Unconsolidated Affiliate (CenterPoint Energy and CERC)

CenterPoint Energy has the ability to significantly influence the operating and financial policies of Enable, a publicly traded MLP, and, accordingly, accounts for its investment in Enable’s common units using the equity method of accounting. Upon the adoption of ASU 2014-09 and ASU 2017-05 on January 1, 2018, CenterPoint Energy and CERC evaluated transactions in the investment in Enable that occurred prior to January 1, 2018 (the effective date) and concluded a cumulative effect adjustment to the opening balance of retained earnings was not required. See Note 2(r) for further discussion.

Enable is considered to be a VIE because the power to direct the activities that most significantly impact Enable’s economic performance does not reside with the holders of equity investment at risk. However, CenterPoint Energy is not considered the primary beneficiary of Enable since it does not have the power to direct the activities of Enable that are considered most significant to the economic performance of Enable. As of December 31, 2018, CenterPoint Energy’s maximum exposure to loss related to Enable is limited to the equity investment, its investment in Enable Series A Preferred Units and outstanding current accounts receivable from Enable.

On September 4, 2018, CERC entered into a Contribution Agreement, by and between CERC and CNP Midstream, a new subsidiary formed by CERC in June 2018, pursuant to which CERC contributed its equity investment in Enable consisting of Enable common units and its interests in Enable GP, to CNP Midstream (collectively, the Enable Contribution). Immediately following the Enable Contribution, CERC distributed all of its interest in CNP Midstream to Utility Holding, CERC’s sole stockholder and a wholly-owned subsidiary of CenterPoint Energy. Utility Holding then distributed all of its interest in CNP Midstream to CenterPoint Energy, its sole member (collectively with the Enable Contribution, the Internal Spin). CERC executed the Internal Spin to, among other things, enhance the access of CERC and CenterPoint Energy to low cost debt and equity through increased transparency and understandability of the financial statements, improve CERC’s credit quality by eliminating the exposure to Enable’s midstream business and provide clarity of internal reporting and performance metrics to enhance management’s decision making for CERC and CNP Midstream.

The Internal Spin has been accounted for under the guidance for transactions between entities under common control. As of September 4, 2018, CERC derecognized its investment in Enable at carrying value on the date of distribution of $2.4 billion, net of deferred income taxes of $974 million, and CNP Midstream recorded the net asset contribution from CERC at CERC’s carrying value. Neither CERC nor CNP Midstream recognized a gain or loss upon the distribution or contribution, respectively, of net assets involved in the Internal Spin. In connection with the Internal Spin, CenterPoint Energy, through Utility Holding, made a $600 million capital contribution to CERC, which was used by CERC to repay outstanding indebtedness that historically supported CERC’s legacy midstream assets. See Note 21 for further discussion.

As a result of the Internal Spin, CERC’s equity in earnings in Enable and related income taxes have been classified as discontinued operations in CERC’s Consolidated Financial Statements as detailed below.

Limited Partner Interest and Units Held in Enable (CenterPoint Energy and CERC):



	As of December 31,
	2018				2017
	Limited Partner Interest (1)		Common Units	Enable Series A Preferred Units (2)	Limited Partner Interest (1)		Common Units	Enable Series A Preferred Units (2)
CenterPoint Energy (3)	54.0	%	233,856,623	14,520,000	54.1	%	233,856,623	14,520,000
OGE	25.6	%	110,982,805	—	25.7	%	110,982,805	—
Public unitholders	20.4	%	88,392,983	—	20.2	%	87,744,652	—


(1)	Excludes the Enable Series A Preferred Units owned by CenterPoint Energy.

(2)

The carrying amount of the Enable Series A Preferred Units, reflected as Preferred units - unconsolidated affiliate on CenterPoint Energy’s Consolidated Balance Sheets, was $363 million as of both December 31, 2018 and 2017. No impairment charges or adjustment to carrying value were made as no observable price changes were identified in the current or prior reporting periods. See Note 2(r) for further discussion.


(3)	Prior to the Internal Spin on September 4, 2018 described above, CenterPoint Energy’s investment in Enable’s common units, excluding the Enable Series A Preferred Units held directly by CenterPoint Energy, was held indirectly through CERC.

Generally, sales to any person or entity (including a series of sales to the same person or entity) of more than 5% of the aggregate of the common units CenterPoint Energy owns in Enable or sales to any person or entity (including a series of sales to the same person or entity) by OGE of more than 5% of the aggregate of the common units it owns in Enable are subject to mutual rights of first offer and first refusal set forth in Enable’s Agreement of Limited Partnership.

Interests Held in Enable GP (CenterPoint Energy and CERC):

CenterPoint Energy and OGE held the following interests in Enable GP as of both December 31, 2018 and 2017:



	Management Rights (1)		Incentive Distribution Rights (2)
CenterPoint Energy (3)	50	%	40	%
OGE	50	%	60	%


(1)	As of December 31, 2018, Enable is controlled jointly by CenterPoint Energy and OGE. Sale of CenterPoint Energy’s or OGE’s ownership interests in Enable GP to a third party is subject to mutual rights of first offer and first refusal, and CenterPoint Energy is not permitted to dispose of less than all of its interest in Enable GP.

