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, through its Indiana Utilities, 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. Outstanding derivative instruments designated as economic hedges at the acquired Indiana Utilities hedge long-term variable rate natural gas purchases. The Indiana Utilities have authority to refund and recover mark-to-market gains and losses associated with hedging natural gas purchases, and thus the gains and losses on derivatives are deferred in a regulatory liability or asset. All other financial instruments do not qualify or are not designated as cash flow or fair value hedges.

Interest Rate Risk Derivative Instruments. From time to time, the Registrants may enter into interest rate derivatives that are designated as economic or cash flow hedges. The objective of these hedges is to offset risk associated with interest rates borne by the Registrants in connection with an anticipated future fixed rate debt offering or other exposure to variable rate debt. The Indiana Utilities have authority to refund and recover mark-to-market gains and losses associated with hedging financing activity, and thus the gains and losses on derivatives are deferred in a regulatory liability or asset. For the impacts of cash flow hedges to Accumulated other comprehensive income, see Note 20.

The table below summarizes the Registrants’ outstanding interest rate hedging activity:



		March 31, 2019		December 31, 2018
Registrant	Hedging Classification	Notional Principal
		(in millions)
CenterPoint Energy (1)	Economic hedge	$	84	$	—
Houston Electric	Cash flow hedge	—		450


(1)	Relates to interest rate derivative instruments at SIGECO.

Weather Hedges. CenterPoint Energy and CERC have weather normalization or other rate mechanisms that largely mitigate the impact of weather on NGD in Arkansas, Indiana, Louisiana, Mississippi, Minnesota, Ohio and Oklahoma. CenterPoint Energy’s and CERC’s NGD in Texas and CenterPoint Energy’s electric operations in Texas and Indiana 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 Texas 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 current weather hedge gain (loss) activity:



				Three Months Ended March 31,
Jurisdiction	Winter Season	Bilateral Cap		2019		2018
		(in millions)
Certain NGD jurisdictions	2018 – 2019	$	9	$	—	$	—
Certain NGD jurisdictions	2017 – 2018	8		—		—
Total CERC (1)				—		—
Electric operations’ Texas service territory	2018 – 2019	8		3		—
Electric operations’ Texas service territory	2017 – 2018	9		—		(4		)
Total CenterPoint Energy (1)				$	3	$	(4	)


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


(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, while the last two tables provide a breakdown of the related income statement impacts.

Fair Value of Derivative Instruments and Hedged Items



		March 31, 2019				December 31, 2018
	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		—		1		7
Derivatives not designated as hedging instruments:
Natural gas derivatives (1) (2) (3)	Current Assets: Non-trading derivative assets	66		3		103		3
Natural gas derivatives (1) (2) (3)	Other Assets: Non-trading derivative assets	47		14		38		—
Natural gas derivatives (1) (2) (3)	Current Liabilities: Non-trading derivative liabilities	36		86		62		173
Natural gas derivatives (1) (2) (3)	Other Liabilities: Non-trading derivative liabilities	—		9		16		25
Total CERC		150		112		220		208
Natural gas derivatives (2) (3)	Current Liabilities: Non-trading derivative liabilities	—		1		—		—
Natural gas derivatives (2) (3)	Other Liabilities: Non-trading derivative liabilities	—		9		—		—
Interest rate derivatives	Other Liabilities	—		3		—		—
Indexed debt securities derivative	Current Liabilities	—		687		—		601
Total CenterPoint Energy		$	150	$	812	$	220	$	833


(1)	The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 2,198 Bcf or a net 495 Bcf long position and 1,674 Bcf or a net 140 Bcf long position as of March 31, 2019 and December 31, 2018, 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 Condensed 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 Condensed 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)



		March 31, 2019						December 31, 2018
	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	$	36		$	(6	)	$	57	$	1
Borrowed natural gas	Current Liabilities: Other	(6		)	1			—		—
Total CenterPoint Energy and CERC		$	30		$	(5	)	$	57	$	1

Offsetting of Natural Gas Derivative Assets and Liabilities



	March 31, 2019									December 31, 2018
	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	$	103		$	(40	)	$	63		$	166		$	(66	)	$	100
Other Assets: Non-trading derivative assets	47			(14		)	33			54			(16		)	38
Current Liabilities: Non-trading derivative liabilities	(89		)	42			(47		)	(183		)	81			(102		)
Other Liabilities: Non-trading derivative liabilities	(23		)	14			(9		)	(25		)	20			(5		)
Total CERC	38			2			40			12			19			31
Current Liabilities: Non-trading derivative	(1		)	—			(1		)	—			—			—
Other Liabilities: Non-trading derivative liabilities	(9		)	—			(9		)	—			—			—
Total CenterPoint Energy	$	28		$	2		$	30		$	12		$	19		$	31


(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 Condensed 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



	Three Months Ended March 31,
	2019			2018			2019			2018
	Location and Amount of Gain (Loss) recognized in Income on Hedging Relationship (1)
	Non-utility cost of revenues, including natural gas
	CenterPoint Energy						CERC
	(in millions)
Total amounts presented in the statements of income in which the effects of hedges are recorded	$	1,251		$	1,273		$	1,171		$	1,273
Gain (loss) on fair value hedging relationships:
Commodity contracts:
Hedged items - Natural gas inventory	(6		)	(2		)	(6		)	(2		)
Derivatives designated as hedging instruments	6			2			6			2
Amounts excluded from effectiveness testing recognized in earnings immediately	(14		)	(71		)	(14		)	(71		)


(1)	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 each Registrant in the three months ended March 31, 2019 and 2018, respectively.



			Three Months Ended March 31,
	Income Statement Location		2019			2018
		(in millions)
Effects of derivatives not designated as hedging instruments on the income statement:
Commodity contracts	Gains (losses) in Non-utility revenues		$	4		$	57
Total CERC			4			57
Indexed debt securities derivative	Loss on indexed debt securities		(86		)	(18		)
Total CenterPoint Energy			$	(82	)	$	39


(c)	Credit Risk Contingent Features

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



	March 31, 2019		December 31, 2018
	(in millions)
Aggregate fair value of derivatives containing material adverse change provisions in a net liability position	$	1	$	1
Fair value of collateral already posted	—		—
Additional collateral required to be posted if credit risk contingent features triggered	—		—