Shared Commitments
20 18 ANNUAL REPOR T
Pictured (left to right):
Bonnie Creason, employee,
Minneapolis, Minnesota
Matt Moore, employee,
Houston, Texas
Roderick Batteaux, employee,
Houston, Texas
Leah Wong, community partner,
Minneapolis Downtown Council,
Minneapolis, Minnesota
A COMMITMENT TO
Customers
Customers trust in our support. We
provide personalized energy delivery
solutions and a focus on reliability,
as well as offer award-winning
customer service.
A COMMITMENT TO
Innovation
Our ongoing investments in
infrastructure and technology
will help us create the future
of energy delivery.
Abbey Roberson, customer,
Texas Medical Center, Houston, Texas
Cynthia Kelly, employee,
Houston, Texas
A COMMITMENT TO
Employees
Our employees can
expect a workplace that
is safe, inclusive and
respectful of everyone.
Many of our employees
dedicate their entire
careers to our company.
Rick Koite, employee,
Little Rock, Arkansas
SHARED We are dedicated to making people’s lives more comfortable,
today we serve millions of customers from the Gulf Coast
to the Great Lakes. Our brand promise is Always There,
employees have delivered safe and reliable energy, and
productive and enjoyable. For more than 150 years, our
and our employees take pride in being our customers’
trusted energy partner.
A COMMITMENT TO
A COMMITMENT TO
A COMMITMENT TO
Safety
The safety of our employees, contractors,
systems and the public is our top priority.
We are committed to sustaining a strong
safety culture and strive to reduce incidents
and injuries.
Shareholders
We manage our company
strategically, while striving
to grow earnings, investing in
infrastructure and focusing
on the environmental, social
and governance issues that are
g
important t
to our shareholders.
Communities
Our volunteerism and charitable
giving reflect our deep sense of
duty to support the communities
where we live and work. We
strengthen our communities
enship.
through corporate citizenship.
A COMMITMENT TO
Opportunity
This is a time of exciting and
significant change for our industry.
Operationally and strategically,
we are well positioned to meet
customers’ future energy delivery
needs through a combination of
traditional and innovative solutions.
Electric and
natural gas utility
businesses in
8
states
Competitive
energy businesses’
presence in nearly
states
40
7million metered
customers
Joel Flores, employee,
Houston, Texas
As of Feb. 1, 2019
Cameron Victor, employee,
Minneapolis, Minnesota
Pam Shaw, community partner,
Fort Bend Independent School District, Texas
Nancy Tsui, employee,
Houston, Texas
2018 OPERATIONAL HIGHLIGHTS
• Invested $1.7 billion in capital expenditures
• Completed the Brazos Valley Connection,
a 60-mile, 345-kilovolt (kV) electric
transmission line in Texas
• Added more than 41,000 metered electric
customers and more than 36,000 natural
gas distribution customers
• Substantially completed the replacement of
cast-iron pipes in our natural gas distribution
system prior to the merger with Vectren
• Sold and delivered more than 1 trillion
cubic feet of natural gas in our competitive
natural gas sales and services business
Dear Fellow Stakeholder,
At CenterPoint Energy, we take our commitments to our
stakeholders seriously. From delivering safe and reliable energy
to our customers, to delivering value to our shareholders,
millions count on us every day.
For more than 150 years, we have worked hard to fulfill our commitments, including the
disciplined execution of our Operate, Serve, Grow strategy. Our board of directors is engaged
regularly to assess progress against our strategy, consider relevant changes in our markets,
assess key business risks, and approve expenditure levels believed to be necessary to achieve
our operational and financial objectives.
We accept the daily responsibility to safely, efficiently and effectively operate our now nearly
$30 billion of assets. We make progress each day to better serve our customers, investors and
communities. And we are committed to achieving a timely and appropriate return as we grow
our investments and product offerings. To that end, we have expanded our company through
organic growth and several strategic acquisitions.
We have many heritage companies that, through various transactions and transitions, have
helped build CenterPoint Energy into the company it is today. Our company is comprised of
nearly 14,000 employees with diverse backgrounds, experiences and perspectives.
Over the years, we have seamlessly integrated these organizations and employees into one
company -- CenterPoint Energy -- with a unified set of values, vision, strategy and culture.
Through it all, we have been passionate about being Always There for our stakeholders.
And CenterPoint Energy has built a reputation for innovation, reliability and commitment
to the communities where we live and work.
We began 2019 with the successful completion of our merger with Vectren Corporation,
an energy delivery company serving utility customers in Indiana and Ohio. The transaction,
which closed on Feb. 1, 2019, is a significant milestone in our journey to lead the nation in
delivering energy, service and value, and is reflected in the theme of this year’s annual report,
Shared Commitments.
Our Results
Our earnings last year were driven in part by customer growth, execution of our regulatory
strategy, growth in our competitive natural gas sales and services business, and continued
value in our midstream investments. For 2018, we reported:
• Income available to common shareholders of $333 million or $0.74 per diluted share;
• Annual adjusted earnings, using the same basis as our guidance and excluding impacts
associated with the merger with Vectren, of $1.60 per diluted share;
• An increase in our dividends for the 14th consecutive year; the increase represented an
approximately 4 percent increase from our previous quarterly dividend; if annualized,
the dividend would equate to $1.15 per share; and
• Total shareholder return of 3.74 percent, closely tracking the S&P 500 Utilities Index
return of 4.11 percent in 2018; we exceeded the broader S&P 500 Index return in 2018,
which was -4.38 percent.
2018 A NNUAL REPORT
1
Five-year Cumulative
Total Return Comparison
for the Fiscal Years
Ended December 31(1)(2)
n CenterPoint Energy
n S&P 500 Utilities Index
n S&P 500 Index
(1)
(2)
Assumes that the value of the investment in the common
stock and each index was $100 on December 31, 2013, and
that all dividends were reinvested.
Historical stock performance is not necessarily indicative
of future stock performance.
CENT ERPO INT EN ERGY
3.74
percent
total
shareholder
return
$831
million
operating
income
$1.60
earnings per
diluted share
on a guidance
basis, excluding
merger impacts
“By combining CenterPoint
Energy and Vectren –
two complementary
companies with world-class
workforces – we created
an energy delivery company
that is expected to drive value
for our shareholders and
customers, while enhancing
growth opportunities for
our businesses.”
Scott M. Prochazka
President &
Chief Executive Officer
Our Businesses in 2018
In 2018, our electric transmission and distribution business produced $568 million in
operating income, excluding securitization bonds, and invested $952 million in infrastructure
to address the needs of the communities we serve.
We completed the Brazos Valley Connection, a 60-mile, 345-kV electric transmission line
that runs from Harris County to Grimes County in Texas, to meet the growing demand in the
greater Houston area. Completed ahead of schedule and under budget, this new line was
energized in March 2018. Early completion of the project represents CenterPoint Energy’s
continued leadership in safe and efficient project execution.
Additionally, CenterPoint Energy and the Electric Reliability Council of Texas determined
that a new transmission line was needed to maintain transmission grid reliability, support
future load growth and provide operational flexibility to perform routine maintenance in the
Freeport, Texas area. If approved, the Bailey to Jones Creek transmission project is expected
to be completed by April 2022 to serve the growing petrochemical industry along the
Texas Gulf Coast.
Our electric service territory continues to experience growth across all customer classes.
With more than 2.4 million metered customers, our 5,000-square-mile service territory
serving the greater Houston area gained more than 41,000 customers last year. To more
effectively serve the southern area of our growing territory, we opened a new service center
in Brazoria County, Texas.
In 2018, our electric crews were called upon to support restoration efforts in parts of the
country affected by major storms. In an unprecedented effort, crews and trucks were
transported to Puerto Rico to help restore power after the island was devastated in 2017 by
Hurricane Maria. The 12-week effort was part of a larger mission involving multiple utilities.
Our crews also participated in mutual assistance efforts in the Carolinas after Hurricane
Florence hit in September 2018. We answered the call again a month later when Hurricane
Michael devastated parts of Florida. The Edison Electric Institute (EEI) presented us with
an Emergency Assistance Award for our outstanding power restoration efforts following
Hurricane Michael. It was the 12th EEI response award we have received.
Our natural gas distribution business, which served approximately 3.5 million residential,
commercial and industrial customers in Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma
and Texas, produced $266 million in operating income last year. In 2018, we added more than
36,000 customers.
We invested $638 million in our natural gas distribution business last year to support
growth and improve the reliability of our systems. We also acquired distribution systems in
Oberlin, La., and Pascagoula, Miss.
Across our businesses, we listened to our customers and strived to meet their evolving
expectations through new products and services. In 2018, our natural gas distribution business
filed a proposal with the Minnesota Public Utilities Commission to introduce a renewable natural
gas green tariff pilot program to our Minnesota customers. Once approved, we will be one of
the first natural gas providers in the country to offer renewable natural gas to customers.
We enhanced our long-term supply and delivery strategy to further increase reliability for
our customers. One of our initiatives is the first-ever propane air peak shaving facility to be
constructed in Texas. During peak demand conditions, this facility is expected to provide
localized supply, storage and increased reliability to our growing greater Houston market.
Additional propane air facilities are being considered throughout our service territory.
Finally, we reached a significant milestone in 2018 by substantially completing the elimination
of cast-iron pipes in CenterPoint Energy’s distribution system prior to the merger with Vectren.
Our proactive program to replace cast-iron is expected to improve the safety, integrity and
reliability of our system.
$200
$150
$100
$50
$0
2013
2014
2015
2016
2017
2018
Our competitive natural gas sales and services business reported an operating loss of
$47 million, including a mark-to-market loss of $110 million. Excluding mark-to-market
adjustments, CenterPoint Energy Services (CES) produced its best results in the past
10 years, with operating income of $63 million. CES sold and delivered more than 1 trillion
cubic feet of natural gas to our customers.
Ranked in the top 10 of natural gas marketers by Natural Gas Intelligence, CES had a record
year in customer sales and expanded its retail natural gas supply to residential and business
customers in many of our regions.
CES’ Mobile Energy Solutions business also experienced growth by supporting customers
during emergency and planned natural gas outages. We worked closely with our pipeline
customers to understand their needs and configure equipment to achieve the high flow
rates necessary to sustain service.
Equity earnings from our ownership of 54 percent of the common units of Enable Midstream
Partners, a publicly traded master limited partnership that owns and operates natural gas
and crude oil infrastructure assets, were $307 million in 2018. Volumes of natural gas
gathered and processed, natural gas liquids produced and crude oil gathered were at all-‐time
highs since Enable’s formation in May 2013. We continue to be pleased with the strong
performance of our midstream investments.
Contributions from Vectren
By combining CenterPoint Energy and Vectren -- two complementary companies with
world-class workforces -- we created an energy delivery company that is expected to drive
value for our shareholders and customers, while enhancing growth opportunities for our
businesses. With a greater level of business operations, resources and capabilities, we plan
to execute a unified business strategy focused on the safe, reliable delivery of electricity,
natural gas and energy-related services.
In addition to maintaining the poles, wires and electric infrastructure that serve customers
in the greater Houston area, our electric utility business now includes 145,000 customers
in Indiana. As a result of our combination with Vectren, we also own and operate nearly
1,300 megawatts of power generation capacity in Indiana.
Prior to our merger, Vectren was moving forward with a plan to transition its power generation
portfolio from baseload coal to a diverse and balanced energy mix. The plan calls for the
retirement of aging coal-fired units, the addition of highly efficient natural gas-fired generation,
and investments in utility solar projects. The new generation portfolio is expected to reduce
carbon emissions by 60 percent from 2005 levels.
In December 2017, Vectren began a program to install smart meter technology for all
electric customers as part of a multi-year grid modernization plan. This initiative, along with
others, will help enhance reliability and modernize the electric grid that delivers power to
Southwestern Indiana.
2
2018 A NNUAL REP ORT
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CENT ERPO INT EN ERGY
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■
Natural Gas Distribution
Electric Transmission & Distribution
and Natural Gas Distribution
■ Power Generation
Company HQ
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Natural Gas Utilities & Indiana Electric HQ
■
Competitive Energy Businesses
As of Feb. 1, 2019
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We pride ourselves on being a trusted energy partner. We are using technology to help
transform the way we interact with our customers. Through our CustomerOne initiative,
we are enhancing our customers’ experiences by providing more personalized services and
communication choices based on their unique preferences.
CustomerOne is one example of how we are investing in technology to support system
FL
reliability and resiliency, as well as enhance monitoring and control. We are also working with
our customers to employ technologies to meet energy efficiency and renewable resource
goals, demand management objectives, and service and voltage reliability specifications.
SC
Six years ago, we completed the deployment of more than 2 million smart meters
MS
throughout our greater Houston service territory, making CenterPoint Energy one of the
first large American utilities to complete its advanced metering system. Smart meters have
enabled us to automate millions of service orders and monthly meter readings, significantly
reducing field visits and the related vehicle carbon emissions. We look forward to bringing
these benefits to our customers in Indiana and Ohio.
TX
LA
“With a greater level of
business operations, resources
and capabilities, we plan to
execute a unified business
strategy focused on the
safe, reliable delivery of
electricity, natural gas and
energy-related services.”
Milton Carroll
Executive Chairman of the Board
Our natural gas utility business now sells and delivers natural gas to 4.5 million homes
and businesses in eight states, including legacy Vectren customers in Indiana and Ohio.
We are one of the largest natural gas distribution utilities based on miles of main and number
of customers in the United States.
We are committed to continuing the execution of legacy Vectren’s natural gas infrastructure
plan. This involves the replacement of cast-iron distribution pipelines, as well as improvements
to system assets for transmission and distribution in Indiana and Ohio.
Our focus on safety and reliability will also include the use of new technologies. CenterPoint
Energy remains a leader in the implementation of the state-of-the-art Picarro leak survey
technology. With 16 surveyor units currently being used in six states, the technology helps
us more accurately identify a potential leak location, enhancing customer and community
safety, as well as reducing methane emissions.
Our competitive energy businesses’ presence now spans nearly 40 states and includes:
natural gas marketing and energy-related services; energy efficiency, sustainability
and infrastructure modernization solutions; and construction and repair services for
pipeline systems, primarily natural gas. Specifically, legacy Vectren’s competitive energy
businesses -- Energy Systems Group, Miller Pipeline and Minnesota Limited -- are now
part of CenterPoint Energy.
These companies are highly respected in their industries, with proven track records of
profitability and customer service. Together, these competitive energy businesses will
offer expanded services to the benefit of our customers.
Our Stakeholders
Our merger with Vectren advances our vision and aligns with our strategy. As a combined
company, we expect to benefit from greater scale and business and geographic diversity.
We also expect to benefit from enhanced operating efficiencies and a larger percentage
of utility earnings to our total earnings.
Over the next five years, we expect to make capital investments totaling approximately
$13 billion. We plan to invest our capital to support safety, growth, reliability, grid hardening
and infrastructure modernization, as well as to meet regulatory requirements.
Across our operations, the safety of our employees, contractors, systems and the public will
continue to be our highest priority. The safety-related initiatives we have supported over
the years through Safety Forward, our companywide approach to safety performance, are
producing important results. Our efforts include training, technology, peer exchanges and
enhanced contractor engagement. Last year, we held our first-ever contractor safety summit
for leaders at the companies we do business with across our service territory.
Scott M. Prochazka
President & Chief Executive Officer
Milton Carroll
Executive Chairman of the Board
CenterPoint Energy is partnering with HomeServe USA, a provider of emergency home repair
programs to homeowners nationwide, through which our natural gas customers in Texas are
able to purchase service plans for several household systems. Within the first two months of
the launch, customers signed up for more than 50,000 plans, and the response to our
offerings continues to be outstanding.
In 2018, our employees volunteered more than 130,000 hours in our communities, valued at
approximately $3 million. We are proud of the fact that nearly six out of every 10 CenterPoint
Energy employees volunteered their time last year. We were named to The Civic 50 in 2018
as one of the most community-minded companies in the United States.
FL
Last year, our natural gas conservation improvement projects awarded more than $22 million
in rebates and grants to individuals, businesses and industries that implemented energy-
saving systems. Through these programs, our customers enjoyed energy cost savings of
nearly $14 million.
Our electric energy-efficiency programs saved more than 178 million megawatt hours of
electricity in 2018. For the 14th consecutive year, we were recognized as an ENERGY STAR
Sustained Excellence partner for promoting certified homes. We also earned the ENERGY
STAR Partners of the Year Award from the U.S. Environmental Protection Agency (EPA).
We remain committed to good stewardship of the environment, with a continued focus
on reducing greenhouse gas emissions from our operations, including our participation
as a founding partner in EPA’s Natural Gas Methane Challenge Program. We have also
expanded the reporting of our environmental, social and governance (ESG) responsibilities
to align with the Global Reporting Initiative (GRI) framework. GRI is the leading set of
standards to disclose ESG information.
Finally, our employees will always be the driving force behind our performance. From the
evolution of customer expectations, to the pace of innovative technologies, this is a time of
extraordinary opportunity for our company. That is why we invest our energy and resources
in our workforce. Our ongoing commitment to our employees is critical to our future success.
Thank you to our shareholders, customers and communities for your trust and confidence in
CenterPoint Energy. Today and always, we will continue to work hard to honor our commitments.
Milton Carroll
Executive Chairman of the Board
Scott M. Prochazka
President & Chief Executive Officer
4
2018 A NNUAL REP ORT
5
CENT ERPO INT EN ERGY
Prochazka
Bridge
Doyle
Mercado
O’Brien
Ortenstone
Meet the Senior Leadership Team
Our senior leadership team answers the most frequently asked
questions following the merger with Vectren.
Compared to CenterPoint Energy from
a year ago, what will be the same and
what will be different?
Prochazka: Emerging as a combined
company gave us the opportunity to examine
the future of CenterPoint Energy and set a
clear direction going forward. We will follow
our values of safety, integrity, accountability,
initiative and respect, as well as our Operate,
Serve, Grow strategy. However, we recognize
our success depends upon retaining many
individual aspects of CenterPoint Energy and
Vectren, while reinforcing our shared strengths.
Mercado: At the same time, we have an
opportunity to do some things even better
through a renewed focus on efficiency,
effectiveness and innovation. Integration
planning helped us to identify areas where
we could improve as a company, so we took
the best of both from CenterPoint Energy
and Vectren to drive our performance
forward. As we advance our integration
efforts, we will continue to encourage a
mindset that rejects the status quo,
emphasizes working together to find new
ideas, and reinforces the importance of
delivering outstanding business results.
Doyle: Our customers should expect to
see a continued focus on enhancing their
experience as they interact with us. Rapidly
increasing expectations drive our philosophy
of meeting customers at their point-of-need.
Investments in our customer service
platforms provide a foundation for offering
creative solutions that make it easier for
customers to do business with us and
manage their accounts. We are also working
to expand services that our customers have
indicated they would like us to provide.
Bridge: One thing that will not change
will be our commitment to the safety of
our stakeholders. Safety Forward, our
companywide approach to safety perfor-
mance, will continue to be a cornerstone
of our efforts to sustain a strong safety
culture and reduce incidents and injuries.
Employees are accountable for understanding
and incorporating safety responsibilities
into their daily activities. Employees are also
accountable for reporting incidents, injuries
or unsafe practices or conditions so they
can be promptly addressed and corrected.
Vortherms: While safe and reliable energy
delivery will continue to be our top priority,
we will also pursue opportunities to expand
our competitive energy businesses across
a larger U.S. footprint. We will strive to use
our increased scale and scope to create
opportunities for long-term efficiencies in
the delivery of energy and energy services
to our customers.
At the heart of every organization is its
culture. What characteristics, behaviors
and practices will drive CenterPoint
Energy’s culture?
Ortenstone: It all starts with our
commitment to make CenterPoint Energy
a great place to work. To that end, we
will continue to value the different
perspectives, experiences and backgrounds
that our employees possess as they
enable us to work with a unified purpose.
We are committed to creating an open
and inclusive work environment where
results are achieved through the skills,
abilities and talents of our workforce.
And our pay-for-performance philosophy
recognizes and rewards our employees.
O’Brien: Our values of safety, integrity,
accountability, initiative and respect will
continue to be at the heart of how we do
business every day. We also recognize that
key environmental, social and governance-
related issues are critical to our success
and important to our stakeholders. Our
employees are actively involved in serving
our communities. We strive to be good
stewards of the environment, with a
focus on reducing our carbon footprint.
Wilson: Developing our employees is an
important part of our culture. We will
continue to focus on giving our employees
opportunities to advance their careers,
develop new skills and experience internal
growth and mobility. At the same time, our
leaders are responsible for developing
succession plans to support leadership
transitions and broader knowledge of the
roles within their organizations. Together,
leaders and employees will continue our
efforts to develop our workforce’s capabilities
and empower them to reach their potential.
Mercado: Innovation will continue to be
critical to our long-term success. We
recognize that it will require everyone
across our businesses and functions
to make innovation part of our culture.
We encourage our employees to act as
ambassadors for innovation, focusing on
practical, efficient and effective opportunities
and solutions for our company. We will
support each other at every level to think
in terms of innovation and share ideas.
Prochazka: We have an adage at our
company: Without our customers, we would
not be in business. We take this saying
seriously. Customers want greater control
over their energy usage, better integration
and management of electric devices at
home and work, and alternative fuels for
transportation. We believe there will be
many exciting opportunities for our company
in the years ahead. We have a chance to
do something impactful -- to be a leading
customer-centric, technology-focused
energy delivery company of the future.
2018 A NNUAL REP ORT
7
SENIOR LEADERSHIP TEAM
Scott M. Prochazka
President & Chief Executive Officer
Tracy B. Bridge
Executive Vice President & President,
Electric Division
Scott E. Doyle
Executive Vice President,
Natural Gas Distribution
Kenneth M. Mercado
Senior Vice President, Integration
Dana C. O’Brien
Executive Vice President
& General Counsel
Sue B. Ortenstone
Senior Vice President
& Chief Human Resources Officer
William D. Rogers*
Executive Vice President
& Chief Financial Officer
Joseph J. Vortherms
Senior Vice President,
Competitive Energy Businesses
Lynnae K. Wilson
Chief Business Officer,
Indiana Electric Utility Business
* William D. Rogers elected to
retire as executive vice president
and chief financial officer, effective
March 8, 2019.
6
CENT ERPO INT EN ERGY
Rogers
Vortherms
Wilson
CenterPoint Energy’s vision is to lead
the nation in delivering energy, service
and value. How will the merger advance
this vision?
Rogers: The merger increases our scale
and geographic and business diversity in
attractive jurisdictions and economies.
It also creates opportunities for operating
efficiencies, additional capital investments,
and greater product and service offerings
to customers. Finally, our combination
with Vectren increases the percentage of
utility earnings.
Bridge: By combining our two complementary
companies, we have created an even stronger,
more diversified CenterPoint Energy with
compelling advantages and benefits. These
include opportunities to leverage our talent,
skills and resources to enhance our award-
winning customer service levels. We will
also share best practices for service and
technology across our footprint.
Wilson: Speaking of sharing best practices,
our combined company will prioritize being
a leader in system reliability. CenterPoint
Energy is already considered an industry
leader for our grid modernization in the
greater Houston area, and our energy grid
modernization plan for Southwestern Indiana
is underway. This work is preparing the grid
to accept advanced technology, which will
enhance service to our customers and provide
them with access to better information
about their energy use.
Vortherms: We believe that combining
our competitive energy businesses under
CenterPoint Energy will strengthen our
position and reputation in the marketplace.
While we serve some of the same customers,
we also have a complementary relationship
through our various lines of business. We
expect that these relationships will provide
additional opportunities for growth, especially
as natural gas utilities make significant
investments in their infrastructure systems
and customers continue to focus on energy
efficiency and sustainability.
Doyle: Like CenterPoint Energy, Vectren
has been committed to providing safe,
reliable service that meets the needs of
its customers in Indiana and Ohio. As a
combined company, we will continue to
be committed to our existing natural gas
infrastructure plan, as well as improvements
to our transmission and other distribution
natural gas system assets. We are poised
to build on our demonstrable track record
of safe and reliable delivery systems for
our customers, employees and the com-
munities we serve. Specifically, we will
deploy CenterPoint Energy’s advanced
leak detection practices and adopt
Vectren’s best-in-class approach for
managing system safety.
8
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number
Registrant, State or Other Jurisdiction
of Incorporation or Organization
Address of Principal Executive Offices, Zip Code
and Telephone Number
I.R.S. Employer Identification No.
1-31447
CenterPoint Energy, Inc.
74-0694415
1-3187
1-13265
(a Texas corporation)
1111 Louisiana
Houston, Texas 77002
(713-207-1111)
CenterPoint Energy Houston
Electric, LLC
(a Texas limited liability company)
1111 Louisiana
Houston, Texas 77002
(713-207-1111)
CenterPoint Energy Resources Corp.
(a Delaware corporation)
1111 Louisiana
Houston, Texas 77002
(713-207-1111)
22-3865106
76-0511406
Registrant
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
CenterPoint Energy, Inc.
Common Stock, $0.01 par value
CenterPoint Energy, Inc.
Depositary shares, each representing a 1/20th interest in a
share of 7.00% Series B Mandatory Convertible Preferred
Stock, $0.01 par value
CenterPoint Energy Houston Electric, LLC
9.15% First Mortgage Bonds due 2021
CenterPoint Energy Houston Electric, LLC
6.95% General Mortgage Bonds due 2033
CenterPoint Energy Resources Corp.
6.625% Senior Notes due 2037
New York Stock Exchange
Chicago Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
CenterPoint Energy, Inc.
CenterPoint Energy Houston Electric, LLC
CenterPoint Energy Resources Corp.
Yes
Yes
Yes
No
No
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
CenterPoint Energy, Inc.
CenterPoint Energy Houston Electric, LLC
CenterPoint Energy Resources Corp.
Yes
Yes
Yes
No
No
No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
CenterPoint Energy, Inc.
CenterPoint Energy Houston Electric, LLC
CenterPoint Energy Resources Corp.
Yes
Yes
Yes
No
No
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
CenterPoint Energy, Inc.
CenterPoint Energy Houston Electric, LLC
CenterPoint Energy Resources Corp.
Yes
Yes
Yes
No
No
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein and will not be contained, to the
best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
CenterPoint Energy, Inc.
CenterPoint Energy Houston Electric, LLC
CenterPoint Energy Resources Corp.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated
filer
Accelerated filer
Non-accelerated
filer
Smaller reporting
company
Emerging growth
company
CenterPoint Energy, Inc.
CenterPoint Energy Houston Electric, LLC
CenterPoint Energy Resources Corp.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
CenterPoint Energy, Inc.
CenterPoint Energy Houston Electric, LLC
CenterPoint Energy Resources Corp.
Yes
Yes
Yes
No
No
No
The aggregate market values of the voting stock held by non-affiliates of the Registrants as of June 29, 2018 are as follows:
CenterPoint Energy, Inc. (using the definition of beneficial ownership contained in Rule 13d-3 promulgated pursuant to Securities Exchange Act of
1934 and excluding shares held by directors and executive officers)
CenterPoint Energy Houston Electric, LLC
CenterPoint Energy Resources Corp.
$11,873,304,802
None
None
Indicate the number of shares outstanding of each of the issuers’ classes of common stock as of February 12, 2019:
CenterPoint Energy, Inc.
501,206,304 shares of common stock outstanding, excluding 166 shares held as treasury stock
CenterPoint Energy Houston Electric, LLC
1,000 common shares outstanding, all held by Utility Holding, LLC, a wholly-owned subsidiary of CenterPoint Energy, Inc.
CenterPoint Energy Resources Corp.
1,000 shares of common stock outstanding, all held by Utility Holding, LLC, a wholly-owned subsidiary of CenterPoint Energy, Inc.
CenterPoint Energy Houston Electric, LLC and CenterPoint Energy Resources Corp. meet the conditions set forth in general instruction I(1)(a) and (b) of Form 10-K and are therefore
filing this Form 10-K with the reduced disclosure format specified in General Instruction I(2) of Form 10-K.
Portions of the definitive proxy statement relating to the 2019 Annual Meeting of Shareholders of CenterPoint Energy, which will be filed with the Securities and Exchange Commission
within 120 days of December 31, 2018, are incorporated by reference in Item 10, Item 11, Item 12, Item 13 and Item 14 of Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Business........................................................................................................................................................
Risk Factors..................................................................................................................................................
Unresolved Staff Comments ........................................................................................................................
Properties......................................................................................................................................................
Legal Proceedings ........................................................................................................................................
Mine Safety Disclosures...............................................................................................................................
PART II
Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities...................................................................................................................................................
Selected Financial Data ................................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations.......................
Quantitative and Qualitative Disclosures About Market Risk .....................................................................
Financial Statements and Supplementary Data ............................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......................
Controls and Procedures...............................................................................................................................
Other Information.........................................................................................................................................
PART III
Directors, Executive Officers and Corporate Governance...........................................................................
Executive Compensation..............................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters....
Certain Relationships and Related Transactions, and Director Independence.............................................
Principal Accounting Fees and Services ......................................................................................................
PART IV
Exhibits and Financial Statement Schedules................................................................................................
Form 10-K Summary ...................................................................................................................................
Page
1
19
45
45
46
46
46
47
47
81
84
164
165
167
167
167
167
168
168
169
169
i
ADFIT.................................................................
ADMS..................................................................
AEM ....................................................................
AFUDC ...............................................................
AMAs...................................................................
AMS.....................................................................
APSC ...................................................................
ARAM..................................................................
ARO.....................................................................
ARP .....................................................................
ASC......................................................................
ASU .....................................................................
AT&T...................................................................
AT&T Common...................................................
Bcf .......................................................................
Bond Companies.................................................
Bond Company II ...............................................
Bond Company III..............................................
Bond Company IV ..............................................
Brazos Valley Connection...................................
Bridge Facility ....................................................
CCR .....................................................................
CEA .....................................................................
CECL...................................................................
CEIP....................................................................
CenterPoint Energy ............................................
CERC Corp. ........................................................
CERC ..................................................................
CERCLA..............................................................
CES......................................................................
GLOSSARY
Accumulated deferred federal income taxes
Advanced Distribution Management System
Atmos Energy Marketing, LLC, previously a wholly-owned subsidiary
of Atmos Energy Holdings, Inc., a wholly-owned subsidiary of Atmos
Energy Corporation
Allowance for funds used during construction
Asset Management Agreements
Advanced Metering System
Arkansas Public Service Commission
Average rate assumption method
Asset retirement obligation
Alternative revenue program
Accounting Standards Codification
Accounting Standards Update
AT&T Inc.
AT&T common stock
Billion cubic feet
Bankruptcy remote entities wholly-owned by Houston Electric and
formed solely for the purpose of purchasing and owning transition or
system restoration property through the issuance of Securitization Bonds,
consisting of Bond Company II, Bond Company III, Bond Company IV
and Restoration Bond Company
CenterPoint Energy Transition Bond Company II, LLC, a wholly-owned
subsidiary of Houston Electric
CenterPoint Energy Transition Bond Company III, LLC, a wholly-owned
subsidiary of Houston Electric
CenterPoint Energy Transition Bond Company IV, LLC, a wholly-owned
subsidiary of Houston Electric
A portion of the Houston region transmission project between Houston
Electric’s Zenith substation and the Gibbons Creek substation owned by
the Texas Municipal Power Agency
A $5 billion 364-day senior unsecured bridge term loan facility
Coal Combustion Residuals
Commodities Exchange Act of 1936
Current expected credit losses
CenterPoint Energy Intrastate Pipelines, LLC
CenterPoint Energy, Inc., and its subsidiaries
CenterPoint Energy Resources Corp.
CERC Corp., together with its subsidiaries
Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended
CenterPoint Energy Services, Inc., a wholly-owned subsidiary of CERC
Corp.
Commodity Futures Trading Commission
Charter Communications, Inc. common stock
CFTC...................................................................
Charter Common ................................................
Charter merger ................................................... Merger of Charter Communications, Inc. and Time Warner Cable Inc.
CIP.......................................................................
CME ....................................................................
CNG.....................................................................
CNP Midstream ..................................................
Conservation Improvement Program
Chicago Mercantile Exchange
Compressed natural gas
CenterPoint Energy Midstream, Inc., a wholly-owned subsidiary of
CenterPoint Energy
Corporate-owned life insurance
COLI....................................................................
ii
Common Stock....................................................
Continuum ..........................................................
CPP......................................................................
CSIA ....................................................................
DCA.....................................................................
DCRF ..................................................................
Dodd-Frank Act ..................................................
DOT.....................................................................
DRR.....................................................................
DSMA..................................................................
Dth.......................................................................
EDIT....................................................................
EECR ..................................................................
EECRF................................................................
EGT .....................................................................
Enable .................................................................
Enable GP ...........................................................
Enable Series A Preferred Units ........................
EPA......................................................................
EPAct of 2005 .....................................................
ERCOT................................................................
ERCOT ISO ........................................................
ERISA..................................................................
ERO.....................................................................
ESG .....................................................................
ESPC ...................................................................
FERC ..................................................................
Fitch ....................................................................
FRP .....................................................................
Gas Daily.............................................................
GenOn .................................................................
GHG ....................................................................
GMES..................................................................
GRIP....................................................................
GWh ....................................................................
Houston Electric .................................................
HVAC ..................................................................
IBEW...................................................................
ICA ......................................................................
IG.........................................................................
Indiana Electric ..................................................
Indiana Gas.........................................................
Infrastructure Services .......................................
GLOSSARY
CenterPoint Energy, Inc. common stock, par value $0.01 per share
The retail energy services business of Continuum Retail Energy
Services, LLC, including its wholly-owned subsidiary Lakeshore Energy
Services, LLC and the natural gas wholesale assets of Continuum Energy
Services, LLC
Clean Power Plan
Compliance and System Improvement Adjustment
Distribution Contractors Association
Distribution Cost Recovery Factor
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
U.S. Department of Transportation
Distribution Replacement Rider
Demand Side Management Adjustment
Dekatherms
Excess deferred income taxes
Energy Efficiency Cost Recovery
Energy Efficiency Cost Recovery Factor
Enable Gas Transmission, LLC
Enable Midstream Partners, LP
Enable GP, LLC, Enable’s general partner
Enable’s 10% Series A Fixed-to-Floating Non-Cumulative Redeemable
Perpetual Preferred Units, representing limited partner interests in
Enable
Environmental Protection Agency
Energy Policy Act of 2005
Electric Reliability Council of Texas
ERCOT Independent System Operator
Employee Retirement Income Security Act of 1974
Electric Reliability Organization
Energy Systems Group, LLC, a wholly-owned subsidiary of Vectren
Energy Savings Performance Contracting
Federal Energy Regulatory Commission
Fitch Ratings, Inc.
Formula Rate Plan
Platts gas daily indices
GenOn Energy, Inc.
Greenhouse gases
Government Mandated Expenditure Surcharge
Gas Reliability Infrastructure Program
Gigawatt-hours
CenterPoint Energy Houston Electric, LLC and its subsidiaries
Heating, ventilation and air conditioning
International Brotherhood of Electrical Workers
Interstate Commerce Act of 1887
Intelligent Grid
Operations of SIGECO’s electric transmission and distribution services,
and includes its power generating and wholesale power operations
Indiana Gas Company, Inc., a wholly-owned subsidiary of Vectren
Provides underground pipeline construction and repair services through
Vectren’s wholly-owned subsidiaries Miller Pipeline, LLC and
Minnesota Limited, LLC
iii
GLOSSARY
Internal Spin .......................................................
IRP.......................................................................
IRS.......................................................................
IURC ...................................................................
kV.........................................................................
LIBOR.................................................................
LNG.....................................................................
LPSC ...................................................................
LTIPs...................................................................
Meredith .............................................................. Meredith Corporation
Merger.................................................................
CERC’s contribution of its equity investment in Enable to CNP
Midstream (detailed in Note 11 to the consolidated financial statements)
Integrated Resource Plan
Internal Revenue Service
Indiana Utility Regulatory Commission
Kilovolt
London Interbank Offered Rate
Liquefied natural gas
Louisiana Public Service Commission
Long-term incentive plans
The merger of Merger Sub with and into Vectren on the terms and
subject to the conditions set forth in the Merger Agreement, with Vectren
continuing as the surviving corporation and as a wholly-owned
subsidiary of CenterPoint Energy, Inc., which closed on February 1,
2019
Merger Agreement ..............................................
Merger Sub .........................................................
Agreement and Plan of Merger, dated as of April 21, 2018, among
CenterPoint Energy, Vectren and Merger Sub
Pacer Merger Sub, Inc., an Indiana corporation and wholly-owned
subsidiary of CenterPoint Energy
MES..................................................................... Mobile Energy Solutions
MGP .................................................................... Manufactured gas plant
MISO................................................................... Midcontinent Independent System Operator
MLP..................................................................... Master Limited Partnership
MMBtu ................................................................
MMcf................................................................... Million cubic feet
Moody’s ............................................................... Moody’s Investors Service, Inc.
MP2017 ...............................................................
One million British thermal units
2017 pension mortality improvement scale developed annually by the
Society of Actuaries
MP2018 ...............................................................
2018 pension mortality improvement scale developed annually by the
Society of Actuaries
National Electrical Contractors Association
North American Electric Reliability Corporation
National Emission Standards for Hazardous Air Pollutants
Enable-Mississippi River Transmission, LLC
MPSC .................................................................. Mississippi Public Service Commission
MPUC.................................................................. Minnesota Public Utilities Commission
MRT ....................................................................
MW ...................................................................... Megawatt
NECA ..................................................................
NERC ..................................................................
NESHAPS...........................................................
NGA.....................................................................
NGD ....................................................................
NGLs ...................................................................
NGPA...................................................................
NGPSA ................................................................
NOPR ..................................................................
NRG.....................................................................
NYMEX...............................................................
NYSE...................................................................
OCC.....................................................................
OGE.....................................................................
OPEIU.................................................................
Oklahoma Corporation Commission
Natural gas distribution business
New York Mercantile Exchange
Notice of Proposed Rulemaking
Natural Gas Policy Act of 1978
New York Stock Exchange
Natural Gas Pipeline Safety Act of 1968
Natural Gas Act of 1938
Natural gas liquids
NRG Energy, Inc.
OGE Energy Corp.
Office & Professional Employees International Union
PBRC...................................................................
PHMSA ...............................................................
PLCA...................................................................
PRPs ....................................................................
PUCT...................................................................
Railroad Commission .........................................
RCRA...................................................................
Registrants ..........................................................
Reliant Energy ....................................................
REP .....................................................................
Restoration Bond Company ...............................
Revised Policy Statement....................................
RICE MACT .......................................................
ROE.....................................................................
RRA .....................................................................
RRI ......................................................................
RSP......................................................................
SEC......................................................................
SESH...................................................................
Securitization Bonds...........................................
Series A Preferred Stock.....................................
Series B Preferred Stock.....................................
SIGECO ..............................................................
S&P .....................................................................
TCEH Corp. ........................................................
TCJA....................................................................
TCOS...................................................................
TDSIC .................................................................
TDU.....................................................................
Time.....................................................................
Time Common.....................................................
Transition Agreements........................................
GLOSSARY
Performance Based Rate Change
Pipeline and Hazardous Materials Safety Administration
Pipeline Contractors Association
Potentially responsible parties
Public Utility Commission of Texas
Railroad Commission of Texas
Resource Conservation and Recovery Act of 1976
CenterPoint Energy, Houston Electric and CERC, collectively
Reliant Energy, Incorporated
Retail electric provider
CenterPoint Energy Restoration Bond Company, LLC, a wholly-owned
subsidiary of Houston Electric
Revised Policy Statement on Treatment of Income Taxes
Reciprocating Internal Combustion Engines Maximum Achievable
Control Technology
Return on equity
Rate Regulation Adjustment
Reliant Resources, Inc.
Rate Stabilization Plan
Securities and Exchange Commission
Southeast Supply Header, LLC
Transition and system restoration bonds
CenterPoint Energy’s Series A Fixed-to-Floating Rate Cumulative
Redeemable Perpetual Preferred Stock, par value $0.01 per share, with a
liquidation preference of $1,000 per share
CenterPoint Energy’s 7.00% Series B Mandatory Convertible Preferred
Stock, par value $0.01 per share, with a liquidation preference of $1,000
per share
Southern Indiana Gas and Electric Company, a wholly-owned subsidiary
of Vectren
S&P Global Ratings
Formerly Texas Competitive Electric Holdings Company LLC,
predecessor to Vistra Energy Corp. whose major subsidiaries include
Luminant and TXU Energy
Tax reform legislation informally called the Tax Cuts and Jobs Act of
2017
Transmission Cost of Service
Transmission, Distribution and Storage System Improvement Charge
Transmission and distribution utility
Time Inc.
Time common stock
Services Agreement, Employee Transition Agreement, Transitional
Seconding Agreement and other agreements entered into in connection
with the formation of Enable
Texas RE .............................................................
TW .......................................................................
TW Common .......................................................
UESC...................................................................
USW.....................................................................
Texas Reliability Entity
Time Warner Inc.
TW common stock
Utility Energy Services Contract
United Steelworkers Union
iv
v
Utility Holding ....................................................
VaR ......................................................................
Vectren.................................................................
VEDO ..................................................................
VIE ......................................................................
Vistra Energy Corp. ............................................
GLOSSARY
Utility Holding, LLC, a wholly-owned subsidiary of CenterPoint Energy
Value at Risk
Vectren Corporation
Vectren Energy Delivery of Ohio, Inc., a wholly-owned subsidiary of
Vectren
Variable interest entity
Texas-based energy company focused on the competitive energy and
power generation markets
Vectren Utility Holdings, Inc., a wholly-owned subsidiary of Vectren
VUHI...................................................................
WACC.................................................................. Weighted average cost of capital
ZENS...................................................................
ZENS-Related Securities....................................
2.0% Zero-Premium Exchangeable Subordinated Notes due 2029
As of December 31, 2018, consisted of AT&T Common and Charter
Common and as of December 31, 2017, consisted of Charter Common,
Time Common and TW Common
2002 Act...............................................................
2006 Act...............................................................
2011 Act...............................................................
2016 Act...............................................................
Pipeline Safety Improvement Act of 2002
Pipeline Inspection, Protection, Enforcement and Safety Act of 2006
Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011
Protecting our Infrastructure of Pipelines and Enhancing Safety Act
of 2016
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
From time to time the Registrants make statements concerning their expectations, beliefs, plans, objectives, goals, strategies,
future events or performance and underlying assumptions and other statements that are not historical facts. These statements are
“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may
differ materially from those expressed or implied by these statements. You can generally identify forward-looking statements by
the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,”
“plan,” “potential,” “predict,” “projection,” “should,” “target,” “will” or other similar words.
The Registrants have based their forward-looking statements on management’s beliefs and assumptions based on information
reasonably available to management at the time the statements are made. The Registrants caution you that assumptions, beliefs,
expectations, intentions and projections about future events may and often do vary materially from actual results. Therefore, the
Registrants cannot assure you that actual results will not differ materially from those expressed or implied by the Registrants’
forward-looking statements. In this Form 10-K, unless context requires otherwise, the terms “our,” “we” and “us” are used as
abbreviated references to CenterPoint Energy, Inc. together with its consolidated subsidiaries, including Houston Electric, CERC,
and, as of February 1, 2019, Vectren and its subsidiaries.
Some of the factors that could cause actual results to differ from those expressed or implied by the Registrants’ forward-
looking statements are described under “Risk Factors” in Item 1A and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Certain Factors Affecting Future Earnings” and “ — Liquidity and Capital Resources —
Other Matters — Other Factors That Could Affect Cash Requirements” in Item 7 of this report, which discussions are incorporated
herein by reference.
You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the
date of the particular statement, and the Registrants undertake no obligation to update or revise any forward-looking statements.
vi
vii
(4) CES 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 over 30 states.
(5) As of December 31, 2018, CNP Midstream owned approximately 54.0% of the common units representing limited partner
interests in Enable, which owns, operates and develops natural gas and crude oil infrastructure assets; CNP Midstream
also owned 50% of the management rights and 40% of the incentive distribution rights in Enable GP. For additional
information regarding CenterPoint Energy’s interest in Enable, including the 14,520,000 Enable Series A Preferred Units
directly owned by CenterPoint Energy, see Note 11 to the consolidated financial statements.
CenterPoint Energy’s service territories as of December 31, 2018 are depicted below:
Item 1.
Business
PART I
This combined Form 10-K is filed separately by three registrants: CenterPoint Energy, Inc., CenterPoint Energy Houston
Electric, LLC and CenterPoint Energy Resources Corp. Information contained herein relating to any individual registrant is filed
by such registrant solely on its own behalf. Each registrant makes no representation as to information relating exclusively to the
other registrants. Except as discussed in Note 14 to the consolidated financial statements, no registrant has an obligation in respect
of any other registrant’s debt securities, and holders of such debt securities should not consider the financial resources or results
of operations of any registrant other than the obligor in making a decision with respect to such securities.
The discussion of CenterPoint Energy’s consolidated financial information includes the financial results of Houston Electric
and CERC, which, along with CenterPoint Energy, are collectively referred to as the Registrants. Where appropriate, information
relating to a specific registrant has been segregated and labeled as such. Unless the context indicates otherwise, specific references
to Houston Electric and CERC also pertain to CenterPoint Energy. In this Form 10-K, the terms “our,” “we” and “us” are used as
abbreviated references to CenterPoint Energy, Inc. together with its consolidated subsidiaries, which, as of February 1, 2019,
includes Vectren and its subsidiaries.
Overview
OUR BUSINESS
CenterPoint Energy is a public utility holding company and owns interests in Enable. As of December 31, 2018, CenterPoint
Energy’s operating subsidiaries, Houston Electric and CERC Corp., owned and operated electric transmission and distribution
and natural gas distribution facilities and supplied natural gas to commercial and industrial customers and electric and natural gas
utilities.
CenterPoint Energy’s simplified corporate structure as of December 31, 2018 is shown below:
As of December 31, 2018, reportable segments by Registrant are as follows:
Electric
Transmission
& Distribution
Natural Gas
Distribution
Energy
Services
Midstream
Investments
Other
Operations
CenterPoint Energy..................................................................
Houston Electric.......................................................................
CERC .......................................................................................
X
X
X
X
X
X
X
X
X
For a discussion of operating income by segment, see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Results of Operations by Reportable Segment” in Item 7 of Part II of this report. For additional information
about the segments, see Note 19 to the consolidated financial statements. From time to time, we consider the acquisition or the
disposition of assets or businesses.
On February 1, 2019, pursuant to the Merger Agreement, CenterPoint Energy consummated the previously announced Merger
and acquired Vectren for approximately $6 billion in cash. For further discussion of the Merger and a description of Vectren’s
businesses, see Note 4 to the consolidated financial statements.
(1) Houston Electric engages in the electric transmission and distribution business in the Texas Gulf Coast area that includes
the city of Houston.
(2) Bond Companies are wholly-owned, bankruptcy remote entities formed solely for the purpose of purchasing and owning
transition or system restoration property through the issuance of Securitization Bonds.
(3) NGD operates natural gas distribution systems in six states.
1
2
Following the Merger, CenterPoint Energy’s simplified corporate structure as of February 1, 2019 is shown below:
Houston Electric’s distribution service territory as of December 31, 2018 is depicted below:
The Registrants’ principal executive offices are located at 1111 Louisiana, Houston, Texas 77002 (telephone number:
713-207-1111).
We make available free of charge on our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the SEC.
The SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC at http://www.sec.gov. Additionally, we make available free of charge on our Internet
website:
our Code of Ethics for our Chief Executive Officer and Senior Financial Officers;
our Ethics and Compliance Code;
our Corporate Governance Guidelines; and
•
•
•
•
Electric Transmission
On behalf of REPs, Houston Electric delivers electricity from power plants to substations, from one substation to another and
to retail electric customers taking power at or above 69 kV in locations throughout Houston Electric’s certificated service territory.
Houston Electric constructs and maintains transmission facilities and provides transmission services under tariffs approved by the
PUCT.
The ERCOT ISO is responsible for operating the bulk electric power supply system in the ERCOT market. Houston Electric’s
transmission business, along with those of other owners of transmission facilities in Texas, supports the operation of the ERCOT
ISO. Houston Electric participates with the ERCOT ISO and other ERCOT utilities to plan, design, obtain regulatory approval
for and construct new transmission lines necessary to increase bulk power transfer capability and to remove existing constraints
on the ERCOT transmission grid.
the charters of the audit, compensation, finance and governance committees of our Board of Directors.
Electric Distribution
Any shareholder who so requests may obtain a printed copy of any of these documents from us. Changes in or waivers of our
Code of Ethics for our Chief Executive Officer and Senior Financial Officers and waivers of our Ethics and Compliance Code for
directors or executive officers will be posted on our Internet website within five business days of such change or waiver and
maintained for at least 12 months or timely reported on Item 5.05 of Form 8-K.
Our website address is www.centerpointenergy.com. Investors should also note that we announce material financial information
in SEC filings, press releases and public conference calls. Based on guidance from the SEC, we may use the investor relations
section of our website to communicate with our investors. It is possible that the financial and other information posted there could
be deemed to be material information. Except to the extent explicitly stated herein, documents and information on our website
are not incorporated by reference herein.
Electric Transmission & Distribution (CenterPoint Energy and Houston Electric)
Houston Electric is a transmission and distribution electric utility that operates wholly within the state of Texas and is a
member of ERCOT. ERCOT serves as the independent system operator and regional reliability coordinator for member electric
power systems in most of Texas. The ERCOT market represents approximately 90% of the demand for power in Texas and is one
of the nation’s largest power markets. The ERCOT market operates under the reliability standards developed by the NERC,
approved by the FERC and monitored and enforced by the Texas RE. The PUCT has primary jurisdiction over the ERCOT market
to ensure the adequacy and reliability of electricity supply across the state’s main interconnected power transmission grid. Houston
Electric does not make direct retail or wholesale sales of electric energy or own or operate any electric generating facilities.
3
In ERCOT, end users purchase their electricity directly from certificated REPs. Houston Electric’s distribution network receives
electricity from the transmission grid through power distribution substations and delivers electricity for REPs in its certificated
service area by carrying lower-voltage power from the substation to the retail electric customer through distribution feeders.
Houston Electric’s operations include construction and maintenance of distribution facilities, metering services, outage response
services and call center operations. Houston Electric provides distribution services under tariffs approved by the PUCT. PUCT
rules and market protocols govern the commercial operations of distribution companies and other market participants. Rates for
these existing services are established pursuant to rate proceedings conducted before municipalities that have original jurisdiction
and the PUCT.
Bond Companies
Houston Electric has 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 Securitization Bonds, and conducting activities
incidental thereto. The Securitization Bonds are repaid through charges imposed on customers in Houston Electric’s service
territory. For further discussion of the Securitization Bonds and the outstanding balances as of December 31, 2018 and 2017, see
Note 14 to the consolidated financial statements.
Customers
Houston Electric serves nearly all of the Houston/Galveston metropolitan area. At December 31, 2018, Houston Electric’s
customers consisted of approximately 65 REPs, which sell electricity to approximately 2.5 million metered customers in Houston
4
Electric’s certificated service area, and municipalities, electric cooperatives and other distribution companies located outside
Houston Electric’s certificated service area. Each REP is licensed by, and must meet minimum creditworthiness criteria established
by, the PUCT. Houston Electric does not have long-term contracts with any of its customers. It operates using a continuous billing
cycle, with meter readings being conducted and invoices being distributed to REPs each business day. For information regarding
Houston Electric’s major customers, see Note 19 to the consolidated financial statements. The table below reflects the number of
metered customers in Houston Electric’s service area as of December 31, 2018:
Texas Gulf Coast..............................................................................
2,198,225
287,145
2,485,370
Residential
Commercial/
Industrial
Total Customers
Utility Technology
Houston Electric’s Smart Grid is comprised of the AMS, IG, ADMS and private telecommunications network. Since 2009,
Houston Electric has deployed fully operational advanced meters to virtually all of its approximately 2.5 million metered customers,
automated 57 substations, installed 1,525 IG Switching Devices on more than 350 circuits, built a wireless radio frequency mesh
telecommunications network across Houston Electric’s 5,000-square mile footprint, and enabled real-time grid monitoring and
control, which leverages information from smart meters and field sensors to manage system events through the ADMS. The Smart
Grid continues to improve electric distribution service reliability and restoration, enhance the consumer experience, support the
growth of renewable energy and help the environment by reducing carbon emissions.
Competition
There are no other electric transmission and distribution utilities in Houston Electric’s service area. For another provider of
transmission and distribution services to provide such services in Houston Electric’s territory, it would be required to obtain a
certificate of convenience and necessity from the PUCT and, depending on the location of the facilities, may also be required to
obtain franchises from one or more municipalities. Houston Electric is not aware of any other party intending to enter this business
in its service area at this time. Distributed generation (i.e., power generation located at or near the point of consumption) could
result in a reduction of demand for Houston Electric’s distribution services but has not been a significant factor to date.
Seasonality
Houston Electric’s revenues are primarily derived from rates that it collects from each REP based on the amount of electricity
it delivers on behalf of that REP. Houston Electric’s revenues and results of operations are subject to seasonality, weather conditions
and other changes in electricity usage, with revenues generally being higher during the warmer months when more electricity is
used for cooling purposes.
Electric Lines - Transmission and Distribution. As of December 31, 2018, Houston Electric owned and operated the following
electric transmission and distribution lines:
Description
Overhead Lines
Underground Lines
Circuit Miles
Transmission lines - 69 kV............................................................................
Transmission lines - 138 kV..........................................................................
Transmission lines - 345 kV..........................................................................
Total transmission lines ......................................................................
Distribution lines...........................................................................................
266
2,207
1,336
3,809
29,094
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25,255
Substations. As of December 31, 2018, Houston Electric owned 235 major substation sites having a total installed rated
transformer capacity of 68,338 megavolt amperes.
Service Centers. As of December 31, 2018, Houston Electric operated 15 regional service centers located on a total of 332 acres
of land. These service centers consist of office buildings, warehouses and repair facilities that are used in the business of transmitting
and distributing electricity.
Franchises
Houston Electric holds non-exclusive franchises from certain incorporated municipalities in its service territory. In exchange
for the payment of fees, these franchises give Houston Electric the right to use the streets and public rights-of-way of these
municipalities to construct, operate and maintain its transmission and distribution system and to use that system to conduct its
electric delivery business and for other purposes that the franchises permit. The terms of the franchises, with various expiration
dates, typically range from 20 to 40 years.
Natural Gas Distribution (CenterPoint Energy and CERC)
CERC’s NGD engages in regulated intrastate natural gas sales to, and natural gas transportation and storage for, approximately
3.5 million residential, commercial, industrial and transportation customers in Arkansas, Louisiana, Minnesota, Mississippi,
Oklahoma and Texas. The largest metropolitan areas served in each state by CERC’s NGD are Houston, Texas; Minneapolis,
Minnesota; Little Rock, Arkansas; Shreveport, Louisiana; Biloxi, Mississippi; and Lawton, Oklahoma. CERC’s NGD also provides
unregulated services in Minnesota consisting of residential appliance repair and maintenance services along with HVAC equipment
sales.
Properties
CERC’s NGD’s service territory as of December 31, 2018 is depicted below:
All of Houston Electric’s properties are located in Texas. Its properties consist primarily of high-voltage electric transmission
lines and poles, distribution lines, substations, service centers, service wires, telecommunications network and meters. Most of
Houston Electric’s transmission and distribution lines have been constructed over lands of others pursuant to easements or along
public highways and streets under franchise agreements and as permitted by law.
All real and tangible properties of Houston Electric, subject to certain exclusions, are currently subject to:
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the lien of a Mortgage and Deed of Trust (the Mortgage) dated November 1, 1944, as supplemented; and
the lien of a General Mortgage (the General Mortgage) dated October 10, 2002, as supplemented, which is junior to the
lien of the Mortgage.
For information related to debt outstanding under the Mortgage and General Mortgage, see Note 14 to the consolidated
financial statements.
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Customers
In 2018, approximately 40% of CERC’s NGD’s total throughput was to residential customers and approximately 60% was
to commercial and industrial and transportation customers. The table below reflects the number of CERC’s NGD customers by
state as of December 31, 2018:
Residential
Commercial/
Industrial
Total Customers
Arkansas........................................................................................
Louisiana .......................................................................................
Minnesota......................................................................................
Mississippi ....................................................................................
Oklahoma ......................................................................................
Texas .............................................................................................
Total NGD.....................................................................................
377,290
230,234
797,907
114,694
88,685
1,637,467
3,246,277
47,963
16,648
70,604
12,628
10,783
101,407
260,033
425,253
246,882
868,511
127,322
99,468
1,738,874
3,506,310
Seasonality
The demand for natural gas sales to residential customers and natural gas sales and transportation for commercial and industrial
customers is seasonal. In 2018, approximately 68% of CERC’s NGD’s total throughput occurred in the first and fourth quarters.
These patterns reflect the higher demand for natural gas for heating purposes during the colder months.
Supply and Transportation. In 2018, CERC’s NGD purchased virtually all of its natural gas supply pursuant to contracts with
remaining terms varying from a few months to four years. Major suppliers in 2018 included the following:
CERC’s NGD uses various third-party storage services or owned natural gas storage facilities to meet peak-day requirements
and to manage the daily changes in demand due to changes in weather. CERC’s NGD may also supplement contracted supplies
and storage from time to time with stored LNG and propane-air plant production.
CERC’s NGD owns and operates an underground natural gas storage facility with a capacity of 7.0 Bcf. It has a working
capacity of 2.0 Bcf available for use during the heating season and a maximum daily withdrawal rate of 50 MMcf. It also owns
eight propane-air plants with a total production rate of 180,000 Dth per day and on-site storage facilities for 12 million gallons of
propane (1.0 Bcf natural gas equivalent). It owns a LNG plant facility with a 12 million-gallon LNG storage tank (1.0 Bcf natural
gas equivalent) and a production rate of 72,000 Dth per day.
On an ongoing basis, CERC’s NGD enters into contracts to provide sufficient supplies and pipeline capacity to meet its
customer requirements. However, it is possible for limited service disruptions to occur from time to time due to weather conditions,
transportation constraints and other events. As a result of these factors, supplies of natural gas may become unavailable from time
to time, or prices may increase rapidly in response to temporary supply constraints or other factors.
CERC’s NGD has AMAs associated with its utility distribution service in Arkansas, Louisiana, Mississippi, Oklahoma and
Texas. In March 2018, CERC’s NGD’s third-party AMAs in Arkansas, Louisiana and Oklahoma expired, and CERC’s NGD
entered into new AMAs with CES effective April 1, 2018 in these states. The AMAs have varying terms, the longest of which
expires in 2021. Pursuant to the provisions of the agreements, CERC’s NGD sells natural gas and agrees to repurchase an equivalent
amount of natural gas during the winter heating seasons at the same cost. Generally, AMAs are contracts between CERC’s NGD
and an asset manager that are intended to transfer the working capital obligation and maximize the utilization of the assets. In
these agreements, CERC’s NGD agrees to release transportation and storage capacity to other parties to manage natural gas storage,
supply and delivery arrangements for CERC’s NGD and to use the released capacity for other purposes when it is not needed for
CERC’s NGD. CERC’s NGD is compensated by the asset manager through payments made over the life of the AMAs. CERC’s
NGD has an obligation to purchase its winter storage requirements that have been released to the asset manager under these AMAs.
Supplier
Percent of Supply
Volumes
Assets
Tenaska Marketing Ventures...................................................................................................................
Macquarie Energy, LLC..........................................................................................................................
BP Energy Company/BP Canada Energy Marketing..............................................................................
Sequent Energy Management, LP...........................................................................................................
Kinder Morgan Tejas Pipeline/Kinder Morgan Texas Pipeline ..............................................................
Mieco, Inc. ..............................................................................................................................................
Spire Marketing, Inc. ..............................................................................................................................
United Energy Trading, LLC ..................................................................................................................
CIMA Energy, LTD.................................................................................................................................
Koch Energy Services, LLC ...................................................................................................................
18.5%
13.1%
10.3%
7.6%
5.6%
5.4%
3.4%
3.1%
3.0%
2.6%
Numerous other suppliers provided the remaining 27.4% of CERC’s NGD’s natural gas supply requirements. CERC’s NGD
transports its natural gas supplies through various intrastate and interstate pipelines under contracts with remaining terms, including
extensions, varying from one to fifteen years. CERC’s NGD anticipates that these gas supply and transportation contracts will be
renewed or replaced prior to their expiration.
CERC’s NGD actively engages in commodity price stabilization pursuant to annual gas supply plans presented to and/or filed
with each of its state regulatory authorities. These price stabilization activities include use of storage gas and contractually
establishing structured prices (e.g., fixed price, costless collars and caps) with CERC’s NGD’s physical gas suppliers. Its gas
supply plans generally call for 50–75% of winter supplies to be stabilized in some fashion.
The regulations of the states in which CERC’s NGD operates allow it to pass through changes in the cost of natural gas,
including savings and costs of financial derivatives associated with the index-priced physical supply, to its customers under
purchased gas adjustment provisions in its tariffs. Depending upon the jurisdiction, the purchased gas adjustment factors are
updated periodically, ranging from monthly to semi-annually. The changes in the cost of gas billed to customers are subject to
review by the applicable regulatory bodies.
As of December 31, 2018, CERC’s NGD owned approximately 76,000 linear miles of natural gas distribution mains, varying
in size from one-half inch to 24 inches in diameter. Generally, in each of the cities, towns and rural areas served by CERC’s NGD,
it owns the underground gas mains and service lines, metering and regulating equipment located on customers’ premises and the
district regulating equipment necessary for pressure maintenance. With a few exceptions, the measuring stations at which CERC’s
NGD receives gas are owned, operated and maintained by others, and its distribution facilities begin at the outlet of the measuring
equipment. These facilities, including odorizing equipment, are usually located on land owned by suppliers.
Competition
CERC’s NGD competes primarily with alternate energy sources such as electricity and other fuel sources. In some areas,
intrastate pipelines, other gas distributors and marketers also compete directly for gas sales to end users. In addition, as a result
of federal regulations affecting interstate pipelines, natural gas marketers operating on these pipelines may be able to bypass
CERC’s NGD’s facilities and market and sell and/or transport natural gas directly to commercial and industrial customers.
Energy Services (CenterPoint Energy and CERC)
CERC offers competitive variable and fixed-priced physical natural gas supplies primarily to commercial and industrial
customers and electric and natural gas utilities through CES and its subsidiary, CEIP, collectively, Energy Services.
In 2018, CES marketed approximately 1,355 Bcf of natural gas (including approximately 33 Bcf to affiliates) and provided
related energy services and transportation to approximately 30,000 customers in over 30 states. CES customers vary in size from
small commercial customers to large utility companies. Not included in the 2018 customer count are approximately 65,000 natural
gas customers that are served under residential and small commercial choice programs invoiced by their host utility. These
customers are not included in customer count so as not to distort the significant margin impact from the remaining customer base.
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Energy Services’ service territory as of December 31, 2018 is depicted below:
In 2017, CES completed the acquisition of AEM, providing CES with a portfolio of industrial and large commercial customers
complementary to CES’s existing customer base and strategically aligned storage and transportation assets. For further information
related to this acquisition, see Note 4 to the consolidated financial statements.
CES offers a variety of natural gas management services to gas utilities, large industrial customers, electric generators, smaller
commercial and industrial customers, municipalities, educational institutions, government facilities and hospitals. These services
include load forecasting, supply acquisition, daily swing volume management, invoice consolidation, storage asset management,
firm and interruptible transportation administration and forward price management. CES also offers a portfolio of physical delivery
services designed to meet customers’ supply and risk management needs. These services include (1) through CEIP, permanent
pipeline connections through interconnects with various interstate and intrastate pipeline companies and (2) through MES,
temporary delivery of LNG and CNG throughout the lower 48 states, utilizing a fleet of customized equipment to provide continuity
of natural gas service when pipeline supply is not available.
In addition to offering natural gas management services, CES procures and optimizes transportation and storage assets. CES
maintains a portfolio of natural gas supply contracts and firm transportation and storage agreements to meet the natural gas
requirements of its customers. CES aggregates supply from various producing regions and offers contracts to buy natural gas with
terms ranging from one month to over five years. In addition, CES actively participates in the spot natural gas markets in an effort
to balance daily and monthly purchases and sales obligations. Natural gas supply and transportation capabilities are leveraged
through contracts for ancillary services including physical storage and other balancing arrangements.
As described above, CES offers its customers a variety of load following services. In providing these services, CES uses its
customers’ purchase commitments to forecast and arrange its own supply purchases, storage and transportation services to serve
customers’ natural gas requirements. As a result of the variance between this forecast activity and the actual monthly activity, CES
will either have too much supply or too little supply relative to its customers’ purchase commitments. These supply imbalances
arise each month as customers’ natural gas requirements are scheduled and corresponding natural gas supplies are nominated by
CES for delivery to those customers. CES’s processes and risk control policy are designed to measure and value imbalances on a
real-time basis to ensure that CES’s exposure to commodity price risk is kept to a minimum. The value assigned to these imbalances
is calculated daily and is known as the aggregate VaR.
