10-Q

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________

FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
FOR THE TRANSITION PERIOD FROM __________________ TO __________________

Commission file number 1-31447
_____________________________________
CenterPoint Energy, Inc.
(Exact name of registrant as specified in its charter)

Texas
74-0694415
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
1111 Louisiana
 
Houston, Texas 77002
(713) 207-1111
(Address and zip code of principal executive offices)
(Registrant’s telephone number, including area code)
_____________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
      Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No þ
 
As of October 23, 2015, CenterPoint Energy, Inc. had 430,262,191 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 SEPTEMBER 30, 2015

TABLE OF CONTENTS

PART I.
 
FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)
 
 
 
 
 
 
 
 
 
Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)
 
 
 
 
 
 
 
 
 
September 30, 2015 and December 31, 2014 (unaudited)
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015 and 2014 (unaudited)
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
PART II.
 
OTHER INFORMATION
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.
 


i


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

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

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

the performance of Enable Midstream Partners, LP (Enable), the amount of cash distributions we receive from Enable, and the value of our interest in Enable, and factors that may have a material impact on such performance, cash distributions and value, including factors such as:

competitive conditions in the midstream industry, and actions taken by Enable’s customers and competitors, including the extent and timing of the entry of additional competition in the markets served by Enable;

the timing and extent of changes in the supply of natural gas and associated commodity prices, particularly prices of natural gas and natural gas liquids (NGLs), the competitive effects of the available pipeline capacity in the regions served by Enable, and the effects of geographic and seasonal commodity price differentials, including the effects of these circumstances on re-contracting available capacity on Enable’s interstate pipelines;

the demand for crude oil, natural gas, NGLs and transportation and storage services;

environmental and other governmental regulations, including the availability of drilling permits and the regulation of hydraulic fracturing;

recording of non-cash goodwill, long-lived asset or other than temporary impairment charges by or related to Enable;

changes in tax status;

access to growth capital; and

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

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

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

problems with regulatory approval, construction, implementation of necessary technology or other issues with respect to major capital projects that result in delays or in cost overruns that cannot be recouped in rates;

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

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

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

our ability to mitigate weather impacts through normalization or rate mechanisms, and the effectiveness of such mechanisms;

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

local, state and federal legislative and regulatory actions or developments relating to the environment, including those related to global climate change;


ii


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

the impact of unplanned facility outages;

any direct or indirect effects on our facilities, operations and financial condition resulting from terrorism, cyber-attacks, data security breaches or other attempts to disrupt our businesses or the businesses of third parties, or other catastrophic events;

our ability to invest planned capital;

our ability to control operation and maintenance costs;

the sufficiency of our insurance coverage, including availability, cost, coverage and terms;

the investment performance of 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;

actions by credit rating agencies;

inability of various counterparties to meet their obligations to us;

non-payment for our services due to financial distress of our customers;

the ability of retail electric providers (REPs), including REP affiliates of NRG Energy, Inc. (NRG) and Energy Future Holdings Corp., to satisfy their obligations to us and our subsidiaries;

our potential business strategies, including restructurings, joint ventures and acquisitions or dispositions of assets or businesses, which we cannot assure you will be completed or will have the anticipated benefits to us;

acquisition and merger activities involving us or our competitors;

our or Enable’s ability to recruit, effectively transition and retain management and key employees and maintain good labor relations;

the ability of GenOn Energy, Inc. (formerly known as RRI Energy, Inc., Reliant Energy, Inc. and Reliant Resources, Inc.), a wholly-owned subsidiary of NRG, and its subsidiaries to satisfy their obligations to us, including indemnity obligations, or obligations in connection with the contractual arrangements pursuant to which we are their guarantor;

the outcome of litigation;

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;

effectiveness of our risk management activities;

the effect of changes in and application of accounting standards and pronouncements; and

other factors we discuss in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2014, which is incorporated herein by reference, and other reports we file from time to time with the Securities and Exchange Commission.

You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement.

iii

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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Revenues
$
1,630

 
$
1,807

 
$
5,595

 
$
6,854

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Natural gas
527

 
702

 
2,410

 
3,625

Operation and maintenance
479

 
493

 
1,465

 
1,441

Depreciation and amortization
268

 
293

 
724

 
784

Taxes other than income taxes
91

 
86

 
289

 
290

Total
1,365

 
1,574

 
4,888

 
6,140

Operating Income
265

 
233

 
707

 
714

 
 
 
 
 
 
 
 
Other Income (Expense):
 
 
 
 
 
 
 
Gain (loss) on marketable securities
(134
)
 
31

 
(72
)
 
73

Gain (loss) on indexed debt securities
129

 
(22
)
 
62

 
(29
)
Interest and other finance charges
(88
)
 
(88
)
 
(266
)
 
(261
)
Interest on transition and system restoration bonds
(25
)
 
(30
)
 
(80
)
 
(90
)
Equity in earnings (losses) of unconsolidated affiliates, net
(794
)
 
79

 
(699
)
 
241

Other, net
12

 
10

 
36

 
28

Total
(900
)
 
(20
)
 
(1,019
)
 
(38
)
 
 
 
 
 
 
 
 
Income (Loss) Before Income Taxes
(635
)
 
213

 
(312
)
 
676

Income tax expense (benefit)
(244
)
 
70

 
(129
)
 
241

Net Income (Loss)
$
(391
)
 
$
143

 
$
(183
)
 
$
435

 
 
 
 
 
 
 
 
Basic Earnings (Loss) Per Share
$
(0.91
)
 
$
0.33

 
$
(0.43
)
 
$
1.01

 
 
 
 
 
 
 
 
Diluted Earnings (Loss) Per Share
$
(0.91
)
 
$
0.33

 
$
(0.43
)
 
$
1.01

 
 
 
 
 
 
 
 
Dividends Declared Per Share
$
0.2475

 
$
0.2375

 
$
0.7425

 
$
0.7125

 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding, Basic
430

 
430

 
430

 
430

 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding, Diluted
430

 
432

 
430

 
431


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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
(391
)
 
