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
March 31, 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
March 31, 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.
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 March 31, 2017 and March 31, 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 and is evaluating the method of adoption.
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.
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.
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, closed the previously announced agreement to acquire 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.
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:
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|
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(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:
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Estimate Fair Value
|
|
Estimate Useful Life
|
|
|
(in millions)
|
|
(in years)
|
Customer relationships
|
|
$
|
25
|
|
|
15
|
Amortization expense related to the above identifiable intangible assets was less than
$1 million
for the
three
months ended
March 31, 2017
.
Revenues of approximately
$359 million
and operating income of approximately
$17 million
attributable to the acquisition are included in CenterPoint Energy’s Condensed Statements of Consolidated Income for the three months ended
March 31, 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.
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.
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|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
|
(in millions)
|
Operating Revenue
|
|
$
|
2,735
|
|
|
$
|
2,244
|
|
Net Income
|
|
192
|
|
|
153
|
|
(4)
Employee Benefit Plans
CenterPoint Energy’s net periodic cost includes the following components relating to pension and postretirement benefits:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
Pension
Benefits
|
|
Postretirement
Benefits
|
|
Pension
Benefits
|
|
Postretirement
Benefits
|
|
(in millions)
|
Service cost
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
1
|
|
Interest cost
|
22
|
|
|
4
|
|
|
23
|
|
|
4
|
|
Expected return on plan assets
|
(24
|
)
|
|
(1
|
)
|
|
(25
|
)
|
|
(2
|
)
|
Amortization of prior service cost (credit)
|
2
|
|
|
(1
|
)
|
|
2
|
|
|
—
|
|
Amortization of net loss
|
14
|
|
|
—
|
|
|
16
|
|
|
—
|
|
Net periodic cost
(1)
|
$
|
23
|
|
|
$
|
2
|
|
|
$
|
25
|
|
|
$
|
3
|
|
|
|
(1)
|
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.
|
CenterPoint Energy’s changes in accumulated comprehensive loss related to defined benefit and postretirement plans are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
Pension and Postretirement Plans
|
|
(in millions)
|
Beginning Balance
|
$
|
(72
|
)
|
|
$
|
(65
|
)
|
Amounts reclassified from accumulated other comprehensive loss:
|
|
|
|
Actuarial losses
(1)
|
2
|
|
|
2
|
|
Tax expense
|
(1
|
)
|
|
(1
|
)
|
Net current period other comprehensive income
|
1
|
|
|
1
|
|
Ending Balance
|
$
|
(71
|
)
|
|
$
|
(64
|
)
|
|
|
(1)
|
This accumulated other comprehensive component is 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
$2 million
was contributed during the
three
months ended
March 31, 2017
.
CenterPoint Energy expects to contribute a total of approximately
$16 million
to its postretirement benefit plan in
2017
, of which approximately
$4 million
was contributed during the
three
months ended
March 31, 2017
.
(5)
Regulatory Accounting
As of
March 31, 2017
, Houston Electric has not recognized an allowed equity return of
$322 million
because such return will be recognized as it is recovered in rates. During the
three
months ended
March 31, 2017
and
2016
, Houston Electric recognized approximately
$7 million
and
$13 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.
|
|
(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 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
and
$9 million
for the 2015–2016 and 2016–2017 winter seasons, respectively. The swaps are based on cooling degree days and heating degree days at
10
-year normal weather. During the
three
months ended
March 31, 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.
In March and April 2017, CenterPoint Energy entered into forward interest rate agreements with several counterparties, having an aggregate notional amount of
$250 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 March 31, 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 will be recorded in income.
