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Item 8. Financial Statements and Supplementary Data

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Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

CenterPoint Energy, Inc.

Houston, Texas

We have audited the accompanying consolidated balance sheets of CenterPoint Energy, Inc. and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related statements of consolidated income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of CenterPoint Energy, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2017 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Houston, Texas

February 28, 2017

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED INCOME

Year Ended December 31,
201620152014
(in millions, except per share amounts)
Revenues:
Utility revenues$5,440$5,448$6,116
Non-utility revenues2,0881,9383,110
Total7,5287,3869,226
Expenses:
Utility natural gas9831,2641,878
Non-utility natural gas1,9831,8383,043
Operation and maintenance2,0932,0071,969
Depreciation and amortization1,1269701,013
Taxes other than income taxes384374388
Total6,5696,4538,291
Operating Income959933935
Other Income (Expense):
Gain (loss) on marketable securities326(93)163
Gain (loss) on indexed debt securities(413)74(86)
Interest and other finance charges(338)(352)(353)
Interest on Securitization Bonds(91)(105)(118)
Equity in earnings (losses) of unconsolidated affiliates208(1,633)308
Other, net354636
Total(273)(2,063)(50)
Income (Loss) Before Income Taxes686(1,130)885
Income tax expense (benefit)254(438)274
Net Income (Loss)$432$(692)$611
Basic Earnings (Loss) Per Share$1.00$(1.61)$1.42
Diluted Earnings (Loss) Per Share$1.00$(1.61)$1.42
Weighted Average Shares Outstanding, Basic431430430
Weighted Average Shares Outstanding, Diluted434430432

See Notes to Consolidated Financial Statements

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

Year Ended December 31,
201620152014
(in millions)
Net income (loss)$432$(692)$611
Other comprehensive income (loss):
Adjustment to pension and other postretirement plans (net of tax of $4, $12 and $5, respectively)(7)203
Net deferred gain from cash flow hedges (net of tax of $-0-, $-0-, and $-0-, respectively)1——
Reclassification of deferred loss from cash flow hedges realized in net income (net of tax of $1, $-0-, and $-0-, respectively)1—1
Other comprehensive income (loss)(5)204
Comprehensive income (loss)$427$(672)$615

See Notes to Consolidated Financial Statements

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2016December 31, 2015
(in millions)
ASSETS
Current Assets:
Cash and cash equivalents ($340 and $264 related to VIEs, respectively)$341$264
Investment in marketable securities953805
Accounts receivable ($52 and $64 related to VIEs, respectively), less bad debt reserve of $15 and $20, respectively740593
Accrued unbilled revenues335279
Natural gas inventory131168
Materials and supplies181179
Non-trading derivative assets5189
Taxes receivable30172
Prepaid expense and other current assets ($40 and $35 related to VIEs, respectively)161140
Total current assets2,9232,689
Property, Plant and Equipment, net12,30711,537
Other Assets:
Goodwill862840
Regulatory assets ($1,919 and $2,373 related to VIEs, respectively)2,6773,129
Notes receivable - affiliated companies—363
Non-trading derivative assets1936
Investment in unconsolidated affiliates2,5052,594
Preferred units - unconsolidated affiliate363—
Other173102
Total other assets6,5997,064
Total Assets$21,829$21,290

See Notes to Consolidated Financial Statements

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS, cont.

December 31, 2016December 31, 2015
(in millions, except par value and shares)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Short-term borrowings$35$40
Current portion of VIE Securitization Bonds long-term debt411391
Indexed debt114145
Current portion of other long-term debt500328
Indexed debt securities derivative717442
Accounts payable657483
Taxes accrued172158
Interest accrued108117
Non-trading derivative liabilities4111
Other325343
Total current liabilities3,0802,458
Other Liabilities:
Deferred income taxes, net5,2635,047
Non-trading derivative liabilities55
Benefit obligations913904
Regulatory liabilities1,2981,276
Other278273
Total other liabilities7,7577,505
Long-term Debt:
VIE Securitization Bonds, net1,8672,276
Other long-term debt, net5,6655,590
Total long-term debt, net7,5327,866
Commitments and Contingencies (Note 15)
Shareholders’ Equity:
Cumulative preferred stock, $0.01 par value, 20,000,000 shares authorized, none issued or outstanding——
Common stock, $0.01 par value, 1,000,000,000 shares authorized, 430,682,504 shares and 430,262,703 shares outstanding, respectively44
Additional paid-in capital4,1954,180
Accumulated deficit(668)(657)
Accumulated other comprehensive loss(71)(66)
Total shareholders’ equity3,4603,461
Total Liabilities and Shareholders’ Equity$21,829$21,290

See Notes to Consolidated Financial Statements

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED CASH FLOWS

Year Ended December 31,
201620152014
(in millions)
Cash Flows from Operating Activities:
Net income (loss)$432$(692)$611
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization1,1269701,013
Amortization of deferred financing costs262728
Deferred income taxes213(413)280
Unrealized loss (gain) on marketable securities(326)93(163)
Loss (gain) on indexed debt securities413(74)86
Write-down of natural gas inventory148
Equity in (earnings) losses of unconsolidated affiliates, net of distributions(208)1,779(2)
Pension contributions(9)(66)(97)
Changes in other assets and liabilities, excluding acquisitions:
Accounts receivable and unbilled revenues, net(117)34539
Inventory3428(102)
Taxes receivable14218(190)
Accounts payable133(224)(3)
Fuel cost recovery(72)43(41)
Non-trading derivatives, net30(7)(34)
Margin deposits, net101(4)(79)
Interest and taxes accrued5(10)(23)
Net regulatory assets and liabilities(60)6322
Other current assets(17)101
Other current liabilities22(50)(20)
Other assets(16)(5)9
Other liabilities30841
Other, net452213
Net cash provided by operating activities1,9281,8651,397
Cash Flows from Investing Activities:
Capital expenditures(1,414)(1,584)(1,372)
Acquisitions, net of cash acquired(102)——
Decrease in notes receivable - unconsolidated affiliate363——
Investment in preferred units - unconsolidated affiliate(363)——
Distributions from unconsolidated affiliates in excess of cumulative earnings297148—
Decrease (increase) in restricted cash of Bond companies(5)12(7)
Investment in unconsolidated affiliates——(1)
Proceeds from sale of marketable securities17832—
Other, net—5(4)
Net cash used in investing activities(1,046)(1,387)(1,384)
Cash Flows from Financing Activities:
Increase (decrease) in short-term borrowings, net(5)(13)10
Proceeds from commercial paper, net469403414
Proceeds from long-term debt600200600
Payments of long-term debt(1,218)(644)(537)
Loss on reacquired debt(22)——
Debt issuance costs(9)—(8)
Payment of dividends on common stock(443)(426)(408)
Distribution to ZENS holders(178)(32)—
Other, net1—6
Net cash provided by (used in) financing activities(805)(512)77
Net Increase (Decrease) in Cash and Cash Equivalents77(34)90
Cash and Cash Equivalents at Beginning of Year264298208
Cash and Cash Equivalents at End of Year$341$264$298

See Notes to Consolidated Financial Statements

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED CASH FLOWS, cont.

Year Ended December 31,
201620152014
(in millions)
Supplemental Disclosure of Cash Flow Information:
Cash Payments:
Interest, net of capitalized interest$406$426$434
Income taxes (refunds), net(104)(45)192
Non-cash transactions:
Accounts payable related to capital expenditures8795104
Exercise of SESH put to Enable—1196

See Notes to Consolidated Financial Statements

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED SHAREHOLDERS’ EQUITY

201620152014
SharesAmountSharesAmountSharesAmount
(in millions of dollars and shares)
Preference Stock, none outstanding—$——$——$—
Cumulative Preferred Stock, $0.01 par value; authorized 20,000,000 shares, none outstanding——————
Common Stock, $0.01 par value; authorized 1,000,000,000 shares
Balance, beginning of year430443044294
Issuances related to benefit and investment plans1———1—
Balance, end of year431443044304
Additional Paid-in-Capital
Balance, beginning of year4,1804,1694,157
Issuances related to benefit and investment plans151112
Balance, end of year4,1954,1804,169
Retained Earnings (Accumulated Deficit)
Balance, beginning of year(657)461258
Net income (loss)432(692)611
Common stock dividends(443)(426)(408)
Balance, end of year(668)(657)461
Accumulated Other Comprehensive Loss
Balance, end of year:
Adjustment to pension and postretirement plans(72)(65)(85)
Net deferred gain (loss) from cash flow hedges1(1)(1)
Total accumulated other comprehensive loss, end of year(71)(66)(86)
Total Shareholders’ Equity$3,460$3,461$4,548

See Notes to Consolidated Financial Statements

CENTERPOINT ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Background

CenterPoint Energy, Inc. is a public utility holding company. CenterPoint Energy’s operating subsidiaries own and operate electric transmission and distribution and natural gas distribution facilities, supply natural gas to commercial and industrial customers and electric and natural gas utilities and own interests in Enable as described below. CenterPoint Energy’s indirect, wholly-owned subsidiaries include:

•Houston Electric, which engages in the electric transmission and distribution business in the Texas Gulf Coast area that includes the city of Houston;
•CERC Corp., which owns and operates natural gas distribution systems in six states; and
•CES, which obtains and offers competitive variable and fixed-price physical natural gas supplies and services primarily to commercial and industrial customers and electric and natural gas utilities in 31 states.

As of December 31, 2016, CenterPoint Energy also owned an aggregate of 14,520,000 Series A Preferred Units in Enable, which owns, operates and develops natural gas and crude oil infrastructure assets, and CERC Corp. owned approximately 54.1% of the limited partner interests in Enable.

For a description of CenterPoint Energy’s reportable business segments, see Note 18.

(2) Summary of Significant Accounting Policies

(a)Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(b)Principles of Consolidation

The accounts of CenterPoint Energy and its wholly-owned and majority owned subsidiaries are included in the consolidated financial statements. All intercompany transactions and balances are eliminated in consolidation. CenterPoint Energy generally uses the equity method of accounting for investments in entities in which CenterPoint Energy has an ownership interest between 20% and 50% and exercises significant influence. CenterPoint Energy also uses the equity method for investments in which it has ownership percentages greater than 50%, when it exercises significant influence, does not have control and is not considered the primary beneficiary, if applicable.

In 2013, CenterPoint Energy, OGE and affiliates of ArcLight, formed Enable as a private limited partnership. CenterPoint Energy has the ability to significantly influence the operating and financial policies of, but not solely control, Enable and, accordingly, recorded an equity method investment, at the historical costs of net assets contributed.

Under the equity method, CenterPoint Energy adjusts its investment in Enable each period for contributions made, distributions received, CenterPoint Energy’s share of Enable’s comprehensive income and amortization of basis differences, as appropriate. CenterPoint Energy evaluates its equity method investments for impairment when events or changes in circumstances indicate there is a loss in value of the investment that is other than a temporary decline.

CenterPoint Energy’s investment in 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.

Other investments, excluding marketable securities, are carried at cost.

As of December 31, 2016, CenterPoint Energy had VIEs consisting of the Bond Companies, which it consolidates. The consolidated VIEs are wholly-owned, bankruptcy remote special purpose entities that were formed specifically for the purpose of securitizing transition and system restoration related property. Creditors of CenterPoint Energy have no recourse to any assets or revenues of the Bond Companies. The bonds issued by these VIEs are payable only from and secured by transition and system restoration property and the bondholders have no recourse to the general credit of CenterPoint Energy.

(c)Revenues

CenterPoint Energy records revenue for electricity delivery and natural gas sales and services under the accrual method and these revenues are recognized upon delivery to customers. Electricity deliveries not billed by month-end are accrued based on actual AMS data, daily supply volumes and applicable rates. Natural gas sales not billed by month-end are accrued based upon estimated purchased gas volumes, estimated lost and unaccounted for gas and currently effective tariff rates.

(d) Long-lived Assets and Intangibles

CenterPoint Energy records property, plant and equipment at historical cost. CenterPoint Energy expenses repair and maintenance costs as incurred.

CenterPoint Energy periodically evaluates long-lived assets, including property, plant and equipment, and specifically identifiable intangibles, when events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. The determination of whether an impairment has occurred is based on an estimate of undiscounted cash flows attributable to the assets compared to the carrying value of the assets.

(e) Regulatory Assets and Liabilities

CenterPoint Energy applies the guidance for accounting for regulated operations to the Electric Transmission & Distribution business segment and the Natural Gas Distribution business segment. CenterPoint Energy’s rate-regulated subsidiaries may collect revenues subject to refund pending final determination in rate proceedings. In connection with such revenues, estimated rate refund liabilities are recorded which reflect management’s current judgment of the ultimate outcomes of the proceedings.

CenterPoint Energy had current regulatory assets of $70 million and $21 million as of December 31, 2016 and 2015, respectively, included in other current assets in its Consolidated Balance Sheets. CenterPoint Energy had current regulatory liabilities of $18 million and $57 million as of December 31, 2016 and 2015, respectively, included in other current liabilities in its Consolidated Balance Sheets.

CenterPoint Energy’s rate-regulated businesses recognize removal costs as a component of depreciation expense in accordance with regulatory treatment. As of December 31, 2016 and 2015, these removal costs of $1,010 million and $980 million, respectively, are classified as regulatory liabilities in CenterPoint Energy’s Consolidated Balance Sheets. In addition, a portion of the amount of removal costs that relate to AROs has been reclassified from a regulatory liability to an asset retirement liability in accordance with accounting guidance for AROs.

(f) Depreciation and Amortization Expense

Depreciation and amortization is computed using the straight-line method based on economic lives or regulatory-mandated recovery periods. Amortization expense includes amortization of regulatory assets and other intangibles.