CenterPoint Energy’s and CERC’s risk control policy, which is overseen by CenterPoint Energy’s Risk Oversight Committee,
defines authorized and prohibited trading instruments and trading limits. CES is a physical marketer of natural gas and uses a
variety of tools, including pipeline and storage capacity, financial instruments and physical commodity purchase contracts, to
support its sales. CES optimizes its use of these various tools to minimize its supply costs and does not engage in speculative
commodity trading. CES currently operates within a VaR limit set by CenterPoint Energy’s Board of Directors, consistent with
CES’ operational objective of matching its aggregate sales obligations (including the swing associated with load following services)
with its supply portfolio in a manner that minimizes its total cost of supply. Should CES exceed this VaR limit, management is
required to notify CenterPoint Energy’s Board of Directors.
Assets
As of December 31, 2018, CEIP owned and operated over 200 miles of intrastate pipeline in Louisiana and Texas. In addition,
CES leases transportation capacity on various interstate and intrastate pipelines and storage to service its shippers and end users.
Competition
CES competes with regional and national wholesale and retail gas marketers, including the marketing divisions of natural gas
producers and utilities. In addition, CES competes with intrastate pipelines for customers and services in its market areas.
Midstream Investments (CenterPoint Energy)
CenterPoint Energy’s Midstream Investments reportable segment consists of its equity method investment in Enable. Enable
is a publicly traded MLP, jointly controlled by CenterPoint Energy (indirectly through CNP Midstream) and OGE as of December
31, 2018.
On September 4, 2018, CERC completed the Internal Spin of its equity investment in Enable, consisting of Enable common
units and its interests in Enable GP, to CenterPoint Energy. For further discussion of the Internal Spin, see Note 11 to the consolidated
financial statements.
Enable. Enable owns, operates and develops midstream energy infrastructure assets strategically located to serve its customers.
Enable’s assets and operations are organized into two reportable segments: (i) gathering and processing and (ii) transportation and
storage. Enable’s gathering and processing segment primarily provides natural gas gathering and processing to its producer
customers and crude oil, condensate and produced water gathering services to its producer and refiner customers. Enable’s
transportation and storage segment provides interstate and intrastate natural gas pipeline transportation and storage services
primarily to its producer, power plant, local distribution company and industrial end-user customers.
Enable’s Gathering and Processing segment. Enable owns and operates substantial natural gas and crude oil gathering and
natural gas processing assets in five states. Enable’s gathering and processing operations consist primarily of natural gas gathering
and processing assets serving the Anadarko, Arkoma and Ark-La-Tex Basins and crude oil gathering assets serving the Anadarko
and Williston Basins. Enable provides a variety of services to the active producers in its operating areas, including gathering,
compressing, treating, and processing natural gas, fractionating NGLs, and gathering crude oil and produced water. Enable serves
shale and other unconventional plays in the basins in which it operates.
Enable’s gathering and processing systems compete with gatherers and processors of all types and sizes, including those
affiliated with various producers, other major pipeline companies and various independent midstream entities. In the process of
selling NGLs, Enable competes against other natural gas processors extracting and selling NGLs. Enable’s primary competitors
are other midstream companies who are active in the regions where it operates. Enable’s management views the principal elements
of competition for its gathering and processing systems as gathering rate, processing value, system reliability, fuel rate, system
run time, construction cycle time and prices at the wellhead.
Enable’s Transportation and Storage segment. Enable owns and operates interstate and intrastate natural gas transportation
and storage systems across nine states. Enable’s transportation and storage systems consist primarily of its interstate systems, its
intrastate system and its investment in SESH. Enable’s transportation and storage assets transport natural gas from areas of
production and interconnected pipelines to power plants, local distribution companies and industrial end users as well as
interconnected pipelines for delivery to additional markets. Enable’s transportation and storage assets also provide facilities where
natural gas can be stored by customers.
Enable’s interstate and intrastate pipelines compete with a variety of other interstate and intrastate pipelines across its operating
areas in providing transportation and storage services, including several pipelines with which it interconnects. Enable’s management
views the principal elements of competition among pipelines as rates, terms of service, flexibility and reliability of service.
For information related to CenterPoint Energy’s equity method investment in Enable, see Note 2(c) and Note 11 to the
consolidated financial statements.
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Other Operations (CenterPoint Energy and CERC)
CenterPoint Energy’s Other Operations reportable segment includes office buildings and other real estate used for business
operations, home repair protection plans through a third party and other corporate support operations that support CenterPoint
Energy’s business operations. CERC’s Other Operations reportable segment includes unallocated corporate costs and inter-segment
eliminations.
Vectren Operations
Upon closing of the Merger on February 1, 2019, Vectren became a direct wholly-owned subsidiary of CenterPoint Energy.
Vectren, through its wholly-owned subsidiary, VUHI, holds three public utilities, SIGECO, Indiana Gas and VEDO, which provide
electric and natural gas utility services. SIGECO provides energy delivery services to electric and natural gas customers located
near Evansville in southwestern Indiana and is a transmission-owning member of MISO, a regional transmission organization.
SIGECO also owns and operates 1,252 MWs of electric generation assets to serve its electric customers and optimizes those assets
in the wholesale power market. Indiana Gas provides energy delivery services to natural gas customers located in central and
southern Indiana. VEDO provides energy delivery services to natural gas customers located near Dayton in west-central Ohio.
Vectren’s utility service territory is depicted below:
Vectren is also involved in non-utility activities in two primary business areas: Infrastructure Services and energy services,
provided through ESG. Infrastructure Services provides underground pipeline construction and repair services. ESG’s energy
services include providing energy performance contracting and sustainable infrastructure, such as renewables, distributed
generation and combined heat and power projects.
For further discussion of the Merger, see Note 4 to the consolidated financial statements.
to ensuring the reliability of electric transmission service, including transmission facilities owned by Houston Electric and other
utilities within ERCOT. The FERC has designated the NERC as the ERO to promulgate standards, under FERC oversight, for all
owners, operators and users of the bulk power system (Electric Entities). The ERO and the FERC have authority to (a) impose
fines and other sanctions on Electric Entities that fail to comply with approved standards and (b) audit compliance with approved
standards. The FERC has approved the delegation by the NERC of authority for reliability in ERCOT to the Texas RE. Houston
Electric does not anticipate that the reliability standards proposed by the NERC and approved by the FERC will have a material
adverse impact on its operations. To the extent that Houston Electric is required to make additional expenditures to comply with
these standards, it is anticipated that Houston Electric will seek to recover those costs through the transmission charges that are
imposed on all distribution service providers within ERCOT for electric transmission provided.
As a public utility holding company, under the Public Utility Holding Company Act of 2005, CenterPoint Energy and its
consolidated subsidiaries are subject to reporting and accounting requirements and are required to maintain certain books and
records and make them available for review by the FERC and state regulatory authorities in certain circumstances.
State and Local Regulation – Electric Transmission & Distribution (CenterPoint Energy and Houston Electric)
Houston Electric conducts its operations pursuant to a certificate of convenience and necessity issued by the PUCT that covers
its present service area and facilities. The PUCT and certain municipalities have the authority to set the rates and terms of service
provided by Houston Electric under cost-of-service rate regulation. Houston Electric holds non-exclusive franchises from certain
incorporated municipalities in its service territory. In exchange for payment of fees, these franchises give Houston Electric the
right to use the streets and public rights-of-way of these municipalities to construct, operate and maintain its transmission and
distribution system and to use that system to conduct its electric delivery business and for other purposes that the franchises permit.
The terms of the franchises, with various expiration dates, typically range from 20 to 40 years.
Houston Electric’s distribution rates charged to REPs for residential and small commercial customers are primarily based on
amounts of energy delivered, whereas distribution rates for a majority of large commercial and industrial customers are primarily
based on peak demand. All REPs in Houston Electric’s service area pay the same rates and other charges for transmission and
distribution services. This regulated delivery charge includes the transmission and distribution rate (which includes municipal
franchise fees), a distribution recovery mechanism for recovery of incremental distribution-invested capital above that which is
already reflected in the base distribution rate, a nuclear decommissioning charge associated with decommissioning the South Texas
nuclear generating facility, an EECR charge, and charges associated with securitization of regulatory assets, stranded costs and
restoration costs relating to Hurricane Ike. Transmission rates charged to distribution companies are based on amounts of energy
transmitted under “postage stamp” rates that do not vary with the distance the energy is being transmitted. All distribution companies
in ERCOT pay Houston Electric the same rates and other charges for transmission services.
For a discussion of certain of Houston Electric’s ongoing regulatory proceedings, see “Management’s Discussion and Analysis
of Financial Condition and Results of Operations — Liquidity and Capital Resources — Regulatory Matters” in Item 7 of Part II
of this report, which discussion is incorporated herein by reference.
REGULATION
State and Local Regulation – Natural Gas Distribution (CenterPoint Energy and CERC)
The Registrants are subject to regulation by various federal, state and local governmental agencies, including the regulations
described below. The following discussion is based on regulation in the Registrants’ businesses and CenterPoint Energy’s investment
in Enable as of December 31, 2018 and does not include Vectren-related regulation.
Federal Energy Regulatory Commission
The FERC has jurisdiction under the NGA and the NGPA, as amended, to regulate the transportation of natural gas in interstate
commerce and natural gas sales for resale in interstate commerce that are not first sales. The FERC regulates, among other things,
the construction of pipeline and related facilities used in the transportation and storage of natural gas in interstate commerce,
including the extension, expansion or abandonment of these facilities. The FERC has authority to prohibit market manipulation
in connection with FERC-regulated transactions, to conduct audits and investigations, and to impose significant civil penalties
(up to approximately $1.27 million per day per violation, subject to periodic adjustment to account for inflation) for statutory
violations and violations of the FERC’s rules or orders. CenterPoint Energy’s and CERC’s Energy Services reportable segment
markets natural gas in interstate commerce pursuant to blanket authority granted by the FERC.
Houston Electric is not a “public utility” under the Federal Power Act and, therefore, is not generally regulated by the FERC,
although certain of its transactions are subject to limited FERC jurisdiction. The FERC has certain responsibilities with respect
In almost all communities in which CERC’s NGD provides natural gas distribution services, NGD operates under franchises,
certificates or licenses obtained from state and local authorities. The original terms of the franchises, with various expiration dates,
typically range from 10 to 30 years, although franchises in Arkansas are perpetual. NGD expects to be able to renew expiring
franchises. In most cases, franchises to provide natural gas utility services are not exclusive.
Substantially all of NGD is subject to cost-of-service rate regulation by the relevant state public utility commissions and, in
Texas, by the Railroad Commission and those municipalities served by NGD that have retained original jurisdiction. In certain
of its jurisdictions, NGD has annual rate adjustment mechanisms that provide for changes in rates dependent upon certain changes
in invested capital, earned returns on equity or actual margins realized.
For a discussion of certain of NGD’s ongoing regulatory proceedings, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and Capital Resources — Regulatory Matters” in Item 7 of Part II of this report,
which discussion is incorporated herein by reference.
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Department of Transportation (CenterPoint Energy and CERC)
In December 2006, Congress enacted the 2006 Act, which reauthorized the programs adopted under the 2002 Act. These
programs included several requirements related to ensuring pipeline safety, and a requirement to assess the integrity of pipeline
transmission facilities in areas of high population concentration.
Pursuant to the 2006 Act, PHMSA, an agency of the DOT, issued regulations, effective February 12, 2010, requiring operators
of gas distribution pipelines to develop and implement integrity management programs similar to those required for gas transmission
pipelines, but tailored to reflect the differences in distribution pipelines. Operators of natural gas distribution systems were required
to write and implement their integrity management programs by August 2, 2011. CenterPoint Energy’s and CERC’s natural gas
distribution systems met this deadline.
Pursuant to the 2002 Act and the 2006 Act, PHMSA has adopted a number of rules concerning, among other things,
distinguishing between gathering lines and transmission facilities, requiring certain design and construction features in new and
replaced lines to reduce corrosion and requiring pipeline operators to amend existing written operations and maintenance procedures
and operator qualification programs. PHMSA also updated its reporting requirements for natural gas pipelines effective January
1, 2011.
In December 2011, Congress passed the 2011 Act. This act increased the maximum civil penalties for pipeline safety
administrative enforcement actions; required the DOT to study and report on the expansion of integrity management requirements
and the sufficiency of existing gathering line regulations to ensure safety; required pipeline operators to verify their records on
maximum allowable operating pressure; and imposed new emergency response and incident notification requirements. In 2016,
the 2016 Act reauthorized PHMSA’s pipeline safety programs through 2019 and provided limited new authority, including the
ability to issue emergency orders, to set inspection requirements for certain underwater pipelines and to promulgate minimum
safety standards for natural gas storage facilities, as well as to provide increased transparency into the status of as-yet-incomplete
PHMSA actions required by the 2011 Act.
CenterPoint Energy and CERC anticipate that compliance with PHMSA’s regulations, performance of the remediation
activities by CenterPoint Energy’s and CERC’s natural gas distribution companies and intrastate pipelines and verification of
records on maximum allowable operating pressure will continue to require increases in both capital expenditures and operating
costs. The level of expenditures will depend upon several factors, including age, location and operating pressures of the facilities.
In particular, the cost of compliance with the DOT’s integrity management rules will depend on integrity testing and the repairs
found to be necessary by such testing. Changes to the amount of pipe subject to integrity management, whether by expansion of
the definition of the type of areas subject to integrity management procedures or of the applicability of such procedures outside
of those defined areas, may also affect the costs incurred. Implementation of the 2011 and 2016 Acts by PHMSA may result in
other regulations or the reinterpretation of existing regulations that could impact compliance costs. In addition, CenterPoint Energy
and CERC may be subject to the DOT’s enforcement actions and penalties if they fail to comply with pipeline regulations.
Midstream Investments – Rate and Other Regulation (CenterPoint Energy)
Federal, state, and local regulation may affect certain aspects of Enable’s business.
Interstate Natural Gas Pipeline Regulation
Enable’s interstate pipeline systems—EGT, MRT and SESH—are subject to regulation by the FERC and are considered
“natural gas companies” under the NGA. Under the NGA, the rates for service on Enable’s interstate facilities must be just and
reasonable and not unduly discriminatory. Rate and tariff changes for these facilities can only be implemented upon approval by
the FERC. Enable’s interstate pipelines business operations may be affected by changes in the demand for natural gas, the available
supply and relative price of natural gas in the Mid-continent and Gulf Coast natural gas supply regions and general economic
conditions.
Market Behavior Rules; Posting and Reporting Requirements
The EPAct of 2005 amended the NGA to add an anti-manipulation provision that makes it unlawful for any entity to engage
in prohibited behavior as prescribed in FERC rules, which were subsequently issued in FERC Order No. 670. The EPAct of 2005
also amends the NGA and the NGPA to give the FERC authority to impose civil penalties for violations of these statutes and
FERC’s regulations, rules, and orders, of up to approximately $1.27 million per day per violation, subject to periodic adjustment
to account for inflation. Should Enable fail to comply with all applicable FERC-administered statutes, rules, regulations and orders,
it could be subject to substantial penalties and fines. In addition, the CFTC is directed under the CEA to prevent price manipulations
for the commodity and futures markets, including the energy futures markets. Pursuant to the Dodd-Frank Act and other authority,
the CFTC has adopted anti-market manipulation regulations that prohibit fraud and price manipulation in the commodity and
futures markets. The CFTC also has statutory authority to seek civil penalties of up to the greater of $1.2 million or triple the
monetary gain to the violator for violations of the anti-market manipulation sections of the CEA. These maximum penalty levels
are also subject to periodic adjustment to account for inflation.
Intrastate Natural Gas Pipeline and Storage Regulation
Intrastate natural gas transportation is largely regulated by the state in which the transportation takes place. However, an
intrastate natural gas pipeline system may transport natural gas in interstate commerce provided that the rates, terms, and conditions
of such transportation service comply with Section 311 of the NGPA and Part 284 of the FERC’s regulations. Rates for service
pursuant to Section 311 of the NGPA are generally subject to review and approval by the FERC at least once every five years.
Failure to observe the service limitations applicable to transportation services provided under Section 311, failure to comply with
the rates approved by the FERC for Section 311 service, or failure to comply with the terms and conditions of service established
in the pipeline’s FERC-approved Statement of Operating Conditions could result in the assertion of federal NGA jurisdiction by
the FERC and/or the imposition of administrative, civil and criminal penalties, as described under “—Interstate Natural Gas
Pipeline Regulation” above.
Natural Gas Gathering and Processing Regulation
Section 1(b) of the NGA exempts natural gas gathering facilities from the jurisdiction of the FERC. Although the FERC has
not made formal determinations with respect to all of the facilities Enable considers to be gathering facilities, Enable believes that
its natural gas pipelines meet the traditional tests that the FERC has used to determine that a pipeline is a gathering pipeline and
is therefore not subject to FERC jurisdiction. The distinction, however, has been the subject of substantial litigation, and the FERC
determines whether facilities are gathering facilities on a case-by-case basis, so the classification and regulation of Enable’s
gathering facilities is subject to change based on future determinations.
States may regulate gathering pipelines. State regulation generally includes various safety, environmental and, in some
circumstances, anti-discrimination requirements, and in some instances complaint-based rate regulation. Enable’s gathering
operations may be subject to ratable take and common purchaser statutes in the states in which they operate.
Enable’s gathering operations could be adversely affected should they be subject in the future to the application of state or
federal regulation of rates and services. Enable’s gathering operations could also be subject to additional safety and operational
regulations relating to the design, construction, testing, operation, replacement and maintenance of gathering facilities. CenterPoint
Energy cannot predict what effect, if any, such changes might have on Enable’s operations, but the industry could be required to
incur additional capital expenditures and increased costs depending on future legislative and regulatory changes.
Interstate Crude Oil Gathering Regulation
Enable’s crude oil gathering systems in the Williston Basin transport crude oil in interstate commerce pursuant to a public
tariff in accordance with FERC regulatory requirements. Crude oil gathering pipelines that transport crude oil in interstate commerce
may be regulated as common carriers by the FERC under the ICA, the Energy Policy Act of 1992, and the rules and regulations
promulgated under those laws. The ICA and FERC regulations require that rates for interstate service pipelines that transport crude
oil and refined petroleum products (collectively referred to as “petroleum pipelines”) and certain other liquids, be just and reasonable
and non-discriminatory or not conferring any undue preference upon any shipper. FERC regulations also require interstate common
carrier petroleum pipelines to file with the FERC and publicly post tariffs stating their interstate transportation rates and terms
and conditions of service.
Intrastate Crude Oil and Condensate Gathering Regulation
Enable’s crude oil and condensate gathering system in the Anadarko Basin is located in Oklahoma and is subject to limited
regulation by the OCC. Crude oil and condensate gathering systems are common carriers under Oklahoma law and are prohibited
from unjust or unlawful discrimination in favor of one customer over another. Additional rules and legislation pertaining to these
matters are considered or adopted from time to time. Enable’s crude oil and condensate gathering operations could be adversely
affected should they be subject in the future to the application of state or federal regulation of rates and services.
13
14
Safety and Health Regulation
Certain of Enable’s facilities are subject to pipeline safety regulations. PHMSA regulates safety requirements in the design,
construction, operation and maintenance of jurisdictional natural gas and hazardous liquid pipeline facilities. All natural gas
transmission facilities, such as Enable’s interstate natural gas pipelines, are subject to PHMSA’s regulations, but natural gas
gathering pipelines are subject only to the extent they are classified as regulated gathering pipelines. In addition, several NGL
pipeline facilities and crude oil pipeline facilities are regulated as hazardous liquids pipelines.
Pursuant to various federal statutes, including the NGPSA, the DOT, through PHMSA, regulates pipeline safety and integrity.
NGL and crude oil pipelines are subject to regulation by PHMSA under the Hazardous Liquid Pipeline Safety Act which requires
PHMSA to develop, prescribe, and enforce minimum federal safety standards for the transportation of hazardous liquids by pipeline,
and comparable state statutes with respect to design, installation, testing, construction, operation, replacement and management
of pipeline facilities. Should Enable fail to comply with DOT or comparable state regulations, it could be subject to penalties and
fines. If future DOT pipeline regulations were to require that Enable expand its integrity management program to currently
unregulated pipelines, costs associated with compliance may have a material effect on its operations.
ENVIRONMENTAL MATTERS
The following discussion is based on environmental matters in the Registrants’ businesses as of December 31, 2018 and does
not include Vectren-related environmental matters. The Registrants’ operations and the operations of Enable are subject to stringent
and complex laws and regulations pertaining to the environment. As an owner or operator of natural gas pipelines, distribution
systems and storage, electric transmission and distribution systems, and the facilities that support these systems, the Registrants
must comply with these laws and regulations at the federal, state and local levels. These laws and regulations can restrict or impact
the Registrants’ business activities in many ways, including, but not limited to:
•
•
•
•
•
restricting the way the Registrants can handle or dispose of wastes;
limiting or prohibiting construction activities in sensitive areas such as wetlands, coastal regions or areas inhabited by
endangered species;
requiring remedial action and monitoring to mitigate environmental conditions caused by the Registrants’ operations or
attributable to former operations;
enjoining the operations of facilities with permits issued pursuant to such environmental laws and regulations; and
impacting the demand for the Registrants’ services by directly or indirectly affecting the use or price of natural gas.
To comply with these requirements, the Registrants may need to spend substantial amounts and devote other resources from
time to time to, among other activities:
•
•
construct or acquire new facilities and equipment;
acquire permits for facility operations;
Registrants try to anticipate future regulatory requirements that might be imposed and plan accordingly to maintain compliance
with changing environmental laws and regulations.
Based on current regulatory requirements and interpretations, the Registrants do not believe that compliance with federal,
state or local environmental laws and regulations will have a material adverse effect on their business, financial position, results
of operations or cash flows. In addition, the Registrants believe that their current environmental remediation activities will not
materially interrupt or diminish their operational ability. The Registrants cannot assure you that future events, such as changes in
existing laws, the promulgation of new laws, or the development or discovery of new facts or conditions will not cause them to
incur significant costs. The following is a discussion of material current environmental and safety issues, laws and regulations
that relate to the Registrants’ operations. The Registrants believe that they are in substantial compliance with these environmental
laws and regulations.
Global Climate Change
There is increasing attention being paid in the United States and worldwide to the issue of climate change. As a result, from
time to time, regulatory agencies have considered the modification of existing laws or regulations or the adoption of new laws or
regulations addressing the emissions of GHG on the state, federal, or international level. Some of the proposals would require
industrial sources to meet stringent new standards that would require substantial reductions in GHG emissions. CenterPoint
Energy’s and CERC’s revenues, operating costs and capital requirements could be adversely affected as a result of any regulatory
action that would require installation of new control technologies or a modification of their operations or would have the effect
of reducing the consumption of natural gas. Houston Electric, in contrast to some electric utilities, does not generate electricity
and thus is not directly exposed to the risk of high capital costs and regulatory uncertainties that face electric utilities that burn
fossil fuels to generate electricity. Nevertheless, CenterPoint Energy’s and Houston Electric’s revenues could be adversely affected
to the extent any resulting regulatory action has the effect of reducing consumption of electricity by ultimate consumers within
Houston Electric’s service territory. Likewise, incentives to conserve energy or to use energy sources other than natural gas could
result in a decrease in demand for the Registrants’ services. Conversely, regulatory actions that effectively promote the consumption
of natural gas because of its lower emissions characteristics would be expected to beneficially affect CenterPoint Energy and
CERC and their natural gas-related businesses. At this point in time, however, it would be speculative to try to quantify the
magnitude of the impacts from possible new regulatory actions related to GHG emissions, either positive or negative, on the
Registrants’ businesses.
To the extent climate changes may occur and such climate changes result in warmer temperatures in the Registrants’ or Enable’s
service territories, financial results from the Registrants’ and Enable’s businesses could be adversely impacted. For example,
CenterPoint Energy’s and CERC’s NGD could be adversely affected through lower natural gas sales and Enable’s natural gas
gathering, processing and transportation and crude oil gathering businesses could experience lower revenues. On the other hand,
warmer temperatures in CenterPoint Energy’s and Houston Electric’s electric service territory may increase revenues from
transmission and distribution through increased demand for electricity for cooling. Another possible result of climate change is
more frequent and more severe weather events, such as hurricanes or tornadoes. Since many of the Registrants’ facilities are
located along or near the Gulf Coast, increased or more severe hurricanes or tornadoes could increase costs to repair damaged
facilities and restore service to customers. When the Registrants cannot deliver electricity or natural gas to customers, or customers
cannot receive services, the Registrants’ financial results can be impacted by lost revenues, and they generally must seek approval
from regulators to recover restoration costs. To the extent the Registrants are unable to recover those costs, or if higher rates
resulting from recovery of such costs result in reduced demand for services, the Registrants’ future financial results may be
adversely impacted.
• modify, upgrade or replace existing and proposed equipment; and
•
decommission or remediate waste management areas, fuel storage facilities and other locations.
Air Emissions
Failure to comply with these laws and regulations may trigger a variety of administrative, civil and criminal enforcement
measures, including the assessment of monetary penalties, the imposition of remedial actions and monitoring and the issuance of
orders enjoining future operations. Certain environmental statutes impose strict, joint and several liability for costs required to
assess, clean up and restore sites where hazardous substances have been stored, disposed or released. Moreover, it is not uncommon
for neighboring landowners and other third parties to file claims for personal injury and/or property damage allegedly caused by
the release of hazardous substances or other waste products into the environment.
The recent trend in environmental regulation has been to place more restrictions and limitations on activities that may impact
the environment. There can be no assurance as to the amount or timing of future expenditures for environmental compliance or
remediation and monitoring, and actual future expenditures may be different from the amounts currently anticipated. The
15
The Registrants’ operations are subject to the federal Clean Air Act and comparable state laws and regulations. These laws
and regulations regulate emissions of air pollutants from various industrial sources, including processing plants and compressor
stations, and also impose various monitoring and reporting requirements. Such laws and regulations may require pre-approval for
the construction or modification of certain projects or facilities expected to produce air emissions or result in the increase of
existing air emissions. The Registrants may be required to obtain and strictly comply with air permits containing various emissions
and operational limitations, or utilize specific emission control technologies to limit emissions. Failure to comply with these
requirements could result in monetary penalties, injunctions, conditions or restrictions on operations, and potentially criminal
enforcement actions. The Registrants may be required to incur certain capital expenditures in the future for air pollution control
equipment in connection with obtaining and maintaining operating permits and approvals for air emissions.
The EPA has established new air emission control requirements for natural gas and NGLs production, processing and
transportation activities. Under the NESHAPS, the EPA established the RICE MACT rule. Compressors and back up electrical
16
generators used by CenterPoint Energy’s and CERC’s NGD, and back up electrical generators used by CenterPoint Energy and
Houston Electric, are substantially compliant with these laws and regulations.
EMPLOYEES
Water Discharges
The Registrants’ operations are subject to the Federal Water Pollution Control Act of 1972, as amended, also known as the
Clean Water Act, and analogous state laws and regulations. These laws and regulations impose detailed requirements and strict
controls regarding the discharge of pollutants into waters of the United States. The unpermitted discharge of pollutants, including
discharges resulting from a spill or leak incident, is prohibited. The Clean Water Act and regulations implemented thereunder also
prohibit discharges of dredged and fill material into wetlands and other waters of the United States unless authorized by an
appropriately issued permit. Any unpermitted release of petroleum or other pollutants from the Registrants’ pipelines or facilities
could result in fines or penalties as well as significant remedial obligations.
Under the Obama administration, the EPA promulgated a set of rules that included a comprehensive regulatory overhaul of
defining “waters of the United States” for the purposes of determining federal jurisdiction. As initially promulgated, these
regulations would expand federal jurisdiction under the Clean Water Act and, therefore, have the potential to affect many aspects
of the Registrants’ water-related regulatory compliance obligations. However, the new rules were challenged in court, and the U.S.
Supreme Court has recently held that any challenge to the rules must be brought in the U.S. district courts rather than directly
before the U.S. courts of appeals. As a result, the new definition of the “waters of the United States” is likely to be disputed in
litigation for years to come. Additionally, the Trump administration has signaled its intent to repeal and replace the Obama-era
rules. In accordance with this intent, the EPA promulgated a rule in early 2018 that postponed the effectiveness of the Obama-
era rules until 2020. Thereafter, the EPA proposed a new set of rules that would narrow the Clean Water Act’s jurisdiction. Thus,
the fate and content of the regulations defining “waters of the United States” is currently uncertain, and it is not clear when, and
even if, they will be enacted. The potential impact of any new “waters of the United States” regulations on the Registrants’ business,
liabilities, compliance obligations or profits and revenues is uncertain at this time.
Hazardous Waste
The Registrants’ operations generate wastes, including some hazardous wastes, that are subject to the federal RCRA, and
comparable state laws, which impose detailed requirements for the handling, storage, treatment, transport and disposal of hazardous
and solid waste. RCRA currently exempts many natural gas gathering and field processing wastes from classification as hazardous
waste. Specifically, RCRA excludes from the definition of hazardous waste waters produced and other wastes associated with the
exploration, development or production of crude oil and natural gas. However, these oil and gas exploration and production wastes
are still regulated under state law and the less stringent non-hazardous waste requirements of RCRA. Moreover, ordinary industrial
wastes such as paint wastes, waste solvents, laboratory wastes and waste compressor oils may be regulated as hazardous waste.
The transportation of natural gas in pipelines may also generate some hazardous wastes that would be subject to RCRA or
comparable state law requirements.
Liability for Remediation
CERCLA, also known as “Superfund,” and comparable state laws impose liability, without regard to fault or the legality of
the original conduct, on certain classes of persons responsible for the release of “hazardous substances” into the environment.
Classes of PRPs include the current and past owners or operators of sites where a hazardous substance was released and companies
that disposed or arranged for the disposal of hazardous substances at offsite locations such as landfills. Although petroleum, as
well as natural gas, is expressly excluded from CERCLA’s definition of a “hazardous substance,” in the course of the Registrants’
ordinary operations they do, from time to time, generate wastes that may fall within the definition of a “hazardous substance.”
CERCLA authorizes the EPA and, in some cases, third parties to take action in response to threats to the public health or the
environment and to recover the costs they incur from the responsible classes of persons. Under CERCLA, the Registrants could
potentially be subject to joint and several liability for the costs of cleaning up and restoring sites where hazardous substances have
been released, for damages to natural resources, and for associated response and assessment costs, including for the costs of certain
health studies.
Liability for Preexisting Conditions
For information about preexisting environmental matters, please see Note 16(d) to the consolidated financial statements.
The following table sets forth the number of employees by Registrant and reportable segment as of December 31, 2018:
Reportable Segment
Electric Transmission & Distribution .............
Natural Gas Distribution.................................
Energy Services ..............................................
Other Operations.............................................
Total..............................................................
Number of Employees
Number of Employees Represented by
Collective Bargaining Groups
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
2,800
3,298
302
1,577
7,977
2,800
—
—
—
2,800
—
3,298
302
—
3,600
1,431
1,200
—
127
2,758
1,431
—
—
—
—
1,200
—
—
1,431
1,200
For information about the status of collective bargaining agreements, see Note 8(j) to the consolidated financial statements.
EXECUTIVE OFFICERS
(as of February 12, 2019)
Name
Milton Carroll.............................
Scott M. Prochazka ....................
William D. Rogers......................
Tracy B. Bridge ..........................
Scott E. Doyle ............................
Joseph J. Vortherms....................
Dana C. O’Brien.........................
Sue B. Ortenstone.......................
Age
68
52
58
60
47
58
51
62
Title
Executive Chairman
President and Chief Executive Officer and Director
Executive Vice President and Chief Financial Officer
Executive Vice President and President, Electric Division
Senior Vice President, Natural Gas Distribution
Senior Vice President, Energy Services
Senior Vice President and General Counsel
Senior Vice President and Chief Human Resources Officer
Milton Carroll has served on the Board of Directors of CenterPoint Energy or its predecessors since 1992. He has served
as Executive Chairman of CenterPoint Energy since June 2013 and as Chairman from September 2002 until May 2013. Mr. Carroll
has served as a director of Halliburton Company since 2006 and Western Gas Holdings, LLC, the general partner of Western Gas
Partners, LP, since 2008. He has served as a director of Health Care Service Corporation since 1998 and as its chairman since
2002. He previously served as a director of LyondellBasell Industries N.V. from July 2010 to July 2016 as well as LRE GP, LLC,
the general partner of LRR Energy, L.P., from November 2011 to January 2014.
Scott M. Prochazka has served as a Director and President and Chief Executive Officer of CenterPoint Energy since January
1, 2014. He previously served as Executive Vice President and Chief Operating Officer from July 2012 to December 2013; as
Senior Vice President and Division President, Electric Operations from May 2011 through July 2012; as Division Senior Vice
President, Electric Operations of Houston Electric from February 2009 to May 2011; as Division Senior Vice President, Regional
Operations of CERC from February 2008 to February 2009; and as Division Vice President, Customer Service Operations, from
October 2006 to February 2008. He currently serves on the Board of Directors of Enable GP, LLC, the general partner of Enable
Midstream Partners, LP, and as the Chairman of the Board of Directors for each of Gridwise Alliance and Central Houston, Inc.
Mr. Prochazka is also a board member of Edison Electric Institute, Electric Power Research Institute, American Gas Association,
Greater Houston Partnership, United Way of Houston, Junior Achievement of South Texas and the Kinder Institute Advisory
Board.
William D. Rogers has served as Executive Vice President and Chief Financial Officer of CenterPoint Energy since March
2015. He previously served as Executive Vice President, Finance and Accounting from February 2015 to March 2015. Prior to
joining CenterPoint Energy, Mr. Rogers was Vice President and Treasurer of American Water Works Company, Inc., the largest
publicly traded U.S. water and wastewater utility company, from October 2010 to January 2015. Mr. Rogers was also the Chief
Financial Officer of NV Energy, Inc., an investor-owned utility headquartered in Las Vegas serving approximately 1.5 million
electric and gas customers in Nevada and with annual revenues of approximately $3 billion, from February 2007 to February 2010.
He has previously served as NV Energy’s vice president of finance, risk and tax, as well as corporate treasurer. Before joining NV
Energy in June 2005, Mr. Rogers was a managing director in capital markets at Merrill Lynch and prior to that worked in a similar
17
18
role at JPMorgan Chase in New York. He currently serves on the Boards of Directors of Enable GP, LLC, the general partner of
Enable Midstream Partners, LP, the West Point Association of Graduates and Sheltering Arms of New York.
Risk Factors Associated with Our Consolidated Financial Condition
Tracy B. Bridge has served as Executive Vice President and President, Electric Division since February 2014. He previously
served as Senior Vice President and Division President, Electric Operations from September 2012 to February 2014; as Senior
Vice President and Division President, Gas Distribution Operations from May 2011 to September 2012; as Division Senior Vice
President - Support Operations from February 2008 to May 2011; and as Division Vice President Regional Operations of CERC
from January 2007 to February 2008. Mr. Bridge has more than 35 years of utility experience. He currently serves as the Chair of
the Board of Directors of Rebuilding Together Houston.
Scott E. Doyle has served as Senior Vice President, Natural Gas Distribution since March 2017. With more than 20 years of
utility experience, he previously served as Senior Vice President, Regulatory and Public Affairs from February 2014 to March
2017; as Division Vice President, Rates and Regulatory from April 2012 to February 2014; and as Division Vice President, Regional
Operations from March 2010 to April 2012. Mr. Doyle currently serves on the boards of Goodwill Industries of Houston and the
Southern Gas Association. He previously served on the boards of the Texas Gas Association and the Association of Electric
Companies of Texas.
Joseph J. Vortherms has served as Senior Vice President, Energy Services since March 2017. He previously served as Vice
President, Energy Services from November 2015 to March 2017; as Vice President, Regional Operations in Minnesota from
October 2014 to November 2015; as Division Vice President, Regional Operations from April 2012 to October 2014; and as
Director, Home Service Plus from January 2007 to April 2012. Mr. Vortherms currently serves on the Southern Gas Association
Executive Council as well as the American Gas Association Scenario Planning Council. He previously served on the boards of
the Minnesota Region American Red Cross and the Minnesota Business Partnership.
Dana C. O’Brien has served as Senior Vice President and General Counsel of CenterPoint Energy since May 2014.
Additionally, she served as Corporate Secretary of the Company until October 2017. Before joining CenterPoint Energy, Ms.
O’Brien was Chief Legal Officer and Chief Compliance Officer and a member of the executive board at CEVA Logistics, a Dutch-
based logistics company, from August 2007 to April 2014. She previously served as the general counsel at EGL, Inc. from October
2005 to July 2007 and Quanta Services, Inc. from January 2001 to October 2005. Ms. O’Brien was appointed as a director of
Sterling Construction Company, Inc., a publicly traded company, effective January 1, 2019. She previously served as a member
of the Boards of Directors of Ronald McDonald House Houston, Child Advocates, Inc. and the Association of Women Attorneys
Foundation.
Sue B. Ortenstone has served as Senior Vice President and Chief Human Resources Officer of CenterPoint Energy since
February 2014. Prior to joining CenterPoint Energy, Ms. Ortenstone was Senior Vice President and Chief Administrative Officer
at Copano Energy from July 2012 to May 2013. Before joining Copano, she spent more than 30 years at El Paso Corporation and
served most recently as Senior Vice President and then Executive Vice President and Chief Administrative Officer from November
2003 to May 2012. Ms. Ortenstone serves on the Industrial Advisory Board in the College of Engineering at the University of
Wisconsin. Ms. Ortenstone also serves on the Board of Trustees for Northwest Assistance Ministries of Houston.
Item 1A.
Risk Factors
CenterPoint Energy is a holding company that conducts all of its business operations through subsidiaries, primarily Houston
Electric, CERC and, as of February 1, 2019, Vectren through its operating subsidiaries. CenterPoint Energy also owns interests
in Enable. The following, along with any additional legal proceedings identified or incorporated by reference in Item 3 of this
combined report on Form 10-K, summarizes the principal risk factors associated with the holding company, the businesses
conducted by its subsidiaries, including Vectren, and its interests in Enable. However, additional risks and uncertainties either not
presently known or not currently believed by management to be material may also adversely affect CenterPoint Energy’s businesses.
Carefully consider each of the risks described below relating to Houston Electric and CERC, which, along with CenterPoint Energy
(including Vectren for purposes of this Item 1A only), are collectively referred to as the Registrants. Unless the context indicates
otherwise, where appropriate, information relating to a specific registrant has been segregated and labeled as such and specific
references to Houston Electric and CERC in this section also pertain to CenterPoint Energy. In this combined report on Form 10-
K, the terms “our,” “we” and “us” are used as abbreviated references to CenterPoint Energy, Inc. together with its subsidiaries,
which, as of February 1, 2019, includes Vectren and its subsidiaries.
19
CenterPoint Energy is a holding company with no operations or operating assets of its own. As a result, CenterPoint Energy
depends on the performance of and distributions from its subsidiaries and from Enable to meet its payment obligations and to
pay dividends on its common and preferred stock, and provisions of applicable law or contractual restrictions could limit the
amount of those distributions.
CenterPoint Energy derives all of its operating income from, and holds all of its assets through, its subsidiaries, including its
interests in Enable. As a result, CenterPoint Energy depends on distributions from its subsidiaries and Enable to meet its payment
obligations and to pay dividends on its common and preferred stock. In general, CenterPoint Energy’s subsidiaries are separate
and distinct legal entities and have no obligation to provide it with funds for its payment obligations, whether by dividends,
distributions, loans or otherwise. In addition, provisions of applicable law, such as those limiting the legal sources of dividends,
limit CenterPoint Energy’s subsidiaries’ and Enable’s ability to make payments or other distributions to CenterPoint Energy, and
its subsidiaries or Enable could agree to contractual restrictions on their ability to make distributions. Additionally, CenterPoint
Energy’s results of operations, future growth and earnings and dividend goals will depend on the performance of its utility and
non-utility (such as CES, Infrastructure Services and ESG) subsidiaries which contribute to a portion of its consolidated earnings
and which may not perform at expected or forecasted levels or do not achieve the projected growth in these businesses as anticipated.
CenterPoint Energy and CERC also offer home repair protection plans to natural gas customers in Texas (through a third-party
provider) and provide home appliance maintenance and repair services to customers in Minnesota. For a discussion of risks that
may impact the amount of cash distributions CenterPoint Energy receives with respect to its interests in Enable, please read “—
Additional Risk Factors Affecting CenterPoint Energy’s Interests in Enable Midstream Partners, LP — CenterPoint Energy’s cash
flows will be adversely impacted if it receives less cash distributions from Enable than it currently expects.”
CenterPoint Energy’s right to receive any assets of any subsidiary, and therefore the right of its creditors to participate in those
assets, will be structurally subordinated to the claims of that subsidiary’s creditors, including trade creditors. In addition, even if
CenterPoint Energy were a creditor of any subsidiary, its rights as a creditor would be effectively subordinated to any security
interest in the assets of that subsidiary and any indebtedness of the subsidiary senior to that held by CenterPoint Energy.
If we are unable to arrange future financings on acceptable terms, our ability to finance our capital expenditures or refinance
outstanding indebtedness could be limited.
Our businesses are capital intensive, and we rely on various sources to finance our capital expenditures. For example, we
depend on (i) long-term debt, (ii) borrowings through our revolving credit facilities and, for CenterPoint Energy and CERC,
commercial paper programs, (iii) distributions from CenterPoint Energy’s interests in Enable (CenterPoint Energy may also depend
on the net proceeds from a sale of a portion of Enable common units it owns) and (iv) if market conditions permit, issuances of
additional shares of common and/or preferred stock by CenterPoint Energy. We may also use such sources to refinance any
outstanding indebtedness as it matures. As of December 31, 2018, CenterPoint Energy had $9.2 billion of outstanding indebtedness
on a consolidated basis, which includes $1.4 billion of non-recourse Securitization Bonds. For information on maturities through
2023, see Note 14 to the consolidated financial statements. As of December 31, 2018, Vectren and its subsidiaries had outstanding
$167 million of short-term debt and $2.2 billion of long-term debt, including current maturities. Our future financing activities
may be significantly affected by, among other things:
•
•
•
•
•
•
general economic and capital market conditions;
credit availability from financial institutions and other lenders;
volatility or fluctuations in distributions from Enable’s units or volatility in Enable’s unit price;
investor confidence in us and the markets in which we operate;
the future performance of our and Enable’s businesses;
integration of Vectren’s businesses into CenterPoint Energy;
• maintenance of acceptable credit ratings;
• market expectations regarding our future earnings and cash flows;
•
our ability to access capital markets on reasonable terms;
20
•
•
incremental collateral that may be required due to regulation of derivatives; and
provisions of relevant tax and securities laws.
As of December 31, 2018, Houston Electric had approximately $3.3 billion aggregate principal amount of general mortgage
bonds outstanding under the General Mortgage, including approximately $68 million held in trust to secure pollution control bonds
for which CenterPoint Energy is obligated. Additionally, as of December 31, 2018, Houston Electric had approximately $102
million aggregate principal amount of first mortgage bonds outstanding under the Mortgage. Houston Electric may issue additional
general mortgage bonds on the basis of retired bonds, up to 70% of property additions or cash deposited with the trustee. As of
December 31, 2018, approximately $4.3 billion of additional first mortgage bonds and general mortgage bonds in the aggregate
could be issued on the basis of retired bonds and 70% of property additions as of December 31, 2018. However, Houston Electric
has contractually agreed that it will not issue additional first mortgage bonds, subject to certain exceptions. In January 2019,
Houston Electric issued $700 million aggregate principal amount of general mortgage bonds. As of December 31, 2018, Indiana
Electric had approximately $293 million aggregate principal amount of first mortgage bonds outstanding. Indiana Electric may
issue additional bonds under its Mortgage Indenture up to 60% of currently unfunded property additions. As of December 31,
2018, approximately $1.0 billion of additional first mortgage bonds could be issued on this basis. However, under certain
circumstances Indiana Electric is limited in its ability to issue additional bonds under the Mortgage Indenture due to a provision
in its parent’s, VUHI, indentures.
The Registrants’ current credit ratings are discussed in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Liquidity and Capital Resources — Other Matters — Impact on Liquidity of a Downgrade in Credit
Ratings” in Item 7 of Part II of this report. These credit ratings may not remain in effect for any given period of time and one or
more of these ratings may be lowered or withdrawn entirely by a rating agency. On January 28, 2019, in anticipation of the closing
of the Merger, Moody’s downgraded the long-term credit ratings of CenterPoint Energy, including its issuer rating to Baa2 from
Baa1, senior unsecured debt rating to Baa2 from Baa1, subordinated debt rating to Baa3 from Baa2 and preferred stock rating to
Ba1 from Baa3 while affirming its Prime 2 short-term rating for commercial paper and A1 senior secured revenue bonds. Moody’s
also changed the rating outlook for CenterPoint Energy to stable from negative. On February 1, 2019, as a result of the closing of
the Merger, S&P lowered its issuer credit rating on CenterPoint Energy to BBB+ from A-, and lowered the credit ratings for
CenterPoint Energy’s senior unsecured and subordinated notes to BBB from BBB+ and the Series A Preferred Stock to BBB-
from BBB. S&P also removed the CenterPoint Energy ratings from CreditWatch, where S&P had previously placed them with
negative implications as a result of the announcement of the Merger in the second quarter of 2018 and changed its outlook to
stable. S&P also lowered its issuer credit ratings on Houston Electric and CERC to BBB+ from A-. S&P affirmed the A credit
rating on Houston Electric’s first mortgage bonds and general mortgage bonds and lowered the credit rating on CERC’s senior
unsecured debt to BBB+ from A-. S&P also removed the Houston Electric and CERC ratings from CreditWatch, where S&P had
previously placed them with negative implications as a result of the announcement of the Merger in the second quarter of 2018
and changed its outlook to stable. S&P also affirmed the A-2 short-term and commercial paper ratings for CenterPoint Energy and
CERC. The Registrants note that these credit ratings are not recommendations to buy, sell or hold their securities. Each rating
should be evaluated independently of any other rating. Any future reduction or withdrawal of one or more of the Registrants’ credit
ratings could have a material adverse impact on their ability to access capital on acceptable terms.
An impairment of goodwill, long-lived assets, including intangible assets, equity method investments and an impairment or
period, if a transaction on an identical or similar investment in Enable is observed. Additionally, CenterPoint Energy considers
qualitative impairment triggers, such as significant deterioration in earnings performance, significant decline in market condition
and other factors that raise significant concerns about Enable’s ability to continue as a going concern, to determine if an impairment
analysis should be performed on its investment.
Further, as a result of the Merger, CenterPoint Energy will have a significant amount of goodwill and other intangible assets
on its consolidated financial statements that are subject to impairment based on future adverse changes to its business or prospects.
Should the annual impairment test or another periodic impairment test or an observable transaction, as described above,
indicate the fair value of our assets is less than the carrying value, we would be required to take a non-cash charge to earnings
with a correlative effect on equity and balance sheet leverage as measured by debt to total capitalization. A non-cash impairment
charge or fair value adjustment could materially adversely impact our results of operations and financial condition.
Changing demographics, poor investment performance of pension plan assets and other factors adversely affecting the
calculation of pension liabilities could unfavorably impact our results of operations, liquidity and financial position.
CenterPoint Energy and its subsidiaries maintain qualified defined benefit pension plans covering certain of its employees.
Costs associated with these plans are dependent upon a number of factors including the investment returns on plan assets, the level
of interest rates used to calculate the funded status of the plan, contributions to the plan, and government regulations with respect
to funding requirements and the calculation of plan liabilities. Funding requirements may increase and CenterPoint Energy may
be required to make unplanned contributions in the event of a decline in the market value of plan assets, a decline in the interest
rates used to calculate the present value of future plan obligations, or government regulations that increase minimum funding
requirements or the pension liability. In addition to affecting CenterPoint Energy’s funding requirements, each of these factors
could adversely affect our results of operations, liquidity and financial position.
Vectren also contributes to several multi-employer pension plans for Infrastructure Services. If Infrastructure Services
withdraws from these plans, CenterPoint Energy may be required to pay an amount based on the allocable share of the plans’
unfunded vested benefits, referred to as the withdrawal liability. This could adversely affect our results of operations, liquidity
and financial position.
The costs of providing health care benefits to our employees and retirees may increase substantially and adversely affect our
results of operations and financial condition.
We provide health care benefits to eligible employees and retirees through self-insured plans. In recent years, the costs of
providing these benefits per beneficiary increased due to higher health care costs and higher levels of large individual health care
claims and overall health care claims. We anticipate that such costs will continue to rise. Further, the effects of health care reform
or any future legislative changes could also materially affect our health care benefit programs and costs. Any potential changes
and resulting cost impacts, which are likely to be passed on to us, cannot be determined with certainty at this time. Our costs of
providing these benefits could also increase materially in the future should there be a material reduction in the amount of the
recovery of these costs through our rates or should significant delays develop in the timing of the recovery of such costs, which
could adversely affect our results of operations and liquidity.
fair value adjustment to CenterPoint Energy’s Enable Series A Preferred Unit investment could reduce our earnings.
The use of derivative contracts in the normal course of business by the Registrants or Enable could result in financial losses
Goodwill is recorded when the purchase price of a business exceeds the fair market value of the tangible and separately
measurable intangible net assets. Accounting principles generally accepted in the United States of America require CenterPoint
Energy to test goodwill for impairment on an annual basis or when events or circumstances occur indicating that goodwill might
be impaired. Long-lived assets, including intangible assets with finite useful lives, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount may not be recoverable.
For investments CenterPoint Energy accounts for under the equity method, the impairment test considers whether the fair
value of such investment as a whole, not the underlying net assets, has declined and whether that decline is other than temporary.
For example, if Enable’s common unit price, distributions or earnings were to decline, and that decline is deemed to be other than
temporary, CenterPoint Energy could determine that it is unable to recover the carrying value of its equity investment in Enable.
Considerable judgment is used in determining if an impairment loss is other than temporary and the amount of any impairment.
A sustained low Enable common unit price could result in CenterPoint Energy recording impairment charges in the future.
that could negatively impact the Registrants’ results of operations and those of Enable.
The Registrants use derivative instruments, such as swaps, options, futures and forwards, to manage commodity, weather and
financial market risks. Enable may also use such instruments from time to time to manage its commodity and financial market
risks. The Registrants or Enable could recognize financial losses as a result of volatility in the market values or ineffectiveness of
these contracts or should a counterparty fail to perform. Additionally, in the absence of actively quoted market prices and pricing
information from external sources, the valuation of these financial instruments can involve management’s judgment or use of
estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair
value of these contracts.
If CenterPoint Energy redeems the ZENS prior to their maturity in 2029, its ultimate tax liability and redemption payments
would result in significant cash payments, which would adversely impact its cash flows. Similarly, a significant amount of
exchanges of ZENS by ZENS holders could adversely impact CenterPoint Energy’s cash flows.
For investments CenterPoint Energy accounts for as investments without a readily determinable fair value, such as the Enable
Series A Preferred Unit investment, the carrying value of the asset may be adjusted to fair value, resulting in a gain or loss in the
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CenterPoint Energy has approximately $828 million principal amount of ZENS outstanding as of December 31, 2018.
CenterPoint Energy owns shares of ZENS-Related Securities equal to approximately 100% of the reference shares used to calculate
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its obligation to the holders of the ZENS. CenterPoint Energy may redeem all of the ZENS at any time at a redemption amount
per ZENS equal to the higher of the contingent principal amount per ZENS ($93 million in the aggregate, or $6.57 per ZENS, as
of December 31, 2018) or the sum of the current market value of the reference shares attributable to one ZENS at the time of
redemption. In the event CenterPoint Energy redeems the ZENS, in addition to the redemption amount, it would be required to
pay deferred taxes related to the ZENS. CenterPoint Energy’s ultimate tax liability related to the ZENS continues to increase by
the amount of the tax benefit realized each year. If the ZENS had been redeemed on December 31, 2018, deferred taxes of
approximately $438 million would have been payable in 2018, based on 2018 tax rates in effect. In addition, if all the shares of
ZENS-Related Securities had been sold on December 31, 2018 to fund the aggregate redemption amount, capital gains taxes of
approximately $90 million would have been payable in 2018. Similarly, a significant amount of exchanges of ZENS by ZENS
holders could adversely impact CenterPoint Energy’s cash flows. This could happen if CenterPoint Energy’s creditworthiness
were to drop or the market for the ZENS were to become illiquid, or for some other reason. While funds for the payment of cash
upon exchange of ZENS could be obtained from the sale of the shares of ZENS-Related Securities that CenterPoint Energy owns
or from other sources, ZENS exchanges result in a cash outflow because tax deferrals related to the ZENS and ZENS-Related
Securities shares would typically cease when ZENS are exchanged and ZENS-Related Securities shares are sold.
Dividend requirements associated with the Series A Preferred Stock and the Series B Preferred Stock that CenterPoint Energy
issued to fund a portion of the Merger subject it to certain risks.
In August 2018, CenterPoint Energy issued 800,000 shares of Series A Preferred Stock. In October 2018, CenterPoint Energy
issued 19,550,000 depositary shares, each representing a 1/20th interest in a share of CenterPoint Energy’s Series B Preferred
Stock. Any future payments of cash dividends, and the amount of any cash dividends CenterPoint Energy pays, on the Series A
Preferred Stock and the Series B Preferred Stock will depend on, among other things, its financial condition, capital requirements
and results of operations and the ability of our subsidiaries and Enable to distribute cash to CenterPoint Energy, as well as other
factors that CenterPoint Energy’s Board of Directors (or an authorized committee thereof) may consider relevant. Any failure to
pay scheduled dividends on the Series A Preferred Stock and the Series B Preferred Stock when due would likely have a material
adverse impact on the market price of the Series A Preferred Stock, the Series B Preferred Stock, Common Stock and CenterPoint
Energy’s debt securities and would prohibit CenterPoint Energy, under the terms of the Series A Preferred Stock and Series B
Preferred Stock, from paying cash dividends on or repurchasing shares of Common Stock (subject to limited exceptions) until
such time as CenterPoint Energy has paid all accumulated and unpaid dividends on the Series A Preferred Stock and the Series B
Preferred Stock.
The terms of the Series A Preferred Stock and the Series B Preferred Stock further provide that if dividends on any of the
respective shares have not been declared and paid for the equivalent of three or more semi-annual or six or more quarterly dividend
periods, whether or not for consecutive dividend periods, the holders of such shares, voting together as a single class with holders
of any and all other series of CenterPoint Energy’s capital stock on parity with its Series A Preferred Stock or its Series B Preferred
Stock (as to the payment of dividends and amounts payable on liquidation, dissolution or winding up of CenterPoint Energy’s
affairs) upon which like voting rights have been conferred and are exercisable, will be entitled to vote for the election of a total
of two additional members of CenterPoint Energy’s Board of Directors, subject to certain terms and limitations.
Risk Factors Affecting Electric Generation, Transmission and Distribution Businesses (CenterPoint Energy and Houston
Electric)
Rate regulation of Houston Electric’s and Indiana Electric’s businesses may delay or deny their ability to earn an expected
return and fully recover their costs.
Houston Electric’s rates are regulated by certain municipalities and the PUCT and Indiana Electric’s rates are regulated by
the IURC. Their rates are set in comprehensive base rate proceedings (i.e., general rate cases) based on an analysis of their invested
capital, their expenses and other factors in a designated test year. Each of these rate proceedings is subject to third-party intervention
and appeal, and the timing of a general base rate proceeding may be out of Houston Electric’s and Indiana Electric’s control. For
Houston Electric, a general base rate proceeding is required 48 months from the date of the last general base rate change, unless
the PUCT issues an order extending the deadline to file that general base rate proceeding. In connection with the PUCT’s review
of the impacts of the TCJA, on February 13, 2018, Houston Electric and other likely parties to a future rate case announced a
settlement that, among other things, requires Houston Electric to make a general rate case filing by April 30, 2019. There is no
guarantee that current rates will continue or that the general rate case will result in rates that fully recover Houston Electric’s costs
or enable it to earn a reasonable return on its invested capital.
The rates that Houston Electric and Indiana Electric are allowed to charge may not match their costs at any given time, a
situation referred to as “regulatory lag.” For Houston Electric and Indiana Electric, though several interim rate adjustment
mechanisms have been implemented to reduce the effects of regulatory lag, these adjustment mechanisms are subject to the
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applicable regulatory body’s approval and are subject to limitations that may reduce Houston Electric’s and Indiana Electric’s
ability to adjust rates. For example, for Houston Electric, the DCRF mechanism adjusts an electric utility’s rates for increases in
net distribution-invested capital (e.g., distribution plant and distribution-related intangible plant and communication equipment)
since its last comprehensive base rate proceeding, but Houston Electric may only make a DCRF filing once per calendar year and
not during a comprehensive base rate proceeding. The TCOS mechanism allows a transmission service provider to update its
wholesale transmission rates to reflect changes in transmission-related invested capital, but is only available to Houston Electric
twice per calendar year. However, neither of these mechanisms provides for recovery of operations and maintenance expenses.
Similarly, for Indiana Electric, the TDSIC rate mechanism allows electric utilities (that have an IURC-approved seven-year
infrastructure improvement plan) to request incremental rate increases every six months to pay for the projects included in that
plan, subject to IURC approval. However, the TDSIC allows the utility to recover 80% of the cost as they are incurred, with the
remaining costs to be deferred as regulatory assets until the next base rate case, and rate increases are limited to no more than 2%
of the utility’s total retail revenues from the prior year. Indiana Electric recovers transmission costs through a FERC-approved
formula rate and reflects charges and costs associated with participation in MISO through the Reliability Cost and Revenue
Adjustment and MISO Cost and Recovery Adjustment mechanisms, which are filed annually. With respect to the DSMA, electricity
suppliers are required to submit energy efficiency plans to the IURC at least once every three years and may file under the DSMA
mechanism annually to recover program and administrative costs, including lost revenues and financial incentives. The DSMA is
subject to IURC approval.
Houston Electric and Indiana Electric can make no assurance that filings for such mechanisms will result in favorable
adjustments to rates or in full cost recovery. Notwithstanding the application of the rate mechanisms discussed above, the regulatory
process by which rates are determined is subject to change as a result of the legislative process or rulemaking, as the case may be,
and may not always be available or result in rates that will produce recovery of Houston Electric’s and Indiana Electric’s costs or
enable them to earn an expected return. In addition, changes to the interim adjustment mechanisms could result in an increase in
regulatory lag or otherwise impact Houston Electric’s and Indiana Electric’s ability to recover their costs in a timely manner.
Additionally, inherent in the regulatory process is some level of risk that jurisdictional regulatory authorities may initiate
investigations of the prudence of operating expenses incurred or capital investments made by Houston Electric or Indiana Electric
and deny the full recovery of their cost of service in rates. To the extent the regulatory process does not allow Houston Electric
and Indiana Electric to make a full and timely recovery of appropriate costs, their results of operations, financial condition and
cash flows could be adversely affected.
Unlike Houston Electric, Indiana Electric must seek approval by the IURC for long-term financing authority. This authority
allows Indiana Electric the flexibility to issue debt securities, among other financing arrangements. In the event that the IURC
does not approve Indiana Electric’s financing authority, Indiana Electric may not be able to fully execute its financing plans and
its financial condition, results of operations and cash flows could be adversely affected.
Disruptions at power generation facilities owned by third parties could interrupt Houston Electric’s sales of transmission
and distribution services.
Houston Electric transmits and distributes to customers of REPs electric power that the REPs obtain from power generation
facilities owned by third parties. Houston Electric does not own or operate any power generation facilities. If power generation
is disrupted or if power generation capacity is inadequate, Houston Electric’s sales of transmission and distribution services may
be diminished or interrupted, and its results of operations, financial condition and cash flows could be adversely affected.
Houston Electric’s and Indiana Electric’s revenues and results of operations are seasonal.
A significant portion of Houston Electric’s revenues is derived from rates that it collects from each REP based on the amount
of electricity it delivers on behalf of such REP. Similarly, Indiana Electric’s revenues are derived from rates it charges its customers
to provide electricity. Thus, Houston Electric’s and Indiana Electric’s revenues and results of operations are subject to seasonality,
weather conditions and other changes in electricity usage. Houston Electric’s revenues are generally higher during the warmer
months. Unusually mild weather in the warmer months could diminish Houston Electric’s results of operations and harm its
financial condition. Conversely, extreme warm weather conditions could increase Houston Electric’s results of operations in a
manner that would not likely be annually recurring.
A significant portion of Indiana Electric’s sales are for space heating and cooling. Consequently, Indiana Electric’s results of
operations may be adversely affected by warmer-than-normal heating season weather or colder-than-normal cooling season
weather, while more extreme seasonal weather conditions could increase Indiana Electric’s results of operations in a manner that
would not likely be annually recurring.
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Houston Electric and Indiana Electric, as a member of ERCOT and MISO, respectively, could be subject to higher costs for
improvements, as well as fines or other sanctions as a result of mandatory reliability standards.
Houston Electric and Indiana Electric are members of ERCOT and MISO, respectively, which serve the electric transmission
needs of their applicable regions. As a result of their respective participation in ERCOT and MISO, Houston Electric and Indiana
Electric do not have operational control over their transmission facilities and are subject to certain costs for improvements to these
regional electric transmission systems. In addition, the FERC has jurisdiction with respect to ensuring the reliability of electric
transmission service, including transmission facilities owned by Houston Electric and other utilities within ERCOT and Indiana
Electric and other utilities within MISO, respectively. The FERC has designated the NERC as the ERO to promulgate standards,
under FERC oversight, for all owners, operators and users of the bulk power system. The FERC has approved the delegation by
the NERC of authority for reliability in ERCOT to the Texas RE, a Texas non-profit corporation and for reliability in the portion
of MISO that includes Indiana Electric to ReliabilityFirst Corporation, a Delaware non-profit corporation. Compliance with
mandatory reliability standards may subject Houston Electric and Indiana Electric to higher operating costs and may result in
increased capital expenditures. In addition, if Houston Electric or Indiana Electric were to be found to be in noncompliance with
applicable mandatory reliability standards, they could be subject to sanctions, including substantial monetary penalties.
Houston Electric’s receivables are primarily concentrated in a small number of REPs, and any delay or default in such
payments could adversely affect Houston Electric’s cash flows, financial condition and results of operations.
Houston Electric’s receivables from the distribution of electricity are collected from REPs that supply the electricity Houston
Electric distributes to their customers. As of December 31, 2018, Houston Electric did business with approximately 65 REPs.
Adverse economic conditions, structural problems in the market served by ERCOT or financial difficulties of one or more REPs
could impair the ability of these REPs to pay for Houston Electric’s services or could cause them to delay such payments. Houston
Electric depends on these REPs to remit payments on a timely basis. Applicable regulatory provisions require that customers be
shifted to another REP or a provider of last resort if a REP cannot make timely payments. Applicable PUCT regulations significantly
limit the extent to which Houston Electric can apply normal commercial terms or otherwise seek credit protection from firms
desiring to provide retail electric service in its service territory, and Houston Electric thus remains at risk for payments related to
services provided prior to the shift to another REP or the provider of last resort. A significant portion of Houston Electric’s billed
receivables from REPs are from affiliates of NRG and Vistra Energy Corp., formerly known as TCEH Corp. Houston Electric’s
aggregate billed receivables balance from REPs as of December 31, 2018 was $207 million. Approximately 34% and 12% of this
amount was owed by affiliates of NRG and Vistra Energy Corp., respectively. Any delay or default in payment by REPs could
adversely affect Houston Electric’s cash flows, financial condition and results of operations. If a REP were unable to meet its
obligations, it could consider, among various options, restructuring under the bankruptcy laws, in which event such REP might
seek to avoid honoring its obligations, and claims might be made by creditors involving payments Houston Electric had received
from such REP.
The AMS deployed throughout Houston Electric’s and Indiana Electric’s service territories may experience unexpected
problems with respect to the timely receipt of accurate metering data.
Houston Electric and Indiana Electric have deployed an AMS throughout their service territories, which integrates equipment
and computer software from various vendors to eliminate the need for physical meter readings to be taken at consumers’ premises,
such as monthly readings for billing purposes and special readings for Houston Electric associated with a customer’s change in
REPs or the connection or disconnection of electric service. Unanticipated difficulties could be encountered during the operation
of the AMS, including failures or inadequacy of equipment or software, difficulties in integrating the various components of the
AMS, changes in technology, cyber-security issues, loss of data and factors outside the control of Houston Electric and Indiana
Electric, which could result in delayed or inaccurate metering data that might lead to delays or inaccuracies in the calculation and
imposition of delivery or other charges, which could have a material adverse effect on Houston Electric’s or Indiana Electric’s
results of operations, financial condition and cash flows.
