Fair Value Measurements

Assets and liabilities that are recorded at fair value in the Registrants’ Condensed 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 the Registrants’ 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 the Registrants’ judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. The Registrants develop these inputs based on the best information available, including the Registrants’ own data. A market approach is utilized to value the Registrants’ Level 3 assets or liabilities. As of June 30, 2018, CenterPoint Energy’s and CERC’s Level 3 assets and liabilities are comprised of physical natural gas forward contracts and options and CenterPoint Energy’s indexed debt securities. Level 3 physical natural gas forward contracts and options are valued using a discounted cash flow model which includes illiquid forward price curve locations (ranging from $1.04 to $3.31 per MMBtu) as an unobservable input. CenterPoint Energy’s and 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. If forward prices decrease, CenterPoint Energy’s and CERC’s long forwards and options lose value whereas their short forwards and options gain in value. CenterPoint Energy’s Level 3 indexed debt securities derivative is valued using an option model and a discounted cash flow model, which uses projected dividends on the ZENS-Related Securities and a discount rate as unobservable inputs. An increase and a decrease in the unobservable inputs will generally decrease and increase the value of the indexed debt securities derivative, respectively.

The Registrants determine the appropriate level for each financial asset and liability on a quarterly basis and recognize transfers between levels at the end of the reporting period. For the six months ended June 30, 2018, there were no transfers between Level 1 and 2. The Registrants also recognize 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 the Registrants’ assets and liabilities (including derivatives that are presented net) measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Registrants to determine such fair value.

CenterPoint Energy



	June 30, 2018											December 31, 2017
	Level 1		Level 2		Level 3		Netting (1)			Total		Level 1		Level 2		Level 3		Netting (1)			Total
Assets	(in millions)
Corporate equities	$	586	$	—	$	—	$	—		$	586	$	963	$	—	$	—	$	—		$	963
Investments, including money market funds (2)	70		—		—		—			70		68		—		—		—			68
Natural gas derivatives (3)	—		142		18		(40		)	120		—		161		57		(64		)	154
Hedged portion of natural gas inventory	—		—		—		—			—		14		—		—		—			14
Total assets	$	656	$	142	$	18	$	(40	)	$	776	$	1,045	$	161	$	57	$	(64	)	$	1,199
Liabilities
Indexed debt securities derivative	$	—	$	—	$	641	$	—		$	641	$	—	$	—	$	668	$	—		$	668
Natural gas derivatives (3)	—		105		5		(72		)	38		—		96		11		(83		)	24
Hedged portion of natural gas inventory	1		—		—		—			1		—		—		—		—			—
Total liabilities	$	1	$	105	$	646	$	(72	)	$	680	$	—	$	96	$	679	$	(83	)	$	692

Houston Electric



	June 30, 2018										December 31, 2017
	Level 1		Level 2		Level 3		Netting		Total		Level 1		Level 2		Level 3		Netting		Total
Assets	(in millions)
Investments, including money market funds (2)	$	52	$	—	$	—	$	—	$	52	$	51	$	—	$	—	$	—	$	51
Total assets	$	52	$	—	$	—	$	—	$	52	$	51	$	—	$	—	$	—	$	51

CERC



	June 30, 2018											December 31, 2017
	Level 1		Level 2		Level 3		Netting (1)			Total		Level 1		Level 2		Level 3		Netting (1)			Total
Assets	(in millions)
Corporate equities	$	2	$	—	$	—	$	—		$	2	$	3	$	—	$	—	$	—		$	3
Investments, including money market funds (2)	11		—		—		—			11		11		—		—		—			11
Natural gas derivatives (3)	—		142		18		(40		)	120		—		161		57		(64		)	154
Hedged portion of natural gas inventory	—		—		—		—			—		14		—		—		—			14
Total assets	$	13	$	142	$	18	$	(40	)	$	133	$	28	$	161	$	57	$	(64	)	$	182
Liabilities
Natural gas derivatives (3)	$	—	$	105	$	5	$	(72	)	$	38	$	—	$	96	$	11	$	(83	)	$	24
Hedged portion of natural gas inventory	1		—		—		—			1		—		—		—		—			—
Total liabilities	$	1	$	105	$	5	$	(72	)	$	39	$	—	$	96	$	11	$	(83	)	$	24


(1)	Amounts represent the impact of legally enforceable master netting arrangements that allow CenterPoint Energy and CERC to settle positive and negative positions and also include cash collateral of $32 million and $19 million as of June 30, 2018 and December 31, 2017, respectively, posted with the same counterparties.


(2)	Amounts are included in Prepaid expenses and other current assets in the Condensed 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 CenterPoint Energy and CERC have utilized Level 3 inputs to determine fair value:



	Three Months Ended June 30,												Six Months Ended June 30,
	2018						2017						2018						2017
	CenterPoint Energy			CERC			CenterPoint Energy			CERC			CenterPoint Energy			CERC			CenterPoint Energy			CERC
	(in millions)
Beginning balance	$	(662	)	$	12		$	(700	)	$	27		$	(622	)	$	46		$	(704	)	$	13
Total gains (losses)	(11		)	1			(6		)	7			(16		)	3			—			23
Total settlements	44			(1		)	—			—			11			(35		)	(4		)	(4		)
Transfers into Level 3	1			1			1			1			1			1			2			2
Transfers out of Level 3	—			—			(7		)	(7		)	(2		)	(2		)	(6		)	(6		)
Ending balance (1)	$	(628	)	$	13		$	(712	)	$	28		$	(628	)	$	13		$	(712	)	$	28

The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date:
	$	(9	)	$	3		$	(9	)	$	4		$	(23	)	$	(4	)	$	(2	)	$	21


(1)	CenterPoint Energy and CERC did not have significant Level 3 sales or purchases during either of the three or six months ended June 30, 2018 or 2017.

Estimated Fair Value of Financial Instruments

The fair values of cash and cash equivalents, investments in debt and equity securities classified as “trading” 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 and CenterPoint Energy’s ZENS indexed debt securities derivative 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 Registrants’ Condensed Consolidated Balance Sheets, but for which the fair value is disclosed, would be classified as Level 2 in the fair value hierarchy.



	June 30, 2018						December 31, 2017
	CenterPoint Energy (1)		Houston Electric (1)		CERC		CenterPoint Energy (1)		Houston Electric (1)		CERC
Long-term debt, including current maturities	(in millions)
Carrying amount	$	8,256	$	4,919	$	2,722	$	8,679	$	4,753	$	2,457
Fair value	8,470		4,991		2,876		9,220		5,034		2,708


(1)	Includes Securitization Bond debt.