(g) Capitalization of Interest and AFUDC

Interest and AFUDC are capitalized as a component of projects under construction and are amortized over the assets’ estimated useful lives once the assets are placed in service. AFUDC represents the composite interest cost of borrowed funds and a reasonable return on the equity funds used for construction for subsidiaries that apply the guidance for accounting for regulated operations. Although AFUDC increases both utility plant and earnings, it is realized in cash when the assets are included in rates. During 2016, 2015 and 2014, CenterPoint Energy capitalized interest and AFUDC of $8 million, $10 million and $11 million, respectively. During 2016, 2015 and 2014, CenterPoint Energy recorded AFUDC equity of $7 million, $12 million and $14 million, respectively, which is included in Other Income in its Statements of Consolidated Income.

(h) Income Taxes

CenterPoint Energy uses the asset and liability method of accounting for deferred income taxes. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is established against deferred tax assets for which management believes realization is not considered to be more likely than not. CenterPoint Energy recognizes interest and penalties as a component of income tax expense. CenterPoint Energy reports the income tax provision associated with its interest in Enable in Income tax expense (benefit) in its Statements of Consolidated Income.

(i) Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount and do not bear interest. It is the policy of management to review the outstanding accounts receivable monthly, as well as the bad debt write-offs experienced in the past, and establish an allowance for doubtful accounts. Account balances are charged off against the allowance when management determines it is probable the receivable will not be recovered. The provision for doubtful accounts in CenterPoint Energy’s Statements of Consolidated Income for 2016, 2015 and 2014 was $7 million, $19 million and $22 million, respectively.

(j) Inventory

Inventory consists principally of materials and supplies and natural gas. Materials and supplies are valued at the lower of average cost or market. Materials and supplies are recorded to inventory when purchased and subsequently charged to expense or capitalized to plant when installed. Natural gas inventories of CenterPoint Energy’s Energy Services business segment are valued at the lower of average cost or market. Natural gas inventories of CenterPoint Energy’s Natural Gas Distribution business segment are primarily valued at weighted average cost. During 2016, 2015 and 2014, CenterPoint Energy recorded $1 million, $4 million and $8 million, respectively, in write-downs of natural gas inventory to the lower of average cost or market.

(k) Derivative Instruments

CenterPoint Energy is exposed to various market risks. These risks arise from transactions entered into in the normal course of business. CenterPoint Energy utilizes derivative instruments such as physical forward contracts, swaps and options to mitigate the impact of changes in commodity prices, weather and interest rates on its operating results and cash flows. Such derivatives are recognized in CenterPoint Energy’s Consolidated Balance Sheets at their fair value unless CenterPoint Energy elects the normal purchase and sales exemption for qualified physical transactions. A derivative may be designated as a normal purchase or normal sale if the intent is to physically receive or deliver the product for use or sale in the normal course of business.

CenterPoint Energy has a Risk Oversight Committee composed of corporate and business segment officers that oversees commodity price, weather and credit risk activities, including CenterPoint Energy’s marketing, risk management services and hedging activities. The committee’s duties are to establish CenterPoint Energy’s commodity risk policies, allocate board-approved commercial risk limits, approve the use of new products and commodities, monitor positions and ensure compliance with CenterPoint Energy’s risk management policies and procedures and limits established by CenterPoint Energy’s board of directors.

CenterPoint Energy’s policies prohibit the use of leveraged financial instruments. A leveraged financial instrument, for this purpose, is a transaction involving a derivative whose financial impact will be based on an amount other than the notional amount or volume of the instrument.

(l) Investments in Other Debt and Equity Securities

CenterPoint Energy reports securities classified as trading at estimated fair value in its Consolidated Balance Sheets, and any unrealized holding gains and losses are recorded as other income (expense) in its Statements of Consolidated Income.

(m) Environmental Costs

CenterPoint Energy expenses or capitalizes environmental expenditures, as appropriate, depending on their future economic benefit. CenterPoint Energy expenses amounts that relate to an existing condition caused by past operations that do not have future economic benefit. CenterPoint Energy records undiscounted liabilities related to these future costs when environmental assessments and/or remediation activities are probable and the costs can be reasonably estimated.

(n) Statements of Consolidated Cash Flows

For purposes of reporting cash flows, CenterPoint Energy considers cash equivalents to be short-term, highly-liquid investments with maturities of three months or less from the date of purchase. In connection with the issuance of securitization bonds, CenterPoint Energy was required to establish restricted cash accounts to collateralize the bonds that were issued in these financing transactions. These restricted cash accounts are not available for withdrawal until the maturity of the bonds and are not included in cash and cash equivalents. These restricted cash accounts of $40 million and $35 million as of December 31, 2016 and 2015, respectively, are included in other current assets in CenterPoint Energy’s Consolidated Balance Sheets. Cash and cash equivalents included $340 million and $264 million as of December 31, 2016 and 2015, respectively, that was held by the Bond Companies solely to support servicing the securitization bonds.

CenterPoint Energy considers distributions received from equity method investments which do not exceed cumulative equity in earnings subsequent to the date of investment to be a return on investment and classifies these distributions as operating activities in the Statements of Consolidated Cash Flows. CenterPoint Energy considers distributions received from equity method investments in excess of cumulative equity in earnings subsequent to the date of investment to be a return of investment and classifies these distributions as investing activities in the Statements of Consolidated Cash Flows.

(o) New Accounting Pronouncements

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (ASU 2015-02). ASU 2015-02 changes the analysis that reporting organizations must perform to evaluate whether they should consolidate certain legal entities, such as limited partnerships. The changes include, among others, modification of the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities and elimination of the presumption that a general partner should consolidate a limited partnership. ASU 2015-02 does not amend the related party guidance for situations in which power is shared between two or more entities that hold interests in a VIE. CenterPoint Energy adopted ASU 2015-02 on January 1, 2016, which did not have a material impact on its financial position, results of operations, cash flows and disclosures.

In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Cost (ASU 2015-03). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03. CenterPoint Energy adopted ASU 2015-03 retrospectively on January 1, 2016, which resulted in a reduction of other long-term assets, indexed debt and total long-term debt on its Consolidated Balance Sheets. CenterPoint Energy had debt issuance costs, excluding amounts related to credit facility arrangements, of $42 million and $44 million as a reduction to long-term debt on its Consolidated Balance Sheets as of December 31, 2016 and 2015, respectively.

In May 2015, the FASB issued ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (ASU 2015-07). ASU 2015-07 removes the requirement to categorize within the fair value hierarchy investments for which fair values are measured at NAV using the practical expedient. Entities will be required to disclose the fair value of investments measured using the NAV practical expedient so that financial statement users can reconcile amounts reported in the fair value hierarchy table to amounts reported on the balance sheet. CenterPoint Energy retrospectively adopted ASU 2015-07 on January 1, 2016, which impacts its employee benefit plan disclosures. See Note 7 for the impacts on the employee benefit plan disclosures. This standard did not have an impact on CenterPoint Energy’s financial position, results of operations or cash flows.

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (ASU 2015-16). ASU 2015-16 eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, an acquirer would recognize a measurement-period adjustment during the period in which the amount of the adjustment is determined. CenterPoint Energy prospectively adopted ASU 2015-16 on January 1, 2016, which did not have an impact on its financial position, results of operations or cash flows.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). ASU 2016-01 requires equity investments that do not result in consolidation and are not accounted for under the equity method to be measured at fair value and to recognize any changes in fair value in net income unless the investments qualify for the new practicability exception. It does not change the guidance for classifying and measuring investments in debt securities and loans. ASU 2016-01 also changes certain disclosure requirements

and other aspects related to recognition and measurement of financial assets and financial liabilities. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. As of the first reporting period in which the guidance is adopted, a cumulative-effect adjustment to beginning retained earnings will be made, with two features that will be adopted prospectively. CenterPoint Energy is currently assessing the impact that this standard will have on its financial position, results of operations, cash flows and disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 provides a comprehensive new lease model that requires lessees to recognize assets and liabilities for most leases and would change certain aspects of lessor accounting. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. A modified retrospective adoption approach is required. CenterPoint Energy is currently assessing the impact that this standard will have on its financial position, results of operations, cash flows and disclosures.

In 2016, the FASB issued ASUs which amended ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09, as amended, provides a comprehensive new revenue recognition model that requires revenue to be recognized in a manner that depicts the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. Early adoption is not permitted, and entities have the option of using either a full retrospective or a modified retrospective adoption approach. CenterPoint Energy is currently evaluating its revenue streams under these ASUs and has not yet identified any significant changes as the result of these new standards. A substantial amount of CenterPoint Energy’s revenues are tariff based, which we do not anticipate will be significantly impacted by these ASUs. CenterPoint Energy is considering the impacts of the new guidance on its ability to recognize revenue for certain contracts when collectability is uncertain and its accounting for contributions in aid of construction. CenterPoint Energy expects to adopt these ASUs on January 1, 2018 and is evaluating the method of adoption.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). ASU 2016-15 provides clarifying guidance on the classification of certain cash receipts and payments in the statement of cash flows and eliminates the variation in practice related to such classifications. ASU 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. A retrospective adoption approach is required. CenterPoint Energy is currently assessing the impact that this standard will have on its statement of cash flows.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. As a result, the statement of cash flows will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. ASU 2016-18 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. A retrospective adoption approach is required. CenterPoint Energy is currently assessing the impact that this standard will have on its statement of cash flows and disclosures.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01). ASU 2017-01 revises the definition of a business. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, then under ASU 2017-01, the asset or group of assets is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs to be more closely aligned with how outputs are described in ASC 606. ASU 2017-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted in certain circumstances. A prospective adoption approach is required. ASU 2017-01 could have a potential impact on CenterPoint Energy’s accounting for future acquisitions.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 eliminates Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. A prospective adoption approach is required. ASU 2017-04 will have an impact on CenterPoint Energy’s future calculation of goodwill impairments if an impairment is identified.

Management believes that other recently issued standards, which are not yet effective, will not have a material impact on CenterPoint Energy’s consolidated financial position, results of operations or cash flows upon adoption.

(3) Property, Plant and Equipment

(a) Property, Plant and Equipment

Property, plant and equipment includes the following:

Weighted Average Useful LivesDecember 31,
(in years)20162015
(in millions)
Electric Transmission & Distribution32$10,840$10,142
Natural Gas Distribution326,2195,762
Energy Services258386
Other property25689660
Total17,83116,650
Accumulated depreciation and amortization:
Electric Transmission & Distribution3,4433,209
Natural Gas Distribution1,7221,575
Energy Services2934
Other property330295
Total accumulated depreciation and amortization5,5245,113
Property, plant and equipment, net$12,307$11,537

(b) Depreciation and Amortization

The following table presents depreciation and amortization expense for 2016, 2015 and 2014.

201620152014
(in millions)
Depreciation expense$607$557$521
Amortization expense519413492
Total depreciation and amortization expense$1,126$970$1,013

(c) AROs

A reconciliation of the changes in the ARO liability is as follows:

December 31,
20162015
(in millions)
Beginning balance$195$176
Accretion expense106
Revisions in estimates of cash flows—13
Ending balance$205$195

CenterPoint Energy recorded AROs associated with the removal of asbestos and asbestos-containing material in its buildings, including substation building structures. CenterPoint Energy also recorded AROs relating to gas pipelines abandoned in place, treated wood poles for electric distribution, distribution transformers containing PCB (also known as Polychlorinated Biphenyl), and underground fuel storage tanks. The estimates of future liabilities were developed using historical information, and where available, quoted prices from outside contractors.

The increase of $13 million in the ARO from the revision in estimates in 2015 is primarily attributable to an increase in estimated disposal costs.

(4) Acquisition

On April 1, 2016, CES, an indirect, wholly-owned subsidiary of CenterPoint Energy, closed the previously announced agreement to acquire the retail energy services business and natural gas wholesale assets of Continuum. After working capital adjustments, the final purchase price was $102 million and allocated to identifiable assets acquired and liabilities assumed based on their estimated fair values on the acquisition date.

The following table summarizes the final purchase price allocation and the fair value amounts recognized for the assets acquired and liabilities assumed related to the acquisition:

(in millions)
Total purchase price consideration$102
Receivables$76
Derivative assets38
Property and equipment1
Identifiable intangibles38
Total assets acquired153
Accounts payable49
Derivative liabilities24
Total liabilities assumed73
Identifiable net assets acquired80
Goodwill22
Net assets acquired$102

The goodwill of $22 million resulting from the acquisition reflects the excess of the purchase price over the fair value of the net identifiable assets acquired. The goodwill recorded as part of the acquisition primarily reflects the value of the complementary operational and geographic footprints, along with the scale, geographic reach and expanded capabilities.

Identifiable intangible assets were recorded at estimated fair value as determined by management based on available information, which includes a valuation prepared by an independent third party. The significant assumptions used in arriving at the estimated identifiable intangible asset values included management’s estimates of future cash flows, the discount rate which is based on the weighted average cost of capital for comparable publicly traded guideline companies and projected customer attrition rates. The useful lives for the identifiable intangible assets were determined using methods that approximate the pattern of economic benefit provided by the utilization of the assets.

The estimated fair value of the identifiable intangible assets and related useful lives as included in the final purchase price allocation include:

Estimate Fair ValueEstimate Useful Life
(in millions)(in years)
Customer relationships$3415
Covenants not to compete44
Total identifiable intangibles$38

Amortization expense related to the above identifiable intangible assets was $3 million for the year ended December 31, 2016.

