchases and sales at index prices. The effective portion of these hedges are excluded from earnings and reported as changes in Other Comprehensive Income. Additionally, the pro forma information does not include the mark-to-market impact of physical forward transactions that were previously accounted for as normal purchase and sale transactions.

9



The unaudited pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of the consolidated results of operations that would have been achieved had the acquisition taken place on the dates indicated or the future consolidated results of operations of the combined company.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in millions)
Operating Revenue
 
$
2,143

 
$
1,773

 
$
4,878

 
$
4,016

Net Income
 
135

 
3

 
327

 
156


(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,
 
2017
 
2016
 
Pension
Benefits
 
Postretirement
Benefits
 
Pension
Benefits
 
Postretirement
Benefits
 
(in millions)
Service cost
$
9

 
$
1

 
$
9

 
$

Interest cost
22

 
4

 
24

 
5

Expected return on plan assets
(24
)
 
(2
)
 
(25
)
 
(1
)
Amortization of prior service cost (credit)
3

 
(1
)
 
2

 
(1
)
Amortization of net loss
15

 

 
16

 

Curtailment gain (1)

 

 

 
(3
)
Net periodic cost (2)
$
25

 
$
2

 
$
26

 
$

 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2017
 
2016
 
Pension
Benefits
 
Postretirement
Benefits
 
Pension
Benefits
 
Postretirement
Benefits
 
(in millions)
Service cost
$
18

 
$
1

 
$
18

 
$
1

Interest cost
44

 
8

 
47

 
9

Expected return on plan assets
(48
)
 
(3
)
 
(50
)
 
(3
)
Amortization of prior service cost (credit)
5

 
(2
)
 
4

 
(1
)
Amortization of net loss
29

 

 
32

 

Curtailment gain (1)

 

 

 
(3
)
Net periodic cost (2)
$
48

 
$
4

 
$
51

 
$
3


(1)
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. In 2016, 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.

(2)
Net periodic cost in this table is before considering amounts subject to overhead allocations for capital expenditure projects or for amounts subject to deferral for regulatory purposes.  


10


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,
 
2017
 
2016
 
2017
 
2016
 
(in millions)
Beginning Balance
$
(71
)
 
$
(64
)
 
$
(72
)
 
$
(65
)
Other comprehensive income (loss) before reclassifications (1)

 
(4
)
 

 
(4
)
Amounts reclassified from accumulated other comprehensive loss:
 
 
 
 
 
 
 
Prior service cost  (2)
1

 

 
1

 

Actuarial losses (2)
1

 
1

 
3

 
3

Tax benefit (expense)
(1
)
 
2

 
(2
)
 
1

Net current period other comprehensive income (loss)
1

 
(1
)
 
2

 

Ending Balance
$
(70
)
 
$
(65
)
 
$
(70
)
 
$
(65
)

(1)
Total other comprehensive income (loss) is 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 minimum of approximately $46 million to its pension plans in 2017 , of which approximately $16 million and $18 million were contributed during the three and six months ended June 30, 2017 , respectively.

CenterPoint Energy expects to contribute a total of approximately $16 million to its postretirement benefit plan in 2017 , of which approximately $4 million and $8 million were contributed during the three and six months ended June 30, 2017 , respectively.

(5) Regulatory Accounting

As of June 30, 2017 , Houston Electric has not recognized an allowed equity return of $312 million because such return will be recognized as it is recovered in rates. During the three months ended June 30, 2017 and 2016 , Houston Electric recognized approximately $10 million and $17 million , respectively, of the allowed equity return not previously recognized. During the six months ended June 30, 2017 and 2016 , Houston Electric recognized approximately $17 million and $30 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, weather and interest rates 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.

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.


11


(a)
Non-Trading Activities

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

Weather Hedges. 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 entered into heating-degree day swaps for certain NGD Texas jurisdictions to mitigate the effect of fluctuations from normal weather on its results of operations and cash flows for the 2017–2018 winter heating season, which contained a bilateral dollar cap of $8 million . However, CenterPoint Energy did not enter into heating-degree day swaps for NGD jurisdictions for the 2015–2016 or 2016–2017 winter heating seasons. CenterPoint Energy entered into weather hedges for the Houston Electric service territory to mitigate the effect of fluctuations from normal weather on its results of operations and cash flows, which contained bilateral dollar caps of $7 million , $9 million and $9 million for the 2015–2016, 2016–2017 and 2017–2018 winter seasons, respectively. The swaps are based on cooling degree days and heating degree days at 10 -year normal weather. During both the three months ended June 30, 2017 and 2016 , CenterPoint Energy recognized no gains or losses related to these swaps. During the six months ended June 30, 2017 and 2016 , CenterPoint Energy recognized gains of $1 million and $3 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 January 2017, 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 10-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 January 2017. These forward interest rate agreements were designated as cash flow hedges. Accordingly, the effective portion of realized losses associated with the agreements, which totaled approximately  $0.5 million , is a component of accumulated other comprehensive income in 2017 and will be amortized over the life of the bonds.