|
|
(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
March 31, 2017
and
December 31, 2016
, while the last table provides a breakdown of the related income statement impacts for the
three
months ended
March 31, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Derivative Instruments
|
|
|
March 31, 2017
|
|
|
Balance Sheet
Location
|
|
Derivative
Assets
Fair Value
|
|
Derivative
Liabilities
Fair Value
|
|
|
|
|
(in millions)
|
Derivatives designated as fair value hedges:
|
|
|
|
|
|
|
Natural gas derivatives
(1) (2) (3)
|
|
Current Liabilities: Non-trading derivative liabilities
|
|
$
|
1
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Natural gas derivatives
(1) (2) (3)
|
|
Current Assets: Non-trading derivative assets
|
|
78
|
|
|
15
|
|
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
|
|
33
|
|
|
58
|
|
Natural gas derivatives
(1) (2) (3)
|
|
Other Liabilities: Non-trading derivative liabilities
|
|
10
|
|
|
28
|
|
Indexed debt securities derivative
|
|
Current Liabilities
|
|
—
|
|
|
727
|
|
Total
|
|
$
|
168
|
|
|
$
|
833
|
|
|
|
(1)
|
The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling
1,905
Bcf or a net
114
Bcf long position. Of the net long position, basis swaps constitute a net
186
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
$74 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
$12 million
.
|
|
(3)
|
Derivative Assets and Derivative Liabilities include no material amounts related to physical forward transactions with Enable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Natural Gas Derivative Assets and Liabilities
|
|
|
March 31, 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
|
|
$
|
112
|
|
|
$
|
(48
|
)
|
|
$
|
64
|
|
Other Assets: Non-trading derivative assets
|
|
56
|
|
|
(10
|
)
|
|
46
|
|
Current Liabilities: Non-trading derivative liabilities
|
|
(78
|
)
|
|
50
|
|
|
(28
|
)
|
Other Liabilities: Non-trading derivative liabilities
|
|
(28
|
)
|
|
20
|
|
|
(8
|
)
|
Total
|
|
$
|
62
|
|
|
$
|
12
|
|
|
$
|
74
|
|
|
|
(1)
|
Gross amounts recognized include some derivative assets and liabilities that are not subject to master netting arrangements.
|
|
|
(2)
|
The derivative assets and liabilities on the Condensed Consolidated Balance Sheets exclude accounts receivable or accounts payable that, should they exist, could be used as offsets to these balances in the event of a default.
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Derivative Instruments
|
|
|
December 31, 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 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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement Impact of Derivative Activity
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Income Statement Location
|
|
2017
|
|
2016
|
|
|
|
|
(in millions)
|
Derivatives designated as fair value hedges:
|
|
|
|
|
|
|
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
|
|
$
|
96
|
|
|
$
|
20
|
|
Natural gas derivatives
|
|
Gains (Losses) in Expenses: Natural Gas
|
|
(67
|
)
|
|
(11
|
)
|
Indexed debt securities derivative
|
|
Gains (Losses) in Other Income (Expense)
|
|
(10
|
)
|
|
(56
|
)
|
Total - derivatives not designated as hedging instruments
|
|
$
|
19
|
|
|
$
|
(47
|
)
|
|
|
(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
March 31, 2017
and
December 31, 2016
was
$2 million
and
$1 million
, respectively. CenterPoint Energy posted
no
assets as collateral towards derivative instruments that contain credit risk contingent features as of either
March 31, 2017
or
December 31, 2016
. If all derivative contracts (in a net liability position) containing credit risk contingent features were triggered as of
March 31, 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:
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
March 31, 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
$1.90
to
$6.05
per MMBtu) as an unobservable input. Level 3 options are valued through Black-Scholes (including forward start) option models which include option volatilities (all zero volatility options as of
March 31, 2017
) 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 (