Revenues of approximately $466 million and operating income of approximately $1 million attributable to the acquisition are included in CenterPoint Energy’s Statements of Consolidated Income for the year ended December 31, 2016.

As Continuum was a non-public company that did not prepare interim financial information and the acquisition included the purchase of both businesses and assets, the historical financial information for the businesses and assets acquired was impracticable to obtain. As a result, pro forma results of the acquired businesses and assets are not presented.

(5) Goodwill

Goodwill by reportable business segment as of December 31, 2015 and changes in the carrying amount of goodwill as of December 31, 2016 are as follows:

December 31, 2015Continuum Acquisition (1)December 31, 2016
(in millions)
Natural Gas Distribution$746$—$746
Energy Services83(2)22105(2)
Other Operations11—11
Total$840$22$862

(1) See Note 4.

(2) Amount presented is net of the accumulated goodwill impairment charge of $252 million.

CenterPoint Energy performs goodwill impairment tests at least annually and evaluates goodwill when events or changes in circumstances indicate that its carrying value may not be recoverable. The impairment evaluation for goodwill is performed by using a two-step process. In the first step, the fair value of each reporting unit is compared with the carrying amount of the reporting unit, including goodwill. The estimated fair value of the reporting unit is generally determined on the basis of discounted cash flows. If the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, then a second step must be completed to determine the amount of the goodwill impairment that should be recorded. In the second step, the implied fair value of the reporting unit’s goodwill is determined by allocating the reporting unit’s fair value to all of its assets and liabilities other than goodwill (including any unrecognized intangible assets) in a manner similar to a purchase price allocation. The resulting implied fair value of the goodwill that results from the application of this second step is then compared to the carrying amount of the goodwill and an impairment charge is recorded for the difference.

CenterPoint Energy performed its annual goodwill impairment test in the third quarter of each of 2016 and 2015 and determined, based on the results of the first step, that no goodwill impairment charge was required for any reportable segment. Other intangibles were not material as of December 31, 2016 and 2015.

(6) Regulatory Accounting

The following is a list of regulatory assets/liabilities reflected on CenterPoint Energy’s Consolidated Balance Sheets as of December 31, 2016 and 2015:

December 31,
20162015
(in millions)
Securitized regulatory assets$1,919$2,373
Unrecognized equity return (1)(329)(393)
Unamortized loss on reacquired debt8493
Pension and postretirement-related regulatory asset (2)809872
Other long-term regulatory assets (3)194184
Total regulatory assets2,6773,129
Estimated removal costs1,010980
Other long-term regulatory liabilities288296
Total regulatory liabilities1,2981,276
Total regulatory assets and liabilities, net$1,379$1,853
(1)The unrecognized allowed equity return will be recognized as it is recovered in rates through 2024. During the years ended December 31, 2016, 2015 and 2014, Houston Electric recognized approximately $64 million, $49 million and $68 million, respectively, of the allowed equity return. The timing of CenterPoint Energy’s recognition of the allowed equity return will vary each period based on amounts actually collected during the period. The actual amounts recovered for the allowed equity return are reviewed and adjusted at least annually by the PUCT to correct any over-collections or under-collections during the preceding 12 months and to provide for the full and timely recovery of the allowed equity return.
(2)NGD’s actuarially determined pension and other postemployment expense in excess of the amount being recovered through rates is being deferred for rate making purposes. Deferred pension and other postemployment expenses of $6 million and $5 million as of December 31, 2016 and 2015, respectively, were not earning a return.
(3)Other regulatory assets that are not earning a return were not material as of December 31, 2016 and 2015.

(7) Stock-Based Incentive Compensation Plans and Employee Benefit Plans

(a) Stock-Based Incentive Compensation Plans

CenterPoint Energy has LTIPs that provide for the issuance of stock-based incentives, including stock options, performance awards, restricted stock unit awards and restricted and unrestricted stock awards to officers, employees and non-employee directors. Approximately 14 million shares of CenterPoint Energy common stock are authorized under these plans for awards.

Equity awards are granted to employees without cost to the participants. The performance awards granted in 2016, 2015 and 2014 are distributed based upon the achievement of certain objectives over a three-year performance cycle. The stock awards granted in 2016, 2015 and 2014 are service based. The stock awards generally vest at the end of a three-year period. Upon vesting, both the performance and stock awards are issued to the participants along with the value of dividend equivalents earned over the performance cycle or vesting period. CenterPoint Energy issues new shares to satisfy stock-based payments related to LTIPs.

CenterPoint Energy recorded LTIP compensation expense of $19 million, $17 million and $18 million for the years ended December 31, 2016, 2015 and 2014, respectively. This expense is included in Operation and Maintenance Expense in the Statements of Consolidated Income.

The total income tax benefit recognized related to LTIPs was $7 million, $6 million and $7 million for the years ended December 31, 2016, 2015 and 2014, respectively. No compensation cost related to LTIPs was capitalized as a part of inventory or fixed assets in 2016, 2015 or 2014. The actual tax benefit realized for tax deductions related to LTIPs totaled $5 million, $6 million and $13 million for 2016, 2015 and 2014, respectively.

Compensation costs for the performance and stock awards granted under LTIPs are measured using fair value and expected achievement levels on the grant date. For performance awards with operational goals, the achievement levels are revised as goals are evaluated. The fair value of awards granted to employees is based on the closing stock price of CenterPoint Energy’s common stock on the grant date. The compensation expense is recorded on a straight-line basis over the vesting period. Forfeitures are estimated on the date of grant based on historical averages, and estimates are updated periodically throughout the vesting period.

The following tables summarize CenterPoint Energy’s LTIP activity for 2016:

Stock Options

CenterPoint Energy has not issued stock options since 2004. There were no outstanding stock options at either December 31, 2016 or 2015.

Cash received from stock options exercised was $1 million for 2014.

Performance Awards

Outstanding and Non-Vested Shares
Year Ended December 31, 2016
Shares (Thousands)Weighted-Average Grant Date Fair ValueRemaining Average Contractual Life (Years)Aggregate Intrinsic Value (Millions)
Outstanding as of December 31, 20152,628$21.95
Granted1,52518.98
Forfeited or canceled(404)20.68
Vested and released to participants(326)20.68
Outstanding as of December 31, 20163,42320.901.2$43

The outstanding and non-vested shares displayed in the table above assumes that shares are issued at the maximum performance level. The aggregate intrinsic value reflects the impact of current expectations of achievement and stock price.

Stock Awards

Outstanding and Non-Vested Shares
Year Ended December 31, 2016
Shares (Thousands)Weighted-Average Grant Date Fair ValueRemaining Average Contractual Life (Years)Aggregate Intrinsic Value (Millions)
Outstanding as of December 31, 2015747$21.86
Granted46419.24
Forfeited or canceled(19)20.53
Vested and released to participants(272)21.26
Outstanding as of December 31, 201692020.741.3$23

The weighted-average grant-date fair values per unit of awards granted were as follows for 2016, 2015 and 2014:

Year Ended December 31,
201620152014
Performance awards$18.98$21.28$23.70
Stock awards19.2421.3923.89

Valuation Data

The total intrinsic value of awards received by participants was as follows for 2016, 2015 and 2014:

Year Ended December 31,
201620152014
(in millions)
Stock options exercised$—$—$2
Performance awards7924
Stock awards6710

The total grant date fair value of performance and stock awards which vested during the years ended December 31, 2016, 2015 and 2014 was $13 million, $13 million and $21 million, respectively. As of December 31, 2016, there was $21 million of total unrecognized compensation cost related to non-vested performance and stock awards which is expected to be recognized over a weighted-average period of 1.7 years.

(b) Pension and Postretirement Benefits

CenterPoint Energy maintains a non-contributory qualified defined benefit pension plan covering substantially all employees, with benefits determined using a cash balance formula. Under the cash balance formula, participants accumulate a retirement benefit based upon 5% of eligible earnings and accrued interest. Participants are 100% vested in their benefit after completing three years of service. In addition to the non-contributory qualified defined benefit pension plan, CenterPoint Energy maintains unfunded non-qualified benefit restoration plans which allow participants to receive the benefits to which they would have been entitled under CenterPoint Energy’s non-contributory pension plan except for federally mandated limits on qualified plan benefits or on the level of compensation on which qualified plan benefits may be calculated.

CenterPoint Energy provides certain healthcare and life insurance benefits for retired employees on both a contributory and non-contributory basis. Employees become eligible for these benefits if they have met certain age and service requirements at retirement, as defined in the plans. Such benefit costs are accrued over the active service period of employees. The net unrecognized transition obligation is being amortized over approximately 20 years. Effective January 1, 2017, members of the IBEW Local Union 66 who retire on or after January 1, 2017, and their dependents, will receive any retiree medical and prescription drug benefits exclusively through the NECA/IBEW Family Medical Care Plan pursuant to the terms of the renegotiated collective bargaining agreement entered into in May 2016.

CenterPoint Energy’s net periodic cost includes the following components relating to pension, including the benefit restoration plan, and postretirement benefits:

Year Ended December 31,
201620152014
Pension BenefitsPost-retirement BenefitsPension BenefitsPost-retirement BenefitsPension BenefitsPost-retirement Benefits
(in millions)
Service cost$38$2$41$2$42$2
Interest cost9316932010022
Expected return on plan assets(101)(6)(120)(7)(125)(7)
Amortization of prior service cost (credit)9(3)9(1)10(1)
Amortization of net loss631575441
Amortization of transition obligation—————5
Curtailment (1)—(5)——6—
Settlement (2)——10———
Net periodic cost$102$5$90$19$77$22
(1)A curtailment gain or loss is required when the expected future services of a significant number of current employees are reduced or eliminated for the accrual of benefits. During the fourth quarter of 2014, CenterPoint Energy recognized a curtailment pension loss of $6 million related to employees seconded to Enable. Substantially all of the seconded employees became employees of Enable effective January 1, 2015. Also, postretirement healthcare benefits were amended during 2016 resulting in a net curtailment gain of $5 million. In May 2016, Houston Electric entered into a renegotiated

collective bargaining agreement with the IBEW Local Union 66 that provides that for Houston Electric union employees covered under the agreement who retire on or after January 1, 2017, retiree medical and prescription drug coverage will be provided exclusively through the NECA/IBEW Family Medical Care Plan in exchange for the payment of monthly premiums as determined under the agreement. As a result, the accrued postretirement benefits related to such future Houston Electric union retirees were eliminated. Houston Electric recognized a curtailment gain of $3 million as an accelerated recognition of the prior service credit that would otherwise be recognized in future periods for the post-retirement plan. CenterPoint Energy also recognized an additional curtailment gain of $2 million in October 2016 related to other amendments in the post-retirement plan. As a result of these amendments, the 2016 post-retirement expense was significantly lower than expenses reported for previous years.

(2)A one-time, non-cash settlement charge is required when lump sum distributions or other settlements of plan benefit obligations during a plan year exceed the service cost and interest cost components of net periodic cost for that year. Due to the amount of lump sum payment distributions from the non-qualified pension plan during the year ended December 31, 2015, CenterPoint Energy recognized a non-cash settlement charge of $10 million. This charge is an acceleration of costs that would otherwise be recognized in future periods.

CenterPoint Energy used the following assumptions to determine net periodic cost relating to pension and postretirement benefits:

Year Ended December 31,
201620152014
Pension BenefitsPost-retirement BenefitsPension BenefitsPost-retirement BenefitsPension BenefitsPost-retirement Benefits
Discount rate4.40%4.35%4.05%3.90%4.80%4.75%
Expected return on plan assets6.254.806.505.207.005.50
Rate of increase in compensation levels4.15—4.00—3.90—

In determining net periodic benefits cost, CenterPoint Energy uses fair value, as of the beginning of the year, as its basis for determining expected return on plan assets.

The following table summarizes changes in the benefit obligation, plan assets, the amounts recognized in consolidated balance sheets and the key assumptions of CenterPoint Energy’s pension, including benefit restoration, and postretirement plans. The measurement dates for plan assets and obligations were December 31, 2016 and 2015.

December 31,
20162015
Pension BenefitsPost-retirement BenefitsPension BenefitsPost-retirement Benefits
(in millions, except for actuarial assumptions)
Change in Benefit Obligation
Benefit obligation, beginning of year$2,193$432$2,403$529
Service cost382412
Interest cost93169320
Participant contributions—10—8
Benefits paid(181)(37)(234)(32)
Actuarial (gain) loss5413(115)(87)
Medicare reimbursement—3—2
Plan amendment (1)—(56)—(10)
Settlement——5—
Benefit obligation, end of year2,1973832,193432
Change in Plan Assets
Fair value of plan assets, beginning of year1,6791361,925141
Employer contributions9186618
Participant contributions—10—8
Benefits paid(181)(37)(234)(32)
Plan amendment (2)—(20)——
Actual investment return (loss)1496(78)1
Fair value of plan assets, end of year1,6561131,679136
Funded status, end of year$(541)$(270)$(514)$(296)
Amounts Recognized in Balance Sheets
Current liabilities-other$(7)$(6)$(8)$(8)
Other liabilities-benefit obligations(534)(264)(506)(288)
Net liability, end of year$(541)$(270)$(514)$(296)
Actuarial Assumptions
Discount rate4.15%4.15%4.40%4.35%
Expected return on plan assets6.004.506.254.80
Rate of increase in compensation levels4.50—4.15—
Healthcare cost trend rate assumed for the next year - Pre-65—5.75—6.00
Healthcare cost trend rate assumed for the next year - Post-65—10.65—5.50
Prescription drug cost trend rate assumed for the next year—10.75—11.00
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)—4.50—5.00
Year that the healthcare rate reaches the ultimate trend rate—2024—2024
Year that the prescription drug rate reaches the ultimate trend rate—2024—2024
(1)The Postretirement plan was amended during 2016 to change retiree medical coverage, effective January 1, 2017, as follows: (i) members of the IBEW Local Union 66 who retire on or after January 1, 2017, and their dependents, will receive any retiree medical and prescription drug coverage exclusively through the NECA/IBEW Family Medical Care Plan pursuant to the terms of the renegotiated collective bargaining agreement entered into in May 2016; and (ii) Medicare eligible post-65 retirees will receive coverage through a Medicare Advantage Program, an insured benefit, in lieu of the previous self-insured benefit. These changes resulted in a reduction in our Postretirement Plan liability of $56 million as of December 31, 2016.
(2)In May 2016, Houston Electric entered into a renegotiated collective bargaining agreement with the IBEW Local Union 66 and amended the Houston Electric Union Postretirement Trust. The amendment resulted in a split of the trust into two segregated and restricted accounts, one holds assets for the benefit of current, retired on or before December 31, 2016, union retirees and one holds assets for the benefit of post-2016 union retirees who are now covered exclusively by the NECA/IBEW Family Medical Care Plan. Accordingly, $20 million was transferred to the account for post-2016 union retirees.

