Fair Value Measurements

Assets and liabilities that are recorded at fair value in the 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, as well as natural gas inventory that has been designated as the hedged item in a fair value hedge.

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 CERC’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 CERC’s judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. CERC develops these inputs based on the best information available, including CERC’s own data. A market approach is utilized to value CERC’s Level 3 assets or liabilities. As of December 31, 2017, CERC’s Level 3 assets and liabilities are comprised of physical natural gas forward contracts and options. Level 3 physical natural gas forward contracts are valued using a discounted cash flow model which includes illiquid forward price curve locations (ranging from $1.73 to $9.02 per MMBtu) 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 83%) as an unobservable input. CERC’s Level 3 physical natural gas forward contracts and options 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, CERC’s long forwards lose value whereas its short forwards gain in value. If volatility decreases, CERC’s long options lose value whereas its short options gain in value.

CERC 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 year ended December 31, 2017, there were no transfers between Level 1 and 2. CERC 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 CERC’s assets and liabilities (including derivatives that are presented net) measured at fair value on a recurring basis as of December 31, 2017 and 2016 and indicate the fair value hierarchy of the valuation techniques utilized by CERC to determine such fair value.



	December 31, 2017
	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
	(in millions)
Assets
Corporate equities	$	3	$	—	$	—	$	—		$	3
Investments, including money market funds (2)	11		—		—		—			11
Natural gas derivatives (3)	—		161		57		(64		)	154
Hedged portion of natural gas inventory	14		—		—		—			14
Total assets	$	28	$	161	$	57	$	(64	)	$	182
Liabilities
Natural gas derivatives (3)	$	—	$	96	$	11	$	(83	)	$	24
Total liabilities	$	—	$	96	$	11	$	(83	)	$	24


(1)	Amounts represent the impact of legally enforceable master netting arrangements that allow CERC to settle positive and negative positions and also include cash collateral of $19 million posted with the same counterparties.


(2)	Amounts are included in Other Assets in the Consolidated Balance Sheets.


(3)	Natural gas derivatives include no material amounts related to physical forward transactions with Enable.



	December 31, 2016
	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
	(in millions)
Assets
Corporate equities	$	3	$	—	$	—	$	—		$	3
Investments, including money market funds (2)	10		—		—		—			10
Natural gas derivatives (3)	11		74		20		(35		)	70
Total assets	$	24	$	74	$	20	$	(35	)	$	83
Liabilities
Natural gas derivatives (3)	$	4	$	56	$	7	$	(21	)	$	46
Total liabilities	$	4	$	56	$	7	$	(21	)	$	46


(1)	Amounts represent the impact of legally enforceable master netting arrangements that allow CERC to settle positive and negative positions and also include cash collateral of $14 million held by CES from the same counterparties.


(2)	Amounts are included in Other Assets in the Consolidated Balance Sheets.


(3)	Natural gas derivatives include no material amounts related to physical forward transactions with Enable.

The following table presents additional information about assets or liabilities, including derivatives that are measured at fair value on a recurring basis for which CERC has utilized Level 3 inputs to determine fair value:



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Derivative assets and liabilities, net
	Year Ended December 31,
	2017			2016			2015
	(in millions)
Beginning balance	$	13		$	12		$	17
Purchases (1)	—			12			—
Total gains	47			12			7
Total settlements	(11		)	(27		)	(12		)
Transfers out of Level 3	(17		)	(1		)	(1		)
Transfers into Level 3	14			5			1
Ending balance (2)	$	46		$	13		$	12
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	$	38		$	11		$	6


(1)	Mark-to-market value of Level 3 derivative assets acquired through the purchase of AEM was less than $1 million at the acquisition date.


(2)	During 2017, 2016 and 2015, CERC did not have significant Level 3 sales.

Items Measured at Fair Value on a Nonrecurring Basis

In 2015, CERC determined that an other than temporary decrease in the value of its investment in Enable had occurred and, using multiple valuation methodologies under both the market and income approaches, recorded an impairment on its investment in Enable of $1,225 million. Key assumptions in the market approach included recent market transactions of comparable companies and EBITDA to total enterprise multiples for comparable companies. Due to volatility of the quoted price of Enable’s units at the valuation date, a volume weighted average price was used under the market approach to best approximate fair value at the measurement date. Key assumptions in the income approach included Enable’s forecasted cash distributions, projected cash flows of incentive distribution rights, forecasted growth rate of Enable’s cash distributions beyond 2020, and the discount rate used to determine the present value of the estimated future cash flows. A weighing of the different approaches was utilized to determine the estimated fair value of our investment in Enable. Based on the significant unobservable estimates and assumptions required, CERC concluded that the fair value estimate should be classified as a Level 3 measurement within the fair value hierarchy. See Note 11 for further discussion of the impairments. As of December 31, 2017, 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 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 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 a combination of historical trading prices and comparable issue data. These liabilities, which are not measured at fair value in the Consolidated Balance Sheets but for which the fair value is disclosed, would be classified as Level 2 in the fair value hierarchy.



	December 31, 2017				December 31, 2016
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(in millions)
Financial liabilities:
Long-term debt	$	2,457	$	2,708	$	2,375	$	2,551