$
143

 
$
(183
)
 
$
435

Other comprehensive income:
 
 
 
 
 
 
 
Adjustment related to pension and other postretirement plans (net of tax of $1, $1, $3 and $4)
1

 
2

 
5

 
5

Total
1

 
2

 
5

 
5

Comprehensive income (loss)
$
(390
)
 
$
145

 
$
(178
)
 
$
440



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

 
September 30,
2015
 
December 31,
2014
Current Assets:
 
 
 
Cash and cash equivalents ($215 and $290 related to VIEs, respectively)
$
227

 
$
298

Investment in marketable securities
826

 
930

Accounts receivable ($73 and $58 related to VIEs, respectively), less bad debt reserve of $19 and $26, respectively
568

 
837

Accrued unbilled revenues
180

 
357

Natural gas inventory
168

 
211

Materials and supplies
174

 
168

Non-trading derivative assets
78

 
99

Taxes receivable
68

 
190

Prepaid expenses and other current assets ($38 and $47 related to VIEs, respectively)
111

 
178

Total current assets
2,400

 
3,268

 
 
 
 
Property, Plant and Equipment:
 
 
 
Property, plant and equipment
16,264

 
15,358

Less: accumulated depreciation and amortization
5,079

 
4,856

Property, plant and equipment, net
11,185

 
10,502

 
 
 
 
Other Assets:
 
 
 
Goodwill
840

 
840

Regulatory assets ($2,465 and $2,738 related to VIEs, respectively)
3,199

 
3,527

Notes receivable - affiliated companies
363

 
363

Non-trading derivative assets
39

 
32

Investment in unconsolidated affiliates
3,604

 
4,521

Other
148

 
147

Total other assets
8,193

 
9,430

 
 
 
 
Total Assets
$
21,778

 
$
23,200


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

 
September 30,
2015
 
December 31,
2014
Current Liabilities:
 
 
 
Short-term borrowings
$
49

 
$
53

Current portion of VIE transition and system restoration bonds long-term debt
390

 
372

Indexed debt
152

 
152

Current portion of other long-term debt
396

 
271

Indexed debt securities derivative
454

 
541

Accounts payable
367

 
716

Taxes accrued
128

 
161

Interest accrued
118

 
124

Non-trading derivative liabilities
12

 
19

Deferred income taxes, net
741

 
683

Other
384

 
383

Total current liabilities
3,191

 
3,475

 
 
 
 
Other Liabilities:
 

 
 

Deferred income taxes, net
4,445

 
4,757

Non-trading derivative liabilities
5

 
1

Benefit obligations
889

 
953

Regulatory liabilities
1,269

 
1,206

Other
259

 
251

Total other liabilities
6,867

 
7,168

 
 
 
 
Long-term Debt:
 

 
 

VIE transition and system restoration bonds
2,346

 
2,674

Other
5,316

 
5,335

Total long-term debt
7,662

 
8,009

 
 
 
 
Commitments and Contingencies (Note 13)


 


 
 
 
 
Shareholders’ Equity:
 

 
 

Common stock (430,262,148 shares and 429,795,830 shares outstanding, respectively)
4

 
4

Additional paid-in capital
4,176

 
4,169

Retained earnings (accumulated deficit)
(41
)
 
461

Accumulated other comprehensive loss
(81
)
 
(86
)
Total shareholders’ equity
4,058

 
4,548

 
 
 
 
Total Liabilities and Shareholders’ Equity
$
21,778

 
$
23,200


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)
 
Nine Months Ended September 30,
 
2015
 
2014
Cash Flows from Operating Activities:
 
 
 
Net income (loss)
$
(183
)
 
$
435

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
724

 
784

Amortization of deferred financing costs
21

 
21

Deferred income taxes
(264
)
 
94

Unrealized loss (gain) on marketable securities
72

 
(73
)
Loss (gain) on indexed debt securities
(62
)
 
29

Write-down of natural gas inventory
4

 
2

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

 
(6
)
Pension contributions
(63
)
 
(94
)
Changes in other assets and liabilities:
 
 
 
Accounts receivable and unbilled revenues, net
450

 
348

Inventory
33

 
(126
)
Taxes receivable
122

 

Accounts payable
(332
)
 
(237
)
Fuel cost recovery
71

 
(57
)
Non-trading derivatives, net
(7
)
 
(26
)
Margin deposits, net
20

 
(13
)
Interest and taxes accrued
(39
)
 
(59
)
Net regulatory assets and liabilities
92

 
53

Other current assets
22

 
23

Other current liabilities
(36
)
 
(20
)
Other assets
6

 
5

Other liabilities
9

 
29

Other, net
15

 
12

Net cash provided by operating activities
1,518

 
1,124

 
 
 
 
Cash Flows from Investing Activities:
 
 
 
Capital expenditures
(1,131
)
 
(998
)
Distributions from unconsolidated affiliates in excess of cumulative earnings
74

 

Decrease (increase) in restricted cash of transition and system restoration bond companies
9

 
(9
)
Proceeds from sale of marketable securities
32

 

Other, net
(8
)
 
(19
)
Net cash used in investing activities
(1,024
)
 
(1,026
)
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
Increase (decrease) in short-term borrowings, net
(4
)
 
37

Proceeds of commercial paper, net
302

 
72

Proceeds from long-term debt

 
600

Payments of long-term debt
(513
)
 
(477
)
Debt issuance costs

 
(8
)
Payment of common stock dividends
(319
)
 
(306
)
Distribution to ZENS holders
(32
)
 

Other, net
1

 
6

Net cash used in financing activities
(565
)
 
(76
)
 
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents
(71
)
 
22

Cash and Cash Equivalents at Beginning of Period
298

 
208

Cash and Cash Equivalents at End of Period
$
227

 
$
230

 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 
 
 
Cash Payments:
 
 
 
Interest, net of capitalized interest
$
323

 
$
338

Income tax payments, net
12

 
157

Non-cash transactions:
 
