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 mitigate the effects of commodity price movements. Certain financial instruments used to hedge portions of the natural gas inventory of the Energy Services business segment are designated as fair value hedges for accounting purposes. All other financial instruments do not qualify or are not designated as cash flow or fair value hedges.

Weather Hedges. 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 for NGD compared to CERC’s other jurisdictions. As a result, fluctuations from normal weather may have a positive or negative effect on NGD’s results in Texas.

CERC 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 2014-2015 winter heating season, which contained a bilateral dollar cap of $16 million. However, CERC did not enter into heating-degree day swaps for NGD jurisdictions for the 2015-2016 or 2016-2017 winter heating seasons. CERC entered into heating-degree day swaps for certain NGD Texas jurisdictions for the 2017-2018 winter heating season, which contained a bilateral dollar cap of $8 million. The swaps are based on 10-year normal weather. During the years ended December 31, 2017, 2016 and 2015, CERC recognized losses of $-0-, $-0- and $4 million, respectively, related to these swaps. Weather hedge gains and losses are included in revenues in the Statements of Consolidated Income.

Hedging of Interest Expense for Future Debt Issuances. In August 2017, CERC Corp. entered into forward interest rate agreements with multiple counterparties, having an aggregate notional amount of $150 million. These agreements were executed to hedge, in part, volatility in the 30-year U.S. treasury rate by reducing CERC Corp.’s exposure to variability in cash flows related to interest payments of CERC Corp.’s $300 million issuance of fixed rate debt in August 2017. These forward interest rate agreements were designated as cash flow hedges. Accordingly, the effective portion of realized losses associated with the agreements, which totaled approximately $2 million, is a component of accumulated other comprehensive income in 2017 and will be amortized over the life of the fixed rate debt.

As of December 31, 2017, CERC Corp. had no pre-issuance interest rate hedges in place.

(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, 2017 and 2016, while the last table provides a breakdown of the related income statement impacts for the years ending December 31, 2017, 2016 and 2015.



Fair Value of Derivative Instruments
	December 31, 2017
Derivatives designated as fair value hedges:	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	$	—	$	—
Natural gas derivatives (1) (2) (3)	Current Liabilities: Non-trading derivative liabilities	13		1

Derivatives not designated as hedging instruments:
Natural gas derivatives (1) (2) (3)	Current Assets: Non-trading derivative assets	114		4
Natural gas derivatives (1) (2) (3)	Other Assets: Non-trading derivative assets	44		—
Natural gas derivatives (1) (2) (3)	Current Liabilities: Non-trading derivative liabilities	38		78
Natural gas derivatives (1) (2) (3)	Other Liabilities: Non-trading derivative liabilities	9		24
Total		$	218	$	107


(1)	The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 1,795 Bcf or a net 224 Bcf long position. Certain natural gas contracts hedge basis risk only and lack a fixed price exposure.

(2)

Natural gas contracts are presented on a net basis in the Consolidated Balance Sheets as they are subject to master netting arrangements. This netting applies to all undisputed amounts due or past due and causes derivative assets (liabilities) to be ultimately presented net in a liability (asset) account within the Consolidated Balance Sheets. The net of total non-trading natural gas derivative assets and liabilities was a $130 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, impacted by collateral netting of $19 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, 2017
	Gross Amounts Recognized (1)			Gross Amounts Offset in the Consolidated Balance Sheets			Net Amount Presented in the Consolidated Balance Sheets (2)
	(in millions)
Current Assets: Non-trading derivative assets	$	165		$	(55	)	$	110
Other Assets: Non-trading derivative assets	53			(9		)	44
Current Liabilities: Non-trading derivative liabilities	(83		)	63			(20		)
Other Liabilities: Non-trading derivative liabilities	(24		)	20			(4		)
Total	$	111		$	19		$	130


(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, 2016
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	$	79	$	14
Natural gas derivatives (1) (2) (3)	Other Assets: Non-trading derivative assets	24		5
Natural gas derivatives (1) (2) (3)	Current Liabilities: Non-trading derivative liabilities	2		43
Natural gas derivatives (1) (2) (3)	Other Liabilities: Non-trading derivative liabilities	—		5
Total		$	105	$	67


(1)	The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 1,035 Bcf or a net 59 Bcf long position. Certain natural gas contracts hedge basis risk only and lack a fixed price exposure.