16%
) 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
three
months ended
March 31, 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
March 31, 2017
and
December 31, 2016
, and indicate the fair value hierarchy of the valuation techniques utilized by CenterPoint Energy to determine such fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 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
|
$
|
1,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,000
|
|
Investments, including money
market funds
(2)
|
71
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
71
|
|
Natural gas derivatives
(3)
|
—
|
|
|
129
|
|
|
39
|
|
|
(58
|
)
|
|
110
|
|
Hedged portion of natural gas inventory
|
86
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
86
|
|
Total assets
|
$
|
1,157
|
|
|
$
|
129
|
|
|
$
|
39
|
|
|
$
|
(58
|
)
|
|
$
|
1,267
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indexed debt securities derivative
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
727
|
|
|
$
|
—
|
|
|
$
|
727
|
|
Natural gas derivatives
(3)
|
—
|
|
|
94
|
|
|
12
|
|
|
(70
|
)
|
|
36
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
94
|
|
|
$
|
739
|
|
|
$
|
(70
|
)
|
|
$
|
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
$12 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31,
|
|
2017
|
|
2016
|
|
(in millions)
|
Beginning balance
|
$
|
(704
|
)
|
|
$
|
12
|
|
Purchases
(1)
|
—
|
|
|
—
|
|
Total gains
|
6
|
|
|
4
|
|
Total settlements
|
(4
|
)
|
|
(5
|
)
|
Transfers into Level 3
|
1
|
|
|
5
|
|
Transfers out of Level 3
|
1
|
|
|
(1
|
)
|
Ending balance
(2)
|
$
|
(700
|
)
|
|
$
|
15
|
|
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)
|
$
|
5
|
|
|
$
|
8
|
|
|
|
(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
months ended
March 31, 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 March 31, 2017, the indexed debt securities liability was
$727 million
. During the three months ended March 31, 2017, there was a loss of
$10 million
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
(in millions)
|
Financial liabilities:
|
|
|
|
|
|
|
|
Long-term debt
|
$
|
8,563
|
|
|
$
|
8,986
|
|
|
$
|
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
March 31, 2017
and outstanding current accounts receivable from Enable.
Transactions with Enable:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
(in millions)
|
Reimbursement of transition services
(1)
|
$
|
2
|
|
|
$
|
3
|
|
Natural gas expenses, including transportation and storage costs
|
33
|
|
|
33
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
(in millions)
|
Accounts receivable for amounts billed for transition services
|
$
|
2
|
|
|
$
|
1
|
|
Accounts payable for natural gas purchases from Enable
|
11
|
|
|
10
|
|
Limited Partner Interest in Enable
(1)
:
|
|
|
|
|
March 31, 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.
Enable Common, Subordinated and Preferred Units Held:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Common
|
|
Subordinated
|
|
Series A Preferred
|
CenterPoint Energy
|
94,151,707
|
|
|
139,704,916
|
|
|
14,520,000
|
|
OGE
|
42,832,291
|
|
|
68,150,514
|
|
|
—
|
|
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 March 31,
|
|
|
2017
|
|
2016
|
|
|
(in millions)
|
Operating revenues
|
|
$
|
666
|
|
|
$
|
509
|
|
Cost of sales, excluding depreciation and amortization
|
|
308
|
|
|
195
|
|
Operating income
|
|
140
|
|
|
103
|
|
Net income attributable to Enable
|
|
111
|
|
|
86
|
|
Reconciliation of Equity in Earnings, net:
|
|
|
|
|
CenterPoint Energy’s interest
|
|
$
|
60
|
|
|
$
|
48
|
|
Basis difference amortization
(1)
|
|
12
|
|
|
12
|
|
CenterPoint Energy’s equity in earnings, net
|
|
$
|
72
|
|
|
$
|
60
|
|
|
|
(1)
|
Equity in earnings of unconsolidated affiliates includes CenterPoint Energy’s share of Enable’s earnings adjusted for the amortization of the basis difference of CenterPoint Energy’s original investment in Enable and its underlying equity in Enable’s net assets. The basis difference is amortized over approximately
33
years, the average life of the assets to which the basis difference is attributed.
