Derivative Instruments

12 Months Ended

Dec. 31, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

Derivative Instruments

CERC is exposed to various market risks. These risks arise from transactions entered into in the normal course of business. CERC utilizes derivative instruments such as physical forward contracts, swaps and options to mitigate the impact of changes in commodity prices, weather and interest rates on its operating results and cash flows.

(a) Non-Trading Activities

Derivative Instruments. CERC enters into certain derivative instruments to manage physical commodity price risks 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.

During the year ended December 31, 2010, CERC recorded increased natural gas revenues from unrealized net gains of $18 million and increased natural gas expense from unrealized net losses of $14 million, a net unrealized gain of $4 million. During the year ended December 31, 2011, CERC recorded increased natural gas revenues from unrealized net gains of $38 million and increased natural gas expense from unrealized net losses of $30 million, a net unrealized gain of $8 million. During the year ended December 31, 2012, CERC recorded decreased natural gas revenues from unrealized net losses of $68 million and decreased natural gas expense from unrealized net gains of $52 million, a net unrealized loss of $16 million.

Weather Hedges. CERC has weather normalization or other rate mechanisms that mitigate the impact of weather on its gas operations in Arkansas, Louisiana, Mississippi, Oklahoma and a portion of Texas. The remaining Gas Operations jurisdictions do not have such mechanisms. As a result, fluctuations from normal weather may have a significant positive or negative effect on the results of the gas operations in the remaining jurisdictions. CERC enters into heating-degree day swaps to mitigate the effect of fluctuations from normal weather on its financial position and cash flows for the respective winter heating seasons.  The swaps were based on ten-year normal weather. During the years ended December 31, 2010, 2011 and 2012, CERC recognized losses of $-0-, losses of less than $1 million and gains of $8 million, respectively, related to these swaps. The 2011/2012 winter weather hedge had a maximum payment limit of $11 million. Due to the warmer than normal weather, the maximum was reached by February 2012. Weather hedge gains and losses are included in revenues in the Statements of Consolidated Income.

(b) Derivative Fair Values and Income Statement Impacts

The following tables present information about CERC’s derivative instruments and hedging activities. The first two tables provide a balance sheet overview of CERC’s Derivative Assets and Liabilities as of December 31, 2011 and 2012, while the last table provides a breakdown of the related income statement impacts for the years ending December 31, 2011 and 2012.

Fair Value of Derivative Instruments
	December 31, 2011
Total derivatives not designated as hedging instruments	Balance Sheet Location	Derivative Assets Fair Value (2) (3)		Derivative Liabilities Fair Value (2) (3)
		(in millions)
Natural gas derivatives (1)	Current Assets: Non-trading derivative assets	$	88	$	1
Natural gas derivatives (1)	Other Assets: Non-trading derivative assets	20		—
Natural gas derivatives (1)	Current Liabilities: Non-trading derivative liabilities	15		110
Natural gas derivatives (1)	Other Liabilities: Non-trading derivative liabilities	—		13
Total		$	123	$	124

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(1) Natural gas contracts are subject to master netting arrangements and are presented on a net basis in the Consolidated Balance Sheets. This netting causes derivative assets (liabilities) to be ultimately presented net in a liability (asset) account within the Consolidated Balance Sheets.

(2) The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 633 billion cubic feet (Bcf) or a net 84 Bcf long position.  Of the net long position, basis swaps constitute 74 Bcf and volumes associated with price stabilization activities of the Natural Gas Distribution business segment constitute 6 Bcf.

(3) The net of total non-trading derivative assets and liabilities is a $55 million asset as shown on CERC’s Consolidated Balance Sheets, and is comprised of the natural gas contracts derivative assets and liabilities separately shown above offset by collateral netting of $56 million.