 
 
Accounts payable related to capital expenditures
87

 
63

Exercise of SESH put to Enable
1

 
196


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

Background. CenterPoint Energy, Inc. is a public utility holding company. CenterPoint Energy’s operating subsidiaries own and operate electric transmission and distribution facilities and natural gas distribution facilities and own interests in Enable Midstream Partners, LP (Enable) as described in Note 7. As of September 30, 2015, CenterPoint Energy’s indirect, wholly-owned subsidiaries included:

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

CenterPoint Energy Resources Corp. (CERC Corp. and, together with its subsidiaries, CERC), which owns and operates natural gas distribution systems. A wholly-owned subsidiary of CERC Corp. offers variable and fixed-price physical natural gas supplies primarily to commercial and industrial customers and electric and gas utilities. As of September 30, 2015, CERC Corp. also owned approximately 55.4% of the limited partner interests in Enable, which owns, operates and develops natural gas and crude oil infrastructure assets.

As of September 30, 2015, CenterPoint Energy had variable interest entities (VIEs) consisting of transition and system restoration 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 transition and system restoration 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 February 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (ASU 2015-02). ASU 2015-02 changes the analysis that reporting organizations must perform to evaluate whether they should consolidate certain legal entities, such as limited partnerships. The changes include, among others, modification of the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities and elimination of the presumption that a general partner should consolidate a limited partnership. ASU 2015-02 does not amend the related party guidance for situations in which power is shared between two or more entities that hold interests in a VIE. ASU 2015-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. CenterPoint Energy will adopt ASU 2015-02 on January 1, 2016 and is currently assessing the impact, if any, that this standard will have on its financial position, results of operations, cash flows and disclosures.


6

Table of Contents

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Cost (ASU 2015-03). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03. CenterPoint Energy will adopt ASU 2015-03 retrospectively on January 1, 2016, which will result in a reduction of both other long-term assets and long-term debt on its Condensed Consolidated Balance Sheets. CenterPoint Energy had debt issuance costs of $55 million and $61 million included in other long-term assets on its Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014, respectively.

In April 2015, the FASB issued Accounting Standards Update No. 2015-05, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) (ASU 2015-05).  ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change a customer’s accounting for service contracts.  ASU 2015-05 is effective for fiscal years, and interim periods within the fiscal years, beginning after December 15, 2015 and may be adopted either prospectively or retrospectively.  CenterPoint Energy will adopt ASU 2015-05 on January 1, 2016 and is currently assessing the impact that this standard will have on its financial position, results of operations, cash flows and disclosures.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which supersedes most current revenue recognition guidance. ASU 2014-09 provides a comprehensive new revenue recognition model that requires revenue to be recognized in a manner that depicts the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. ASU 2014-09 was initially effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is not permitted, and entities have the option of using either a full retrospective or a modified retrospective adoption approach. In August 2015, the FASB issued Accounting Standard Update No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year.  CenterPoint Energy is currently evaluating the impact that ASU 2014-09 will have on its financial position, results of operations, cash flows and disclosures, and may adopt ASU 2014-09 on January 1, 2018 as permitted by the new guidance.

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

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

(3) Employee Benefit Plans

CenterPoint Energy’s net periodic cost includes the following components relating to pension and postretirement benefits:
 
Three Months Ended September 30,
 
2015
 
2014
 
Pension
Benefits (1)
 
Postretirement
Benefits (1)
 
Pension
Benefits (1)
 
Postretirement
Benefits (1)
 
(in millions)
Service cost
$
10

 
$
1

 
$
10

 
$

Interest cost
24

 
5

 
25

 
5

Expected return on plan assets
(30
)
 
(2
)
 
(32
)
 
(1
)
Amortization of prior service cost
2

 

 
3

 

Amortization of net loss
14

 
1

 
11

 

Amortization of transition obligation

 

 

 
1

Settlement cost (2)
1

 

 

 

Net periodic cost
$
21

 
$
5

 
$
17

 
$
5

 
 
 
 
 
 
 
 

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Nine Months Ended September 30,
 
2015
 
2014
 
Pension
Benefits (1)
 
Postretirement
Benefits (1)
 
Pension
Benefits (1)
 
Postretirement
Benefits (1)
 
(in millions)
Service cost
$
30

 
$
2

 
$
31

 
$
1

Interest cost
70

 
15

 
75

 
16

Expected return on plan assets
(90
)
 
(5
)
 
(94
)
 
(5
)
Amortization of prior service cost (credit)
7

 
(1
)
 
8

 
(1
)
Amortization of net loss
43

 
3

 
33

 
1

Amortization of transition obligation

 

 

 
4

Settlement cost (2)
10

 

 

 

Net periodic cost
$
70

 
$
14

 
$
53

 
$
16


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

(2)
A one-time, non-cash settlement charge is required when lump sum distributions or other settlements of plan benefit obligations during a plan year exceed the service cost and interest cost components of net periodic cost for that year.  Due to the amount of lump sum payment distributions from the non-qualified pension plan during the three and nine months ended September 30, 2015, CenterPoint Energy recognized a non-cash settlement charge of $1 million and $10 million, respectively.  This charge is an acceleration of costs that would otherwise be recognized in future periods.  CenterPoint Energy will continue to recognize incremental settlement costs in subsequent quarters as additional lump sum distributions are made under the non-qualified pension plan. 

CenterPoint Energy’s changes in accumulated comprehensive loss related to defined benefit and postretirement plans are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
Pension and Postretirement Plans
 
Pension and Postretirement Plans
 
(in millions)
Beginning Balance
$
(81
)
 
$
(85
)
 
$
(85
)
 
$
(88
)
Amounts reclassified from accumulated other comprehensive loss:
 
 
 
 
 
 
 
     Prior service cost (1)
1

 
1

 
1

 
2

     Actuarial losses (1)
1

 
2

 
7

 
7

Total reclassifications from accumulated other comprehensive loss
2

 
3

 
8

 
9

Tax expense
(1
)
 
(1
)
 
(3
)
 
(4
)
Net current period other comprehensive income
1

 
2

 
5

 
5

Ending Balance
$
(80
)
 
$
(83
)
 
$
(80
)
 
$
(83
)

(1)
These components are included in the computation of net periodic cost.