The accumulated benefit obligation for all defined benefit pension plans was $2,168 million and $2,157 million as of December 31, 2016 and 2015, respectively.

The expected rate of return assumption was developed using the targeted asset allocation of CenterPoint Energy’s plans and the expected return for each asset class.

The discount rate assumption was determined by matching the projected cash flows of CenterPoint Energy’s plans against a hypothetical yield curve of high-quality corporate bonds represented by a series of annualized individual discount rates from one-half to 99 years.

For measurement purposes, medical costs are assumed to increase to 5.75% and 10.65% for the pre-65 and post-65 retirees during 2017, respectively, and the prescription cost is assumed to increase to 10.75% during 2017, after which these rates decrease until reaching the ultimate trend rate of 4.50% in 2024.

CenterPoint Energy’s changes in accumulated comprehensive loss related to defined benefit, postretirement and other postemployment plans are as follows:

Year Ended December 31,
20162015
(in millions)
Beginning Balance$(65)$(85)
Other comprehensive income (loss) before reclassifications (1)(19)21
Amounts reclassified from accumulated other comprehensive income:
Prior service cost (2)—1
Actuarial losses (2)810
Total reclassifications from accumulated other comprehensive income811
Tax benefit (expense)4(12)
Net current period other comprehensive income (loss)(7)20
Ending Balance$(72)$(65)
(1)Total other comprehensive income (loss) related to the remeasurement of pension, postretirement and other postemployment plans.
(2)These accumulated other comprehensive components are included in the computation of net periodic cost.

Amounts recognized in accumulated other comprehensive loss consist of the following:

December 31,
20162015
Pension BenefitsPostretirement BenefitsPension BenefitsPostretirement Benefits
(in millions)
Unrecognized actuarial loss (gain)$100$3$106$(2)
Unrecognized prior service cost (credit)263(1)
Net amount recognized in accumulated other comprehensive loss$102$9$109$(3)

The changes in plan assets and benefit obligations recognized in other comprehensive income during 2016 are as follows:

Pension BenefitsPostretirement Benefits
(in millions)
Net loss$2$11
Amortization of net loss(8)—
Amortization of prior service credit (cost)(1)1
Total recognized in comprehensive income$(7)$12

The total expense recognized in net periodic costs and other comprehensive income was $95 million and $17 million for pension and postretirement benefits, respectively, for the year ended December 31, 2016.

The amounts in accumulated other comprehensive loss expected to be recognized as components of net periodic benefit cost during 2017 are as follows:

Pension BenefitsPostretirement Benefits
(in millions)
Unrecognized actuarial loss$6$—
Unrecognized prior service cost11
Amounts in accumulated comprehensive loss to be recognized in net periodic cost in 2017$7$1

The following table displays pension benefits related to CenterPoint Energy’s pension plans that have accumulated benefit obligations in excess of plan assets:

December 31,
20162015
Pension QualifiedPension Non-qualifiedPension QualifiedPension Non-qualified
(in millions)
Accumulated benefit obligation$2,097$71$2,082$75
Projected benefit obligation2,126712,11875
Fair value of plan assets1,656—1,679—

Assumed healthcare cost trend rates have a significant effect on the reported amounts for CenterPoint Energy’s postretirement benefit plans. A 1% change in the assumed healthcare cost trend rate would have the following effects:

1% Increase1% Decrease
(in millions)
Effect on the postretirement benefit obligation$16$15
Effect on total of service and interest cost11

In managing the investments associated with the benefit plans, CenterPoint Energy’s objective is to achieve and maintain a fully funded plan. This objective is expected to be achieved through an investment strategy that manages liquidity requirements while maintaining a long-term horizon in making investment decisions and efficient and effective management of plan assets.

As part of the investment strategy discussed above, CenterPoint Energy maintained the following weighted average allocation targets for its benefit plans as of December 31, 2016:

Pension BenefitsPostretirement Benefits
U.S. equity12 – 28%13 – 23%
International developed market equity7 – 17%3 – 13%
Emerging market equity3 – 13%—
Fixed income54 – 66%69 – 79%
Cash0 – 2%0 – 2%

The following tables set forth by level, within the fair value hierarchy (see Note 9), CenterPoint Energy’s pension plan assets at fair value as of December 31, 2016 and 2015:

Fair Value Measurements as of December 31, 2016
Quoted Prices in Active Markets for Identical Assets (Level 1)Significant Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)Total
Cash$14$—$—$14
Corporate bonds:
Investment grade or above—401—401
Equity securities:
U.S. companies73——73
Cash received as collateral from securities lending69——69
U.S. treasuries49——49
Mortgage backed securities—3—3
Asset backed securities—2—2
Municipal bonds—52—52
Mutual funds (1)171——171
International government bonds—16—16
Obligation to return cash received as collateral from securities lending(69)——(69)
Total investments at fair value$307$474$—$781
Investments measured by net asset value per share or its equivalent (2)875
Total Investments$1,656
(1)57% of the amount invested in mutual funds was in international equities, 28% was in emerging market equities and 15% was in U.S. equities.
(2)This represents the common collective trust funds with 53% of the amount invested in fixed income securities, 12% in U.S. equities, 30% in international equities and 5% in emerging market equities.
Fair Value Measurements as of December 31, 2015
Quoted Prices in Active Markets for Identical Assets (Level 1)Significant Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)Total
Cash$11$—$—$11
Corporate bonds:
Investment grade or above—385—385
Equity securities:
International companies38——38
U.S. companies74——74
Cash received as collateral from securities lending71——71
U.S. treasuries57——57
Mortgage backed securities—4—4
Asset backed securities—3—3
Municipal bonds—66—66
Mutual funds (1)144——144
International government bonds—1—1
Obligation to return cash received as collateral from securities lending(71)——(71)
Total investments at fair value$324$459$—$783
Investments measured by net asset value per share or its equivalent (2)896
Total investments$1,679
(1)58% of the amount invested in mutual funds was in international equities, 28% was in emerging market equities and 14% was in U.S. equities.
(2)This represents the common collective trust funds with 60% of the amount invested in fixed income securities, 11% in U.S. equities, 23% in international equities and 2% in emerging market equities.

The pension plan utilized both exchange traded and over-the-counter financial instruments such as futures, interest rate options and swaps that were marked to market daily with the gains/losses settled in the cash accounts. The pension plan did not include any holdings of CenterPoint Energy common stock as of December 31, 2016 or 2015.

The changes in the fair value of the pension plan’s level 3 investments for the years ended December 31, 2016 and 2015 were not material.

The following tables present by level, within the fair value hierarchy, CenterPoint Energy’s postretirement plan assets at fair value as of December 31, 2016 and 2015, by asset category:

Fair Value Measurements as of December 31, 2016
Quoted Prices in Active Markets for Identical Assets (Level 1)Significant Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)Total
Mutual funds (1)$113$—$—$113
Total$113$—$—$113
(1)74% of the amount invested in mutual funds was in fixed income securities, 18% was in U.S. equities and 8% was in international equities.
Fair Value Measurements as of December 31, 2015
Quoted Prices in Active Markets for Identical Assets (Level 1)Significant Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)Total
Mutual funds (1)$136$—$—$136
Total$136$—$—$136
(1)72% of the amount invested in mutual funds was in fixed income securities, 20% was in U.S. equities and 8% was in international equities.

CenterPoint Energy contributed $-0-, $9 million and $18 million to its qualified pension, non-qualified pension and postretirement benefits plans, respectively, in 2016. CenterPoint Energy expects to contribute approximately $39 million, $7 million and $16 million to its qualified pension, non-qualified pension and postretirement benefits plans, respectively, in 2017.

The following benefit payments are expected to be paid by the pension and postretirement benefit plans:

Pension BenefitsPostretirement Benefit Payments
(in millions)
2017$140$19
201814620
201915223
202015525
202115928
2022-2026802152

(c) Savings Plan

CenterPoint Energy has a tax-qualified employee savings plan that includes a cash or deferred arrangement under Section 401(k) of the Internal Revenue Code of 1986, as amended (the Code), and an employee stock ownership plan under Section 4975(e)(7) of the Code. Under the plan, participating employees may contribute a portion of their compensation, on a pre-tax or after-tax basis, generally up to a maximum of 50% of eligible compensation. CenterPoint Energy matches 100% of the first 6% of each employee’s compensation contributed. The matching contributions are fully vested at all times.

Participating employees may elect to invest all (prior to January 1, 2016) or a portion of their contributions to the plan in CenterPoint Energy, Inc. common stock, to have dividends reinvested in additional shares or to receive dividend payments in cash on any investment in CenterPoint Energy, Inc. common stock, and to transfer all or part of their investment in CenterPoint Energy, Inc. common stock to other investment options offered by the plan.

Effective January 1, 2016, the savings plan was amended to limit the percentage of future contributions that could be invested in CenterPoint Energy, Inc. common stock to 25% and to prohibit transfers of account balances where the transfer would result in more than 25% of a participant’s total account balance invested in CenterPoint Energy, Inc. common stock.

The savings plan has significant holdings of CenterPoint Energy, Inc. common stock. As of December 31, 2016, 14,216,986 shares of CenterPoint Energy, Inc. common stock were held by the savings plan, which represented approximately 17% of its investments. Given the concentration of the investments in CenterPoint Energy, Inc. common stock, the savings plan and its participants have market risk related to this investment.

CenterPoint Energy’s savings plan benefit expenses were $38 million, $35 million and $39 million in 2016, 2015 and 2014, respectively.

(d) Postemployment Benefits

CenterPoint Energy provides postemployment benefits for certain former or inactive employees, their beneficiaries and covered dependents, after employment but before retirement (primarily healthcare and life insurance benefits for participants in the long-term disability plan). CenterPoint Energy recorded postemployment expenses of $5 million, $2 million and $3 million in 2016, 2015 and 2014, respectively.

Included in Benefit Obligations in the accompanying Consolidated Balance Sheets as of December 31, 2016 and 2015 was $22 million and $23 million, respectively, relating to postemployment obligations.

(e) Other Non-Qualified Plans

CenterPoint Energy has non-qualified deferred compensation plans that provide benefits payable to directors, officers and certain key employees or their designated beneficiaries at specified future dates or upon termination, retirement or death. Benefit payments are made from the general assets of CenterPoint Energy. CenterPoint Energy recorded benefit expense relating to these plans of $3 million, $3 million and $5 million for the years in 2016, 2015 and 2014, respectively. Included in Benefit Obligations in the accompanying Consolidated Balance Sheets as of December 31, 2016 and 2015 was $47 million and $51 million, respectively, relating to deferred compensation plans.

Included in Benefit Obligations in CenterPoint Energy’s Consolidated Balance Sheets as of December 31, 2016 and 2015 was $40 million and $32 million, respectively, relating to split-dollar life insurance arrangements.

(f) Change in Control Agreements and Other Employee Matters

CenterPoint Energy had change in control agreements with certain of its officers, which expired December 31, 2014. In lieu of these agreements, our Board of Directors approved a new change in control plan, which was effective January 1, 2015. The plan, like the expired agreements, generally provides, to the extent applicable, in the case of a change in control of CenterPoint Energy and termination of employment, for severance benefits of up to three times annual base salary plus bonus, and other benefits. Our officers, including our Executive Chairman, are participants under the plan.

As of December 31, 2016, approximately 35% of CenterPoint Energy’s employees were covered by collective bargaining agreements. The collective bargaining agreement with the IBEW Local 66 and the two collective bargaining agreements with Professional Employees International Union Local 12, which collectively cover approximately 21% of CenterPoint Energy’s employees, expired in March and May of 2016, respectively. CenterPoint Energy successfully negotiated all three follow-on agreements in 2016. The new collective bargaining agreement with the IBEW Local 66 expires in May of 2020, and the two new collective bargaining agreements with Professional Employees International Union Local 12 expire in March and May of 2021, respectively.

The collective bargaining agreements with Gas Workers Union, Local 340 and the IBEW, Local 949, covering approximately 8% of CenterPoint Energy’s employees, will expire in April and December of 2020, respectively. These two agreements were last negotiated in 2015.

The two collective bargaining agreements with the United Steelworkers Union, Locals 13-227 and 13-1, which cover approximately 6% of CenterPoint Energy’s employees, are scheduled to expire in June and July of 2017, respectively. CenterPoint Energy believes it has good relationships with these bargaining units and expect to negotiate new agreements in 2017.