To date in 2017, CenterPoint Energy entered into forward interest rate agreements with several counterparties, having an aggregate notional amount of $350 million . These agreements were executed to hedge, in part, volatility in the 5-year U.S. treasury rate by reducing CenterPoint Energy’s exposure to variability in cash flows relating to interest payments on a forecasted issuance of fixed rate debt in 2017. These forward interest rate agreements were designated as cash flow hedges. As of June 30, 2017 , an approximately $1 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 forward interest rate agreements will be recorded as a component of accumulated other comprehensive income and the ineffective portion, if any, will be recorded in income.


12


(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, 2017 and December 31, 2016 , while the last table provides a breakdown of the related income statement impacts for the three and six months ended June 30, 2017 and 2016 .
Fair Value of Derivative Instruments
 
 
June 30, 2017
Derivatives designated
as fair value hedges:
 
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
 
$
6

 
$
1

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

 

 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Natural gas derivatives (1) (2) (3)
 
Current Assets: Non-trading derivative assets
 
91

 
25

Natural gas derivatives (1) (2) (3)
 
Other Assets: Non-trading derivative assets
 
46

 

Natural gas derivatives (1) (2) (3)
 
Current Liabilities: Non-trading derivative liabilities
 
8

 
34

Natural gas derivatives (1) (2) (3)
 
Other Liabilities: Non-trading derivative liabilities
 
8

 
21

Indexed debt securities derivative
 
Current Liabilities
 

 
740

Total
 
$
160

 
$
821


(1)
The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 1,906  Bcf or a net 17  Bcf short position.  Certain natural gas contracts hedge basis risk only and lack a fixed price exposure.

(2)
Natural gas contracts are presented on a net basis in the Condensed Consolidated Balance Sheets as they are subject to master netting arrangements. This netting applies to all undisputed amounts due or past due and causes derivative assets (liabilities) to be ultimately presented net in a liability (asset) account within the Condensed Consolidated Balance Sheets. The net of total non-trading natural gas derivative assets and liabilities was a $89 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, impacted by collateral netting of $10 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, 2017
 
 
Gross Amounts   Recognized (1)
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amount Presented in the Consolidated Balance Sheets (2)
 
 
(in millions)
Current Assets: Non-trading derivative assets
 
$
106

 
$
(39
)
 
$
67

Other Assets: Non-trading derivative assets
 
54

 
(8
)
 
46

Current Liabilities: Non-trading derivative liabilities
 
(60
)
 
40

 
(20
)
Other Liabilities: Non-trading derivative liabilities
 
(21
)
 
17

 
(4
)
Total
 
$
79

 
$
10

 
$
89


(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


Fair Value of Derivative Instruments
 
 
December 31, 2016
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
 
$
79

 
$
14

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

 
5

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

 
43

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

 
5

Indexed debt securities derivative
 
Current Liabilities
 

 
717

Total (4)
 
$
105

 
$
784


(1)
The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 1,035  Bcf or a net 59  Bcf long position.  Of the net long position, basis swaps constitute a net 126  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 $24 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, impacted by collateral netting of $14 million .

(3)
Derivative Assets and Derivative Liabilities include no material amounts related to physical forward transactions with Enable.

(4)
No derivatives were designated as fair value hedges as of December 31, 2016.
Offsetting of Natural Gas Derivative Assets and Liabilities
 
 
December 31, 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
 
$
81

 
$
(30
)
 
$
51

Other Assets: Non-trading derivative assets
 
24

 
(5
)
 
19

Current Liabilities: Non-trading derivative liabilities
 
(57
)
 
16

 
(41
)
Other Liabilities: Non-trading derivative liabilities
 
(10
)
 
5

 
(5
)
Total
 
$
38

 
$
(14
)
 
$
24


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

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

Realized and unrealized gains and losses on natural gas derivatives are recognized in the Condensed Statements of Consolidated Income as revenue for physical sales derivative contracts and as natural gas expense for financial natural gas derivatives and physical purchase natural gas derivatives. Realized and unrealized gains and losses on indexed debt securities are recorded as Other Income (Expense) in the Condensed Statements of Consolidated Income.

