Derivative Instruments

The Registrants are exposed to various market risks. These risks arise from transactions entered into in the normal course of business. The Registrants utilize derivative instruments such as physical forward contracts, swaps and options to mitigate the impact of changes in commodity prices, weather and interest rates on operating results and cash flows.

(a) Non-Trading Activities

Commodity Derivative Instruments. CenterPoint Energy and CERC, through CES, enter 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 reportable 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. CenterPoint Energy and CERC have weather normalization or other rate mechanisms that mitigate the impact of weather on NGD in Arkansas, Louisiana, Mississippi, Minnesota and Oklahoma. CenterPoint Energy’s and CERC’s NGD and CenterPoint Energy’s electric operations in Texas do not have such mechanisms, although fixed customer charges are historically higher in Texas for NGD compared to its other jurisdictions. As a result, fluctuations from normal weather may have a positive or negative effect on CenterPoint Energy’s and CERC’s NGD’s results in Texas and on CenterPoint Energy’s electric operations’ results in its service territory.

CenterPoint Energy and CERC, as applicable, enter into winter season weather hedges from time to time for certain NGD jurisdictions and electric operations’ service territory to mitigate the effect of fluctuations from normal weather on results of operations and cash flows. These weather hedges are based on heating degree days at 10-year normal weather. Houston Electric does not enter into weather hedges.

The table below summarizes CenterPoint Energy’s and CERC’s weather hedge gain (loss) activity:



				Year Ended December 31,
Jurisdiction	Winter Season	Bilateral Cap		2018			2017			2016
		(in millions)
Certain NGD jurisdictions	2018 – 2019	$	9	$	—		$	—		$	—
Certain NGD jurisdictions	2017 – 2018	8		(2		)	—			—
Total CERC (1)				(2		)	—			—
Electric operations’ Texas service territory	2018 – 2019	8		—			—			—
Electric operations’ Texas service territory	2017 – 2018	9		(2		)	—			—
Electric operations’ Texas service territory	2016 – 2017	9		—			(1		)	1
Total CenterPoint Energy (1)				$	(4	)	$	(1	)	$	1


(1)	Weather hedge gains (losses) are recorded in Revenues in the Statements of Consolidated Income.

Cash Flow Hedging of Interest Expense. From time to time, the Registrants enter into forward interest rate agreements with certain counterparties designated as cash flow hedges. The objective of these cash flow hedges is to reduce exposure to variability in cash flows related to interest payments on anticipated future fixed rate debt offerings or other exposure to variable rate debt. As of December 31, 2018 and 2017, the total outstanding notional amount of CenterPoint Energy’s and Houston Electric’s forward interest rate agreements related to cash flow hedges was $450 million and $-0-, respectively. The maximum length of time over which CenterPoint Energy and Houston Electric are exposed to the variability in future cash flows of the forecasted debt offerings is less than 12 months. For the impacts of cash flow hedges to accumulated other comprehensive income, see Note 13.

Economic Hedging of Interest Rate Risk. From time to time, the Registrants may enter into forward interest rate agreements with certain counterparties designated as economic hedges. The objective of these economic hedges is to offset any interest rate risk borne by one or more of the Registrants in connection with an anticipated future fixed rate debt offering or other exposure to variable rate debt. As of December 31, 2018 and 2017, the Registrants did not have any outstanding forward interest rate agreements related to economic hedges.

(b) Derivative Fair Values and Income Statement Impacts

The following tables present information about derivative instruments and hedging activities. The first three tables provide a balance sheet overview of Derivative Assets and Liabilities as of December 31, 2018 and 2017, while the last three tables provide a breakdown of the related income statement impacts for the years ending December 31, 2018, 2017 and 2016.



Fair Value of Derivative Instruments

		December 31, 2018				December 31, 2017
	Balance Sheet Location	Derivative Assets Fair Value		Derivative Liabilities Fair Value		Derivative Assets Fair Value		Derivative Liabilities Fair Value
		(in millions)
Derivatives designated as cash flow hedges:
Interest rate derivatives	Current Liabilities: Non-trading derivative liabilities	$	—	$	24	$	—	$	—
	Total Houston Electric	—		24		—		—
Derivatives designated as fair value hedges:
Natural gas derivatives (1) (2) (3)	Current Liabilities: Non-trading derivative liabilities	1		7		13		1
Derivatives not designated as hedging instruments:
Natural gas derivatives (1) (2) (3)	Current Assets: Non-trading derivative assets	103		3		114		4
Natural gas derivatives (1) (2) (3)	Other Assets: Non-trading derivative assets	38		—		44		—
Natural gas derivatives (1) (2) (3)	Current Liabilities: Non-trading derivative liabilities	62		173		38		78
Natural gas derivatives (1) (2) (3)	Other Liabilities: Non-trading derivative liabilities	16		25		9		24
	Total CERC	220		208		218		107
Indexed debt securities derivative	Current Liabilities	—		601		—		668
	Total CenterPoint Energy	$	220	$	833	$	218	$	775


(1)	The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 1,674 Bcf or a net 140 Bcf long position and 1,795 Bcf or a net 224 Bcf long position as of December 31, 2018 and 2017, respectively. 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 is detailed in the Offsetting of Natural Gas Derivative Assets and Liabilities table below.