(2)

Enable is expected to pay a minimum quarterly distribution of $0.2875 per common unit on its outstanding common units to the extent it has sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to Enable GP and its affiliates, within 60 days after the end of each quarter. If cash distributions to Enable’s unitholders exceed $0.330625 per common unit in any quarter, Enable GP will receive increasing percentages or incentive distributions rights, up to 50%, of the cash Enable distributes in excess of that amount. In certain circumstances Enable GP will have the right to reset the minimum quarterly distribution and the target distribution levels at which the incentive distributions receive increasing percentages to higher levels based on Enable’s cash distributions at the time of the exercise of this reset election. To date, no incentive distributions have been made.


(3)	CenterPoint Energy held the management rights and incentive distributions rights in Enable GP indirectly through CERC until the Internal Spin on September 4, 2018 described above.

Distributions Received from Enable (CenterPoint Energy and CERC):



	Year Ended December 31,
	2018				2017				2016
	Per Unit		Cash Distribution		Per Unit		Cash Distribution		Per Unit		Cash Distribution
	(in millions, except per unit amounts)
Enable common units (1)	$	0.9540	$	223	$	1.2720	$	297	$	1.2720	$	297
Total CERC			223				297				297
Enable common units (1)	0.3180		74		—		—		—		—
Enable Series A Preferred Units (2)	2.5000		36		2.5000		36		1.5417		22
Total CenterPoint Energy			$	333			$	333			$	319


(1)	Reflects CERC’s ownership of Enable common units up to September 4, 2018 when CERC completed the Internal Spin. After such date, distributions from Enable were received directly by CenterPoint Energy.


(2)	2016 amounts represent the period from February 18, 2016 to December 31, 2016.

Transactions with Enable (CenterPoint Energy and CERC):



	Year Ended December 31,
	2018		2017		2016
CenterPoint Energy and CERC	(in millions)
Natural gas expenses, including transportation and storage costs	$	122	$	115	$	110
CenterPoint Energy
Reimbursement of transition services (1)	4		4		7


(1)	Represents amounts billed under the Transition Agreements for certain support services provided to Enable. Actual transition services costs are recorded net of reimbursement.



	December 31,
	2018		2017
CenterPoint Energy and CERC	(in millions)
Accounts payable for natural gas purchases from Enable	$	11	$	13
CenterPoint Energy
Accounts receivable for amounts billed for transition services	2		1

CERC’s continuing involvement with Enable subsequent to the Internal Spin is limited to its natural gas purchases from Enable.

Summarized consolidated income (loss) information for Enable is as follows:



	Year Ended December 31,
	2018			2017		2016
	(in millions)
Operating revenues	$	3,431		$	2,803	$	2,272
Cost of sales, excluding depreciation and amortization	1,819			1,381		1,017
Depreciation and amortization	398			366		338
Operating income	648			528		385
Net income attributable to Enable common units	485			400		290

Reconciliation of Equity in Earnings (Losses), net:
CenterPoint Energy’s interest	$	262		$	216	$	160
Basis difference amortization (1)	47			49		48
Loss on dilution, net of proportional basis difference recognition	(2		)	—		—
CenterPoint Energy’s equity in earnings, net	$	307		$	265	$	208

(1)

Equity in earnings of unconsolidated affiliate includes CenterPoint Energy’s share of Enable earnings adjusted for the amortization of the basis difference of CenterPoint Energy’s original investment in Enable and its underlying equity in net assets of Enable. The basis difference is being amortized over approximately 30 years, the remaining average life of the assets to which the basis difference is attributed.

Summarized consolidated balance sheet information for Enable is as follows:



	December 31,
	2018			2017
	(in millions)
Current assets	$	449		$	416
Non-current assets	11,995			11,177
Current liabilities	1,615			1,279
Non-current liabilities	3,211			2,660
Non-controlling interest	38			12
Preferred equity	362			362
Enable partners’ equity	7,218			7,280
Reconciliation of Investment in Enable:
CenterPoint Energy’s ownership interest in Enable partners’ equity	$	3,896		$	3,935
CenterPoint Energy’s basis difference	(1,414		)	(1,463		)
CenterPoint Energy’s equity method investment in Enable	$	2,482		$	2,472

Discontinued Operations (CERC):

The Internal Spin represents a significant strategic shift that has a material effect on CERC’s operations and financial results and, as a result, CERC’s distribution of its equity investment in Enable met the criteria for discontinued operations classification. CERC has no continuing involvement in the equity investment of Enable. Therefore, CERC’s equity in earnings and related income taxes have been classified as Income from discontinued operations, net of tax, in CERC’s Statements of Consolidated Income for the periods presented. CERC’s equity method investment and related deferred income tax liabilities have been classified as Investment in unconsolidated affiliate - discontinued operations and Deferred income taxes, net - discontinued operations, respectively, in CERC’s Consolidated Balance Sheets for the periods presented. The following table presents amounts included in Income from discontinued operations, net of tax in CERC’s Statements of Consolidated Income.



	Year Ended December 31,
	2018		2017		2016
	(in millions)
Equity in earnings of unconsolidated affiliate, net	$	184	$	265	$	208
Income tax expense	46		104		81
Income from discontinued operations, net of tax	$	138	$	161	$	127