Indiana Electric’s execution of its electric generation transition plan and its regulated power supply operations are subject
to various risks, including timely recovery of capital investments, increased costs and facility outages or shutdowns.
As required by Indiana regulation, Indiana Electric filed its 2016 IRP with the IURC in December 2016. Indiana requires
each electric utility to perform and submit an IRP that uses economic modeling to consider the costs and risks associated with
available resource options to provide reliable electric service for the next 20-year period. While the IURC does not approve or
reject the IRP, the process involves the issuance of a staff report that provides comments on the IRP, which was issued in November
2017. Indiana Electric has taken the comments provided in the report into consideration in its generation resource plans.
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Consistent with the recommendations presented in Indiana Electric’s IRP and as a direct result of significant environmental
investments required to comply with current regulations, Indiana Electric plans to retire a significant portion of its current generating
fleet by the end of 2023. Indiana Electric’s electric generation transition plan will require recovery of new capital investments, as
well as costs of retiring the current generation fleet, including decommissioning costs, costs of removal and any remaining
unrecovered costs of retired assets. Currently, Indiana Electric relies on coal for substantially all of its generation capacity. In
February 2018, Indiana Electric filed a petition seeking authorization from the IURC to construct a new 800-900 MW natural gas
combined cycle generating facility to replace this capacity at an approximate cost of $900 million, which includes the cost of a
new natural gas pipeline to serve the plant. Indiana Electric is requesting a certificate of public convenience and necessity authorizing
construction timelines and costs of new generation resources, as well as necessary unit retrofits, to implement the generation
transition plan. Also, Indiana Electric is seeking approval to defer some capital costs associated with the generation plan until its
next base rate proceeding and may use rate recovery mechanisms to recover other portions of the cost. Indiana Electric expects
an order from the IURC in the certificate of public convenience and necessity proceeding in the first half of 2019. Given the
significance of the plan, there is inherent risk associated with the construction of new generation, including the ability to procure
resources needed to build at a reasonable cost, scarcity of resources and labor, ability to appropriately estimate costs of new
generation, the effects of potential construction delays and cost overruns and the ability to meet capacity requirements.
Additionally, Indiana Electric’s generating facilities are subject to operational risks that could result in unscheduled plant
outages, unanticipated operation and maintenance expenses and increased purchase power costs. These operational risks can arise
from circumstances such as facility shutdowns due to equipment failure or operator error; interruption of fuel supply or increased
prices of fuel as contracts expire; disruptions in the delivery of electricity; inability to comply with regulatory or permit requirements;
labor disputes; or natural disasters. Further, Indiana Electric’s coal supply is purchased largely from a single, unrelated party and,
although the coal supply is under long-term contract, the loss of this supplier or transportation interruptions could adversely affect
Indiana Electric’s results of operations, financial condition and cash flows.
Risk Factors Affecting Natural Gas Distribution and Competitive Energy Services Businesses (CenterPoint Energy and
CERC)
Rate regulation of NGD may delay or deny its ability to earn an expected return and fully recover its costs.
NGD’s rates are regulated by certain municipalities (in Texas only) and state commissions based on an analysis of NGD’s
invested capital, expenses and other factors in a test year (often either fully or partially historic) in comprehensive base rate
proceedings, subject to periodic review and adjustment. Each of these proceedings is subject to third-party intervention and appeal,
and the timing of a general base rate proceeding may be out of NGD’s control. Thus, the rates that NGD is allowed to charge may
not match its costs at any given time, resulting in what is referred to as “regulatory lag.”
Though several interim rate adjustment mechanisms have been approved by jurisdictional regulatory authorities and
implemented by NGD to reduce the effects of regulatory lag, such adjustment mechanisms are subject to the applicable regulatory
body’s approval and are subject to certain limitations that may reduce NGD’s ability to adjust its rates.
Arkansas allows public utilities to elect to have their rates regulated pursuant to a FRP, providing for a utility’s base rates to
be adjusted once a year. In each of Louisiana, Mississippi and Oklahoma, NGD makes annual filings utilizing various formula
rate mechanisms that adjust rates based on a comparison of authorized return to actual return to achieve the allowed return rates
in those jurisdictions. Additionally, in Minnesota, the MPUC implemented a full revenue decoupling program, which separates
approved revenues from the amount of natural gas used by its customers. Further, in Indiana, NGD may file a CSIA every six
months to seek rate increases to recover certain federally mandated project costs (e.g., pipeline safety). The TDSIC (recovered
through the CSIA), allows the utility to recover 80% of its project costs associated with an IURC-approved seven-year infrastructure
improvement plan as they are incurred, with the remaining costs to be deferred until the next base rate case, and rate increases are
limited to no more than 2% of the utility’s total retail revenues. In Ohio, the DRR is an annual mechanism that allows a utility to
recover its investments in utility plant and operating expenses associated with replacing bare steel and cast-iron pipelines, as well
as certain other infrastructure investments. The effectiveness of these filings and programs depends on the approval of the applicable
state regulatory body.
In Texas, NGD’s Houston, South Texas, Beaumont/East Texas and Texas Coast divisions each submit annual GRIP filings to
recover the incremental capital investments made in the preceding year. NGD must file a general rate case no later than five years
after the initial GRIP implementation date.
NGD can make no assurance that filings for such mechanisms will result in favorable adjustments to rates. Notwithstanding
the application of the rate mechanisms discussed above, the regulatory process by which rates are determined is subject to change
as a result of the legislative process or rulemaking, as the case may be, and may not always be available or result in rates that will
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produce recovery of NGD’s costs or enable NGD to earn an expected return. In addition, changes to the interim adjustment
mechanisms could result in an increase in regulatory lag or otherwise impact NGD’s ability to recover its costs in a timely manner.
Additionally, inherent in the regulatory process is some level of risk that jurisdictional regulatory authorities may initiate
investigations of the prudence of operating expenses incurred or capital investments made by NGD and deny the full recovery of
NGD’s cost of service or the full recovery of incurred natural gas costs in rates. To the extent the regulatory process does not allow
NGD to make a full and timely recovery of appropriate costs, its results of operations, financial condition and cash flows could
be adversely affected.
Unlike CERC, Indiana Gas, SIGECO’s natural gas distribution business and VEDO must seek approval by the IURC and
PUCO, as applicable, for long-term financing authority. This authority allows these utilities the flexibility to issue their debt
securities, among other financing arrangements. In the event that the IURC or PUCO do not approve these utilities’ respective
financing authorities, they may not be able to fully execute their financing plans and their respective financial conditions, results
of operations and cash flows could be adversely affected.
Access to natural gas supplies and pipeline transmission and storage capacity are essential components of reliable service
for NGD’s customers.
NGD depends on third-party service providers to maintain an adequate supply of natural gas and for available storage and
intrastate and interstate pipeline capacity to satisfy its customers’ needs, all of which are critical to system reliability. Substantially
all of NGD’s natural gas supply is purchased from intrastate and interstate pipelines. If NGD is unable to secure an independent
natural gas supply of its own or through its affiliates or if third-party service providers fail to timely deliver natural gas to meet
NGD’s requirements, the resulting decrease in natural gas supply in NGD’s service territories could have a material adverse effect
on its results of operations, cash flows and financial condition. Additionally, a significant disruption, whether through reduced
intrastate and interstate pipeline transmission or storage capacity or other events affecting natural gas supply, including, but not
limited to, operational failures, hurricanes, tornadoes, floods, acts of terrorism or cyber-attacks or changes in legislative or regulatory
requirements, could also adversely affect NGD’s businesses. Further, to the extent that NGD’s natural gas requirements cannot
be met through access to or continued use of existing natural gas infrastructure or if additional infrastructure, including onshore
and offshore exploration and production facilities, gathering and processing systems and pipeline and storage capacity is not
constructed at a rate that satisfies demand, then NGD’s operations could be negatively affected.
NGD and CES, including transportation and storage, whether through the use of AMAs or other arrangements, are subject
to fluctuations in notional natural gas prices as well as geographic and seasonal natural gas price differentials, which could
affect the ability of their suppliers and customers to meet their obligations or otherwise adversely affect their liquidity, results
of operations and financial condition.
NGD and CES are subject to risk associated with changes in the notional price of natural gas as well as geographic and
seasonal natural gas price differentials that impact our business, including transportation and storage, whether through the use of
AMAs or other arrangements. Increases in natural gas prices might affect NGD’s and CES’s ability to collect balances due from
their customers and, for NGD, could create the potential for uncollectible accounts expense to exceed the recoverable levels built
into tariff rates. In addition, a sustained period of high natural gas prices could (i) decrease demand for natural gas in the areas in
which NGD and CES operate, thereby resulting in decreased sales and revenues and (ii) increase the risk that NGD’s and CES’s
suppliers or customers fail or are unable to meet their obligations. An increase in natural gas prices would also increase working
capital requirements by increasing the investment that must be made to maintain natural gas inventory levels. Additionally, a
decrease in natural gas prices could increase the amount of collateral required under hedging arrangements. AMAs may be subject
to regulatory approval, and such agreements may not be renewed or may be renewed with less favorable terms.
A decline in CERC’s credit rating could result in CERC having to provide collateral under its shipping or hedging
arrangements or to purchase natural gas, which consequently would increase its cash requirements and adversely affect its
financial condition.
If CERC’s credit rating were to decline, it might be required to post cash collateral under its shipping or hedging arrangements
or to purchase natural gas. If a credit rating downgrade and the resultant cash collateral requirement were to occur at a time when
CERC was experiencing significant working capital requirements or otherwise lacked liquidity, CERC’s results of operations,
financial condition and cash flows could be adversely affected.
NGD’s and CES’s revenues and results of operations are seasonal.
NGD’s and CES’s revenues are primarily derived from natural gas sales. Thus, their revenues and results of operations are
subject to seasonality, weather conditions and other changes in natural gas usage, with revenues being higher during the winter
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months. Unusually mild weather in the winter months could diminish our results of operations and harm our financial condition.
Conversely, extreme cold weather conditions could increase our results of operations in a manner that would not likely be annually
recurring.
The states in which NGD provides regulated local natural gas distribution may, either through legislation or rules, adopt
restrictions regarding organization, financing and affiliate transactions that could have significant adverse impacts on NGD’s
ability to operate.
From time to time, proposals have been put forth in some of the states in which NGD does business to give state regulatory
authorities increased jurisdiction and scrutiny over organization, capital structure, intracompany relationships and lines of business
that could be pursued by registered holding companies and their affiliates that operate in those states. Some of these frameworks
attempt to regulate financing activities, acquisitions and divestitures, and arrangements between the utilities and their affiliates,
and to restrict the level of non-utility business that can be conducted within the holding company structure. Additionally, they may
impose record-keeping, record access, employee training and reporting requirements related to affiliate transactions and reporting
in the event of certain downgrading of the utility’s credit rating.
These regulatory frameworks could have adverse effects on NGD’s ability to conduct its utility operations, to finance its
business and to provide cost-effective utility service. In addition, if more than one state adopts restrictions on similar activities, it
may be difficult for NGD and us to comply with competing regulatory requirements.
NGD and CES must compete with alternate energy sources, which could result in less natural gas marketed and have an
adverse impact on our results of operations, financial condition and cash flows.
NGD and CES compete primarily with alternate energy sources such as electricity and other fuel sources. In some areas,
intrastate pipelines, other natural gas distributors and marketers also compete directly with NGD and CES for natural gas sales to
end users. In addition, as a result of federal regulatory changes affecting interstate pipelines, natural gas marketers operating on
these pipelines may be able to bypass NGD’s facilities and market, sell and/or transport natural gas directly to commercial and
industrial customers. Any reduction in the amount of natural gas marketed, sold or transported by NGD and CES as a result of
competition may have an adverse impact on our results of operations, financial condition and cash flows.
Infrastructure Services’ and ESG’s operations could be adversely affected by a number of factors.
Infrastructure Services’ and ESG’s business results are dependent on a number of factors. The industries are competitive and
many of the contracts are subject to a bidding process. Should Infrastructure Services and ESG be unsuccessful in bidding contracts
(e.g., federal Indefinite Delivery/Indefinite Quantity contracts for ESG), results of operations could be impacted. Through
competitive bidding, the volume of contracted work could vary significantly from year to year. Further, to the extent there are
unanticipated cost increases in completion of the contracted work or issues arise where amounts due for work performed may not
be collected, the profit margin realized on any single project could be reduced. Changes in legislation and regulations impacting
the sectors in which the customers served by Infrastructure Services or ESG operate could adversely impact operating results.
Infrastructure Services enters into a variety of contracts, some of which are fixed price. Other risks that could adversely affect
Infrastructure Services include, but are not limited to: failure to properly construct pipeline infrastructure; loss of significant
customers or a significant decline in related customer revenues; cancellation of projects by customers and/or reductions in the
scope of the projects; changes in the timing of projects; the inability to obtain materials and equipment required to perform services
from suppliers and manufacturers; and changes in the market prices of oil and natural gas and state regulatory requirements that
mandate pipeline replacement programs that would affect the demand for infrastructure construction and/or the project margin
realized on projects. For ESG, other risks include, but are not limited to: discontinuation of the federal ESPC and UESC programs;
the inability of customers to finance projects; risks associated with projects owned or operated; failure to appropriately design,
construct or operate projects; and cancellation of projects by customers and/or reductions in the scope of the projects.
In addition, Vectren’s non-utility businesses have supported its utilities pursuant to service contracts by providing infrastructure
services. In most instances, Vectren’s ability to maintain these service contracts depends upon regulatory discretion, and there
can be no assurance it will be able to obtain future service contracts, or that existing arrangements will not be revisited.
ESG’s business has performance and warranty obligations, some of which are guaranteed by Vectren.
In the normal course of business, ESG issues performance bonds and other forms of assurance that commit it to operate
facilities, pay vendors or subcontractors and support warranty obligations. Vectren, as the parent company, will from time to time
guarantee its subsidiaries’ commitments. These guaranties do not represent incremental consolidated obligations; rather, they
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represent parental guaranties of subsidiary obligations to allow the subsidiary the flexibility to conduct business without posting
other forms of collateral. Vectren has not been called upon to satisfy any obligations pursuant to these parental guaranties. As a
result of the closing of the Merger, these guaranties would ultimately become obligations of CenterPoint Energy or its subsidiaries.
Risk Factors Affecting CenterPoint Energy’s Interests in Enable Midstream Partners, LP (CenterPoint Energy)
CenterPoint Energy holds a substantial limited partner interest in Enable (54.0% of the outstanding common units representing
limited partner interests in Enable as of December 31, 2018), as well as 50% of the management rights in Enable GP and a 40%
interest in the incentive distribution rights held by Enable GP. As of December 31, 2018, CenterPoint Energy owned an aggregate
of 14,520,000 Enable Series A Preferred Units representing limited partner interests in Enable. Accordingly, CenterPoint Energy’s
future earnings, results of operations, cash flows and financial condition will be affected by the performance of Enable, the amount
of cash distributions it receives from Enable and the value of its interests in Enable. Factors that may have a material impact on
Enable’s performance and cash distributions, and, hence, the value of CenterPoint Energy’s interests in Enable, include the risk
factors outlined below, as well as the risks described elsewhere under “Risk Factors” that are applicable to Enable.
CenterPoint Energy’s cash flows will be adversely impacted if it receives less cash distributions from Enable than it currently
expects or if it reduces its ownership in Enable.
Both CenterPoint Energy and OGE hold their limited partner interests in Enable in the form of common units. CenterPoint
Energy also holds Enable Series A Preferred Units. For the Enable Series A Preferred Units, Enable is expected to pay $0.625 per
Enable Series A Preferred Unit, or $2.50 per Enable Series A Preferred Unit on an annualized basis. However, distributions on
each Enable Series A Preferred Unit are not mandatory and are non-cumulative in the event distributions are not declared on the
Enable Series A Preferred Units. Enable is expected to pay a minimum quarterly distribution of $0.2875 per unit, or $1.15 per unit
on an annualized basis, on its outstanding common units to the extent it has sufficient cash from operations after establishment of
cash reserves and payment of fees and expenses, including payments to Enable GP and its affiliates (referred to as “available
cash”). Enable may not have sufficient available cash each quarter to enable it (i) to pay distributions on the Enable Series A
Preferred Units or (ii) maintain or increase the distributions on its common units. Additionally, distributions on the Enable Series
A Preferred Units reduce the amount of available cash Enable has to pay distributions on its common units. The amount of cash
Enable can distribute on its common units and the Enable Series A Preferred Units will principally depend upon the amount of
cash it generates from its operations, which will fluctuate from quarter to quarter based on, among other things:
•
•
•
•
•
the fees and gross margins it realizes with respect to the volume of natural gas, NGLs and crude oil that it handles;
the prices of, levels of production of, and demand for natural gas, NGLs and crude oil;
the volume of natural gas, NGLs and crude oil it gathers, compresses, treats, dehydrates, processes, fractionates, transports
and stores;
the relationship among prices for natural gas, NGLs and crude oil;
cash calls and settlements of hedging positions;
• margin requirements on open price risk management assets and liabilities;
•
•
•
•
the level of competition from other companies offering midstream services;
adverse effects of governmental and environmental regulation;
the level of its operation and maintenance expenses and general and administrative costs; and
prevailing economic conditions.
In addition, the actual amount of cash Enable will have available for distribution will depend on other factors, including:
•
•
•
the level and timing of its capital expenditures;
the cost of acquisitions;
its debt service requirements and other liabilities;
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•
•
•
•
•
•
fluctuations in its working capital needs;
its ability to borrow funds and access capital markets;
restrictions contained in its debt agreements;
the amount of cash reserves established by Enable GP;
distributions paid on the Enable Series A Preferred Units;
any impact on cash levels should any sale of CenterPoint Energy’s investment in Enable occur, as discussed further
below; and
•
other business risks affecting its cash levels.
Additionally, CenterPoint Energy may also reduce its ownership in Enable over time through sales in the public equity markets,
or otherwise, of the Enable common units it holds, subject to market conditions. CenterPoint Energy’s ability to execute any sale
of Enable common units is subject to a number of uncertainties, including the timing, pricing and terms of any such sale. Any
sales of Enable common units CenterPoint Energy owns could have an adverse impact on the price of Enable common units or
on any trading market for Enable common units. Further, CenterPoint Energy’s sales of Enable common units may have an adverse
impact on Enable’s ability to issue equity on satisfactory terms, or at all, which may limit its ability to expand operations or make
future acquisitions. Any reduction in CenterPoint Energy’s interest in Enable would result in decreased distributions from Enable
and decrease income, which may adversely impact CenterPoint Energy’s ability to meet its payment obligations and pay dividends
on its Common Stock. Further, any sales of Enable common units would result in a significant amount of taxes due. There can be
no assurances that any sale of Enable common units in the public equity markets or otherwise will be completed. Any sale of
Enable common units in the public equity markets or otherwise may involve significant costs and expenses, including, in connection
with any public offering, a significant underwriting discount. CenterPoint Energy may not realize any or all of the anticipated
strategic, financial, operational or other benefits from any completed sale or reduction in its investment in Enable. Furthermore,
under certain circumstances, including following certain changes in the methodology employed by ratings agencies whereby the
Enable Series A Preferred Units are no longer eligible for the same or a higher amount of “equity credit” attributed to the Enable
Series A Preferred Units on their original issue date (referred to as a “rating event”), Enable has the option to redeem the Enable
Series A Preferred Units. There can be no assurances that CenterPoint Energy will be able to reinvest any proceeds from such
redemption in a manner that provides for a similar rate of return as the Enable Series A Preferred Units.
The amount of cash Enable has available for distribution to CenterPoint Energy on its common units and the Enable Series
A Preferred Units depends primarily on its cash flow rather than on its profitability, which may prevent Enable from making
distributions, even during periods in which Enable records net income.
The amount of cash Enable has available for distribution on its common units and the Enable Series A Preferred Units, depends
primarily upon its cash flows and not solely on profitability, which will be affected by non-cash items. As a result, Enable may
make cash distributions during periods when it records losses for financial accounting purposes and may not make cash distributions
during periods when it records net earnings for financial accounting purposes.
Enable is required to, or may at its option, redeem the Enable Series A Preferred Units in certain circumstances, and Enable
may not have sufficient funds to redeem the Enable Series A Preferred Units if required to do so.
As a holder of the Enable Series A Preferred Units, CenterPoint Energy may request that Enable list those units for trading
on the NYSE. If Enable is unable to list the Enable Series A Preferred Units in certain circumstances, it will be required to redeem
the Enable Series A Preferred Units. There can be no assurance that Enable would have sufficient financial resources available to
satisfy its obligation to redeem the Enable Series A Preferred Units. In addition, mandatory redemption of the Enable Series A
Preferred Units could have a material adverse effect on Enable’s business, financial position, results of operations and ability to
make quarterly cash distributions to its unitholders.
Additionally, Enable may redeem the Enable Series A Preferred Units under certain circumstances, including following a
rating event. Upon a rating event, the Enable Series A Preferred Units may be considered by Enable to be an expensive form of
indebtedness. If Enable does not have sufficient funds to exercise its option to redeem the Enable Series A Preferred Units upon
a rating event, then such inability could have a material adverse effect on Enable’s business, financial position, results of operations
and ability to make quarterly cash distributions to its unitholders.
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CenterPoint Energy is not able to exercise control over Enable, which entails certain risks.
Enable is controlled jointly by CenterPoint Energy and OGE, who each own 50% of the management rights in Enable GP.
The board of directors of Enable GP is composed of an equal number of directors appointed by OGE and by CenterPoint Energy,
the president and chief executive officer of Enable GP and three directors who are independent as defined under the independence
standards established by the NYSE. Accordingly, CenterPoint Energy is not able to exercise control over Enable.
Although CenterPoint Energy jointly controls Enable with OGE, CenterPoint Energy may have conflicts of interest with
Enable that could subject it to claims that CenterPoint Energy has breached its fiduciary duty to Enable and its unitholders.
CenterPoint Energy and OGE each own 50% of the management rights in Enable GP, as well as limited partner interests in
Enable, and interests in the incentive distribution rights held by Enable GP. CenterPoint Energy also holds Enable Series A
Preferred Units. Conflicts of interest may arise between CenterPoint Energy and Enable and its unitholders. CenterPoint Energy’s
joint control of Enable GP may increase the possibility of claims of breach of fiduciary or contractual duties including claims of
conflicts of interest related to Enable. In resolving these conflicts, CenterPoint Energy may favor its own interests and the interests
of its affiliates over the interests of Enable and its unitholders as long as the resolution does not conflict with Enable’s partnership
agreement. These circumstances could subject CenterPoint Energy to claims that, in favoring its own interests and those of its
affiliates, CenterPoint Energy breached a fiduciary or contractual duty to Enable or its unitholders.
Enable is subject to various operational risks, all of which could affect Enable’s ability to make cash distributions to
CenterPoint Energy.
The execution of Enable’s businesses is subject to a number of operational risks, which include, but are not limited to, the
following:
• Contract Renewal: Enable’s contracts are subject to renewal risks. To the extent Enable is unable to renew or replace its
expiring contracts on terms that are favorable, if at all, or successfully manage its overall contract mix over time, its
financial position, results of operations and ability to make cash distributions could be adversely affected;
• Customers: Enable depends on a small number of customers for a significant portion of its gathering and processing
revenues and its transportation and storage revenues. The loss of, or reduction in volumes from, these customers or the
failure to extend or replace these contracts or the extension or replacement of these contracts on less favorable terms, as
a result of competition or otherwise, could result in a decline in sales of its gathering and processing or transportation
and storage services and adversely affect Enable’s financial position, results of operations and ability to make cash
distributions;
• Third-Party Drilling and Production Decisions: Enable’s businesses are dependent, in part, on the natural gas and crude
oil drilling and production market conditions and decisions of others, over which Enable has no control. Further, sustained
reductions in exploration or production activity in Enable’s areas of operation and fluctuations in energy prices could
lead to further reductions in the utilization of Enable’s systems, which could adversely affect its financial position, results
of operations and ability to make cash distributions. It may also become more difficult to maintain or increase the current
volumes on Enable’s gathering systems and in its processing plants, as several of the formations in the unconventional
resource plays in which it operates generally have higher initial production rates and steeper production decline curves
than wells in more conventional basins. Should Enable determine that the economics of its gathering assets do not justify
the capital expenditures needed to grow or maintain volumes associated therewith, Enable may reduce such capital
expenditures, which could cause revenues associated with these assets to decline over time;
• Competition: Enable competes with similar enterprises, some of which include large energy companies with greater
financial resources and access to natural gas, NGL and crude oil supplies, in its respective areas of operation, primarily
through rates, terms of service and flexibility and reliability of service. Increased competitive pressure in Enable’s industry,
which is already highly competitive, could adversely affect Enable’s financial position, results of operations and ability
to make cash distributions;
• Cost Recovery of Capital Improvements: Enable may not be able to recover the costs of its substantial planned investment
in capital improvements and additions, and the actual cost of such improvements and additions may be significantly
higher than it anticipates. In Enable’s Form 10-K for the fiscal year ended December 31, 2018, Enable stated that it
expects that its expansion capital could range from approximately $325 million to $425 million and its maintenance
capital could range from approximately $105 million to $125 million for the year ending December 31, 2019;
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• Commodity Prices: Natural gas, NGL and crude oil prices are volatile, and changes in these prices could adversely affect
Enable’s financial position, results of operations and ability to make cash distributions. Factors affecting prices are beyond
Enable’s control and include the following: (i) demand for these commodities, which fluctuates with changes in market
and economic conditions and other factors, including the impact of seasonality and weather, general economic conditions,
the level of domestic and offshore natural gas production and consumption, (ii) the availability of imported natural gas,
LNG, NGLs and crude oil, (iii) actions taken by foreign natural gas and oil producing nations, (iv) the availability of
local, intrastate and interstate transportation systems, (v) the availability and marketing of competitive fuels, (vi) the
impact of energy conservation efforts, technological advances affecting energy consumption and (vii) the extent of
governmental regulation and taxation. Further, Enable’s natural gas processing arrangements expose it to commodity
price fluctuations. In 2018, 6%, 27% and 67% of Enable’s processing plant inlet volumes consisted of keep-whole
arrangements, percent-of-proceeds or percent-of-liquids and fee-based, respectively. If the price at which Enable sells
natural gas or NGLs is less than the cost at which Enable purchases natural gas or NGLs under these arrangements, then
Enable’s financial position, results of operations and ability to make cash distributions could be adversely affected;
• Credit Risk of Customers: Enable is exposed to credit risks of its customers, and any material nonpayment or
nonperformance by its customers, whether through severe financial problems or otherwise, could adversely affect its
financial position, results of operations and ability to make cash distributions;
•
“Negotiated Rate” Contracts: Enable provides certain transportation and storage services under fixed-price “negotiated
rate” contracts, which are authorized by the FERC, that are not subject to adjustment, even if its cost to perform these
services exceeds the revenues received from these contracts. As of December 31, 2018, approximately 44% of Enable’s
aggregate contracted firm transportation capacity on EGT and MRT and 45% of its aggregate contracted firm storage
capacity on EGT and MRT, was subscribed under such “negotiated rate” contracts. As a result, Enable’s costs could
exceed its revenues received under these contracts, and if Enable’s costs increase and it is not able to recover any shortfall
of revenue associated with its negotiated rate contracts, the cash flow realized by its systems could decrease and, therefore,
the cash Enable has available for distribution could also decrease;
• Unavailability of Interconnected Facilities: If third-party pipelines and other facilities interconnected to Enable’s
gathering, processing or transportation facilities (including those providing transportation of natural gas and crude oil,
transportation and fractionation of NGLs and electricity for compression, among others) become partially or fully
unavailable for any reason, Enable’s financial position, results of operations and ability to make cash distributions could
be adversely affected; and
• Land Ownership: Enable does not own all of the land on which its pipelines and facilities are located, and it is therefore
subject to the possibility of more onerous terms and/or increased costs to retain necessary land use if it does not have
valid rights-of-way or if such rights-of-way lapse or terminate, which could disrupt its operations or result in increased
costs related to the construction and continuing operations elsewhere and adversely affect its financial position, results
of operations and ability to make cash distributions.
Enable conducts a portion of its operations through joint ventures, which subject it to additional risks that could adversely
affect the success of these operations and Enable’s financial position, results of operations and ability to make cash distributions.
Enable conducts a portion of its operations through joint ventures with third parties, including Enbridge Inc., DCP Midstream,
LP, CVR Refining, LP, Trans Louisiana Gas Pipeline, Inc. and Pablo Gathering LLC. Enable may also enter into other joint venture
arrangements in the future. These third parties may have obligations that are important to the success of the joint venture, such as
the obligation to pay their share of capital and other costs of the joint venture.
Enable’s joint venture arrangements may involve risks not otherwise present when operating assets directly, including, for
example:
• Enable shares certain approval rights over major decisions and may not be able to control decisions, including control
of cash distributions to Enable from the joint venture;
• Enable may incur liabilities as a result of an action taken by its joint venture partners, including leaving Enable liable for
the other joint venture partners’ shares of joint venture liabilities if those partners do not pay their share of the joint
venture’s obligations;
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• Enable may be required to devote significant management time to the requirements of and matters relating to the joint
Enable’s debt levels may limit its flexibility in obtaining additional financing and in pursuing other business opportunities.
ventures;
• Enable’s insurance policies may not fully cover loss or damage incurred by both Enable and its joint venture partners in
certain circumstances;
• Enable’s joint venture partners may take actions contrary to its instructions or requests or contrary to its policies or
objectives; and
•
disputes between Enable and its joint venture partners may result in delays, litigation or operational impasses.
The risks described above or the failure to continue Enable’s joint ventures or to resolve disagreements with its joint venture
partners could adversely affect its ability to transact the business that is the subject of such joint venture, which would in turn
adversely affect Enable’s financial position, results of operations and ability to make cash distributions. The agreements under
which Enable formed certain joint ventures may subject it to various risks, limit the actions it may take with respect to the assets
subject to the joint venture and require Enable to grant rights to its joint venture partners that could limit its ability to benefit fully
from future positive developments. Some joint ventures require Enable to make significant capital expenditures. If Enable does
not timely meet its financial commitments or otherwise does not comply with its joint venture agreements, its rights to participate,
exercise operator rights or otherwise influence or benefit from the joint venture may be adversely affected. Certain of Enable’s
joint venture partners may have substantially greater financial resources than Enable has and Enable may not be able to secure
the funding necessary to participate in operations its joint venture partners propose, thereby reducing its ability to benefit from
the joint venture.
Under certain circumstances, Enbridge Inc. could have the right to purchase Enable’s ownership interest in SESH at fair
market value.
Enable owns a 50% ownership interest in SESH. The remaining 50% ownership interest is held by Enbridge Inc. CenterPoint
Energy owns 54.0% of Enable’s common units, 100% of the Enable Series A Preferred Units and a 40% economic interest in
Enable GP. Pursuant to the terms of the limited liability company agreement of SESH, as amended, if, at any time, CenterPoint
Energy has a right to receive less than 50% of Enable’s distributions through its interests in Enable and Enable GP, or do not have
the ability to exercise certain control rights, Enbridge Inc. could have the right to purchase Enable’s interest in SESH at fair market
value, subject to certain exceptions.
Enable’s ability to grow is dependent in part on its ability to access external financing sources on acceptable terms.
Enable expects that it will distribute all of its “available cash” to its unitholders. As a result, Enable is expected to rely
significantly upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities,
to fund acquisitions and expansion capital expenditures. To the extent Enable is unable to finance growth externally or through
internally generated cash flows, Enable’s cash distribution policy may significantly impair its ability to grow. In addition, because
Enable is expected to distribute all of its available cash, its growth may not be as fast as businesses that reinvest their available
cash to expand ongoing operations.
To the extent Enable issues additional units in connection with any acquisitions or expansion capital expenditures, the payment
of distributions on those additional units may increase the risk that Enable will be unable to maintain or increase its per unit
distribution level, which in turn may impact the available cash that it has to distribute on each unit. There are no limitations in
Enable’s partnership agreement on its ability to issue additional units, including units ranking senior to the common units. The
incurrence of additional commercial borrowings or other debt by Enable to finance its growth strategy would result in increased
interest expense, which in turn may negatively impact the available cash that Enable has to distribute to its unitholders.
Enable depends, in part, on access to the capital markets and other external financing sources to fund its expansion capital
expenditures, although it has also increasingly relied on cash flow generated from operations. Historically, unit prices of midstream
master limited partnerships have experienced periods of volatility. In addition, because Enable’s common units are yield-based
securities, rising market interest rates could impact the relative attractiveness of its common units to investors. As a result of capital
market volatility, Enable may be unable to issue equity or debt on satisfactory terms, or at all, which may limit its ability to expand
its operations or make future acquisitions.
As of December 31, 2018, Enable had approximately $2.9 billion of long-term debt outstanding, excluding the premiums,
discounts and unamortized debt expense on their senior notes, $649 million outstanding under its commercial paper program and
$500 million outstanding of its 2.40% senior notes dues 2019, excluding unamortized debt expense. Enable has a $1.75 billion
revolving credit facility for working capital, capital expenditures and other partnership purposes, including acquisitions, with
approximately $250 million in borrowings outstanding and $848 million remaining available as of February 1, 2019. Enable has
the ability to incur additional debt, subject to limitations in its credit facilities. The levels of Enable’s debt could have important
consequences, including the following:
•
•
the ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other
purposes may be impaired or the financing may not be available on favorable terms, if at all;
a portion of cash flows will be required to make interest payments on the debt, reducing the funds that would otherwise
be available for operations, future business opportunities and distributions;
• Enable’s debt level will make it more vulnerable to competitive pressures or a downturn in its business or the economy
generally; and
• Enable’s debt level may limit its flexibility in responding to changing business and economic conditions.
Enable’s ability to service its debt will depend upon, among other things, its future financial and operating performance, which
will be affected by prevailing economic conditions, commodity prices and financial, business, regulatory and other factors, some
of which are beyond Enable’s control. If operating results are not sufficient to service current or future indebtedness, Enable may
be forced to take actions such as reducing distributions, reducing or delaying business activities, acquisitions, investments or
capital expenditures, selling assets, restructuring or refinancing debt, or seeking additional equity capital. These actions may not
be effected on satisfactory terms, or at all.
Further, any reductions in Enable’s credit ratings could increase its financing costs and the cost of maintaining certain
contractual relationships. Enable cannot assure that its credit ratings will remain in effect for any given period of time or that a
rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances warrant. If any of Enable’s
credit ratings are below investment grade, it may have higher future borrowing costs, and Enable or its subsidiaries may be required
to post cash collateral or letters of credit under certain contractual agreements. If cash collateral requirements were to occur at a
time when Enable was experiencing significant working capital requirements or otherwise lacked liquidity, its financial position,
results of operations and ability to make cash distributions could be adversely affected.
Enable’s credit facilities contain operating and financial restrictions, including covenants and restrictions that may be
affected by events beyond Enable’s control, which could adversely affect its financial condition, results of operations and ability
to make distributions.
Enable’s credit facilities contain customary covenants that, among other things, limit its ability to:
•
•
•
permit its subsidiaries to incur or guarantee additional debt;
incur or permit to exist certain liens on assets;
dispose of assets;
• merge or consolidate with another company or engage in a change of control;
•
•
enter into transactions with affiliates on non-arm’s length terms; and
change the nature of its business.
Enable’s credit facilities also require it to maintain certain financial ratios. Enable’s ability to meet those financial ratios can
be affected by events beyond its control, and we cannot assure you that it will meet those ratios. In addition, Enable’s credit
facilities contain events of default customary for agreements of this nature.
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Enable’s ability to comply with the covenants and restrictions contained in its credit facilities may be affected by events
beyond its control, including prevailing economic, financial and industry conditions. If market or other economic conditions
deteriorate, Enable’s ability to comply with these covenants may be impaired. If Enable violates any of the restrictions, covenants,
ratios or tests in its credit facilities, a significant portion of its indebtedness may become immediately due and payable. In addition,
Enable’s lenders’ commitments to make further loans to it under the revolving credit facility may be suspended or terminated.
Enable might not have, or be able to obtain, sufficient funds to make these accelerated payments.
Enable’s businesses are exposed to various regulatory risks.
Enable’s operations are subject to extensive regulation by federal, state and local regulatory authorities. Changes or additional
regulatory measures adopted by such authorities could adversely affect Enable’s financial position, results of operations and ability
to make cash distributions. This regulation includes, but is not limited to, the following:
• Rate Regulation: The rates charged by several of Enable’s pipeline systems, including for interstate gas transportation
service provided by its intrastate pipelines, are regulated by the FERC. Enable’s pipeline operations that are not regulated
by the FERC may be subject to state and local regulation applicable to intrastate natural gas transportation services and
crude oil gathering services. The FERC and state regulatory agencies also regulate other terms and conditions of the
services Enable may offer. If one of these regulatory agencies, on its own initiative or due to challenges by third parties,
were to lower its tariff rates or deny any rate increase or other material changes to the types, or terms and conditions, of
service Enable might propose or offer, the profitability of Enable’s pipeline businesses could suffer.
•
•
FERC Revised Policy Statement and NOPR: In a series of related issuances on March 15, 2018, the FERC issued a
Revised Policy Statement stating that it will no longer permit pipelines organized as MLPs to recover an income tax
allowance in their cost-of-service rates. On July 18, 2018, FERC issued a Final Rule adopting procedures that are generally
the same as proposed in a March 15, 2018 NOPR implementing the Revised Policy Statement and the corporate income
tax rate reduction with certain clarifications and modifications. For more information, please read “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources —
Regulatory Matters” in Item 7 of Part II of this report, which discussion is incorporated herein by reference. If FERC
requires Enable to establish new tariff rates for either its natural gas or crude oil pipelines that reflect a lower federal
corporate income tax rate, it is possible the rates would be reduced, which could adversely affect Enable’s financial
position, results of operations and ability to make cash distributions to its unitholders. With regard to FERC-jurisdictional
rates on Enable’s crude oil pipelines, the FERC plans to address the Revised Policy Statement and corporate tax rate
reduction in its next five-year review of the oil pipeline rate index, which will occur in 2020 and become effective July
1, 2021. The potential rate impacts from the revision are currently uncertain.
Permits, Licenses and Approvals: Enable may be unable to obtain or renew federal or state permits, licenses or approvals
necessary for its operations, which could inhibit its ability to do business. All of these permits, licenses, approval limits
and standards require a significant amount of monitoring, record keeping and reporting to demonstrate compliance with
the underlying permit, license, approval limit or standard. Noncompliance or incomplete documentation of Enable’s
compliance status may result in the imposition of fines, penalties and injunctive relief. Further, to obtain new permits or
renew permits and other approvals in the future, Enable may be required to prepare and present data to governmental
authorities pertaining to potential adverse impact of a proposed project. Compliance with these regulatory requirements
may be expensive and may significantly lengthen the time required to prepare applications and to receive authorizations
and consequently could disrupt Enable’s project construction schedules;
• Hydraulic Fracturing Regulation: Increased regulation of hydraulic fracturing and waste water injection wells could result
in reductions or delays in natural gas or crude oil production by Enable’s customers, which could adversely affect its
financial position, results of operations and ability to make cash distributions; and
•
Jurisdictional Characterization of Assets: Enable’s natural gas gathering and intrastate transportation systems are generally
exempt from the jurisdiction of the FERC under the NGA, and its crude oil gathering system in the Anadarko Basin is
generally exempt from the jurisdiction of the FERC under ICA. FERC regulation may indirectly impact these businesses
and the markets for products derived from these businesses. Natural gas gathering and intrastate crude oil gathering may
receive greater regulatory scrutiny at the state level; therefore, Enable’s operations could be adversely affected should
they become subject to the application of state regulation of rates and services. A change in the jurisdictional
characterization of some of Enable’s assets by federal, state or local regulatory agencies or a change in policy by those
agencies may result in increased regulation of its assets, which may cause its revenues to decline and operating expenses
to increase.
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Other Risk Factors Affecting Our Businesses or CenterPoint Energy’s Interests in Enable Midstream Partners, LP
The success of the Merger depends, in part, on CenterPoint Energy’s ability to realize anticipated benefits and conduct an
effective integration process.
The success of the Merger will depend, in part, on CenterPoint Energy’s ability to realize the expected benefits in the anticipated
timeframe, including operating efficiencies, growth opportunities, cost savings and customer retention, from integrating
CenterPoint Energy’s and Vectren’s businesses, while at the same time continuing to provide consistent, high quality services. The
integration process could be complex, costly and time consuming, including the diversion of significant management time and
resources thereto, and may result in the following challenges, among others:
•
•
•
•
unanticipated delays, disruptions, issues or costs in integrating operations, financial and accounting, information
technology, communications and other systems;
potential inconsistencies in procedures, practices, policies, controls, and standards;
possible differences in compensation arrangements, management perspectives and corporate culture; and
loss of or difficulties retaining talented employees or valuable third-party relationships.
CenterPoint Energy must also successfully integrate its systems of internal controls to accurately provide reliable financial
reports, including reporting of its financial condition, results of operations or cash flows, effectively prevent fraud and operate
successfully as a public company. If CenterPoint Energy’s efforts to integrate and maintain an effective system of internal controls
are not successful, it is unable to maintain adequate controls over its financial reporting and processes in the future or it is unable
to comply with its obligations under Section 404 of the Sarbanes-Oxley Act of 2002, CenterPoint Energy’s operating results could
be harmed or it may fail to meet its reporting obligations. Ineffective internal controls also could cause investors to lose confidence
in CenterPoint Energy’s reported financial information, which would likely have a negative effect on the trading prices of its
securities.
Even with the successful integration of the businesses, CenterPoint Energy may not achieve the expected results or economic
benefits, including any expected revenue or synergy opportunities. Failure to fully realize the anticipated benefits could adversely
affect CenterPoint Energy’s results of operations, financial condition and cash flows and have a negative effect on the trading
prices of its securities.
Cyber-attacks, physical security breaches, acts of terrorism or other disruptions could adversely impact our or Enable’s
reputation, results of operations, financial condition and/or cash flows.
We and Enable are subject to cyber and physical security risks related to adversaries attacking information technology systems,
network infrastructure, technology and facilities used to conduct almost all of our and Enable’s business, which includes, among
other things, (i) managing operations and other business processes and (ii) protecting sensitive information maintained in the
normal course of business. For example, the operation of our electric transmission and distribution system is dependent on not
only physical interconnection of our facilities but also on communications among the various components of our system. This
reliance on information and communication between and among those components has increased since deployment of smart meters
and the intelligent grid. Further, certain of the various internal systems we use to conduct our businesses are highly integrated.
Consequently, a cyber-attack or unauthorized access in any one of these systems could potentially impact the other systems.
Similarly, our and Enable’s business operations are interconnected with external networks and facilities. The distribution of
natural gas to our customers requires communications with Enable’s pipeline facilities and third-party systems. The gathering,
processing and transportation of natural gas from Enable’s gathering, processing and pipeline facilities and crude oil gathering
pipeline systems also rely on communications among its facilities and with third-party systems that may be delivering natural gas
or crude oil into or receiving natural gas or crude oil and other products from Enable’s facilities. Disruption of those communications,
whether caused by physical disruption such as storms or other natural disasters, by failure of equipment or technology or by
manmade events, such as cyber-attacks or acts of terrorism, may disrupt our or Enable’s ability to conduct operations and control
assets.
Cyber-attacks and unauthorized access could also result in the loss, or unauthorized use, of confidential, proprietary or critical
infrastructure data or security breaches of other information technology systems that could disrupt operations and critical business
functions, adversely affect reputation, increase costs and subject us or Enable to possible legal claims and liability. Further, third
parties, including vendors, suppliers and contractors, who perform certain services for us or administer and maintain our sensitive
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information, could also be targets of cyber-attacks and unauthorized access. Neither we nor Enable is fully insured against all
cyber-security risks, any of which could adversely affect our reputation and could have a material adverse effect on either our or
Enable’s results of operations, financial condition and/or cash flows.
As domestic and global cyber threats are on-going and increasing in sophistication, magnitude and frequency, our and Enable’s
critical energy infrastructure may be targets of terrorist activities or otherwise that could disrupt our respective business operations.
Any such disruptions could result in significant costs to repair damaged facilities and implement increased security measures,
which could have a material adverse effect on either our or Enable’s results of operations, financial condition and/or cash flows.
Failure to maintain the security of personally identifiable information could adversely affect us.
In connection with our business we and our vendors, suppliers and contractors collect and retain personally identifiable
information (e.g., information of our customers, shareholders, suppliers and employees), and there is an expectation that we and
such third parties will adequately protect that information. The U.S. regulatory environment surrounding information security and
privacy is increasingly demanding. New laws and regulations governing data privacy and the unauthorized disclosure of confidential
information, including recent California legislation, pose increasingly complex compliance challenges and potentially elevate our
costs. Any failure by us to comply with these laws and regulations, including as a result of a security or privacy breach, could
result in significant penalties and liabilities for us. A significant theft, loss or fraudulent use of the personally identifiable information
we maintain or failure of our vendors, suppliers and contractors to use or maintain such data in accordance with contractual
provisions could adversely impact our reputation and could result in significant costs, fines, litigation. Additionally, if we acquire
a company that has violated or is not in compliance with applicable data protection laws, we may incur significant liabilities and
penalties as a result.
We are subject to operational and financial risks and liabilities arising from environmental laws and regulations.
Our operations and the operations of Enable are subject to stringent and complex laws and regulations pertaining to the
environment. As an owner or operator of natural gas pipelines, distribution systems and storage, electric generating facilities and
electric transmission and distribution systems, and the facilities that support these systems, we must comply with these laws and
regulations at the federal, state and local levels. These laws and regulations can restrict or impact our business activities in many
ways, such as:
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restricting the way we manage hazardous and non-hazardous wastes;
limiting or prohibiting construction activities in sensitive areas such as wetlands, coastal regions, or areas inhabited by
endangered species;
requiring remedial action and monitoring to mitigate environmental conditions caused by our operations, or attributable
to former operations;
limiting airborne emissions from electric generating facilities, including particulate matter, sulfur dioxide (SO2), nitrogen
oxides (NOx) and mercury, and the disposal non-hazardous substances such as coal combustion residuals, among others;
enjoining the operations of facilities with permits issued pursuant to such environmental laws and regulations; and
impacting the demand for our services by directly or indirectly affecting the use or price of natural gas.
To comply with these requirements, we may need to spend substantial amounts and devote other resources from time to time
to:
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construct or acquire new facilities and equipment;
acquire permits for facility operations;
future operations. Certain environmental statutes impose strict joint and several liability for costs required to clean, restore and
monitor sites where hazardous substances have been stored, disposed or released. Moreover, it is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of
hazardous substances or other waste products into the environment.
In April 2015, the EPA finalized its CCR Rule, which regulates ash as non-hazardous material under the RCRA. Under the
CCR Rule, Indiana Electric is required to complete integrity assessments and groundwater monitoring studies. In January 2018,
Indiana Electric completed its first annual groundwater monitoring and corrective action report. This report identified localized
impacts to groundwater near Indiana Electric’s coal impoundments. Further analysis is ongoing. In October 2018, Indiana Electric
completed the CCR Rule’s required evaluation of the placement of Indiana Electric’s coal ash ponds relative to the uppermost
aquifer. This evaluation indicated that Indiana Electric must cease placing materials into the ash ponds by October 31, 2020 and
initiate closure of the ponds thereafter. However, the October 2020 closure deadline, which resulted from a July 2018 amendment
to the CCR Rule, is being challenged in the D.C. Circuit. Were the July 2018 amendment vacated, the deadline for Indiana Electric
to cease placing materials into the ash ponds and initiate closure could revert to the original April 2019 deadline. However, the
CCR Rule allows for a pond to continue receiving materials beyond the deadline for closure upon certification that there is an
absence of alternative disposal capacity. Indiana Electric plans to seek such an extension that would allow it to continue to use
the ponds through completion of the generation transition plans by December 31, 2023. Failure to obtain this extension may result
in increased and potentially significant operational costs in connection with the accelerated implementation of an alternative ash
disposal system or adversely impact Indiana Electric’s future operations. Failure to comply with these requirements could also
result in an enforcement proceeding including imposition of fines and penalties. Further, a release of coal ash that presents an
imminent and substantial endangerment to health of the environment could result in remediation costs, civil and/or criminal
penalties, claims, litigation, increased regulation and compliance costs and reputational damage, all of which could adversely
affect the financial condition of Indiana Electric.
The recent trend in environmental regulation has been to place more restrictions and limitations on activities that may impact
the environment, and thus there can be no assurance as to the amount or timing of future expenditures for environmental compliance
or remediation, and actual future expenditures may be greater than the amounts we currently anticipate.
Our insurance coverage may not be sufficient. Insufficient insurance coverage and increased insurance costs could adversely
impact our results of operations, financial condition and cash flows.
We currently have general liability and property insurance in place to cover certain of our facilities in amounts that we consider
appropriate. Such policies are subject to certain limits and deductibles and do not include business interruption coverage. Insurance
coverage may not be available in the future at current costs or on commercially reasonable terms, and the insurance proceeds
received for any loss of, or any damage to, any of our facilities may not be sufficient to restore the loss or damage without negative
impact on our results of operations, financial condition and cash flows.
In common with other companies in its line of business that serve coastal regions, Houston Electric does not have insurance
covering its transmission and distribution system, other than substations, because Houston Electric believes it to be cost prohibitive
and believes insurance capacity to be limited. Historically, Houston Electric has been able to recover the costs incurred in restoring
its transmission and distribution properties following hurricanes or other disasters through issuance of storm restoration bonds or
a change in its regulated rates or otherwise. In the future, any such recovery may not be granted. Therefore, Houston Electric may
not be able to restore any loss of, or damage to, any of its transmission and distribution properties without negative impact on its
results of operations, financial condition and cash flows.
Enable is not fully insured against all risks inherent in its business. Enable currently has general liability and property insurance
in place to cover certain of its facilities in amounts that Enable considers appropriate. Such policies are subject to certain limits
and deductibles. Enable does not have business interruption insurance coverage for all of its operations. Insurance coverage may
not be available in the future at current costs or on commercially reasonable terms, and the insurance proceeds received for any
loss of, or any damage to, any of Enable’s facilities may not be sufficient to restore the loss or damage without negative impact
on its results of operations and its ability to make cash distributions.
Our operations and Enable’s operations are subject to all of the risks and hazards inherent in the gathering, processing,
• modify or replace existing and proposed equipment; and
transportation and storage of natural gas and crude oil, including:
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decommission or remediate waste management areas, fuel storage facilities and other locations.
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damage to pipelines and plants, related equipment and surrounding properties caused by hurricanes, tornadoes, floods,
fires, earthquakes and other natural disasters, acts of terrorism and actions by third parties;
Failure to comply with these laws and regulations may trigger a variety of administrative, civil and criminal enforcement
measures, including the assessment of monetary penalties, the imposition of remedial actions, and the issuance of orders enjoining
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inadvertent damage from construction, vehicles and farm and utility equipment;
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leaks of natural gas, NGLs, crude oil and other hydrocarbons or losses of natural gas, NGLs and crude oil as a result of
the malfunction of equipment or facilities;
ruptures, fires and explosions; and
other hazards that could also result in personal injury and loss of life, pollution and suspension of operations.
These risks could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of
property, plant and equipment and pollution or other environmental damage. These risks may also result in curtailment or suspension
of our or Enable’s operations. A natural disaster or other hazard affecting the areas in which we or Enable operate could have a
material adverse effect on our or Enable’s operations.
The Registrants could incur liabilities associated with businesses and assets that they have transferred to others.
Under some circumstances, the Registrants could incur liabilities associated with assets and businesses no longer owned by
them. These assets and businesses were previously owned by Reliant Energy, a predecessor of Houston Electric, directly or through
subsidiaries and include:
• merchant energy, energy trading and REP businesses transferred to RRI or its subsidiaries in connection with the
organization and capitalization of RRI prior to its initial public offering in 2001 and now owned by affiliates of NRG;
and
• Texas electric generating facilities transferred to a subsidiary of Texas Genco in 2002, later sold to a third party and now
owned by an affiliate of NRG.
In connection with the organization and capitalization of RRI (now GenOn) and Texas Genco (now an affiliate of NRG),
those companies and/or their subsidiaries assumed liabilities associated with various assets and businesses transferred to them and
agreed to certain indemnity agreements of the Registrants. Such indemnities have applied in various asbestos and other
environmental matters that arise from time to time and cases such as the litigation arising out of sales of natural gas in California
and other markets (further appellate review of the last remaining case involving CES, a subsidiary of CERC Corp., has been stayed
pending approval of a settlement agreement following the Ninth Court of Appeals’ reversal in August 2018 of the district court’s
grant of summary judgment in favor of CES). In June 2017, GenOn and various affiliates filed for protection under Chapter 11 of
the U.S. Bankruptcy Code. CenterPoint Energy, CERC and CES submitted proofs of claim in the bankruptcy proceedings to protect
their indemnity rights. In October 2018, CES, GenOn, and the plaintiffs reached an agreement to settle all claims against CES and
CES’s indemnity claims against GenOn, subject to approvals by the bankruptcy court and the federal district court. In December
2018, GenOn completed its reorganization and emerged from Chapter 11, and in January 2019, the bankruptcy court approved
the settlement between CES and GenOn. If the settlement agreement between CES, GenOn and the plaintiffs is not approved by
the federal district court, CES could incur liability and be responsible for satisfying it.
In connection with our sale of Texas Genco, the separation agreement was amended to provide that Texas Genco would no
longer be liable for, and CenterPoint Energy would assume and agree to indemnify Texas Genco against, liabilities that Texas
Genco originally assumed in connection with its organization to the extent, and only to the extent, that such liabilities are covered
by certain insurance policies held by CenterPoint Energy, and in certain of the asbestos lawsuits CenterPoint Energy has agreed
to continue to defend such claims to the extent they are covered by insurance maintained by CenterPoint Energy, subject to
reimbursement of the costs of such defense by an NRG affiliate.
Our results of operations, financial condition and cash flows may be adversely affected if we are unable to successfully
operate our facilities or perform certain corporate functions.
Our performance depends on the successful operation of our facilities. Operating these facilities involves many risks, including:
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operator error or failure of equipment or processes, including failure to follow appropriate safety protocols;
the handling of hazardous equipment or materials that could result in serious personal injury, loss of life and environmental
and property damage;
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operating limitations that may be imposed by environmental or other regulatory requirements;
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labor disputes;
information technology or financial system failures, including those due to the implementation and integration of new
technology, that impair our information technology infrastructure, reporting systems or disrupt normal business
operations;
information technology failure that affects our ability to access customer information or causes us to lose confidential or
proprietary data that materially and adversely affects our reputation or exposes us to legal claims; and
catastrophic events such as fires, earthquakes, explosions, leaks, floods, droughts, hurricanes, terrorism, pandemic health
events or other similar occurrences, which may require participation in mutual assistance efforts by us or other utilities
to assist in power restoration efforts.
Such events may result in a decrease or elimination of revenue from our facilities, an increase in the cost of operating our
facilities or delays in cash collections, any of which could have a material adverse effect on our results of operations, financial
condition and/or cash flows.
Our and Enable’s success depends upon our and Enable’s ability to attract, effectively transition, motivate and retain key
employees and identify and develop talent to succeed senior management.
We and Enable depend on senior executive officers and other key personnel. Our and Enable’s success depends on our and
Enable’s ability to attract, effectively transition and retain key personnel. The inability to recruit and retain or effectively transition
key personnel or the unexpected loss of key personnel may adversely affect our and Enable’s operations. In addition, because of
the reliance on our and Enable’s management team, our and Enable’s future success depends in part on our and Enable’s ability
to identify and develop talent to succeed senior management. The retention of key personnel and appropriate senior management
succession planning will continue to be critically important to the successful implementation of our and Enable’s strategies.
Failure to attract and retain an appropriately qualified workforce could adversely impact our and Enable’s results of
operations.
Our and Enable’s businesses are dependent on recruiting, retaining and motivating employees. Certain circumstances, such
as an aging workforce without appropriate replacements, a mismatch of existing skillsets to future needs, or the unavailability of
contract resources may lead to operating challenges such as a lack of resources, loss of knowledge or a lengthy time period
associated with skill development. Our and Enable’s costs, including costs to replace employees, productivity costs and safety
costs, may rise. Failure to hire and adequately train replacement employees, including the transfer of significant internal historical
knowledge and expertise to the new employees, or the future availability and cost of contract labor may adversely affect the ability
to manage and operate our and Enable’s businesses. If we and Enable are unable to successfully attract and retain an appropriately
qualified workforce, our and Enable’s results of operations could be negatively affected.
Climate change legislation and regulatory initiatives could result in increased operating costs and reduced demand for our
or Enable’s services.
Regulatory agencies have from time to time considered adopting new legislation and/or modifying existing laws and
regulations, to reduce GHGs, and there continues to be a wide-ranging policy and regulatory debate, both nationally and
internationally, regarding the potential impact of GHGs and possible means for their regulation. Efforts have been made and
continue to be made in the international community toward the adoption of international treaties or protocols that would address
global climate change issues.
Due to the electric generating facilities acquired in the Merger, CenterPoint Energy is subject to the requirements of the CPP,
which requires a 32% reduction in carbon emissions from 2005 levels. While implementation of the CPP remains uncertain due
to the February 2016 U.S. Supreme Court stay delaying implementation during court challenges and an October 2017 proposed
rule from the EPA which, if finalized, would result in the CPP’s repeal, as written the CPP may substantially affect both the costs
and operating characteristics of CenterPoint Energy’s fossil fuel generating plants and NGD business. In August 2018, the EPA
proposed a CPP replacement rule, the Affordable Clean Energy (ACE) rule, which, if finalized could similarly impact the costs
of CenterPoint Energy’s fossil fuel generating plants. In addition to regulatory risk, we may be subject to climate change lawsuits
which could result in substantial penalties or damages. Moreover, evolving investor sentiment related to the use of fossil fuels and
initiatives to restrict continued production of fossil fuels may have substantial impacts on CenterPoint Energy’s electric generation
and NGD businesses.
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Following a finding by the EPA that certain GHGs represent an endangerment to human health, the EPA adopted two sets of
rules regulating GHG emissions under the Clean Air Act, one that requires a reduction in emissions of GHGs from motor vehicles
and another that regulates emissions of GHGs from certain large stationary sources. The EPA has also expanded its existing GHG
emissions reporting requirements. These permitting and reporting requirements could lead to further regulation of GHGs by the
EPA. As a distributor and transporter of natural gas, or a consumer of natural gas in its pipeline and gathering businesses, NGD’s
or Enable’s revenues, operating costs and capital requirements, as applicable, could be adversely affected as a result of any
regulatory action that would require installation of new control technologies or a modification of its operations or would have the
effect of reducing the consumption of natural gas. Further, Indiana Electric’s current generating facilities substantially rely on coal
for their operations. Additionally, Houston Electric’s and Indiana Electric’s transmission and distribution businesses’ revenues
could be adversely affected to the extent any resulting regulatory action has the effect of reducing consumption of electricity by
ultimate consumers within its service territory. Likewise, incentives to conserve energy or use energy sources other than natural
gas could result in a decrease in demand for our services.
Climate changes could adversely impact financial results from our and Enable’s businesses and result in more frequent and
more severe weather events which could adversely affect the results of operations of our businesses.
A changing climate creates uncertainty and could result in broad changes, both physical and financial in nature, to our service
territories. If climate changes occur that result in warmer temperatures in our service territories, financial results from our and
Enable’s businesses could be adversely impacted. For example, NGD could be adversely affected through lower natural gas sales
and Enable’s natural gas gathering, processing and transportation and crude oil gathering businesses could experience lower
revenues. Another possible result of climate change is more frequent and more severe weather events, such as hurricanes, tornadoes
or ice storms. Since many of our facilities are located along or near the Gulf Coast, increased or more severe hurricanes or tornadoes
could increase our costs to repair damaged facilities and restore service to our customers. When we cannot deliver electricity or
natural gas to customers or our customers cannot receive our services, our financial results can be impacted by lost revenues, and
we generally must seek approval from regulators to recover restoration costs. To the extent we are unable to recover those costs,
or if higher rates resulting from our recovery of such costs result in reduced demand for our services, our future financial results
may be adversely impacted. Decreased energy use may also require us to retire current infrastructure that is no longer needed.
We are uncertain how state commissions and local municipalities may require us to respond to the effects of the TCJA, and
these regulatory requirements may adversely affect our results of operations, financial condition and cash flows.
On December 22, 2017, President Trump signed into law the TCJA, which resulted in significant changes to federal tax laws
effective January 1, 2018, including, but not limited to, a reduction in the corporate income tax rate.
For Houston Electric, Indiana Electric and NGD, federal income tax expense is included in the rates approved by state
commissions and local municipalities and charged by those utilities to consumers. When Houston Electric, Indiana Electric and
NGD have general rate cases and other periodic rate adjustments, we expect the lower corporate tax expense resulting from the
TCJA (which includes determining the treatment of EDIT), along with other increases and decreases in our revenue requirements,
to be incorporated into Houston Electric’s, Indiana Electric’s and NGD’s future rates. Nevertheless, regulators may require us to
respond to the TCJA in other ways, including through faster recoveries of reductions in federal income tax expense, accounting
orders to reflect a liability to return to customers in future rate proceedings, accelerated returns to consumers of previously collected
deferred federal income taxes, increased funding of infrastructure upgrades, or offsets of future rate increases. The effect on us
of any potential return of tax savings resulting from the TCJA to consumers may differ depending on how each regulatory body
requires us to return such savings. We can provide no assurances on how any regulatory body will ultimately require us to act. As
such, we are currently unable to determine the impact of these potential regulatory actions in response to the enactment of the
TCJA, which may adversely affect our results of operations, financial condition and cash flows. For further information, see
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources
— Regulatory Matters” in Item 7 of Part II of this report.
In addition, the TCJA also includes a variety of other changes, such as a limitation on the tax deductibility of interest expense
and acceleration of business asset expensing, among others. Several provisions of the TCJA are not generally applicable to the
public utility industry, including the limitation on the tax deductibility of interest expense and the acceleration of business asset
expensing. We continue to assess the impact that the TCJA may have on our future results of operations, financial condition and
cash flows, which impact may adversely affect our future results of operations, financial condition and cash flows.
NGD and Enable may incur significant costs and liabilities resulting from pipeline integrity and other similar programs and
related repairs.
Certain of NGD’s and Enable’s pipeline operations are subject to pipeline safety laws and regulations. The DOT’s PHMSA
has adopted regulations requiring pipeline operators to develop integrity management programs, including more frequent
inspections and other measures, for transportation pipelines located in “high consequence areas,” which are those areas where a
leak or rupture could do the most harm. The regulations require pipeline operators, including NGD and Enable, to, among other
things:
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perform ongoing assessments of pipeline integrity;
develop a baseline plan to prioritize the assessment of a covered pipeline segment;
identify and characterize applicable threats that could impact a high consequence area;
improve data collection, integration, and analysis;
develop processes for performance management, record keeping, management of change and communication;
repair and remediate pipelines as necessary; and
implement preventive and mitigating action.
Failure to comply with PHMSA or analogous state pipeline safety regulations could result in a number of consequences that
may have an adverse effect on NGD’s and Enable’s operations. Both NGD and Enable incur significant costs associated with their
compliance with existing PHMSA and comparable state regulations, which may not be recoverable in rates.
Changes to pipeline safety laws and regulations that result in more stringent or costly safety standards could have a significant
adverse effect on NGD and Enable. Changes to pipeline safety regulations occur frequently. For example, PHMSA is expected to
publish finalized regulations in 2019, for both natural gas and hazardous liquids pipelines, that will significantly extend and expand
the reach of certain PHMSA integrity management requirements (e.g., period assessments, leak detection and repairs) regardless
of proximity to a high consequence area. The final rules may also impose new requirements for certain unregulated pipelines,
including gathering lines. The adoption of new regulations requiring more comprehensive or stringent safety standards could
require us to install new or modified safety controls, pursue new capital projects, or conduct maintenance programs on an accelerated
basis, all of which could require us and Enable to incur increased and potentially significant operational costs.
Aging infrastructure may lead to increased costs and disruptions in operations that could negatively impact our financial
results.
We have risks associated with aging infrastructure assets. The age of certain of our assets may result in a need for
replacement, or higher level of maintenance costs as a result of our risk based federal and state compliant integrity management
programs. Failure to achieve timely recovery of these expenses could adversely impact revenues and could result in increased
capital expenditures or expenses. Further, with respect to NGD’s operations, if certain pipeline replacements (for example, cast-
iron or bare steel pipe) are not completed timely or successfully, government agencies and private parties might allege the
uncompleted replacements caused events such as fires, explosions or leaks. Although we maintain insurance for certain of our
facilities, our insurance coverage may not be sufficient in the event that a catastrophic loss is alleged to have been caused by a
failure to timely complete equipment replacements. Insufficient insurance coverage and increased insurance costs could adversely
impact our results of operations, financial condition and cash flows.