(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 $24 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, impacted by collateral netting of $14 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, 2016
	Gross Amounts Recognized (1)			Gross Amounts Offset in the Consolidated Balance Sheets			Net Amount Presented in the Consolidated Balance Sheets (2)
	(in millions)
Current Assets: Non-trading derivative assets	$	81		$	(30	)	$	51
Other Assets: Non-trading derivative assets	24			(5		)	19
Current Liabilities: Non-trading derivative liabilities	(57		)	16			(41		)
Other Liabilities: Non-trading derivative liabilities	(10		)	5			(5		)
Total	$	38		$	(14	)	$	24


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


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

Realized and unrealized gains and losses on natural gas derivatives are recognized in the Statements of Consolidated Income as revenue for physical sales derivative contracts and as natural gas expense for financial natural gas derivatives and physical purchase natural gas derivatives.

Hedge ineffectiveness is recorded as a component of natural gas expense and primarily results from differences in the location of the derivative instrument and the hedged item. Basis ineffectiveness arises from natural gas market price differences between the locations of the hedged inventory and the delivery location specified in the hedge instruments. The impact of natural gas derivatives designated as fair value hedges, the related hedged item, and natural gas derivatives not designated as hedging instruments are presented in the table below.



Income Statement Impact of Derivative Activity
		Year Ended December 31,
	Income Statement Location	2017			2016			2015
Derivatives designated as fair value hedges:		(in millions)
Natural gas derivatives	Gains (Losses) in Expenses: Natural Gas	$	(9	)	$	—		$	—
Fair value adjustments for natural gas inventory designated as the hedged item	Gains (Losses) in Expenses: Natural Gas	14			—			—
Total increase in Expenses: Natural Gas (1)		$	5		$	—		$	—

Derivatives not designated as hedging instruments:
Natural gas derivatives	Gains (Losses) in Revenues	$	211		$	(18	)	$	134
Natural gas derivatives	Gains (Losses) in Expenses: Natural Gas	(72		)	70			(105		)
Total - derivatives not designated as hedging instruments		$	139		$	52		$	29

(1)

Hedge ineffectiveness results from the basis ineffectiveness discussed above, and excludes the impact to natural gas expense from timing ineffectiveness. Timing ineffectiveness arises due to changes in the difference between the spot price and the futures price, as well as the difference between the timing of the settlement of the futures and the valuation of the underlying physical commodity. As the commodity contract nears the settlement date, spot-to-forward price differences should converge, which should reduce or eliminate the impact of this ineffectiveness on natural gas expense.

CERC enters into financial derivative contracts containing material adverse change provisions. These provisions could require CERC to post additional collateral if the S&P or Moody’s 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 as of December 31, 2017 and 2016 was $2 million and $1 million, respectively. CERC posted no assets as collateral towards derivative instruments that contain credit risk contingent features as of either December 31, 2017 or 2016. If all derivative contracts (in a net liability position) containing credit risk contingent features were triggered at December 31, 2017 and 2016, $2 million and $-0-, 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, 2017 and 2016:



	December 31, 2017					December 31, 2016
	Investment Grade(1)		Total			Investment Grade(1)		Total
	(in millions)
Energy marketers	$	6	$	45		$	1	$	4
Financial institutions	—		—			33		33
End users (2)	17		109			2		47
Total	$	23	$	154	(3)	$	36	$	84


(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.


(3)	The net of total non-trading natural gas derivative assets was $154 million and $70 million as of December 31, 2017 and 2016, respectively, as shown on CERC’s Consolidated Balance Sheets, and was comprised of the natural gas contracts derivatives assets separately shown above, impacted by collateral netting of $-0- and $14 million as of December 31, 2017 and 2016, respectively.