CenterPoint Energy expects to contribute a total of approximately $66 million to its pension plans in 2015, of which approximately $38 million and $63 million were contributed during the three and nine months ended September 30, 2015, respectively.

CenterPoint Energy expects to contribute a total of approximately $17 million to its postretirement benefits plan in 2015, of which approximately $4 million and $12 million were contributed during the three and nine months ended September 30, 2015, respectively.


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(4) Regulatory Accounting

As of September 30, 2015, CenterPoint Energy has not recognized an allowed equity return of $405 million because such return will be recognized as it is recovered in rates. During the three months ended September 30, 2015 and 2014, CenterPoint Houston recognized approximately $16 million and $20 million, respectively, of the allowed equity return not previously recognized. During the nine months ended September 30, 2015 and 2014, CenterPoint Houston recognized approximately $37 million and $52 million, respectively, of the allowed equity return not previously recognized.

(5) Derivative Instruments

CenterPoint Energy is exposed to various market risks. These risks arise from transactions entered into in the normal course of business.  CenterPoint Energy utilizes derivative instruments such as physical forward contracts, swaps and options to mitigate the impact of changes in commodity prices and weather on its operating results and cash flows. Such derivatives are recognized in CenterPoint Energy’s Condensed Consolidated Balance Sheets at their fair value unless CenterPoint Energy elects the normal purchase and sales exemption for qualified physical transactions. A derivative may be designated as a normal purchase or sale if the intent is to physically receive or deliver the product for use or sale in the normal course of business.

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

CenterPoint Energy’s policies prohibit the use of leveraged financial instruments. A leveraged financial instrument, for this purpose, is a transaction involving a derivative whose financial impact will be based on an amount other than the notional amount or volume of the instrument.

(a)
Non-Trading Activities

Derivative Instruments. CenterPoint Energy enters into certain derivative instruments to manage physical commodity price risk and does not engage in proprietary or speculative commodity trading.  These financial instruments do not qualify or are not designated as cash flow or fair value hedges.

Weather Hedges. CenterPoint Energy has weather normalization or other rate mechanisms that mitigate the impact of weather on its natural gas distribution business (NGD) in Arkansas, Louisiana, Mississippi, Minnesota and Oklahoma. NGD in Texas and electric operations in Texas do not have such mechanisms. As a result, fluctuations from normal weather may have a positive or negative effect on NGD’s results in Texas and on CenterPoint Houston’s results in its service territory.

CenterPoint Energy has historically entered into heating-degree day swaps for certain NGD jurisdictions to mitigate the effect of fluctuations from normal weather on its results of operations and cash flows for the winter heating season, which contained a bilateral dollar cap of $16 million in both 2013–2014 and 2014–2015. However, NGD did not enter into heating-degree day swaps for the 2015–2016 winter season as a result of NGD’s Minnesota division implementing a full decoupling pilot in July 2015. CenterPoint Energy also entered into weather hedges for the CenterPoint Houston service territory, which contained a bilateral dollar cap of $8 million for both the 2013–2014 and 2014–2015 winter seasons and a bilateral dollar cap of $7 million for the 2015–2016 winter season. The swaps are based on ten-year normal weather. During both the three months ended September 30, 2015 and 2014, CenterPoint Energy recognized no losses related to these swaps. During the nine months ended September 30, 2015 and 2014, CenterPoint Energy recognized losses of $9 million and $8 million, respectively, related to these swaps. Weather hedge gains and losses are included in revenues in the Condensed Statements of Consolidated Income.


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

 
$
2

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

 

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

 
59

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

 
24

Indexed debt securities derivative
 
Current Liabilities
 

 
454

Total
 
$
138

 
$
539


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

(2)
Natural gas contracts are presented on a net basis in the Condensed Consolidated Balance Sheets. Natural gas contracts are subject to master netting arrangements. This netting applies to all undisputed amounts due or past due and causes derivative assets (liabilities) to be ultimately presented net in a liability (asset) account within the Condensed Consolidated Balance Sheets. The net of total non-trading derivative assets and liabilities was a $100 million asset as shown on CenterPoint Energy’s Condensed Consolidated Balance Sheets (and as detailed in the table below), and was comprised of the natural gas contracts derivative assets and liabilities separately shown above, offset by collateral netting of $47 million.
Offsetting of Natural Gas Derivative Assets and Liabilities
 
 
September 30, 2015
 
 
Gross Amounts Recognized (1)
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amount Presented in the Consolidated Balance Sheets (2)
 
 
(in millions)
Current Assets: Non-trading derivative assets
 
$
96

 
$
(18
)
 
$
78

Other Assets: Non-trading derivative assets
 
42

 
(3
)
 
39

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

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

 
(5
)
Total
 
$
53

 
$
47

 
$
100


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

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

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

 
$
1

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

 

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

 
83

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

 
18

Indexed debt securities derivative
 
Current Liabilities
 

 
541

Total
 
$
149

 
$
643


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

(2)
Natural gas contracts are presented on a net basis in the Condensed Consolidated Balance Sheets. Natural gas contracts are subject to master netting arrangements. This netting applies to all undisputed amounts due or past due and causes derivative assets (liabilities) to be ultimately presented net in a liability (asset) account within the Condensed Consolidated Balance Sheets. The net of total non-trading derivative assets and liabilities was a $111 million asset as shown on CenterPoint Energy’s Condensed Consolidated Balance Sheets (and as detailed in the table below), and was comprised of the natural gas contracts derivative assets and liabilities separately shown above, offset by collateral netting of $64 million.
Offsetting of Natural Gas Derivative Assets and Liabilities
 
 
December 31, 2014
 
 
Gross Amounts Recognized (1)
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amount Presented in the Consolidated Balance Sheets (2)
 