The operation of our facilities depends on good labor relations with our employees.
Several of our businesses have entered into and have in place collective bargaining agreements with different labor unions.
We have several separate bargaining units, each with a unique collective bargaining agreement described below:
• The collective bargaining agreement with IBEW Local 66 related to employees of Houston Electric is scheduled to expire
in May 2020;
• The collective bargaining agreements with USW Locals 13-227 and 13-1 related to NGD’s employees in Texas are
scheduled to expire in June 2022 and July 2022, respectively;
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• The collective bargaining agreements with Gas Workers Union Local 340, IBEW Local 949 and OPEIU Local 12 and
Mankato related to NGD employees in Minnesota are scheduled to expire in April 2020, December 2020, May 2021 and
March 2021, respectively;
• The collective bargaining agreements with IBEW Local 1393, USW Locals 12213 and 7441 related to employees of
NGD in Indiana are scheduled to expire in December 2020;
• The collective bargaining agreements with the Teamsters, Chauffeurs, Warehousemen and Helpers Union Local 135 and
Utility Workers Union Local 175 related to employees of Indiana Electric were recently renegotiated and are scheduled
to expire in September 2021 and October 2021, respectively; and
• The collective bargaining agreement with IBEW Local 702 related to employees of Indiana Electric was scheduled to
expire in June 2019 but was renegotiated in January 2019 with the ratification of a new three-year labor agreement.
Additionally, Infrastructure Services negotiates various trade agreements through contractor associations. The two primary
associations are the DCA and the PLCA. These trade agreements are with a variety of construction unions including Laborer’s
International Union of North America, International Union of Operating Engineers, United Association of Journeymen and
Apprentices of the Plumbing and Pipe Fitting Industry, and Teamsters. The trade agreements have varying expiration dates in
2020, 2021 and 2022. In addition, these subsidiaries have various project agreements and small local agreements. These agreements
expire upon completion of a specific project or on various dates throughout the year.
Any failure to reach an agreement on new labor contracts or to negotiate these labor contracts might result in strikes, boycotts
or other labor disruptions. These potential labor disruptions could have a material adverse effect on our businesses, results of
operations and/or cash flows. Labor disruptions, strikes or significant negotiated wage and benefit increases, whether due to union
activities, employee turnover or otherwise, could have a material adverse effect on our businesses, results of operations and/or
cash flows.
Our businesses will continue to have to adapt to technological change and may not be successful or may have to incur
significant expenditures to adapt to technological change.
We operate in businesses that require sophisticated data collection, processing systems, software and other technology. Some
of the technologies supporting the industries we serve are changing rapidly and increasing in complexity. New technologies will
emerge or grow that may be superior to, or may not be compatible with, some of our existing technologies, and may require us to
make significant expenditures so that we can continue to provide cost-effective and reliable methods for energy production and
delivery. Among such technological advances are distributed generation resources (e.g., private solar, microturbines, fuel cells),
energy storage devices and more energy-efficient buildings and products designed to reduce consumption. As these technologies
become a more cost-competitive option over time, whether through cost effectiveness or government incentives and subsidies,
certain customers may choose to meet their own energy needs and subsequently decrease usage of our systems and services.
Further, certain regulatory and legislative bodies have introduced or are considering requirements and/or incentives to reduce
energy consumption by certain dates. Additionally, technological advances driven by federal laws mandating new levels of energy
efficiency in end-use electric and natural gas devices or other improvements in or applications of technology could lead to declines
in per capita energy consumption.
Our future success will depend, in part, on our ability to anticipate and adapt to these technological changes in a cost-effective
manner and to offer, on a timely basis, reliable services that meet customer demands and evolving industry standards. If we fail
to adapt successfully to any technological change or obsolescence, fail to obtain access to important technologies or incur significant
expenditures in adapting to technological change, or if implemented technology does not operate as anticipated, our businesses,
operating results, financial condition and cash flows could be materially and adversely affected.
Our or Enable’s potential business strategies and strategic initiatives, including merger and acquisition activities and the
disposition of assets or businesses, may not be completed or perform as expected.
From time to time, we and Enable have made and may continue to make acquisitions or divestitures of businesses and assets,
form joint ventures or undertake restructurings. However, suitable acquisition candidates or potential buyers may not continue
to be available on terms and conditions we or Enable, as the case may be, find acceptable, or the expected benefits of completed
acquisitions may not be realized fully or at all, or may not be realized in the anticipated timeframe. If we or Enable are unable to
make acquisitions or if those acquisitions do not perform as anticipated, our and Enable’s future growth may be adversely affected.
Any completed or future acquisitions involve substantial risks, including the following:
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acquired businesses or assets may not produce revenues, earnings or cash flow at anticipated levels;
acquired businesses or assets could have environmental, permitting or other problems for which contractual protections
prove inadequate;
• we or Enable may assume liabilities that were not disclosed to us, that exceed our estimates, or for which our rights to
indemnification from the seller are limited;
• we or Enable may be unable to integrate acquired businesses successfully and realize anticipated economic, operational
and other benefits in a timely manner, which could result in substantial costs and delays or other operational, technical
or financial problems; and
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acquisitions, or the pursuit of acquisitions, could disrupt our or Enable’s ongoing businesses, distract management, divert
resources and make it difficult to maintain current business standards, controls and procedures.
We are involved in numerous legal proceedings, the outcomes of which are uncertain, and resolutions adverse to us could
negatively affect our financial results.
The Registrants are subject to numerous legal proceedings, the most significant of which are summarized in Note 16 to the
Registrants’ respective consolidated financial statements.
With respect to the Merger, in July 2018, seven separate lawsuits were filed against Vectren and the individual directors of
Vectren’s Board of Directors in the U.S. District Court for the Southern District of Indiana. These lawsuits allege violations of
Sections 14(a) of the Exchange Act and SEC Rule 14a-9 on the grounds that the Proxy Statement filed on June 18, 2018 was
materially incomplete because it omitted material information concerning the Merger. The lawsuits also seek certification as class
actions. In August 2018, the seven lawsuits were consolidated, and the Court denied the plaintiffs’ request for a preliminary
injunction. The plaintiffs filed their Consolidated Amended Class Action Complaint on October 29, 2018, which Defendants have
moved to dismiss and which motion remains pending. On December 28, 2018, two plaintiffs voluntarily dismissed their lawsuits.
The defendants believe that the allegations asserted are without merit and intend to vigorously defend themselves against the
claims raised.
Litigation is subject to many uncertainties, and the Registrants cannot predict the outcome of all matters with assurance. Final
resolution of these matters may require additional expenditures over an extended period of time that may be in excess of established
insurance or reserves and may have a material adverse effect on the Registrants’ financial results.
We are exposed to risks related to reduction in energy consumption due to factors including unfavorable economic conditions
in our service territories.
Our businesses are affected by reduction in energy consumption due to factors including economic climate in our service
territories, energy efficiency initiatives and use of alternative technologies, which could impact our ability to grow our customer
base and our rate of growth. Growth in customer accounts and growth of customer usage each directly influence demand for
electricity and the need for additional delivery facilities. Customer growth and customer usage are affected by a number of factors
outside our control, such as mandated energy efficiency measures, demand-side management goals, distributed generation resources
and economic and demographic conditions, such as population changes, job and income growth, housing starts, new business
formation and the overall level of economic activity.
Declines in demand for electricity as a result of economic downturns in Houston Electric’s and Indiana Electric’s regulated
electric service territories will reduce overall sales and lessen cash flows, especially as industrial customers reduce production
and, therefore, consumption of electricity. Although Houston Electric’s and Indiana Electric’s transmission and distribution
businesses are subject to regulated allowable rates of return and recovery of certain costs under periodic adjustment clauses, overall
declines in electricity sold as a result of economic downturn or recession could reduce revenues and cash flows, thereby diminishing
results of operations. Additionally, prolonged economic downturns that negatively impact results of operations and cash flows
could result in future material impairment charges to write-down the carrying value of certain assets, including goodwill, to their
respective fair values.
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For example, Houston Electric’s business is largely concentrated in Houston, Texas, where a higher percentage of employment
is tied to the energy sector relative to other regions of the country. Although Houston, Texas has a diverse economy, employment
in the energy industry remains important with overall Houston employment growing at a moderate rate in 2018. Further, the
operations of Vectren’s utility businesses are concentrated in central and southern Indiana and west-central Ohio and are therefore
impacted by changes in the Midwest economy in general and changes in particular industries concentrated in the Midwest. These
industries include automotive assembly, parts and accessories; feed, flour and grain processing; metal castings, plastic products;
gypsum products; electrical equipment, metal specialties, glass and steel finishing; pharmaceutical and nutritional products;
gasoline and oil products; ethanol; and coal mining.
In the event economic conditions further decline, the respective rates of growth in Houston, Indiana and the other areas in
which we operate may also deteriorate. Changing market conditions, including changing regulation, changes in market prices of
oil or other commodities, or changes in government regulation and assistance, may cause certain industrial customers to reduce
or cease production and thereby decrease consumption of natural gas and/or electricity. Increases in customer defaults or delays
in payment due to liquidity constraints could negatively impact our cash flows and financial condition. Some or all of these factors,
could result in a lack of growth or decline in customer demand for electricity or number of customers, and may result in our failure
to fully realize anticipated benefits from significant capital investments and expenditures, which could have a material adverse
effect on their financial position, results of operations and cash flows.
Our businesses may be adversely affected by the intentional misconduct of our employees.
We are committed to living our core values of safety, integrity, accountability, initiative and respect and complying with all
applicable laws and regulations. Despite that commitment and our efforts to prevent misconduct, it is possible for employees to
engage in intentional misconduct, fail to uphold our core values, and violate laws and regulations for individual gain through
contract or procurement fraud, misappropriation, bribery or corruption, fraudulent related-party transactions and serious breaches
of our Ethics and Compliance Code and Standards of Conduct/Business Ethics policy, among other policies. If such intentional
misconduct by employees should occur, it could result in substantial liability, higher costs, increased regulatory scrutiny and
negative public perceptions, any of which could have a material adverse effect on our results of operations, financial condition
and cash flows.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
The following discussion is based on the Registrants’ businesses and equity method investment as of December 31, 2018 and
does not include Vectren and its subsidiaries.
Character of Ownership
Midstream Investments (CenterPoint Energy)
For information regarding the properties of the Midstream Investments reportable segment, please read “Business — Our
Business — Midstream Investments” in Item 1 of this report, which information is incorporated herein by reference.
Other Operations (CenterPoint Energy and CERC)
For information regarding the properties of the Other Operations reportable segment, please read “Business — Our Business —
Other Operations” in Item 1 of this report, which information is incorporated herein by reference.
Item 3.
Legal Proceedings
For a discussion of material legal and regulatory proceedings affecting the Registrants as of December 31, 2018, please read
“Business — Regulation” and “Business — Environmental Matters” in Item 1 of this report, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Regulatory Matters” in Item 7
of this report and Note 16(d) to the consolidated financial statements, which information is incorporated herein by reference.
Item 4.
Mine Safety Disclosures
Not applicable.
PART II
This combined Form 10-K is filed separately by three registrants: CenterPoint Energy, Houston Electric and CERC.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
CenterPoint Energy
As of February 12, 2019, CenterPoint Energy’s common stock was held by approximately 28,987 shareholders of record.
CenterPoint Energy’s common stock is listed on the NYSE and Chicago Stock Exchange and is traded under the symbol “CNP.”
The amount of future cash dividends will be subject to determination based upon CenterPoint Energy’s results of operations
and financial condition, future business prospects, any applicable contractual restrictions and other factors that CenterPoint Energy’s
Board of Directors considers relevant and will be declared at the discretion of CenterPoint Energy’s Board of Directors. For further
information on CenterPoint Energy’s dividends, see Note 13 to the consolidated financial statements.
Repurchases of Equity Securities
We lease or own our principal properties in fee, including our corporate office space and various real property. Most of our
electric lines and natural gas mains are located, pursuant to easements and other rights, on public roads or on land owned by others.
During the quarter ended December 31, 2018, none of CenterPoint Energy’s equity securities registered pursuant to Section 12
of the Securities Exchange Act of 1934 were purchased by or on behalf of CenterPoint Energy or any “affiliated purchasers,” as
defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934.
Electric Transmission & Distribution (CenterPoint Energy and Houston Electric)
Houston Electric
For information regarding the properties of the Electric Transmission & Distribution reportable segment, please read
“Business — Our Business — Electric Transmission & Distribution — Properties” in Item 1 of this report, which information is
incorporated herein by reference.
As of February 12, 2019, all of Houston Electric’s 1,000 outstanding common shares are held by Utility Holding, LLC, a
wholly-owned subsidiary of CenterPoint Energy.
Natural Gas Distribution (CenterPoint Energy and CERC)
For information regarding the properties of the Natural Gas Distribution reportable segment, please read “Business — Our
Business — Natural Gas Distribution — Assets” in Item 1 of this report, which information is incorporated herein by reference.
Energy Services (CenterPoint Energy and CERC)
For information regarding the properties of the Energy Services reportable segment, please read “Business — Our Business —
Energy Services — Assets” in Item 1 of this report, which information is incorporated herein by reference.
CERC
As of February 12, 2019, all of CERC Corp.’s 1,000 outstanding shares of common stock are held by Utility Holding, LLC,
a wholly-owned subsidiary of CenterPoint Energy.
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Item 6. Selected Financial Data (CenterPoint Energy)
The following table presents selected financial data with respect to CenterPoint Energy’s consolidated financial condition and
consolidated results of operations and should be read in conjunction with CenterPoint Energy’s consolidated financial statements
and the related notes in Item 8 of this report.
Year Ended December 31,
2018
2017
2016
2015
2014
(in millions, except per share amounts)
Revenues ................................................................................................. $ 10,589
$
9,614
$
7,528
$
7,386
$
9,226
Equity in earnings (losses) of unconsolidated affiliates, net...................
Income (loss) available to common shareholders...................................
Basic earnings (loss) per common share.................................................
Diluted earnings (loss) per common share..............................................
307
333
0.74
0.74
265
1,792
(1)
4.16
4.13
208
432
1.00
1.00
(1,663)
(2)
(692)
(1.61)
(1.61)
308
611
1.42
1.42
Cash dividends paid per common share.................................................. $
1.11
$
1.07
$
1.03
$
0.99
$
0.95
Dividend payout ratio .............................................................................
Return on average common equity .........................................................
150%
5%
26%
44%
103%
12%
n/a
(17)%
67%
14%
At year-end: ............................................................................................
Book value per common share............................................................. $
Market price per common share ..........................................................
16.08
28.23
$
10.88
28.36
$
8.04
24.64
$
8.05
18.36
$
10.58
23.43
Market price as a percent of book value ..............................................
176%
Percentage of common units owned representing limited partner
interests in Enable ...........................................................................
54.0%
Total assets (3) (4) .................................................................................. $ 27,009
—
Short-term borrowings .........................................................................
Securitization Bonds, including current maturities (3) .........................
Other long-term debt, including current maturities (3) .........................
Capitalization: ......................................................................................
1,435
7,729
Common stock equity ....................................................................
Long-term debt, including current maturities ................................
Capitalization, excluding Securitization Bonds:..................................
Common stock equity ....................................................................
Long-term debt, excluding Securitization Bonds, and including
current maturities.......................................................................
47%
53%
51%
49%
261%
54.1%
306%
54.1%
228 %
55.4 %
221%
55.4%
$ 22,736
$ 21,829
$ 21,290
$ 23,150
39
1,868
6,933
35%
65%
40%
60%
35
2,278
6,279
29%
71%
36%
64%
40
2,667
6,063
28 %
72 %
36 %
64 %
53
3,037
5,717
34%
66%
44%
56%
Capital expenditures............................................................................. $
1,720
$
1,494
$
1,406
$
1,575
$
1,402
(1) Net income for the year ended December 31, 2017 includes a reduction in income tax expense of $1,113 million due to
tax reform. See Note 15 to the consolidated financial statements for further discussion of the impacts of the TCJA
implementation.
(2) This amount includes $1,846 million of non-cash impairment charges related to Enable.
(3) Amounts for 2014 and 2015 have been recast to reflect adoption of ASU 2015-03.
(4) Total assets as of December 31, 2018 include cash and cash equivalents of $4.2 billion.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
No Registrant makes any representations as to the information related solely to CenterPoint Energy or the subsidiaries of
CenterPoint Energy other than itself.
The following combined discussion and analysis should be read in combination with the consolidated financial statements
included in Item 8 herein. When discussing CenterPoint Energy’s consolidated financial information, it includes the results of
Houston Electric and CERC, which, along with CenterPoint Energy, are collectively referred to as the Registrants. Where
appropriate, information relating to a specific registrant has been segregated and labeled as such. Unless the context indicates
otherwise, specific references to Houston Electric and CERC also pertain to CenterPoint Energy. In this combined Form 10-K,
the terms “our,” “we” and “us” are used as abbreviated references to CenterPoint Energy, Inc. together with its consolidated
subsidiaries.
Because the Merger closed after December 31, 2018, unless otherwise specifically indicated, the Registrants’ respective
consolidated financial statements and notes thereto and the discussion of the Registrants’ financial condition, results of operations,
tax payments and other financial and business-related information herein do not include or take into account Vectren and its
subsidiaries, the closing of the Merger and the effects of the Merger. See Note 4 to the consolidated financial statements for further
information related to the Merger.
Background
OVERVIEW
CenterPoint Energy, Inc. is a public utility holding company and owns interests in Enable as described below. CenterPoint
Energy’s operating subsidiaries, Houston Electric and CERC Corp., own and operate electric transmission and distribution and
natural gas distribution facilities and supply natural gas to commercial and industrial customers and electric and natural gas utilities.
• Houston Electric engages in the electric transmission and distribution business in the Texas Gulf Coast area that includes
the city of Houston; and
• CERC Corp. (i) owns and operates natural gas distribution systems in six states and (ii) 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 over 30 states through its wholly-owned subsidiary, CES.
As of December 31, 2018, CenterPoint Energy, indirectly through CNP Midstream, owned approximately 54.0% of the
common units representing limited partner interests in Enable, 50% of the management rights and 40% of the incentive distribution
rights in Enable GP and also directly owned an aggregate of 14,520,000 Enable Series A Preferred Units. Enable owns, operates
and develops natural gas and crude oil infrastructure assets.
On February 1, 2019, pursuant to the Merger Agreement, CenterPoint Energy consummated the previously announced Merger
and acquired Vectren for approximately $6 billion in cash. For further discussion of the Merger, see Note 4 to the consolidated
financial statements.
Reportable Segments
In this Management’s Discussion and Analysis, we discuss our results from continuing operations on a consolidated basis and
individually for each of our reportable segments, which are listed below. We also discuss our liquidity, capital resources and critical
accounting policies. We are first and foremost an energy delivery company and it is our intention to remain focused on these
segments of the energy business. The results of our business operations are significantly impacted by weather, customer growth,
economic conditions, cost management, competition, rate proceedings before regulatory agencies and other actions of the various
regulatory agencies to whose jurisdiction we are subject, among other factors.
• Electric transmission and distribution services are subject to rate regulation and are reported in the Electric Transmission &
Distribution reportable segment, as are impacts of generation-related stranded costs and other true-up balances recoverable
by the regulated electric utility. For further information about the Electric Transmission & Distribution reportable segment,
see “Business — Our Business — Electric Transmission & Distribution” in Item 1 of Part I of this report.
• Natural gas distribution services are also subject to rate regulation and are reported in the Natural Gas Distribution
reportable segment. For further information about the Natural Gas Distribution reportable segment, see “Business —
Our Business — Natural Gas Distribution” in Item 1 of Part I of this report.
• The Energy Services reportable segment includes non-rate regulated natural gas sales to, and transportation and storage
services, for commercial and industrial customers. For further information about the Energy Services reportable segment,
see “Business — Our Business — Energy Services” in Item 1 of Part I of this report.
• The results of the Midstream Investments reportable segment are dependent upon the results of Enable, which are driven
primarily by the volume of natural gas, NGLs and crude oil that Enable gathers, processes and transports across its systems
and other factors as discussed below under “— Factors Influencing Midstream Investments.”
• CenterPoint Energy’s Other Operations reportable segment includes office buildings and other real estate used for business
operations, home repair protection plans through a third party and other corporate support operations that support
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CenterPoint Energy’s business operations. CERC’s Other Operations reportable segment includes unallocated corporate
costs and inter-segment eliminations.
EXECUTIVE SUMMARY
We expect our and Enable’s businesses to continue to be affected by the key factors and trends discussed below. Our expectations
are based on assumptions made by us and information currently available to us. To the extent our underlying assumptions about,
or interpretations of, available information prove to be incorrect, our actual results may vary materially from our expected results.
Factors Influencing Our Businesses and Industry Trends
We are an energy delivery company. The majority of our revenues are generated from the transmission and delivery of electricity
and the sale of natural gas by our subsidiaries, Houston Electric and CERC, respectively. The Electric Transmission & Distribution
reportable segment does not own or operate electric generating facilities or make retail sales to end-use electric customers. To
assess our financial performance, our management primarily monitors operating income and cash flows, among other things, from
our reportable segments. Within these broader financial measures, we monitor margins, operation and maintenance expense, interest
expense, capital spending and working capital requirements. In addition to these financial measures, we also monitor a number
of variables that management considers important to our reportable segments, including the number of customers, throughput, use
per customer, commodity prices and heating and cooling degree days. From an operational standpoint, we monitor safety factors,
system reliability and customer satisfaction to gauge our performance.
The nature of our businesses requires significant amounts of capital investment, and we rely on internally generated cash,
borrowings under our credit facilities, proceeds from commercial paper and issuances of debt and equity in the capital markets to
satisfy these capital needs. We strive to maintain investment grade ratings for our securities to access the capital markets on terms
we consider reasonable. A reduction in our ratings generally would increase our borrowing costs for new issuances of debt, as
well as borrowing costs under our existing revolving credit facilities, and may prevent us from accessing the commercial paper
markets. Disruptions in the financial markets can also affect the availability of new capital on terms we consider attractive. In
those circumstances, we may not be able to obtain certain types of external financing or may be required to accept terms less
favorable than they would otherwise accept. For that reason, we seek to maintain adequate liquidity for our businesses through
existing credit facilities and prudent refinancing of existing debt.
Long-term national trends indicate customers have reduced their energy consumption, which could adversely affect our results.
However, due to more affordable energy prices and continued economic improvement in the areas we serve, the trend toward
lower usage has slowed.
To the extent adverse economic conditions affect our suppliers and customers, results from our energy delivery businesses
may suffer. For example, Houston Electric is largely concentrated in Houston, Texas, where a higher percentage of employment
is tied to the energy sector relative to other regions of the country. Although Houston, Texas has a diverse economy, employment
in the energy industry remains important with overall Houston employment growing at a moderate rate in 2018.
Also, adverse economic conditions, coupled with concerns for protecting the environment and increased availability of alternate
energy sources, may cause consumers to use less energy or avoid expansions of their facilities, resulting in less demand for our
services. To the extent population growth is affected by lower energy prices and there is financial pressure on some of our customers
who operate within the energy industry, there may be an impact on the growth rate of our customer base and overall demand.
Primarily due to the cyclical correction of over-building in multifamily residential construction, residential meter growth for
Houston Electric remained at approximately 1.6% in 2018. Based on, among other things, the anticipated completion of more
apartment units in 2019, management expects residential meter growth to increase this year to 2%, in line with long-term trends.
Performance of the Electric Transmission & Distribution reportable segment and the Natural Gas Distribution reportable
segment is significantly influenced by energy usage per customer, which is significantly impacted by weather conditions. For
Houston Electric, revenues are generally higher during the warmer months when more electricity is used for cooling purposes.
For CERC’s NGD, demand for natural gas for heating purposes is generally higher in the colder months. Therefore, we compare
our results on a weather-adjusted basis.
Overall, in 2018 the Houston area experienced weather that was much closer to normal relative to 2017. Although January,
April and November experienced colder than normal weather, this was offset during the remaining months of the year due to
warmer than normal weather. While overall rainfall was higher than normal in 2018, it did not rise to the record rainfall levels
experienced in 2017 that occurred largely due to Hurricane Harvey. After two years of consistently warmer than normal weather
in 2016 and 2017 in our NGD territories, 2018 experienced a return to normal weather in the first and fourth quarters.
Historically, both CenterPoint Energy’s TDU and CERC’s NGD have utilized weather hedges to help reduce the impact of
mild weather on their financial results. CenterPoint Energy’s TDU and CERC’s NGD entered into a weather hedge for the 2017-2018
and 2018-2019 winter heating seasons in Texas where no weather normalization mechanisms exist. In CERC’s non-Texas
jurisdictions, weather normalization mechanisms or decoupling in the Minnesota division help to mitigate the impact of abnormal
weather on our financial results.
In Minnesota and Arkansas for CERC, there are rate adjustment mechanisms to counter the impact of declining usage from
energy efficiency improvements. In addition, in many of our service areas, particularly in the Houston area and Minnesota, as
applicable to each registrant, we have benefited from growth in the number of customers, which could mitigate the effects of
reduced consumption. We anticipate that this trend will continue as the regions’ economies continue to grow. The profitability of
our businesses is influenced significantly by the regulatory treatment we receive from the various state and local regulators who
set our electric and natural gas distribution rates.
With respect to upcoming general rate cases, as required by a settlement related to the TCJA filed with the PUCT in February
2018, Houston Electric expects to make its comprehensive base rate filing by the April 30, 2019 deadline. The amount and other
terms of the rate filing have not been established at this time. There is no guarantee that current rates will continue while that case
is pending, or that the rate case will result in rates that fully recover Houston Electric’s costs or enable it to earn a reasonable return
on its invested capital. The results of this rate case may significantly impact Houston Electric’s business.
The Energy Services reportable segment contracts with customers for transportation, storage and sales of natural gas on an
unregulated basis. Its operations serve customers throughout the United States. The segment is impacted by price differentials on
both a regional and seasonal basis, as well as fluctuations in regional daily natural gas prices driven by weather and other market
factors. While this business utilizes financial derivatives to mitigate the effects of price movements, it does not enter into risk
management contracts for speculative purposes and evaluates VaR daily to monitor significant financial exposures to realized
income. At the end of 2017, a weather-driven spike in natural gas prices caused the accrual of unusually high unrealized mark-to-
market income, which substantially reversed in the first quarter of 2018 as natural gas prices normalized.
The regulation of natural gas pipelines and related facilities by federal and state regulatory agencies affects CERC’s business.
In accordance with natural gas pipeline safety and integrity regulations, CERC is making, and will continue to make, significant
capital investments in its service territories, which are necessary to help operate and maintain a safe, reliable and growing natural
gas system. CERC’s compliance expenses may also increase as a result of preventative measures required under these regulations.
Consequently, new rates in the areas it serves are necessary to recover these increasing costs.
Consistent with the regulatory treatment of pension costs, the Registrants defer the amount of pension expense that differs
from the level of pension expense included in the Registrants’ base rates for the Electric Transmission & Distribution reportable
segment and Natural Gas Distribution reportable segment in Texas. CenterPoint Energy expects to contribute a minimum of
approximately $93 million to its pension plans in 2019.
Additional Considerations Relating to Vectren (CenterPoint Energy)
The following additional considerations affect the business and industry of the utility and non-utility businesses and operations
of Vectren that CenterPoint Energy acquired upon consummation of the Merger. With respect to Vectren’s utilities, its natural gas
operations (comprised of Indiana Gas, VEDO and SIGECO’s natural gas distribution business) provide natural gas distribution
and transportation services to nearly 67% of Indiana and about 20% of Ohio, primarily in the west-central area. Its electric
operations (comprised of Indiana Electric) provide electric transmission and distribution services to southwestern Indiana, and
include power generating and wholesale power operations. In total, these utility operations supply natural gas and electricity to
over one million customers in Indiana and Ohio.
Similar to Houston Electric and CERC’s NGD, sales of natural gas and electricity to residential and commercial customers
are largely seasonal and are impacted by weather. Trends in the average consumption among natural gas residential and commercial
customers have tended to decline as more efficient appliances and furnaces are installed, and as Vectren’s utilities have implemented
conservation programs. In Vectren’s two Indiana natural gas service territories, normal temperature adjustment and decoupling
mechanisms largely mitigate the effect that would otherwise be caused by variations in volumes sold to these customers due to
weather and changing consumption patterns. The Ohio natural gas service territory has a straight fixed variable rate design for its
residential customers. This rate design mitigates approximately 90% of the Ohio service territory’s weather risk and risk of
decreasing consumption specific to its small customer classes. While Indiana Electric has neither a normal temperature adjustment
mechanism nor a decoupling mechanism, rate designs provide for a lost margin recovery mechanism that operates in tandem with
conservation initiatives.
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Vectren’s non-utility operations include Infrastructure Services and energy services, provided through ESG. Infrastructure
Services, through its wholly-owned subsidiaries, provides underground pipeline and repair services to many utilities, including
Vectren’s utilities, as well as other industries. ESG provides energy services through performance-based energy contracting
operations and sustainable infrastructure services, such as renewables, distributed generation and combined heat and power
projects. ESG assists schools, hospitals, governmental facilities and other private institutions with reducing energy and
maintenance costs by upgrading their facilities with energy-efficient equipment. ESG operates throughout the United States.
Demand for Infrastructure Services remains high due to the aging infrastructure and evolving safety and reliability regulations
across the United States. The long-term focus for Infrastructure Services is recurring work in both the distribution and transmission
businesses, but opportunities for large transmission pipeline construction projects will continue to be pursued and Infrastructure
Services is well positioned to do this work. The timing and recurrence of these large transmission projects is less predictable and
may create volatility in its year-over-year results.
We believe the long-term outlook for ESG’s performance contracting and sustainable infrastructure opportunities remains
strong with continued national focus expected on energy conservation and sustainability, renewable energy and security as power
prices across the country rise and customer focus on new, efficient and clean sources of energy grows.
Factors Influencing Midstream Investments (CenterPoint Energy)
The results of CenterPoint Energy’s Midstream Investments reportable segment are dependent upon the results of Enable,
which are driven primarily by the volume of natural gas, NGLs and crude oil that Enable gathers, processes and transports across
its systems. These volumes depend significantly on the level of production from natural gas wells connected to Enable’s systems
across a number of U.S. mid-continent markets. Aggregate production volumes are affected by the overall amount of oil and gas
drilling and completion activities. Production must be maintained or increased by new drilling or other activity, because the
production rate of oil and gas wells declines over time.
Enable expects its business to continue to be impacted by the trends affecting the midstream industry. Enable’s outlook is
based on its management’s assumptions regarding the impact of these trends that it has developed by interpreting the information
currently available to it. If Enable management’s assumptions or interpretation of available information prove to be incorrect,
Enable’s future financial condition and results of operations may differ materially from its expectations.
Enable’s business is impacted by commodity prices, which have declined and otherwise experienced significant volatility in
recent years. Commodity prices impact the drilling and production of natural gas and crude oil in the areas served by Enable’s
systems. In addition, Enable’s processing arrangements expose it to commodity price fluctuations. Enable has attempted to mitigate
the impact of commodity prices on its business by entering into hedges, focusing on contracting fee-based business and converting
existing commodity-based contracts to fee-based contracts.
Enable’s long-term view is that natural gas and crude oil production in the U.S. will increase. Natural gas continues to be a
critical component of energy demand in the U.S. Enable’s management believes that the prospects for continued natural gas demand
are favorable and will be driven by population and economic growth, as well as the continued displacement of coal-fired power
plants by natural gas-fired power plants due to the price of natural gas and stricter government environmental regulations on the
mining and burning of coal. Enable’s management believes that increasing consumption of natural gas over the long term in these
sectors will continue to drive demand for Enable’s natural gas gathering, processing, transportation and storage services.
Significant Events
Merger with Vectren. On February 1, 2019, pursuant to the Merger Agreement, CenterPoint Energy consummated the
previously announced Merger and acquired Vectren for approximately $6 billion in cash. For further discussion of the Merger, see
Note 4 to the consolidated financial statements.
Credit Facility. On October 5, 2018, CenterPoint Energy terminated all remaining commitments by lenders to provide the
Bridge Facility, which resulted in increased aggregate commitments under CenterPoint Energy’s revolving credit facility. For
further information, see Note 14 to the consolidated financial statements.
Enable Midstream Spin. On September 4, 2018, CERC completed the Internal Spin of its equity investment in Enable and
Enable GP. For further information regarding the Internal Spin, see Note 11 to the consolidated financial statements.
Equity Offerings. On August 22, 2018, CenterPoint Energy completed an offering of its Series A Preferred Stock. On October 1,
2018, CenterPoint Energy completed concurrent equity offerings of depositary shares, each representing a 1/20th interest in a
share of Series B Preferred Stock, and Common Stock. For further information about the equity offerings, see Note 13 to the
consolidated financial statements.
Debt Transactions. In February 2018, Houston Electric issued $400 million aggregate principal amount of general mortgage
bonds. In March 2018, CERC issued $600 million aggregate principal amount of unsecured senior notes. In October 2018,
CenterPoint Energy issued $1.5 billion aggregate principal amount of senior notes. In January 2019, Houston Electric issued $700
million aggregate principal amount of general mortgage bonds. For further information about the Registrants’ debt issuance in
2018 and to date in 2019, see Note 14 to the consolidated financial statements.
Regulatory Proceedings. For details related to pending and completed regulatory proceedings during 2018 and to date in
2019, see “—Liquidity and Capital Resources — Regulatory Matters” below.
CERTAIN FACTORS AFFECTING FUTURE EARNINGS
Our past earnings and results of operations are not necessarily indicative of our future earnings and results of operations. The
magnitude of our and Enable’s future earnings and results of our and Enable’s operations will depend on or be affected by numerous
factors that apply to all Registrants unless otherwise indicated including:
•
the performance of Enable, the amount of cash distributions CenterPoint Energy receives from Enable, Enable’s ability
to redeem the Enable Series A Preferred Units in certain circumstances and the value of CenterPoint Energy’s interest in
Enable, and factors that may have a material impact on such performance, cash distributions and value, including factors
such as:
competitive conditions in the midstream industry, and actions taken by Enable’s customers and competitors, including
the extent and timing of the entry of additional competition in the markets served by Enable;
the timing and extent of changes in the supply of natural gas and associated commodity prices, particularly prices
of natural gas and NGLs, the competitive effects of the available pipeline capacity in the regions served by Enable,
and the effects of geographic and seasonal commodity price differentials, including the effects of these circumstances
on re-contracting available capacity on Enable’s interstate pipelines;
the demand for crude oil, natural gas, NGLs and transportation and storage services;
environmental and other governmental regulations, including the availability of drilling permits and the regulation
of hydraulic fracturing;
recording of goodwill, long-lived asset or other than temporary impairment charges by or related to Enable;
changes in tax status; and
access to debt and equity capital;
• CenterPoint Energy’s expected benefits of the Merger and integration, including the outcome of shareholder litigation
filed against Vectren that could reduce anticipated benefits of the Merger, as well as the ability to successfully integrate
the Vectren businesses and realize anticipated benefits and the risk that the credit ratings of the combined company or
its subsidiaries may be different from what CenterPoint Energy expects;
•
•
•
industrial, commercial and residential growth in our service territories and changes in market demand, including the
demand for our non-utility products and services and effects of energy efficiency measures and demographic patterns;
timely and appropriate rate actions that allow recovery of costs and a reasonable return on investment, including Houston
Electric’s anticipated rate case in 2019, the outcome of which may not result in expected rates or recovery of costs;
future economic conditions in regional and national markets and their effect on sales, prices and costs;
• weather variations and other natural phenomena, including the impact of severe weather events on operations and capital;
•
state and federal legislative and regulatory actions or developments affecting various aspects of our businesses (including
the businesses of Enable), including, among others, energy deregulation or re-regulation, pipeline integrity and safety
and changes in regulation and legislation pertaining to trade, health care, finance and actions regarding the rates charged
by our regulated businesses;
51
52
•
tax legislation, including the effects of the TCJA (which includes any potential changes to interest deductibility) and
uncertainties involving state commissions’ and local municipalities’ regulatory requirements and determinations regarding
the treatment of EDIT and our rates;
• CenterPoint Energy’s and CERC’s ability to mitigate weather impacts through normalization or rate mechanisms, and
the effectiveness of such mechanisms;
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the timing and extent of changes in commodity prices, particularly natural gas, and the effects of geographic and seasonal
commodity price differentials on CERC and Enable;
actions by credit rating agencies, including any potential downgrades to credit ratings;
changes in interest rates and their impact on costs of borrowing and the valuation of CenterPoint Energy’s pension benefit
obligation;
problems with regulatory approval, construction, implementation of necessary technology or other issues with respect
to major capital projects that result in delays or in cost overruns that cannot be recouped in rates;
the availability and prices of raw materials and services and changes in labor for current and future construction projects;
local, state and federal legislative and regulatory actions or developments relating to the environment, including those
related to global climate change;
the impact of unplanned facility outages;
any direct or indirect effects on our or Enable’s facilities, operations and financial condition resulting from terrorism,
cyber-attacks, data security breaches or other attempts to disrupt our businesses or the businesses of third parties, or other
catastrophic events such as fires, earthquakes, explosions, leaks, floods, droughts, hurricanes, pandemic health events or
other occurrences;
our ability to invest planned capital and the timely recovery of our investments;
our ability to control operation and maintenance costs;
the sufficiency of our insurance coverage, including availability, cost, coverage and terms and ability to recover claims;
the investment performance of CenterPoint Energy’s pension and postretirement benefit plans;
commercial bank and financial market conditions, our access to capital, the cost of such capital, and the results of our
financing and refinancing efforts, including availability of funds in the debt capital markets;
changes in rates of inflation;
inability of various counterparties to meet their obligations to us;
non-payment for our services due to financial distress of our customers;
the extent and effectiveness of our and Enable’s risk management and hedging activities, including, but not limited to
financial and weather hedges and commodity risk management activities;
timely and appropriate regulatory actions, which include actions allowing securitization, for any future hurricanes or
natural disasters or other recovery of costs, including costs associated with Hurricane Harvey;
• CenterPoint Energy’s or Enable’s potential business strategies and strategic initiatives, including restructurings, joint
ventures and acquisitions or dispositions of assets or businesses (including a reduction of CenterPoint Energy’s interest
in Enable, if any, whether through its decision to sell a portion of the Enable common units it owns in the public equity
markets or otherwise, subject to certain limitations), which CenterPoint Energy and Enable cannot assure will be completed
or will have the anticipated benefits to CenterPoint Energy or Enable;
•
•
•
•
acquisition and merger activities involving us or our competitors, including the ability to successfully complete merger,
acquisition and divestiture plans;
our or Enable’s ability to recruit, effectively transition and retain management and key employees and maintain good
labor relations;
the outcome of litigation;
the ability of REPs, including REP affiliates of NRG and Vistra Energy Corp., formerly known as TCEH Corp., to satisfy
their obligations to CenterPoint Energy and Houston Electric;
•
•
•
•
•
changes in technology, particularly with respect to efficient battery storage or the emergence or growth of new, developing
or alternative sources of generation;
the timing and outcome of any audits, disputes and other proceedings related to taxes;
the effective tax rates;
the effect of changes in and application of accounting standards and pronouncements; and
other factors discussed in “Risk Factors” in Item 1A of this report and in other reports that the Registrants file from time
to time with the SEC.
CENTERPOINT ENERGY CONSOLIDATED RESULTS OF OPERATIONS
Revenues ......................................................................................................... $
Expenses..........................................................................................................
Operating Income............................................................................................
Gain (Loss) on Marketable Securities.............................................................
Gain (Loss) on Indexed Debt Securities .........................................................
Interest and Other Finance Charges ................................................................
Interest on Securitization Bonds .....................................................................
Equity in Earnings of Unconsolidated Affiliates ............................................
Other Income (Expense), net ..........................................................................
Income Before Income Taxes..........................................................................
Income Tax Expense (Benefit)........................................................................
Net Income ......................................................................................................
Preferred Stock dividend requirement ............................................................
Income Available to Common Shareholders................................................... $
Basic Earnings Per Common Share ................................................................ $
Diluted Earnings Per Common Share ............................................................. $
2018 Compared to 2017
Year Ended December 31,
2018
2017
2016
(in millions, except per share amounts)
10,589
$
9,614
$
9,758
831
(22)
(232)
(361)
(59)
307
50
514
146
368
35
333
0.74
0.74
$
$
$
8,478
1,136
7
49
(313)
(77)
265
(4)
1,063
(729)
1,792
—
1,792
4.16
4.13
$
$
$
7,528
6,505
1,023
326
(413)
(338)
(91)
208
(29)
686
254
432
—
432
1.00
1.00
Net Income. CenterPoint Energy reported income available to common shareholders of $333 million ($0.74 per diluted
common share) for 2018 compared to $1,792 million ($4.13 per diluted common share) for 2017.
The decrease in income available to common shareholders of $1,459 million was primarily due to the following key factors:
• an $875 million increase in income tax expense, resulting from a reduction in income tax expense of $1,113 million due
to tax reform in 2017, discussed further in Note 15 to the consolidated financial statements, offset by a $238 million
decrease in income tax expense primarily due to a reduction in the corporate income tax rate resulting from the TCJA in
2018 and lower income before income taxes year over year;
• a $305 million decrease in operating income, discussed below by reportable segment in Results of Operations by
Reportable Segment;
• a $281 million increase in losses on indexed debt securities related to the ZENS, resulting from a loss of $11 million
from Meredith’s acquisition of Time in March 2018, a loss of $242 million from AT&T’s acquisition of TW in June 2018
and reduced gains of $28 million in the underlying value of the indexed debt securities;
53
54
• a $48 million increase in interest expense primarily due to higher outstanding other long-term debt and the amortization
of Bridge Facility fees of $24 million;
• a $14 million decrease in interest expense related to lower outstanding balances of the Securitization Bonds.
• a $35 million increase in preferred stock dividend requirements; and
These increases were partially offset by:
• a $29 million increase in losses on marketable securities.
• a $319 million decrease in gains on marketable securities; and
These decreases were partially offset by:
• a $42 million increase in equity earnings from the investment in Enable, discussed further in Note 11 to the consolidated
financial statements;
• a $25 million increase in interest income on investments included in Other Income (Expense), net shown above;
• an $17 million decrease in the non-service cost components of net periodic pension and post-retirement costs included
in Other Income (Expense), net shown above;
• an $18 million decrease in interest expense related to lower outstanding balances of the Securitization Bonds;
• a $6 million increase in miscellaneous other non-operating income included in Other Income (Expense), net shown above;
• a $4 million increase in dividend income on CenterPoint Energy’s ZENS-Related Securities included in Other Income
(Expense), net shown above; and
• a $2 million increase in gains on interest rate economic hedges included in Other Income (Expense), net shown above.
Income Tax Expense. CenterPoint Energy reported an effective tax rate of 28% and (69%) for the years ended December 31,
2018 and 2017, respectively. The effective tax rate of 28% is primarily due to the reduction in the federal corporate income tax
rate from 35% to 21% effective January 1, 2018 as prescribed by the TCJA and the amortization of EDIT. These decreases were
partially offset by an increase to the effective tax rate as a result of the establishment of a valuation allowance on certain state net
operating loss deferred tax assets that are no longer expected to be utilized prior to expiration after the Internal Spin. The effective
tax rate was also increased for state law changes that resulted in remeasurement of state deferred taxes in those jurisdictions.
2017 Compared to 2016
Net Income. CenterPoint Energy reported income available to common shareholders of $1,792 million ($4.13 per diluted
common share) for 2017 compared to $432 million ($1.00 per diluted common share) for 2016.
The increase in income available to common shareholders of $1,360 million was primarily due to the following key factors:
• a $983 million decrease in income tax expense, resulting from a reduction in income tax expense of $1,113 million due
to tax reform, discussed further in Note 15 to the consolidated financial statements, offset by a $130 million increase in
income tax expense primarily due to higher net income year over year;
• a $462 million increase in gains on indexed debt securities related to the ZENS, resulting from increased gains of $345
million in the underlying value of the indexed debt securities and a loss of $117 million from the Charter merger in 2016;
• a $113 million increase in operating income discussed below by reportable segment in Results of Operations by Reportable
Segment;
• a $6 million decrease in miscellaneous other non-operating income included in Other Income (Expense), net shown
above.
Income Tax Expense. CenterPoint Energy reported an effective tax rate of (69%) and 37% for the years ended December 31,
2017 and 2016, respectively. The effective tax rate of (69%) was primarily due to the remeasurement of CenterPoint Energy’s
ADFIT liability as a result of the enactment of the TCJA on December 22, 2017, which reduced the U.S. corporate income tax
rate from 35% to 21%. See Note 15 to the consolidated financial statements for a more in-depth discussion of the 2017 impacts
of the TCJA.
HOUSTON ELECTRIC CONSOLIDATED RESULTS OF OPERATIONS
Houston Electric’s results of operations are affected by seasonal fluctuations in the demand for electricity. Houston Electric’s
results of operations are also affected by, among other things, the actions of various governmental authorities having jurisdiction
over rates Houston Electric charges, debt service costs, income tax expense, Houston Electric’s ability to collect receivables from
REPs and Houston Electric’s ability to recover its regulatory assets.
Revenues ......................................................................................................... $
Expenses..........................................................................................................
Operating Income............................................................................................
Interest and other finance charges...................................................................
Interest on Securitization Bonds .....................................................................
Other expense, net...........................................................................................
Income before income taxes ...........................................................................
Income tax expense (benefit) ..........................................................................
Net income ...................................................................................................... $
2018 Compared to 2017
Year Ended December 31,
2018
2017
2016
(in millions)
3,234
$
2,998
$
2,609
2,361
625
(138)
(59)
(3)
425
89
336
$
637
(128)
(77)
(8)
424
(9)
433
$
3,059
2,407
652
(126)
(91)
(10)
425
149
276
Net Income. Houston Electric reported net income of $336 million for 2018 compared to $433 million for 2017.
The decrease of $97 million in net income was primarily due to the following key factors:
• a $98 million increase in income tax expense, resulting from a reduction in income tax expense of $158 million due to
tax reform in 2017, discussed further in Note 15 to the consolidated financial statements, offset by a $60 million
decrease in income tax expense primarily due to a reduction in the corporate income tax rate resulting from the TCJA
in 2018; and
• a $57 million increase in equity earnings from the investment in Enable, discussed further in Note 11 to the consolidated
• an $10 million increase in interest expense due to higher outstanding other long-term debt.
financial statements;
• a $25 million decrease in interest expense due to lower weighted average interest rates on outstanding debt;
• a $17 million decrease in losses on early debt redemption;
• a $14 million increase in cash distributions on the Enable Series A Preferred Units included in Other Income (Expense),
net shown above; and
55
These decreases to net income were partially offset by the following:
• a $5 million decrease in non-service cost components of net periodic pension and post-retirement costs included in Other
expense, net shown above; and
56
• an $8 million increase in TDU operating income resulting from a $7 million increase discussed below in Results of
Operations by Reportable Segment and increased usage of $1 million, primarily due to a return to more normal weather,
which was not offset by the weather hedge loss recorded on CenterPoint Energy.
Income Tax Expense. Houston Electric reported an effective tax rate of 21% and (2%) for the years ended December 31, 2018
and 2017, respectively. The effective tax rate of 21% is primarily due to the reduction in the federal corporate income tax rate
from 35% to 21% effective January 1, 2018 as prescribed by the TCJA and the amortization of EDIT.
2017 Compared to 2016
The decrease in net income of $537 million was primarily due to the following key factors:
• a $287 million increase in income tax expense, resulting from a reduction in income tax expense of $396 million due to
tax reform in 2017, discussed further in Note 15 to the consolidated financial statements, offset by a $109 million decrease
in income tax expense primarily due to lower income from continuing operations and a reduction in the corporate income
tax rate resulting from the TCJA in 2018;
• a $245 million decrease in operating income, discussed below by reportable segment in Results of Operations by
Reportable Segment; and
Net Income. Houston Electric reported net income of $433 million for 2017 compared to $276 million for 2016.
• a $23 million decrease in income from discontinued operations, net of tax, due to the Internal Spin discussed further in
The increase of $157 million in net income was primarily due to the following key factors:
• a $158 million decrease in income tax expense due to a reduction in the corporate income tax rate resulting from the
TCJA; and
• a $1 million increase in TDU operating income resulting from a $1 million decrease discussed below in Results of
Operations by Reportable Segment, which was more than offset by increased usage of $2 million, primarily due to a
return to more normal weather, which was not offset by the weather hedge loss recorded on CenterPoint Energy.
This increase in net income was partially offset by a $2 million increase in interest expense due to higher outstanding other
long-term debt.
Income Tax Expense. Houston Electric reported an effective tax rate of (2%) and 35% for the years ended December 31, 2017
and 2016, respectively. The effective tax rate of (2%) was primarily due to the remeasurement of Houston Electric’s ADFIT liability
as a result of the enactment of the TCJA on December 22, 2017, which reduced the U.S. corporate income tax rate from 35% to
21%. See Note 15 to the consolidated financial statements for a more in-depth discussion of the 2017 impacts of the TCJA.
Note 11 to the consolidated financial statements.
These decreases were partially offset by:
• a $12 million decrease in the non-service cost components of net periodic pension and post-retirement costs included in
Other expense, net shown above;
• a $5 million increase in miscellaneous other non-operating income included in Other expense, net shown above; and
• a $1 million decrease in interest expense due to lower outstanding long-term debt.
Income Tax Expense. CERC’s effective tax rate reported on income from continuing operations was 24% and (83%) for the
years ended December 31, 2018 and 2017, respectively. The effective tax rate of 24% on income from continuing operations is
primarily due to the reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018 as prescribed
by the TCJA and the amortization of EDIT.
2017 Compared to 2016
CERC CONSOLIDATED RESULTS OF OPERATIONS
Net Income. CERC reported net income of $745 million for 2017 compared to net income of $245 million for 2016.
CERC’s results of operations are affected by seasonal fluctuations in the demand for natural gas and price movements of
energy commodities as well as natural gas basis differentials. CERC’s results of operations are also affected by, among other
things, the actions of various federal, state and local governmental authorities having jurisdiction over rates CERC charges,
competition in CERC’s various business operations, the effectiveness of CERC’s risk management activities, debt service costs
and income tax expense.
Year Ended December 31,
2018
2017
(in millions)
2016
Revenues ......................................................................................................... $
Expenses..........................................................................................................
Operating Income............................................................................................
Interest and other finance charges...................................................................
Other expense, net...........................................................................................
Income from continuing operations before income taxes ...............................
Income tax expense (benefit) ..........................................................................
Income from continuing operations ................................................................
Income from discontinued operations, net of tax............................................
Net Income ...................................................................................................... $
7,343
7,121
222
(122)
(8)
92
22
70
138
208
$
$
6,603
6,136
467
(123)
(25)
319
(265)
584
161
745
$
$
4,454
4,113
341
(122)
(20)
199
81
118
127
245
2018 Compared to 2017
Net Income. CERC reported net income of $208 million for 2018 compared to $745 million for 2017.
The increase in net income of $500 million was primarily due to the following key factors:
• a $346 million decrease in income tax expense, resulting from a reduction in income tax expense of $396 million due to
tax reform, discussed further in Note 15 to the consolidated financial statements, offset by a $50 million increase in
income tax expense primarily due to higher income from continuing operations year-over-year;
• a $126 million increase in operating income discussed below in Results of Operations by Reportable Segment; and
• a $34 million increase in income from discontinued operations, net of tax, discussed further in Notes 11 and 15 to the
consolidated financial statements.
These increases were partially offset by:
• a $5 million decrease in miscellaneous other non-operating income included in Other Income, net shown above; and
• a $1 million increase in interest expense due to the issuance of $300 million of unsecured senior notes and higher weighted
average commercial paper interest rates discussed further in Note 14 to the consolidated financial statements.
Income Tax Expense. CERC’s effective tax rate reported on income from continuing operations was (83%) and 41% for the
years ended December 31, 2017 and 2016, respectively. The effective tax rate of (83%) on income from continuing operations is
primarily due to the remeasurement of CERC’s ADFIT liability as a result of the enactment of the TCJA on December 22, 2017,
which reduced the U.S. corporate income tax rate from 35% to 21%. See Note 15 to the consolidated financial statements for a
more in-depth discussion of the 2017 impacts of the TCJA.
57
58
RESULTS OF OPERATIONS BY REPORTABLE SEGMENT
Electric Transmission & Distribution (CenterPoint Energy and Houston Electric)
As of December 31, 2018, reportable segments by Registrant are as follows:
The following table provides summary data of the Electric Transmission & Distribution reportable segment:
Registrant
Electric
Transmission
& Distribution
Natural Gas
Distribution
Energy
Services
Midstream
Investments
Other
Operations
Revenues:
CenterPoint Energy..................................................................
Houston Electric.......................................................................
CERC .......................................................................................
X
X
X
X
X
X
X
X
X
The following table presents operating income (loss) for each reportable segment for 2018, 2017 and 2016. Included in
revenues by reportable segment below are intersegment sales, which are accounted for as if the sales were to third parties at current
market prices. These revenues are eliminated during consolidation. See Note 19 to the consolidated financial statements for details
of reportable segments by registrant.
Operating Income (Loss) by Reportable Segment
Year Ended December 31,
2018
2017
(in millions)
2016
CenterPoint Energy
Electric Transmission & Distribution ............................................................. $
Natural Gas Distribution .................................................................................
Energy Services...............................................................................................
Other Operations .............................................................................................
Total CenterPoint Energy Consolidated Operating Income ......................... $
Houston Electric
Electric Transmission & Distribution (1) ......................................................... $
CERC
Natural Gas Distribution ................................................................................. $
Energy Services...............................................................................................
Other Operations .............................................................................................
623
$
266
(47)
(11)
831
625
266
(47)
3
$
$
$
Total CERC Consolidated Operating Income............................................... $
222
$
636
348
126
26
1,136
637
348
126
(7)
467
$
$
$
$
$
653
321
21
28
1,023
652
321
21
(1)
341
(1) Excludes weather hedge gain (loss) of $(2) million, $(1) million and $1 million recorded on CenterPoint Energy. See
Note 9(a) to the consolidated financial statements for more information on the weather hedge.
59
TDU .............................................................................................................. $
Bond Companies...........................................................................................
Total revenues........................................................................................
Expenses:
Operation and maintenance, excluding Bond Companies............................
Depreciation and amortization, excluding Bond Companies .......................
Taxes other than income taxes......................................................................
Bond Companies...........................................................................................
Total expenses .......................................................................................
Operating Income............................................................................................ $
Operating Income:
TDU .............................................................................................................. $
Bond Companies (1) ......................................................................................
Total segment operating income............................................................ $
Throughput (in GWh):
Year Ended December 31,
2018
2017
2016
(in millions, except throughput and customer data)
2,638
$
2,588
$
594
3,232
1,444
386
240
539
2,609
623
568
55
623
$
$
$
409
2,997
1,397
395
235
334
2,361
636
561
75
636
$
$
$
2,507
553
3,060
1,330
384
231
462
2,407
653
562
91
653
Residential .............................................................................................
Total.......................................................................................................
30,405
90,409
29,703
88,636
29,586
86,829
Number of metered customers at end of period:
Residential .............................................................................................
Total .......................................................................................................
2,198,225
2,485,370
2,164,073
2,444,299
2,129,773
2,403,340
(1) Represents the amount necessary to pay interest on the Securitization Bonds.
2018 Compared to 2017. The Electric Transmission & Distribution reportable segment reported operating income of $623
million for 2018, consisting of $568 million from the TDU and $55 million related to the Bond Companies. For 2017, operating
income totaled $636 million, consisting of $561 million from the TDU and $75 million related to the Bond Companies.
TDU operating income increased $7 million primarily due to the following key factors:
• higher transmission-related revenues of $37 million, exclusive of the TCJA, and lower transmission costs billed by
transmission providers of $32 million;
• customer growth of $31 million from the addition of over 41,000 customers;
• rate increases of $36 million related to distribution capital investments, exclusive of the TCJA;
• higher equity return of $32 million, primarily related to the annual true-up of transition charges correcting for under-
collections that occurred during the preceding 12 months;
• higher miscellaneous revenues of $9 million largely due to right-of-way and fiber and wireless revenues; and
• higher usage of $8 million, primarily due to a return to more normal weather.
These increases to operating income were partially offset by the following:
• increased operation and maintenance expenses of $79 million, excluding transmission costs billed by transmission
providers, primarily due to the following:
60
contract services of $24 million, largely due to increased resiliency spend and services related to fiber and wireless;
Natural Gas Distribution (CenterPoint Energy and CERC)
The following table provides summary data of the Natural Gas Distribution reportable segment:
support services of $23 million, primarily related to technology projects;
labor and benefits costs of $14 million;
other miscellaneous operation and maintenance expenses of $12 million; and
damage claims from third parties of $6 million;
• lower revenues of $79 million due to the recording of a regulatory liability and a corresponding decrease to revenue of
$31 million reflecting the difference in revenues collected under customer rates at the pre-TCJA tax rate and the revenues
that would have been collected had rates been adjusted to the lower corporate tax rate upon TCJA enactment and lower
revenues of $48 million due to lower transmission and distribution rate filings as a result of the TCJA; and
• higher depreciation and amortization expense, primarily because of ongoing additions to plant in service, and other taxes
of $17 million.
Lower depreciation and amortization expenses related to AMS of $21 million were offset by a corresponding decrease in
related revenues.
2017 Compared to 2016. The Electric Transmission & Distribution reportable segment reported operating income of $636
million for 2017, consisting of $561 million from the TDU and $75 million related to the Bond Companies. For 2016, operating
income totaled $653 million, consisting of $562 million from the TDU and $91 million related to the Bond Companies.
TDU operating income decreased $1 million primarily due to the following key factors:
Year Ended December 31,
2018
2017
2016
(in millions, except throughput and customer data)
2,967
$
2,639
$
2,409
Revenues ......................................................................................................... $
Expenses:
Natural gas ....................................................................................................
Operation and maintenance ..........................................................................
Depreciation and amortization......................................................................
Taxes other than income taxes......................................................................
Total expenses...................................................................................
1,467
803
277
154
2,701
1,164
722
260
145
2,291
Operating Income............................................................................................ $
Throughput (in Bcf):
266
$
348
$
Residential ....................................................................................................
Commercial and industrial............................................................................
Total Throughput ..............................................................................
186
285
471
151
261
412
Number of customers at end of period:
1,008
696
242
142
2,088
321
152
259
411
Residential ....................................................................................................
Commercial and industrial............................................................................
Total ..................................................................................................
3,246,277
260,033
3,506,310
3,213,140
256,651
3,469,791
3,183,538
255,806
3,439,344
• lower equity return of $22 million, primarily related to the annual true-up of transition charges correcting for over-
2018 Compared to 2017. The Natural Gas Distribution reportable segment reported operating income of $266 million for
collections that occurred during the preceding 12 months;
2018 compared to $348 million for 2017.
• higher depreciation, primarily because of ongoing additions to plant in service, and other taxes of $20 million;
Operating income decreased $82 million primarily as a result of the following key factors:
• higher operation and maintenance expenses of $18 million, primarily due to higher labor and benefits costs of $10 million
and corporate support services expenses of $8 million;
• lower usage of $15 million; and
• lower miscellaneous revenues, including right-of-way, of $10 million.
These decreases to operating income were partially offset by the following:
• rate increases of $47 million related to distribution capital investments;
• customer growth of $32 million from the addition of almost 41,000 customers; and
• higher transmission-related revenues of $61 million, partially offset by transmission costs billed by transmission providers
of $56 million.
• lower revenue of $47 million, associated with the recording of a regulatory liability and a corresponding decrease to
revenue in certain jurisdictions of $14 million reflecting the difference in revenues collected under customer rates at the
pre-TCJA tax rates and the revenues that would have been collected had rates been adjusted to the lower corporate tax
rate upon TCJA enactment and lower filing amounts of $33 million associated with the lower corporate tax rate as a result
of the TCJA;
• higher operation and maintenance expenses of $41 million, primarily consisting of:
materials and supplies, contracts and services and bad debt expenses of $15 million;
support services expenses of $16 million, primarily related to technology projects; and
other miscellaneous operation and maintenance expenses of $10 million;
• higher labor and benefits costs of $30 million, resulting from the recording in 2017 of regulatory assets (and a corresponding
reduction in expense) to recover $16 million of prior post-retirement expenses in future rates established in the Texas
Gulf rate order and additional maintenance activities;
• increased depreciation and amortization expense of $17 million, primarily due to ongoing additions to plant-in-service;
• decreased revenue of $10 million, primarily driven by timing of weather normalization adjustments; and
• higher other taxes of $2 million, primarily due to higher property taxes.
61
62
Year Ended December 31,
2018
2017
2016
(in millions, except throughput and customer data)
4,521
$
4,049
$
2,099
4,453
96
16
3
4,568
(47) $
3,816
86
19
2
3,923
126
2,011
58
7
2
2,078
21
(21)
777
$
$
These decreases were partially offset by:
Energy Services (CenterPoint Energy and CERC)
• rate increases of $46 million, primarily in the Texas, Minnesota and Arkansas jurisdictions, exclusive of the TCJA impact
The following table provides summary data of the Energy Services reportable segment:
discussed above;
• an increase in non-volumetric revenues of $10 million; and
• a $10 million increase associated with customer growth from the addition of over 36,000 customers.
Increased operation and maintenance expense related to energy efficiency programs of $10 million and increased other taxes
expense related to gross receipt taxes of $7 million were offset by a corresponding increase in the related revenues.
2017 Compared to 2016. The Natural Gas Distribution reportable segment reported operating income of $348 million for
2017 compared to $321 million for 2016.
Operating income increased $27 million primarily as a result of the following key factors:
Revenues ......................................................................................................... $
Expenses:
Natural gas ....................................................................................................
Operation and maintenance ..........................................................................
Depreciation and amortization......................................................................
Taxes other than income taxes ......................................................................
Total expenses..........................................................................................
Operating Income (Loss) ................................................................................ $
• rate increases of $38 million, primarily from Texas rate filings of $14 million, Arkansas rate case and formula rate plan
filings of $9 million, Minnesota interim rates of $7 million and Mississippi RRA of $4 million;
Timing impacts related to mark-to-market gain (loss) (1) ............................... $
(110) $
79
• higher other revenues of $8 million, primarily driven by transportation revenues;
• customer growth of $7 million from the addition of over 30,000 new customers;
• labor and benefits were favorable by $5 million, resulting primarily from the recording of a regulatory asset (and a
corresponding reduction in expense) to recover $16 million of prior postretirement expenses in future rates established
in the Texas Gulf rate order; and
• an increase of $7 million from weather normalization adjustments, partially offset by $4 million of milder weather effects.
These increases were partially offset by:
Throughput (in Bcf) ........................................................................................
1,355
1,200
Number of customers at end of period (2) .......................................................
30,000
31,000
30,000
(1) Includes the change in unrealized mark-to-market value and the impact from derivative assets and liabilities acquired
through the purchase of Continuum and AEM.
(2) These numbers do not include approximately 65,000, 72,000 and 60,100 natural gas customers as of December 31, 2018,
2017 and 2016, respectively, that are under residential and small commercial choice programs invoiced by their host
utility.
2018 Compared to 2017. The Energy Services reportable segment reported an operating loss of $47 million for 2018 compared
• higher operation and maintenance expenses of $18 million, primarily due to increased bad debt expenses of $7 million,
increased contract services of $7 million and increased insurance costs of $3 million; and
to operating income of $126 million for 2017.
• increased depreciation and amortization expense, primarily due to ongoing additions to plant-in-service, and other taxes
of $16 million.
Increased operation and maintenance expense related to energy efficiency programs of $13 million and decreased other taxes
expense related to gross receipt taxes of $5 million were offset by a corresponding increase or decrease in the related revenues.
Operating income decreased $173 million as a result of the following key factors:
• a $189 million decrease from mark-to-market accounting for derivatives associated with certain natural gas purchases
and sales used to lock in economic margins; and
• an $10 million increase in operation and maintenance expenses, attributable to increased technology expenses, higher
contract and services expense related to pipeline integrity testing, higher support services and legal expenses.
These decreases were partially offset by the following:
• a $22 million increase in margin due to increased opportunities to optimize natural gas supply costs through storage and
transportation capacity, primarily in the first quarter of 2018, and incremental volumes from customers. Realized
commercial opportunities attributable to the Continuum and AEM acquisitions and colder than normal weather in several
regions of the United States, primarily in the first quarter of 2018, drove incremental sales volumes; and
• a $5 million increase in margin due to increased revenues from energy delivery to customers through CEIP interconnect
projects and MES’ portable natural gas supply services.
