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.

(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 NGD in Arkansas, Louisiana, Mississippi, Minnesota and Oklahoma. NGD in Texas does not have such mechanisms, although fixed customer charges are historically higher in Texas compared to NGD’s other jurisdictions. As a result, fluctuations from normal weather may have a positive or negative effect on NGD’s results in Texas.

CERC 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. The swaps are based on 10-year normal weather. During the years ended December 31, 2015, 2014 and 2013, CERC recognized losses of $4 million, $10 million and $16 million, respectively, related to these swaps. 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 four tables provide a balance sheet overview of CERC’s Derivative Assets and Liabilities as of December 31, 2015 and 2014, while the last table provides a breakdown of the related income statement impacts for the years ending December 31, 2015 and 2014.



Fair Value of Derivative Instruments
	December 31, 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) (3)	Current Assets: Non-trading derivative assets	$	90	$	2
Natural gas derivatives (1) (2) (3)	Other Assets: Non-trading derivative assets	36		—
Natural gas derivatives (1) (2) (3)	Current Liabilities: Non-trading derivative liabilities	10		60
Natural gas derivatives (1) (2) (3)	Other Liabilities: Non-trading derivative liabilities	4		25
Total		$	140	$	87


(1)	The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 767 billion cubic feet (Bcf) or a net 112 Bcf long position. Of the net long position, basis swaps constitute 133 Bcf.

(2)

Natural gas contracts are presented on a net basis in the 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 Consolidated Balance Sheets. The net of total non-trading derivative assets and liabilities was a $109 million asset as shown on CERC’s 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 $56 million.


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



Offsetting of Natural Gas Derivative Assets and Liabilities
	December 31, 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	$	100		$	(11	)	$	89
Other Assets: Non-trading derivative assets	40			(4		)	36
Current Liabilities: Non-trading derivative liabilities	(62		)	51			(11		)
Other Liabilities: Non-trading derivative liabilities	(25		)	20			(5		)
Total	$	53		$	56		$	109


(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.



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) (3)	Current Assets: Non-trading derivative assets	$	101	$	1
Natural gas derivatives (1) (2) (3)	Other Assets: Non-trading derivative assets	32		—
Natural gas derivatives (1) (2) (3)	Current Liabilities: Non-trading derivative liabilities	14		83
Natural gas derivatives (1) (2) (3)	Other Liabilities: Non-trading derivative liabilities	2		18
Total		$	149	$	102


(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 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 Consolidated Balance Sheets. The net of total non-trading derivative assets and liabilities was a $111 million asset as shown on CERC’s 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.


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



Offsetting of Natural Gas Derivative Assets and Liabilities
	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 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.

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	2015			2014		2013
		(in millions)
Natural gas derivatives	Gains (Losses) in Revenue	$	134		$	35	$	11
Natural gas derivatives (1)	Gains (Losses) in Expense: Natural Gas	(105		)	11		10
Total		$	29		$	46	$	21


(1)	The Gains (Losses) in Expense: Natural Gas includes $-0- and $2 million during the years ended December 31, 2015 and 2014, respectively, related to physical forwards purchased from Enable.

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, 2015 and 2014 was $3 million and $2 million, respectively. CERC posted no assets as collateral towards derivative instruments that contain credit risk contingent features at either December 31, 2015 or 2014. If all derivative contracts (in a net liability position) containing credit risk contingent features were triggered at both December 31, 2015 and 2014, $2 million 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, 2015 and 2014:



	December 31, 2015				December 31, 2014
	Investment Grade(1)		Total		Investment Grade(1)		Total
	(in millions)
Energy marketers	$	4	$	10	$	2	$	4
Financial institutions	—		—		—		—
End users (2)	2		115		2		127
Total	$	6	$	125	$	4	$	131


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


(2)	End users are comprised primarily of customers who have contracted to fix the price of a portion of their physical gas requirements for future periods.