(8) Derivative Instruments

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

(a) Non-Trading Activities

Derivative Instruments. CenterPoint Energy enters into certain derivative instruments to mitigate the effects of commodity price movements. These financial instruments do not qualify or are not designated as cash flow or fair value hedges.

Weather Hedges. CenterPoint Energy has weather normalization or other rate mechanisms that mitigate the impact of weather on NGD in Arkansas, Louisiana, Mississippi, Minnesota and Oklahoma. NGD and electric operations in Texas do not have such

mechanisms, although fixed customer charges are historically higher in Texas for NGD compared to CenterPoint Energy’s other jurisdictions. As a result, fluctuations from normal weather may have a positive or negative effect on NGD’s results in Texas and on Houston Electric’s results in its service territory.

CenterPoint Energy has historically entered into heating-degree day swaps for certain NGD jurisdictions to mitigate the effect of fluctuations from normal weather on its results of operations and cash flows for the winter heating season, which contained a bilateral dollar cap of $16 million in 2014–2015. However, NGD did not enter into heating-degree day swaps for the 2015–2016 winter season as a result of NGD’s Minnesota division implementing a full decoupling pilot in July 2015. CenterPoint Energy entered into weather hedges for the Houston Electric service territory, which contained bilateral dollar caps of $8 million, $7 million and $9 million for the 2014–2015, 2015–2016 and 2016–2017 winter seasons, respectively. The swaps are based on 10-year normal weather. During the years ended December 31, 2016, 2015 and 2014, CenterPoint Energy recognized a gain of $1 million, and losses of $6 million and $11 million, respectively, related to these swaps. Weather hedge gains and losses are included in revenues in the Statements of Consolidated Income.

Hedging of Interest Expense for Future Debt Issuances. In April 2016, Houston Electric entered into forward interest rate agreements with several counterparties, having an aggregate notional amount of $150 million. These agreements were executed to hedge, in part, volatility in the 5-year U.S. treasury rate by reducing Houston Electric’s exposure to variability in cash flows related to interest payments of Houston Electric’s $300 million issuance of fixed rate debt in May 2016. These forward interest rate agreements were designated as cash flow hedges. The realized gains and losses associated with the agreements were immaterial.

In June and July 2016, Houston Electric entered into forward interest rate agreements with several counterparties, having an aggregate notional amount of $300 million. These agreements were executed to hedge, in part, volatility in the 10-year U.S. treasury rate by reducing Houston Electric’s exposure to variability in cash flows related to interest payments of Houston Electric’s $300 million issuance of fixed rate debt in August 2016. These forward interest rate agreements were designated as cash flow hedges. Accordingly, the effective portion of realized gains associated with the agreements, which totaled $1.1 million, is a component of accumulated other comprehensive income and will be amortized over the life of the bonds. The ineffective portion of the gains and losses was recorded in income and was immaterial.

In January 2017, Houston Electric entered into forward interest rate agreements with several counterparties, having an aggregate notional amount of $150 million. These agreements were executed to hedge, in part, volatility in the 10-year U.S. treasury rate by reducing Houston Electric’s exposure to variability in cash flows related to interest payments of Houston Electric’s $300 million issuance of fixed rate debt in January 2017. These forward interest rate agreements were designated as cash flow hedges. Accordingly, the effective portion of unrealized losses associated with the agreements, which totaled approximately $0.5 million, will be a component of accumulated other comprehensive income in 2017 and will be amortized over the life of the bonds.

(b) Derivative Fair Values and Income Statement Impacts

The following tables present information about CenterPoint Energy’s derivative instruments and hedging activities. The first four tables provide a balance sheet overview of CenterPoint Energy’s Derivative Assets and Liabilities as of December 31, 2016 and 2015, while the last table provides a breakdown of the related income statement impacts for the years ending December 31, 2016, 2015 and 2014.

Fair Value of Derivative Instruments
December 31, 2016
Total derivatives not designated as hedging instrumentsBalance Sheet LocationDerivative Assets Fair ValueDerivative Liabilities Fair Value
(in millions)
Natural gas derivatives (1) (2) (3)Current Assets: Non-trading derivative assets$79$14
Natural gas derivatives (1) (2) (3)Other Assets: Non-trading derivative assets245
Natural gas derivatives (1) (2) (3)Current Liabilities: Non-trading derivative liabilities243
Natural gas derivatives (1) (2) (3)Other Liabilities: Non-trading derivative liabilities—5
Indexed debt securities derivativeCurrent Liabilities—717
Total$105$784
(1)The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 1,035 Bcf or a net 59 Bcf long position. Of the net long position, basis swaps constitute a net 126 Bcf long position.
(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 was a $24 million asset as shown on CenterPoint Energy’s Consolidated Balance Sheets (and as detailed in the table below), and was comprised of the natural gas contracts derivative assets and liabilities separately shown above, impacted by collateral netting of $14 million.
(3)Derivative Assets and Derivative Liabilities include no material amounts related to physical forward transactions with Enable.
Offsetting of Natural Gas Derivative Assets and Liabilities
December 31, 2016
Gross Amounts Recognized (1)Gross Amounts Offset in the Consolidated Balance SheetsNet Amount Presented in the Consolidated Balance Sheets (2)
(in millions)
Current Assets: Non-trading derivative assets$81$(30)$51
Other Assets: Non-trading derivative assets24(5)19
Current Liabilities: Non-trading derivative liabilities(57)16(41)
Other Liabilities: Non-trading derivative liabilities(10)5(5)
Total$38$(14)$24
(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.
Fair Value of Derivative Instruments
December 31, 2015
Total derivatives not designated as hedging instrumentsBalance Sheet LocationDerivative Assets Fair ValueDerivative Liabilities Fair Value
(in millions)
Natural gas derivatives (1) (2) (3)Current Assets: Non-trading derivative assets$90$2
Natural gas derivatives (1) (2) (3)Other Assets: Non-trading derivative assets36—
Natural gas derivatives (1) (2) (3)Current Liabilities: Non-trading derivative liabilities1060
Natural gas derivatives (1) (2) (3)Other Liabilities: Non-trading derivative liabilities425
Indexed debt securities derivativeCurrent Liabilities—442
Total$140$529
(1)The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 767 Bcf or a net 112 Bcf long position. Of the net long position, basis swaps constitute 133 Bcf.
(2)Natural gas contracts are presented on a net basis in the Consolidated Balance Sheets. Natural gas contracts 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 derivative assets and liabilities was a $109 million asset as shown on CenterPoint Energy’s Consolidated Balance Sheets (and as detailed in the table below), and was comprised of the natural gas contracts derivative assets and liabilities separately shown above, impacted by collateral netting of $56 million.
(3)Derivative Assets and Derivative Liabilities include no material amounts related to physical forward transactions with Enable.
Offsetting of Natural Gas Derivative Assets and Liabilities
December 31, 2015
Gross Amounts Recognized (1)Gross Amounts Offset in the Consolidated Balance SheetsNet Amount Presented in the Consolidated Balance Sheets (2)
(in millions)
Current Assets: Non-trading derivative assets$100$(11)$89
Other Assets: Non-trading derivative assets40(4)36
Current Liabilities: Non-trading derivative liabilities(62)51(11)
Other Liabilities: Non-trading derivative liabilities(25)20(5)
Total$53$56$109
(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.

Realized and unrealized gains and losses on natural gas derivatives are recognized in the Statements of Consolidated Income as revenue for retail sales derivative contracts and as natural gas expense for financial natural gas derivatives and non-retail related physical natural gas derivatives. Realized and unrealized gains and losses on indexed debt securities are recorded as Other Income (Expense) in the Statements of Consolidated Income.

Income Statement Impact of Derivative Activity
Year Ended December 31,
Total derivatives not designated as hedging instrumentsIncome Statement Location201620152014
(in millions)
Natural gas derivativesGains (Losses) in Revenue$(18)$134$35
Natural gas derivativesGains (Losses) in Expense: Natural Gas70(105)11
Indexed debt securities derivativeGains (Losses) in Other Income (Expense)(413)74(86)
Total$(361)$103$(40)

(c) Credit Risk Contingent Features

CenterPoint Energy enters into financial derivative contracts containing material adverse change provisions. These provisions could require CenterPoint Energy to post additional collateral if the S&P or Moody’s credit ratings of CenterPoint Energy, Inc. or its subsidiaries are downgraded. The total fair value of the derivative instruments that contain credit risk contingent features that are in a net liability position as of December 31, 2016 and 2015 was $1 million and $3 million, respectively. CenterPoint Energy posted no assets as collateral towards derivative instruments that contain credit risk contingent features as of either December 31, 2016 or 2015. If all derivative contracts (in a net liability position) containing credit risk contingent features were triggered at December 31, 2016 and 2015, $-0- and $2 million, respectively, of additional assets would be required to be posted as collateral.

(d) Credit Quality of Counterparties

In addition to the risk associated with price movements, credit risk is also inherent in CenterPoint Energy’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 of CenterPoint Energy as of December 31, 2016 and 2015:

December 31, 2016December 31, 2015
Investment Grade(1)TotalInvestment Grade(1)Total
(in millions)
Energy marketers$1$4$4$10
Financial institutions3333——
End users (2)2472115
Total$36$84(3)$6$125
(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 determines a synthetic credit rating by performing financial statement analysis and considers 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 net of total non-trading natural gas derivative assets was $70 million and $125 million as of December 31, 2016 and 2015, respectively, as shown on CenterPoint Energy’s Consolidated Balance Sheets, and was comprised of the natural gas contracts derivatives assets separately shown above, impacted by collateral netting of $14 million and $-0- as of December 31, 2016 and 2015, respectively.

(9) Fair Value Measurements

Assets and liabilities that are recorded at fair value in the 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.

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 CenterPoint Energy’s 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 CenterPoint Energy’s judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. CenterPoint Energy develops these inputs based on the best information available, including CenterPoint Energy’s own data. A market approach is utilized to value CenterPoint Energy’s Level 3 assets or liabilities. At December 31, 2016, CenterPoint Energy’s Level 3 assets and liabilities are comprised of physical forward contracts and options and its indexed debt securities derivative. Level 3 physical forward contracts are valued using a discounted cash flow model which includes illiquid forward price curve locations (ranging from $2.24 to $7.01 per MMBtu) as an unobservable input. Level 3 options are valued through Black-Scholes (including forward start) option models which include option volatilities (ranging from 0% to 86%) as an unobservable input. CenterPoint Energy’s Level 3 physical 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 and volatilities. If forward prices decrease, CenterPoint Energy’s long forwards lose value whereas its short forwards gain in value. If volatility decreases, CenterPoint Energy’s long options lose value whereas its short options gain in value. CenterPoint Energy’s Level 3 indexed debt securities are valued using a Black-Scholes option model and a discounted cash flow model, which use option volatility (19%) and a projected dividend

growth rate (8%) as unobservable inputs. An increase in either volatilities or projected dividends will increase the value of the indexed debt securities, and a decrease in either volatilities or projected dividends will decrease the value of the indexed debt securities.

CenterPoint Energy determines the appropriate level for each financial asset and liability on a quarterly basis and recognizes transfers between levels at the end of the reporting period. For the year ended December 31, 2016, there were no transfers between Level 1 and 2. CenterPoint Energy also recognizes 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 CenterPoint Energy’s 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 CenterPoint Energy to determine such fair value.

December 31, 2016
Quoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)Netting Adjustments (1)Balance
(in millions)
Assets
Corporate equities$956$—$—$—$956
Investments, including money market funds (2)77———77
Natural gas derivatives (3)117420(35)70
Total assets$1,044$74$20$(35)$1,103
Liabilities
Indexed debt securities derivative$—$—$717$—$717
Natural gas derivatives (3)4567(21)46
Total liabilities$4$56$724$(21)$763
(1)Amounts represent the impact of legally enforceable master netting arrangements that allow CenterPoint Energy to settle positive and negative positions and also include cash collateral of $14 million held by CES from 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.
December 31, 2015
Quoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)Netting Adjustments (1)Balance
(in millions)
Assets
Corporate equities$807$—$—$—$807
Investments, including money market funds (2)53———53
Natural gas derivatives (3)411521(15)125
Total assets$864$115$21$(15)$985
Liabilities
Indexed debt securities derivative$—$442$—$—$442
Natural gas derivatives (3)13659(71)16
Total liabilities$13$507$9$(71)$458
(1)Amounts represent the impact of legally enforceable master netting arrangements that allow CenterPoint Energy to settle positive and negative positions and also include cash collateral of $56 million 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.

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 has utilized Level 3 inputs to determine fair value:

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Derivative assets and liabilities, net
Year Ended December 31,
201620152014
(in millions)
Beginning balance$12$17$3
Purchases12——
Total gains12714
Total settlements(27)(12)1
Transfers out of Level 3(1)(1)—
Transfers into Level 3 (1)(712)1(1)
Ending balance (2)$(704)$12$17
The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date (1)$(402)$6$16
(1)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. As of December 31, 2016, the indexed debt securities liability was $717 million. During 2016, there was a loss of $413 million on the indexed debt securities.
(2)During 2016, 2015 and 2014, CenterPoint Energy did not have significant Level 3 sales.