|
Summarized unaudited consolidated balance sheet information for Enable is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31, 2016
|
|
|
(in millions)
|
Current assets
|
|
$
|
375
|
|
|
$
|
396
|
|
Non-current assets
|
|
10,786
|
|
|
10,816
|
|
Current liabilities
|
|
279
|
|
|
362
|
|
Non-current liabilities
|
|
3,111
|
|
|
3,056
|
|
Non-controlling interest
|
|
12
|
|
|
12
|
|
Preferred equity
|
|
362
|
|
|
362
|
|
Enable partners’ equity
|
|
7,397
|
|
|
7,420
|
|
Reconciliation of Equity Method Investment in Enable:
|
|
|
|
|
CenterPoint Energy’s ownership interest in Enable partners’ capital
|
|
$
|
4,053
|
|
|
$
|
4,067
|
|
CenterPoint Energy’s basis difference
|
|
(1,551
|
)
|
|
(1,562
|
)
|
CenterPoint Energy’s equity method investment in Enable
|
|
$
|
2,502
|
|
|
$
|
2,505
|
|
Distributions Received from Unconsolidated Affiliate:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
(in millions)
|
Investment in Enable’s common and subordinated units
|
$
|
74
|
|
|
$
|
74
|
|
Investment in Enable’s Series A Preferred Units
|
9
|
|
|
—
|
|
As of
March 31, 2017
, CERC Corp. and OGE also own
40%
and
60%
, respectively, of the incentive distribution rights held by the general partner of Enable. Enable is expected to pay a minimum quarterly distribution of
$0.2875
per unit on its outstanding units (other than the Series A Preferred Units) to the extent it has sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to its general partner and its affiliates, within 60 days after the end of each quarter. If cash distributions to Enable’s unitholders exceed
$0.330625
per unit (other than the Series A Preferred Units) in any quarter, the general partner will receive increasing percentages or incentive distributions rights, up to
50%
, of the cash Enable distributes in excess of that amount. In certain circumstances the general partner of Enable will have the right to reset the minimum quarterly distribution and the target distribution levels at which the incentive distributions receive increasing percentages to higher
levels based on Enable’s cash distributions at the time of the exercise of this reset election. To date, no incentive distributions have been made.
(9)
Goodwill
Goodwill by reportable business segment as of
December 31, 2016
and changes in the carrying amount of goodwill as of
March 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
AEM Acquisition (1)
|
|
March 31,
2017
|
|
|
(in millions)
|
|
Natural Gas Distribution
|
$
|
746
|
|
|
$
|
—
|
|
|
$
|
746
|
|
|
Energy Services
|
105
|
|
(2)
|
5
|
|
|
110
|
|
(2)
|
Other Operations
|
11
|
|
|
—
|
|
|
11
|
|
|
Total
|
$
|
862
|
|
|
$
|
5
|
|
|
$
|
867
|
|
|
(1) See Note 3.
(2) Amount presented is net of the accumulated goodwill impairment charge of
$252 million
recorded in 2012.
(10)
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 Condensed 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 as of
March 31, 2017
. Each ZENS 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 are adjusted for certain corporate events. As of
March 31, 2017
, the reference shares for each ZENS consisted of
0.5
share of TW Common,
0.0625
share of Time Common and
0.061382
share of Charter Common, and the contingent principal balance was
$512 million
.
On October 22, 2016, AT&T announced that it had entered into a definitive agreement to acquire TW in a stock and cash transaction. On February 15, 2017, TW shareholders approved the announced transaction with AT&T. Pursuant to the merger agreement, upon closing of the merger, TW shareholders would receive for each of their shares of TW Common an estimated implied value of
$107.50
, comprised of
$53.75
per share in cash and
$53.75
per share in AT&T Common. The stock portion will be subject to a collar such that TW shareholders will receive
1.437
shares of AT&T Common if AT&T Common’s average stock price is below
$37.411
at closing and
1.3
shares of AT&T Common if AT&T Common’s average stock price is above
$41.349
at closing. Cash received for the TW Common reference shares would subsequently be distributed to ZENS holders, which is expected to reduce the contingent principal balance, and reference shares would consist of Charter Common, Time Common and AT&T Common. AT&T has publicly announced that the merger is expected to close by the end of 2017.
(11)
Short-term Borrowings and Long-term Debt
|
|
(a)
|
Short-term Borrowings
|
Inventory Financing
. NGD currently has AMAs associated with its utility distribution service in Arkansas, north Louisiana and Oklahoma that extend through 2020. Pursuant to the provisions of the agreements, NGD sells natural gas and agrees to repurchase an equivalent amount of natural gas during the winter heating seasons at the same cost, plus a financing charge. These transactions are accounted for as an inventory financing and had an associated principal obligation of
$-0-
and
$35 million
as of
March 31, 2017
and
December 31, 2016
, respectively.