2017 Compared to 2016. The Energy Services reportable segment reported operating income of $126 million for 2017
compared to $21 million for 2016. The increase in operating income of $105 million was primarily due to a $100 million increase
from mark-to-market accounting for derivatives associated with certain natural gas purchases and sales used to lock in economic
margins. A weather-driven spike in natural gas prices at the end of 2017 caused the accrual of an unusually high mark-to-market
asset, expected to be substantially reversed in the first quarter of 2018 as natural gas prices normalize. Operating income in 2017
63
64
also included approximately $5 million of expenses related to the acquisition and integration of AEM. The remaining increase in
operating income was primarily due to increased throughput related to the acquisition of AEM in 2017.
Operating Activities. The following items contributed to increased (decreased) net cash provided by operating activities:
Midstream Investments (CenterPoint Energy)
The following table provides pre-tax equity income of the Midstream Investments reportable segment:
Equity earnings from Enable, net.................................................................... $
307
$
265
$
208
Other Operations (CenterPoint Energy and CERC)
The following table shows the operating income (loss) of CenterPoint Energy’s Other Operations reportable segment:
Year Ended December 31,
2018
2017
(in millions)
2016
Year Ended December 31,
2018
2017
(in millions)
2016
Revenues ......................................................................................................... $
Expenses..........................................................................................................
Operating Income (Loss) ................................................................................ $
$
15
26
(11) $
14
(12)
26
$
$
15
(13)
28
2018 Compared to 2017. CenterPoint Energy’s Other Operations reportable segment reported an operating loss of $11 million
for 2018 compared to operating income of $26 million for 2017. Operating income decreased $37 million primarily due to costs
related to the Merger.
2017 Compared to 2016. CenterPoint Enegy’s Other Operations reportable segment reported operating income of $26 million
for 2017 compared to $28 million for 2016. Operating income decreased $2 million primarily due to increased operating expenses,
partially offset by decreased depreciation and amortization.
The following table shows the operating income (loss) of CERC’s Other Operations reportable segment:
Revenues ......................................................................................................... $
Expenses..........................................................................................................
Operating Income (Loss) ................................................................................ $
1
(2)
3
$
$
— $
7
(7) $
1
2
(1)
Year Ended December 31,
2018
2017
(in millions)
2016
Historical Cash Flows
LIQUIDITY AND CAPITAL RESOURCES
Year Ended December 31,
2018 compared to 2017
2017 compared to 2016
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
154
$
(in millions)
(243) $
595
$
141
(545)
(22) $
(189)
215
(474)
Changes in net income after adjusting for non-cash items. $
Changes in working capital ................................................
Change in equity in earnings from Enable, net of
distributions (1) ................................................................
Changes related to discontinued operations (2) ..................
Higher pension contribution...............................................
Other...................................................................................
$
(63) $
604
225
—
(21)
(26)
719
$
57
—
—
—
(1)
210
—
176
—
8
$
536
$
(57)
—
(39)
(6)
(506) $
—
—
—
—
—
—
14
(197) $
25
(234)
(1) This change is partially offset by the change in distributions from Enable in excess of cumulative earnings in investing
activities noted in the table below.
(2) See Notes 2(c) and 11 to the consolidated financial statements for a discussion of CERC’s discontinued operations.
Investing Activities. The following items contributed to (increased) decreased net cash used in investing activities:
Year Ended December 31,
2018 compared to 2017
2017 compared to 2016
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
Proceeds from the sale of marketable securities ................ $
Acquisitions, net of cash acquired......................................
Net change in capital expenditures.....................................
Investment in Enable Series A Preferred Units ..................
Net change in notes receivable from unconsolidated
affiliates ..........................................................................
(in millions)
398
$ — $ — $
132
(225)
—
—
(47)
—
132
(120)
—
(178) $ — $ —
(30)
(30)
—
(13)
(12)
4
—
363
—
—
(96)
(114)
(363)
192
—
Change in distributions from Enable in excess of
cumulative earnings ........................................................
Changes related to discontinued operations (1) ..................
Other...................................................................................
(267)
—
—
—
12
50
8
(135) $
$
$
—
(250)
1
(351) $
—
—
(3)
(223) $
—
—
(4)
175
$
—
(363)
1
(388)
The net cash provided by (used in) operating, investing and financing activities for 2018, 2017 and 2016 is as follows:
(1) See Notes 2(c) and 11 to the consolidated financial statements for a discussion of CERC’s discontinued operations.
2018
2017
2016
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
Year Ended December 31,
(in millions)
Cash provided by (used in):
Operating activities ................. $
2,136
$
1,115
$
814
$
1,417
$
905
$
278
$
1,923
$
1,102
$
Investing activities ..................
Financing activities .................
(1,207)
3,053
(911)
(108)
(697)
(104)
(1,257)
(245)
(776)
(236)
(346)
79
(1,034)
(808)
(951)
(69)
512
42
(553)
65
66
Financing Activities. The following items contributed to (increased) decreased net cash used in financing activities:
Year Ended December 31,
2018 compared to 2017
2017 compared to 2016
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
Net changes in commercial paper outstanding.................. $
Increased proceeds from issuances of preferred stock ......
Increased proceeds from issuance of Common Stock.......
Net changes in long-term debt outstanding, excluding
commercial paper...........................................................
Net changes in reacquired debt..........................................
Net changes in debt issuance costs....................................
Net changes in short-term borrowings ..............................
Distributions to ZENS note holders ..................................
Increased payment of Common Stock dividends ..............
Increased payment of preferred stock dividends ...............
Net change in notes payable from affiliated companies....
Contribution from parent...................................................
Dividend to parent .............................................................
Other ..................................................................................
$
(in millions)
(1,892) $ — $ (1,017) $
—
1,740
—
1,844
2,126
5
(34)
(43)
(398)
(38)
(11)
—
—
—
(1)
3,298
—
77
—
(1)
—
—
—
—
(119)
200
(29)
—
$
128
$
—
851
5
(1)
(43)
—
—
—
(1,140)
922
241
(1)
(183) $
(120) $ — $
—
—
503
17
(4)
9
178
(18)
—
—
—
—
(2)
563
—
—
(123)
—
3
—
—
—
—
372
(374)
(45)
—
(167) $
$
(21)
—
—
73
(5)
(4)
9
—
—
—
570
(34)
42
2
632
Future Sources and Uses of Cash
The liquidity and capital requirements of the Registrants are affected primarily by results of operations, capital expenditures,
debt service requirements, tax payments, working capital needs and various regulatory actions. Capital expenditures are expected
to be used for investment in infrastructure for electric and natural gas distribution operations. These capital expenditures are
anticipated to maintain reliability and safety, increase resiliency and expand our systems through value-added projects. In addition
to dividend payments on CenterPoint Energy’s Series A Preferred Stock, Series B Preferred Stock and Common Stock, and in
addition to interest payments on debt, the Registrants’ principal anticipated cash requirements for 2019 include the following:
Merger consideration for Vectren acquisition (1) .......................................................
Estimated capital expenditures (2) ..............................................................................
Change in control debt redemption (1) .......................................................................
Scheduled principal payments on Securitization Bonds............................................
Minimum contributions to pension plans and other post-retirement plans................
Maturing Vectren senior notes ...................................................................................
CenterPoint
Energy
Houston
Electric
CERC
(in millions)
$
5,982
$
— $
2,432
759
458
110
60
979
—
458
10
—
—
714
—
—
4
—
(1) On February 1, 2019, pursuant to the Merger Agreement, CenterPoint Energy consummated the previously announced
Merger and acquired Vectren for approximately $6 billion in cash. In conjunction with the consummation of the Merger,
$759 million of debt at Vectren was redeemed due to the change in control. For further discussion of the Merger, see Note
4 to the consolidated financial statements.
(2) CenterPoint Energy’s estimated capital expenditures include estimated capital expenditures for Vectren and its subsidiaries
as of the closing of the Merger.
The Registrants expect that anticipated 2019 cash needs will be met with borrowings under their credit facilities, proceeds
from the issuance of long-term debt (including Houston Electric’s January 2019 issuance of $700 million aggregate principal
amount of general mortgage bonds), anticipated cash flows from operations, with respect to CenterPoint Energy and CERC,
proceeds from commercial paper and with respect to CenterPoint Energy, distributions from Enable. In addition, if CenterPoint
Energy decides to sell Enable common units that it owns in the public equity markets or otherwise in 2019 (reducing the amount
of future distributions CenterPoint Energy receives from Enable to the extent of any such sales), any net proceeds received from
such sales could provide a source for CenterPoint Energy’s remaining 2019 cash needs. Discretionary financing or refinancing
may result in the issuance of equity securities of CenterPoint Energy or debt securities of the Registrants in the capital markets or
the arrangement of additional credit facilities or term bank loans. Issuances of equity or debt in the capital markets, funds raised
in the commercial paper markets, additional credit facilities and any sales of CenterPoint Energy’s Enable common units may not,
however, be available on acceptable terms.
The following table sets forth the Registrants’ actual capital expenditures by reportable segment for 2018 and estimates of the
Registrants’ capital expenditures currently planned for projects for 2019 through 2023:
2018
2019
2020
2021
2022
2023
CenterPoint Energy
Electric Transmission & Distribution ............... $
Natural Gas Distribution...................................
Energy Services ................................................
Other Operations...............................................
Vectren and its subsidiaries (1) ..........................
Total
................................................................ $
Houston Electric (2) ......................................... $
CERC
Natural Gas Distribution................................... $
Energy Services ................................................
Other Operations...............................................
$
$
$
$
952
638
20
110
—
1,720
952
638
20
—
979
673
40
71
669
2,432
979
673
40
1
(in millions)
$
1,028
$
1,178
$
678
16
39
740
2,501
1,028
678
16
—
$
$
$
691
15
33
867
2,784
1,178
691
15
—
$
$
$
$
$
$
$
$
$
$
979
694
39
34
1,056
2,802
979
694
39
—
Total................................................................ $
658
$
714
$
694
$
706
$
733
$
980
711
13
35
896
2,635
980
711
13
—
724
(1) Vectren 2019 capital expenditures reflect capital expenditure estimates for the period February through December 2019
only.
(2) Houston Electric consists of a single reportable segment, Electric Transmission & Distribution.
The following table sets forth estimates of the Registrants’ contractual obligations as of December 31, 2018, including payments
due by period but does not include any amounts for Vectren or its subsidiaries:
Contractual Obligations
Total
2019
2020-2021
2022-2023
2024 and
thereafter
(in millions)
CenterPoint Energy
Securitization Bonds ..........................................................
Other long-term debt (1) .....................................................
Interest payments — Securitization Bonds (2) ...................
Interest payments — other long-term debt (2) ....................
Operating leases (3) .............................................................
Benefit obligations (4) .........................................................
Non-trading derivative liabilities .......................................
Commodity and other commitments (5) .............................
Total contractual cash obligations (6) ...............................
$
1,435
$
458
$
442
$
375
$
7,798
125
4,482
36
—
131
3,058
—
46
350
6
—
126
454
1,495
1,510
51
679
11
—
5
773
24
541
7
—
—
385
$
17,065
$
1,440
$
3,456
$
2,842
$
160
4,793
4
2,912
12
—
—
1,446
9,327
67
68
Contractual Obligations
Total
2019
2020-2021
2022-2023
2024 and
thereafter
(in millions)
for interim recovery of project costs incurred through July 31, 2018, which were not already included in rates in a filing with the
PUCT in September 2018 and received approval for interim recovery in November 2018. Final approval by the PUCT of the
project costs is expected to occur in Houston Electric’s next base rate case, which is anticipated to be filed in April 2019.
$
1,435
$
458
$
Houston Electric
Securitization Bonds ..........................................................
Other long-term debt (1) .....................................................
Interest payments — Securitization Bonds (2) ...................
Interest payments — other long-term debt (2) ....................
Non-trading derivative liabilities .......................................
Operating leases (3) .............................................................
Benefit obligations (4) .........................................................
Total contractual cash obligations (6) ...............................
CERC
Long-term debt ...................................................................
Interest payments — long-term debt (1) .............................
Operating leases (3) .............................................................
Benefit obligations (4) .........................................................
Non-trading derivative liabilities .......................................
Commodity and other commitments (5) .............................
Total contractual cash obligations (6) ...............................
3,281
125
2,150
24
1
—
7,016
2,371
1,488
32
—
107
3,058
$
$
$
$
$
7,056
$
442
402
51
255
—
—
—
593
209
9
—
5
773
$
$
$
$
$
$
375
500
24
226
—
—
—
1,125
510
153
7
—
—
385
160
2,379
4
1,537
—
—
—
4,080
1,268
1,015
11
—
—
1,446
3,740
$
1,589
$
1,055
$
—
46
132
24
1
—
111
5
—
102
454
672
661
$
1,150
— $
(1) ZENS obligations are included in the 2024 and thereafter column at their contingent principal amount as of December 31,
2018 of $93 million. These obligations are exchangeable for cash at any time at the option of the holders for 95% of the
current value of the reference shares attributable to each ZENS ($540 million as of December 31, 2018), as discussed in
Note 12 to the consolidated financial statements.
(2) The Registrants calculated estimated interest payments for long-term debt as follows: for fixed-rate debt and term debt,
the Registrants calculated interest based on the applicable rates and payment dates; for variable-rate debt and/or non-term
debt, the Registrants used interest rates in place as of December 31, 2018. The Registrants typically expect to settle such
interest payments with cash flows from operations and short-term borrowings.
(3) For a discussion of operating leases, please read Note 16(c) to the consolidated financial statements.
(4) See Note 8(g) to the consolidated financial statements for information on the Registrants’ expected contributions to pension
plans and other postretirement plans in 2019.
(5) For a discussion of commodity and other commitments, please read Note 16(a) to the consolidated financial statements.
(6) This table does not include estimated future payments for expected future AROs. These payments are primarily estimated
to be incurred after 2024. See Note 3(c) to the consolidated financial statements for further information.
Off-Balance Sheet Arrangements
Other than Houston Electric’s first mortgage bonds and general mortgage bonds issued as collateral for tax-exempt long-term
debt of CenterPoint Energy (see Note 14 to the consolidated financial statements) and operating leases, the Registrants have no
off-balance sheet arrangements.
Regulatory Matters
Brazos Valley Connection Project (CenterPoint Energy and Houston Electric)
Houston Electric completed construction on and energized the Brazos Valley Connection in March 2018, ahead of the original
June 1, 2018 energization date. The final capital costs of the project reported to the PUCT in December 2018 were $281 million,
which was within the estimated range of approximately $270-$310 million in the PUCT’s original order. Houston Electric applied
69
Bailey to Jones Creek Project (CenterPoint Energy and Houston Electric)
In April 2017, Houston Electric submitted a proposal to ERCOT requesting its endorsement of a transmission project in the
greater Freeport, Texas area, which includes enhancements to two existing substations and the construction of a new 345 kV
double-circuit line to be located in the counties of Brazoria, Matagorda and Wharton. On December 12, 2017, Houston Electric
received approval from ERCOT. In September 2018, Houston Electric filed a certificate of convenience and necessity application
with the PUCT that included capital cost estimates for the project that ranged from approximately $482-$695 million, which were
higher than the initial cost estimates. The revised project cost estimates include additional costs associated with the routing of the
line to mitigate environmental and other land use impacts and structure design to address soil and coastal wind conditions. The
actual capital costs of the project will depend on those factors as well as other factors, including land acquisition costs, construction
costs and the ultimate route approved by the PUCT. On the request of the PUCT, ERCOT intervened in the proceeding and
performed a re-evaluation of the cost-effectiveness of the proposed project. Based on that re-evaluation, ERCOT’s recommended
transmission option for the project remains unchanged. Houston Electric anticipates that the PUCT will issue a final decision on
the certificate of convenience and necessity application in the fourth quarter of 2019.
Rate Change Applications
The Registrants are routinely involved in rate change applications before state regulatory authorities. Those applications
include general rate cases, where the entire cost of service of the utility is assessed and reset. In addition, Houston Electric is
periodically involved in proceedings to adjust its capital tracking mechanisms (TCOS and DCRF) and annually files to adjust its
EECRF. CERC is periodically involved in proceedings to adjust its capital tracking mechanisms in Texas (GRIP), its cost of service
adjustments in Arkansas, Louisiana, Mississippi and Oklahoma (FRP, RSP, RRA and PBRC, respectively), its decoupling
mechanism in Minnesota, and its energy efficiency cost trackers in Arkansas, Minnesota, Mississippi and Oklahoma (EECR, CIP,
EECR and EECR, respectively). The recently acquired Vectren entities are also routinely involved in rate change applications
before regulatory authorities. However, disclosures related to rate change applications for Vectren entities during 2018 have not
been included in the table below. The table below reflects significant applications pending or completed during 2018 and to date
in 2019 for the Registrants.
Annual
Increase
(Decrease)
(1)
(in millions)
Mechanism
Filing
Date
Effective
Date
Approval
Date
Additional Information
CenterPoint Energy and Houston Electric (PUCT)
Revised TCOS annual revenue application approved in November 2017 by a
reduction of $41.6 million to recognize a decrease in the federal income tax
rate, amortize certain EDIT balances and adjust rate base by EDIT
attributable to new plant since the last rate case, all of which are related to the
TCJA.
Requested an increase of $285 million to rate base and reflects a $40.8
million annual increase in current revenues. Also reflects a one-time refund
of $6.6 million in excess federal income tax collected from January to April
2018.
April
2018
July
2018
TCOS
N/A
February
2018
April
2018
May
2018
July
2018
TCOS
TCOS
EECRF
$40.8
2.4
8.4
September
2018
November
2018
November
2018
Requested an increase of $15.4 million to rate base and reflects a $2.4
million annual increase in current revenues.
June
2018
March
2019
December
2018
The PUCT issued a final order in December 2018 approving recovery of
2019 EECRF of $39.5 million, including an $8.4 million performance bonus.
DCRF
30.9
April
2018
September
2018
August
2018
Unanimous settlement agreement approved by the PUCT in August 2018
results in incremental annual revenue of $30.9 million. It results in a $120.6
million annual revenue requirement effective September 1, 2018. The
settlement agreement also reflects an approximately $39 million decrease
resulting from the 21% federal income tax rate, a $20 million decrease to
return to customers the reserve recorded recognizing this decrease in the
federal income tax rate from January 25, 2018 through August 31, 2018 and a
$19.2 million decrease related to the unprotected EDIT. Effective September
1, 2019, the reserve amount returned to customers ends. In December 2018,
Houston Electric filed an updated DCRF tariff to adjust the interim DCRF
rates to reflect the difference between the $20 million estimated tax-expense
regulatory liability and the $23.4 million actual tax-expense regulatory
liability recorded by Houston Electric.
70
Annual
Increase
(Decrease)
(1)
(in millions)
Mechanism
Filing
Date
Effective
Date
Approval
Date
Additional Information
CenterPoint Energy and CERC - South Texas (Railroad Commission)
Rate Case
(1.0)
November
2017
May
2018
May
2018
Unanimous settlement agreement approved by the Railroad Commission in
May 2018 that provides for a $1 million annual decrease in current revenues.
The settlement agreement also reflects an approximately $2 million decrease
in the federal income tax rate and amortization of certain EDIT balances and
establishes a 9.8% ROE for future GRIP filings for the South Texas
jurisdiction.
CenterPoint Energy and CERC - Beaumont/East Texas, Houston and Texas Coast (Railroad Commission)
GRIP
14.7
March
2018
July
2018
June
2018
Administrative
104.111
N/A
July
2018
September
2018
August
2018
Based on net change in invested capital of $70.0 million and reflects a $14.7
million annual increase in current revenues, net of an approximate $1.0
million decrease from the federal income tax rate reduction as a result of the
TCJA.
Beaumont/East Texas, Houston and Texas Coast proposed to decrease base
rates by $12.9 million to reflect the change in the federal income tax rate. In
addition, Beaumont/East Texas proposed to decrease the GRIP charge to
reflect the change in the federal income tax rate. The impact of deferred
taxes is expected to be reflected in the next rate case.
CenterPoint Energy and CERC - Arkansas (APSC)
FRP
13.2
August
2018
October
2018
September
2018
Based on ROE of 9.5% as approved in the last rate case and reflects a $13.2
million annual increase in current revenues, excluding the effects of the
TCJA. The annual increase is reduced from TCJA impacts by approximately
$8.1 million, which include the effects of a lower federal income tax rate and
amortization of EDIT balances.
CenterPoint Energy and CERC - Louisiana (LPSC)
RSP
6.1
December
2018
December
2018
February
2019
Based on ROE of 9.95% and the 21% federal income tax rate and reflects a
$6.1 million annual increase in current revenues. Other impacts of the TCJA,
which were calculated outside the band, reduced the annual increase by
approximately $4 million. Interim rates were implemented in December
2018. Final rates were implemented February 2019 upon receipt of the
LPSC’s final order. The LPSC also approved the refund of $5.6 million of
other TCJA impacts over a three month period, beginning January 31, 2019.
CenterPoint Energy and CERC - Minnesota (MPUC)
Rate Case
3.9
August
2017
November
2018
July
2018
Includes a proposal to extend decoupling beyond current expiration date of
June 2018. Interim rates reflecting an annual increase of $47.8 million were
effective October 1, 2017. A unanimous settlement agreement was filed in
March 2018, subject to MPUC approval. The settlement agreement increases
base rates by $3.9 million, makes decoupling a permanent part of the tariff,
incorporates the impact of the decrease in the federal income tax rate and
amortization of EDIT balances (approximately $20 million) and establishes
or continues tracker recovery mechanisms that account for approximately
$13.3 million in the initial filing. The MPUC voted to approve the settlement
and a formal order was issued on July 20, 2018. Final rates (and the refund
of interim rates that exceed final rates) were implemented beginning
November 1, 2018.
Decoupling
(13.8)
CIP
12.5
September
2018
May
2018
September
2018
September
2018
January
2019
Represents revenue over-recovery of $21.9 million recorded for and during
the period July 1, 2017 through June 30, 2018 offset by the rate and prior
period adjustments totaling $8.1 million recorded in 2018.
September
2018
Annual reconciliation filing for program year 2017 and includes performance
bonus of $12.5 million which was recorded in September 2018.
RRA
3.2
May
2018
November
2018
November
2018
Based on authorized ROE of 9.144% and a capital structure of 50% debt and
50% equity and reflects a $3.2 million annual increase in revenues.
CenterPoint Energy and CERC - Mississippi (MPSC)
CenterPoint Energy and CERC - Oklahoma (OCC)
PBRC
5.4
March
2018
October
2018
October
2018
Based on ROE of 10% and reflects a $5.4 million annual increase in
revenues. As a result of the final order, all EDIT was removed from the
PBRC calculation. Protected EDIT amortization will begin to be refunded in
April 2019 via one-time annual bill credits. Unprotected EDIT will be
refunded over a five-year period via annual bill credits which began in
October 2018.
(1) Represents proposed increases (decreases) when effective date and/or approval date is not yet determined. Approved
rates could differ materially from proposed rates.
Tax Reform
For the Registrants, federal income tax expense is included in the rates approved by state commissions and local municipalities
and charged by those utilities to consumers. As the Registrants file general rate cases and other periodic rate adjustments, the
impacts of the TCJA (including the lower tax rate and the calculation and amortization of EDIT), along with other increases and
decreases in their revenue requirements, will be incorporated into the Registrants’ future rates as allowed by IRS rules. The effect
of any potential return of tax savings resulting from the TCJA to consumers may differ depending on how each regulatory body
requires the Registrants to return such savings. Regulatory commissions across most of the Registrants’ jurisdictions have issued
accounting orders to track or record a regulatory liability for (1) the difference between revenues collected under existing rates
and revenues that would have been collected had the existing rates been set using the recently approved federal income tax rates
and (2) the balance of EDIT that now exists because of the reduction in federal income tax rates.
On January 25, 2018, the PUCT issued an accounting order in Project No. 47945 directing electric utilities, including Houston
Electric, to record as a regulatory liability (1) the difference between revenues collected under existing rates and revenues that
would have been collected had the existing rates been set using the recently approved federal income tax rates and (2) the balance
of EDIT that now exists because of the reduction in federal income tax rates. On February 13, 2018, Houston Electric and other
likely parties to a future rate case announced a settlement that required Houston Electric to make (i) a TCOS filing by February
20, 2018 to reflect the change in the federal income tax rate for Houston Electric’s transmission rate base through July 31, 2017
(and such filing was timely submitted), (ii) a DCRF filing in April 2018 to reflect the change in the federal income tax rate for
Houston Electric’s distribution rate base through December 31, 2017 (and such filing was timely submitted) and (iii) a full rate
case filing by April 30, 2019. The settlement was presented to the PUCT during its open meeting on February 15, 2018. In response
to the settlement, the PUCT did not proceed with a prior proposal to require Houston Electric to file a rate case in the summer of
2018. The PUCT also amended its prior accounting order to remove the requirement that utilities include carrying costs in the new
regulatory liability. Additional information related to tax reform for Houston Electric is described in the table above.
On January 12, 2018, the APSC issued an order in Docket No. 18-006-U opening an investigatory docket into the TCJA and
directing utilities, including CERC, to record as a regulatory liability the current and deferred impacts of the TCJA. On July 26,
2018, the APSC issued an order in the investigatory docket requiring CERC to (1) include the reduction in tax expense due to the
January 1, 2018 change in the tax rate from 35% to 21% in the utility’s FRP as a reduction to the revenue requirement; this reduction
will be reflected in the utility’s historical year netting process in the 2019 FRP filing; (2) file and include all unprotected EDIT,
including plant-related unprotected EDIT, in a separate rider within 30 days and refund the entire balance before December 31,
2019; (3) include protected EDIT in the FRP and amortize such amount using the ARAM method; and (4) adjust all other riders
impacted by the TCJA changes and apply carrying charges calculated using the pre-tax cost of capital of 6.44% for the amounts
related to the TCJA within 30 days of the July 26, 2018 order. On August 24, 2018 CERC filed Rider TCJA in Docket No. 18-050-
TF. This rider returns the entire unprotected EDIT of approximately $19 million over five months from October 2018 through
February 2019. The GMES Rider, which is not currently in effect, was revised to reflect the effects of the TCJA. No other riders
were impacted. On September 21, 2018, the APSC approved Rider TCJA as filed, with an effective date of October 1, 2018. On
December 3, 2018, CERC filed an adjustment to Rider TCJA reflecting unprotected EDIT of approximately $17 million, as
compared to the originally estimated amount of $19 million. This update reflects known amounts as a result of CNP’s 2017 corporate
income tax filing. On December 21, 2018, the APSC approved the updated Rider TCJA effective through February 2019.
On October 5, 2018, the LPSC Staff filed its Final Report and Recommended Proposed Rule in Docket No. R-34754, which
addresses the TCJA. The proposed rule recommends that CERC (1) adjust rates prospectively to reflect the new 21% federal
corporate income tax rate; (2) refund to ratepayers 100% of federal corporate income taxes collected that are in excess of the new
lower applicable tax rate plus carrying cost at the utility’s WACC over a 12-month period or other period approved by the LPSC;
(3) accrue carrying charges on EDIT balances at the utility’s WACC until fully amortized, except to the extent ratepayers are
receiving benefits of EDIT as a reduction to rate base; (4) amortize protected EDIT over ARAM and implement through an outside-
the-band reduction in rates attributable to the annual amortization; and (5) amortize unprotected EDIT over 24 months or other
period approved by the LPSC and implement through an outside-the-band reduction in rates or special tax rider. The LPSC Staff
presented this proposed rule to the LPSC for vote at the October 26, 2018 Business & Executive Session. The interim RSP rates,
protected EDIT impacts and the reduction of corporate income tax were implemented on December 26, 2018. On January 16,
2019, the LPSC approved the TCJA impacts implemented in December and a separate TCJA rider to return the unprotected EDIT
and excess funds collected over a three-month period, which began on January 31, 2019, as provided in the final order issued
February 1, 2019.
On November 6, 2018, within the order approving the 2018 Mississippi RRA, the MPSC ruled that protected EDIT will be
amortized over ARAM beginning with the 2019 RRA, unprotected EDIT will be amortized over a three-year period beginning
December 1, 2018, and the refund due to the change in tax rate for 2018 billings prior to the 2018 RRA implementation will be a
71
72
component of the 2019 RRA filing for the 2018 calendar year.
FERC Revised Policy Statement and NOPR (CenterPoint Energy and CERC)
On March 15, 2018, the FERC addressed treatment of federal income tax allowances in FERC-regulated pipeline rates. The
FERC issued a Revised Policy Statement stating that it will no longer permit pipelines organized as MLPs to recover an income
tax allowance in their cost-of-service rates. The FERC issued the Revised Policy Statement in response to a remand from the U.S.
Court of Appeals for the D.C. Circuit in United Airlines v. FERC. On July 18, 2018, the FERC issued an order denying requests
for rehearing of its Revised Policy Statement because it is a non-binding policy and parties will have the opportunity to address
the policy as applied in future cases. On September 14, 2018, MRT, filed a Petition for Review. That case remains undecided.
On March 15, 2018, the FERC also proposed, in a NOPR, the method by which it would apply the Revised Policy Statement
to FERC-jurisdictional natural gas pipeline rates, as well as account for the corporate income tax rate reduction in the TCJA. On
July 18, 2018, the FERC issued a final rule requiring FERC-regulated natural gas pipelines that have cost-based rates to make a
filing providing certain cost and revenue information and then either propose to reduce or support current cost-based rates, or take
no further action. The final rule is currently subject to requests for rehearing. On January 16, 2019, the FERC used this filing as
the basis to open an investigation into the rates of Northern Natural Gas Company. CERC is a shipper on Northern Natural Gas
Company’s pipeline system.
EGT, made its required filing on October 11, 2018, in which it asserted that no rate reduction is warranted. That filing remains
subject to FERC review. MRT is not required to make such a filing as it is engaged in an ongoing rate case. As part of that rate
case, FERC ordered the filings to conform to its tax policy. That order is currently subject to requests for rehearing. SESH, in
which Enable owns a 50% interest, made its required filing in November 2018 and a limited rate reduction filing. With regard to
FERC-jurisdictional rates on Enable’s crude oil pipelines, the FERC plans to address the Revised Policy Statement and corporate
tax rate reduction in its next five-year review of the oil pipeline rate index, which will occur in 2020 and become effective July 1,
2021. At this time, we cannot predict the outcome of the final rule on Enable, but it could continue to adversely impact the rates
Enable is permitted to charge its customers.
Other Matters
Credit Facilities
The Registrants may draw on their respective revolving credit facilities from time to time to provide funds used for general
corporate and limited liability company purposes, including to backstop CenterPoint Energy’s and CERC’s commercial paper
programs. The facilities may also be utilized to obtain letters of credit. For further details related to the Registrants’ revolving
credit facilities, please see Note 14 to the consolidated financial statements.
Based on the consolidated debt to capitalization covenant in the Registrants’ revolving credit facilities, the Registrants would
have been permitted to utilize the full capacity of such revolving credit facilities, which aggregated approximately $4.5 billion as
of December 31, 2018. As of February 12, 2019, the Registrants had the following revolving credit facilities and utilization of
such facilities:
Registrant/Subsidiary
Size of
Facility
Loans
Letters
of Credit
Commercial
Paper
Weighted
Average
Interest Rate
Termination Date
Amount Utilized as of February 12, 2019
CenterPoint Energy (1) ..................................
$
3,300
$
— $
6
$
2,592
(in millions, except weighted average interest rate)
VUHI (2) ...................................................
Vectren Capital Corp. (2) ..........................
Total CenterPoint Energy .................
Houston Electric...........................................
CERC (3) .......................................................
400
200
3,900
300
900
Total ........................................................
$
5,100
$
—
—
6
4
1
190
—
2,782
—
—
$
11
$
2,782
—
37
37
—
—
37
73
2.88%
2.73%
3.63%
—
—
March 2022
July 2022
July 2022
March 2022
March 2022
(1) Pursuant to the amendment entered into in May 2018, the aggregate commitments under the CenterPoint Energy revolving
credit facility increased to $3.3 billion on October 5, 2018 due to the satisfaction of certain conditions, including the
termination of the Bridge Facility. For further information, see Note 4 to the consolidated financial statements.
(2) Vectren’s outstanding short-term and long-term debt on the closing date of the Merger became debt of CenterPoint Energy.
(3) Issued by CERC Corp.
Borrowings under each of the revolving credit facilities are subject to customary terms and conditions. However, there is no
requirement that the borrower makes representations prior to borrowing as to the absence of material adverse changes or litigation
that could be expected to have a material adverse effect. Borrowings under each of the revolving credit facilities are subject to
acceleration upon the occurrence of events of default that we consider customary. The revolving credit facilities also provide for
customary fees, including commitment fees, administrative agent fees, fees in respect of letters of credit and other fees. In each
of the revolving credit facilities, the spread to LIBOR and the commitment fees fluctuate based on the borrower’s credit rating.
The borrowers are currently in compliance with the various business and financial covenants in the three revolving credit facilities.
Long-term Debt
For detailed information about the Registrants’ debt issuances in 2018 and to date in 2019, see Note 14 to the consolidated
financial statements.
Vectren Debt
As a result of the Merger, Vectren’s outstanding short-term and long-term debt on the closing date of the Merger became debt
of CenterPoint Energy, which included debt of Vectren and its subsidiaries with maturities ranging from 2019 to 2055 and containing
customary covenants for investment grade debt.
Securities Registered with the SEC
On January 31, 2017, the Registrants filed a joint shelf registration statement with the SEC, as amended on September 24,
2018, registering indeterminate principal amounts of Houston Electric’s general mortgage bonds, CERC Corp.’s senior debt
securities and CenterPoint Energy’s senior debt securities and junior subordinated debt securities and an indeterminate number of
shares of Common Stock, shares of preferred stock, depositary shares, as well as stock purchase contracts and equity units. The
joint shelf registration statement will expire on January 31, 2020. For information related to the Registrants’ debt and equity
security issuances in 2018 and to date in 2019, see Notes 13 and 14 to the consolidated financial statements.
Temporary Investments
As of February 12, 2019, the Registrants had no temporary investments.
Money Pool
The Registrants participate in a money pool through which they and certain of their subsidiaries can borrow or invest on a
short-term basis. CNP Midstream cannot borrow from the money pool but can invest in it. Funding needs are aggregated and
external borrowing or investing is based on the net cash position. The net funding requirements of the money pool are expected
to be met with borrowings under CenterPoint Energy’s revolving credit facility or the sale of CenterPoint Energy’s commercial
paper. The money pool may not provide sufficient funds to meet the Registrants’ cash needs.
The table below summarizes money pool activity by participant as of February 12, 2019:
Money pool investments ........................................................
2.92%
$
485
$
27
$
293
Weighted Average
Interest Rate
Houston
Electric
CERC
(in millions)
CNP
Midstream
74
Impact on Liquidity of a Downgrade in Credit Ratings
The interest on borrowings under the Registrants’ credit facilities is based on their credit ratings. On January 28, 2019, in
anticipation of the closing of the Merger, Moody’s downgraded CenterPoint Energy’s senior unsecured debt rating to Baa2 from
Baa1 and changed the rating outlook for CenterPoint Energy to stable from negative. On February 1, 2019, as a result of the closing
of the Merger, S&P lowered its issuer credit rating on CenterPoint Energy’s senior unsecured debt to BBB from BBB+. S&P also
lowered its issuer credit ratings on Houston Electric and CERC Corp. to BBB+ from A- in each case, affirmed the A credit rating
on Houston Electric’s senior secured debt and lowered the credit rating on CERC’s senior unsecured debt to BBB+ from A-.
Additionally, S&P removed the issuer credit ratings for each Registrant from CreditWatch and changed the rating outlooks to
stable. As of February 12, 2019, Moody’s, S&P and Fitch had assigned the following credit ratings to senior debt of the Registrants:
Registrant/Instrument
Rating
Outlook (1)
Rating
Outlook (2)
Rating
Outlook (3)
CenterPoint Energy Senior Unsecured Debt ..........
Houston Electric Senior Secured Debt...................
CERC Senior Unsecured Debt (4) ..........................
Baa2
A1
Baa1
Stable
Stable
BBB
A
Positive
BBB+
Stable
Stable
Stable
BBB
A+
BBB+
Stable
Stable
Stable
Moody’s
S&P
Fitch
States. To economically hedge its exposure to natural gas prices, CES uses derivatives with provisions standard for the industry,
including those pertaining to credit thresholds. Typically, the credit threshold negotiated with each counterparty defines the amount
of unsecured credit that such counterparty will extend to CES. To the extent that the credit exposure that a counterparty has to
CES at a particular time does not exceed that credit threshold, CES is not obligated to provide collateral. Mark-to-market exposure
in excess of the credit threshold is routinely collateralized by CES. Similarly, mark-to-market exposure offsetting and exceeding
the credit threshold may cause the counterparty to provide collateral to CES. As of December 31, 2018, the amount posted by
CES as collateral aggregated approximately $36 million. Should the credit ratings of CERC Corp. (as the credit support provider
for CES) fall below certain levels, CES would be required to provide additional collateral up to the amount of its previously
unsecured credit limit. CenterPoint Energy and CERC estimate that as of December 31, 2018, unsecured credit limits extended to
CES by counterparties aggregated $268 million, and none of such amount was utilized.
Pipeline tariffs and contracts typically provide that if the credit ratings of a shipper or the shipper’s guarantor drop below a
threshold level, which is generally investment grade ratings from both Moody’s and S&P, cash or other collateral may be demanded
from the shipper in an amount equal to the sum of three months’ charges for pipeline services plus the unrecouped cost of any
lateral built for such shipper. If the credit ratings of CERC Corp. decline below the applicable threshold levels, CERC Corp. might
need to provide cash or other collateral of as much as $186 million as of December 31, 2018. The amount of collateral will depend
on seasonal variations in transportation levels.
(1) A Moody’s rating outlook is an opinion regarding the likely direction of an issuer’s rating over the medium term.
ZENS and Securities Related to ZENS (CenterPoint Energy)
(2) An S&P outlook assesses the potential direction of a long-term credit rating over the intermediate to longer term.
(3) A Fitch rating outlook indicates the direction a rating is likely to move over a one- to two-year period.
(4) Issued by CERC Corp.
As of February 12, 2019, Moody’s and S&P had assigned the following credit ratings to CenterPoint Energy’s Vectren entities:
Company/Instrument
Rating
Outlook (1)
Rating
Outlook (2)
Moody’s
S&P
Vectren Corp. Issuer Rating..........................................................................
VUHI Senior Unsecured Debt ......................................................................
Indiana Gas Senior Unsecured Debt.............................................................
SIGECO Senior Secured Debt......................................................................
n/a
A2
A2
Aa3
n/a
Negative
Negative
Negative
BBB+
BBB+
BBB+
A
Stable
Stable
Stable
Stable
(1) A Moody’s rating outlook is an opinion regarding the likely direction of an issuer’s rating over the medium term.
(2) An S&P outlook assesses the potential direction of a long-term credit rating over the intermediate to longer term.
The Registrants cannot assure that the ratings set forth above will remain in effect for any given period of time or that one or
more of these ratings will not be lowered or withdrawn entirely by a rating agency. The Registrants note that these credit ratings
are included for informational purposes and are not recommendations to buy, sell or hold the Registrants’ securities and may be
revised or withdrawn at any time by the rating agency. Each rating should be evaluated independently of any other rating. Any
future reduction or withdrawal of one or more of the Registrants’ credit ratings could have a material adverse impact on the
Registrants’ ability to obtain short- and long-term financing, the cost of such financings and the execution of the Registrants’
commercial strategies.
A decline in credit ratings could increase borrowing costs and other fees under the Registrants’ revolving credit facilities. As
a result of the January 28, 2019 and February 1, 2019 credit ratings downgrade of CenterPoint Energy at Moody’s and S&P,
respectively, commitment fees on undrawn balances under CenterPoint Energy’s revolving credit facility of $3.3 billion as of
December 31, 2018 are expected to increase by approximately $2 million annually. Additionally, as a result of the February 1,
2019 credit rating downgrades of CERC at S&P, commitment fees on undrawn balances under CERC’s revolving credit facility
of $0.9 billion as of December 31, 2018 are expected to increase by less than $1 million annually. If the Registrants’ credit ratings
had been further downgraded one notch by each of Moody’s and S&P from the ratings that existed immediately after February 1,
2019, the impact on the borrowing costs under the respective revolving credit facilities would not have been material.
CES, a wholly-owned subsidiary of CERC Corp. operating in the Energy Services reportable segment, provides natural gas
sales and services primarily to commercial and industrial customers and electric and natural gas utilities throughout the United
75
If CenterPoint Energy’s creditworthiness were to drop such that ZENS holders thought its liquidity was adversely affected or
the market for the ZENS were to become illiquid, some ZENS holders might decide to exchange their ZENS for cash. Funds for
the payment of cash upon exchange could be obtained from the sale of the shares of ZENS-Related Securities that CenterPoint
Energy owns or from other sources. CenterPoint Energy owns shares of ZENS-Related Securities equal to approximately 100%
of the reference shares used to calculate its obligation to the holders of the ZENS. ZENS exchanges result in a cash outflow because
tax deferrals related to the ZENS and shares of ZENS-Related Securities would typically cease when ZENS are exchanged or
otherwise retired and shares of ZENS-Related Securities are sold. The ultimate tax liability related to the ZENS continues to
increase by the amount of the tax benefit realized each year, and there could be a significant cash outflow when the taxes are paid
as a result of the retirement or exchange of the ZENS. If all ZENS had been exchanged for cash on December 31, 2018, deferred
taxes of approximately $438 million would have been payable in 2018. If all the shares of ZENS-Related Securities had been sold
on December 31, 2018, capital gains taxes of approximately $90 million would have been payable in 2018 based on 2018 tax rates
in effect. For additional information about ZENS, see Note 12 to the consolidated financial statements.
Cross Defaults
Under CenterPoint Energy’s revolving credit facility, a payment default on, or a non-payment default that permits acceleration
of, any indebtedness for borrowed money and certain other specified types of obligations (including guarantees) exceeding $125
million by it or any of its significant subsidiaries will cause a default. A default by CenterPoint Energy would not trigger a default
under its subsidiaries’ debt instruments or revolving credit facilities.
Possible Acquisitions, Divestitures and Joint Ventures
From time to time, the Registrants consider the acquisition or the disposition of assets or businesses or possible joint ventures,
strategic initiatives or other joint ownership arrangements with respect to assets or businesses. Any determination to take action
in this regard will be based on market conditions and opportunities existing at the time, and accordingly, the timing, size or success
of any efforts and the associated potential capital commitments are unpredictable. The Registrants may seek to fund all or part of
any such efforts with proceeds from debt and/or equity issuances. Debt or equity financing may not, however, be available to the
Registrants at that time due to a variety of events, including, among others, maintenance of their credit ratings, industry conditions,
general economic conditions, market conditions and market perceptions.
Additionally, CenterPoint Energy may also reduce its ownership in Enable over time through sales in the public equity markets,
or otherwise, of the Enable common units it holds, subject to market conditions. CenterPoint Energy’s ability to execute any sale
of Enable common units is subject to a number of uncertainties, including the timing, pricing and terms of any such sale. Any
sales of Enable common units CenterPoint Energy owns could have an adverse impact on the price of Enable common units or
on any trading market for Enable common units. Further, CenterPoint Energy’s sales of Enable common units may have an adverse
impact on Enable’s ability to issue equity on satisfactory terms, or at all, which may limit its ability to expand operations or make
future acquisitions. Any reduction in CenterPoint Energy’s interest in Enable would result in decreased distributions from Enable
and decrease income, which may adversely impact its ability to meet its payment obligations and pay dividends on its Common
76
Stock. Further, any sales of Enable common units would result in a significant amount of taxes due. There can be no assurances
that any sale of Enable common units in the public equity markets or otherwise will be completed. Any sale of Enable common
units in the public equity markets or otherwise may involve significant costs and expenses, including, in connection with any
public offering, a significant underwriting discount. CenterPoint Energy may not realize any or all of the anticipated strategic,
financial, operational or other benefits from any completed sale or reduction in its investment in Enable.
Enable Midstream Partners (CenterPoint Energy and CERC)
In September 2018, CERC completed the Internal Spin, after which CERC’s equity investment in Enable met the criteria for
discontinued operations classification. As a result, the operations have been classified as Income from discontinued operations,
net of tax, in CERC’s Statements of Consolidated Income for the periods presented. For further information, see Note 11 to the
consolidated financial statements.
CenterPoint Energy receives quarterly cash distributions from Enable on its common units and Enable Series A Preferred
Units. A reduction in the cash distributions CenterPoint Energy receives from Enable could significantly impact CenterPoint
Energy’s liquidity. For additional information about cash distributions from Enable, see Notes 11 and 22 to the consolidated
financial statements.
Hedging of Interest Expense for Future Debt Issuances
From time to time, the Registrants may enter into forward interest rate agreements to hedge, in part, volatility in the U.S.
treasury rates by reducing variability in cash flows related to interest payments. For further information, see Note 9(a) to the
consolidated financial statements.
•
•
•
•
•
•
•
•
•
•
acceleration of payment dates on certain gas supply contracts, under certain circumstances, as a result of increased natural
gas prices and concentration of natural gas suppliers (CenterPoint Energy and CERC);
increased costs related to the acquisition of natural gas (CenterPoint Energy and CERC);
increases in interest expense in connection with debt refinancings and borrowings under credit facilities;
various legislative or regulatory actions;
incremental collateral, if any, that may be required due to regulation of derivatives (CenterPoint Energy and CERC);
the ability of REPs, including REP affiliates of NRG and Vistra Energy Corp., formerly known as TCEH Corp., to satisfy
their obligations to CenterPoint Energy and Houston Electric;
slower customer payments and increased write-offs of receivables due to higher natural gas prices or changing economic
conditions (CenterPoint Energy and CERC);
the outcome of litigation;
contributions to pension and postretirement benefit plans (CenterPoint Energy);
restoration costs and revenue losses resulting from future natural disasters such as hurricanes and the timing of recovery
of such restoration costs; and
Weather Hedge (CenterPoint Energy and CERC)
•
various other risks identified in “Risk Factors” in Item 1A of Part I of this report.
CenterPoint Energy and CERC have historically entered into partial weather hedges for certain NGD jurisdictions and electric
operations’ service territory to mitigate the impact of fluctuations from normal weather. CenterPoint Energy and CERC remain
exposed to some weather risk as a result of the partial hedges. For more information about weather hedges, see Note 9(a) to the
consolidated financial statements.
Collection of Receivables from REPs (CenterPoint Energy and Houston Electric)
Houston Electric’s receivables from the distribution of electricity are collected from REPs that supply the electricity Houston
Electric distributes to their customers. Before conducting business, a REP must register with the PUCT and must meet certain
financial qualifications. Nevertheless, adverse economic conditions, structural problems in the market served by ERCOT or
financial difficulties of one or more REPs could impair the ability of these REPs to pay for Houston Electric’s services or could
cause them to delay such payments. Houston Electric depend on these REPs to remit payments on a timely basis, and any delay
or default in payment by REPs could adversely affect Houston Electric’s cash flows. In the event of a REP’s default, Houston
Electric’s tariff provides a number of remedies, including the option for Houston Electric to request that the PUCT suspend or
revoke the certification of the REP. Applicable regulatory provisions require that customers be shifted to another REP or a provider
of last resort if a REP cannot make timely payments. However, Houston Electric remain at risk for payments related to services
provided prior to the shift to the replacement REP or the provider of last resort. If a REP were unable to meet its obligations, it
could consider, among various options, restructuring under the bankruptcy laws, in which event such REP might seek to avoid
honoring its obligations and claims might be made against Houston Electric involving payments it had received from such REP.
If a REP were to file for bankruptcy, Houston Electric may not be successful in recovering accrued receivables owed by such REP
that are unpaid as of the date the REP filed for bankruptcy. However, PUCT regulations authorize utilities, such as Houston Electric,
to defer bad debts resulting from defaults by REPs for recovery in future rate cases, subject to a review of reasonableness and
necessity.
Certain Contractual Limits on Our Ability to Issue Securities and Borrow Money
Houston Electric has contractually agreed that it will not issue additional first mortgage bonds, subject to certain exceptions.
For information about the total debt to capitalization financial covenants in the Registrants’ revolving credit facilities, see Note
14 to the consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one that is both important to the presentation of the Registrants’ financial condition and results
of operations and requires management to make difficult, subjective or complex accounting estimates. An accounting estimate is
an approximation made by management of a financial statement element, item or account in the financial statements. Accounting
estimates in the Registrants’ historical consolidated financial statements measure the effects of past business transactions or events,
or the present status of an asset or liability. The accounting estimates described below require the Registrants to make assumptions
about matters that are highly uncertain at the time the estimate is made. Additionally, different estimates that the Registrants could
have used or changes in an accounting estimate that are reasonably likely to occur could have a material impact on the presentation
of their financial condition, results of operations or cash flows. The circumstances that make these judgments difficult, subjective
and/or complex have to do with the need to make estimates about the effect of matters that are inherently uncertain. Estimates and
assumptions about future events and their effects cannot be predicted with certainty. The Registrants base their estimates on
historical experience and on various other assumptions that they believe to be reasonable under the circumstances, the results of
which form the basis for making judgments. These estimates may change as new events occur, as more experience is acquired, as
additional information is obtained and as the Registrants’ operating environment changes. The Registrants’ significant accounting
policies are discussed in Note 2 to the consolidated financial statements. The Registrants believe the following accounting policies
involve the application of critical accounting estimates. Accordingly, these accounting estimates have been reviewed and discussed
with the Audit Committee of CenterPoint Energy’s Board of Directors.
Other Factors that Could Affect Cash Requirements
In addition to the above factors, the Registrants’ liquidity and capital resources could be affected by:
Accounting for Rate Regulation
•
cash collateral requirements that could exist in connection with certain contracts, including weather hedging arrangements,
and natural gas purchases, natural gas price and natural gas storage activities of CenterPoint Energy’s and CERC’s Natural
Gas Distribution and Energy Services reportable segments;
Accounting guidance for regulated operations provides that rate-regulated entities account for and report assets and liabilities
consistent with the recovery of those incurred costs in rates if the rates established are designed to recover the costs of providing
the regulated service and if the competitive environment makes it probable that such rates can be charged and collected. CenterPoint
Energy’s and Houston Electric’s Electric Transmission & Distribution reportable segment and CenterPoint Energy’s and CERC’s
Natural Gas Distribution reportable segment apply this accounting guidance. Certain expenses and revenues subject to utility
77
78
regulation or rate determination normally reflected in income are deferred on the balance sheet as regulatory assets or liabilities
and are recognized in income as the related amounts are included in service rates and recovered from or refunded to
customers. Regulatory assets and liabilities are recorded when it is probable that these items will be recovered or reflected in
future rates. Determining probability requires significant judgment on the part of management and includes, but is not limited to,
consideration of testimony presented in regulatory hearings, proposed regulatory decisions, final regulatory orders and the strength
or status of applications for rehearing or state court appeals. If events were to occur that would make the recovery of these assets
and liabilities no longer probable, the Registrants would be required to write off or write down these regulatory assets and
liabilities. For further detail on the Registrants’ regulatory assets and liabilities, see Note 7 to the consolidated financial statements.
Impairment of Long-Lived Assets, Including Identifiable Intangibles, Goodwill, Equity Method Investments, and
Investments without a Readily Determinable Fair Value
The Registrants review the carrying value of long-lived assets, including identifiable intangibles, goodwill, equity method
investments, and investments without a readily determinable fair value whenever events or changes in circumstances indicate that
such carrying values may not be recoverable, and at least annually for goodwill as required by accounting guidance for goodwill
and other intangible assets. Unforeseen events and changes in market conditions could have a material effect on the value of long-
lived assets, including intangibles, goodwill, equity method investments, and investments without a readily determinable fair value
due to changes in observable or estimated marked value, estimates of future cash flows, interest rate and regulatory matters and
could result in an impairment charge. A loss in value of an equity method investment is recognized when the decline is deemed
to be other than temporary. The Registrants recorded no impairments to goodwill, long-lived assets, including intangibles, equity
method investment, or readily determinable fair value during 2018, 2017 and 2016.
CenterPoint Energy and CERC performed the annual goodwill impairment test in the third quarter of 2018 and determined,
based primarily on the income approach, that no goodwill impairment charge was required for any reporting unit, which approximate
the Registrants’ applicable reportable segments.
Fair value is the amount at which the asset could be bought or sold in a current transaction between willing parties and may
be estimated using a number of techniques, including quoted market prices or valuations by third parties, present value techniques
based on estimates of cash flows, or multiples of earnings or revenue performance measures. The fair value of the asset could be
different using different estimates and assumptions in these valuation techniques.
The determination of fair value requires significant assumptions by management which are subjective and forward-looking
in nature. To assist in making these assumptions, CenterPoint Energy and CERC utilized a third-party valuation specialist in both
determining and testing key assumptions used in the valuation of each of the reporting units. CenterPoint Energy and CERC based
their assumptions on projected financial information that they believe is reasonable; however, actual results may differ materially
from those projections. These projected cash flows factor in planned growth initiatives, and for CenterPoint Energy’s and CERC’s
Natural Gas Distribution reporting unit, the regulatory environment. The fair values of CenterPoint Energy’s and CERC’s Natural
Gas Distribution and Energy Services reporting units significantly exceeded the carrying values.
Although there was not a goodwill asset impairment in the 2018 annual test, an interim impairment test could be triggered
by the following: actual earnings results that are materially lower than expected, significant adverse changes in the operating
environment, an increase in the discount rate, changes in other key assumptions which require judgment and are forward looking
in nature, or if CenterPoint Energy’s market capitalization falls below book value for an extended period of time. No impairment
triggers were identified subsequent to the 2018 annual test.
Unbilled Energy Revenues
Revenues related to electricity delivery and natural gas sales and services are generally recognized upon delivery to customers.
However, the determination of deliveries to individual customers is based on the reading of their meters, which is performed on
a systematic basis throughout the month either electronically through AMS meter communications or manual readings. At the end
of each month, deliveries to non-AMS customers since the date of the last meter reading are estimated and the corresponding
unbilled revenue is estimated. Information regarding deliveries to AMS customers after the last billing is obtained from actual
AMS meter usage data. Unbilled electricity delivery revenue is estimated each month based on actual AMS meter data, daily
supply volumes and applicable rates. Unbilled natural gas sales are estimated based on estimated purchased gas volumes, estimated
lost and unaccounted for gas and tariffed rates in effect. As additional information becomes available, or actual amounts are
determinable, the recorded estimates are revised. Consequently, operating results can be affected by revisions to prior accounting
estimates.
79
Pension and Other Retirement Plans
CenterPoint Energy sponsors pension and other retirement plans in various forms covering all employees who meet eligibility
requirements. CenterPoint Energy uses several statistical and other factors that attempt to anticipate future events in calculating
the expense and liability related to its plans. These factors include assumptions about the discount rate, expected return on plan
assets and rate of future compensation increases as estimated by management, within certain guidelines. In addition, CenterPoint
Energy’s actuarial consultants use subjective factors such as withdrawal and mortality rates. The actuarial assumptions used may
differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer
or shorter life spans of participants. These differences may result in a significant impact to the amount of pension expense recorded.
Please read “— Other Significant Matters — Pension Plans” for further discussion.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 2(r) to the consolidated financial statements, incorporated herein by reference, for a discussion of new accounting
pronouncements that affect the Registrants.
OTHER SIGNIFICANT MATTERS
Pension Plans (CenterPoint Energy). As discussed in Note 8(b) to the consolidated financial statements, CenterPoint Energy
maintains a non-contributory qualified defined benefit pension plan covering substantially all employees. Employer contributions
for the qualified plan are based on actuarial computations that establish the minimum contribution required under ERISA and the
maximum deductible contribution for income tax purposes.
Under the terms of CenterPoint Energy’s pension plan, it reserves the right to change, modify or terminate the plan. CenterPoint
Energy’s funding policy is to review amounts annually and contribute an amount at least equal to the minimum contribution
required under ERISA.
Additionally, CenterPoint Energy maintains an unfunded non-qualified benefit restoration plan that allows participants to
receive the benefits to which they would have been entitled under the non-contributory qualified pension plan except for the
federally mandated limits on qualified plan benefits or on the level of compensation on which qualified plan benefits may be
calculated.
Year Ended December 31,
2018
2017
2016
CenterPoint Energy
Minimum funding requirements for qualified pension plan.............................................. $
Employer contributions to the qualified pension plan.......................................................
Employer contributions to the non-qualified benefit restoration plan...............................
(in millions)
$
60
60
9
$
39
39
9
—
—
9
CenterPoint Energy expects to contribute a minimum of approximately $86 million to the qualified pension plan and
contributions aggregating approximately $7 million to the non-qualified benefit restoration plan in 2019.
Changes in pension obligations and assets may not be immediately recognized as pension expense in CenterPoint Energy’s
Statements of Consolidated Income, but generally are recognized in future years over the remaining average service period of
plan participants. As such, significant portions of pension expense recorded in any period may not reflect the actual level of benefit
payments provided to plan participants.
As the sponsor of a plan, CenterPoint Energy is required to (a) recognize on its Consolidated Balance Sheet as an asset a
plan’s over-funded status or as a liability such plan’s under-funded status, (b) measure a plan’s assets and obligations as of the end
of the fiscal year and (c) recognize changes in the funded status of the plans in the year that changes occur through adjustments
to other comprehensive income and, when related to its rate-regulated utilities with recovery mechanisms, to regulatory assets.
The projected benefit obligation for all defined benefit pension plans was $2,013 million and $2,225 million as of December 31,
2018 and 2017, respectively.
As of December 31, 2018, the projected benefit obligation exceeded the market value of plan assets of CenterPoint Energy’s
pension plans by $497 million. Changes in interest rates or the market values of the securities held by the plan during 2019 could
materially, positively or negatively, change the funded status and affect the level of pension expense and required contributions.
80
Houston Electric and CERC participate in CenterPoint Energy’s qualified and non-qualified pension plans covering
substantially all employees. Pension cost and the impact to pre-tax earnings, after capitalization and regulatory impacts, by
Registrant were as follows:
2018
2017
2016
Year Ended December 31,
• Equity price risk results from exposures to changes in prices of individual equity securities (CenterPoint Energy).
• Commodity price risk results from exposures to changes in spot prices, forward prices and price volatilities of commodities,
such as natural gas, NGLs and other energy commodities (CenterPoint Energy and CERC).
Management has established comprehensive risk management policies to monitor and manage these market risks.
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
Interest Rate Risk
Pension cost................................... $
Impact to pre-tax earnings.............
$
61
64
$
25
27
$
22
23
$
95
71
$
42
23
35
29
$
102
$
67
$
45
20
37
28
(in millions)
The calculation of pension cost and related liabilities requires the use of assumptions. Changes in these assumptions can result
in different expense and liability amounts, and future actual experience can differ from the assumptions. Two of the most critical
assumptions are the expected long-term rate of return on plan assets and the assumed discount rate.
As of December 31, 2018, CenterPoint Energy’s qualified pension plan had an expected long-term rate of return on plan assets
of 6.00%, which is unchanged from the rate assumed as of December 31, 2017. The expected rate of return assumption was
developed using the targeted asset allocation of our plans and the expected return for each asset class. CenterPoint Energy regularly
reviews its actual asset allocation and periodically rebalances plan assets to reduce volatility and better match plan assets and
liabilities.
As of December 31, 2018, the projected benefit obligation was calculated assuming a discount rate of 4.35%, which is 0.70%
higher than the 3.65% discount rate assumed as of December 31, 2017. The discount rate was determined by reviewing yields on
high-quality bonds that receive one of the two highest ratings given by a recognized rating agency and the expected duration of
pension obligations specific to the characteristics of CenterPoint Energy’s plan.
CenterPoint Energy’s actuarially determined pension and other postemployment expense for 2018 and 2017 that is greater or
less than the amounts being recovered through rates in certain jurisdictions is deferred as a regulatory asset or liability,
respectively. Pension cost for 2019, including the benefit restoration plan, is estimated to be $93 million, of which CenterPoint
Energy expects approximately $70 million to impact pre-tax earnings after effecting such deferrals and capitalization, based on
an expected return on plan assets of 6.00% and a discount rate of 4.35% as of December 31, 2018. If the expected return assumption
were lowered by 0.50% from 6.00% to 5.50%, 2019 pension cost would increase by approximately $7 million.
As of December 31, 2018, the pension plan projected benefit obligation, including the unfunded benefit restoration plan,
exceeded plan assets by $497 million. If the discount rate were lowered by 0.50% from 4.35% to 3.85%, the assumption change
would increase CenterPoint Energy’s projected benefit obligation by approximately $98 million and decrease its 2019 pension
cost by approximately $2 million. The expected reduction in pension cost due to the decrease in discount rate is a result of the
expected correlation between the reduced interest rate and appreciation of fixed income assets in pension plans with significantly
more fixed income instruments than equity instruments. In addition, the assumption change would impact CenterPoint Energy’s
Consolidated Balance Sheets by increasing the regulatory asset recorded as of December 31, 2018 by $84 million and would result
in a charge to comprehensive income in 2018 of $11 million, net of tax of $3 million, due to the increase in the projected benefit
obligation.
Future changes in plan asset returns, assumed discount rates and various other factors related to the pension plans will impact
CenterPoint Energy’s future pension expense and liabilities. CenterPoint Energy cannot predict with certainty what these factors
will be in the future.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Impact of Changes in Interest Rates, Equity Prices and Energy Commodity Prices
The Registrants are exposed to various market risks. These risks arise from transactions entered into in the normal course of
business and are inherent in the Registrants’ consolidated financial statements. Most of the revenues and income from the
Registrants’ business activities are affected by market risks. Categories of market risk include exposure to commodity prices
through non-trading activities, interest rates and equity prices. A description of each market risk is set forth below:
•
Interest rate risk primarily results from exposures to changes in the level of borrowings and changes in interest rates.
81
As of December 31, 2018, the Registrants had outstanding long-term debt and lease obligations and CenterPoint Energy had
obligations under its ZENS that subject them to the risk of loss associated with movements in market interest rates.
CenterPoint Energy’s floating rate obligations aggregated $210 million and $1.8 billion as of December 31, 2018 and 2017,
respectively. If the floating interest rates were to increase by 10% from December 31, 2018 rates, CenterPoint Energy’s combined
interest expense would increase by approximately $1 million annually.
Houston Electric did not have any floating rate obligations as of either December 31, 2018 or 2017.
CERC’s floating rate obligations aggregated $210 million and $1.5 billion at December 31, 2018 and 2017, respectively. If
the floating interest rates were to increase by 10% from December 31, 2018 rates, CERC’s combined interest expense would
increase by approximately $1 million annually.
As of December 31, 2018 and 2017, CenterPoint Energy had outstanding fixed-rate debt (excluding indexed debt securities)
aggregating $9.0 billion and $7.0 billion, respectively, in principal amount and having a fair value of $9.2 billion and $7.5 billion,
respectively. Because these instruments are fixed-rate, they do not expose CenterPoint Energy to the risk of loss in earnings due
to changes in market interest rates. However, the fair value of these instruments would increase by approximately $286 million if
interest rates were to decline by 10% from their levels as of December 31, 2018.
As of December 31, 2018 and 2017, Houston Electric had outstanding fixed-rate debt aggregating $4.8 billion and $4.8 billion,
respectively, in principal amount and having a fair value of approximately $4.8 billion and $5.1 billion, respectively. Because
these instruments are fixed-rate, they do not expose Houston Electric to the risk of loss in earnings due to changes in market
interest rates. However, the fair value of these instruments would increase by approximately $158 million if interest rates were to
decline by 10% from their levels as of December 31, 2018.
As of December 31, 2018 and 2017, CERC had outstanding fixed-rate debt aggregating $2.2 billion and $1.6 billion,
respectively, in principal amount and having a fair value of $2.3 billion and $1.8 billion, respectively. Because these instruments
are fixed-rate, they do not expose CERC to the risk of loss in earnings due to changes in market interest rates. However, the fair
value of these instruments would increase by approximately $89 million if interest rates were to decline by 10% from their levels
at December 31, 2018.
In general, such an increase in fair value would impact earnings and cash flows only if the Registrants were to reacquire all
or a portion of these instruments in the open market prior to their maturity.
As discussed in Note 12 to the consolidated financial statements, the ZENS obligation is bifurcated into a debt component
and a derivative component. The debt component of $24 million at December 31, 2018 was a fixed-rate obligation and, therefore,
did not expose CenterPoint Energy to the risk of loss in earnings due to changes in market interest rates. However, the fair value
of the debt component would increase by approximately $3 million if interest rates were to decline by 10% from levels at
December 31, 2018. Changes in the fair value of the derivative component, a $601 million recorded liability at December 31,
2018, are recorded in CenterPoint Energy’s Statements of Consolidated Income and, therefore, it is exposed to changes in the fair
value of the derivative component as a result of changes in the underlying risk-free interest rate. If the risk-free interest rate were
to increase by 10% from December 31, 2018 levels, the fair value of the derivative component liability would decrease by
approximately $2 million, which would be recorded as an unrealized gain in CenterPoint Energy’s Statements of Consolidated
Income.