 
(in millions)
Current Assets: Non-trading derivative assets
 
$
115

 
$
(16
)
 
$
99

Other Assets: Non-trading derivative assets
 
34

 
(2
)
 
32

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

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

 
(1
)
Total
 
$
47

 
$
64

 
$
111


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

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

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

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Table of Contents


Income Statement Impact of Derivative Activity
 
 
 
 
Three Months Ended September 30,
Total derivatives not designated
as hedging instruments
 
Income Statement Location
 
2015
 
2014
 
 
 
 
(in millions)
Natural gas derivatives
 
Gains (Losses) in Revenues
 
$
39

 
$
22

Natural gas derivatives (1)
 
Gains (Losses) in Expenses: Natural Gas
 
(30
)
 
(4
)
Indexed debt securities derivative
 
Gains (Losses) in Other Income (Expense)
 
129

 
(22
)
Total
 
$
138

 
$
(4
)

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

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

Indexed debt securities derivative
 
Gains (Losses) in Other Income (Expense)
 
62

 
(29
)
Total
 
$
78

 
$
7


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

(c)
Credit Risk Contingent Features

CenterPoint Energy enters into financial derivative contracts containing material adverse change provisions.  These provisions could require CenterPoint Energy to post additional collateral if the Standard & Poor’s Ratings Services or Moody’s Investors Service, Inc. 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 at September 30, 2015 and December 31, 2014 was $3 million and $2 million, respectively.  CenterPoint Energy posted no assets as collateral towards derivative instruments that contain credit risk contingent features at either September 30, 2015 or December 31, 2014.  If all derivative contracts (in a net liability position) containing credit risk contingent features were triggered at September 30, 2015 and December 31, 2014, $3 million and $2 million, respectively, of additional assets would be required to be posted as collateral.

(6) Fair Value Measurements

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

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

Level 2: Inputs, other than quoted prices included in Level 1, are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability. Fair value assets and liabilities that are generally included in this category are derivatives with fair values based on inputs from actively quoted markets.  A market approach is utilized to value 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

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Table of Contents

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

CenterPoint Energy determines the appropriate level for each financial asset and liability on a quarterly basis and recognizes transfers between levels at the end of the reporting period.  For the nine months ended September 30, 2015, 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 September 30, 2015 and December 31, 2014, and indicate the fair value hierarchy of the valuation techniques utilized by CenterPoint Energy to determine such fair value.
 
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Netting
Adjustments (1)
 
Balance
as of
September 30, 2015
 
 
 
 
 
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
Corporate equities
$
828

 
$

 
$

 
$

 
$
828

Investments, including money
market funds (2)
55

 

 

 

 
55

Natural gas derivatives
5

 
111

 
22

 
(21
)
 
117

Total assets
$
888

 
$
111

 
$
22

 
$
(21
)
 
$
1,000

Liabilities
 

 
 

 
 

 
 

 
 

Indexed debt securities derivative
$

 
$
454

 
$

 
$

 
$
454

Natural gas derivatives
14

 
63

 
8

 
(68
)
 
17

Total liabilities
$
14

 
$
517

 
$
8

 
$
(68
)
 
$
471

 
(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 $47 million posted with the same counterparties.

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

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Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Netting
Adjustments (1)
 
Balance
as of
December 31, 2014
 
 
 
 
 
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
Corporate equities
$
932

 
$

 
$

 
$

 
$
932

Investments, including money
market funds (2)
54

 

 

 

 
54

Natural gas derivatives
7

 
122

 
20

 
(18
)
 
131

Total assets
$
993

 
$
122

 
$
20

 
$
(18
)
 
$
1,117

Liabilities
 

 
 

 
 

 
 

 
 

Indexed debt securities derivative
$

 
$
541

 
$

 
$

 
$
541

Natural gas derivatives
22

 
77

 
3

 
(82
)
 
20

Total liabilities
$
22

 
$
618

 
$
3

 
$
(82
)
 
$
561


(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 $64 million posted with the same counterparties.

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

The following table presents additional information about assets or liabilities, including derivatives that are measured at fair value on a recurring basis for which 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 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Beginning balance
$
10

 
$
4

 
$
17

 
$
3

Total gains
5

 
6

 
5

 
6

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

Transfers into Level 3
1

 

 
1

 
(1
)
Transfers out of Level 3

 

 
(1
)
 

Ending balance (1)
$
14

 
$
9

 
$
14

 
$
9

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

 
$
6

 
$
7

 
$
7


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

Items Measured at Fair Value on a Nonrecurring Basis

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

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Table of Contents

Both of these approaches incorporate significant estimates and assumptions, including:

Market Approach

quoted price of Enable’s common units;

recent market transactions of comparable companies; and

EBITDA to total enterprise multiples for comparable companies.

Income Approach

Enable’s forecasted cash distributions;

projected cash flows of incentive distribution rights;

forecasted growth rate of Enable’s cash distributions; and

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

Weighting of the different approaches

Significant unobservable inputs used include the growth rate applied to the projected cash distributions beyond 2020 and the discount rate used to determine the present value of the estimated future cash flows. Based on the significant unobservable estimates and assumptions required, CenterPoint Energy concluded that the fair value estimate should be classified as a Level 3 measurement within the fair value hierarchy. As a result of the analysis, CenterPoint Energy recorded an other than temporary impairment on its investment in Enable of $250 million, reducing the fair value of the investment to $3.6 billion. See Note 7 for further discussion of the impairment. As of December 31, 2014, there were no significant assets or liabilities measured at fair value on a nonrecurring basis.

Estimated Fair Value of Financial Instruments

The fair values of cash and cash equivalents, 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 2.0% Zero-Premium Exchangeable Subordinated Notes due 2029 (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.
 