Debt Retirements
. In February 2017, CenterPoint Energy retired
$250 million
aggregate principal amount of its
5.95%
senior notes at their maturity. The retirement of senior notes was financed by the issuance of commercial paper.
Debt Issuances.
During the three months ended March 31, 2017, Houston Electric issued the following general mortgage bonds:
|
|
|
|
|
|
|
|
|
|
Issuance Date
|
|
Aggregate Principal Amount
|
|
Interest Rate
|
|
Maturity Date
|
|
|
(in millions)
|
|
|
|
|
January 2017
|
|
$
|
300
|
|
|
3.00%
|
|
2027
|
The proceeds from the issuance of these bonds were used to repay short-term debt and for general limited liability company purposes.
Credit Facilities.
As of
March 31, 2017
and
December 31, 2016
, CenterPoint Energy, Houston Electric and CERC Corp. had the following revolving credit facilities and utilization of such facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
Size of
Facility
|
|
Loans
|
|
Letters
of Credit
|
|
Commercial
Paper
|
|
Loans
|
|
Letters
of Credit
|
|
Commercial
Paper
|
|
|
(in millions)
|
|
CenterPoint Energy
|
$
|
1,600
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
1,032
|
|
(1)
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
835
|
|
(1)
|
Houston Electric
|
300
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
CERC Corp.
|
600
|
|
|
—
|
|
|
—
|
|
|
599
|
|
(2)
|
—
|
|
|
4
|
|
|
569
|
|
(2)
|
Total
|
$
|
2,500
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
1,631
|
|
|
$
|
—
|
|
|
$
|
14
|
|
|
$
|
1,404
|
|
|
|
|
(1)
|
Weighted average interest rate was
1.24%
and
1.04%
as of
March 31, 2017
and
December 31, 2016
, respectively.
|
|
|
(2)
|
Weighted average interest rate was
1.27%
and
1.03%
as of
March 31, 2017
and
December 31, 2016
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Execution Date
|
|
Company
|
|
Size of
Facility
|
|
Draw Rate of LIBOR plus
(1)
|
|
Financial Covenant Limit on Debt to Capital Ratio
|
|
Debt to Capital
Ratio as of
March 31, 2017
(2)
|
|
Termination Date
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
March 3, 2016
|
|
CenterPoint Energy
|
|
$
|
1,600
|
|
|
1.250%
|
|
65%
|
(3)
|
56.6%
|
|
March 3, 2021
|
March 3, 2016
|
|
Houston Electric
|
|
300
|
|
|
1.125%
|
|
65%
|
(3)
|
50.2%
|
|
March 3, 2021
|
March 3, 2016
|
|
CERC Corp.
|
|
600
|
|
|
1.250%
|
|
65%
|
|
35.8%
|
|
March 3, 2021
|
|
|
(1)
|
Based on current credit ratings.
|
|
|
(2)
|
As defined in the revolving credit facility agreement, excluding Securitization Bonds.
|
|
|
(3)
|
The financial covenant limit will temporarily increase from
65%
to
70%
if Houston Electric experiences damage from a natural disaster in its service territory and CenterPoint Energy certifies to the administrative agent that Houston Electric has incurred system restoration costs reasonably likely to exceed
$100 million
in a consecutive
twelve
-month period, all or part of which Houston Electric intends to seek to recover through securitization financing. Such temporary increase in the financial covenant would be in effect from the date CenterPoint Energy delivers its certification until the earliest to occur of (i) the completion of the securitization financing, (ii) the first anniversary of CenterPoint Energy’s certification or (iii) the revocation of such certification.
|
CenterPoint Energy, Houston Electric and CERC Corp. were in compliance with all financial debt covenants as of
March 31, 2017
.
(12)
Income Taxes
The effective tax rate reported for both the three months ended March 31, 2017 and 2016 was
36%
.