Equity Market Value Risk (CenterPoint Energy)
CenterPoint Energy is exposed to equity market value risk through its ownership of 10.2 million shares of AT&T Common
and 0.9 million shares of Charter Common, which CenterPoint Energy holds to facilitate its ability to meet its obligations under
the ZENS. See Note 12 to the consolidated financial statements for a discussion of CenterPoint Energy’s ZENS obligation. Changes
82
in the fair value of the ZENS-Related Securities held by CenterPoint Energy are expected to substantially offset changes in the
fair value of the derivative component of the ZENS. A decrease of 10% from the December 31, 2018 aggregate market value of
these shares would result in a net loss of less than $1 million, which would be recorded as an unrealized loss in CenterPoint
Energy’s Statements of Consolidated Income.
Commodity Price Risk From Non-Trading Activities (CenterPoint Energy and CERC)
CenterPoint Energy and CERC use derivative instruments as economic hedges to offset the commodity price exposure inherent
in their businesses. The commodity risk created by these instruments, including the offsetting impact on the market value of natural
gas inventory, is described below. CenterPoint Energy and CERC measure this commodity risk using a sensitivity analysis. For
purposes of this analysis, CenterPoint Energy and CERC estimate commodity price risk by applying a $0.50 change in the forward
NYMEX price to their net open fixed price position (including forward fixed price physical contracts, natural gas inventory and
fixed price financial contracts) at the end of each period. As of December 31, 2018, the recorded fair value of CenterPoint Energy’s
and CERC’s non-trading energy derivatives was a net asset of $12 million (before collateral), all of which is related to CenterPoint
Energy’s and CERC’s Energy Services reportable segment. A $0.50 change in the forward NYMEX price would have had a
combined impact of $7 million on CenterPoint Energy’s and CERC’s non-trading energy derivatives net asset and the market
value of natural gas inventory.
Commodity price risk is not limited to changes in forward NYMEX prices. Variation of commodity pricing between the
different indices used to mark to market portions of CenterPoint Energy’s and CERC’s natural gas inventory (Gas Daily) and the
related fair value hedge (NYMEX) can result in volatility to CenterPoint Energy’s and CERC’s net income. Over time, any gains
or losses on the sale of storage gas inventory would be offset by gains or losses on the fair value hedges.
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
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CenterPoint Energy, Inc. and subsidiaries (the “Company”) as
of December 31, 2018 and 2017, the related statements of consolidated income, comprehensive income, changes in equity, and
cash flows, for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as
the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position
of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2018, 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)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on 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, 2019, expressed an unqualified opinion on the Company’s internal control over
financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 28, 2019
We have served as the Company’s auditor since 1932.
83
84
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
Net income ...................................................................................................... $
Other comprehensive income (loss):
Adjustment to pension and other postretirement plans (net of tax expense
(benefit) of ($2), $6 and ($4), respectively)..............................................
Net deferred gain (loss) from cash flow hedges (net of tax expense
(benefit) of ($4), ($2), and $-0-, respectively) ..........................................
Reclassification of deferred loss from cash flow hedges realized in net
income (net of tax expense of $-0-, $-0-, and $1, respectively)................
Other comprehensive income (loss)................................................................
Comprehensive income...................................................................................
Preferred stock dividend requirement...........................................................
Comprehensive income available to common shareholders ........................... $
Year Ended December 31,
2018
2017
(in millions)
2016
368
$
1,792
$
432
(10)
(15)
—
(25)
343
35
308
$
6
(3)
—
3
1,795
—
1,795
$
(7)
1
1
(5)
427
—
427
See Combined Notes to Consolidated Financial Statements
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Year Ended December 31,
2018
2017
2016
(in millions, except per share amounts)
Revenues:
Utility revenues............................................................................................. $
Non-utility revenues .....................................................................................
Total .........................................................................................................
$
6,163
4,426
10,589
Expenses:
Utility natural gas .........................................................................................
Non-utility natural gas ..................................................................................
Operation and maintenance ..........................................................................
Depreciation and amortization......................................................................
Taxes other than income taxes......................................................................
Total .........................................................................................................
Operating Income .........................................................................................
Other Income (Expense):
Gain (loss) on marketable securities.............................................................
Gain (loss) on indexed debt securities ..........................................................
Interest and other finance charges ................................................................
Interest on Securitization Bonds...................................................................
Equity in earnings of unconsolidated affiliates, net......................................
Other, net ......................................................................................................
Total .........................................................................................................
Income Before Income Taxes........................................................................
Income tax expense (benefit)........................................................................
Net Income .....................................................................................................
Preferred stock dividend requirement...........................................................
Income Available to Common Shareholders............................................... $
Basic Earnings Per Common Share ............................................................ $
Diluted Earnings Per Common Share......................................................... $
Weighted Average Common Shares Outstanding, Basic ...........................
Weighted Average Common Shares Outstanding, Diluted........................
1,410
4,364
2,335
1,243
406
9,758
831
(22)
(232)
(361)
(59)
307
50
(317)
514
146
368
35
333
0.74
0.74
449
452
$
$
$
See Combined Notes to Consolidated Financial Statements
$
$
$
$
5,603
4,011
9,614
1,109
3,785
2,157
1,036
391
8,478
1,136
7
49
(313)
(77)
265
(4)
(73)
1,063
(729)
1,792
—
1,792
4.16
4.13
431
434
5,440
2,088
7,528
983
1,983
2,029
1,126
384
6,505
1,023
326
(413)
(338)
(91)
208
(29)
(337)
686
254
432
—
432
1.00
1.00
431
434
85
86
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, cont.
December 31,
2018
December 31,
2017
(in millions)
ASSETS
Current Assets:
Cash and cash equivalents ($335 and $230 related to VIEs, respectively) ............................................. $
Investment in marketable securities.........................................................................................................
Accounts receivable ($56 and $73 related to VIEs, respectively), less bad debt reserve of $18 and
$19, respectively ..................................................................................................................................
Accrued unbilled revenues ......................................................................................................................
Natural gas inventory...............................................................................................................................
Materials and supplies .............................................................................................................................
Non-trading derivative assets ..................................................................................................................
Prepaid expense and other current assets ($34 and $35 related to VIEs, respectively)...........................
Total current assets .............................................................................................................................
Property, Plant and Equipment, net.......................................................................................................
Other Assets:
Goodwill ..................................................................................................................................................
Regulatory assets ($1,059 and $1,590 related to VIEs, respectively) .....................................................
Non-trading derivative assets ..................................................................................................................
Investment in unconsolidated affiliates ...................................................................................................
Preferred units - unconsolidated affiliate.................................................................................................
Other ........................................................................................................................................................
Total other assets ................................................................................................................................
Total Assets................................................................................................................................ $
$
4,231
540
1,190
378
194
200
100
192
7,025
14,044
867
1,967
38
2,482
363
223
5,940
27,009
$
260
960
1,000
427
222
175
110
241
3,395
13,057
867
2,347
44
2,472
363
191
6,284
22,736
See Combined Notes to Consolidated Financial Statements
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Short-term borrowings.............................................................................................................................. $
Current portion of VIE Securitization Bonds long-term debt ..................................................................
Indexed debt, net.......................................................................................................................................
Current portion of other long-term debt ...................................................................................................
Indexed debt securities derivative ............................................................................................................
Accounts payable......................................................................................................................................
Taxes accrued ...........................................................................................................................................
Interest accrued.........................................................................................................................................
Dividends accrued ....................................................................................................................................
Non-trading derivative liabilities..............................................................................................................
Other .........................................................................................................................................................
Total current liabilities ........................................................................................................................
Other Liabilities:
Deferred income taxes, net .......................................................................................................................
Non-trading derivative liabilities..............................................................................................................
Benefit obligations....................................................................................................................................
Regulatory liabilities.................................................................................................................................
Other .........................................................................................................................................................
Total other liabilities............................................................................................................................
Long-term Debt:
VIE Securitization Bonds, net ..................................................................................................................
Other long-term debt, net..........................................................................................................................
Total long-term debt, net .....................................................................................................................
Commitments and Contingencies (Note 16)
Shareholders’ Equity:
Cumulative preferred stock, $0.01 par value, 20,000,000 shares authorized...........................................
Series A Preferred Stock, $0.01 par value, $800 aggregate liquidation preference, 800,000 shares
outstanding.........................................................................................................................................
Series B Preferred Stock, $0.01 par value, $978 aggregate liquidation preference, 977,500 shares
outstanding.........................................................................................................................................
Common stock, $0.01 par value, 1,000,000,000 shares authorized, 501,197,784 shares and
431,044,845 shares outstanding, respectively ......................................................................................
Additional paid-in capital .........................................................................................................................
Retained earnings .....................................................................................................................................
Accumulated other comprehensive loss ...................................................................................................
Total shareholders’ equity ...................................................................................................................
Total Liabilities and Shareholders’ Equity ............................................................................. $
See Combined Notes to Consolidated Financial Statements
December 31,
2018
December 31,
2017
(in millions, except par value
and shares)
— $
458
24
—
601
1,240
204
121
187
126
341
3,302
3,239
5
796
2,525
402
6,967
977
7,705
8,682
—
790
950
39
434
122
50
668
963
181
104
120
20
368
3,069
3,174
4
785
2,464
357
6,784
1,434
6,761
8,195
—
—
—
5
6,072
349
(108)
8,058
27,009
$
4
4,209
543
(68)
4,688
22,736
87
88
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CHANGES IN EQUITY
2018
Year Ended December 31,
2017
(in millions)
2016
Cash Flows from Operating Activities:
Net income ......................................................................................................................................................... $
Adjustments to reconcile net income to net cash provided by operating activities:
368
$
1,792
$
432
Depreciation and amortization ........................................................................................................................
Amortization of deferred financing costs ........................................................................................................
Deferred income taxes.....................................................................................................................................
Unrealized loss (gain) on marketable securities..............................................................................................
Loss (gain) on indexed debt securities ............................................................................................................
Write-down of natural gas inventory...............................................................................................................
Equity in earnings of unconsolidated affiliates, net of distributions ...............................................................
Pension contributions ......................................................................................................................................
Changes in other assets and liabilities, excluding acquisitions:
Accounts receivable and unbilled revenues, net ....................................................................................
Inventory ................................................................................................................................................
Taxes receivable .....................................................................................................................................
Accounts payable ...................................................................................................................................
Fuel cost recovery ..................................................................................................................................
Non-trading derivatives, net ...................................................................................................................
Margin deposits, net ...............................................................................................................................
Interest and taxes accrued.......................................................................................................................
Net regulatory assets and liabilities........................................................................................................
Other current assets ................................................................................................................................
Other current liabilities...........................................................................................................................
Other assets.............................................................................................................................................
Other liabilities .......................................................................................................................................
Other, net .........................................................................................................................................................
Net cash provided by operating activities ........................................................................................
Cash Flows from Investing Activities:
Capital expenditures ...........................................................................................................................................
Acquisitions, net of cash acquired......................................................................................................................
Decrease in notes receivable - unconsolidated affiliate .....................................................................................
Investment in preferred units - unconsolidated affiliate.....................................................................................
Distributions from unconsolidated affiliates in excess of cumulative earnings .................................................
Proceeds from sale of marketable securities ......................................................................................................
Other, net ............................................................................................................................................................
Net cash used in investing activities.................................................................................................
Cash Flows from Financing Activities:
Increase (decrease) in short-term borrowings, net .............................................................................................
Proceeds from (payments of) commercial paper, net.........................................................................................
Proceeds from long-term debt, net .....................................................................................................................
Payments of long-term debt ...............................................................................................................................
Loss on reacquired debt......................................................................................................................................
Debt and equity issuance costs...........................................................................................................................
Payment of dividends on Common Stock ..........................................................................................................
Payment of dividends on preferred stock ...........................................................................................................
Proceeds from issuance of Common Stock, net .................................................................................................
Proceeds from issuance of preferred stock, net ..................................................................................................
Distribution to ZENS holders.............................................................................................................................
Other, net ............................................................................................................................................................
Net cash provided by (used in) financing activities .........................................................................
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash ...........................................................
Cash, Cash Equivalents and Restricted Cash at Beginning of Year.....................................................................
Cash, Cash Equivalents and Restricted Cash at End of Year ............................................................................... $
See Combined Notes to Consolidated Financial Statements
1,243
48
48
22
232
2
(40)
(69)
(154)
1
—
220
33
103
5
40
28
—
(24)
6
12
12
2,136
(1,651)
—
—
—
30
398
16
(1,207)
(39)
(1,543)
2,495
(484)
—
(47)
(499)
(11)
1,844
1,740
(398)
(5)
3,053
3,982
296
4,278
$
1,036
24
(770)
(7)
(49)
—
(265)
(48)
(216)
(7)
30
136
(85)
(84)
(55)
5
(107)
(3)
34
(4)
36
24
1,417
(1,426)
(132)
—
—
297
—
4
(1,257)
4
349
1,096
(1,211)
(5)
(13)
(461)
—
—
—
—
(4)
(245)
(85)
381
296
$
1,126
26
213
(326)
413
1
(208)
(9)
(117)
34
142
133
(72)
30
101
5
(60)
(25)
22
(16)
30
48
1,923
(1,414)
(102)
363
(363)
297
178
7
(1,034)
(5)
469
600
(1,218)
(22)
(9)
(443)
—
—
—
(178)
(2)
(808)
81
300
381
Cumulative Preferred Stock, $0.01 par value;
authorized 20,000,000 shares
Balance, beginning of year ........................................
Issuances of Series A Preferred Stock........................
Issuances of Series B Preferred Stock .......................
Balance, end of year...................................................
Common Stock, $0.01 par value; authorized
1,000,000,000 shares
Balance, beginning of year ........................................
Issuances related to benefit and investment plans .....
Issuances of Common Stock......................................
Balance, end of year...................................................
Additional Paid-in-Capital
Balance, beginning of year ........................................
Issuances related to benefit and investment plans .....
Issuances of Common Stock, net of issuance costs ...
Balance, end of year...................................................
Retained Earnings (Accumulated Deficit)
Balance, beginning of year ........................................
Net income .................................................................
Common Stock dividends declared ($1.12, $1.3475
and $1.03 per share, respectively) ..........................
Series A Preferred Stock dividends declared
($32.1563, $-0- and $-0- per share, respectively) ..
Series B Preferred Stock dividends declared
($29.1667, $-0- and $-0- per share, respectively) ..
Adoption of ASU 2018-02.........................................
Balance, end of year...................................................
Accumulated Other Comprehensive Loss
Balance, beginning of year ........................................
Other comprehensive income (loss)...........................
Adoption of ASU 2018-02.........................................
Balance, end of year...................................................
Total Shareholders’ Equity.............................................
2018
2017
2016
Shares
Amount
Shares
Amount
Shares
Amount
(in millions of dollars and shares, except per share amounts)
— $
1
1
2
431
—
70
501
—
790
950
1,740
4
—
1
5
4,209
19
1,844
6,072
543
368
(523)
(26)
(28)
15
349
(68)
(25)
(15)
(108)
$ 8,058
— $
—
—
—
431
—
—
431
—
—
—
—
4
—
—
4
4,195
14
—
4,209
(668)
1,792
(581)
—
—
—
543
(71)
3
—
(68)
$ 4,688
— $
—
—
—
430
1
—
431
—
—
—
—
4
—
—
4
4,180
15
—
4,195
(657)
432
(443)
—
—
—
(668)
(66)
(5)
—
(71)
$ 3,460
See Combined Notes to Consolidated Financial Statements
89
90
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Member of
CenterPoint Energy Houston Electric, LLC
Houston, Texas
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CenterPoint Energy Houston Electric, LLC and subsidiaries
(the “Company”, an indirect wholly owned subsidiary of CenterPoint Energy, Inc.) as of December 31, 2018 and 2017, the related
statements of consolidated income, comprehensive income, changes in equity, and cash flows, for each of the three years in the
period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and
2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in
conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for
the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly,
we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 28, 2019
We have served as the Company’s auditor since 1932.
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(An Indirect, Wholly-Owned Subsidiary of CenterPoint Energy, Inc.)
STATEMENTS OF CONSOLIDATED INCOME
Revenues .................................................................................................................... $
3,234
(in millions)
2,998
$
$
3,059
Year Ended December 31,
2018
2017
2016
Expenses:
Operation and maintenance ......................................................................................
Depreciation and amortization..................................................................................
Taxes other than income taxes..................................................................................
Total .....................................................................................................................
Operating Income .....................................................................................................
1,452
917
240
2,609
625
1,402
724
235
2,361
637
Other Income (Expense):
Interest and other finance charges ............................................................................
Interest on Securitization Bonds...............................................................................
Other, net ..................................................................................................................
Total .....................................................................................................................
Income Before Income Taxes....................................................................................
Income tax expense (benefit)....................................................................................
Net Income ................................................................................................................. $
(138)
(59)
(3)
(200)
425
89
336
$
(128)
(77)
(8)
(213)
424
(9)
433
$
1,338
838
231
2,407
652
(126)
(91)
(10)
(227)
425
149
276
See Combined Notes to Consolidated Financial Statements
91
92
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(An Indirect, Wholly-Owned Subsidiary of CenterPoint Energy, Inc.)
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(An Indirect, Wholly-Owned Subsidiary of CenterPoint Energy, Inc.)
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
CONSOLIDATED BALANCE SHEETS
Net income ..................................................................................................... $
Other comprehensive income (loss):
Net deferred gain (loss) from cash flow hedges (net of tax expense
(benefit) of ($4), $-0-, and $-0-) ..................................................................
Other comprehensive income (loss): ..............................................................
Comprehensive income .................................................................................. $
Year Ended December 31,
2018
2017
(in millions)
2016
336
$
433
$
276
(14)
(14)
322
$
(1)
(1)
432
$
1
1
277
See Combined Notes to Consolidated Financial Statements
December 31,
2018
December 31,
2017
(in millions)
335
$
238
ASSETS
Current Assets:
Cash and cash equivalents ($335 and $230 related to VIEs, respectively)...................................... $
Accounts and notes receivable, net ($56 and $73 related to VIEs, respectively), less bad debt reserve
of $1 and $1, respectively ...........................................................................................................
Accounts and notes receivable—affiliated companies.....................................................................
Accrued unbilled revenues ...............................................................................................................
Materials and supplies ......................................................................................................................
Taxes receivable ...............................................................................................................................
Other ($34 and $35 related to VIEs, respectively)...........................................................................
Total current assets ......................................................................................................................
Property, Plant and Equipment, net ...............................................................................................
Other Assets:
283
20
110
135
5
61
949
8,402
$
$
Regulatory assets ($1,059 and $1,590 related to VIEs, respectively)..............................................
Other.................................................................................................................................................
Total other assets .........................................................................................................................
Total Assets................................................................................................................................. $
1,124
32
1,156
10,507
LIABILITIES AND MEMBER’S EQUITY
Current Liabilities:
Current portion of VIE Securitization Bonds long-term debt .......................................................... $
Accounts payable .............................................................................................................................
Accounts and notes payable—affiliated companies.........................................................................
Taxes accrued ...................................................................................................................................
Interest accrued ................................................................................................................................
Non-trading derivative liabilities .....................................................................................................
Other.................................................................................................................................................
Total current liabilities.................................................................................................................
Other Liabilities:
Deferred income taxes, net...............................................................................................................
Benefit obligations ...........................................................................................................................
Regulatory liabilities ........................................................................................................................
Other.................................................................................................................................................
Total other liabilities....................................................................................................................
Long-Term Debt, net:
VIE Securitization Bonds, net ..........................................................................................................
Other long-term debt, net .................................................................................................................
Total long-term debt, net .............................................................................................................
458
262
78
115
64
24
89
1,090
1,023
91
1,298
65
2,477
977
3,281
4,258
Commitments and Contingencies (Note 16)
Member’s Equity:
284
7
120
119
—
62
830
7,863
1,570
29
1,599
10,292
434
243
104
116
65
—
120
1,082
1,059
146
1,263
54
2,522
1,434
2,885
4,319
Common stock..................................................................................................................................
Paid-in capital...................................................................................................................................
Retained earnings .............................................................................................................................
Accumulated other comprehensive loss ...........................................................................................
Total member’s equity .................................................................................................................
Total Liabilities and Member’s Equity.................................................................................... $
—
1,896
800
(14)
2,682
10,507
$
—
1,696
673
—
2,369
10,292
See Combined Notes to Consolidated Financial Statements
93
94
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(An Indirect, Wholly-Owned Subsidiary of CenterPoint Energy, Inc.)
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
(An Indirect, Wholly-Owned Subsidiary of CenterPoint Energy, Inc.)
STATEMENTS OF CONSOLIDATED CASH FLOWS
STATEMENTS OF CONSOLIDATED CHANGES IN EQUITY
Year Ended December 31,
2018
2017
2016
(in millions)
Cash Flows from Operating Activities:
Net income .............................................................................................................................. $
Adjustments to reconcile net income to net cash provided by operating activities:
336
$
433
$
Depreciation and amortization..............................................................................................
Amortization of deferred financing costs .............................................................................
Deferred income taxes ..........................................................................................................
Changes in other assets and liabilities:
Accounts and notes receivable, net....................................................................................
Accounts receivable/payable–affiliated companies ...........................................................
Inventory ............................................................................................................................
Accounts payable ...............................................................................................................
Taxes receivable.................................................................................................................
Interest and taxes accrued ..................................................................................................
Non-trading derivatives, net...............................................................................................
Net regulatory assets and liabilities ...................................................................................
Other current assets............................................................................................................
Other current liabilities ......................................................................................................
Other assets ........................................................................................................................
Other liabilities...................................................................................................................
Other, net .................................................................................................................................
Net cash provided by operating activities .......................................................................
Cash Flows from Investing Activities:
Capital expenditures................................................................................................................
Decrease (increase) in notes receivable–affiliated companies ................................................
Other, net .................................................................................................................................
Net cash used in investing activities ...............................................................................
Cash Flows from Financing Activities:
Proceeds from long-term debt, net ..........................................................................................
Payments of long-term debt ....................................................................................................
Dividend to parent...................................................................................................................
Increase (decrease) in notes payable–affiliated companies ....................................................
Debt issuance costs..................................................................................................................
Contribution from parent.........................................................................................................
Net cash used in financing activities ...............................................................................
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash..........................
Cash, Cash Equivalents and Restricted Cash at Beginning of the Year.............................
Cash, Cash Equivalents and Restricted Cash at End of the Year ....................................... $
917
11
(38)
11
20
(16)
(1)
(5)
(2)
5
(97)
(2)
(26)
(3)
17
(12)
1,115
(922)
—
11
(911)
398
(434)
(209)
(59)
(4)
200
(108)
96
274
370
$
See Combined Notes to Consolidated Financial Statements
724
13
(98)
(73)
(46)
15
59
6
7
—
(148)
(6)
16
13
(4)
(6)
905
(875)
96
3
(776)
298
(411)
(180)
60
(3)
—
(236)
(107)
381
274
$
276
838
14
(34)
(1)
63
(1)
(4)
53
4
—
(110)
(6)
21
(8)
(4)
1
1,102
(862)
(96)
7
(951)
600
(590)
(135)
(312)
(6)
374
(69)
82
299
381
Common Stock
Balance, beginning of year ..............................................
Balance, end of year.........................................................
$
1,000
1,000
—
—
$
1,000
1,000
—
—
$
1,000
1,000
—
—
2018
2017
2016
Shares
Amount
Shares
Amount
Shares
Amount
(in millions, except share amounts)
Additional Paid-in-Capital
Balance, beginning of year ..............................................
Contribution from parent .................................................
Balance, end of year.........................................................
Retained Earnings
Balance, beginning of year ..............................................
Net income .......................................................................
Dividend to parent............................................................
Balance, end of year.........................................................
Accumulated Other Comprehensive Income (Loss)
Balance, beginning of year ..............................................
Other comprehensive income (loss).................................
Balance, end of year.........................................................
Total Member’s Equity ....................................................
1,696
200
1,896
673
336
(209)
800
—
(14)
(14)
2,682
$
1,696
—
1,696
420
433
(180)
673
1
(1)
—
2,369
$
1,322
374
1,696
279
276
(135)
420
—
1
1
2,117
$
See Combined Notes to Consolidated Financial Statements
95
96
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholder of
CenterPoint Energy Resources Corp.
Houston, Texas
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CenterPoint Energy Resources Corp. and subsidiaries (the
“Company”, an indirect wholly owned subsidiary of CenterPoint Energy, Inc.) as of December 31, 2018 and 2017, the related
statements of consolidated income, comprehensive income, changes in equity, and cash flows, for each of the three years in the
period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and
2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in
conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for
the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly,
we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 28, 2019
We have served as the Company’s auditor since 1997.
CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(An Indirect, Wholly-Owned Subsidiary of CenterPoint Energy, Inc.)
STATEMENTS OF CONSOLIDATED INCOME
Year Ended December 31,
2018
2017
(in millions)
2016
Revenues:
Utility revenues ......................................................................................... $
Non-utility revenues..................................................................................
Total......................................................................................................
$
2,931
4,412
7,343
$
2,606
3,997
6,603
Expenses:
Utility natural gas......................................................................................
Non-utility natural gas ..............................................................................
Operation and maintenance.......................................................................
Depreciation and amortization ..................................................................
Taxes other than income taxes ..................................................................
Total......................................................................................................
Operating Income......................................................................................
Other Income (Expense):
Interest and other finance charges.............................................................
Other, net...................................................................................................
Total......................................................................................................
Income From Continuing Operations Before Income Taxes.................
Income tax expense (benefit) ....................................................................
Income From Continuing Operations......................................................
Income from discontinued operations (net of tax expense of $46, $104,
and $81, respectively) ..............................................................................
Net Income ................................................................................................. $
1,410
4,364
898
293
156
7,121
222
(122)
(8)
(130)
92
22
70
1,109
3,785
816
279
147
6,136
467
(123)
(25)
(148)
319
(265)
584
138
208
$
161
745
$
2,380
2,074
4,454
983
1,983
754
249
144
4,113
341
(122)
(20)
(142)
199
81
118
127
245
See Combined Notes to Consolidated Financial Statements
97
98
CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(An Indirect, Wholly-Owned Subsidiary of CenterPoint Energy, Inc.)
CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(An Indirect, Wholly-Owned Subsidiary of CenterPoint Energy, Inc.)
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
CONSOLIDATED BALANCE SHEETS
Net income ................................................................................................. $
Other comprehensive income (loss):
Adjustment to postretirement and other postemployment plans (net of
tax expense (benefit) of $1, $4 and ($4)) ............................................
Net deferred loss from cash flow hedges (net of tax expense (benefit)
of $-0-, ($1), and $-0-, respectively)..................................................
Other comprehensive income (loss) ...........................................................
Comprehensive income .............................................................................. $
Year Ended December 31,
2018
2017
(in millions)
2016
208
$
745
$
245
1
(1)
—
208
$
4
(1)
3
748
$
(6)
—
(6)
239
See Combined Notes to Consolidated Financial Statements
December 31,
2018
2017
(in millions)
ASSETS
Current Assets:
Cash and cash equivalents .................................................................................................... $
Accounts receivable, less bad debt reserve of $17 million and $18 million, respectively ...
Accrued unbilled revenue .....................................................................................................
Accounts and notes receivable — affiliated companies .......................................................
Material and supplies............................................................................................................
Natural gas inventory............................................................................................................
Non-trading derivative assets ...............................................................................................
Prepaid expenses and other current assets ............................................................................
Total current assets...........................................................................................................
Property, Plant and Equipment, Net ...................................................................................
Other Assets:
Goodwill ...............................................................................................................................
Regulatory Assets .................................................................................................................
Non-trading derivative assets ...............................................................................................
Investment in unconsolidated affiliates - discontinued operations.......................................
Other .....................................................................................................................................
Total other assets..............................................................................................................
Total Assets ..................................................................................................................... $
14
894
268
120
65
194
100
115
1,770
5,226
867
181
38
—
132
1,218
8,214
$
$
12
713
307
6
56
222
110
166
1,592
4,852
867
181
44
2,472
104
3,668
10,112
See Combined Notes to Consolidated Financial Statements
99
100
CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(An Indirect, Wholly-Owned Subsidiary of CenterPoint Energy, Inc.)
CONSOLIDATED BALANCE SHEETS, cont.
CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(An Indirect, Wholly-Owned Subsidiary of CenterPoint Energy, Inc.)
STATEMENTS OF CONSOLIDATED CASH FLOWS
December 31,
2018
2017
(in millions)
LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Short-term borrowings .............................................................................................................. $
Accounts payable ......................................................................................................................
Accounts and notes payable–affiliated companies ...................................................................
Taxes accrued ............................................................................................................................
Interest accrued .........................................................................................................................
Customer deposits .....................................................................................................................
Non-trading derivative liabilities ..............................................................................................
Other..........................................................................................................................................
Total current liabilities..........................................................................................................
— $
856
50
82
38
75
102
137
1,340
Other Liabilities:
Deferred income taxes, net........................................................................................................
Deferred income taxes, net - discontinued operations ..............................................................
Non-trading derivative liabilities ..............................................................................................
Benefit obligations ....................................................................................................................
Regulatory liabilities .................................................................................................................
Other..........................................................................................................................................
Total other liabilities.............................................................................................................
Long-Term Debt ........................................................................................................................
Commitments and Contingencies (Note 16)
Stockholder’s Equity:
Common stock ..........................................................................................................................
Paid-in capital ...........................................................................................................................
Retained earnings ......................................................................................................................
Accumulated other comprehensive income ..............................................................................
Total stockholder’s equity ....................................................................................................
406
—
5
93
1,227
329
2,060
2,371
—
2,015
423
5
2,443
39
669
611
75
32
76
20
137
1,659
362
927
4
97
1,201
297
2,888
2,457
—
2,528
574
6
3,108
Total Liabilities and Stockholder’s Equity....................................................................... $
8,214
$
10,112
See Combined Notes to Consolidated Financial Statements
Year Ended December 31,
2018
2017
(in millions)
2016
Cash Flows from Operating Activities:
Net income .................................................................................................................. $
Less: Income from discontinued operations, net of tax ...............................................
Income from continuing operations ............................................................................
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ..............................................................................
Amortization of deferred financing costs ..............................................................
Deferred income taxes ...........................................................................................
Write-down of natural gas inventory .....................................................................
Changes in other assets and liabilities:
Accounts receivable and unbilled revenues, net .................................................
Accounts receivable/payable–affiliated companies ............................................
Inventory ............................................................................................................
Accounts payable ...............................................................................................
Fuel cost recovery ..............................................................................................
Interest and taxes accrued ...................................................................................
Non-trading derivatives, net ...............................................................................
Margin deposits, net ...........................................................................................
Net regulatory assets and liabilities ....................................................................
Other current assets ............................................................................................
Other current liabilities .......................................................................................
Other assets ........................................................................................................
Other liabilities ...................................................................................................
Other, net ...............................................................................................................
Net cash provided by operating activities from continuing operations .............
Net cash provided by operating activities from discontinued operations ..........
Net cash provided by operating activities .........................................................
Cash Flows from Investing Activities:
Capital expenditures ...................................................................................................
Acquisitions, net of cash acquired ..............................................................................
Increase in notes receivable–affiliated companies ......................................................
....................................................................................................................
Other, net
Net cash used in investing activities from continuing operations .....................
Net cash provided by investing activities from discontinued operations...........
Net cash provided by (used in) investing activities ...........................................
Cash Flows from Financing Activities:
Increase (decrease) in short-term borrowings, net ......................................................
Proceeds from (payments of) commercial paper, net ..................................................
Proceeds from long-term debt .....................................................................................
Payments of long-term debt ........................................................................................
Dividends to parent .....................................................................................................
Debt issuance costs .....................................................................................................
Loss on reacquired debt ..............................................................................................
Contribution from parent ............................................................................................
Increase (decrease) in notes payable–affiliated companies .........................................
....................................................................................................................
Other, net
Net cash provided by (used in) financing activities from continuing operations
Net cash provided by financing activities from discontinued operations ..........
Net cash provided by (used in) financing activities ..........................................
Net Increase in Cash, Cash Equivalents and Restricted Cash .................................
Cash, Cash Equivalents and Restricted Cash at Beginning of Year ........................
Cash, Cash Equivalents and Restricted Cash at End of Year .................................. $
208
138
70
293
9
31
2
(155)
9
17
163
33
—
98
5
50
4
(3)
5
6
1
638
176
814
(633)
—
(114)
3
(744)
47
(697)
(39)
(688)
599
—
(360)
(5)
—
960
(570)
(1)
(104)
—
(104)
13
12
25
$
$
745
161
584
279
9
(224)
—
(143)
—
(22)
64
(85)
(41)
(82)
(55)
(27)
2
15
(8)
6
6
278
—
278
(513)
(132)
—
2
(643)
297
(346)
4
329
298
(550)
(601)
(4)
(5)
38
570
—
79
—
79
11
1
12
$
$
245
127
118
249
9
56
1
(122)
4
34
117
(72)
26
29
101
—
(19)
2
(21)
(2)
2
512
—
512
(517)
(102)
—
1
(618)
660
42
(5)
350
—
(325)
(643)
—
—
72
—
(2)
(553)
—
(553)
1
—
1
101
See Combined Notes to Consolidated Financial Statements
102
CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
(An Indirect, Wholly-Owned Subsidiary of CenterPoint Energy, Inc.)
STATEMENTS OF CONSOLIDATED CHANGES IN EQUITY
2018
2017
2016
Shares
Amount
Shares
Amount
Shares
Amount
(in millions, except share amounts)
Common Stock
Balance, beginning of year ....................................
Balance, end of year...............................................
1,000
$
1,000
—
—
1,000
$
1,000
—
—
1,000
$
1,000
Additional Paid-in-Capital
Balance, beginning of year ....................................
Contribution from parent .......................................
Capital distribution to parent associated with
Internal Spin .......................................................
Other ......................................................................
Balance, end of year...............................................
Retained Earnings
Balance, beginning of year ....................................
Net income .............................................................
Dividend to parent..................................................
Adoption of ASU 2018-02 .....................................
Balance, end of year...............................................
Accumulated Other Comprehensive Income
Balance, beginning of year ....................................
Other comprehensive income (loss).......................
Adoption of ASU 2018-02 .....................................
Balance, end of year...............................................
....................................
Total Stockholder’s Equity
$
2,528
960
(1,473)
—
2,015
574
208
(360)
1
423
6
—
(1)
5
2,443
2,489
38
—
1
2,528
430
745
(601)
—
574
3
3
—
See Combined Notes to Consolidated Financial Statements
6
3,108
$
3
2,922
$
—
—
2,417
72
—
—
2,489
828
245
(643)
—
430
9
(6)
—
CENTERPOINT ENERGY, INC. AND SUBSIDIARIES
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND SUBSIDIARIES
CENTERPOINT ENERGY RESOURCES CORP. AND SUBSIDIARIES
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Background
No Registrant makes any representations as to the information related solely to CenterPoint Energy or the subsidiaries of
CenterPoint Energy other than itself.
General. Included in this combined Form 10-K are the Financial Statements of CenterPoint Energy, Houston Electric and
CERC, which are referred to collectively as the Registrants. The Combined Notes to the Consolidated Financial Statements apply
to all Registrants and specific references to Houston Electric and CERC herein also pertain to CenterPoint Energy, unless otherwise
indicated.
Background. CenterPoint Energy, Inc. is a public utility holding company and owns interests in Enable as described below.
As of December 31, 2018, CenterPoint Energy’s operating subsidiaries, Houston Electric and CERC, owned and operated electric
transmission and distribution and natural gas distribution facilities and supplied natural gas to commercial and industrial customers
and electric and natural gas utilities.
• Houston Electric engages in the electric transmission and distribution business in the Texas Gulf Coast area that includes
the city of Houston; and
• CERC Corp. (i) owns and operates natural gas distribution systems in six states and (ii) 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 over 30 states through its wholly-owned subsidiary, CES.
As of December 31, 2018, CenterPoint Energy, indirectly through CNP Midstream, owned approximately 54.0% of the
common units representing limited partner interests in Enable, 50% of the management rights and 40% of the incentive distribution
rights in Enable GP and also directly owned an aggregate of 14,520,000 Enable Series A Preferred Units. Enable owns, operates
and develops natural gas and crude oil infrastructure assets.
On April 21, 2018, CenterPoint Energy entered into the Merger Agreement to acquire Vectren for approximately $6 billion
in cash. On February 1, 2019, pursuant to the Merger Agreement, CenterPoint Energy consummated the previously announced
Merger and acquired Vectren. For further information about the closing of the Merger, see Note 4.
For a description of CenterPoint Energy’s and CERC’s reportable segments, see Note 19. Houston Electric consists of a single
reportable segment, Electric Transmission & Distribution.
(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 the Registrants and their wholly-owned and majority-owned subsidiaries are included in the consolidated
financial statements. All intercompany transactions and balances are eliminated in consolidation.
As of December 31, 2018, CenterPoint Energy and Houston Electric had VIEs consisting of the Bond Companies, which are
consolidated. The consolidated VIEs are wholly-owned, bankruptcy remote special purpose entities that were formed solely for
the purpose of securitizing transition and system restoration related property. Creditors of CenterPoint Energy and Houston Electric
have no recourse to any assets or revenues of the Bond Companies. The bonds issued by these VIEs are payable only from and
103
104
secured by transition and system restoration property and the bondholders have no recourse to the general credit of CenterPoint
Energy or Houston Electric.
(g) Depreciation and Amortization Expense
(c) Equity and Investments without a Readily Determinable Fair Value (CenterPoint Energy and CERC)
CenterPoint Energy and CERC generally use the equity method of accounting for investments in entities in which they have
an ownership interest between 20% and 50% and exercise significant influence. CenterPoint Energy and CERC also use the equity
method for investments in which they have ownership percentages greater than 50%, when they exercise significant influence, do
not have control and are not considered the primary beneficiary, if applicable.
Under the equity method, CenterPoint Energy and CERC adjust their investments each period for contributions made,
distributions received, respective shares of comprehensive income and amortization of basis differences, as appropriate.
CenterPoint Energy and CERC evaluate their 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 and CERC consider 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 classify these distributions
as operating activities in their respective Statements of Consolidated Cash Flows. CenterPoint Energy and CERC consider
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 classify these distributions as investing activities in their respective Statements of
Consolidated Cash Flows.
On September 4, 2018, CERC completed the Internal Spin of its equity investment in Enable and Enable GP. For further
The Registrants compute depreciation and amortization using the straight-line method based on economic lives or regulatory-
mandated recovery periods. Amortization expense includes amortization of certain regulatory assets and other intangibles.
(h) Capitalization of Interest and AFUDC
The Registrants capitalize interest and AFUDC as a component of projects under construction and amortize 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.
CenterPoint
Energy
2018
Houston
Electric
CERC
CenterPoint
Energy
2017
Houston
Electric
CERC
CenterPoint
Energy
2016
Houston
Electric
CERC
Year Ended December 31,
Interest and AFUDC debt (1) ... $
AFUDC equity (2) ....................
$
8
12
$
6
10
$
2
2
(in millions)
$
9
11
$
6
10
$
2
1
$
8
7
$
6
6
2
1
(1) Included in Interest and other finance charges on the Registrants’ respective Statements of Consolidated Income.
information regarding the Internal Spin, see Note 11.
(2) Included in Other Income (Expense) on the Registrants’ respective Statements of Consolidated Income.
Investments without a readily determinable fair value will be measured at cost, less impairment, plus or minus
(i) Income Taxes
observable prices changes of an identical or similar investment of the same issuer.
(d) Revenues
The Registrants record 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. For further discussion, see Note
5.
(e) Long-lived Assets and Intangibles Subject to Amortization
The Registrants record property, plant and equipment at historical cost and expense repair and maintenance costs as incurred.
The Registrants periodically evaluate long-lived assets, including property, plant and equipment, and specifically identifiable
intangibles subject to amortization, 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.
(f) Regulatory Assets and Liabilities
The Registrants apply the guidance for accounting for regulated operations to the Electric Transmission & Distribution
reportable segment and the Natural Gas Distribution reportable segment. The Registrants’ 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.
The Registrants’ rate-regulated businesses recognize removal costs as a component of depreciation expense in accordance
with regulatory treatment. In addition, a portion of the amount of removal costs collected from customers that relate to AROs has
been reclassified from a regulatory liability to an asset retirement liability in accordance with accounting guidance for AROs.
For further detail on the Registrants’ regulatory assets and liabilities, see Note 7.
Houston Electric and CERC are included in CenterPoint Energy’s U.S. federal consolidated income tax return. Houston
Electric and CERC report their income tax provision on a separate entity basis pursuant to a tax sharing agreement with CenterPoint
Energy. Current federal and certain state income taxes are payable to or receivable from CenterPoint Energy.
The Registrants use 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. The Registrants recognize interest
and penalties as a component of income tax expense (benefit), as applicable, in their respective Statements of Consolidated Income.
CenterPoint Energy reports the income tax provision associated with its interest in Enable in income tax expense (benefit) in its
Statements of Consolidated Income.
On December 22, 2017, President Trump signed into law comprehensive tax reform legislation informally called the Tax Cuts
and Jobs Acts, or TCJA, which resulted in significant changes to federal tax laws effective January 1, 2018. See Note 15 for further
discussion of the impacts of tax reform implementation.
To the extent certain EDIT of the Registrants’ rate-regulated subsidiaries may be recoverable or payable through future rates,
regulatory assets and liabilities have been recorded, respectively.
The Registrants use the portfolio approach to recognize income tax effects on other comprehensive income from accumulated
other comprehensive income.
(j) Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do not bear interest. Management reviews the outstanding
accounts receivable, as well as the bad debt write-offs experienced in the past, and establishes 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.
105
106
The table below summarizes the Registrants’ provision for doubtful accounts for 2018, 2017 and 2016:
Year Ended December 31,
CenterPoint
Energy
2018
Houston
Electric
CERC
CenterPoint
Energy
2017
Houston
Electric
(in millions)
CERC
CenterPoint
Energy
2016
Houston
Electric
CERC
Provision for doubtful
accounts............................... $
16
$
— $
16
$
14
$
1
$
13
$
7
$
— $
7
(k) Inventory
The Registrants’ inventory consists principally of materials and supplies and, for CERC, 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 CERC’s Energy Services business segment
at locations qualifying for and utilizing the fair value hedge accounting election are valued at fair value; inventories at locations
not qualifying for or not utilizing the fair value hedge accounting election are valued at the lower of average cost or market. During
2018, 2017 and 2016, CERC recorded write-downs of natural gas inventory to the lower of average cost or market which are
disclosed on the respective Statements of Consolidated Cash Flows.
(l) Derivative Instruments
The Registrants are exposed to various market risks. These risks arise from transactions entered into in the normal course of
business. The Registrants utilize derivative instruments such as physical forward contracts, swaps and options to mitigate the
impact of changes in commodity prices, weather and interest rates on operating results and cash flows. Such derivatives are
recognized in the Registrants’ Consolidated Balance Sheets at their fair value unless the Registrant 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 reportable segment officers that oversees
commodity price, weather and credit risk activities, including the Registrants’ marketing, risk management services and hedging
activities. The committee’s duties are to establish the Registrants’ commodity risk policies, allocate board-approved commercial
risk limits, approve the use of new products and commodities, monitor positions and ensure compliance with the Registrants’ risk
management policies and procedures and limits established by CenterPoint Energy’s Board of Directors.
The Registrants’ 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.
(m) Investments in Equity Securities (CenterPoint Energy and CERC)
CenterPoint Energy and CERC report equity securities at estimated fair value in their respective Consolidated Balance Sheets,
and any unrealized holding gains and losses are recorded as Other Income (Expense) in their respective Statements of Consolidated
Income.
(n) Environmental Costs
The Registrants expense or capitalize environmental expenditures, as appropriate, depending on their future economic benefit.
The Registrants expense amounts that relate to an existing condition caused by past operations that do not have future economic
benefit. The Registrants record undiscounted liabilities related to these future costs when environmental assessments and/or
remediation activities are probable and the costs can be reasonably estimated.
(o) Cash and Cash Equivalents and Restricted Cash
For purposes of reporting cash flows, the Registrants consider cash equivalents to be short-term, highly-liquid investments
with maturities of three months or less from the date of purchase. Cash and cash equivalents held by the Bond Companies (VIEs)
solely to support servicing the Securitization Bonds as of December 31, 2018 and 2017 are reflected on CenterPoint Energy’s and
Houston Electric’s Consolidated Balance Sheets.
In connection with the issuance of Securitization Bonds, CenterPoint Energy and Houston Electric were 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. For more
information on restricted cash see Note 20.
(p) Preferred Stock and Dividends
Preferred stock is evaluated to determine balance sheet classification, and all conversion and redemption features are evaluated
for bifurcation treatment. Proceeds received net of issuance costs are recognized on the settlement date. Cash dividends become
a liability once declared. Income available to common stockholders is computed by deducting from net income the dividends
accumulated and earned during the period on cumulative preferred stock.
(q) Purchase Accounting
The Registrants evaluate acquisitions to determine when a set of acquired activities and assets represent a business. When
control of a business is obtained, the Registrants apply the acquisition method of accounting and record the assets acquired,
liabilities assumed and any non-controlling interest obtained based on fair value at the acquisition date. The excess of the fair
value of purchase consideration over the fair value of the net assets acquired is recorded as goodwill. The results of operations of
the acquired business are included in the Registrants’ respective Statements of Consolidated Income beginning on the date of the
acquisition.
(r) New Accounting Pronouncements
The following table provides an overview of recently adopted or issued accounting pronouncements applicable to all the
Registrants, unless otherwise noted.
Recently Adopted Accounting Standards
ASU Number and Name
ASU 2014-09- Revenue
from Contracts with
Customers (Topic 606) and
related amendments
Description
This standard 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.
Transition method: modified retrospective
ASU 2017-05- Other
Income-Gains and Losses
from the Derecognition of
Nonfinancial Assets
(Subtopic 610-20):
Clarifying the Scope of
Asset Derecognition
Guidance and Accounting
for Partial Sales of
Nonfinancial Assets
This standard clarifies when and how to apply
ASC 610-20, which was issued as part of ASU
2014-09. It amends or supersedes the guidance
in ASC 350 and ASC 360 on determining a gain
or loss recognized upon the derecognition of
nonfinancial assets. This standard also eliminates
industry specific guidance, including ASC
360-20 Property, Plant, and Equipment - Real
Estate Sales, for the recognition of gains or
losses upon the sale of in-substance real estate.
Transition method: modified retrospective
ASU 2016-01-Financial
Instruments-Overall
(Subtopic 825-10):
Recognition and
Measurement of Financial
Assets and Financial
Liabilities
ASU 2018-03-Technical
Corrections and
Improvements to Financial
Instruments-Overall
(Subtopic 825-10):
Recognition and
Measurement of Financial
Assets and Financial
Liabilities
This standard 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. It also changes certain disclosure
requirements and other aspects related to
recognition and measurement of financial assets
and financial liabilities.
Transition method: cumulative-effect
adjustment to beginning retained earnings, and
two features prospective
Date of Adoption
January 1, 2018
Financial Statement Impact
upon Adoption
Note 5 addresses the disclosure requirements.
Adoption of the standard did not result in
significant changes to revenue recognition. A
substantial amount of the Registrants’ revenues
are tariff and/or derivative based, which were not
significantly impacted by these ASUs.
January 1, 2018
CenterPoint Energy and CERC elected to apply
the practical expedient upon adoption to only
evaluate transactions that were not determined to
be complete as of the date of adoption.
Subsequent to adoption, gains or losses on sales
or dilution events in CenterPoint Energy’s
investment in Enable may result in gains or
losses recognized in earnings.
January 1, 2018
The adoption of this standard did not have an
impact on the Registrants’ financial position,
results of operations or cash flows. The
Registrants elected the practicability exception
for investments without a readily determinable
fair value to be measured at cost. This includes
the Enable Series A Preferred Units owned by
CenterPoint Energy, which were previously
accounted for under the cost method. See Note
11 for further discussion.
107
108
Recently Adopted Accounting Standards
ASU Number and Name
ASU 2016-15- Statement of
Cash Flows (Topic 230):
Classification of Certain
Cash Receipts and Cash
Payments
Description
This standard 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.
Transition method: retrospective
Date of Adoption
January 1, 2018
ASU 2016-18- Statement of
Cash Flows (Topic 230):
Restricted Cash
ASU 2017-07-
Compensation-Retirement
Benefits (Topic 715):
Improving the Presentation
of Net Periodic Pension
Cost and Net Periodic
Postretirement Benefit Cost
ASU 2017-12- Derivatives
and Hedging (Topic 815):
Targeted Improvements to
Accounting for Hedging
Activities
ASU 2018-02-Income
Statement-Reporting
Comprehensive Income
(Topic 220):
Reclassification of Certain
Tax Effects from
Accumulated Other
Comprehensive Income
This standard 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.
Transition method: retrospective
This standard requires an employer to report the
service cost component of the net periodic
pension cost and postretirement benefit cost in
the same line item(s) as other employee
compensation costs arising from services
rendered during the period; all other components
will be presented separately from the line item(s)
that includes the service cost and outside of any
subtotal of operating income. In addition, only
the service cost component will be eligible for
capitalization in assets.
Transition method: retrospective for the
presentation of the service cost component and
other components; prospective for the
capitalization of the service cost component
This standard, including standards amending this
standard, expands an entity’s ability to hedge and
account for risk components, reduces the
complexity of applying certain aspects of hedge
accounting and updates the presentation and
disclosure requirements. The guidance
eliminates the requirement to separately measure
and report hedge ineffectiveness.
Transition method: cumulative-effect
adjustment for elimination of the separate
measurement of ineffectiveness; prospective for
presentation and disclosure
This standard allows a reclassification from
accumulated other comprehensive income to
retained earnings for stranded tax effects
resulting from the TCJA and requires entities to
provide certain disclosures regarding stranded
tax effects.
Transition method: in the period of adoption
January 1, 2018
January 1, 2018
July 1, 2018
Applicable January
1, 2018
October 1, 2018
ASU 2018-13- Fair Value
Measurement (Topic 820):
Disclosure Framework-
Changes to the Disclosure
Requirements for Fair Value
Measurement
This standard eliminates, modifies and adds
certain disclosure requirements for fair value
measurements.
Transition method: prospective for additions
and one modification and retrospective for all
other amendments
Adoption of
eliminations and
modifications as of
September 30, 2018;
Additions will be
adopted January 1,
2020
Financial Statement Impact
upon Adoption
The adoption did not have a material impact on
the Registrants’ financial position, results of
operations or disclosures. However, CenterPoint
Energy’s and Houston Electric’s Statements of
Consolidated Cash Flows reflect an increase in
investing activities and a corresponding decrease
in operating activities of $2 million, $4 million
and $8 million for the years ended December 31,
2018, 2017 and 2016, respectively, due to the
requirement that cash proceeds from COLI
policies be classified as cash inflows from
investing activity.
The adoption of this standard did not have a
material impact on the Registrants’ financial
position, results of operations or disclosures.
However, the Registrants’ respective Statements
of Consolidated Cash Flows are reconciled to
cash, cash equivalents and restricted cash,
resulting in a decrease in investing activities of
$11 million for each of CenterPoint Energy’s and
CERC’s respective Statements of Consolidated
Cash Flows for the year ended December 31,
2018. In addition, each of CenterPoint Energy
and Houston Electric showed a decrease of $4
million and an increase of $5 million in investing
activities for the years ended December 31, 2017
and 2016, respectively, in their respective
Statements of Consolidated Cash Flows. See
Note 20 for further discussion.
The adoption of this standard did not have a
material impact on the Registrants’ financial
position, results of operations, cash flows or
disclosures; however, it resulted in the increases
to operating income and corresponding decreases
to other income reported in the table below.
Other components of net periodic costs
previously capitalized in assets are recorded as
regulatory assets by the Registrants’ rate-
regulated businesses prospectively from date of
adoption.
The adoption of this standard did not have a
material impact on the Registrants’ financial
position, results of operations or cash flows. As a
result of the adoption, the Registrants will no
longer recognize ineffectiveness for derivatives
designated as cash flow hedges; all changes in
fair value will flow through other comprehensive
income. As the Registrants did not have existing
cash flow hedges as of the initial application date
and the adoption date, no cumulative effective
adjustment was recorded. Note 9 reflects
disclosures modified upon adoption.
The adoption of this standard did not impact the
Registrants’ results of operations or cash flows.
As a result of the adoption, CenterPoint Energy
and CERC elected to reclassify a stranded tax
benefit of $15 million and $1 million,
respectively, primarily related to benefit plans,
from accumulated other comprehensive loss and
income to Retained earnings on their respective
Consolidated Balance Sheets. The
reclassification only encompasses the change in
the federal corporate income tax rate due to the
TCJA.
The adoption of this standard did not impact the
Registrants’ financial position, results of
operations or cash flows. Note 10 reflects the
disclosures modified upon adoption.
Recently Adopted Accounting Standards
ASU Number and Name
ASU 2018-14-
Compensation-Retirement
Benefits-Defined Benefit
Plans-General (Subtopic
715-20): Disclosure
Framework-Changes to the
Disclosure Requirements for
Defined Benefit Plans
Description
This standard eliminates, modifies and adds
certain disclosure requirements for employers
that sponsor defined benefit pension or other
postretirement plans.
Transition method: retrospective
Date of Adoption
October 1, 2018
Financial Statement Impact
upon Adoption
The adoption of this standard did not impact the
Registrants’ financial position, results of
operations, and cash flows. Note 8 reflects the
disclosures modified upon adoption.
The table below reflects the impact of adoption of ASU 2017-07 (Compensation—Retirement Benefits (Topic 715)) on
each of the Registrants’ respective Statements of Consolidated Income:
2018
2017
2016
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
Year Ended December 31,
(in millions)
Increase to operating income .. $
Decrease to other income ........
$
47
47
$
21
21
$
11
11
$
64
64
$
26
26
$
23
23
$
64
64
$
25
25
23
23
Issued, Not Yet Effective Accounting Standards
ASU Number and Name
Description
ASU 2016-02- Leases
(Topic 842) and related
amendments
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.
Transition method: modified retrospective
Effective Date
January 1, 2019
Early adoption is
permitted
Financial Statement Impact
upon Adoption
The Registrants have completed the
identification of leases under the revised
definition. In addition to expanded disclosure for
lessees and lessors, which will include
qualitative disclosures of the nature of the lease
population and additional quantitative
information, the Registrants expect to recognize
approximately $30 million, $1 million and $28
million of right-of-use assets and lease liabilities
on the statements of financial position of
CenterPoint Energy, Houston Electric and
CERC, respectively, on the date of adoption but
do not expect a material impact on their results
of operations and cash flows.
The Registrants elected the practical expedient
for existing easements provided by ASU
2018-01, and the transition option to not apply
the new lease standards in the comparative
financial statements presented in the year of
adoption provided by ASU 2018-11.
ASU 2018-01- Leases
(Topic 842) Land Easement
Practical Expedient for
Transition to Topic 842
ASU 2018-01 allows entities to elect not to
assess whether existing land easements that were
not previously accounted for in accordance with
ASC 840 Leases under ASC 842 Leases when
transitioning to the new leasing standard.
ASU 2018-10 - Codification
Improvements to Topic 842,
Leases
ASU 2018-10 makes sixteen narrow-scope
amendments to ASC 842 Leases.
ASU 2018-11- Leases
(Topic 842)-Targeted
Improvements
ASU 2018-20- Leases
(Topic 842)-Narrow-Scope
Improvements for Lessors
ASU 2016-13- Financial
Instruments-Credit Losses
(Topic 326): Measurement
of Credit Losses on
Financial Instruments
ASU 2018-11 allows entities the transition
option to not apply the new lease standards in the
comparative financial statements presented in the
year of adoption. It also gives lessors the
practical expedient to not separate non-lease and
lease components when certain criteria are met.
ASU 2018-20 updates several narrow-scope
changes for lessors, including sales taxes
collected from lessees, lessor costs paid directly
by lessees, and recognition of variable payments
for contracts with lease and non-lease
components.
This standard, including standards amending this
standard, requires a new model called CECL to
estimate credit losses for (1) financial assets
subject to credit losses and measured at
amortized cost and (2) certain off-balance sheet
credit exposures. Upon initial recognition of the
exposure, the CECL model requires an entity to
estimate the credit losses expected over the life
of an exposure based on historical information,
current information and reasonable and
supportable forecasts, including estimates of
prepayments.
Transition method: modified retrospective
January 1, 2020
Early adoption is
permitted starting
January 1, 2019
The Registrants are currently assessing the
impact that this standard will have on their
financial position, results of operations, cash
flows and disclosures.
109
110
Issued, Not Yet Effective Accounting Standards
ASU Number and Name
ASU 2018-15- Intangibles-
Goodwill and Other-
Internal-Use Software
(Subtopic 350-40):
Customer's Accounting for
Implementation Costs
Incurred in a Cloud
Computing Arrangement
That Is a Service Contract
Description
This standard aligns accounting for
implementation costs incurred in a cloud
computing arrangement that is accounted for as a
service contract with the requirements for
capitalizing implementation costs incurred to
develop or obtain internal-use software. The
update also prescribes the balance sheet, income
statement, and cash flow classification of the
capitalized implementation costs and related
amortization expense, and requires additional
quantitative and qualitative disclosures.
Transition method: retrospective or prospective
Effective Date
January 1, 2020
Early adoption is
permitted
Financial Statement Impact
upon Adoption
The adoption of this standard will allow the
Registrants to capitalize certain implementation
costs incurred in cloud computing arrangements
that are accounted for as service contracts. The
Registrants are currently assessing the impact
that adoption of this standard will have on their
financial position, results of operations, cash
flows and disclosures.
(c) AROs
The Registrants recorded AROs associated with the removal of asbestos and asbestos-containing material in its buildings,
including substation building structures. CenterPoint Energy and Houston Electric also recorded AROs relating to treated wood
poles for electric distribution, distribution transformers containing PCB (also known as Polychlorinated Biphenyl), and
underground fuel storage tanks. CenterPoint Energy and CERC also recorded AROs relating to gas pipelines abandoned in place.
The estimates of future liabilities were developed using historical information, and where available, quoted prices from outside
contractors.
A reconciliation of the changes in the ARO liability recorded in Other non-current liabilities on each of the Registrants’
respective Consolidated Balance Sheets is as follows:
Management believes that other recently adopted standards and recently issued standards that are not yet effective will not
have a material impact on the Registrants’ financial position, results of operations or cash flows upon adoption.
December 31, 2018
December 31, 2017
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
(3) Property, Plant and Equipment
(a) Property, Plant and Equipment
Beginning balance ............................................................... $
281
$
Accretion expense (1) ...........................................................
Revisions in estimates (2) ....................................................
10
(33)
35
1
(2)
(in millions)
$
243
$
205
$
33
$
9
(31)
8
68
1
1
Property, plant and equipment includes the following:
Ending balance .................................................................... $
258
$
34
$
221
$
281
$
35
$
169
7
67
243
Weighted
Average
Useful Lives
(in years)
35
28
27
26
45
33
18
28
27
23
CenterPoint Energy
Electric Transmission & Distribution ...............
Natural Gas Distribution ...................................
Energy Services ................................................
Other property...................................................
Total..............................................................
Houston Electric
Electric Transmission........................................
Electric Distribution..........................................
Other transmission & distribution property ......
Total..............................................................
CERC
Natural Gas Distribution ...................................
Energy Services ................................................
Other property...................................................
Total..............................................................
(b) Depreciation and Amortization
$
$
$
$
$
December 31, 2018
December 31, 2017
Property,
Plant and
Equipment,
Gross
Accumulated
Depreciation
&
Amortization
Property,
Plant and
Equipment,
Net
Property,
Plant and
Equipment,
Gross
Accumulated
Depreciation
&
Amortization
Property,
Plant and
Equipment,
Net
$
12,148
$
3,746
$
8,402
$
11,496
$
3,633
$
(in millions)
7,257
121
741
20,267
3,077
7,524
1,547
12,148
7,257
121
53
$
$
$
$
2,128
43
306
6,223
650
2,553
543
3,746
2,128
43
34
$
$
$
$
5,129
78
435
14,044
2,427
4,971
1,004
8,402
5,129
78
19
$
$
$
$
6,735
102
698
19,031
2,767
7,178
1,551
11,496
6,735
102
51
$
$
$
$
1,968
35
338
5,974
620
2,522
491
3,633
1,968
35
33
$
$
$
$
7,863
4,767
67
360
13,057
2,147
4,656
1,060
7,863
4,767
67
18
7,431
$
2,205
$
5,226
$
6,888
$
2,036
$
4,852
(1) Reflected in Regulatory assets on each of the Registrants’ respective Consolidated Balance Sheets.
(2) In 2018, CenterPoint Energy and CERC reflected a decrease in their respective ARO liability which is primarily attributable
to increases in the long-term interest rates used for discounting in the ARO calculation. In 2017, CenterPoint Energy and
CERC reflected an increase in their respective ARO liability which is primarily attributable to decreases in the long-term
interest rates used for discounting in the ARO calculation.
(4) Mergers and Acquisitions
Merger with Vectren (CenterPoint Energy)
On February 1, 2019 (the Merger Date), pursuant to the Merger Agreement, CenterPoint Energy consummated the previously
announced Merger and acquired Vectren for approximately $6 billion in cash. Each share of Vectren common stock issued and
outstanding immediately prior to the closing was canceled and converted into the right to receive $72.00 in cash per share, without
interest. At the closing, each stock unit payable in Vectren common stock or whose value is determined with reference to the value
of Vectren common stock, whether vested or unvested, was canceled with cash consideration paid therefor in accordance with the
terms of the Merger Agreement. These amounts did not include a stub period cash dividend of $0.41145 per share, which was
declared, with CenterPoint Energy’s consent, by Vectren’s board of directors on January 16, 2019, and paid to Vectren stockholders
as of the record date of February 1, 2019. See Notes 13 and 14 for further details regarding the Merger financings.
Following the closing, shares of Vectren common stock, which previously traded under the ticker symbol “VVC” on the
NYSE, ceased trading on and were delisted from the NYSE.
On the Merger Date, Vectren became a wholly-owned subsidiary of CenterPoint Energy. Vectren, through its wholly owned
The following table presents depreciation and amortization expense for 2018, 2017 and 2016:
subsidiary, VUHI, holds three public utilities:
Year Ended December 31,
CenterPoint
Energy
2018
Houston
Electric
CERC
CenterPoint
Energy
2017
Houston
Electric
(in millions)
CERC
CenterPoint
Energy
2016
Houston
Electric
CERC
•
•
Indiana Gas provides energy delivery services to natural gas customers located in central and southern Indiana;
SIGECO provides energy delivery services to electric and natural gas customers located near Evansville in southwestern
Indiana and owns and operates electric generation assets to serve its electric customers and optimizes those assets in the
wholesale power market; and
• VEDO provides energy delivery services to natural gas customers located near Dayton in west-central Ohio.
Depreciation........................... $
626
$
342
$
264
$
619
$
354
$
243
$
607
$
349
$
230
Amortization of securitized
regulatory assets.................
Other amortization .................
531
86
531
44
—
29
329
88
329
41
—
36
455
64
455
34
—
19
Total ....................................... $
1,243
$
917
$
293
$
1,036
$
724
$
279
$
1,126
$
838
$
249
111
112
Vectren is also involved in non-utility activities through two business units:
•
Infrastructure Services provides underground pipeline construction and repair services; and
(5) Revenue Recognition
• ESG provides energy performance contracting and sustainable infrastructure, such as renewables, distributed generation
and combined heat and power projects.
As of December 31, 2018, Vectren and its subsidiaries had outstanding $167 million of short-term debt and $2.2 billion of
long-term debt, including current maturities. Vectren’s outstanding short-term and long-term debt on the closing date of the Merger
became debt of CenterPoint Energy.
The Merger is anticipated to provide significant potential strategic benefits to CenterPoint Energy, including growth
opportunities for more rate-regulated investment, more customers for existing products and services and additional products and
services for existing customers. Additionally, CenterPoint Energy believes the Merger will increase geographic and business
diversity as well as scale in attractive jurisdictions and economies.
The Merger is being accounted for in accordance with ASC 805, Business Combinations, with identifiable assets acquired
and liabilities assumed recorded at their estimated fair values on the Merger Date. Due to the limited time between the Merger
Date and this filing, CenterPoint Energy’s purchase price allocation for the assets acquired and the liabilities assumed in the Merger
has not been completed. CenterPoint Energy will provide the required disclosures in the first quarter of 2019. The results of
operations of Vectren will be reported in CenterPoint Energy’s consolidated financial statements beginning on the Merger Date.
CenterPoint Energy incurred transaction costs of $28 million and integration costs of $18 million in connection with the
Merger for the year ended December 31, 2018, which were included in operation and maintenance expenses in CenterPoint Energy’s
Statements of Consolidated Income.