Items Measured at Fair Value on a Nonrecurring Basis

In 2015, CenterPoint Energy determined that an other than temporary decrease in the value of its investment in Enable had occurred and, using multiple valuation methodologies under both the market and income approaches, recorded an impairment on its investment in Enable of $1,225 million. Key assumptions in the market approach included recent market transactions of comparable companies and EBITDA to total enterprise multiples for comparable companies. Due to volatility of the quoted price of Enable’s units at the valuation date, a volume weighted average price was used under the market approach to best approximate fair value at the measurement date. Key assumptions in the income approach included Enable’s forecasted cash distributions, projected cash flows of incentive distribution rights, forecasted growth rate of Enable’s cash distributions beyond 2020, and the discount rate used to determine the present value of the estimated future cash flows. A weighing of the different approaches was utilized to determine the estimated fair value of our investment in Enable. Based on the significant unobservable estimates and assumptions required, CenterPoint Energy concluded that the fair value estimate should be classified as a Level 3 measurement within the fair value hierarchy. See Note 10 for further discussion of the impairments. As of December 31, 2016, 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 the market price. These assets and liabilities, which are not measured at fair value in the Consolidated Balance Sheets but for which the fair value is disclosed, would be classified as Level 1 or Level 2 in the fair value hierarchy.

December 31, 2016December 31, 2015
Carrying AmountFair ValueCarrying AmountFair Value
(in millions)
Financial assets:
Notes receivable - affiliated companies$—$—$363$356
Financial liabilities:
Long-term debt$8,443$8,846$8,585$9,067

(10) Unconsolidated Affiliates

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 and subordinated units using the equity method of accounting. See Note 2 for information on the formation of Enable.

CenterPoint Energy’s maximum exposure to loss related to Enable, a VIE in which CenterPoint Energy is not the primary beneficiary, is limited to its equity investment and Series A Preferred Unit investment as presented in the Consolidated Balance Sheet as of December 31, 2016 and outstanding current accounts receivable from Enable. On February 18, 2016, CenterPoint Energy purchased an aggregate of 14,520,000 Series A Preferred Units from Enable for a total purchase price of $363 million, which is accounted for as a cost method investment. In connection with the purchase, Enable redeemed $363 million of notes owed to a wholly-owned subsidiary of CERC Corp., which bore interest at an annual rate of 2.10% to 2.45%.

Effective on the Formation Date, CenterPoint Energy and Enable entered into the Transition Agreements. Under the Services Agreement, CenterPoint Energy agreed to provide certain support services to Enable such as accounting, legal, risk management and treasury functions for an initial term, which ended on April 30, 2016. CenterPoint Energy is providing certain services to Enable on a year-to-year basis. Enable may terminate (i) the entire Services Agreement with at least 90 days’ notice prior to the end of any extension term, or (ii) either any service provided under the Services Agreement, or the entire Services Agreement, at any time upon approval by its board of directors and with at least 180 days’ notice.

CenterPoint Energy provided seconded employees to Enable to support its operations for a term ending on December 31, 2014. Enable, at its discretion, had the right to select and offer employment to seconded employees from CenterPoint Energy. During the fourth quarter of 2014, Enable notified CenterPoint Energy that it selected seconded employees and provided employment offers to substantially all of the seconded employees from CenterPoint Energy. Substantially all of the seconded employees became employees of Enable effective January 1, 2015.

In accordance with the Enable formation agreements, CenterPoint Energy had certain put rights, and Enable had certain call rights, exercisable with respect to the 25.05% interest in SESH retained by CenterPoint Energy. As of June 30, 2015, CenterPoint Energy’s remaining interest in SESH was transferred to Enable.

Transactions with Enable:

Year Ended December 31,
201620152014
(in millions)
Reimbursement of transition services (1)$7$16$163
Natural gas expenses, including transportation and storage costs110117130
Interest income related to notes receivable from Enable188
(1)Represents amounts billed under the Transition Agreements, including the costs of seconded employees. Actual transition services costs are recorded net of reimbursement.
Year Ended December 31,
20162015
(in millions)
Accounts receivable for amounts billed for transition services$1$3
Interest receivable related to notes receivable from Enable—4
Accounts payable for natural gas purchases from Enable1011

CenterPoint Energy evaluates its equity method investments for impairment when factors indicate that a decrease in the value of its investment has occurred and the carrying amount of its investment may not be recoverable. An impairment loss, based on the excess of the carrying value over estimated fair value of the investment, is recognized in earnings when an impairment is deemed to be other than temporary. Considerable judgment is used in determining if an impairment loss is other than temporary and the amount of any impairment. Based on the sustained low Enable common unit price and further declines in such price during the year ended December 31, 2015, as well as the market outlook for continued depressed crude oil and natural gas prices impacting the midstream oil and gas industry, CenterPoint Energy determined that an other than temporary decrease in the value of its equity method investment in Enable had occurred. CenterPoint Energy wrote down the value of its equity method investment in Enable to its estimated fair value which resulted in impairment charges of $1,225 million for the year ended December 31, 2015. Both the income approach and market approach were utilized to estimate the fair value of CenterPoint Energy’s total investment in Enable, which includes the limited partner common and subordinated units, general partner interest and incentive distribution rights held by CenterPoint Energy. The determination of fair value considered a number of relevant factors including Enable’s common unit price and forecasted results, recent comparable transactions and the limited float of Enable’s publicly traded common units. See Note 9 for further discussion of the determination of fair value of CenterPoint Energy’s equity method investment in Enable in 2015.

As of December 31, 2016, the carrying value of CenterPoint Energy’s equity method investment in Enable was $10.71 per unit, which includes limited partner common and subordinated units, a general partner interest and incentive distribution rights. On December 31, 2016, Enable’s common unit price closed at $15.73. There was no impairment indicated in 2016.

As there were no identified events or changes in circumstances that may have a significant adverse effect on the fair value of CenterPoint Energy’s cost method investment in Enable’s Series A Preferred Units as of December 31, 2016, and the investment’s fair value is not readily determinable, an estimate of the fair value of the cost method investment was not performed.

Investment in Unconsolidated Affiliates:

As of December 31,
20162015
(in millions)
Enable$2,505$2,594

Equity in Earnings (Losses) of Unconsolidated Affiliates, net:

Year Ended December 31,
201620152014
(in millions)
Enable$208$(1,633)$303
SESH (1)——5
Total$208$(1,633)$308
(1)CenterPoint Energy contributed a 24.95% interest in SESH to Enable on May 30, 2014 and its remaining 0.1% interest in SESH to Enable on June 30, 2015.

Limited Partner Interest in Enable:

As of December 31,
201620152014
CenterPoint Energy54.1%(1)55.4%55.4%
OGE25.7%26.3%26.3%
(1)In November 2016, Enable closed a public offering of 10,000,000 common units. In connection with the offering, Enable and an affiliate of ArcLight sold an additional combined 1,500,000 common units to the underwriters.

Enable Common and Subordinated Units Held:

December 31, 2016
CommonSubordinated
CenterPoint Energy94,151,707139,704,916
OGE42,832,29168,150,514

Sales of more than 5% of the aggregate of the common units and subordinated units we own in Enable or sales by OGE of more than 5% of the aggregate of the common units and subordinated units it owns in Enable are subject to mutual rights of first offer and first refusal.

Enable is controlled jointly by CERC Corp. and OGE, and each own 50% of the management rights in the general partner of Enable. Sale of our or OGE’s ownership interests in Enable’s general partner to a third party is subject to mutual rights of first offer and first refusal, and we are not permitted to dispose of less than all of our interest in Enable’s general partner.

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

Year Ended December 31,
201620152014
(in millions)
Operating revenues$2,272$2,418$3,367
Cost of sales, excluding depreciation and amortization1,0171,0971,914
Impairment of goodwill and other long-lived assets91,1348
Operating income (loss)385(712)586
Net income (loss) attributable to Enable290(752)530
Reconciliation of Equity in Earnings (Losses), net:
CenterPoint Energy’s interest$160$(416)$298
Basis difference amortization (1)4885
Impairment of CenterPoint Energy’s equity method investment in Enable—(1,225)—
CenterPoint Energy’s equity in earnings (losses), net (2)$208$(1,633)$303
(1)Equity in earnings of unconsolidated affiliates 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 33 years, the average life of the assets to which the basis difference is attributed.
(2)These amounts include impairment charges totaling $1,846 million composed of CenterPoint Energy’s impairment of its equity method investment in Enable of $1,225 million and CenterPoint Energy’s share, $621 million, of impairment charges Enable recorded for goodwill and long-lived assets for the year ended December 31, 2015. This impairment is offset by $213 million of earnings for the year ended December 31, 2015.

Summarized consolidated balance sheet information for Enable is as follows:

December 31,
20162015
(in millions)
Current assets$396$381
Non-current assets10,81610,845
Current liabilities362615
Non-current liabilities3,0563,080
Non-controlling interest1212
Preferred equity362—
Enable partners’ capital7,4207,519
Reconciliation of Investment in Enable:
CenterPoint Energy’s ownership interest in Enable partners’ capital$4,067$4,163
CenterPoint Energy’s basis difference(1,562)(1,569)
CenterPoint Energy’s investment in Enable$2,505$2,594

Distributions Received from Unconsolidated Affiliates:

Year Ended December 31,
201620152014
(in millions)
Investment in Enable’s common and subordinated units$297$294$298
Investment in Enable’s Series A Preferred Units22(1)——
Interest in SESH (2)——7
Total$319$294$305
(1)Represents the period from February 18, 2016 to December 31, 2016.
(2)CenterPoint Energy contributed a 24.95% interest in SESH to Enable on May 30, 2014 and its remaining 0.1% interest in SESH to Enable on June 30, 2015.

As of December 31, 2016, CERC Corp. and OGE also own 40% and 60%, respectively, of the incentive distribution rights held by the general partner of Enable. Enable is expected to pay a minimum quarterly distribution of $0.2875 per unit on its outstanding units to the extent it has sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to its general partner and its affiliates, within 60 days after the end of each quarter. If cash distributions to Enable’s unitholders exceed $0.330625 per unit in any quarter, the general partner will receive increasing percentages or incentive distributions rights, up to 50%, of the cash Enable distributes in excess of that amount. In certain circumstances the general partner of Enable 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.

(11) Indexed Debt Securities (ZENS) and Securities Related to ZENS

(a) Investment in Securities Related to ZENS

In 1995, CenterPoint Energy sold a cable television subsidiary to TW and received TW securities as partial consideration. A subsidiary of CenterPoint Energy now holds 7.1 million shares of TW Common, 0.9 million shares of Time Common and 0.9 million shares of Charter Common, which are classified as trading securities and are expected to be held to facilitate CenterPoint Energy’s ability to meet its obligation under the ZENS. Unrealized gains and losses resulting from changes in the market value of the TW Securities are recorded in CenterPoint Energy’s Statements of Consolidated Income.

(b) ZENS

In September 1999, CenterPoint Energy issued ZENS having an original principal amount of $1 billion of which $828 million remain outstanding at December 31, 2016. Each ZENS was originally exchangeable at the holder’s option at any time for an amount of cash equal to 95% of the market value of the reference shares of TW Common attributable to such note. The number and identity of the reference shares attributable to each ZENS are adjusted for certain corporate events. Prior to the closing of the transactions discussed below, the reference shares for each ZENS consisted of 0.5 share of TW Common, 0.125505 share of TWC Common and 0.0625 share of Time Common.

On May 26, 2015, Charter announced that it had entered into a definitive merger agreement with TWC. On September 21, 2015, Charter shareholders approved the announced transaction with TWC. Pursuant to the merger agreement, upon closing of the merger, TWC Common would be exchanged for cash and Charter Common and as a result, reference shares for the ZENS would consist of Charter Common, TW Common and Time Common. The merger closed on May 18, 2016. CenterPoint Energy received $100 and 0.4891 shares of Charter Common for each share of TWC Common held, resulting in cash proceeds of $178 million and 872,531 shares of Charter Common. In accordance with the terms of the ZENS, CenterPoint Energy remitted $178 million to ZENS holders in June 2016, which reduced contingent principal.

As a result, CenterPoint Energy recorded the following:

(in millions)
Cash payment to ZENS holders$178
Indexed debt – reduction(40)
Indexed debt securities derivative – reduction(21)
Loss on indexed debt securities$117

As of December 31, 2016, the reference shares for each ZENS consisted of 0.5 share of TW Common, 0.0625 share of Time Common and 0.061382 share of Charter Common.

On October 22, 2016, AT&T announced that it had entered into a definitive agreement to acquire TW in a stock and cash transaction. Pursuant to the agreement, TW Common would be exchanged for cash and AT&T Common, and as a result, reference shares would consist of Charter Common, Time Common and AT&T Common. AT&T announced that the merger is expected to close by the end of 2017.

CenterPoint Energy pays interest on the ZENS at an annual rate of 2% plus the amount of any quarterly cash dividends paid in respect of the reference shares attributable to the ZENS. The principal amount of ZENS is subject to being increased or decreased to the extent that the annual yield from interest and cash dividends on the reference shares is less than or more than 2.309%. The adjusted principal amount is defined in the ZENS instrument as “contingent principal.” At December 31, 2016, ZENS having an original principal amount of $828 million and a contingent principal amount of $514 million were outstanding and were exchangeable, at the option of the holders, for cash equal to 95% of the market value of reference shares deemed to be attributable to the ZENS. As of December 31, 2016, the market value of such shares was approximately $953 million, which would provide an exchange amount of $1,094 for each $1,000 original principal amount of ZENS. At maturity of the ZENS in 2029, CenterPoint Energy will be obligated to pay in cash the higher of the contingent principal amount of the ZENS or an amount based on the then-current market value of the reference shares, which will include any additional publicly-traded securities distributed with respect to the current reference shares prior to maturity.

The ZENS obligation is bifurcated into a debt component and a derivative component (the holder’s option to receive the appreciated value of the reference shares at maturity). The bifurcated debt component accretes through interest charges at 19.5% annually up to the contingent principal amount of the ZENS in 2029. Such accretion will be reduced by annual cash interest payments, as described above. The derivative component is recorded at fair value and changes in the fair value of the derivative component are recorded in CenterPoint Energy’s Statements of Consolidated Income. Changes in the fair value of the TW Securities held by CenterPoint Energy are expected to substantially offset changes in the fair value of the derivative component of the ZENS.