September 30, 2015
 
December 31, 2014
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
(in millions)
Financial assets:
 
 
 
 
 
 
 
Notes receivable - affiliated companies
$
363

 
$
362

 
$
363

 
$
362

Financial liabilities:
 
 
 
 
 
 
 
Long-term debt
$
8,448

 
$
9,047

 
$
8,652

 
$
9,427


(7) Unconsolidated Affiliates

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

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 as presented in the Condensed Consolidated Balance Sheet at September 30, 2015, CERC Corp.’s guarantee of collection of Enable’s $1.1 billion senior notes due 2019 and 2024 (Guaranteed Senior Notes) and other guarantees discussed in Note 13, CERC Corp.’s $363 million notes receivable from Enable and outstanding current accounts receivable from Enable. The $363 million of notes receivable from Enable bears interest at an annual rate of 2.10% to 2.45% and

15

Table of Contents

matures in 2017. CenterPoint Energy recorded interest income of $2 million during each of the three months ended September 30, 2015 and 2014, and $6 million during each of the nine months ended September 30, 2015 and 2014, and had interest receivable from Enable of $2 million and $4 million as of September 30, 2015 and December 31, 2014, respectively, on its notes receivable.

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

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

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

CenterPoint Energy billed Enable for reimbursement of transition services, including the costs of seconded employees, $3 million and $36 million during the three months ended September 30, 2015 and 2014, respectively, and $10 million and $118 million during the nine months ended September 30, 2015 and 2014, respectively, under the Transition Agreements. Actual transition services costs are recorded net of reimbursements received from Enable. CenterPoint Energy had accounts receivable from Enable of $4 million and $28 million as of September 30, 2015 and December 31, 2014, respectively, for amounts billed for transition services, including the cost of seconded employees.

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

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

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

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

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recent comparable transactions and the limited float of Enable’s publicly traded common units. See Note 6 for further discussion of the determination of fair value of CenterPoint Energy’s investment in Enable.

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

 
$
4,520

SESH (1)
 

 
1

  Total
 
$
3,604

 
$
4,521


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

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

 
$
(699
)
 
$
236

SESH (1)
 

 

 

 
5

  Total
 
$
(794
)
 
$
79

 
$
(699
)
 
$
241

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

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

 
$
804

 
$
1,852

 
$
2,632

Cost of sales, excluding depreciation and amortization
 
287

 
439

 
856

 
1,550

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

 
1

 
1,105

 
1

Operating income (loss)
 
(975
)
 
151

 
(778
)
 
452

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

 
(817
)
 
408

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

 
$
(453
)
 
$
230

Basis difference accretion
 
2

 
3

 
4

 
6

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

 
(250
)
 

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

 
$
(699
)
 
$
236

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


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

 
$
438

Non-current assets
 
10,774

 
11,399

Current liabilities
 
804

 
671

Non-current liabilities
 
2,786

 
2,343

Non-controlling interest
 
25

 
31

Enable partners’ capital
 
7,586

 
8,792

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

 
$
4,869

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

CenterPoint Energy’s investment in Enable
 
$
3,604

 
$
4,520


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

 
$
70

 
$
219

 
$
227

SESH (1)
 

 
1

 

 
8

  Total
 
$
74

 
$
71

 
$
219

 
$
235

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

(8) Goodwill

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

Energy Services
83

Other Operations
11

Total
$
840


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

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


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(9) Capital Stock

CenterPoint Energy, Inc. has 1,020,000,000 authorized shares of capital stock, comprised of 1,000,000,000 shares of $0.01 par value common stock and 20,000,000 shares of $0.01 par value cumulative preferred stock. At September 30, 2015, 430,262,314 shares of CenterPoint Energy, Inc. common stock were issued and 430,262,148 shares were outstanding. At December 31, 2014, 429,795,996 shares of CenterPoint Energy, Inc. common stock were issued and 429,795,830 shares were outstanding. Outstanding common shares exclude 166 treasury shares at both September 30, 2015 and December 31, 2014.

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

In September 1999, CenterPoint Energy issued ZENS having an original principal amount of $1.0 billion, of which $828 million remains outstanding at September 30, 2015. Each ZENS note was originally exchangeable at the holder’s option at any time for an amount of cash equal to 95% of the market value of the reference shares of Time Warner Inc. common stock (TW Common) attributable to such note.  The number and identity of the reference shares attributable to each ZENS note are adjusted for certain corporate events. The principal amount of ZENS increases or decreases to the extent the annual yield from interest and cash dividends on the reference shares is less than or more than 2.309%. The adjusted principal amount is defined in the ZENS instrument as “contingent principal.” Prior to the closing of the merger discussed below, the reference shares for each ZENS note consisted of 0.5 share of TW Common, 0.125505 share of Time Warner Cable Inc. (TWC) common stock (TWC Common), 0.045455 share of AOL Inc. common stock (AOL Common) and 0.0625 share of Time Inc. common stock (Time Common). 

On May 26, 2015, Verizon Communications, Inc. (Verizon) initiated a tender offer to purchase all outstanding shares of AOL Common for $50 per share, in which CenterPoint Energy tendered all of its shares of AOL Common for $32 million. Verizon acquired the remaining eligible shares through a merger, which closed on June 23, 2015. In accordance with the terms of the ZENS, CenterPoint Energy remitted $32 million to ZENS holders in July 2015, which reduced contingent principal.  As a result, CenterPoint Energy recorded a reduction in the indexed debt securities derivative liability of $18 million, a reduction in the indexed debt balance of $7 million and a loss of $7 million, which is included in Gain (loss) on indexed debt securities on the Condensed Statements of Consolidated Income.  As of September 30, 2015, the reference shares for each ZENS note consisted of 0.5 share of TW Common, 0.125505 share of TWC Common and 0.0625 share of Time Common and the contingent principal balance was $708 million.

On May 26, 2015, Charter Communications, Inc. (Charter) announced that it had entered into a definitive merger agreement with TWC, and that the merger is expected to close by the end of the year. On September 21, 2015, Charter shareholders approved the announced transaction with TWC. Pursuant to the merger agreement, upon closing of the merger, TWC Common shares would be exchanged for cash and Charter stock and reference shares would consist of Charter stock, TW Common and Time Common.