Acquisition of AEM (CenterPoint Energy and CERC)
On January 3, 2017, CES completed the acquisition of AEM. After working capital adjustments, the final purchase price of
$147 million was allocated to identifiable assets acquired and liabilities assumed based on their fair values on the acquisition date.
The goodwill of $5 million recorded as part of the acquisition primarily reflects the value of the complementary operational
and geographic footprints, scale and expanded capabilities provided by the acquisition.
The fair value of the identifiable intangible assets and related useful lives included in the final purchase price allocation is as
follows:
Customer relationships.............................................................................................
$
25
Fair Value
(in millions)
Useful Life
(in years)
15
The following unaudited pro forma financial information reflects the consolidated results of operations of CenterPoint Energy
and CERC, assuming the AEM acquisition had taken place on January 1, 2016. The unaudited pro forma financial information
has been presented for illustrative purposes only and is not necessarily indicative of the consolidated results of operations that
would have been achieved had the acquisition taken place on the dates indicated or the future consolidated results of operations
of the combined companies.
Year Ended December 31,
2017
2016
CenterPoint
Energy
CERC
CenterPoint
Energy
CERC
(in millions)
Revenues ....................................................................................
Net Income (1) ............................................................................
$
9,614
$
6,603
$
8,541
$
1,792
745
442
5,467
255
(1) Net income for the year ended December 31, 2017 includes a reduction in income tax expense of $1,113 million and
$396 million due to the TCJA for CenterPoint Energy and CERC, respectively. See Note 15 for further discussion of the
impacts of tax reform implementation.
The Registrants adopted ASC 606 and all related amendments on January 1, 2018 using the modified retrospective method
for those contracts that were not completed as of the date of adoption. Application of the new revenue standard did not result in
a cumulative effect adjustment to the opening balance of retained earnings. The comparative information has not been restated
and continues to be reported under the accounting standards in effect for those periods. The adoption of the new standard did not
have a material impact on the Registrants’ financial position, results of operations or cash flows.
In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The
amount of revenue recognized reflects the consideration to which the Registrants expect to be entitled to receive in exchange for
these goods or services. Contract assets and liabilities are not material.
The following tables disaggregate revenues by reportable segment and major source:
Year Ended December 31, 2018
CenterPoint Energy
Electric
Transmission
&
Distribution
(1)
Natural Gas
Distribution
(1)
Energy
Services
(2)
Other
Operations
(2)
Houston
Electric
CERC
Total
Total
(in millions)
Natural Gas
Distribution
(1)
Energy
Services
(2)
Other
Operations
(2)
Total
Revenue from
contracts ...............
$
3,235
$
3,011
$
493
$
Derivatives income...
Other (3) ...................
Eliminations..............
(2)
(1)
—
(2)
(42)
(36)
4,028
—
(110)
Total revenues........
$
3,232
$
2,931
$
4,411
$
6
—
9
—
15
$
6,745
$
3,235
$
3,011
$
493
$
4,024
(34)
(146)
—
(1)
—
(2)
(42)
(36)
4,028
—
(110)
$ 10,589
$
3,234
$
2,931
$
4,411
$
1
—
—
—
1
$
3,505
4,026
(42)
(146)
$
7,343
Year Ended December 31, 2017
CenterPoint Energy
Electric
Transmission
&
Distribution
(1)
Natural Gas
Distribution
(1)
Energy
Services
(2)
Other
Operations
(2)
Houston
Electric
CERC
Total
Total
(in millions)
Natural Gas
Distribution
(1)
Energy
Services
(2)
Other
Operations
(2)
Total
Revenue from
contracts ...............
$
3,001
$
2,638
$
480
$
Derivatives income...
Other (3) ...................
Eliminations..............
(1)
(3)
—
—
1
(33)
3,569
—
(52)
Total revenues........
$
2,997
$
2,606
$
3,997
$
5
—
9
—
14
$
6,124
$
3,001
$
2,638
$
480
$
— $
3,118
3,568
7
(85)
—
(3)
—
—
1
(33)
3,569
—
(52)
—
—
—
3,569
1
(85)
$
9,614
$
2,998
$
2,606
$
3,997
$
— $
6,603
Year Ended December 31, 2016
CenterPoint Energy
Electric
Transmission
&
Distribution
(1)
Natural Gas
Distribution
(1)
Energy
Services
(2)
Other
Operations
(2)
Houston
Electric
CERC
Total
Total
(in millions)
Natural Gas
Distribution
(1)
Energy
Services
(2)
Other
Operations
(2)
Total
Revenue from
contracts ...............
$
3,050
$
2,368
$
288
$
Derivatives income...
Other (3) ...................
Eliminations..............
1
9
—
—
41
(29)
1,811
—
(26)
Total revenues........
$
3,060
$
2,380
$
2,073
$
5
—
10
—
15
$
5,711
$
3,050
$
2,368
$
288
$
— $
2,656
1,812
60
(55)
—
9
—
—
41
(29)
1,811
—
(26)
$
7,528
$
3,059
$
2,380
$
2,073
$
—
1
—
1
1,811
42
(55)
$
4,454
(1) Reflected in Utility revenues in the Statements of Consolidated Income.
113
114
(2) Reflected in Non-utility revenues in the Statements of Consolidated Income.
(1) Amount presented is net of the accumulated goodwill impairment charge of $252 million recorded in 2012.
(3) Primarily consists of income from ARPs and leases. ARPs are contracts between the utility and its regulators, not between
the utility and a customer. The Registrants recognize ARP revenue as other revenues when the regulator-specified
conditions for recognition have been met. Upon recovery of ARP revenue through incorporation in rates charged for
utility service to customers, ARP revenue is reversed and recorded as revenue from contracts with customers. The
recognition of ARP revenues and the reversal of ARP revenues upon recovery through rates charged for utility service
may not occur in the same period.
Revenues from Contracts with Customers
Electric Transmission & Distribution. Houston Electric distributes electricity to customers over time and customers consume
the electricity when delivered. Revenue, consisting of both volumetric and fixed tariff rates set by the PUCT, is recognized as
electricity is delivered and represents amounts both billed and unbilled. Discretionary services requested by customers are provided
at a point in time with control transferring upon the completion of the service. Revenue for discretionary services is recognized
upon completion of service based on the tariff rates set by the PUCT. Payments for electricity distribution and discretionary services
are aggregated and received on a monthly basis. Houston Electric performs transmission services over time as a stand-ready
obligation to provide a reliable network of transmission systems. Revenue is recognized upon time elapsed, and the monthly tariff
rate set by the PUCT. Payments are received on a monthly basis.
Natural Gas Distribution. CERC distributes and transports natural gas to customers over time, and customers consume the
natural gas when delivered. Revenue, consisting of both volumetric and fixed tariff rates set by the state governing agency for that
service area, is recognized as natural gas is delivered and represents amounts both billed and unbilled. Discretionary services
requested by the customer are satisfied at a point in time and revenue is recognized upon completion of service and the tariff rates
set by the applicable state regulator. Payments of natural gas distribution, transportation and discretionary services are aggregated
and received on a monthly basis.
Energy Services. The majority of CES natural gas sales contracts are considered a derivative, as the contracts typically have
a stated minimum or contractual volume of delivery.
For contracts in which CES delivers the full requirement of the natural gas needed by the customer and a volume is not stated,
a contract as defined under ASC 606 is created upon the customer’s exercise of its option to take natural gas. CES supplies natural
gas to retail customers over time as customers consume the natural gas when delivered. For wholesale customers, CES supplies
natural gas at a point in time because the wholesale customer is presumed to have storage capabilities. Control is transferred to
both types of customers upon delivery of natural gas. Revenue is recognized on a monthly basis based on the estimated volume
of natural gas delivered and the price agreed upon with the customer. Payments are received on a monthly basis.
AMAs are natural gas sales contracts under which CES also assumes management of a customer’s physical storage and/or
transportation capacity. AMAs have two distinct performance obligations, which consist of natural gas sales and natural gas delivery
because delivery could occur separate from the sale of natural gas (e.g., from storage to customer premises). Most AMAs’ natural
gas sales performance obligations are accounted for as embedded derivatives. The transaction price is allocated between the sale
of natural gas and the delivery based on the stand-alone selling price as stated in the contract. CES performs natural gas delivery
over time as customers take delivery of the natural gas and recognizes revenue on an aggregated monthly basis based on the volume
of natural gas delivered and the fees stated within the contract. Payments are received on a monthly basis.
Practical Expedients and Exemption. Sales taxes and other similar taxes collected from customers are excluded from the
transaction price.
(6) Goodwill and Other Intangibles (CenterPoint Energy and CERC)
CenterPoint Energy’s and CERC’s goodwill by reportable segment as of both December 31, 2018 and 2017 is as follows:
Natural Gas Distribution .............................................................................................................................................................................. $
Energy Services (1)......................................................................................................................................................................................
Other Operations..........................................................................................................................................................................................
Total .......................................................................................................................................................................................................... $
(in millions)
746
110
11
867
CenterPoint Energy and CERC perform goodwill impairment tests at least annually and evaluate goodwill when events or
changes in circumstances indicate that its carrying value may not be recoverable. The impairment evaluation for goodwill is
performed by comparing the fair value of each reporting unit with the carrying amount of the reporting unit, including goodwill.
The estimated fair value of the reporting unit is primarily determined on the basis of discounted cash flows. If the carrying amount
is in excess of the estimated fair value of the reporting unit, then the excess amount is the impairment charge that should be
recorded, not to exceed the carrying amount of goodwill. See Note 2(e) for further discussion.
CenterPoint Energy and CERC performed the annual goodwill impairment test in the third quarter of each of 2018 and 2017 and
determined that no goodwill impairment charge was required for any reporting unit, which approximate the Registrants’ applicable
reportable segments.
The tables below present information on CenterPoint Energy’s and CERC’s finite lived intangible assets recorded in Other
non-current assets on the Consolidated Balance Sheets. Finite lived intangible assets are amortized over their estimated useful
lives.
December 31, 2018
December 31, 2017
Gross
Carrying
Amount
Accumulated
Amortization
Net Balance
Gross
Carrying
Amount
Accumulated
Amortization
Net Balance
Customer relationships .......................
Covenants not to compete...................
Other ...................................................
Total..................................................
$
$
$
86
4
16
106
$
(27) $
(3)
(11)
(41) $
(in millions)
59
$
1
5
$
86
4
15
65
$
105
$
(21) $
(2)
(8)
(31) $
65
2
7
74
Year Ended December 31,
2018
2017
2016
(in millions)
Amortization expense of intangible assets (1) .............................................................
$
10
$
13
$
4
(1) Recorded in Depreciation and amortization expenses on CenterPoint Energy’s and CERC’s respective Statements of
Consolidated Income.
CenterPoint Energy and CERC estimate that amortization expense of intangible assets with finite lives for the next five years
will be as follows:
2019........................................................................................................................................................................ $
2020........................................................................................................................................................................
2021........................................................................................................................................................................
2022........................................................................................................................................................................
2023........................................................................................................................................................................
11
6
6
6
5
Amortization
Expense
(in millions)
115
116
(7) Regulatory Accounting
The following is a list of regulatory assets and liabilities reflected on the Registrants’ respective Consolidated Balance Sheets
as of December 31, 2018 and 2017:
December 31, 2018
December 31, 2017
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
(in millions)
Regulatory Assets:
(5) The EDIT and deferred revenues will be recovered or refunded to customers as required by tax and regulatory authorities.
See Note 15 for additional information.
(6) Other long-term regulatory assets that are not earning a return were not material as of December 31, 2018 and 2017.
(7) Current regulatory liabilities are included in Other current liabilities in each of the Registrants’ respective Consolidated
Balance Sheets.
(8) Stock-Based Incentive Compensation Plans and Employee Benefit Plans
Current regulatory assets (1) ................................................... $
77
$
— $
77
$
130
$
— $
130
(a) Stock-Based Incentive Compensation Plans (CenterPoint Energy)
Non-current regulatory assets:
Securitized regulatory assets...............................................
Unrecognized equity return (2)...........................................
Unamortized loss on reacquired debt..................................
Pension and postretirement-related regulatory
asset (3)...........................................................................
Hurricane Harvey restoration costs (4) ...............................
Regulatory assets related to TCJA (5) ................................
Other long-term regulatory assets (6) .................................
Total non-current regulatory assets ................................
Total regulatory assets................................................
1,059
(213)
68
725
68
33
227
1,967
2,044
Regulatory Liabilities:
Current regulatory liabilities (7)..............................................
38
Non-current regulatory liabilities:
Regulatory liabilities related to TCJA (5)...........................
Estimated removal costs .....................................................
Other long-term regulatory liabilities .................................
Total non-current regulatory liabilities...........................
Total regulatory liabilities ..........................................
1,323
886
316
2,525
2,563
1,059
(213)
68
33
64
23
90
1,124
1,124
17
847
269
182
1,298
1,315
—
—
—
30
4
10
137
181
258
21
476
617
134
1,227
1,248
1,590
(287)
75
646
64
48
211
2,347
2,477
24
1,354
878
232
2,464
2,488
1,590
(287)
75
31
58
33
70
1,570
1,570
22
862
285
116
1,263
1,285
—
—
—
20
6
15
140
181
311
2
492
593
116
1,201
1,203
Total regulatory assets and liabilities, net........ $
(519) $
(191) $
(990) $
(11) $
285
$
(892)
(1) Current regulatory assets are included in Prepaid expenses and other current assets in the Registrants’ respective
Consolidated Balance Sheets.
(2) The unrecognized equity return will be recognized as it is recovered in rates through 2024. During the years ended
December 31, 2018, 2017 and 2016, Houston Electric recognized approximately $74 million, $42 million and $64 million,
respectively, of the allowed equity return. The timing of Houston Electric’s recognition of the equity return will vary
each period based on amounts actually collected during the period. The actual amounts recognized are adjusted at least
annually to correct any over-collections or under-collections during the preceding 12 months.
(3) Includes a portion of Houston Electric’s and CERC’s NGD’s actuarially determined pension and other postemployment
expense in excess of the amount being recovered through rates that is being deferred for rate making purposes, of which
$33 million and $4 million as of December 31, 2018, respectively, and $31 million and $7 million as of December 31,
2017, respectively, were not earning a return.
(4) The Registrants suffered damage as a result of Hurricane Harvey, a major storm classified as a Category 4 hurricane on
the Saffir-Simpson Hurricane Wind Scale, that first struck the Texas coast on Friday, August 25, 2017 and remained over
the Houston area for the next several days. The unprecedented flooding from torrential amounts of rainfall accompanying
the storm caused significant damage to or destruction of residences and businesses served by the Registrants. The
Registrants deferred the uninsured storm restoration costs as management believed it was probable that such costs will
be recovered through traditional rate adjustment mechanisms for capital costs and through the next base rate proceeding
for operation and maintenance expenses. As a result, storm restoration costs did not materially affect the Registrants’
reported net income for 2017. The Registrants are not earning a return on Hurricane Harvey restoration costs.
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 Common Stock are authorized under these plans for awards. CenterPoint Energy issues new
shares of its Common Stock to satisfy stock-based payments related to LTIPs. Equity awards are granted to employees without
cost to the participants.
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 performance awards granted in 2018, 2017 and 2016 are distributed based upon the achievement of certain objectives
over a three-year performance cycle. The stock unit awards granted in 2018, 2017 and 2016 are service based. The stock unit
awards generally vest at the end of a three-year period, provided, however, that stock unit awards granted to non-employee directors
vested at the end of a one-year period (for awards granted in 2017 and 2016) or vested immediately upon grant (for awards granted
in 2018). 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.
The following table summarizes CenterPoint Energy’s expenses related to LTIPs for 2018, 2017 and 2016:
LTIP Compensation expense (1) ........................................................................................ $
Income tax benefit recognized ..........................................................................................
Actual tax benefit realized for tax deductions...................................................................
Year Ended December 31,
2018
2017
2016
(in millions)
26
$
21
$
6
5
8
6
19
7
5
(1) Included in Operation and maintenance expense in CenterPoint Energy’s Statements of Consolidated Income and not
capitalized as a part of Inventory or Property, Plant and Equipment.
117
118
The following tables summarize CenterPoint Energy’s LTIP activity for 2018:
CenterPoint Energy’s net periodic cost includes the following components relating to pension, including the non-qualified
Year Ended December 31, 2018
Weighted-
Average
Grant Date
Fair Value
Remaining
Average
Contractual
Life (Years)
Aggregate
Intrinsic
Value (2)
(Millions)
Shares
(Thousands)
benefit restoration plan:
Year Ended December 31,
2018
2017
(in millions)
2016
Performance Awards (1)
Outstanding and non-vested as of December 31, 2017....................
Granted ..........................................................................................
Forfeited or canceled .....................................................................
Vested and released to participants................................................
Outstanding and non-vested as of December 31, 2018....................
Stock Awards
Outstanding and non-vested as of December 31, 2017....................
Granted ..........................................................................................
Forfeited or canceled .....................................................................
Vested and released to participants................................................
Outstanding and non-vested as of December 31, 2018 .................
(1) Reflects maximum performance achievement.
3,627
1,321
(721)
(409)
3,818
980
409
(29)
(300)
1,060
$
$
$
$
22.15
26.74
21.72
21.31
23.91
22.68
26.62
25.31
22.84
24.08
1
$
57
Service cost (1) .................................................................................... $
Interest cost (2) ....................................................................................
Expected return on plan assets (2) .......................................................
Amortization of prior service cost (2) .................................................
Amortization of net loss (2) .................................................................
Net periodic cost ................................................................................. $
37
79
(107)
9
43
61
$
$
36
89
(97)
9
58
95
$
$
38
93
(101)
9
63
102
(1) Amounts presented in the table above are included in Operation and maintenance expense in CenterPoint Energy’s
Statements of Consolidated Income, net of regulatory deferrals and amounts capitalized. See Note 2(r).
(2) Amounts presented in the table above are included in Other, net in CenterPoint Energy’s Statements of Consolidated
Income, net of regulatory deferrals. See Note 2(r).
1.1
$
30
CenterPoint Energy used the following assumptions to determine net periodic cost relating to pension benefits:
(2) Reflects the impact of current expectations of achievement and stock price.
The weighted average grant date fair values per unit of awards granted were as follows for 2018, 2017 and 2016:
Performance Awards
Weighted-average grant date fair value per unit of awards granted............................. $
Total intrinsic value of awards received by participants ..............................................
Vested grant date fair value ..........................................................................................
Stock Awards
Weighted-average grant date fair value per unit of awards granted............................. $
Total intrinsic value of awards received by participants ..............................................
Vested grant date fair value ..........................................................................................
Year Ended December 31,
2018
2017
2016
(In millions, except for per unit amounts)
$
$
26.74
12
9
26.62
9
7
$
$
26.64
7
5
26.77
9
7
18.98
7
7
19.24
6
6
As of December 31, 2018, there was $27 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 Benefits (CenterPoint Energy)
CenterPoint Energy maintains a non-contributory qualified defined benefit pension plan covering substantially all employees,
with benefits determined using a cash balance formula. Substantially all of the Registrants’ employees participate in CenterPoint
Energy’s non-contributory qualified defined benefit plan. 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 plans, 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 qualified 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.
Discount rate .......................................................................................
Expected return on plan assets ............................................................
Rate of increase in compensation levels .............................................
3.65%
6.00
4.45
4.15%
6.00
4.50
4.40%
6.25
4.15
Year Ended December 31,
2018
2017
2016
In determining net periodic benefit 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 the Consolidated
Balance Sheets as well as the key assumptions of CenterPoint Energy’s pension plans. The measurement dates for plan assets and
obligations were December 31, 2018 and 2017.
Change in Benefit Obligation
Benefit obligation, beginning of year ................................................................................. $
Service cost.........................................................................................................................
Interest cost.........................................................................................................................
Benefits paid .......................................................................................................................
Actuarial (gain) loss (1) .......................................................................................................
Benefit obligation, end of year ...........................................................................................
Change in Plan Assets
Fair value of plan assets, beginning of year .......................................................................
Employer contributions ......................................................................................................
Benefits paid .......................................................................................................................
Actual investment return.....................................................................................................
Fair value of plan assets, end of year..................................................................................
Funded status, end of year .................................................................................................. $
December 31,
2018
2017
(in millions, except for actuarial
assumptions)
2,225
$
2,197
37
79
(201)
(127)
2,013
1,801
69
(201)
(153)
1,516
(497)
$
36
89
(168)
71
2,225
1,656
48
(168)
265
1,801
(424)
119
120
Amounts Recognized in Balance Sheets
Current liabilities-other....................................................................................................... $
Other liabilities-benefit obligations ....................................................................................
Net liability, end of year ..................................................................................................... $
Actuarial Assumptions
Discount rate (2) ..................................................................................................................
Expected return on plan assets (3) .......................................................................................
Rate of increase in compensation levels.............................................................................
Interest crediting rate ..........................................................................................................
December 31,
2018
2017
(in millions, except for actuarial
assumptions)
(7)
(490)
(497)
$
$
4.35%
6.00
4.60
3.75
(7)
(417)
(424)
3.65%
6.00
4.45
3.75
(1) Significant sources of gain for 2018 include the increase in discount rate from 3.65% to 4.35% and the mortality projection
scale change from MP2017 to MP2018. For 2017, the significant source of loss was the decrease in the discount rate
from 4.15% to 3.65%.
(2) 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.
(3) 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 following table displays pension benefits related to CenterPoint Energy’s pension plans that have accumulated benefit
obligations in excess of plan assets:
December 31,
2018
2017
Pension
(Qualified)
Pension
(Non-qualified)
Pension
(Qualified)
Pension
(Non-qualified)
Accumulated benefit obligation .......................................... $
Projected benefit obligation.................................................
Fair value of plan assets ......................................................
$
1,930
1,952
1,516
(in millions)
$
61
61
—
$
2,090
2,151
1,801
74
74
—
The accumulated benefit obligation for all defined benefit pension plans on CenterPoint Energy’s Consolidated Balance Sheets
was $1,991 million and $2,164 million as of December 31, 2018 and 2017, respectively.
(c) Postretirement Benefits
CenterPoint Energy provides certain healthcare and life insurance benefits for retired employees on both a contributory and
non-contributory basis. The Registrants’ employees who were hired before January 1, 2018 and who have met certain age and
service requirements at retirement, as defined in the plans, are eligible to participate in these benefit plans. Employees hired on
or after January 1, 2018 are not eligible for these benefits, except that employees represented by IBEW Local Union 66 are eligible
to participate in certain of the benefits, subject to the applicable age and service requirements. With respect to retiree medical and
prescription drug benefits, employees represented by the IBEW Local Union 66 who retire on or after January 1, 2017, and their
dependents, receive any such 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. Houston Electric and CERC are required to fund a
portion of their obligations in accordance with rate orders. All other obligations are funded on a pay-as-you-go basis.
Postretirement benefits are accrued over the active service period of employees. The net postretirement benefit cost includes
the following components:
2018
Year Ended December 31,
2017
2016
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
Service cost (1) ..................... $
Interest cost (2) .....................
Expected return on plan
assets (2) ...........................
Amortization of prior
service cost (credit) (2) .....
Amortization of net loss (2) .
Curtailment (3) .....................
Net postretirement benefit
cost (credit)...................... $
2
13
(5)
(5)
—
—
$
— $
8
(4)
(5)
—
—
$
1
4
(1)
1
—
—
2
16
(5)
(5)
—
—
(in millions)
$
$
1
9
(4)
(6)
—
—
1
5
(1)
1
—
—
$
$
2
16
$
1
10
(6)
(3)
1
(5)
(5)
(4)
1
(4)
1
4
(1)
—
1
(1)
5
$
(1) $
5
$
8
$
— $
6
$
5
$
(1) $
4
(1) Amounts presented in the table above are included in Operation and maintenance expense in CenterPoint Energy’s
Statements of Consolidated Income, net of regulatory deferrals and amounts capitalized. See Note 2(r).
(2) Amounts presented in the table above are included in Other, net in each of the Registrants’ respective Statements of
Consolidated Income, net of regulatory deferrals. See Note 2(r).
(3) 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 2016, postretirement healthcare benefits were amended 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 bargaining unit 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 CenterPoint Energy
and 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
postretirement plan. CenterPoint Energy also recognized an additional curtailment gain of $2 million in October 2016
related to other amendments in the postretirement plan.
The following assumptions were used to determine net periodic cost relating to postretirement benefits:
2018
Year Ended December 31,
2017
2016
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
Discount rate ..................
3.60%
3.60%
3.60%
4.15%
4.15%
4.15%
4.35%
4.35%
4.35%
Expected return on plan
assets ..........................
4.55
4.75
3.85
4.50
4.75
3.60
4.80
5.00
3.95
121
122
The following table summarizes changes in the benefit obligation, plan assets, the amounts recognized in consolidated balance
sheets and the key assumptions of the postretirement plans. The measurement dates for plan assets and benefit obligations were
December 31, 2018 and 2017.
CenterPoint
Energy
2018
Houston
Electric
December 31,
CERC
CenterPoint
Energy
(in millions)
2017
Houston
Electric
CERC
(3) The expected rate of return assumption was developed using the targeted asset allocation of the plans and the expected
return for each asset class.
(d) Accumulated Other Comprehensive Income (Loss) (CenterPoint Energy and CERC)
CenterPoint Energy recognizes the funded status of its pension plans and other postretirement plans on its Consolidated
Balance Sheets. To the extent this obligation exceeds amounts previously recognized in the Statements of Consolidated Income,
CenterPoint Energy records a regulatory asset for that portion related to its rate regulated utilities. To the extent that excess liability
does not relate to a rate regulated utility, the offset is recorded as a reduction to equity in accumulated other comprehensive income.
386
$
225
$
109
$
383
$
217
$
115
Amounts recognized in accumulated other comprehensive loss (gain) consist of the following:
Change in Benefit Obligation
Benefit obligation, beginning of year............... $
Service cost ......................................................
Interest cost ......................................................
Participant contributions ..................................
Benefits paid.....................................................
Actuarial (gain) loss (1) .....................................
Benefit obligation, end of year .........................
Change in Plan Assets
Fair value of plan assets, beginning of year .....
Employer contributions ....................................
Participant contributions ..................................
Benefits paid.....................................................
Actual investment return ..................................
Fair value of plan assets, end of year ...............
Funded status, end of year................................ $
Amounts Recognized in Balance Sheets
Current liabilities-other .................................... $
Other liabilities-benefit obligations..................
Net liability, end of year ................................... $
Actuarial Assumptions
Discount rate (2) ................................................
Expected return on plan assets (3) .....................
Medical cost trend rate assumed for the next
year - Pre-65 .................................................
Medical/prescription drug cost trend rate
2
13
7
(25)
(52)
331
120
14
7
(25)
(2)
114
(217)
(6)
(211)
(217)
$
$
$
—
8
2
(13)
(56)
166
93
9
2
(13)
(2)
89
(77)
$
— $
(77)
(77)
$
1
4
4
(9)
1
110
26
4
4
(9)
—
25
(85)
(3)
(82)
(85)
$
$
$
2
16
7
(26)
4
386
113
16
7
(26)
10
120
(266)
(6)
(260)
(266)
1
9
2
(14)
10
225
88
10
2
(14)
7
93
(132)
$
— $
(132)
(132)
$
$
$
$
1
5
3
(9)
(6)
109
25
5
3
(9)
2
26
(83)
(4)
(79)
(83)
4.35%
4.60
4.35%
4.70
4.35%
4.15
3.60%
4.55
3.60%
4.75
3.60%
3.85
5.95
5.95
5.95
6.15
6.15
6.15
assumed for the next year - Post-65..............
28.60
28.60
28.60
23.85
23.85
23.85
Prescription drug cost trend rate assumed for
the next year - Pre-65....................................
Rate to which the cost trend rate is assumed to
decline (the ultimate trend rate)....................
Year that the cost trend rates reach the
ultimate trend rate - Pre-65 ...........................
Year that the cost trend rates reach the
ultimate trend rate - Post-65 .........................
9.20
4.50
2026
2027
9.20
4.50
2026
2027
9.20
4.50
2026
2027
9.85
4.50
2026
2024
9.85
4.50
2026
2024
9.85
4.50
2026
2024
(1) Significant sources of gain for 2018 include the increase in the discount rate from 3.60% to 4.35%, favorable benefit
claims experience and cost trend rates in addition to the change in mortality projection scale from MP2017 to MP2018.
(2) The discount rate assumption was determined by matching the projected cash flows of the 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.
December 31,
2018
2017
Pension
Benefits
Postretirement
Benefits
Pension
Benefits
Postretirement
Benefits
CenterPoint
Energy
CenterPoint
Energy
CERC
CenterPoint
Energy
CenterPoint
Energy
CERC
Unrecognized actuarial loss (gain) ......................... $
Unrecognized prior service cost .............................
Deferred tax benefit (1) ...........................................
Net amount recognized in accumulated other
comprehensive loss (gain) .................................. $
$
109
1
—
(7) $
5
—
(in millions)
(3) $
5
(9)
$
94
1
—
(8) $
6
—
(2)
6
(11)
110
$
(2) $
(7) $
95
$
(2) $
(7)
(1) CenterPoint Energy’s and CERC’s postretirement benefit obligation is reduced by the impact of previously non-taxable
government subsidies under the Medicare Prescription Drug Act. Because the subsidies were non-taxable, the temporary
difference used in measuring the deferred tax impact was determined on the unrecognized losses excluding such subsidies.
The changes in plan assets and benefit obligations recognized in other comprehensive income during 2018 are as follows:
Pension
Benefits
Postretirement
Benefits
CenterPoint
Energy
CenterPoint
Energy
CERC
Net loss (gain) ................................................................................................................... $
Amortization of net loss ....................................................................................................
Amortization of prior service cost ....................................................................................
Total recognized in comprehensive income...................................................................... $
Total expense recognized in net periodic costs and Other comprehensive income .......... $
22
(6)
(1)
15
76
(e) Pension Plan Assets (CenterPoint Energy)
$
$
(in millions)
$
— $
—
—
— $
$
5
(1)
—
(1)
(2)
3
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 pension plans as of December 31, 2018:
U.S. equity..........................................................................................................................................................
International developed market equity ...............................................................................................................
Emerging market equity .....................................................................................................................................
Fixed income ......................................................................................................................................................
Cash....................................................................................................................................................................
12 - 28%
7 - 17%
5 - 11%
55 - 65%
0 - 2%
123
124
The following tables set forth by level, within the fair value hierarchy (see Note 10), CenterPoint Energy’s pension plan assets
As part of the investment strategy discussed above, the Registrants maintained the following weighted average allocation
at fair value as of December 31, 2018 and 2017:
targets for the postretirement plans as of December 31, 2018:
Fair Value Measurements as of December 31,
2018
2017
(Level 1)
(Level 2)
(Level 3)
Total
(Level 1)
(Level 2)
(Level 3)
Total
(in millions)
Cash.......................................................... $
19
$
— $
— $
19
$
18
$
— $
— $
18
Corporate bonds:
Investment grade or above.....................
Equity securities:
U.S. companies......................................
Cash received as collateral from
securities lending..................................
U.S. treasuries ..........................................
Mortgage backed securities......................
Asset backed securities ............................
Municipal bonds.......................................
Mutual funds (2) ........................................
International government bonds...............
—
60
77
196
—
—
—
167
—
Obligation to return cash received as
collateral from securities lending .........
(77)
368
—
—
—
6
1
27
—
16
—
Total investments at fair value ................. $
442
$
418
$
Investments measured by net asset value
per share or its equivalent (1) (2) ...........
Total Investments ...................................
(1) Represents investments in common collective trust funds.
—
—
—
—
—
—
—
—
—
—
—
368
60
77
196
6
1
27
167
16
—
76
76
67
—
—
—
211
—
(77)
(76)
432
—
—
—
8
1
47
—
17
—
860
$
372
$
505
$
656
$
1,516
—
—
—
—
—
—
—
—
—
—
—
432
76
76
67
8
1
47
211
17
(76)
877
924
$
1,801
(2) The amounts invested in mutual funds and common collective trust funds were allocated as follows:
As of December 31,
2018
2017
Mutual Funds
Common Collective
Trust Funds
Mutual Funds
Common Collective
Trust Funds
International equities ...........................................
Emerging market equities....................................
U.S. equities.........................................................
Fixed income .......................................................
51%
34%
15%
—
37%
4%
5%
54%
57%
30%
13%
—
34%
5%
6%
55%
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, 2018 or 2017.
(f) Postretirement Plan Assets
In managing the investments associated with the postretirement plans, the Registrants’ 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.
U.S. equity ..................................................................................................
International developed market equity .......................................................
Fixed income ..............................................................................................
Cash ............................................................................................................
CenterPoint
Energy
13 - 23%
3 - 13%
69 - 79%
0 - 2%
Houston Electric
13 - 23%
3 - 13%
69 - 79%
0 - 2%
CERC
15 - 25%
2 - 12%
68 - 78%
0 - 2%
The following table presents mutual funds by level, within the fair value hierarchy, the Registrants’ postretirement plan assets
at fair value as of December 31, 2018 and 2017:
Fair Value Measurements as of December 31,
2018
2017
Mutual Funds
(Level 1)
(Level 2)
(Level 3)
Total
(Level 1)
(Level 2)
(Level 3)
Total
(in millions)
CenterPoint Energy ....................................... $
114
$
— $
— $
114
$
120
$
— $
— $
120
Houston Electric............................................
CERC ............................................................
89
25
—
—
—
—
89
25
93
26
—
—
—
—
93
26
The amounts invested in mutual funds were allocated as follows:
CenterPoint
Energy
2018
Houston
Electric
As of December 31,
CERC
CenterPoint
Energy
Fixed income........................................................
U.S. equities .........................................................
International equities............................................
74%
19%
7%
74%
19%
7%
73%
21%
6%
74%
18%
8%
(g) Benefit Plan Contributions
2017
Houston
Electric
74%
18%
8%
CERC
71%
21%
8%
The Registrants made the following contributions in 2018 and expect to make the following minimum contributions in 2019
to the indicated benefit plans below:
Contributions in 2018
Expected Minimum Contributions in 2019
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
Qualified pension plan ......................... $
Non-qualified pension plan ..................
Postretirement benefit plan...................
60
9
14
$
— $
— $
(in millions)
—
9
—
4
86
7
17
$
— $
—
10
—
—
4
125
126
The following benefit payments are expected to be paid by the pension and postretirement benefit plans:
Expenses related to other benefit plans were recorded as follows:
Pension
Benefits
CenterPoint
Energy
Postretirement Benefits
CenterPoint
Energy
Houston Electric
CERC
2019 ..................................................................... $
2020 .....................................................................
2021 .....................................................................
2022 .....................................................................
2023 .....................................................................
2024-2028............................................................
$
141
146
154
155
156
759
(h) Savings Plan
(in millions)
$
16
19
20
21
22
116
$
9
10
11
11
12
61
5
6
6
7
7
37
The Registrants participate in CenterPoint Energy’s 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 make pre-tax or Roth contributions up
to 50%, and after tax contributions up to 16%, of their eligible compensation, not to exceed certain federally mandated limits. The
Registrants match 100% of the first 6% of each employee’s compensation contributed. The matching contributions are fully vested
at all times.
Effective January 1, 2016, the savings plan was amended to limit the percentage of future contributions that could be invested
in 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 Common Stock.
The savings plan has significant holdings of Common Stock. As of December 31, 2018, 12,062,915 shares of Common Stock
were held by the savings plan, which represented approximately 16% of its investments. Given the concentration of the investments
in Common Stock, the savings plan and its participants have market risk related to this investment.
CenterPoint Energy allocates to Houston Electric and CERC the savings plan benefit expense related to their respective
employees. The following table summarizes the Registrants’ savings plan benefit expense for 2018, 2017 and 2016:
CenterPoint
Energy
2018
Houston
Electric
CERC
CenterPoint
Energy
2017
Houston
Electric
CERC
CenterPoint
Energy
2016
Houston
Electric
CERC
Year Ended December 31,
(in millions)
The Registrants participate in CenterPoint Energy’s plan that 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).
The Registrants participate in CenterPoint Energy’s non-qualified deferred compensation plans that provide benefits payable
to directors, officers and select employees or their designated beneficiaries at specified future dates or upon termination, retirement
or death. Benefit payments are made from the general assets of the Registrants.
CenterPoint
Energy
2018
Houston
Electric
CERC
CenterPoint
Energy
2017
Houston
Electric
CERC
CenterPoint
Energy
2016
Houston
Electric
CERC
Year Ended December 31,
(in millions)
Postemployment benefits ........ $
Deferred compensation plans ..
$
3
3
$
4
1
$
1
—
$
6
3
$
1
1
$
4
—
$
5
3
$
3
1
3
—
Amounts related to other benefit plans were included in Benefit Obligations in the Registrants’ accompanying Consolidated
Balance Sheets as follows:
December 31, 2018
December 31, 2017
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
Postemployment benefits ............................................. $
Deferred compensation plans.......................................
Split-dollar life insurance arrangements ......................
$
11
42
36
$
3
9
1
(in millions)
$
7
3
—
$
20
45
39
$
3
10
1
14
3
—
(j) Change in Control Agreements and Other Employee Matters
CenterPoint Energy has a change in control plan, which was amended and restated on May 1, 2017. The plan generally
provides, to the extent applicable, in the case of a change in control of CenterPoint Energy and covered termination of employment,
for severance benefits of up to three times annual base salary plus bonus, and other benefits. CenterPoint Energy officers, including
the Executive Chairman, are participants under the plan.
As of December 31, 2018, the Registrants’ employees were covered by collective bargaining agreements as follows:
Agreement Expiration
CenterPoint
Energy
Houston Electric
CERC
Percentage of Employees Covered
IBEW Local 66......................................................
OPEIU Local 12 and Mankato .............................. March and May 2021
Gas Workers Union Local 340 ..............................
IBEW Local 949....................................................
USW Locals 13-227 and 13-1 ...............................
June and July 2022
December 2020
April 2020
May 2020
18%
3%
6%
3%
5%
35%
51%
—
—
—
—
51%
—
3%
12%
7%
11%
33%
The Registrants are exposed to various market risks. These risks arise from transactions entered into in the normal course of
business. The Registrants utilize derivative instruments such as physical forward contracts, swaps and options to mitigate the
impact of changes in commodity prices, weather and interest rates on operating results and cash flows.
(a) Non-Trading Activities
Commodity Derivative Instruments. CenterPoint Energy and CERC, through CES, enter into certain derivative instruments
to mitigate the effects of commodity price movements. Certain financial instruments used to hedge portions of the natural gas
inventory of the Energy Services reportable segment are designated as fair value hedges for accounting purposes. All other financial
instruments do not qualify or are not designated as cash flow or fair value hedges.
Weather Hedges. CenterPoint Energy and CERC have weather normalization or other rate mechanisms that mitigate the impact
of weather on NGD in Arkansas, Louisiana, Mississippi, Minnesota and Oklahoma. CenterPoint Energy’s and CERC’s NGD and
CenterPoint Energy’s electric operations in Texas do not have such mechanisms, although fixed customer charges are historically
higher in Texas for NGD compared to its other jurisdictions. As a result, fluctuations from normal weather may have a positive
Savings plan benefit
expenses............................ $
(i) Other Benefits Plans
43
$
17
$
18
$
41
$
17
$
17
$
38
$
15
$
16
Total........................................................................................................
(9) Derivative Instruments
127
128
or negative effect on CenterPoint Energy’s and CERC’s NGD’s results in Texas and on CenterPoint Energy’s electric operations’
results in its service territory.
(b) Derivative Fair Values and Income Statement Impacts
CenterPoint Energy and CERC, as applicable, enter into winter season weather hedges from time to time for certain NGD
jurisdictions and electric operations’ service territory to mitigate the effect of fluctuations from normal weather on results of
operations and cash flows. These weather hedges are based on heating degree days at 10-year normal weather. Houston Electric
does not enter into weather hedges.
The table below summarizes CenterPoint Energy’s and CERC’s weather hedge gain (loss) activity:
Jurisdiction
Winter Season
Bilateral
Cap
2018
2017
2016
Year Ended December 31,
Certain NGD jurisdictions ........................................................
Certain NGD jurisdictions ........................................................
8
Total CERC (1) ................................................................................................................
8
2017 – 2018
2018 – 2019
2018 – 2019
$
9
$
Electric operations’ Texas service territory...............................
Electric operations’ Texas service territory...............................
Electric operations’ Texas service territory...............................
9
Total CenterPoint Energy (1) .........................................................................................
2016 – 2017
$
2017 – 2018
9
(in millions)
— $
(2)
(2)
—
(2)
—
(4) $
— $
—
—
—
—
(1)
(1) $
—
—
—
—
—
1
1
(1) Weather hedge gains (losses) are recorded in Revenues in the Statements of Consolidated Income.
Cash Flow Hedging of Interest Expense. From time to time, the Registrants enter into forward interest rate agreements with
certain counterparties designated as cash flow hedges. The objective of these cash flow hedges is to reduce exposure to variability
in cash flows related to interest payments on anticipated future fixed rate debt offerings or other exposure to variable rate debt.
As of December 31, 2018 and 2017, the total outstanding notional amount of CenterPoint Energy’s and Houston Electric’s forward
interest rate agreements related to cash flow hedges was $450 million and $-0-, respectively. The maximum length of time over
which CenterPoint Energy and Houston Electric are exposed to the variability in future cash flows of the forecasted debt offerings
is less than 12 months. For the impacts of cash flow hedges to accumulated other comprehensive income, see Note 13.
Economic Hedging of Interest Rate Risk. From time to time, the Registrants may enter into forward interest rate agreements
with certain counterparties designated as economic hedges. The objective of these economic hedges is to offset any interest rate
risk borne by one or more of the Registrants in connection with an anticipated future fixed rate debt offering or other exposure to
variable rate debt. As of December 31, 2018 and 2017, the Registrants did not have any outstanding forward interest rate agreements
related to economic hedges.
The following tables present information about derivative instruments and hedging activities. The first three tables provide
a balance sheet overview of Derivative Assets and Liabilities as of December 31, 2018 and 2017, while the last three tables provide
a breakdown of the related income statement impacts for the years ending December 31, 2018, 2017 and 2016.
Fair Value of Derivative Instruments
Balance Sheet
Location
December 31, 2018
December 31, 2017
Derivative
Assets
Fair Value
Derivative
Liabilities
Fair Value
Derivative
Assets
Fair Value
Derivative
Liabilities
Fair Value
(in millions)
Derivatives designated as cash flow hedges:
Interest rate derivatives ................ Current Liabilities: Non-trading derivative liabilities.......
$
— $
Total Houston Electric..................................
Derivatives designated as fair value hedges:
Natural gas derivatives (1) (2) (3)
Current Liabilities: Non-trading derivative liabilities.......
Derivatives not designated as hedging instruments:
Natural gas derivatives (1) (2) (3)
Current Assets: Non-trading derivative assets ..................
Natural gas derivatives (1) (2) (3) Other Assets: Non-trading derivative assets .....................
Natural gas derivatives (1) (2) (3)
Current Liabilities: Non-trading derivative liabilities.......
Natural gas derivatives (1) (2) (3) Other Liabilities: Non-trading derivative liabilities..........
Indexed debt securities derivative
Current Liabilities .............................................................
Total CERC ...................................................
—
1
103
38
62
16
220
—
24
24
7
3
—
173
25
208
601
$
— $
—
13
114
44
38
9
218
—
Total CenterPoint Energy ............................
$
220
$
833
$
218
$
—
—
1
4
—
78
24
107
668
775
(1) The fair value shown for natural gas contracts is comprised of derivative gross volumes totaling 1,674 Bcf or a net 140 Bcf
long position and 1,795 Bcf or a net 224 Bcf long position as of December 31, 2018 and 2017, respectively. Certain
natural gas contracts hedge basis risk only and lack a fixed price exposure.
(2) Natural gas contracts are presented on a net basis in the Consolidated Balance Sheets as they are subject to master netting
arrangements. This netting applies to all undisputed amounts due or past due and causes derivative assets (liabilities) to
be ultimately presented net in a liability (asset) account within the Consolidated Balance Sheets. The net of total non-
trading natural gas derivative assets and liabilities is detailed in the Offsetting of Natural Gas Derivative Assets and
Liabilities table below.
(3) Derivative Assets and Derivative Liabilities include no material amounts related to physical forward transactions with
Enable.
Cumulative Basis Adjustment for Fair Value Hedges (CenterPoint Energy and CERC)
December 31, 2018
December 31, 2017
Cumulative
Amount of
Fair Value
Hedging
Adjustment
Included in
the Carrying
Amount of
Hedged Item
Carrying
Amount of
Hedged
Assets/
(Liabilities)
Cumulative
Amount of
Fair Value
Hedging
Adjustment
Included in
the Carrying
Amount of
Hedged Item
Carrying
Amount of
Hedged
Assets/
(Liabilities)
(in millions)
Balance Sheet Location
Hedged items in fair value hedge relationship:
Natural gas inventory............... Current Assets: Natural gas inventory ...................
Total CenterPoint Energy and CERC.....
$
$
57
57
$
$
1
1
$
$
80
80
$
$
14
14
129
130
Offsetting of Natural Gas Derivative Assets and Liabilities (CenterPoint Energy and CERC)
December 31, 2018
December 31, 2017
Gross
Amounts
Recognized
(1)
Gross
Amounts
Offset in the
Consolidated
Balance
Sheets
Net Amount
Presented in
the
Consolidated
Balance
Sheets (2)
Gross
Amounts
Recognized
(1)
Gross
Amounts
Offset in the
Consolidated
Balance
Sheets
Net Amount
Presented in
the
Consolidated
Balance
Sheets (2)
(in millions)
Current Assets: Non-trading derivative assets............
$
166
$
(66) $
100
$
165
$
(55) $
Other Assets: Non-trading derivative assets...............
Current Liabilities: Non-trading derivative liabilities
Other Liabilities: Non-trading derivative liabilities ...
54
(183)
(25)
Total............................................................................
$
12
$
(16)
81
20
19
38
(102)
(5)
53
(83)
(24)
$
31
$
111
$
(9)
63
20
19
$
110
44
(20)
(4)
130
(1) Gross amounts recognized include some derivative assets and liabilities that are not subject to master netting arrangements.
(2) The derivative assets and liabilities on the Consolidated Balance Sheets exclude accounts receivable or accounts payable
that, should they exist, could be used as offsets to these balances in the event of a default.
Income Statement Impact of Hedge Accounting Activity (CenterPoint Energy and CERC)
Year Ended December 31,
2018
2017
2016
Location and Amount of Gain (Loss)
recognized in Income on Hedging
Relationship (2)
Non-utility natural gas expense
(in millions)
Total amounts presented in the statements of income in which the effects of hedges are recorded ................. $
4,364
$
3,785
$
1,983
Gain (loss) on fair value hedging relationships:
Commodity contracts:
Hedged items - Natural gas inventory................................................................................................................
Derivatives designated as hedging instruments..................................................................................................
Amounts excluded from effectiveness testing recognized in earnings immediately (1)....................................
(13)
13
(149)
14
(14)
(67)
—
—
70
(1) Upon adoption of ASU 2017-12 effective January 1, 2018 (see Note 2 for additional information), CenterPoint Energy
and CERC elected to exclude from their assessment of hedge effectiveness the natural gas market price difference between
locations of the hedged inventory and the delivery location specified in the hedge instruments. Prior to the adoption of
this accounting guidance, the timing difference between the spot price and the futures price, as well as the difference
between the timing of the settlement of the futures and the valuation of the underlying physical commodity, was excluded
from the assessment of effectiveness for CenterPoint Energy’s and CERC’s existing fair value hedges and will continue
to be excluded from the assessment of hedge effectiveness. CenterPoint Energy and CERC elected to continue to
immediately recognize amounts excluded from hedge effectiveness in their respective Statements of Consolidated Income.
(2) Income statement impact associated with cash flow hedge activity is related to gains and losses reclassified from
Accumulated other comprehensive income into income. Amounts are immaterial for the Registrants for the years ended
December 31, 2018, 2017 and 2016, respectively.
Income Statement Location
2018
2017
2016
Year Ended December 31,
Effects of derivatives not designated as hedging instruments on the income statement:
Commodity contracts ..................... Gains (Losses) in Non-utility revenues........................................................
$
Total CERC........................................................................................................
Indexed debt securities derivative .. Gains (Losses) in Other Income (Expense) .................................................
Interest rate derivatives .................. Gains in Other Income (Expense)................................................................
(in millions)
$
107
107
(232)
2
$
211
211
49
—
(18)
(18)
(413)
—
Total CenterPoint Energy .................................................................................
$
(123) $
260
$
(431)
(c) Credit Risk Contingent Features
CenterPoint Energy and CERC enter into financial derivative contracts containing material adverse change provisions. These
provisions could require CenterPoint Energy or CERC to post additional collateral if the S&P or Moody’s credit ratings of
CenterPoint Energy, Inc. or its subsidiaries, including CERC Corp., are downgraded.
CenterPoint Energy and CERC
December 31,
2018
December 31,
2017
(in millions)
Aggregate fair value of derivatives containing material adverse change provisions in a net liability position ............
$
1
$
Fair value of collateral already posted ...........................................................................................................................
Additional collateral required to be posted if credit risk contingent features triggered ................................................
—
—
2
—
2
(d) Credit Quality of Counterparties
In addition to the risk associated with price movements, credit risk is also inherent in CenterPoint Energy’s and CERC’s non-
trading derivative activities. Credit risk relates to the risk of loss resulting from non-performance of contractual obligations by a
counterparty. The following table shows the composition of counterparties to the non-trading derivative assets:
CenterPoint Energy and CERC
December 31, 2018
December 31, 2017
Investment
Grade (1)
Total (3)
Investment
Grade (1)
Total (3)
Energy marketers......................................................................... $
End users (2) .................................................................................
Total........................................................................................... $
11
30
41
$
$
(in millions)
24
114
138
$
$
6
17
23
$
$
45
109
154
(1) “Investment grade” is primarily determined using publicly available credit ratings and considers credit support (including
parent company guarantees) and collateral (including cash and standby letters of credit). For unrated counterparties,
CenterPoint Energy and CERC determine a synthetic credit rating by performing financial statement analysis and consider
contractual rights and restrictions and collateral.
(2) End users are comprised primarily of customers who have contracted to fix the price of a portion of their physical gas
requirements for future periods.
(3) The amounts reflected in the table above were not impacted by collateral netting.
131
132
(10) Fair Value Measurements
Houston Electric
Assets and liabilities that are recorded at fair value in the Registrants’ Consolidated Balance Sheets are categorized based
upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined below and directly
related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, are as follows:
Level 1: Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. The
types of assets carried at Level 1 fair value generally are exchange-traded derivatives and equity securities, as well as natural
gas inventory that has been designated as the hedged item in a fair value hedge.
Level 2: Inputs, other than quoted prices included in Level 1, are observable for the asset or liability, either directly or indirectly.
Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are
observable for the asset or liability. Fair value assets and liabilities that are generally included in this category are derivatives
with fair values based on inputs from actively quoted markets. A market approach is utilized to value the Registrants’ Level
2 natural gas derivative assets or liabilities. CenterPoint Energy’s Level 2 indexed debt securities derivative is valued using
an option model and a discounted cash flow model, which uses projected dividends on the ZENS-Related Securities and a
discount rate as observable inputs.
Level 3: Inputs are unobservable for the asset or liability, and include situations where there is little, if any, market activity
for the asset or liability. Unobservable inputs reflect the Registrants’ judgments about the assumptions market participants
would use in pricing the asset or liability since limited market data exists. The Registrants develop these inputs based on the
best information available, including the Registrants’ own data. A market approach is utilized to value the Registrants’ Level
3 assets or liabilities. As of December 31, 2018, CenterPoint Energy’s and CERC’s Level 3 assets and liabilities are comprised
of physical natural gas forward contracts and options. Level 3 physical natural gas forward contracts and options are valued
using a discounted cash flow model which includes illiquid forward price curve locations (ranging from $1.39 to $5.96 per
MMBtu) as an unobservable input. CenterPoint Energy’s and CERC’s Level 3 physical natural gas forward contracts and
options derivative assets and liabilities consist of both long and short positions (forwards and options). Forward price decreases
(increases) as of December 31, 2018 would have resulted in lower (higher) values, respectively, for long forwards and options
and higher (lower) values, respectively, for short forwards and options.
The Registrants determine the appropriate level for each financial asset and liability on a quarterly basis and recognize transfers
between levels at the end of the reporting period.
The following tables present information about the Registrants’ assets and liabilities (including derivatives that are presented
net) measured at fair value on a recurring basis as of December 31, 2018 and December 31, 2017, and indicate the fair value
hierarchy of the valuation techniques utilized by the Registrants to determine such fair value.
CenterPoint Energy
December 31, 2018
December 31, 2017
Level 1
(4)
Level 2
Level 3
Netting
(1)
Total
Level 1
(4)
Level 2
Level 3
Netting
(1)
Total
Assets
(in millions)
Corporate equities ...................... $
542
$
— $
— $
— $
542
$
963
$
— $
— $
— $
963
Investments, including money
market funds (2) ....................
Natural gas derivatives (3)(4) ....
Hedged portion of natural gas
inventory................................
66
—
1
—
173
—
Total assets........................... $
609
$
173
$
—
47
—
47
—
(82)
—
66
138
1
68
—
14
—
161
—
$
(82) $
747
$
1,045
$
161
$
—
57
—
57
—
(64)
—
68
154
14
$
(64) $
1,199
Liabilities
Indexed debt securities
derivative ............................... $
— $
Interest rate derivatives ..............
Natural gas derivatives (3)(4) ....
Total liabilities ..................... $
24
—
24
$
601
—
191
792
$
$
— $
— $
601
$
— $
— $
668
$
— $
668
—
17
17
—
(101)
$
(101) $
24
107
732
—
—
$
— $
—
96
96
—
11
—
(83)
—
24
$
679
$
(83) $
692
December 31, 2018
December 31, 2017
Level 1
Level 2
Level 3
Netting
Total
Level 1
Level 2
Level 3
Netting
Total
Assets
Investments, including money
market funds (2) .................... $
Total assets........................... $
Liabilities
Interest rate derivatives .............. $
Total liabilities ..................... $
48
48
24
24
$
$
$
$
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
(in millions)
48
48
24
24
$
$
$
$
51
51
$
$
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
51
51
—
—
CERC
Assets
December 31, 2018
December 31, 2017
Level 1
(4)
Level 2
Level 3
Netting
(1)
Total
Level 1
(4)
Level 2
Level 3
Netting
(1)
Total
(in millions)
Corporate equities ...................... $
2
$
— $
— $
— $
2
$
3
$
— $
— $
— $
3
Investments, including money
market funds (2) ....................
Natural gas derivatives (3)(4) ....
Hedged portion of natural gas
inventory................................
Total assets........................... $
11
—
1
14
$
Liabilities
Natural gas derivatives (3)(4) .... $
Total liabilities ..................... $
— $
— $
—
173
—
173
191
191
$
$
$
—
47
—
47
17
17
$
$
$
—
(82)
—
11
138
1
(82) $
152
(101) $
(101) $
107
107
$
$
$
11
—
14
28
—
161
—
$
161
$
— $
— $
96
96
$
$
—
57
—
57
11
11
$
$
$
—
(64)
—
(64) $
(83) $
(83) $
11
154
14
182
24
24
(1) Amounts represent the impact of legally enforceable master netting arrangements that allow CenterPoint Energy and
CERC to settle positive and negative positions and also include cash collateral of $19 million as of both December 31,
2018 and 2017, respectively, posted with the same counterparties.
(2) Amounts are included in Prepaid and Other Current Assets and Other Assets in the Consolidated Balance Sheets.
(3) Natural gas derivatives include no material amounts related to physical forward transactions with Enable.
(4) Level 1 natural gas derivatives include exchange-traded derivatives cleared by the CME, which deems that financial
instruments cleared by the CME are settled daily in connection with posted cash payments. As a result of this exchange
rule, CME-related derivatives are considered to have no fair value at the balance sheet date for financial reporting purposes,
and are presented in Level 1 net of posted cash; however, the derivatives remain outstanding and subject to future
commodity price fluctuations until they are settled in accordance with their contractual terms. Derivative transactions
cleared on exchanges other than the CME (e.g., the Intercontinental Exchange or ICE) continue to be reported on a gross
basis.
133
134
The following table presents additional information about assets or liabilities, including derivatives that are measured at fair
(11) Unconsolidated Affiliate (CenterPoint Energy and CERC)
value on a recurring basis for which CenterPoint Energy and CERC have utilized Level 3 inputs to determine fair value:
Year Ended December 31,
2018
2017
2016
CenterPoint
Energy
CERC
CenterPoint
Energy
CERC
CenterPoint
Energy
CERC
Beginning balance................................ $
(622) $
Purchases (1) .........................................
Total gains (losses)...............................
Total settlements ..................................
Transfers into Level 3 (2) ......................
Transfers out of Level 3 (3) ..................
—
30
(39)
5
656
46
—
30
(39)
5
(12)
(in millions)
$
(704) $
—
96
(11)
14
(17)
$
13
—
47
(11)
14
(17)
$
12
12
12
(27)
(712)
(1)
Ending balance (4) ................................ $
30
$
30
$
(622) $
46
$
(704) $
12
12
12
(27)
5
(1)
13
The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the
reporting date:
$
18
$
18
$
87
$
38
$
(402) $
11
(1) Mark-to-market value of Level 3 derivative assets acquired through the purchase of AEM were less than $1 million at
the acquisition date.
(2) During 2016, CenterPoint Energy transferred its indexed debt securities from Level 2 to Level 3 to reflect changes in the
significance of the unobservable inputs used in the valuation.
(3) During 2018, CenterPoint Energy transferred its indexed debt securities derivative from Level 3 to Level 2 to reflect
changes in the significance of the unobservable inputs used in the valuation.
(4) CenterPoint Energy and CERC did not have significant Level 3 sales during any of the years ended December 31, 2018,
2017 or 2016.
Items Measured at Fair Value on a Nonrecurring Basis
CenterPoint Energy has the ability to significantly influence the operating and financial policies of Enable, a publicly traded
MLP, and, accordingly, accounts for its investment in Enable’s common units using the equity method of accounting. Upon the
adoption of ASU 2014-09 and ASU 2017-05 on January 1, 2018, CenterPoint Energy and CERC evaluated transactions in the
investment in Enable that occurred prior to January 1, 2018 (the effective date) and concluded a cumulative effect adjustment to
the opening balance of retained earnings was not required. See Note 2(r) for further discussion.
Enable is considered to be a VIE because the power to direct the activities that most significantly impact Enable’s economic
performance does not reside with the holders of equity investment at risk. However, CenterPoint Energy is not considered the
primary beneficiary of Enable since it does not have the power to direct the activities of Enable that are considered most significant
to the economic performance of Enable. As of December 31, 2018, CenterPoint Energy’s maximum exposure to loss related to
Enable is limited to the equity investment, its investment in Enable Series A Preferred Units and outstanding current accounts
receivable from Enable.
On September 4, 2018, CERC entered into a Contribution Agreement, by and between CERC and CNP Midstream, a new
subsidiary formed by CERC in June 2018, pursuant to which CERC contributed its equity investment in Enable consisting of
Enable common units and its interests in Enable GP, to CNP Midstream (collectively, the Enable Contribution). Immediately
following the Enable Contribution, CERC distributed all of its interest in CNP Midstream to Utility Holding, CERC’s sole
stockholder and a wholly-owned subsidiary of CenterPoint Energy. Utility Holding then distributed all of its interest in CNP
Midstream to CenterPoint Energy, its sole member (collectively with the Enable Contribution, the Internal Spin). CERC executed
the Internal Spin to, among other things, enhance the access of CERC and CenterPoint Energy to low cost debt and equity through
increased transparency and understandability of the financial statements, improve CERC’s credit quality by eliminating the
exposure to Enable’s midstream business and provide clarity of internal reporting and performance metrics to enhance
management’s decision making for CERC and CNP Midstream.
The Internal Spin has been accounted for under the guidance for transactions between entities under common control. As of
September 4, 2018, CERC derecognized its investment in Enable at carrying value on the date of distribution of $2.4 billion, net
of deferred income taxes of $974 million, and CNP Midstream recorded the net asset contribution from CERC at CERC’s carrying
value. Neither CERC nor CNP Midstream recognized a gain or loss upon the distribution or contribution, respectively, of net assets
involved in the Internal Spin. In connection with the Internal Spin, CenterPoint Energy, through Utility Holding, made a $600
million capital contribution to CERC, which was used by CERC to repay outstanding indebtedness that historically supported
CERC’s legacy midstream assets. See Note 21 for further discussion.
As of December 31, 2018 and 2017, there were no significant assets or liabilities measured at fair value on a nonrecurring
As a result of the Internal Spin, CERC’s equity in earnings in Enable and related income taxes have been classified as
basis.
Estimated Fair Value of Financial Instruments
The fair values of cash and cash equivalents, investments in debt and equity securities classified as “trading” and short-term
borrowings are estimated to be approximately equivalent to carrying amounts and have been excluded from the table below. The
carrying amounts of non-trading derivative assets and liabilities and CenterPoint Energy’s ZENS indexed debt securities derivative
are stated at fair value and are excluded from the table below. The fair value of each debt instrument is determined by multiplying
the principal amount of each debt instrument by a combination of historical trading prices and comparable issue data. These
liabilities, which are not measured at fair value in the Registrants’ Consolidated Balance Sheets, but for which the fair value is
disclosed, would be classified as Level 2 in the fair value hierarchy.
December 31, 2018
December 31, 2017
CenterPoint
Energy (1)
Houston
Electric (1)
CERC
CenterPoint
Energy (1)
Houston
Electric (1)
CERC
Long-term debt, including current maturities
(in millions)
Carrying amount ......................................... $
9,140
$
4,717
$
2,371
$
8,679
$
4,753
$
Fair value ....................................................
9,308
4,770
2,488
9,220
5,034
2,457
2,708
(1) Includes Securitization Bond debt.
discontinued operations in CERC’s Consolidated Financial Statements as detailed below.
Limited Partner Interest and Units Held in Enable (CenterPoint Energy and CERC):
As of December 31,
2018
2017
Limited
Partner
Interest (1)
Common Units
Enable Series A
Preferred Units
(2)
Limited
Partner
Interest (1)
Common Units
Enable Series A
Preferred Units
(2)
CenterPoint Energy (3) ..............
OGE..........................................
Public unitholders.....................
54.0% 233,856,623
14,520,000
54.1% 233,856,623
14,520,000
25.6% 110,982,805
20.4% 88,392,983
—
—
25.7% 110,982,805
20.2% 87,744,652
—
—
(1) Excludes the Enable Series A Preferred Units owned by CenterPoint Energy.
(2) The carrying amount of the Enable Series A Preferred Units, reflected as Preferred units - unconsolidated affiliate on
CenterPoint Energy’s Consolidated Balance Sheets, was $363 million as of both December 31, 2018 and 2017. No
impairment charges or adjustment to carrying value were made as no observable price changes were identified in the
current or prior reporting periods. See Note 2(r) for further discussion.
(3) Prior to the Internal Spin on September 4, 2018 described above, CenterPoint Energy’s investment in Enable’s common
units, excluding the Enable Series A Preferred Units held directly by CenterPoint Energy, was held indirectly through
CERC.
135
136
Generally, sales to any person or entity (including a series of sales to the same person or entity) of more than 5% of the
aggregate of the common units CenterPoint Energy owns in Enable or sales to any person or entity (including a series of sales to
the same person or entity) by OGE of more than 5% of the aggregate of the common units it owns in Enable are subject to mutual
rights of first offer and first refusal set forth in Enable’s Agreement of Limited Partnership.
Interests Held in Enable GP (CenterPoint Energy and CERC):
CenterPoint Energy and OGE held the following interests in Enable GP as of both December 31, 2018 and 2017:
Management
Rights (1)
Incentive Distribution
Rights (2)
(1) Represents amounts billed under the Transition Agreements for certain support services provided to Enable. Actual
transition services costs are recorded net of reimbursement.
CenterPoint Energy and CERC
Accounts payable for natural gas purchases from Enable ........................................................
CenterPoint Energy
Accounts receivable for amounts billed for transition services ................................................
$
December 31,
2018
2017
(in millions)
11
$
2
13
1
CenterPoint Energy (3) ....................................................................................
OGE ................................................................................................................
50%
50%
40%
60%
CERC’s continuing involvement with Enable subsequent to the Internal Spin is limited to its natural gas purchases from
Enable.
(1) As of December 31, 2018, Enable is controlled jointly by CenterPoint Energy and OGE. Sale of CenterPoint Energy’s
or OGE’s ownership interests in Enable GP to a third party is subject to mutual rights of first offer and first refusal, and
CenterPoint Energy is not permitted to dispose of less than all of its interest in Enable GP.
