Derivative Instruments

9 Months Ended

Sep. 30, 2014

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 and weather on its operating results and cash flows. Such derivatives are recognized in CERC’s Condensed Consolidated Balance Sheets at their fair value unless CERC 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 all commodity price, weather and credit risk activities, including CERC’s marketing, risk management services and hedging activities. The committee’s duties are to establish CERC’s commodity risk policies, allocate board-approved commercial risk limits, approve the use of new products and commodities, monitor positions and ensure compliance with CERC’s risk management policies and procedures and limits established by CenterPoint Energy’s board of directors.

CERC’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. CERC 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. CERC has weather normalization or other rate mechanisms that mitigate the impact of weather on its gas operations in Arkansas, Louisiana, Mississippi and Oklahoma. Gas operations in Texas and Minnesota do not have such mechanisms. As a result, fluctuations from normal weather may have a significant positive or negative effect on Gas Operations’ results in these jurisdictions.

CERC entered into heating-degree day swaps for certain Gas Operations 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 $15 million in 2012 - 2013, $16 million in 2013 - 2014 and $16 million in 2014 - 2015.  The swaps are based on ten-year normal weather. During both the three months ended September 30, 2014 and 2013, CERC recognized losses of $-0- related to these swaps. During the nine months ended September 30, 2014 and 2013, CERC recognized losses of $7 million and $6 million, respectively, related to these swaps. Weather hedge gains and losses are included in revenues in the Condensed 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 four tables provide a balance sheet overview of CERC’s Derivative Assets and Liabilities as of September 30, 2014 and December 31, 2013, while the last two tables provide a breakdown of the related income statement impacts for the three and nine months ended September 30, 2014 and 2013.

Fair Value of Derivative Instruments
		September 30, 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	$	45	$	11
Natural gas derivatives (1) (2)	Other Assets: Non-trading derivative assets	17		—
Natural gas derivatives (1) (2)	Current Liabilities: Non-trading derivative liabilities	1		12
Natural gas derivatives (1) (2)	Other Liabilities: Non-trading derivative liabilities	3		5
Total		$	66	$	28

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(1) The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 811 billion cubic feet (Bcf) or a net 34 Bcf long position.  Of the net long position, basis swaps constitute 126 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 $38 million asset as shown on CERC’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.

Offsetting of Natural Gas Derivative Assets and Liabilities
	September 30, 2014
	Gross AmountsRecognized (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	$	46		$	(12	)	$	34
Other Assets: Non-trading derivative assets	20			(3		)	17
Current Liabilities: Non-trading derivative liabilities	(23		)	12			(11		)
Other Liabilities: Non-trading derivative liabilities	(5		)	3			(2		)
Total	$	38		$	—		$	38

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

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

Fair Value of Derivative Instruments
		December 31, 2013
Total derivatives not designated as hedging instruments	Balance Sheet Location	Derivative Assets Fair Value		Derivative Liabilities Fair Value
		(in millions)
Natural gas derivatives (1) (2) (3)	Current Assets: Non-trading derivative assets	$	28	$	4
Natural gas derivatives (1) (2)	Other Assets: Non-trading derivative assets	10		—
Natural gas derivatives (1) (2)	Current Liabilities: Non-trading derivative liabilities	4		21
Natural gas derivatives (1) (2)	Other Liabilities: Non-trading derivative liabilities	1		5
Total		$	43	$	30

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(1) The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 607 Bcf or a net 46 Bcf long position.  Of the net long position, basis swaps constitute 99 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 $13 million asset as shown on CERC’s Condensed Consolidated Balance Sheets (and as detailed in the table below), and was comprised of the natural gas contracts derivative assets and liabilities separately shown above, offset by collateral netting of less than $1 million.

(3) The $28 million Derivative Current Asset includes $1 million related to physical forwards purchased from Enable.

Offsetting of Natural Gas Derivative Assets and Liabilities
	December 31, 2013
	Gross AmountsRecognized (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	$	32		$	(8	)	$	24
Other Assets: Non-trading derivative assets	11			(1		)	10
Current Liabilities: Non-trading derivative liabilities	(25		)	8			(17		)
Other Liabilities: Non-trading derivative liabilities	(5		)	1			(4		)
Total	$	13		$	—		$	13

________________

(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 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 physical natural gas sales derivative contracts and as natural gas expense for financial natural gas derivatives and other physical natural gas derivatives.

Income Statement Impact of Derivative Activity
		Three Months Ended September 30,
Total derivatives not designated as hedging instruments	Income Statement Location	2014			2013
		(in millions)
Natural gas derivatives	Gains (Losses) in Revenue	$	22		$	11
Natural gas derivatives (1)	Gains (Losses) in Expense: Natural Gas	(4		)	(2		)
Total		$	18		$	9

Income Statement Impact of Derivative Activity
		Nine Months Ended September 30,
Total derivatives not designated as hedging instruments	Income Statement Location	2014			2013
		(in millions)
Natural gas derivatives	Gains (Losses) in Revenue	$	(74	)	$	24
Natural gas derivatives (1)	Gains (Losses) in Expense: Natural Gas	110			(3		)
Total		$	36		$	21

 ________________

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

(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 both September 30, 2014 and December 31, 2013 was $1 million.  The aggregate fair value of assets that were posted as collateral was less than $1 million at both September 30, 2014 and December 31, 2013.  If all derivative contracts (in a net liability position) containing credit risk contingent features were triggered at both September 30, 2014 and December 31, 2013, $1 million of additional assets would be required to be posted as collateral.