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

(a)
Short-term Borrowings

Inventory Financing. NGD has asset management agreements associated with its utility distribution service in Arkansas, north Louisiana and Oklahoma that extend through 2018. Pursuant to the provisions of the agreements, NGD sells natural gas and agrees to repurchase an equivalent amount of natural gas during the winter heating seasons at the same cost, plus a financing charge. These transactions are accounted for as a financing and they had an associated principal obligation of $49 million and $53 million as of September 30, 2015 and December 31, 2014, respectively.

(b)
Long-term Debt

Debt Repayments. In June 2015, CenterPoint Energy repaid its $200 million 6.85% Senior Notes using proceeds from its commercial paper program. CenterPoint Energy’s $1.2 billion revolving credit facility backstops its $1.0 billion commercial paper program.


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Credit Facilities. As of September 30, 2015 and December 31, 2014, CenterPoint Energy, CenterPoint Houston and CERC Corp. had the following revolving credit facilities and utilization of such facilities:
 
 
 
September 30, 2015
 
December 31, 2014
 
Size of
Facility
 
Loans
 
Letters
of Credit
 
Commercial
Paper
 
Loans
 
Letters
of Credit
 
Commercial
Paper
 
(in millions)
CenterPoint Energy
$
1,200

 
$

 
$
6

 
$
725

 
$

 
$
6

 
$
191

CenterPoint Houston
300

 

 
4

 

 

 
4

 

CERC Corp.
600

 

 
2

 
109

 

 

 
341

Total
$
2,100

 
$

 
$
12

 
$
834

 
$

 
$
10

 
$
532


CenterPoint Energy’s $1.2 billion revolving credit facility, which is scheduled to terminate on September 9, 2019, can be drawn at the London Interbank Offered Rate (LIBOR) plus 1.25% based on CenterPoint Energy’s current credit ratings. The revolving credit facility contains a financial covenant which limits CenterPoint Energy’s consolidated debt (excluding transition and system restoration bonds) to an amount not to exceed 65% of CenterPoint Energy’s consolidated capitalization. The financial covenant limit will temporarily increase from 65% to 70% if CenterPoint Houston experiences damage from a natural disaster in its service territory and CenterPoint Energy certifies to the administrative agent that CenterPoint Houston has incurred system restoration costs reasonably likely to exceed $100 million in a consecutive twelve-month period, all or part of which CenterPoint Houston 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 Houston’s $300 million revolving credit facility, which is scheduled to terminate on September 9, 2019, can be drawn at LIBOR plus 1.125% based on CenterPoint Houston’s current credit ratings. The revolving credit facility contains a financial covenant which limits CenterPoint Houston’s consolidated debt (excluding transition and system restoration bonds) to an amount not to exceed 65% of CenterPoint Houston’s consolidated capitalization.

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

CenterPoint Energy, CenterPoint Houston and CERC Corp. were in compliance with all financial covenants as of September 30, 2015.

(12) Income Taxes

The effective tax rate reported for the three months ended September 30, 2015 was 38% compared to 33% for the same period in 2014. The effective tax rate reported for the nine months ended September 30, 2015 was 41% compared to 36% for the same period in 2014. The higher effective tax rate for the three and nine months ended September 30, 2015 was primarily due to lower earnings from the impairment of CenterPoint Energy’s investment in Enable. The impairment loss reduced the deferred tax liability on CenterPoint Energy’s investment in Enable.

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

(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 Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014 as these contracts meet an exception as “normal purchases contracts” or do not meet the definition of a derivative. Natural gas supply commitments also include natural gas transportation contracts that do not meet the definition of a derivative. As of September 30, 2015, minimum payment obligations for natural gas supply commitments are approximately $159 million for the remaining three months in 2015, $489 million in 2016, $466 million in 2017, $413 million in 2018, $224 million in 2019 and $128 million after 2019.

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(b)
Legal, Environmental and Other Regulatory Matters

Legal Matters

Gas Market Manipulation Cases.  CenterPoint Energy, CenterPoint Houston or their predecessor, Reliant Energy, Incorporated (Reliant Energy), and certain of their former subsidiaries have been named as defendants in certain lawsuits described below. Under a master separation agreement between CenterPoint Energy and a former subsidiary, Reliant Resources, Inc. (RRI), CenterPoint Energy and its subsidiaries are entitled to be indemnified by RRI and its successors for any losses, including certain attorneys’ fees and other costs, arising out of these lawsuits.  In May 2009, RRI sold its Texas retail business to a subsidiary of NRG and RRI changed its name to RRI Energy, Inc. In December 2010, Mirant Corporation merged with and became a wholly-owned subsidiary of RRI, and RRI changed its name to GenOn Energy, Inc. (GenOn). In December 2012, NRG acquired GenOn through a merger in which GenOn became a wholly-owned subsidiary of NRG. None of the sale of the retail business, the merger with Mirant Corporation, or the acquisition of GenOn by NRG alters RRI’s (now GenOn’s) contractual obligations to indemnify CenterPoint Energy and its subsidiaries, including CenterPoint Houston, for certain liabilities, including their indemnification obligations regarding the gas market manipulation litigation, nor does it affect the terms of existing guarantee arrangements for certain GenOn gas transportation contracts discussed below.

A large number of lawsuits were filed against numerous gas market participants in a number of federal and western state courts in connection with the operation of the natural gas markets in 2000–2002. CenterPoint Energy and its affiliates have since been released or dismissed from all but one such case. CenterPoint Energy Services, Inc. (CES), a subsidiary of CERC Corp., is a defendant in a case now pending in federal court in Nevada alleging a conspiracy to inflate Wisconsin natural gas prices in 2000–2002.  In July 2011, the court issued an order dismissing the plaintiffs’ claims against other defendants in the case, each of whom had demonstrated Federal Energy Regulatory Commission jurisdictional sales for resale during the relevant period, based on federal preemption, and stayed the remainder of the case pending outcome of the appeals.  The plaintiffs appealed this ruling to the U.S. Court of Appeals for the Ninth Circuit, which reversed the trial court’s dismissal of the plaintiffs’ claims. The U.S. Supreme Court agreed to review the case, and on April 21, 2015, affirmed the Ninth Circuit’s ruling and remanded the case to the district court for further proceedings. CenterPoint Energy and CES intend to continue vigorously defending against the plaintiffs’ claims on remand.  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.