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



Cumulative Basis Adjustment for Fair Value Hedges (CenterPoint Energy and CERC)
		December 31, 2018				December 31, 2017
	Balance Sheet Location	Carrying Amount of Hedged Assets/(Liabilities)		Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of Hedged Item		Carrying Amount of Hedged Assets/(Liabilities)		Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of Hedged Item
		(in millions)
Hedged items in fair value hedge relationship:
Natural gas inventory	Current Assets: Natural gas inventory	$	57	$	1	$	80	$	14
Total CenterPoint Energy and CERC		$	57	$	1	$	80	$	14



Offsetting of Natural Gas Derivative Assets and Liabilities (CenterPoint Energy and CERC)
	December 31, 2018									December 31, 2017
	Gross Amounts Recognized (1)			Gross Amounts Offset in the Consolidated Balance Sheets			Net Amount Presented in the Consolidated Balance Sheets (2)			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	$	166		$	(66	)	$	100		$	165		$	(55	)	$	110
Other Assets: Non-trading derivative assets	54			(16		)	38			53			(9		)	44
Current Liabilities: Non-trading derivative liabilities	(183		)	81			(102		)	(83		)	63			(20		)
Other Liabilities: Non-trading derivative liabilities	(25		)	20			(5		)	(24		)	20			(4		)
Total	$	12		$	19		$	31		$	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.

Income Statement Impact of Hedge Accounting Activity (CenterPoint Energy and CERC)



	Year Ended December 31,
	2018			2017			2016
	Location and Amount of Gain (Loss) recognized in Income on Hedging Relationship (2)
	Non-utility natural gas expense
	(in millions)
Total amounts presented in the statements of income in which the effects of hedges are recorded	$	4,364		$	3,785		$	1,983

Gain (loss) on fair value hedging relationships:
Commodity contracts:
Hedged items - Natural gas inventory	(13		)	14			—
Derivatives designated as hedging instruments	13			(14		)	—
Amounts excluded from effectiveness testing recognized in earnings immediately (1)	(149		)	(67		)	70

(1)

Upon adoption of ASU 2017-12 effective January 1, 2018 (see Note 2 for additional information), CenterPoint Energy and CERC elected to exclude from their assessment of hedge effectiveness the natural gas market price difference between locations of the hedged inventory and the delivery location specified in the hedge instruments. Prior to the adoption of this accounting guidance, the timing 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, was excluded from the assessment of effectiveness for CenterPoint Energy’s and CERC’s existing fair value hedges and will continue to be excluded from the assessment of hedge effectiveness. CenterPoint Energy and CERC elected to continue to immediately recognize amounts excluded from hedge effectiveness in their respective Statements of Consolidated Income.


(2)	Income statement impact associated with cash flow hedge activity is related to gains and losses reclassified from Accumulated other comprehensive income into income. Amounts are immaterial for the Registrants for the years ended December 31, 2018, 2017 and 2016, respectively.



		Year Ended December 31,
	Income Statement Location	2018			2017		2016
		(in millions)
Effects of derivatives not designated as hedging instruments on the income statement:
Commodity contracts	Gains (Losses) in Non-utility revenues	$	107		$	211	$	(18	)
Total CERC		107			211		(18		)
Indexed debt securities derivative	Gains (Losses) in Other Income (Expense)	(232		)	49		(413		)
Interest rate derivatives	Gains in Other Income (Expense)	2			—		—
Total CenterPoint Energy		$	(123	)	$	260	$	(431	)

CenterPoint Energy and CERC enter into financial derivative contracts containing material adverse change provisions. These provisions could require CenterPoint Energy or CERC to post additional collateral if the S&P or Moody’s credit ratings of CenterPoint Energy, Inc. or its subsidiaries, including CERC Corp., are downgraded.

CenterPoint Energy and CERC



	December 31, 2018		December 31, 2017
	(in millions)
Aggregate fair value of derivatives containing material adverse change provisions in a net liability position	$	1	$	2
Fair value of collateral already posted	—		—
Additional collateral required to be posted if credit risk contingent features triggered	—		2

(d) Credit Quality of Counterparties

In addition to the risk associated with price movements, credit risk is also inherent in CenterPoint Energy’s and 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:



CenterPoint Energy and CERC
	December 31, 2018				December 31, 2017
	Investment Grade (1)		Total (3)		Investment Grade (1)		Total (3)
	(in millions)
Energy marketers	$	11	$	24	$	6	$	45
End users (2)	30		114		17		109
Total	$	41	$	138	$	23	$	154

(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, CenterPoint Energy and CERC determine a synthetic credit rating by performing financial statement analysis and consider 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 amounts reflected in the table above were not impacted by collateral netting.