Fair Value of Derivative Instruments
	December 31, 2012
Total derivatives not designated as hedging instruments	Balance Sheet Location	Derivative Assets Fair Value (2) (3)		Derivative Liabilities Fair Value (2) (3)
		(in millions)
Natural gas derivatives (1)	Current Assets: Non-trading derivative assets	$	37	$	1
Natural gas derivatives (1)	Other Assets: Non-trading derivative assets	6		—
Natural gas derivatives (1)	Current Liabilities: Non-trading derivative liabilities	5		27
Natural gas derivatives (1)	Other Liabilities: Non-trading derivative liabilities	1		4
Total		$	49	$	32

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(1) Natural gas contracts are subject to master netting arrangements and are presented on a net basis in the Consolidated Balance Sheets. This netting causes derivative assets (liabilities) to be ultimately presented net in a liability (asset) account within the Consolidated Balance Sheets.

(2) The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 489 Bcf or a net 101 Bcf long position.  Of the net long position, basis swaps constitute 73 Bcf.

(3) The net of total non-trading derivative assets and liabilities is a $26 million asset as shown on CERC’s Consolidated Balance Sheets, and is comprised of the natural gas contracts derivative assets and liabilities separately shown above offset by collateral netting of $9 million.

For CERC’s price stabilization activities of the Natural Gas Distribution business segment, the settled costs of derivatives are ultimately recovered through purchased gas adjustments. Accordingly, the net unrealized gains and losses associated with these contracts are recorded as net regulatory assets. Realized and unrealized gains and losses on other derivatives are recognized in the Statements of Consolidated Income as revenue for retail sales derivative contracts and as natural gas expense for financial natural gas derivatives and non-retail related physical natural gas derivatives.

Income Statement Impact of Derivative Activity
		Year Ended December 31,
Total derivatives not designated as hedging instruments	Income Statement Location	2011			2012
		(in millions)
Natural gas derivatives	Gains (Losses) in Revenue	$	102		$	43
Natural gas derivatives (1)	Gains (Losses) in Expense: Natural Gas	(144		)	(63		)
Total		$	(42	)	$	(20	)

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(1) The Gains (Losses) in Expense: Natural Gas includes $(107) million and $(38) million of costs in 2011 and 2012, respectively, associated with price stabilization activities of the Natural Gas Distribution business segment that will be ultimately recovered through purchased gas adjustments.

(c) Credit Risk Contingent Features

CERC enters into financial derivative contracts containing material adverse change provisions.  These provisions could require CERC to post additional collateral if the Standard & Poor’s Ratings Services or Moody’s Investors Service, Inc. credit ratings of CERC are downgraded.  The total fair value of the derivative instruments that contain credit risk contingent features that are in a net liability position at December 31, 2011 and 2012 was $39 million and $5 million, respectively.  The aggregate fair value of assets that are already posted as collateral was less than $1 million at both December 31, 2011 and 2012.  If all derivative contracts (in a net liability position) containing credit risk contingent features were triggered at December 31, 2011 and 2012, $38 million and $5 million, respectively, of additional assets would be required to be posted as collateral.

(d) Credit Quality of Counterparties

In addition to the risk associated with price movements, credit risk is also inherent in CERC’s non-trading derivative activities. Credit risk relates to the risk of loss resulting from non-performance of contractual obligations by a counterparty. The following table shows the composition of counterparties to the non-trading derivative assets of CERC as of December 31, 2011 and 2012 (in millions):

	December 31, 2011				December 31, 2012
	Investment Grade(1)		Total		Investment Grade(1)		Total
Energy marketers	$	1	$	7	$	1	$	1
Financial institutions	—		—		—		—
Retail end users (2)	—		100		—		41
Total	$	1	$	107	$	1	$	42

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(1) “Investment grade” is primarily determined using publicly available credit ratings and considering credit support (such as parent company guaranties) and collateral, which encompass cash and standby letters of credit. For unrated counterparties, CERC determines a synthetic credit rating by performing financial statement analysis and considering contractual rights and restrictions and collateral.

(2) Retail end users represent customers who have contracted to fix the price of a portion of their physical gas requirements for future periods.