CenterPoint Energy reported no uncertain tax liability as of March 31, 2017 and expects no significant change to the uncertain tax liability over the next twelve months. Tax years through 2014 have been audited and settled with the IRS. For the 2015-2017 tax years, CenterPoint Energy is a participant in the IRS’s Compliance Assurance Process.
(13)
Commitments and Contingencies
|
|
(a)
|
Natural Gas Supply Commitments
|
Natural gas supply commitments include natural gas contracts related to CenterPoint Energy’s Natural Gas Distribution and Energy Services business segments, which have various quantity requirements and durations, that are not classified as non-trading derivative assets and liabilities in CenterPoint Energy’s Condensed Consolidated Balance Sheets as of
March 31, 2017
and
December 31, 2016
as these contracts meet an exception as “normal purchases contracts” or do not meet the definition of a derivative. Natural gas supply commitments also include natural gas transportation contracts that do not meet the definition of a derivative. As of
March 31, 2017
, minimum payment obligations for natural gas supply commitments are approximately:
|
|
|
|
|
|
(in millions)
|
Remaining nine months of 2017
|
$
|
298
|
|
2018
|
490
|
|
2019
|
334
|
|
2020
|
169
|
|
2021
|
78
|
|
2022 and beyond
|
87
|
|
|
|
(b)
|
Legal, Environmental and Other Matters
|
Legal Matters
Gas Market Manipulation Cases.
CenterPoint Energy, Houston Electric or their predecessor, Reliant Energy, and certain of their former subsidiaries have been named as defendants in certain lawsuits described below. Under a master separation agreement between CenterPoint Energy and a former subsidiary, RRI, CenterPoint Energy and its subsidiaries are entitled to be indemnified by RRI and its successors for any losses, including certain attorneys’ fees and other costs, arising out of these lawsuits. In May 2009, RRI sold its Texas retail business to a subsidiary of NRG and RRI changed its name to RRI Energy, Inc. In December 2010, Mirant Corporation merged with and became a wholly-owned subsidiary of RRI, and RRI changed its name to GenOn. In December 2012, NRG acquired GenOn through a merger in which GenOn became a wholly-owned subsidiary of NRG. None of the sale of the retail business, the merger with Mirant Corporation, or the acquisition of GenOn by NRG alters RRI’s (now GenOn’s) contractual obligations to indemnify CenterPoint Energy and its subsidiaries, including Houston Electric, for certain liabilities, including their indemnification obligations regarding the gas market manipulation litigation.
A large number of lawsuits were filed against numerous gas market participants in a number of federal and western state courts in connection with the operation of the natural gas markets in 2000–2002. CenterPoint Energy and its affiliates have since been released or dismissed from all such cases. CES, a subsidiary of CERC Corp., was a defendant in a case now pending in federal court in Nevada alleging a conspiracy to inflate Wisconsin natural gas prices in 2000–2002. On May 24, 2016, the district court granted CES’s motion for summary judgment, dismissing CES from the case. The plaintiffs have appealed that ruling. CenterPoint Energy and CES intend to continue vigorously defending against the plaintiffs’ claims. CenterPoint Energy does not expect the ultimate outcome of this matter to have a material adverse effect on its financial condition, results of operations or cash flows.
GenOn has publicly disclosed that it may be unable to continue as a going concern and is exploring various options, including negotiations with creditors and lessors, refinancing, potential sale of assets, as well as the possibility of filing for protection under Chapter 11 of the U.S. Bankruptcy Code. If GenOn were unable to meet its indemnity obligations or satisfy a liability that has been assumed in the gas market manipulation litigation, then CenterPoint Energy, Houston Electric or CERC could incur liability and be responsible for satisfying the liability.
Environmental Matters
MGP Sites.
CERC and its predecessors operated MGPs in the past. With respect to certain Minnesota MGP sites, CERC has completed state-ordered remediation and continues state-ordered monitoring and water treatment. As of
March 31, 2017
, CERC had a recorded liability of
$7 million
for continued monitoring and any future remediation required by regulators in Minnesota. The estimated range of possible remediation costs for the sites for which CERC believes it may have responsibility was
$5 million
to
$30 million
based on remediation continuing for
30
to
50
years. The cost estimates are based on studies of a site or industry average costs for remediation of sites of similar size. The actual remediation costs will depend on the number of sites to be remediated, the participation of other PRPs, if any, and the remediation methods used.