Hedge ineffectiveness is recorded as a component of natural gas expense and primarily results from differences in the location of the derivative instrument and the hedged item. Basis ineffectiveness arises from natural gas market price differences between the locations of the hedged inventory and the delivery location specified in the hedge instruments. The impact of natural gas derivatives designated as fair value hedges, the related hedged item, and natural gas derivatives not designated as hedging instruments are presented in the table below.


14


Income Statement Impact of Derivative Activity
 
 
 
 
Three Months Ended June 30,
 
 
Income Statement Location
 
2017
 
2016
Derivatives designated as fair value hedges:
 
 
 
(in millions)
Natural gas derivatives
 
Gains (Losses) in Expenses: Natural Gas
 
$
3

 
$

Fair value adjustments for natural gas inventory designated as the hedged item
 
Gains (Losses) in Expenses: Natural Gas
 
(4
)
 

Total increase in Expenses: Natural Gas (1)
 
$
(1
)
 
$

 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Natural gas derivatives
 
Gains (Losses) in Revenues
 
$
36

 
$
(50
)
Natural gas derivatives
 
Gains (Losses) in Expenses: Natural Gas
 
(9
)
 
59

Indexed debt securities derivative
 
Gains (Losses) in Other Income (Expense)
 
(13
)
 
(130
)
Total - derivatives not designated as hedging instruments
 
$
14

 
$
(121
)

Income Statement Impact of Derivative Activity
 
 
 
 
Six Months Ended June 30,
 
 
Income Statement Location
 
2017
 
2016
Derivatives designated as fair value hedges:
 
 
 
(in millions)
Natural gas derivatives
 
Gains (Losses) in Expenses: Natural Gas
 
$
12

 
$

Fair value adjustments for natural gas inventory designated as the hedged item
 
Gains (Losses) in Expenses: Natural Gas
 
(14
)
 

Total increase in Expenses: Natural Gas (1)
 
$
(2
)
 
$

 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Natural gas derivatives
 
Gains (Losses) in Revenues
 
$
132

 
$
(30
)
Natural gas derivatives
 
Gains (Losses) in Expenses: Natural Gas
 
(82
)
 
48

Indexed debt securities derivative
 
Gains (Losses) in Other Income (Expense)
 
(23
)
 
(186
)
Total - derivatives not designated as hedging instruments
 
$
27

 
$
(168
)

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

(c)
Credit Risk Contingent Features

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, 2017 and December 31, 2016 was $1 million .  CenterPoint Energy posted no assets as collateral toward derivative instruments that contain credit risk contingent features as of either June 30, 2017 or December 31, 2016 .  If all derivative contracts (in a net liability position) containing credit risk contingent features were triggered as of June 30, 2017 and December 31, 2016 , $1 million and $-0- , respectively, 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:


15


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

Level 2: Inputs, other than quoted prices included in Level 1, are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability. Fair value assets and liabilities that are generally included in this category are derivatives with fair values based on inputs from actively quoted markets.  A market approach is utilized to value 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, 2017 , CenterPoint Energy’s Level 3 assets and liabilities are comprised of physical forward contracts and options and its indexed debt securities. Level 3 physical forward contracts are valued using a discounted cash flow model which includes illiquid forward price curve locations (ranging from $1.18 to $6.01 per MMBtu) 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 80% ) as an unobservable input.  CenterPoint Energy’s Level 3 physical forward contracts and options derivative assets and liabilities consist of both long and short positions (forwards and options) and their fair value is sensitive to 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’s Level 3 indexed debt securities are valued using a Black-Scholes option model and a discounted cash flow model, which use option volatility ( 12.5% ) and a projected dividend growth rate ( 7% ) as unobservable inputs. An increase in either volatilities or projected dividends will increase the value of the indexed debt securities, and a decrease in either the volatilities or projected dividends will decrease the value of the indexed debt securities.

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, 2017 , 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, 2017 and December 31, 2016 , and indicate the fair value hierarchy of the valuation techniques utilized by CenterPoint Energy to determine such fair value.
 
June 30, 2017
 
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
 
 
 
 
 
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
Corporate equities
$
1,023

 
$

 
$

 
$

 
$
1,023

Investments, including money
market funds (2)
66

 

 

 

 
66

Natural gas derivatives (3)
2

 
125

 
33

 
(47
)
 
113

Hedged portion of natural gas inventory
107

 

 

 

 
107

Total assets
$
1,198

 
$
125

 
$
33

 
$
(47
)
 
$
1,309

Liabilities
 

 
 

 
 

 
 

 
 

Indexed debt securities derivative
$

 
$

 
$
740

 
$

 
$
740

Natural gas derivatives (3)
2

 
74

 
5

 
(57
)
 
24

Total liabilities
$
2

 
$
74

 
$
745

 
$
(57
)
 
$
764

 
(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 $10 million posted with the same counterparties.