Environmental Matters

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

At September 30, 2015, CERC had a recorded liability of $7 million for remediation of these five Minnesota sites. The estimated range of possible remediation costs for the sites for which CERC believes it may have responsibility was $4 million to $28 million based on remediation continuing for 30 to 50 years. The cost estimates are based on studies of a site or industry average costs for remediation of sites of similar size. The actual remediation costs will be dependent upon the number of sites to be remediated, the participation of other potentially responsible parties (PRPs), if any, and the remediation methods used. 

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

Asbestos. Some facilities owned by CenterPoint Energy contain or have contained asbestos insulation and other asbestos-containing materials. CenterPoint Energy or its subsidiaries have been named, along with numerous others, as a defendant in lawsuits filed by a number of individuals who claim injury due to exposure to asbestos. Some of the claimants have worked at locations owned by subsidiaries of CenterPoint Energy, but most existing claims relate to facilities previously owned by CenterPoint Energy’s subsidiaries. In 2004 and early 2005, CenterPoint Energy sold its generating business, to which most of these claims relate, to a company which is now an affiliate of NRG. Under the terms of the arrangements regarding separation of the generating business from CenterPoint Energy and its sale of that business, ultimate financial responsibility for uninsured losses from claims relating to the generating business has been assumed by the NRG affiliate, but CenterPoint Energy has agreed to continue to defend such claims to the extent they are covered by insurance maintained by CenterPoint Energy, subject to reimbursement of the costs of such defense by the NRG affiliate. CenterPoint Energy anticipates that additional claims like those received may be asserted in the future. Although their ultimate outcome cannot be predicted at this time, CenterPoint Energy intends to continue vigorously

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contesting claims that it does not consider to have merit and, based on its experience to date, does not expect these matters, either individually or in the aggregate, to have a material adverse effect on 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 on property where its subsidiaries conduct or 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, based on its experience to date, 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 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.

(c)
Guarantees

Prior to the distribution of CenterPoint Energy’s ownership in RRI to its shareholders, CERC had guaranteed certain contractual obligations of what became RRI’s trading subsidiary.  When the companies separated, RRI agreed to secure CERC against obligations under the guarantees RRI had been unable to extinguish by the time of separation.  Pursuant to such agreement, as amended in December 2007, RRI (now GenOn) agreed to provide to CERC cash or letters of credit as security against CERC’s obligations under its remaining guarantees for demand charges under certain gas transportation agreements if and to the extent changes in market conditions expose CERC to a risk of loss on those guarantees based on an annual calculation, with any required collateral to be posted each December.  The undiscounted maximum potential payout of the demand charges under these transportation contracts, which will be in effect until 2018, was approximately $31 million as of September 30, 2015.  Based on market conditions in the fourth quarter of 2015 at the time the most recent annual calculation was made under the agreement, GenOn was not obligated to post any security. If GenOn should fail to perform the contractual obligations, CERC could have to honor its guarantee and, in such event, any collateral then provided as security may be insufficient to satisfy CERC’s obligations.

CenterPoint Energy has provided guarantees (CenterPoint Midstream Guarantees) with respect to the performance of certain obligations of Enable under long-term gas gathering and treating agreements with an indirect, wholly-owned subsidiary of Encana Corporation (Encana) and an indirect, wholly-owned subsidiary of Royal Dutch Shell plc (Shell). Under the terms of the omnibus agreement entered into in connection with the closing of the formation of Enable, Enable and CenterPoint Energy have agreed to use commercially reasonable efforts and cooperate with each other to terminate the CenterPoint Midstream Guarantees and to release CenterPoint Energy from such guarantees by causing Enable or one of its subsidiaries to enter into substitute guarantees or to assume the CenterPoint Midstream Guarantees as applicable. The guarantee in favor of the indirect, wholly-owned subsidiary of Encana was released on August 24, 2015. As of September 30, 2015, CenterPoint Energy had guaranteed Enable’s obligations up to an aggregate amount of $50 million under the guarantee in favor of the indirect, wholly-owned subsidiary of Shell.

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

The fair value of these guarantees is not material.


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(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 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions, except share and per share amounts)
Net income (loss)
$
(391
)
 
$
143

 
$
(183
)
 
$
435

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
430,262,000

 
429,796,000

 
430,152,000

 
429,580,000

Plus: Incremental shares from assumed conversions:
 
 
 
 
 
 
 
Restricted stock (1)

 
1,777,000

 

 
1,777,000

Diluted weighted average shares
430,262,000

 
431,573,000

 
430,152,000

 
431,357,000

 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
 
 
 
 
 
 
Net income (loss)
$
(0.91
)
 
$
0.33

 
$
(0.43
)
 
$
1.01

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share
 
 
 
 
 
 
 
Net income (loss)
$
(0.91
)
 
$
0.33

 
$
(0.43
)
 
$
1.01


(1)
1,759,000 incremental shares from assumed conversions of restricted stock have not been included in the computation of diluted earnings (loss) per share for either the three months or nine months ended September 30, 2015, as their inclusion would be anti-dilutive.

(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.

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 (CenterPoint Houston) 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 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 September 30, 2015
 
 
Revenues from
External
Customers
 
Net
Intersegment
Revenues
 
Operating
Income
 
 
(in millions)
 
Electric Transmission & Distribution
$
827

(1)
$

 
$
244

 
Natural Gas Distribution
353

 
6

 
11

 
Energy Services
446

 
6

 
7

 
Midstream Investments (2)

 

 

 
Other Operations
4

 

 
3