In addition to the Minnesota sites, the Environmental Protection Agency and other regulators have investigated MGP sites that were owned or operated by CERC or may have been owned by one of its former affiliates. CenterPoint Energy does not expect the ultimate outcome of these matters to have a material adverse effect on the financial condition, results of operations or cash flows of either CenterPoint Energy or CERC.
Asbestos.
Some facilities owned by CenterPoint Energy or its predecessors contain or have contained asbestos insulation and other asbestos-containing materials. CenterPoint Energy and its subsidiaries are from time to time named, along with numerous others, as defendants in lawsuits filed by a number of individuals who claim injury due to exposure to asbestos, and CenterPoint Energy anticipates that additional claims may be asserted in the future. Although their ultimate outcome cannot be predicted at this time, CenterPoint Energy does not expect these matters, either individually or in the aggregate, to have a material adverse effect on CenterPoint Energy’s financial condition, results of operations or cash flows.
Other Environmental.
From time to time CenterPoint Energy identifies the presence of environmental contaminants during its operations or on property where its predecessor companies have conducted operations. Other such sites involving contaminants may be identified in the future. CenterPoint Energy has and expects to continue to remediate identified sites consistent with its legal obligations. From time to time CenterPoint Energy has received notices from regulatory authorities or others regarding its status as a PRP in connection with sites found to require remediation due to the presence of environmental contaminants. In addition, CenterPoint Energy has been named from time to time as a defendant in litigation related to such sites. Although the ultimate outcome of such matters cannot be predicted at this time, CenterPoint Energy does not expect these matters, either individually or in the aggregate, to have a material adverse effect on CenterPoint Energy’s financial condition, results of operations or cash flows.
Other Proceedings
CenterPoint Energy is involved in other legal, environmental, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies regarding matters arising in the ordinary course of business. From time to time, CenterPoint Energy is also a defendant in legal proceedings with respect to claims brought by various plaintiffs against broad groups of participants in the energy industry. Some of these proceedings involve substantial amounts. CenterPoint Energy regularly analyzes current information and, as necessary, provides accruals for probable and reasonably estimable liabilities on the eventual disposition of these matters. CenterPoint Energy does not expect the disposition of these matters to have a material adverse effect on CenterPoint Energy’s financial condition, results of operations or cash flows.
(14)
Earnings Per Share
The following table reconciles numerators and denominators of CenterPoint Energy’s basic and diluted earnings per share calculations:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
(in millions, except share and per share amounts)
|
Net income
|
$
|
192
|
|
|
$
|
154
|
|
|
|
|
|
Basic weighted average shares outstanding
|
430,794,000
|
|
|
430,407,000
|
|
Plus: Incremental shares from assumed conversions:
|
|
|
|
Restricted stock
|
2,554,000
|
|
|
2,187,000
|
|
Diluted weighted average shares
|
433,348,000
|
|
|
432,594,000
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
Net income
|
$
|
0.45
|
|
|
$
|
0.36
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
Net income
|
$
|
0.44
|
|
|
$
|
0.36
|
|
(15)
Reportable Business Segments
CenterPoint Energy’s determination of reportable business segments considers the strategic operating units under which CenterPoint Energy manages sales, allocates resources and assesses performance of various products and services to wholesale or retail customers in differing regulatory environments. CenterPoint Energy uses operating income as the measure of profit or loss for its business segments other than Midstream Investments, where it uses equity in earnings of unconsolidated affiliates.
CenterPoint Energy’s reportable business segments include the following: Electric Transmission & Distribution, Natural Gas Distribution, Energy Services, Midstream Investments and Other Operations. The electric transmission and distribution function (Houston Electric) is reported in the Electric Transmission & Distribution business segment. Natural Gas Distribution consists of intrastate natural gas sales to, and natural gas transportation and distribution for, residential, commercial, industrial and institutional customers. Energy Services represents CenterPoint Energy’s non-rate regulated gas sales and services operations. Midstream Investments consists of CenterPoint Energy’s equity investment in Enable. Other Operations consists primarily of other corporate operations which support all of CenterPoint Energy’s business operations.
