Fair Value Measurements

Assets and liabilities that are recorded at fair value in the Registrants’ 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 natural gas derivative assets or liabilities. CenterPoint Energy’s Level 2 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 observable inputs.

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 December 31, 2018, CenterPoint Energy’s and CERC’s Level 3 assets and liabilities are comprised of physical natural gas forward contracts and options. 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 $1.39 to $5.96 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). Forward price decreases (increases) as of December 31, 2018 would have resulted in lower (higher) values, respectively, for long forwards and options and higher (lower) values, respectively, for short forwards and options.

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.

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 as of December 31, 2018 and December 31, 2017, and indicate the fair value hierarchy of the valuation techniques utilized by the Registrants to determine such fair value.

CenterPoint Energy



	December 31, 2018											December 31, 2017
	Level 1 (4)		Level 2		Level 3		Netting (1)			Total		Level 1 (4)		Level 2		Level 3		Netting (1)			Total
Assets	(in millions)
Corporate equities	$	542	$	—	$	—	$	—		$	542	$	963	$	—	$	—	$	—		$	963
Investments, including money market funds (2)	66		—		—		—			66		68		—		—		—			68
Natural gas derivatives (3)(4)	—		173		47		(82		)	138		—		161		57		(64		)	154
Hedged portion of natural gas inventory	1		—		—		—			1		14		—		—		—			14
Total assets	$	609	$	173	$	47	$	(82	)	$	747	$	1,045	$	161	$	57	$	(64	)	$	1,199
Liabilities
Indexed debt securities derivative	$	—	$	601	$	—	$	—		$	601	$	—	$	—	$	668	$	—		$	668
Interest rate derivatives	24		—		—		—			24		—		—		—		—			—
Natural gas derivatives (3)(4)	—		191		17		(101		)	107		—		96		11		(83		)	24
Total liabilities	$	24	$	792	$	17	$	(101	)	$	732	$	—	$	96	$	679	$	(83	)	$	692

Houston Electric



	December 31, 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)	$	48	$	—	$	—	$	—	$	48	$	51	$	—	$	—	$	—	$	51
Total assets	$	48	$	—	$	—	$	—	$	48	$	51	$	—	$	—	$	—	$	51
Liabilities
Interest rate derivatives	$	24	$	—	$	—	$	—	$	24	$	—	$	—	$	—	$	—	$	—
Total liabilities	$	24	$	—	$	—	$	—	$	24	$	—	$	—	$	—	$	—	$	—

CERC



	December 31, 2018											December 31, 2017
	Level 1 (4)		Level 2		Level 3		Netting (1)			Total		Level 1 (4)		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)(4)	—		173		47		(82		)	138		—		161		57		(64		)	154
Hedged portion of natural gas inventory	1		—		—		—			1		14		—		—		—			14
Total assets	$	14	$	173	$	47	$	(82	)	$	152	$	28	$	161	$	57	$	(64	)	$	182
Liabilities
Natural gas derivatives (3)(4)	$	—	$	191	$	17	$	(101	)	$	107	$	—	$	96	$	11	$	(83	)	$	24
Total liabilities	$	—	$	191	$	17	$	(101	)	$	107	$	—	$	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 $19 million as of both December 31, 2018 and 2017, respectively, posted with the same counterparties.


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


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

(4)

Level 1 natural gas derivatives include exchange-traded derivatives cleared by the CME, which deems that financial instruments cleared by the CME are settled daily in connection with posted cash payments. As a result of this exchange rule, CME-related derivatives are considered to have no fair value at the balance sheet date for financial reporting purposes, and are presented in Level 1 net of posted cash; however, the derivatives remain outstanding and subject to future commodity price fluctuations until they are settled in accordance with their contractual terms. Derivative transactions cleared on exchanges other than the CME (e.g., the Intercontinental Exchange or ICE) continue to be reported on a gross basis.

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:



	Year Ended December 31,
	2018						2017						2016
	CenterPoint Energy			CERC			CenterPoint Energy			CERC			CenterPoint Energy			CERC
	(in millions)
Beginning balance	$	(622	)	$	46		$	(704	)	$	13		$	12		$	12
Purchases (1)	—			—			—			—			12			12
Total gains (losses)	30			30			96			47			12			12
Total settlements	(39		)	(39		)	(11		)	(11		)	(27		)	(27		)
Transfers into Level 3 (2)	5			5			14			14			(712		)	5
Transfers out of Level 3 (3)	656			(12		)	(17		)	(17		)	(1		)	(1		)
Ending balance (4)	$	30		$	30		$	(622	)	$	46		$	(704	)	$	13

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:
	$	18		$	18		$	87		$	38		$	(402	)	$	11


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


(2)	During 2016, CenterPoint Energy transferred its indexed debt securities from Level 2 to Level 3 to reflect changes in the significance of the unobservable inputs used in the valuation.


(3)	During 2018, CenterPoint Energy transferred its indexed debt securities derivative from Level 3 to Level 2 to reflect changes in the significance of the unobservable inputs used in the valuation.


(4)	CenterPoint Energy and CERC did not have significant Level 3 sales during any of the years ended December 31, 2018, 2017 or 2016.

Items Measured at Fair Value on a Nonrecurring Basis

As of December 31, 2018 and 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, 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’ Consolidated Balance Sheets, but for which the fair value is disclosed, would be classified as Level 2 in the fair value hierarchy.



	December 31, 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	$	9,140	$	4,717	$	2,371	$	8,679	$	4,753	$	2,457
Fair value	9,308		4,770		2,488		9,220		5,034		2,708


(1)	Includes Securitization Bond debt.