16


(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.
 
December 31, 2016
 
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
 
 
 
 
 
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
Corporate equities
$
956

 
$

 
$

 
$

 
$
956

Investments, including money
market funds (2)
77

 

 

 

 
77

Natural gas derivatives (3)
11

 
74

 
20

 
(35
)
 
70

Total assets
$
1,044

 
$
74

 
$
20

 
$
(35
)
 
$
1,103

Liabilities
 

 
 

 
 

 
 

 
 

Indexed debt securities derivative
$

 
$

 
$
717

 
$

 
$
717

Natural gas derivatives (3)
4

 
56

 
7

 
(21
)
 
46

Total liabilities
$
4

 
$
56

 
$
724

 
$
(21
)
 
$
763


(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 $14 million held by CES from 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.

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,
 
2017
 
2016
 
2017
 
2016
 
(in millions)
Beginning balance
$
(700
)
 
$
15

 
$
(704
)
 
$
12

Purchases (1)

 
12

 

 
12

Total gains (losses)
(6
)
 

 

 
4

Total settlements

 
(11
)
 
(4
)
 
(16
)
Transfers into Level 3
1

 

 
2

 
5

Transfers out of Level 3
(7
)
 

 
(6
)
 
(1
)
Ending balance (2)
$
(712
)
 
$
16

 
$
(712
)
 
$
16

The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date (3)
$
(9
)
 
$
3

 
$
(2
)
 
$
11


(1)
Mark-to-market value of Level 3 derivative assets acquired through the purchase of AEM was less than $1 million at the acquisition date.

(2)
CenterPoint Energy did not have significant Level 3 sales during either of the three or six months ended June 30, 2017 or 2016 .

(3)
During 2016, CenterPoint Energy transferred its indexed debt securities from Level 2 to Level 3 to reflect changes in the significance of the unobservable inputs used in the valuation. As of June 30, 2017 , the indexed debt securities liability

17


was $740 million . During the three and six months ended June 30, 2017 , there was a loss of $13 million and $23 million , respectively, on the indexed debt securities.

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, 2017
 
December 31, 2016
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
(in millions)
Financial liabilities:
 
 
 
 
 
 
 
Long-term debt
$
8,559

 
$
9,051

 
$
8,443

 
$
8,846


(8) Unconsolidated Affiliate

CenterPoint Energy has the ability to significantly influence the operating and financial policies of Enable, a publicly traded MLP, and, accordingly, accounts for its investment in Enable’s common 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 Series A Preferred Unit investment as presented in the Condensed Consolidated Balance Sheets as of June 30, 2017 and outstanding current accounts receivable from Enable.

Transactions with Enable:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in millions)
Reimbursement of transition services (1)
$
1

 
$
2

 
$
3

 
$
5

Natural gas expenses, including transportation and storage costs
24

 
24

 
57

 
57

Interest income related to notes receivable from Enable

 

 

 
1


(1)
Represents amounts billed under the Transition Agreements for certain support services provided to Enable. Actual transition services costs are recorded net of reimbursement.
 
June 30, 2017
 
December 31, 2016
 
(in millions)
Accounts receivable for amounts billed for transition services
$
1

 
$
1

Accounts payable for natural gas purchases from Enable
8

 
10


Limited Partner Interest in Enable (1) :
 
June 30, 2017
CenterPoint Energy
54.1
%
OGE
25.7
%

(1)
Excluding the Series A Preferred Units owned by CenterPoint Energy.

In November 2016, Enable completed a public offering of 11,500,000 common units of which 1,424,281 were sold by ArcLight Capital Partners, LLC. The common units issued and sold by Enable resulted in dilution of both CenterPoint Energy’s and OGE’s limited partner interest in Enable.

18



Enable Common, Subordinated and Series A Preferred Units Held:
 
June 30, 2017
 
Common
 
Subordinated
 
Series A Preferred
CenterPoint Energy
94,151,707

 
139,704,916

 
14,520,000

OGE
42,832,291

 
68,150,514

 


Generally, sales of more than 5% of the aggregate of the common units and subordinated units CenterPoint Energy owns in Enable or sales by OGE of more than 5% of the aggregate of the common units and subordinated units it owns in Enable are subject to mutual rights of first offer and first refusal.

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

Summarized unaudited consolidated income information for Enable is as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017

2016
 
 
(in millions)
Operating revenues
 
$
626

 
$
529

 
$
1,2