The following table sets forth summarized financial information regarding CenterPoint Energy’s investment in TW Securities and each component of CenterPoint Energy’s ZENS obligation.

TW SecuritiesDebt Component of ZENS (1)Derivative Component of ZENS
(in millions)
Balance as of December 31, 2013$767$132$455
Accretion of debt component of ZENS—27—
2% interest paid—(17)—
Loss on indexed debt securities——86
Gain on TW Securities163——
Balance as of December 31, 2014930142541
Accretion of debt component of ZENS—27—
2% interest paid—(17)—
Sale of TW Securities(32)——
Distribution to ZENS holders—(7)(18)
Gain on indexed debt securities——(81)
Loss on TW Securities(93)——
Balance as of December 31, 2015805145442
Accretion of debt component of ZENS—26—
2% interest paid—(17)—
Sale of TW securities(178)——
Distribution to ZENS holders—(40)(21)
Loss on indexed debt securities——296
Gain on TW Securities326——
Balance as of December 31, 2016$953$114$717
(1)To reflect adoption of ASU 2015-03, balances have been restated to include unamortized debt issuance costs of $9 million, $10 million and $11 million as of December 31, 2015, 2014 and 2013, respectively.

(12) Equity

Dividends Declared

CenterPoint Energy declared dividends per share of $1.03, $0.99 and $0.95, respectively, during the years ended December 31, 2016, 2015 and 2014.

Undistributed Retained Earnings

As of both December 31, 2016 and 2015, CenterPoint Energy’s consolidated retained earnings balance includes undistributed earnings from Enable of $-0-.

(13) Short-term Borrowings and Long-term Debt

December 31, 2016December 31, 2015
Long-TermCurrent (1)Long-Term (2)Current (1)
(in millions)
Short-term borrowings:
Inventory financing (3)$—$35$—$40
Total short-term borrowings—35—40
Long-term debt:
CenterPoint Energy:
ZENS due 2029 (4)—114—145
Senior notes 5.95% due 2017—250550—
Pollution control bonds 5.05% to 5.125% due 2018 to 2028 (5)118—118—
Commercial paper (6)835—716—
Other———3
Houston Electric:
Bank Loans——200—
First mortgage bonds 9.15% due 2021102—102—
General mortgage bonds 1.85% to 6.95% due 2021 to 20442,512—1,912—
System restoration bonds 3.46% to 4.243% due 2018 to 20223125336550
Transition bonds 0.901% to 5.302% due 2017 to 20241,5603581,918341
CERC Corp.:
Senior notes 4.50% to 6.625% due 2017 to 20411,5932501,843325
Commercial paper (6)569—219—
Unamortized debt issuance costs(33)—(35)—
Unamortized discount and premium, net(36)—(42)—
Total long-term debt7,5321,0257,866864
Total debt$7,532$1,060$7,866$904
(1)Includes amounts due or exchangeable within one year of the date noted.
(2)Includes $35 million of unamortized debt issuance costs to reflect adoption of ASU 2015-03.
(3)NGD currently has AMAs associated with its utility distribution service in Arkansas, north Louisiana and Oklahoma that extend through 2020. Pursuant to the provisions of the agreements, NGD sells natural gas and agrees to repurchase an equivalent amount of natural gas during the winter heating seasons at the same cost, plus a financing charge. These transactions are accounted for as an inventory financing.
(4)CenterPoint Energy’s ZENS obligation is bifurcated into a debt component and an embedded derivative component. For additional information regarding ZENS, see Note 11(b). As ZENS are exchangeable for cash at any time at the option of the holders, these notes are classified as a current portion of long-term debt.
(5)$118 million of these series of debt were secured by general mortgage bonds of Houston Electric as of both December 31, 2016 and 2015.
(6)Classified as long-term debt because the termination date of the facility that backstops the commercial paper is more than one year from the date noted.

Long-term Debt

Debt Retirements. In May 2016, CERC retired approximately $325 million aggregate principal amount of its 6.15% senior notes at their maturity. The retirement of senior notes was financed by the issuance of commercial paper.

In December, 2016, CenterPoint Energy redeemed $300 million aggregate principal amount of its outstanding 6.50% senior notes due 2018 at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon to but excluding the redemption date, plus the make-whole premium. The make-whole premium associated with the redemption was approximately $22 million and was included in Other Income, net on the Statements of Consolidated Income.

In December 2016, Houston Electric retired $56 million of collateralized pollution control bonds that had been held for remarketing. These bonds were not reflected on our consolidated financial statements because Houston Electric was both the obligor on the bonds and the current owner of the bonds.

Debt Issuances. Houston Electric issued the following general mortgage bonds during 2016 and as of February 10, 2017 in 2017.

Issuance DateAggregate Principal AmountInterest RateMaturity Date
(in millions)
May 2016$3001.85%2021
August 20163002.40%2026
January 20173003.00%2027

The proceeds from the issuance of these bonds were used to repay short-term debt and for general corporate purposes.

Securitization Bonds. As of December 31, 2016, Houston Electric had special purpose subsidiaries consisting of the Bond Companies, which it consolidates. The consolidated special purpose subsidiaries are wholly-owned, bankruptcy remote entities that were formed solely for the purpose of purchasing and owning transition or system restoration property through the issuance of transition bonds or system restoration bonds and activities incidental thereto. These Securitization Bonds are payable only through the imposition and collection of “transition” or “system restoration” charges, as defined in the Texas Public Utility Regulatory Act, which are irrevocable, non-bypassable charges to provide recovery of authorized qualified costs. Houston Electric has no payment obligations in respect of the Securitization Bonds other than to remit the applicable transition or system restoration charges it collects. Each special purpose entity is the sole owner of the right to impose, collect and receive the applicable transition or system restoration charges securing the bonds issued by that entity. Creditors of CenterPoint Energy or Houston Electric have no recourse to any assets or revenues of the Bond Companies (including the transition and system restoration charges), and the holders of Securitization Bonds have no recourse to the assets or revenues of CenterPoint Energy or Houston Electric.

Credit Facilities.

December 31, 2016December 31, 2015
Size of FacilityLoansLetters of CreditCommercial PaperSize of FacilityLoansLetters of CreditCommercial Paper
(in millions)
CenterPoint Energy$1,600$—$6$835(1)$1,200$—$6$716(1)
Houston Electric300—4—300200(2)4—
CERC Corp.600—4569(3)600—2219(3)
Total$2,500$—$14$1,404$2,100$200$12$935
(1)Weighted average interest rate was approximately 1.04% and 0.79% as of December 31, 2016 and December 31, 2015, respectively.
(2)Weighted average interest rate was approximately 1.64% as of December 31, 2015.
(3)Weighted average interest rate was approximately 1.03% and 0.81% as of December 31, 2016 and December 31, 2015, respectively.
Execution DateCompanySize of FacilityDraw Rate of LIBOR plus (1)Financial Covenant Limit on Debt to Capital RatioDebt to Capital Ratio as of December 31, 2016 (2)Termination Date
(in millions)
March 3, 2016CenterPoint Energy$1,6001.250%65%(3)56.0%March 3, 2021
March 3, 2016Houston Electric3001.125%65%(3)47.4%March 3, 2021
March 3, 2016CERC Corp.6001.250%65%35.8%March 3, 2021
(1)Based on current credit ratings.
(2)As defined in the revolving credit facility agreement, excluding Securitization Bonds.
(3)The financial covenant limit will temporarily increase from 65% to 70% if Houston Electric experiences damage from a natural disaster in its service territory and CenterPoint Energy certifies to the administrative agent that Houston Electric has incurred system restoration costs reasonably likely to exceed $100 million in a consecutive twelve-month period, all or part of which Houston Electric intends to seek to recover through securitization financing. Such temporary increase in the financial covenant would be in effect from the date CenterPoint Energy delivers its certification until the earliest to occur of (i) the completion of the securitization financing, (ii) the first anniversary of CenterPoint Energy’s certification or (iii) the revocation of such certification.

CenterPoint Energy, Houston Electric and CERC Corp. were in compliance with all financial debt covenants as of December 31, 2016.

Maturities. Maturities of long-term debt, capital leases and sinking fund requirements, excluding the ZENS obligation, are as follows:

CenterPoint Energy (1)Securitization Bonds
(in millions)
2017$911$411
2018784434
2019458458
2020231231
20212,610211

(1)These maturities include Securitization Bonds principal repayments on scheduled payment dates.

Liens. As of December 31, 2016, Houston Electric’s assets were subject to liens securing approximately $102 million of first mortgage bonds. Sinking or improvement fund and replacement fund requirements on the first mortgage bonds may be satisfied by certification of property additions. Sinking fund and replacement fund requirements for 2016, 2015 and 2014 have been satisfied by certification of property additions. The replacement fund requirement to be satisfied in 2017 is approximately $240 million, and the sinking fund requirement to be satisfied in 2017 is approximately $1.6 million. CenterPoint Energy expects Houston Electric to meet these 2017 obligations by certification of property additions. As of December 31, 2016, Houston Electric’s assets were also subject to liens securing approximately $2.6 billion of general mortgage bonds, which are junior to the liens of the first mortgage bonds.

(14) Income Taxes

The components of CenterPoint Energy’s income tax expense (benefit) were as follows:

Year Ended December 31,
201620152014
(in millions)
Current income tax expense (benefit):
Federal$23$(37)$(20)
State181214
Total current expense (benefit)41(25)(6)
Deferred income tax expense (benefit):
Federal185(359)273
State28(54)7
Total deferred expense (benefit)213(413)280
Total income tax expense (benefit)$254$(438)$274

A reconciliation of income tax expense (benefit) using the federal statutory income tax rate to the actual income tax expense and resulting effective income tax rate is as follows:

Year Ended December 31,
201620152014
(in millions)
Income (loss) before income taxes$686$(1,130)$885
Federal statutory income tax rate35%35%35%
Expected federal income tax expense (benefit)240(396)310
Increase (decrease) in tax expense resulting from:
State income tax expense, net of federal income tax27(27)16
State valuation allowance, net of federal3——
Tax basis balance sheet adjustments——(29)
Other, net(16)(15)(23)
Total14(42)(36)
Total income tax expense (benefit)$254$(438)$274
Effective tax rate37%39%31%

In 2016, CenterPoint Energy recognized a $6 million deferred tax expense due to Louisiana state law change and recorded an additional $3 million valuation allowance on certain state carryforwards.

In 2015, CenterPoint Energy’s effective tax rate was higher than the statutory rate primarily due to lower earnings from the impairment of CenterPoint Energy’s equity method investment in Enable. The impairment loss reduced the deferred tax liability on CenterPoint Energy’s equity method investment in Enable.

In 2014, CenterPoint Energy recognized a $29 million deferred income tax benefit upon completion of its tax basis balance sheet review. The adjustment resulted in a decrease to deferred tax liabilities of $32 million, a decrease to income taxes payable of $5 million and a decrease to income tax regulatory assets of $8 million. CenterPoint Energy determined the impact of the $29 million adjustment was not material to any prior period or the year ended December 31, 2014.

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities were as follows:

December 31,
20162015
(in millions)
Deferred tax assets:
Benefits and compensation$316$334
Loss and credit carryforwards79115
AROs7773
Other2145
Valuation allowance(5)(2)
Total deferred tax assets488565
Deferred tax liabilities:
Property, plant, and equipment2,6032,423
Investment in unconsolidated affiliates1,3831,277
Regulatory assets/liabilities, net8831,060
Investment in marketable securities and indexed debt772654
Indexed debt securities derivative491
Other106107
Total deferred tax liabilities5,7515,612
Net deferred tax liabilities$5,263$5,047

Tax Attribute Carryforwards and Valuation Allowance. CenterPoint Energy has no remaining federal net operating loss carryforward or federal tax credits as of December 31, 2016. CenterPoint Energy has $962 million of state net operating loss carryforwards that expire between 2017 and 2036, $11 million of state tax credits that do not expire and $244 million of state capital loss carryforwards that expire in 2017. CenterPoint Energy reported a tax-effected valuation allowance of $5 million because it is more likely than not that the benefit from certain state carryforwards will not be realized.

Uncertain Income Tax Positions. CenterPoint Energy reported no uncertain tax liability as of December 31, 2016, 2015 and 2014. We expect no significant change to the uncertain tax liability over the next twelve months ending December 31, 2017.

Tax Audits and Settlements. Tax years through 2014 have been audited and settled with the IRS. For the 2015, 2016 and 2017 tax years, CenterPoint Energy is a participant in the IRS’s Compliance Assurance Process.

(15) Commitments and Contingencies

(a) Natural Gas Supply Commitments

Natural gas supply commitments include natural gas contracts related to CenterPoint Energy’s Natural Gas Distribution and Energy Services business segments, which have various quantity requirements and durations, that are not classified as non-trading derivative assets and liabilities in CenterPoint Energy’s Consolidated Balance Sheets as of December 31, 2016 and 2015 as these contracts meet an exception as “normal purchases contracts” or do not meet the definition of a derivative. Natural gas supply commitments also include natural gas transportation contracts that do not meet the definition of a derivative. As of December 31, 2016, minimum payment obligations for natural gas supply commitments are approximately:

(in millions)
2017$461
2018467
2019268
2020125
2021127
2022 and beyond8

(b) AMAs

NGD has had AMAs associated with its utility distribution service in Arkansas, Louisiana, Mississippi, Oklahoma and Texas. Generally, AMAs are contracts between NGD and an asset manager that are intended to transfer the working capital obligation and maximize the utilization of the assets. In these AMAs, NGD agrees to release transportation and storage capacity to other parties to manage natural gas storage, supply and delivery arrangements for NGD and to use the released capacity for other purposes when it is not needed for NGD. NGD is compensated by the asset manager through payments made over the life of the AMAs based in part on the results of the asset optimization. NGD has an obligation to purchase its winter storage requirements that have been released to the asset manager under these AMAs. NGD has received approval from the state regulatory commissions in Arkansas, Louisiana, Mississippi and Oklahoma to retain a share of the AMA proceeds. NGD currently has AMAs in Arkansas, north Louisiana and Oklahoma that extend through 2020.