Financial data for business segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2017
|
|
|
|
|
Revenues from
External
Customers
|
|
Net
Intersegment
Revenues
|
|
Operating
Income (Loss)
|
|
Total Assets as of March 31, 2017
|
|
|
(in millions)
|
|
Electric Transmission & Distribution
|
$
|
639
|
|
(1)
|
$
|
—
|
|
|
$
|
78
|
|
|
$
|
10,245
|
|
|
Natural Gas Distribution
|
907
|
|
|
9
|
|
|
164
|
|
|
5,975
|
|
|
Energy Services
|
1,185
|
|
|
11
|
|
|
35
|
|
|
1,326
|
|
|
Midstream Investments
(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
2,502
|
|
|
Other Operations
|
4
|
|
|
—
|
|
|
(3
|
)
|
|
2,679
|
|
(3)
|
Eliminations
|
—
|
|
|
(20
|
)
|
|
—
|
|
|
(796
|
)
|
|
Consolidated
|
$
|
2,735
|
|
|
$
|
—
|
|
|
$
|
274
|
|
|
$
|
21,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2016
|
|
|
|
|
Revenues from
External
Customers
|
|
Net
Intersegment
Revenues
|
|
Operating
Income
|
|
Total Assets as of December 31, 2016
|
|
|
(in millions)
|
|
Electric Transmission & Distribution
|
$
|
660
|
|
(1)
|
$
|
—
|
|
|
$
|
83
|
|
|
$
|
10,211
|
|
|
Natural Gas Distribution
|
888
|
|
|
7
|
|
|
160
|
|
|
6,099
|
|
|
Energy Services
|
432
|
|
|
7
|
|
|
6
|
|
|
1,102
|
|
|
Midstream Investments
(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
2,505
|
|
|
Other Operations
|
4
|
|
|
—
|
|
|
1
|
|
|
2,681
|
|
(3)
|
Eliminations
|
—
|
|
|
(14
|
)
|
|
—
|
|
|
(769
|
)
|
|
Consolidated
|
$
|
1,984
|
|
|
$
|
—
|
|
|
$
|
250
|
|
|
$
|
21,829
|
|
|
|
|
(1)
|
Electric Transmission & Distribution revenues from major customers are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
|
(in millions)
|
Affiliates of NRG
|
|
$
|
152
|
|
|
$
|
145
|
|
Affiliates of Energy Future Holdings Corp.
|
|
47
|
|
|
45
|
|
|
|
(2)
|
Midstream Investments’ equity earnings are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
|
(in millions)
|
Enable
|
|
$
|
72
|
|
|
$
|
60
|
|
|
|
(3)
|
Included in total assets of Other Operations as of
March 31, 2017
and
December 31, 2016
are pension and other postemployment-related regulatory assets of
$745 million
and
$759 million
, respectively.
|
(16)
Subsequent Events
On
April 27, 2017
, CenterPoint Energy’s board of directors declared a regular quarterly cash dividend of
$0.2675
per share of common stock payable on
June 9, 2017
, to shareholders of record as of the close of business on
May 16, 2017
.
On
May 2, 2017
, Enable declared a quarterly cash distribution of
$0.318
per unit on all of its outstanding common and subordinated units for the quarter ended
March 31, 2017
. Accordingly, CERC Corp. expects to receive a cash distribution of approximately
$74 million
from Enable in the second quarter of 2017 to be made with respect to CERC Corp.’s investment in common and subordinated units of Enable for the first quarter of 2017.
On
May 2, 2017
, Enable declared a quarterly cash distribution of
$0.625
per Series A Preferred Unit for the quarter ended
March 31, 2017
. Accordingly, CenterPoint Energy expects to receive a cash distribution of approximately
$9 million
from Enable in the second quarter of 2017 to be made with respect to CenterPoint Energy’s investment in Series A Preferred Units of Enable for the first quarter of 2017.