(c) Lease Commitments

The following table sets forth information concerning CenterPoint Energy’s obligations under non-cancelable long-term operating leases as of December 31, 2016, which primarily consist of rental agreements for building space, data processing equipment, compression equipment and rights-of-way:

(in millions)
2017$5
20184
20194
20203
20213
2022 and beyond7
Total$26

Total lease expense for all operating leases was $10 million, $9 million and $11 million during 2016, 2015 and 2014, respectively.

(d) Legal, Environmental and Other Matters

Legal Matters

Gas Market Manipulation Cases. CenterPoint Energy, Houston Electric or their predecessor, Reliant Energy, and certain of their former subsidiaries have been named as defendants in certain lawsuits described below. Under a master separation agreement between CenterPoint Energy and a former subsidiary, RRI, CenterPoint Energy and its subsidiaries are entitled to be indemnified by RRI and its successors for any losses, including certain attorneys’ fees and other costs, arising out of these lawsuits. In May 2009, RRI sold its Texas retail business to a subsidiary of NRG and RRI changed its name to RRI Energy, Inc. In December 2010, Mirant Corporation merged with and became a wholly-owned subsidiary of RRI, and RRI changed its name to GenOn. In December 2012, NRG acquired GenOn through a merger in which GenOn became a wholly-owned subsidiary of NRG. None of the sale of the retail business, the merger with Mirant Corporation, or the acquisition of GenOn by NRG alters RRI’s (now GenOn’s) contractual obligations to indemnify CenterPoint Energy and its subsidiaries, including Houston Electric, for certain liabilities, including their indemnification obligations regarding the gas market manipulation litigation.

A large number of lawsuits were filed against numerous gas market participants in a number of federal and western state courts in connection with the operation of the natural gas markets in 2000–2002. CenterPoint Energy and its affiliates have since been released or dismissed from all such cases. CES, a subsidiary of CERC Corp., was a defendant in a case now pending in federal court in Nevada alleging a conspiracy to inflate Wisconsin natural gas prices in 2000–2002. On May 24, 2016, the district court granted CES’s motion for summary judgment, dismissing CES from the case. The plaintiffs have appealed that ruling. CenterPoint Energy and CES intend to continue vigorously defending against the plaintiffs’ claims. CenterPoint Energy does not expect the ultimate outcome of this matter to have a material adverse effect on its financial condition, results of operations or cash flows.

Environmental Matters

MGP Sites. CERC and its predecessors operated MGPs in the past. With respect to certain Minnesota MGP sites, CERC has completed state-ordered remediation and continues state-ordered monitoring and water treatment. As of December 31, 2016, CERC had a recorded liability of $7 million for continued monitoring and any future remediation required by regulators in Minnesota. The estimated range of possible remediation costs for the sites for which CERC believes it may have responsibility was $5 million to $30 million based on remediation continuing for 30 to 50 years. The cost estimates are based on studies of a site or industry average costs for remediation of sites of similar size. The actual remediation costs will depend on the number of sites to be remediated, the participation of other PRPs, if any, and the remediation methods used.

In addition to the Minnesota sites, the EPA and other regulators have investigated MGP sites that were owned or operated by CERC or may have been owned by one of its former affiliates. CenterPoint Energy does not expect the ultimate outcome of these matters to have a material adverse effect on the financial condition, results of operations or cash flows of either CenterPoint Energy or CERC.

Asbestos. Some facilities owned by CenterPoint Energy or its predecessors contain or have contained asbestos insulation and other asbestos-containing materials. CenterPoint Energy and its subsidiaries are from time to time named, along with numerous others, as defendants in lawsuits filed by a number of individuals who claim injury due to exposure to asbestos, and CenterPoint Energy anticipates that additional claims may be asserted in the future. Although their ultimate outcome cannot be predicted at this time, CenterPoint Energy does not expect these matters, either individually or in the aggregate, to have a material adverse effect on CenterPoint Energy’s financial condition, results of operations or cash flows.

Other Environmental. From time to time CenterPoint Energy identifies the presence of environmental contaminants during its operations or on property where its predecessor companies have conducted operations. Other such sites involving contaminants may be identified in the future. CenterPoint Energy has and expects to continue to remediate identified sites consistent with its legal obligations. From time to time CenterPoint Energy has received notices from regulatory authorities or others regarding its status as a PRP in connection with sites found to require remediation due to the presence of environmental contaminants. In addition, CenterPoint Energy has been named from time to time as a defendant in litigation related to such sites. Although the ultimate outcome of such matters cannot be predicted at this time, CenterPoint Energy does not expect these matters, either individually or in the aggregate, to have a material adverse effect on CenterPoint Energy’s financial condition, results of operations or cash flows.

Other Proceedings

CenterPoint Energy is involved in other legal, environmental, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies regarding matters arising in the ordinary course of business. From time to time, CenterPoint Energy is also a defendant in legal proceedings with respect to claims brought by various plaintiffs against broad groups of participants in the energy industry. Some of these proceedings involve substantial amounts. CenterPoint Energy regularly analyzes current information and, as necessary, provides accruals for probable and reasonably estimable liabilities on the eventual disposition of these matters. CenterPoint Energy does not expect the disposition of these matters to have a material adverse effect on CenterPoint Energy’s financial condition, results of operations or cash flows.

(16) Earnings Per Share

The following table reconciles numerators and denominators of CenterPoint Energy’s basic and diluted earnings (loss) per share calculations:

For the Year Ended December 31,
201620152014
(in millions, except per share and share amounts)
Net income (loss)$432$(692)$611
Basic weighted average shares outstanding430,606,000430,180,000429,634,000
Plus: Incremental shares from assumed conversions:
Restricted stock (1)2,997,000—2,034,000
Diluted weighted average shares433,603,000430,180,000431,668,000
Basic earnings (loss) per share$1.00$(1.61)$1.42
Diluted earnings (loss) per share$1.00$(1.61)$1.42
(1)2,349,000 incremental shares from assumed conversions of restricted stock have not been included in the computation of diluted earnings (loss) per share for the year ended December 31, 2015, as their inclusion would be anti-dilutive.

(17) Unaudited Quarterly Information

Summarized quarterly financial data is as follows:

Year Ended December 31, 2016
First QuarterSecond QuarterThird QuarterFourth Quarter
(in millions, except per share amounts)
Revenues$1,984$1,574$1,889$2,081
Operating income250182284243
Net income (loss)154(2)179101
Basic earnings (loss) per share (1)$0.36$(0.01)$0.42$0.23
Diluted earnings (loss) per share (1)$0.36$(0.01)$0.41$0.23
Year Ended December 31, 2015
First QuarterSecond QuarterThird Quarter (2)Fourth Quarter (3)
(in millions, except per share amounts)
Revenues$2,433$1,532$1,630$1,791
Operating income256186265226
Net income (loss)13177(391)(509)
Basic earnings (loss) per share (1)$0.30$0.18$(0.91)$(1.18)
Diluted earnings (loss) per share (1)$0.30$0.18$(0.91)$(1.18)
(1)Quarterly earnings (loss) per common share are based on the weighted average number of shares outstanding during the quarter, and the sum of the quarters may not equal annual earnings (loss) per common share.
(2)CenterPoint Energy recognized $862 million ($537 million after tax) in impairment charges related to Enable during the three months ended September 30, 2015.
(3)CenterPoint Energy recognized $984 million ($620 million after tax) in impairment charges related to Enable during the three months ended December 31, 2015.

(18) Reportable Business Segments

CenterPoint Energy’s determination of reportable business segments considers the strategic operating units under which CenterPoint Energy manages sales, allocates resources and assesses performance of various products and services to wholesale or retail customers in differing regulatory environments. CenterPoint Energy uses operating income as the measure of profit or loss for its business segments other than Midstream Investments, where it uses equity in earnings.

CenterPoint Energy’s reportable business segments include the following: Electric Transmission & Distribution, Natural Gas Distribution, Energy Services, Midstream Investments and Other Operations. The electric transmission and distribution function (Houston Electric) is reported in the Electric Transmission & Distribution business segment. Natural Gas Distribution consists of intrastate natural gas sales to, and natural gas transportation and distribution for, residential, commercial, industrial and institutional customers. Energy Services represents CenterPoint Energy’s non-rate regulated gas sales and services operations. Midstream Investments consists of CenterPoint Energy’s equity investment in Enable. Other Operations consists primarily of other corporate operations which support all of CenterPoint Energy’s business operations.

Long-lived assets include net property, plant and equipment, goodwill and other intangibles and equity investments in unconsolidated subsidiaries. Intersegment sales are eliminated in consolidation.

Financial data for business segments and products and services are as follows:

Revenues from External CustomersIntersegment RevenuesDepreciation and AmortizationOperating Income (Loss)Total Assets (1)Expenditures for Long-Lived Assets
(in millions)
As of and for the year ended December 31, 2016:
Electric Transmission & Distribution$3,060(2)$—$838$628$10,211$858
Natural Gas Distribution2,380292423036,099510
Energy Services2,073267201,1025
Midstream Investments (3)————2,505—
Other15—3982,681(4)33
Reconciling Eliminations—(55)——(769)—
Consolidated$7,528$—$1,126$959$21,829$1,406
As of and for the year ended December 31, 2015:
Electric Transmission & Distribution$2,845(2)$—$705$607$10,028$934
Natural Gas Distribution2,603292222735,657601
Energy Services1,924335428575
Midstream Investments (3)————2,594—
Other14—38112,879(4)35
Reconciling Eliminations—(62)——(725)—
Consolidated$7,386$—$970$933$21,290$1,575
As of and for the year ended December 31, 2014:
Electric Transmission & Distribution$2,845(2)$—$768$595$10,041$818
Natural Gas Distribution3,271302012875,464525
Energy Services3,095845529783
Midstream Investments (3)————4,521—
Other15—3913,343(4)56
Reconciling Eliminations—(114)——(1,197)—
Consolidated$9,226$—$1,013$935$23,150$1,402
(1)Amounts for 2015 and 2014 have been restated to reflect the adoption of ASU 2015-03.
(2)Houston Electric’s transmission and distribution revenues from major customers are as follows:
Year Ended December 31, 2016
201620152014
(in millions)
Affiliates of NRG$698$741$735
Affiliates of Energy Future Holdings220220189
(3)Midstream Investments’ equity earnings (losses) are as follows:
Year Ended December 31, 2016
201620152014
(in millions)
Enable (a)$208$(1,633)$303
SESH——5
Total$208$(1,633)$308
(a)These amounts include impairment charges totaling $1,846 million composed of CenterPoint Energy’s impairment of its equity method investment in Enable of $1,225 million and CenterPoint Energy’s share, $621 million, of impairment charges Enable recorded for goodwill and long-lived assets for the year ended December 31, 2015. This impairment is offset by $213 million of earnings for the year ended December 31, 2015.
(4)Included in total assets of Other Operations as of December 31, 2016, 2015 and 2014, are pension and other postemployment related regulatory assets of $759 million, $814 million and $795 million, respectively.
Year Ended December 31,
Revenues by Products and Services:201620152014
(in millions)
Electric delivery$3,060$2,845$2,845
Retail gas sales3,3293,7255,049
Wholesale gas sales9776571,159
Gas transportation and processing232638
Energy products and services139133135
Total$7,528$7,386$9,226

(19) Subsequent Events

On January 5, 2017, CenterPoint Energy’s board of directors declared a regular quarterly cash dividend of $0.2675 per share of common stock payable on March 10, 2017, to shareholders of record as of the close of business on February 16, 2017.

On January 3, 2017, CES, an indirect, wholly-owned subsidiary of CenterPoint Energy, closed the previously announced agreement to acquire AEM for approximately $140 million, including estimated working capital of $100 million. With the addition of this business, CES now operates in a total of 33 states, including seven states where CES previously had no commercial or industrial natural gas sales customers though CES did have other operations in five of those states. CES has begun to integrate AEM into its existing business. Due to the limited amount of time since the acquisition, the initial accounting for the acquisition is incomplete, principally with regard to the valuation of derivatives, property, plant and equipment, intangible assets and goodwill. CenterPoint Energy intends to provide additional business combination disclosures, if material, in its Form 10-Q for the first quarter of 2017.

On February 10, 2017, Enable declared a quarterly cash distribution of $0.318 per unit on all of its outstanding common and subordinated units for the quarter ended December 31, 2016. Accordingly, CERC Corp. expects to receive a cash distribution of approximately $74 million from Enable in the first quarter of 2017 to be made with respect to CERC Corp.’s limited partner interest in Enable for the fourth quarter of 2016.

On February 10, 2017, Enable declared a quarterly cash distribution of $0.625 per Series A Preferred Unit for the quarter ended December 31, 2016. Accordingly, CenterPoint Energy expects to receive a cash distribution of approximately $9 million from Enable in the first quarter of 2017 to be made with respect to CenterPoint Energy’s investment in Series A Preferred Units of Enable for the fourth quarter of 2016.

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