(2) Enable is expected to pay a minimum quarterly distribution of $0.2875 per common unit on its outstanding common
units to the extent it has sufficient cash from operations after establishment of cash reserves and payment of fees and
expenses, including payments to Enable GP and its affiliates, within 60 days after the end of each quarter. If cash
distributions to Enable’s unitholders exceed $0.330625 per common unit in any quarter, Enable GP will receive increasing
percentages or incentive distributions rights, up to 50%, of the cash Enable distributes in excess of that amount. In certain
circumstances Enable GP will have the right to reset the minimum quarterly distribution and the target distribution levels
at which the incentive distributions receive increasing percentages to higher levels based on Enable’s cash distributions
at the time of the exercise of this reset election. To date, no incentive distributions have been made.
(3) CenterPoint Energy held the management rights and incentive distributions rights in Enable GP indirectly through CERC
until the Internal Spin on September 4, 2018 described above.
Distributions Received from Enable (CenterPoint Energy and CERC):
Year Ended December 31,
2018
2017
2016
Per Unit
Cash
Distribution
Per Unit
Cash
Distribution
Per Unit
Cash
Distribution
Enable common units (1) .....................
Total CERC....................................
Enable common units (1) .....................
Enable Series A Preferred Units (2) .....
Total CenterPoint Energy.............
$
0.9540
$
0.3180
2.5000
$
(in millions, except per unit amounts)
223
223
74
36
333
$
1.2720
$
—
2.5000
$
297
297
—
36
333
$
1.2720
$
—
1.5417
$
297
297
—
22
319
(1) Reflects CERC’s ownership of Enable common units up to September 4, 2018 when CERC completed the Internal Spin.
After such date, distributions from Enable were received directly by CenterPoint Energy.
(2) 2016 amounts represent the period from February 18, 2016 to December 31, 2016.
Transactions with Enable (CenterPoint Energy and CERC):
CenterPoint Energy and CERC
Natural gas expenses, including transportation and storage costs.............................
CenterPoint Energy
Reimbursement of transition services (1) ...................................................................
Year Ended December 31,
2018
2017
2016
(in millions)
$
122
$
115
$
110
4
4
7
Summarized consolidated income (loss) information for Enable is as follows:
Year Ended December 31,
2018
2017
2016
Operating revenues .......................................................................................................
Cost of sales, excluding depreciation and amortization ...............................................
Depreciation and amortization......................................................................................
Operating income..........................................................................................................
Net income attributable to Enable common units.........................................................
(in millions)
$
3,431
$
2,803
$
1,819
1,381
398
648
485
366
528
400
Reconciliation of Equity in Earnings (Losses), net:
CenterPoint Energy’s interest .......................................................................................
Basis difference amortization (1) ...................................................................................
Loss on dilution, net of proportional basis difference recognition ...............................
CenterPoint Energy’s equity in earnings, net ...............................................................
$
$
262
$
216
$
47
(2)
307
49
—
$
265
$
2,272
1,017
338
385
290
160
48
—
208
(1) Equity in earnings of unconsolidated affiliate includes CenterPoint Energy’s share of Enable earnings adjusted for the
amortization of the basis difference of CenterPoint Energy’s original investment in Enable and its underlying equity in
net assets of Enable. The basis difference is being amortized over approximately 30 years, the remaining average life of
the assets to which the basis difference is attributed.
Summarized consolidated balance sheet information for Enable is as follows:
$
Current assets............................................................................................................................
Non-current assets ....................................................................................................................
Current liabilities ......................................................................................................................
Non-current liabilities...............................................................................................................
Non-controlling interest............................................................................................................
Preferred equity ........................................................................................................................
Enable partners’ equity .............................................................................................................
Reconciliation of Investment in Enable:
CenterPoint Energy’s ownership interest in Enable partners’ equity ....................................... $
CenterPoint Energy’s basis difference......................................................................................
CenterPoint Energy’s equity method investment in Enable .....................................................
$
December 31,
2018
2017
(in millions)
449
$
11,995
1,615
3,211
38
362
7,218
3,896
(1,414)
2,482
$
$
416
11,177
1,279
2,660
12
362
7,280
3,935
(1,463)
2,472
137
138
Discontinued Operations (CERC):
The Internal Spin represents a significant strategic shift that has a material effect on CERC’s operations and financial results
and, as a result, CERC’s distribution of its equity investment in Enable met the criteria for discontinued operations classification.
CERC has no continuing involvement in the equity investment of Enable. Therefore, CERC’s equity in earnings and related
income taxes have been classified as Income from discontinued operations, net of tax, in CERC’s Statements of Consolidated
Income for the periods presented. CERC’s equity method investment and related deferred income tax liabilities have been
classified as Investment in unconsolidated affiliate - discontinued operations and Deferred income taxes, net - discontinued
operations, respectively, in CERC’s Consolidated Balance Sheets for the periods presented. The following table presents amounts
included in Income from discontinued operations, net of tax in CERC’s Statements of Consolidated Income.
Equity in earnings of unconsolidated affiliate, net ........................................................
Income tax expense .......................................................................................................
Income from discontinued operations, net of tax ..........................................................
$
$
Year Ended December 31,
2018
2017
2016
(in millions)
184
46
138
$
$
265
104
161
$
$
208
81
127
(12) Indexed Debt Securities (ZENS) and Securities Related to ZENS (CenterPoint Energy)
(a) Investment in Securities Related to ZENS
In 1995, CenterPoint Energy sold a cable television subsidiary to TW and received certain ZENS-Related Securities as partial
consideration. A subsidiary of CenterPoint Energy holds shares of certain securities detailed in the table below, 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 ZENS-Related Securities are recorded in CenterPoint
Energy’s Statements of Consolidated Income.
AT&T Common ................................................................................................................
Charter Common...............................................................................................................
Time Common...................................................................................................................
TW Common.....................................................................................................................
(b) ZENS
Shares Held at December 31,
2018
10,212,945
872,912
—
—
2017
—
872,503
888,392
7,107,130
In September 1999, CenterPoint Energy issued ZENS having an original principal amount of $1 billion of which $828 million
remained outstanding as of December 31, 2018. 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.
On October 22, 2016, AT&T announced that it had entered into a definitive agreement to acquire TW in a stock and cash
transaction. On February 15, 2017, TW shareholders approved the announced transaction with AT&T. The merger closed on June
14, 2018. CenterPoint Energy received $53.75 and 1.437 shares of AT&T Common for each share of TW Common held, resulting
in cash proceeds of $382 million and 10,212,945 shares of AT&T Common. In accordance with the terms of the ZENS, CenterPoint
Energy remitted $382 million to ZENS note holders in July 2018, which reduced the ZENS contingent principal amount.
On November 26, 2017, Meredith announced that it had entered into a definitive merger agreement with Time. Pursuant to
the merger agreement, upon closing of the merger, a subsidiary of Meredith would purchase for cash all outstanding Time Common
shares for $18.50 per share. The transaction was consummated on January 31, 2018. CenterPoint Energy elected to make a reference
share offer adjustment and distribute additional interest, if any, in accordance with the terms of its ZENS rather than electing to
increase the early exchange ratio to 100%. CenterPoint Energy’s distribution of additional interest in connection with the reference
share offer was proportionate to the percentage of eligible shares that were validly tendered by Time stockholders in Meredith’s
tender offer. CenterPoint Energy received $18.50 for each share of Time Common held, resulting in cash proceeds of approximately
$16 million. In accordance with the terms of the ZENS, CenterPoint Energy distributed additional interest of approximately $16
million to ZENS holders on March 6, 2018, which reduced the ZENS contingent principal amount.
As a result, CenterPoint Energy recorded the following during the year ended December 31, 2018 related to the events discussed
above:
Cash payment to ZENS note holders .................................................................................. $
Indexed debt – reduction.....................................................................................................
Indexed debt securities derivative – reduction....................................................................
Loss on indexed debt securities ..................................................................................... $
CenterPoint Energy’s reference shares for each ZENS consisted of the following:
Meredith/Time
AT&T/TW
(in millions)
16
(4)
(1)
11
$
$
382
(95)
(45)
242
December 31,
2018
2017
(in shares)
AT&T Common ................................................................................................................
Charter Common...............................................................................................................
Time Common...................................................................................................................
TW Common.....................................................................................................................
0.7185
0.061382
—
—
—
0.061382
0.0625
0.5
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, 2018, ZENS having an
original principal amount of $828 million and a contingent principal amount of $93 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, 2018, the market value of such shares was approximately $540 million, which would provide an exchange
amount of $620 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 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 ZENS-Related Securities
held by CenterPoint Energy are expected to substantially offset changes in the fair value of the derivative component of the ZENS.
139
140
The following table sets forth summarized financial information regarding CenterPoint Energy’s investment in ZENS-Related
Securities and each component of CenterPoint Energy’s ZENS obligation.
ZENS-Related
Securities
Debt
Component
of ZENS
(in millions)
Derivative
Component
of ZENS
Balance as of December 31, 2015................................................................... $
Accretion of debt component of ZENS ........................................................
2% interest paid ............................................................................................
Sale of ZENS-Related Securities..................................................................
Distribution to ZENS holders .......................................................................
Loss on indexed debt securities ....................................................................
Gain on ZENS-Related Securities ................................................................
Balance as of December 31, 2016...................................................................
Accretion of debt component of ZENS ........................................................
2% interest paid ............................................................................................
Distribution to ZENS holders .......................................................................
Gain on indexed debt securities....................................................................
Gain on ZENS-Related Securities ................................................................
Balance as of December 31, 2017...................................................................
Accretion of debt component of ZENS ........................................................
2% interest paid ............................................................................................
Sale of ZENS-Related Securities..................................................................
Distribution to ZENS holders .......................................................................
Gain on indexed debt securities....................................................................
Loss on ZENS-Related Securities ................................................................
Balance as of December 31, 2018................................................................... $
(13) Equity (CenterPoint Energy)
Dividends Declared
805
$
145
$
—
—
(178)
—
—
326
953
—
—
—
—
7
960
—
—
(398)
—
—
(22)
540
26
(17)
—
(40)
—
—
114
27
(17)
(2)
—
—
122
21
(17)
—
(102)
—
$
—
24
$
442
—
—
—
(21)
296
—
717
—
—
—
(49)
—
668
—
—
—
(46)
(21)
—
601
CenterPoint Energy declared dividends on its Common Stock during 2018, 2017 and 2016 as presented in the table below:
Declaration Date
Record Date
Payment Date
Per Share
October 27, 2016..................... November 16, 2016 ................ December 9, 2016...................
$
0.2575
$
July 28, 2016........................... August 16, 2016 ..................... September 9, 2016..................
April 28, 2016 ......................... May 16, 2016..........................
June 10, 2016..........................
January 20, 2016 ..................... February 16, 2016................... March 10, 2016.......................
0.2575
0.2575
0.2575
Total 2016 ........................................................................................................................
$
1.0300
$
Total
(in millions)
CenterPoint Energy declared dividends on its Series A Preferred Stock during 2018 as presented in the table below:
Declaration Date
Record Date
Payment Date
Per Share
Total
(in millions)
December 12, 2018 ................. February 15, 2019................... March 1, 2019.........................
Total 2018 ........................................................................................................................
$
$
32.1563
32.1563
$
$
CenterPoint Energy declared dividends on its Series B Preferred Stock during 2018 as presented in the table below:
Declaration Date
Record Date
Payment Date
Per Share
Total
(in millions)
December 12, 2018 ................. February 15, 2019................... March 1, 2019.........................
$
17.5000
$
October 23, 2018..................... November 15, 2018 ................ December 1, 2018...................
11.6667
Total 2018 ........................................................................................................................
$
29.1667
$
111
111
111
110
443
26
26
17
11
28
There were no Series A Preferred Stock or Series B Preferred Stock outstanding or dividends declared in 2017 and 2016.
Dividend Requirement on Preferred Stock
Series A Preferred Stock ....................................................................................... $
Series B Preferred Stock .......................................................................................
Total preferred stock dividend requirement ............................................... $
Year Ended December 31,
2018
2017
2016
(in millions)
18
17
35
$
$
— $
—
— $
—
—
—
Declaration Date
Record Date
Payment Date
Per Share
December 12, 2018 ................. February 21, 2019................... March 14, 2019.......................
$
0.2875
$
October 23, 2018..................... November 15, 2018 ................ December 13, 2018.................
July 26, 2018........................... August 16, 2018 ..................... September 13, 2018................
April 26, 2018 ......................... May 17, 2018..........................
June 14, 2018..........................
0.2775
0.2775
0.2775
Total 2018 ........................................................................................................................
$
1.1200
$
December 13, 2017 ................. February 15, 2018................... March 8, 2018.........................
$
0.2775
$
October 25, 2017..................... November 16, 2017 ................ December 8, 2017...................
July 27, 2017........................... August 16, 2017 ..................... September 8, 2017..................
April 27, 2017 ......................... May 16, 2017..........................
June 9, 2017............................
January 5, 2017 ....................... February 16, 2017................... March 10, 2017.......................
0.2675
0.2675
0.2675
0.2675
Total 2017 ........................................................................................................................
$
1.3475
$
Total
(in millions)
Series A Preferred Stock
144
139
120
120
523
120
116
115
115
115
581
On August 22, 2018, CenterPoint Energy completed the issuance of 800,000 shares of its Series A Preferred Stock, at a price
of $1,000 per share, resulting in net proceeds of $790 million after issuance costs. The aggregate liquidation value of the Series
A Preferred Stock is $800 million with a per share liquidation value of $1,000.
CenterPoint Energy used the net proceeds from the Series A Preferred Stock offering to fund a portion of the Merger and to
pay related fees and expenses.
Dividends. The Series A Preferred Stock accrue cumulative dividends, calculated as a percentage of the stated amount per
share, at a fixed annual rate of 6.125% per annum to, but excluding, September 1, 2023, and at an annual rate of three-month LIBOR
plus a spread of 3.270% thereafter to be paid in cash if, when and as declared. If declared, prior to September 1, 2023, dividends
are payable semi-annually in arrears on each March 1 and September 1, beginning on March 1, 2019, and, for the period commencing
on September 1, 2023, dividends are payable quarterly in arrears each March 1, June 1, September 1 and December 1, beginning
on December 1, 2023. Cumulative dividends earned during the applicable periods are presented on CenterPoint Energy’s Statements
of Consolidated Income as Preferred stock dividend requirement.
141
142
Optional Redemption. On or after September 1, 2023, CenterPoint Energy may, at its option, redeem the Series A Preferred
Stock, in whole or in part, at any time or from time to time, for cash at a redemption price of $1,000 per share, plus any accumulated
and unpaid dividends thereon to, but excluding, the redemption date.
At any time within 120 days after the conclusion of any review or appeal process instituted by CenterPoint Energy, if any,
following the occurrence of a ratings event, CenterPoint Energy may, at its option, redeem the Series A Preferred Stock in whole,
but not in part, at a redemption price in cash per share equal to $1,020 (102% of the liquidation value of $1,000) plus an amount
equal to all accumulated and unpaid dividends thereon to, but excluding, the redemption date, whether or not declared.
Ranking. The Series A Preferred Stock, with respect to anticipated dividends and distributions upon CenterPoint Energy’s
liquidation or dissolution, or winding-up of CenterPoint Energy’s affairs, ranks or will rank:
•
•
•
•
•
senior to Common Stock and to each other class or series of capital stock established after the initial issue date of the
Series A Preferred Stock that is expressly made subordinated to the Series A Preferred Stock;
on a parity with any class or series of capital stock established after the initial issue date of the Series A Preferred Stock
that is not expressly made senior or subordinated to the Series A Preferred Stock, including the Series B Preferred Stock;
junior to any class or series of capital stock established after the initial issue date of the Series A Preferred Stock that is
expressly made senior to the Series A Preferred Stock;
junior to all existing and future indebtedness (including indebtedness outstanding under CenterPoint Energy’s credit
facilities, senior notes and commercial paper) and other liabilities with respect to assets available to satisfy claims against
CenterPoint Energy; and
structurally subordinated to any existing and future indebtedness and other liabilities of CenterPoint Energy’s subsidiaries
and capital stock of CenterPoint Energy’s subsidiaries held by third parties.
Voting Rights. Holders of the Series A Preferred Stock generally will not have voting rights. Whenever dividends on shares
of Series A Preferred Stock have not been declared and paid for the equivalent of three or more semi-annual or six or more quarterly
dividend periods (including, for the avoidance of doubt, the dividend period beginning on, and including, the original issue date
and ending on, but excluding, March 1, 2019), whether or not consecutive, the holders of such shares of Series A Preferred Stock,
voting together as a single class with holders of any and all other series of voting preferred stock (as defined in the Statement of
Resolution for the Series A Preferred Stock) then outstanding, will be entitled at CenterPoint Energy’s next annual or special
meeting of shareholders to vote for the election of a total of two additional members of CenterPoint Energy’s Board of Directors,
subject to certain limitations. This right will terminate if and when all accumulated dividends have been paid in full and, upon
such termination, the term of office of each director so elected will terminate at such time and the number of directors on CenterPoint
Energy’s Board of Directors will automatically decrease by two, subject to the revesting of such rights in the event of each
subsequent nonpayment.
Series B Preferred Stock
On October 1, 2018, CenterPoint Energy completed the issuance of 19,550,000 depositary shares, each representing a 1/20th
interest in a share of its Series B Preferred Stock, at a price of $50 per depositary share, resulting in net proceeds of $950 million
after issuance costs. The aggregate liquidation value of Series B Preferred Stock is $978 million with a per share liquidation value
of $1,000. The amount issued included 2,550,000 depositary shares issued pursuant to the exercise in full of the option granted
to the underwriters to purchase additional depositary shares.
CenterPoint Energy used the net proceeds from the offering of depositary shares, each representing a 1/20th interest in a share
of its Series B Preferred Stock, to fund a portion of the Merger and to pay related fees and expenses.
Dividends. Dividends on the Series B Preferred Stock will be payable on a cumulative basis when, as and if declared at an
annual rate of 7.00% on the liquidation value of $1,000 per share. CenterPoint Energy may pay declared dividends in cash or,
subject to certain limitations, in shares of Common Stock, or in any combination of cash and shares of Common Stock on March
1, June 1, September 1 and December 1 of each year, commencing on December 1, 2018 and ending on, and including, September
1, 2021. Cumulative dividends earned during the applicable periods are presented on CenterPoint Energy’s Statements of
Consolidated Income as Preferred stock dividend requirement.
Mandatory Conversion. Unless earlier converted or redeemed, each share of the Series B Preferred Stock will automatically
convert on the mandatory conversion date, which is expected to be September 1, 2021, into not less than 30.5820 and not more
than 36.6980 shares of Common Stock, subject to certain anti-dilution adjustments. Correspondingly, the conversion rate per
depositary share will be not less than 1.5291 and not more than 1.8349 shares of Common Stock, subject to certain anti-dilution
adjustments. The conversion rate will be determined based on a preceding 20-day volume-weighted-average-price of Common
Stock.
The following table illustrates the conversion rate per share of the Series B Preferred Stock, subject to certain anti-dilution
adjustments:
Applicable Market Value of the Common Stock
Conversion Rate per Share of Series B Preferred Stock
Greater than $32.6990 (threshold appreciation price)
30.5820 shares of Common Stock
Equal to or less than $32.6990 but greater than or equal to
$27.2494
Between 30.5820 and 36.6980 shares of Common Stock,
determined by dividing $1,000 by the applicable market
value
Less than $27.2494 (initial price)
36.6980 shares of Common Stock
The following table illustrates the conversion rate per depositary share, subject to certain anti-dilution adjustments:
Applicable Market Value of the Common Stock
Conversion Rate per Depository Share
Greater than $32.6990 (threshold appreciation price)
1.5291 shares of Common Stock
Equal to or less than $32.6990 but greater than or equal to
$27.2494
Between 1.5291 and 1.8349 shares of Common Stock,
determined by dividing $50 by the applicable market value
Less than $27.2494 (initial price)
1.8349 shares of Common Stock
Optional Conversion of the Holder. Other than during a fundamental change conversion period, and unless CenterPoint Energy
has redeemed the Series B Preferred Stock, a holder of the Series B Preferred Stock may, at any time prior to September 1, 2021,
elect to convert such holder’s shares of the Series B Preferred Stock, in whole or in part, at the minimum conversion rate of 30.5820
shares of Common Stock per share of the Series B Preferred Stock (equivalent to 1.5291 shares of Common Stock per depositary
share), subject to certain anti-dilution and other adjustments. Because each depositary share represents a 1/20th fractional interest
in a share of the Series B Preferred Stock, a holder of depositary shares may convert its depositary shares only in lots of 20
depositary shares.
Fundamental Change Conversion. If a fundamental change occurs on or prior to September 1, 2021, holders of the Series B
Preferred Stock will have the right to convert their shares of the Series B Preferred Stock, in whole or in part, into shares of
Common Stock at the fundamental change conversion rate during the period beginning on, and including, the effective date of
such fundamental change and ending on, and including, the date that is 20 calendar days after such effective date (or, if later, the
date that is 20 calendar days after holders receive notice of such fundamental change, but in no event later than September 1,
2021). Holders who convert shares of the Series B Preferred Stock during that period will also receive a make-whole dividend
amount comprised of a fundamental change dividend make-whole amount, and to the extent there is any, the accumulated dividend
amount. Because each depositary share represents a 1/20th fractional interest in a share of the Series B Preferred Stock, a holder
of depositary shares may convert its depositary shares upon a fundamental change only in lots of 20 depositary shares.
Ranking. The Series B Preferred Stock, with respect to anticipated dividends and distributions upon CenterPoint Energy’s
liquidation or dissolution, or winding-up of CenterPoint Energy’s affairs, ranks or will rank:
•
•
•
•
senior to Common Stock and to each other class or series of capital stock established after the initial issue date of the
Series B Preferred Stock that is expressly made subordinated to the Series B Preferred Stock;
on a parity with the Series A Preferred Stock and any class or series of capital stock established after the initial issue date
that is not expressly made senior or subordinated to the Series B Preferred Stock;
junior to any class or series of capital stock established after the initial issue date that is expressly made senior to the
Series B Preferred Stock;
junior to all existing and future indebtedness (including indebtedness outstanding under CenterPoint Energy’s credit
facilities, senior notes and commercial paper) and other liabilities with respect to assets available to satisfy claims against
CenterPoint Energy; and
143
144
•
structurally subordinated to any existing and future indebtedness and other liabilities of CenterPoint Energy’s subsidiaries
and capital stock of CenterPoint Energy’s subsidiaries held by third parties.
Voting Rights. Holders of the Series B Preferred Stock generally will not have voting rights. Whenever dividends on shares
of the Series B Preferred Stock have not been declared and paid for six or more dividend periods (including, for the avoidance of
doubt, the dividend period beginning on, and including, the initial issue date and ending on, but excluding, December 1, 2018),
whether or not consecutive, the holders of such shares of Series B Preferred Stock, voting together as a single class with holders
of any and all other series of voting preferred stock then outstanding (as defined in the Statement of Resolution for the Series B
Preferred Stock), will be entitled at CenterPoint Energy’s next annual or special meeting of shareholders to vote for the election
of a total of two additional members of CenterPoint Energy’s Board of Directors, subject to certain limitations. This right will
terminate if and when all accumulated and unpaid dividends have been paid in full and, upon such termination, the term of office
of each director so elected will terminate at such time and the number of directors on CenterPoint Energy’s Board of Directors
will automatically decrease by two, subject to the revesting of such rights in the event of each subsequent nonpayment.
Common Stock
On October 1, 2018, CenterPoint Energy completed the issuance of 69,633,027 shares of Common Stock at a price of $27.25
per share, for net proceeds of $1,844 million after issuance costs. The amount issued included 9,082,568 shares of Common Stock
issued pursuant to the exercise in full of the option granted to the underwriters to purchase additional shares of Common Stock.
CenterPoint Energy used the net proceeds from the Common Stock offering to fund a portion of the Merger and to pay related
fees and expenses.
Undistributed Retained Earnings
As of December 31, 2018 and 2017, CenterPoint Energy’s consolidated retained earnings balance includes undistributed
earnings from Enable of $31 million and $-0-, respectively.
Accumulated Other Comprehensive Income (Loss)
Changes in accumulated comprehensive income (loss) are as follows:
Year Ended December 31,
2018
2017
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
(in millions)
Beginning Balance .............................................................. $
(68) $
— $
6
$
(71) $
1
$
3
Other comprehensive income (loss) before
reclassifications:
Remeasurement of pension and other postretirement
plans ........................................................................
Deferred loss from interest rate derivatives (1) ............
Amounts reclassified from accumulated other
comprehensive loss:
Prior service cost (2) ....................................................
Actuarial losses (2) .......................................................
Tax benefit (expense) ..........................................................
(19)
(19)
1
6
6
—
(18)
—
—
4
Net current period other comprehensive income (loss) ......
Adoption of ASU 2018-02 ..................................................
Ending Balance ................................................................... $
(25)
(15)
(108) $
(14)
—
(14) $
1
(1)
1
—
(1)
—
(1)
5
4
(5)
1
7
(4)
—
(1)
—
—
—
3
—
(68) $
(1)
—
— $
$
7
(2)
1
—
(3)
3
—
6
(1) Gains and losses are reclassified from Accumulated other comprehensive income into income when the hedged
transactions affect earnings. The reclassification amounts are included in Interest and other finance charges in each of
the Registrant’s respective Statements of Consolidated Income. Amounts are less than $1 million for each of the years
ended December 31, 2018 and 2017, respectively.
(2) Amounts are included in the computation of net periodic cost and are reflected in Other, net in each of the Registrants’
respective Statements of Consolidated Income.
(14) Short-term Borrowings and Long-term Debt
December 31,
2018
December 31,
2017
Long-Term
Current (1)
Long-Term
Current (1)
CERC (2):
Short-term borrowings:
Inventory financing (3) .............................................................. $
Total short-term borrowings ..............................................
— $
—
Long-term debt:
Senior notes 3.55% to 6.625% due 2021 to 2047 .....................
Commercial paper (4) ................................................................
Unamortized debt issuance costs ..............................................
Unamortized discount and premium, net ..................................
Total CERC long-term debt ...............................................
Total CERC debt ...........................................................
Houston Electric:
First mortgage bonds 9.15% due 2021......................................
General mortgage bonds 1.85% to 6.95% due 2021 to 2048....
Restoration Bond Company:
2,193
210
(15)
(17)
2,371
2,371
102
3,212
System restoration bonds 4.243% due 2022..........................
197
Bond Company II:
Transition bonds 5.302% due 2019 .......................................
Bond Company III:
Transition bonds 5.234% due 2020 .......................................
Bond Company IV:
Transition bonds 2.161% to 3.028% due 2020 to 2024.........
Unamortized debt issuance costs ..............................................
Unamortized discount and premium, net ..................................
Total Houston Electric debt...........................................
CenterPoint Energy:
ZENS due 2029 (5) ....................................................................
Senior notes 2.50% to 4.25% due 2021 to 2028 .......................
Pollution control bonds 5.125% due 2028 (6) ...........................
Commercial paper (4) ................................................................
Unamortized debt issuance costs ..............................................
Unamortized discount and premium, net ..................................
Total CenterPoint Energy long-term debt ..........................
—
29
753
(24)
(11)
4,258
—
2,000
68
—
(13)
(2)
8,682
Total CenterPoint Energy debt ...................................... $
8,682
$
(1) Includes amounts due or exchangeable within one year of the date noted.
(2) Issued by CERC Corp.
(in millions)
— $
—
—
—
—
—
—
—
—
—
59
208
56
135
—
—
458
24
—
—
—
—
—
482
482
— $
—
1,593
898
(12)
(22)
2,457
2,457
102
2,812
256
208
85
888
(22)
(10)
4,319
—
500
68
855
(4)
—
8,195
$
8,195
$
39
39
—
—
—
—
—
39
—
—
56
194
53
131
—
—
434
122
—
50
—
—
—
606
645
(3) CenterPoint Energy’s and CERC’s NGD has AMAs associated with its utility distribution service in Arkansas, Louisiana,
Mississippi, Oklahoma and Texas. In March 2018, NGD’s third-party AMAs in Arkansas, Louisiana and Oklahoma
145
146
expired, and NGD entered into new AMAs with CES effective April 1, 2018 in these states. The AMAs have varying
terms, the longest of which expires in 2021. 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.
(4) 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.
(5) CenterPoint Energy’s ZENS obligation is bifurcated into a debt component and an embedded derivative component. For
additional information regarding ZENS, see Note 12(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.
(6) $68 million and $118 million of these series of debt were secured by general mortgage bonds of Houston Electric as of
December 31, 2018 and 2017, respectively.
Long-term Debt
Debt Retirements. During the year ended December 31, 2018, CenterPoint Energy retired the following debt instrument at
maturity:
Registrant
Retirement Date
Debt Instrument
Aggregate
Principal
Amount (1)
(in millions)
Interest
Rate
Maturity
Date
CenterPoint Energy .................. November 2018
Pollution control bonds
$
50
5.050%
2018
(1) Secured by general mortgage bonds of Houston Electric.
Debt Issuances. During the year ended December 31, 2018 and in January 2019, the Registrants issued the following debt
instruments:
Registrant
Issuance Date
Debt Instrument
Aggregate
Principal
Amount
(in millions)
Interest
Rate
Maturity
Date
Houston Electric (1) ...........
CERC (1) (2) .......................
CERC (1) (2) .......................
CenterPoint Energy (3) ......
CenterPoint Energy (3) ......
CenterPoint Energy (3) ......
Houston Electric (1) ...........
February 2018
March 2018
March 2018
October 2018
October 2018
October 2018
January 2019
$
General mortgage bonds
Unsecured senior notes
Unsecured senior notes
Unsecured senior notes
Unsecured senior notes
Unsecured senior notes
General mortgage bonds
400
300
300
500
500
500
700
3.95%
3.55%
4.00%
3.60%
3.85%
4.25%
4.25%
2048
2023
2028
2021
2024
2028
2049
(1) Proceeds from these debt issuances were used for general limited liability company and corporate purposes, as applicable,
including capital expenditures, repayment of portions of outstanding commercial paper and borrowings under CenterPoint
Energy’s money pool.
(2) Issued by CERC Corp.
(3) Proceeds from these debt issuances were used to fund a portion of the Merger and to pay related fees and expenses.
Securitization Bonds. As of December 31, 2018, CenterPoint Energy and Houston Electric had special purpose subsidiaries
consisting of the Bond Companies, which they consolidate. 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. CenterPoint Energy and Houston Electric have no payment obligations in respect of the Securitization Bonds other than to
remit the applicable transition or system restoration charges they collect as set forth in servicing agreements among Houston
Electric, the Bond Companies and other parties. 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. In April 2018, CenterPoint Energy obtained commitments by lenders to provide a $5 billion Bridge Facility
to provide flexibility for the timing of the long-term acquisition financing and fund, in part, amounts payable by CenterPoint
Energy in connection with the Merger. In May 2018, CenterPoint Energy entered into an amendment to its revolving credit facility
to increase the aggregate commitments from $1.7 billion to $3.3 billion effective the earlier of (i) the termination of all commitments
by certain lenders to provide the Bridge Facility and (ii) the payment in full of all obligations (other than contingent obligations)
under the Bridge Facility and termination of all commitments to advance additional credit thereunder, and in each case, so long
as the Merger Agreement has not been terminated pursuant to the terms thereof without consummation of the Merger. This increase
to CenterPoint Energy’s revolving credit facility will automatically expire on the termination date of the revolving credit facility.
In addition, the amendment provided for a temporary increase on the maximum ratio of debt for borrowed money to capital from
65% to 75% until the earlier of (i) June 30, 2019 and (ii) the termination of all commitments in respect of the Bridge Facility
without any borrowing thereunder. On October 5, 2018, CenterPoint Energy terminated all remaining commitments by lenders to
provide the Bridge Facility. As a result, the aggregate commitments under the revolving credit facility automatically increased
from $1.7 billion to $3.3 billion and the maximum ratio of debt for borrowed money to capital reverted to 65%.
As of December 31, 2018 and 2017, the Registrants had the following revolving credit facilities and utilization of such
facilities:
December 31, 2018
December 31, 2017
Size of
Facility
Loans
Letters
of Credit
Commercial
Paper
Weighted
Average
Interest
Rate
Size of
Facility
Loans
Letters
of Credit
Commercial
Paper
Weighted
Average
Interest
Rate
(in millions, except weighted average interest rate)
CenterPoint Energy ...
$ 3,300
$ — $
Houston Electric ........
CERC (1) ....................
300
900
—
—
$
6
4
1
Total......................
$ 4,500
$ — $
11
$
—
—
210
210
— $ 1,700
$ — $
—
2.93%
300
900
—
—
$
6
4
1
855
—
898
1.88%
—
1.72%
$ 2,900
$ — $
11
$
1,753
(1) Issued by CERC Corp.
In January 2019, CenterPoint Energy issued the following commercial paper in connection with the closing of the Merger:
Registrant
Issuance Date
Debt Instrument
Weighted
Average
Interest
Rate
Aggregate
Principal
Amount
(in millions)
CenterPoint Energy (1) (2) ............................
January 2019
Commercial paper
$
1,660
2.88%
(1) Proceeds from these commercial paper issuances were used to fund a portion of the Merger and to pay related fees and
expenses and were contributed to Vectren for its payment of its stub period cash dividend, long-term incentive payments
and to fund the repayment of indebtedness of Vectren subsidiaries redeemed at the option of the holder as a result of the
closing of the Merger.
(2) The commercial paper notes were issued at various times in January 2019 with maturities up to and including 90 days
as of the time of issuance, and, prior to their use as described in connection with the closing of the Merger, the net proceeds
of such issuances were invested in short-term investments.
147
148
Execution
Date
Registrant
Size of
Facility
(in millions)
Draw Rate
of LIBOR
plus (1)
March 3, 2016 CenterPoint Energy............
March 3, 2016 Houston Electric.................
March 3, 2016 CERC (6) .............................
$
3,300 (5)
1.250%
300
900
1.125%
1.125%
(1) Based on credit ratings as of December 31, 2018.
Financial
Covenant
Limit on
Debt for
Borrowed
Money to
Capital
Ratio (2)
65%
65%
65%
Debt for
Borrowed
Money to
Capital
Ratio as of
December
31, 2018 (3)
bonds are issued. Houston Electric may issue additional general mortgage bonds on the basis of retired bonds, 70% of property
additions or cash deposited with the trustee. Approximately $4.3 billion of additional first mortgage bonds and general mortgage
bonds could be issued on the basis of retired bonds and 70% of property additions as of December 31, 2018. Houston Electric has
contractually agreed that it will not issue additional first mortgage bonds, subject to certain exceptions.
Termination
Date (4)
(15) Income Taxes
44.9%
49.2%
46.8%
March 3, 2022
March 3, 2022
March 3, 2022
The components of the Registrant’ income tax expense (benefit) were as follows:
Year Ended December 31,
2018
2017
2016
(in millions)
(2) For CenterPoint Energy and Houston Electric, 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 12-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.
(3) As defined in the revolving credit facility agreement, excluding Securitization Bonds.
(4) Amended on June 16, 2017 to extend the termination date.
(5) Pursuant to the amendment entered into in May 2018, the aggregate commitments under the CenterPoint Energy revolving
credit facility increased to $3.3 billion on October 5, 2018 as a result of the satisfaction of certain conditions described
above.
(6) Issued by CERC Corp.
The Registrants were in compliance with all financial debt covenants as of December 31, 2018.
Maturities. As of December 31, 2018, maturities of long-term debt, capital leases and sinking fund requirements, excluding
the ZENS obligation, are as follows:
CenterPoint
Energy (1)
Houston
Electric (1)
CERC
Securitization
Bonds
CenterPoint Energy
Current income tax expense:
Federal................................................................................................................................................ $
89
$
32
$
State....................................................................................................................................................
Total current expense ...................................................................................................................
Deferred income tax expense (benefit):
Federal................................................................................................................................................
State....................................................................................................................................................
Total deferred expense (benefit) ..................................................................................................
9
98
(25)
73
48
9
41
(806)
36
(770)
Total income tax expense (benefit)....................................................................................................... $
Houston Electric
146
$
(729) $
Current income tax expense:
Federal................................................................................................................................................ $
109
$
State....................................................................................................................................................
Total current expense ...................................................................................................................
Deferred income tax benefit:
Federal................................................................................................................................................
Total deferred benefit...................................................................................................................
18
127
(38)
(38)
$
70
19
89
(98)
(98)
Total income tax expense (benefit)....................................................................................................... $
CERC - Continuing Operations
89
$
(9) $
Current income tax expense (benefit):
(in millions)
Federal................................................................................................................................................ $
(9) $
(31) $
2019................................................................... $
2020...................................................................
2021...................................................................
2022...................................................................
2023...................................................................
$
458
231
1,706
1,230
656
458
231
613
519
356
$
— $
—
593
210
300
458
231
211
219
156
(1) These maturities include Securitization Bonds principal repayments on scheduled payment dates.
Liens. As of December 31, 2018, 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 2018, 2017 and 2016 have been satisfied
by certification of property additions. The replacement fund requirement to be satisfied in 2019 is approximately $283 million,
and the sinking fund requirement to be satisfied in 2019 is approximately $1.6 million. CenterPoint Energy expects Houston
Electric to meet these 2019 obligations by certification of property additions.
As of December 31, 2018, Houston Electric’s assets were also subject to liens securing approximately $3.3 billion of general
mortgage bonds, including approximately $68 million held in trust to secure pollution control bonds for which CenterPoint Energy
is obligated. The lien of the general mortgage indenture is junior to that of the mortgage pursuant to which the first mortgage
149
State....................................................................................................................................................
Total current expense (benefit) ....................................................................................................
Deferred income tax expense (benefit):
Federal................................................................................................................................................
State....................................................................................................................................................
Total deferred expense (benefit) ..................................................................................................
Total income tax expense (benefit) ....................................................................................................... $
—
(9)
10
21
31
22
(10)
(41)
(249)
25
(224)
$
(265) $
150
23
18
41
185
28
213
254
165
18
183
(34)
(34)
149
21
4
25
41
15
56
81
Year Ended December 31,
2018
2017
2016
(in millions)
CERC - Discontinued Operations
Current income tax expense (benefit):
Federal................................................................................................................................................ $
State....................................................................................................................................................
Total current expense (benefit) ....................................................................................................
Deferred income tax expense:
Federal................................................................................................................................................
State....................................................................................................................................................
Total deferred expense .................................................................................................................
Total income tax expense...................................................................................................................... $
9
4
13
29
4
33
46
$
$
31
11
42
56
6
62
$
104
$
(21)
2
(19)
90
10
100
81
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,
2018
2017
2016
(in millions)
CenterPoint Energy (1) (2) (3)
Income before income taxes.................................................................................................................... $
514
$
1,063
$
Federal statutory income tax rate ............................................................................................................
Expected federal income tax expense ............................................................................................
Increase (decrease) in tax expense resulting from:
State income tax expense, net of federal income tax ...........................................................................
State valuation allowance, net of federal income tax ...........................................................................
State law change, net of federal income tax .........................................................................................
Federal income tax rate reduction ........................................................................................................
Excess deferred income tax amortization.............................................................................................
Other, net ..............................................................................................................................................
Total...................................................................................................................................................
21%
108
22
11
32
—
(24)
(3)
38
35 %
372
26
3
—
(1,113)
—
(17)
(1,101)
Total income tax expense (benefit)................................................................................................. $
146
$
(729)
$
Effective tax rate......................................................................................................................................
Houston Electric (4) (5)
28%
(69)%
Income before income taxes.................................................................................................................... $
425
$
424
$
Federal statutory income tax rate ............................................................................................................
Expected federal income tax expense ............................................................................................
Increase (decrease) in tax expense resulting from:
State income tax expense, net of federal income tax ...........................................................................
Federal income tax rate reduction ........................................................................................................
Excess deferred income tax amortization.............................................................................................
Other, net ..............................................................................................................................................
Total...................................................................................................................................................
Total income tax expense (benefit)................................................................................................. $
21%
89
14
—
(9)
(5)
—
89
Effective tax rate......................................................................................................................................
21%
35 %
148
12
(158)
—
(11)
(157)
$
(9)
$
(2)%
686
35%
240
27
3
—
—
—
(16)
14
254
37%
425
35%
149
12
—
—
(12)
—
149
35%
Year Ended December 31,
2018
2017
2016
(in millions)
CERC - Continuing Operations (6) (7)
Income before income taxes.................................................................................................................... $
92
$
319
$
199
Federal statutory income tax rate ............................................................................................................
Expected federal income tax expense ............................................................................................
Increase (decrease) in tax expense resulting from:
State income tax expense, net of federal income tax ...........................................................................
State law change, net of federal income tax .........................................................................................
State valuation allowance, net of federal income tax ...........................................................................
Federal income tax rate reduction ........................................................................................................
Excess deferred income tax amortization.............................................................................................
Tax basis balance sheet adjustment ......................................................................................................
Other, net ..............................................................................................................................................
Total...................................................................................................................................................
21%
19
5
—
11
—
(15)
—
2
3
35 %
112
6
—
3
(396)
—
11
(1)
(377)
Total income tax expense (benefit)................................................................................................. $
22
$
(265)
$
35%
70
4
6
2
—
—
—
(1)
11
81
Effective tax rate......................................................................................................................................
CERC - Discontinued Operations (7)
24%
(83)%
41%
Income before income taxes.................................................................................................................... $
184
$
265
$
208
Federal statutory income tax rate ............................................................................................................
Expected federal income tax expense ............................................................................................
Increase in tax expense resulting from:
State income tax expense, net of federal income tax ...........................................................................
Total...................................................................................................................................................
21%
39
7
7
35 %
93
11
11
Total income tax expense ............................................................................................................... $
46
$
104
$
Effective tax rate......................................................................................................................................
25%
39 %
35%
73
8
8
81
39%
(1) Recognized a $32 million deferred tax expense due to state law changes that resulted in remeasurement of state deferred
taxes in those jurisdictions. Also recorded an additional $11 million valuation allowance on certain state net operating
loss deferred tax assets that are no longer expected to be utilized prior to expiration after the Internal Spin. These items
are partially offset by $24 million of amortization of the net regulatory EDIT liability as decreed by regulators in certain
jurisdictions beginning in 2018.
(2) Recognized a $1.1 billion deferred tax benefit from the remeasurement of CenterPoint Energy’s ADFIT liability as a
result of the enactment of the TCJA on December 22, 2017, which reduced the U.S. corporate income tax rate from 35%
to 21%. For additional information on the 2017 impacts of the TCJA, please see the discussion following the deferred
tax assets and liabilities table below.
(3) Recognized a $6 million deferred tax expense in 2016 due to Louisiana state law change and recorded an additional $3
million valuation allowance on certain state carryforwards.
(4) Recognized $9 million of amortization of the net regulatory EDIT liability as decreed by regulators in certain jurisdictions
beginning in 2018.
(5) Recognized a $158 million deferred tax benefit from the remeasurement of Houston Electric’s ADFIT liability as a result
of the enactment of the TCJA on December 22, 2017, which reduced the U.S. corporate income tax rate from 35% to 21%.
For additional information on the 2017 impacts of the TCJA, please see the discussion following the deferred tax assets
and liabilities table below.
151
152
(6) Recorded an additional $11 million valuation allowance on certain state net operating loss deferred tax assets that are no
longer expected to be utilized prior to expiration after the Internal Spin. This item is partially offset by $15 million of
amortization of the net regulatory EDIT liability in certain jurisdictions as decreed by regulators beginning in 2018.
(7) Recognized a $396 million deferred tax benefit from the remeasurement of CERC’s ADFIT liability as a result of the
enactment of the TCJA on December 22, 2017, which reduced the U.S. corporate income tax rate from 35% to 21%.
ASC 740 requires tax impacts of changes in tax laws or rates be reported in continuing operations. Therefore, CERC’s
federal income tax benefit generated by the remeasurement of the ADFIT liability for Enable during 2017 and state law
changes during 2016 associated with its investment in Enable are reported in continuing operations on CERC’s Statements
of Consolidated Income. The ADFIT liability associated with CERC’s investment in Enable is reported as discontinued
operations on CERC’s Consolidated Balance Sheets.
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities were as
follows:
CenterPoint Energy
Deferred tax assets:
December 31,
2018
2017
(in millions)
Benefits and compensation ................................................................................................................ $
Regulatory liabilities..........................................................................................................................
Loss and credit carryforwards............................................................................................................
Asset retirement obligations ..............................................................................................................
Other ..................................................................................................................................................
Valuation allowance...........................................................................................................................
Total deferred tax assets..................................................................................................................
Deferred tax liabilities:
Property, plant and equipment ...........................................................................................................
Investment in unconsolidated affiliates .............................................................................................
Regulatory assets ...............................................................................................................................
Investment in marketable securities and indexed debt ......................................................................
Indexed debt securities derivative......................................................................................................
Other ..................................................................................................................................................
Total deferred tax liabilities ............................................................................................................
Net deferred tax liabilities........................................................................................................ $
Houston Electric
Deferred tax assets:
$
160
356
84
62
29
(18)
673
1,894
987
395
478
27
131
3,912
3,239
$
Regulatory liabilities.......................................................................................................................... $
205
$
Benefits and compensation ................................................................................................................
Asset retirement obligations ..............................................................................................................
Other ..................................................................................................................................................
Total deferred tax assets..................................................................................................................
Deferred tax liabilities:
Property, plant and equipment ...........................................................................................................
Regulatory assets ...............................................................................................................................
Total deferred tax liabilities ............................................................................................................
17
7
12
241
1,087
177
1,264
Net deferred tax liabilities........................................................................................................ $
1,023
$
162
347
90
68
16
(7)
676
1,808
927
473
502
13
127
3,850
3,174
198
28
7
3
236
1,030
265
1,295
1,059
December 31,
2018
2017
(in millions)
CERC - Continuing Operations
Deferred tax assets:
Benefits and compensation ................................................................................................................ $
27
$
Regulatory liabilities..........................................................................................................................
Loss and credit carryforwards............................................................................................................
Asset retirement obligations ..............................................................................................................
Other ..................................................................................................................................................
Valuation allowance...........................................................................................................................
Total deferred tax assets..................................................................................................................
Deferred tax liabilities:
Property, plant and equipment ...........................................................................................................
Regulatory assets ...............................................................................................................................
Other ..................................................................................................................................................
Total deferred tax liabilities ............................................................................................................
Net deferred tax liabilities........................................................................................................ $
CERC - Discontinued Operations
Deferred tax liabilities:
Investment in unconsolidated affiliates .............................................................................................
Net deferred tax liabilities........................................................................................................ $
Federal Tax Reform
150
259
54
20
(18)
492
773
41
84
898
406
$
—
— $
27
150
288
60
18
(7)
536
745
38
115
898
362
927
927
On December 22, 2017, President Trump signed into law comprehensive tax reform legislation informally called the Tax Cuts
and Jobs Acts, or TCJA, which resulted in significant changes to federal tax laws effective January 1, 2018. The new legislation
contained several key tax provisions that impacted the Registrants, including the reduction of the corporate income tax rate from
35% to 21% effective January 1, 2018. The legislation also includes a variety of other changes, such as, a limitation on the tax
deductibility of interest expense, acceleration of business asset expensing and reduction in the amount of executive pay that may
qualify for a tax deduction, among others. Several other provisions of the TCJA were not generally applicable to the public utility
industry, including the limitation on the tax deductibility of interest expense and the acceleration of business asset expensing.
While the effective date of the rate change in the legislation was January 1, 2018, ASC 740 requires that deferred tax balances
be adjusted in the period of enactment to the rate in which those deferred taxes will reverse.
During 2017, CenterPoint Energy’s EDIT from the rate change resulted in an adjustment to income tax expense of
approximately $1.1 billion and creation of a net regulatory liability of $1.3 billion (includes $0.3 billion gross-up) for the amount
that is likely to be returned to ratepayers. The major components of the $1.1 billion benefit to income tax expense are for the
remeasurement of CenterPoint Energy's deferred taxes associated with its investment in Enable, investment in marketable securities
(ZENS) and stranded costs related to the Securitization Bonds.
During 2017, Houston Electric’s EDIT from the rate change resulted in an adjustment to income tax expense of $158 million and
creation of a net regulatory liability of $829 million (includes $180 million gross-up) for the amount that is likely to be returned
to ratepayers. The $158 million benefit to income tax expense is for the remeasurement of Houston Electric’s stranded costs related
to the Securitization Bonds.
During 2017, CERC’s EDIT from the rate change resulted in an adjustment to income tax expense of $396 million and creation
of a net regulatory liability of $478 million (includes $121 million gross-up) for the amount that is likely to be returned to ratepayers.
The major components of the $396 million benefit to income tax expense were for the remeasurement of CERC’s deferred taxes
associated with its investment in Enable and federal net operating loss carryforwards.
The amount and expected amortization of the net regulatory tax liability may differ from the Registrants’ estimates, possibly
materially, due to, among other things, regulatory actions, interpretations and assumptions the Registrants have made, and any
guidance that may be issued in the future. The Registrants will continue to assess the amount and expected amortization of the
net regulatory tax liability as they have proceedings with regulators in future periods.
153
154
Houston Electric and CERC are included in CenterPoint Energy’s U.S. federal consolidated income tax return. Houston
Electric and CERC report their income tax provision on a separate entity basis pursuant to a tax sharing agreement with CenterPoint
Energy.
Tax Attribute Carryforwards and Valuation Allowance. CenterPoint Energy has no remaining federal net operating loss
carryforward or federal tax credits as of December 31, 2018. As of December 31, 2018, CenterPoint Energy had $802 million of
state net operating loss carryforwards that expire between 2019 and 2038 and $18 million of state tax credits that do not expire.
CenterPoint Energy reported a valuation allowance of $18 million because it is more likely than not that the benefit from certain
state net operating loss carryforwards will not be realized.
CERC has $951 million of federal net operating loss carryforwards which have an indefinite carryforward period, however,
utilization is limited to 80 percent of taxable income in any given taxable year. CERC has $797 million of state net operating loss
carryforwards which expire between 2019 and 2038 and $17 million of state tax credits which do not expire. CERC reported a
valuation allowance of $18 million since it is more likely than not that the benefit from certain state net operating loss carryforwards
will not be realized.
Uncertain Income Tax Positions. The Registrants reported no uncertain tax liabilities as of December 31, 2018, 2017 and
2016. The Registrants expect no significant change to the uncertain tax liabilities over the next 12 months ending December 31,
2019.
Tax Audits and Settlements. Tax years through 2016 have been audited and settled with the IRS, however, during 2018
CenterPoint Energy filed an amended 2014 tax return to claim additional tax credits that is currently under review by the IRS.
For the 2017 and 2018 tax years, the Registrants are participants in the IRS’s Compliance Assurance Process.
(16) Commitments and Contingencies
(a) Natural Gas Supply Commitments (CenterPoint Energy and CERC)
Natural gas supply commitments include natural gas contracts related to CenterPoint Energy’s and CERC’s Natural Gas
Distribution and Energy Services reportable segments, which have various quantity requirements and durations, that are not
classified as non-trading derivative assets and liabilities in CenterPoint Energy’s and CERC’s Consolidated Balance Sheets as of
December 31, 2018 and 2017 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, 2018, minimum payment obligations for natural gas supply commitments are approximately:
2019................................................................................................................................................................ $
2020................................................................................................................................................................
2021................................................................................................................................................................
2022................................................................................................................................................................
2023................................................................................................................................................................
2024 and beyond ............................................................................................................................................
(in millions)
454
430
343
231
154
1,446
(b) AMAs (CenterPoint Energy and CERC)
NGD has AMAs associated with its utility distribution service in Arkansas, Louisiana, Mississippi, Oklahoma and Texas. In
March 2018, NGD’s third party AMAs in Arkansas, Louisiana and Oklahoma expired, and NGD entered into new AMAs with
CES effective April 1, 2018 in these states. The AMAs have varying terms, the longest of which expires in 2021. 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. 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. NGD has an obligation to purchase its winter storage requirements that have been released to
the asset manager under these AMAs.
(c) Lease Commitments
The following table sets forth information concerning the Registrants’ obligations under non-cancelable long-term operating
leases as of December 31, 2018, which primarily consist of rental agreements for real property:
CenterPoint
Energy
Houston Electric
CERC
(in millions)
2019........................................................................................................ $
2020........................................................................................................
2021........................................................................................................
2022........................................................................................................
2023........................................................................................................
2024 and beyond ....................................................................................
Total ..................................................................................................... $
6
6
5
4
3
12
36
$
$
1
—
—
—
—
—
1
$
$
5
5
4
4
3
11
32
CenterPoint
Energy
2018
Houston
Electric
CERC
CenterPoint
Energy
2017
Houston
Electric
CERC
CenterPoint
Energy
2016
Houston
Electric
CERC
Year Ended December 31,
(in millions)
Lease expense $
9
$
1
$
8
$
10
$
1
$
9
$
10
$
1
$
9
(d) Legal, Environmental and Other Matters
Legal Matters (CenterPoint Energy and CERC)
Gas Market Manipulation Cases. CenterPoint Energy, its predecessor, Reliant Energy, and certain of their former subsidiaries
were named as defendants in a large number of lawsuits 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 were released or dismissed from all such cases, except for one case pending in federal court in Nevada in which CES, a
subsidiary of CERC Corp., is a defendant. Plaintiffs in that case allege a conspiracy to inflate Wisconsin natural gas prices in
2000-2002. In May 2016, the district court granted CES’s motion for summary judgment, dismissing CES from the case. In August
2018, the Ninth Circuit Court of Appeals reversed that ruling, and CES requested further appellate review of that decision (which
review has been stayed pending approval of the settlement agreement 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. Through a series of transactions, RRI became known as GenOn and a wholly-owned subsidiary
of NRG. None of those transactions alters GenOn’s contractual obligations to indemnify CenterPoint Energy and its subsidiaries
for certain liabilities, including their indemnification obligations regarding the gas market manipulation litigation. In June 2017,
however, GenOn and various affiliates filed for protection under Chapter 11 of the U.S. Bankruptcy Code. In December 2018,
GenOn completed its reorganization and emerged from Chapter 11. CenterPoint Energy, CERC, and CES submitted proofs of
claim in the bankruptcy proceedings to protect their indemnity rights. In October 2018, CES, GenOn, and the plaintiffs reached
an agreement to settle all claims against CES and CES’s indemnity claims against GenOn, subject to approvals by the bankruptcy
court and the federal district court. In January 2019, the bankruptcy court approved the settlement between CES and GenOn. If
the settlement agreement between CES, GenOn and the plaintiffs is not approved by the federal district court, CES could incur
liability and be responsible for satisfying it. 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.
Minnehaha Academy. On August 2, 2017, a natural gas explosion occurred at the Minnehaha Academy in Minneapolis,
Minnesota, resulting in the deaths of two school employees, serious injuries to others and significant property damage to the
school. CenterPoint Energy, certain of its subsidiaries, including CERC, and the contractor company working in the school have
been named in litigation arising out of this incident. CenterPoint Energy and CERC have reached confidential settlement agreements
with some claimants. Additionally, CenterPoint Energy and CERC are cooperating with the ongoing investigation conducted by
155
156
the National Transportation Safety Board. Further, CenterPoint Energy and CERC are contesting approximately $200,000 in fines
imposed by the Minnesota Office of Pipeline Safety. In early 2018, the Minnesota Occupational Safety and Health Administration
concluded its investigation without any adverse findings against CenterPoint Energy or CERC. CenterPoint Energy’s and CERC’s
general and excess liability insurance policies provide coverage for third party bodily injury and property damage claims.
Environmental Matters
MGP Sites (CenterPoint Energy and CERC). CenterPoint Energy, CERC and its predecessors operated MGPs in the past.
With respect to certain Minnesota MGP sites, CenterPoint Energy and CERC have completed state-ordered remediation and
continue state-ordered monitoring and water treatment. As of December 31, 2018, CenterPoint Energy and 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 CenterPoint Energy and CERC believe they may have responsibility
was $5 million to $32 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
CenterPoint Energy or CERC or may have been owned by one of their former affiliates. CenterPoint Energy and CERC do 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 the Registrants or their predecessors in interest contain or have contained asbestos insulation
and other asbestos-containing materials. The Registrants 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 the Registrants anticipate that
additional claims may be asserted in the future. Although their ultimate outcome cannot be predicted at this time, the Registrants
do not expect these matters, either individually or in the aggregate, to have a material adverse effect on their financial condition,
results of operations or cash flows.
Other Environmental. From time to time, the Registrants identify the presence of environmental contaminants during operations
or on property where predecessor companies have conducted operations. Other such sites involving contaminants may be identified
in the future. The Registrants have and expect to continue to remediate any identified sites consistent with state and federal legal
obligations. From time to time, the Registrants have received notices, and may receive notices in the future, from regulatory
authorities or others regarding status as a PRP in connection with sites found to require remediation due to the presence of
environmental contaminants. In addition, the Registrants have been, or may be, named from time to time as defendants in litigation
related to such sites. Although the ultimate outcome of such matters cannot be predicted at this time, the Registrants do not expect
these matters, either individually or in the aggregate, to have a material adverse effect on their financial condition, results of
operations or cash flows.
Other Proceedings
The Registrants are 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, the
Registrants are also defendants 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. The Registrants regularly analyze
current information and, as necessary, provide accruals for probable and reasonably estimable liabilities on the eventual disposition
of these matters. The Registrants do not expect the disposition of these matters to have a material adverse effect on the Registrants’
financial condition, results of operations or cash flows.
(17) Earnings Per Share (CenterPoint Energy)
The following table reconciles numerators and denominators of CenterPoint Energy’s basic and diluted earnings per common
share. Basic earnings per common share is determined by dividing Income available to common shareholders - basic by the
Weighted average common shares outstanding - basic for the applicable period. Diluted earnings per common share is determined
by the inclusion of potentially dilutive common stock equivalent shares that may occur if securities to issue Common Stock were
exercised or converted into Common Stock.
For the Year Ended December 31,
2018
2017
2016
(in millions, except per share and share amounts)
Numerator:
Income available to common shareholders - basic (1) ................... $
Add back: Series B Preferred Stock dividend...............................
Income available to common shareholders - diluted (1) ................ $
333
—
333
$
$
1,792
—
1,792
$
$
432
—
432
Denominator:
Weighted average common shares outstanding - basic.................
Plus: Incremental shares from assumed conversions:
Restricted stock (2) ......................................................................
Series B Preferred Stock (3) ........................................................
Weighted average common shares outstanding - diluted..............
448,829,000
430,964,000
430,606,000
3,636,000
3,344,000
2,997,000
—
—
—
452,465,000
434,308,000
433,603,000
Earnings per common share:
Basic earnings per common share................................................. $
Diluted earnings per common share.............................................. $
0.74
0.74
$
$
4.16
4.13
$
$
1.00
1.00
(1) Income available to common shareholders for the year ended December 31, 2017 includes a reduction in income tax
expense of $1,113 million due to tax reform. See Note 15 for further discussion of the impacts of the TCJA.
(2) The potentially dilutive impact from restricted stock awards applies the treasury stock method. Under this method, an
increase in the average fair market value of Common Stock can result in a greater dilutive impact from these securities.
(3) The potentially dilutive impact from Series B Preferred Stock applies the if-converted method in calculating diluted
earnings per common share. Under this method, diluted earnings per common share is adjusted for the more dilutive
effect of the Series B Preferred Stock as a result of either its accumulated dividend for the period in the numerator or the
assumed-converted common share equivalent in the denominator. The computation of diluted earnings per common share
outstanding for the year ended December 31, 2018 excludes 8,885,000 potentially dilutive shares because to include them
would be anti-dilutive. However, these shares could be potentially dilutive in the future.
(18) Unaudited Quarterly Information
Summarized quarterly financial data is as follows:
First
Quarter
Year Ended December 31, 2018
Second
Quarter
Third
Quarter
(in millions, except per share amounts)
Fourth
Quarter
CenterPoint Energy
Revenues.............................................................................. $
Operating income ................................................................
Income (loss) available to common shareholders ...............
Basic earnings (loss) per common share (1) ........................
Diluted earnings (loss) per common share (1) .....................
$
3,155
251
165
0.38
0.38
$
2,186
187
(75)
(0.17)
(0.17)
$
2,212
226
153
0.35
0.35
3,036
167
90
0.18
0.18
157
158
Houston Electric
Revenues..............................................................................
Operating income ................................................................
Net income...........................................................................
CERC (4)
Revenues..............................................................................
Operating income (loss) ......................................................
Income (loss) from continuing operations...........................
Income (loss) from discontinued operations .......................
Net income...........................................................................
CenterPoint Energy
Revenues.............................................................................. $
Operating income (2) ............................................................
Income available to common shareholders (3) .....................
Basic earnings per common share (1) ..................................
Diluted earnings per common share (1) ...............................
Houston Electric
Revenues..............................................................................
Operating income (2) ............................................................
Net income (3) ......................................................................
CERC (4)
Revenues..............................................................................
Operating income (2) ............................................................
Income (loss) from continuing operations...........................
Income from discontinued operations .................................
Net income (3) ......................................................................
Year Ended December 31, 2018
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(in millions, except per share amounts)
755
119
52
2,400
131
78
52
130
854
181
101
1,328
22
(8)
44
36
897
227
143
1,312
(7)
(35)
44
9
728
98
40
2,303
76
35
(2)
33
Year Ended December 31, 2017
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(in millions, except per share amounts)
$
2,735
291
192
0.45
0.44
638
85
18
2,093
199
102
45
147
$
2,143
240
135
0.31
0.31
752
171
75
1,387
59
17
37
54
$
2,098
297
169
0.39
0.39
843
254
130
1,251
31
(4)
42
38
2,638
308
1,296
3.01
2.99
765
127
210
1,872
178
469
37
506
(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) Recast to reflect the adoption of ASU 2017-07. See Note 2(r) for further information.
(3) Income available to common shareholders and Net income for the fourth quarter 2017 include a reduction in income tax
expense of $1,113 million, $158 million and $396 million for CenterPoint Energy, Houston Electric and CERC,
respectively, due to the TCJA. See Note 15 for further discussion of the impacts of tax reform implementation.
(4) Amounts have been recast to reflect discontinued operations in all periods presented.
(19) Reportable Segments
The Registrants’ determination of reportable segments considers the strategic operating units under which the Registrants
manage sales, allocate resources and assess performance of various products and services to wholesale or retail customers in
differing regulatory environments. The Registrants use operating income as the measure of profit or loss for the reportable segments
other than Midstream Investments, where equity in earnings is used.
As of December 31, 2018, reportable segments by Registrant are as follows:
Electric
Transmission
& Distribution
Natural Gas
Distribution
Energy
Services
Midstream
Investments
Other
Operations
CenterPoint Energy..................................................................
Houston Electric.......................................................................
CERC .......................................................................................
X
X
X
X
X
X
X
(1)
X
X
(1) On September 4, 2018, CERC completed the Internal Spin. Previously, CERC’s equity method investment in Enable was
included in CERC’s Midstream Investments reportable segment. CERC’s equity in earnings in Enable, net of basis
difference amortization and income tax, have been classified as discontinued operations for all periods presented. See
Note 11 for further discussion on the Internal Spin and the associated discontinued operations presentation.
Electric Transmission & Distribution consists of the electric transmission and distribution function. 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 consists of non-rate regulated natural gas sales and services operations. Midstream
Investments consists of the equity investment in Enable (excluding the Enable Series A Preferred Units). Other Operations consists
primarily of other corporate operations which support all of the business operations.
Houston Electric consists of a single reportable segment, Electric Transmission & Distribution, and therefore is not included
in the tabular reportable segment presentation below.
Operating income (loss) amounts for 2017 and 2016 have been recast to reflect the adoption of ASU 2017-07 (see Note 2(r)
for further information).
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 reportable segments and products and services are as follows:
CenterPoint Energy
Revenues
from
External
Customers
Intersegment
Revenues
Depreciation
and
Amortization
Operating
Income
Total
Assets
Expenditures
for Long-
Lived
Assets
As of and for the year ended December 31,
2018:
Electric Transmission & Distribution.............. $
Natural Gas Distribution .................................
Energy Services ...............................................
Midstream Investments (2)..............................
Other Operations .............................................
Eliminations.....................................................
Consolidated.................................................... $
3,232 (1) $
2,931
4,411
—
15
—
10,589
$
(in millions)
$
917
277
16
—
33
—
$
—
36
110
—
—
(146)
—
$
1,243
$
623
266
(47)
—
(11)
—
831
$
10,509
$
6,956
1,558
2,482
6,156 (3)
(652)
$
27,009
Reconciling items .......................................................................................................................................................................................................
952
638
20
—
110
—
1,720
(69)
Capital expenditures per Statements of
Consolidated Cash Flows....................................................................................................................................................................................... $
1,651
159
160
Revenues
from
External
Customers
Intersegment
Revenues
Depreciation
and
Amortization
Operating
Income
Total
Assets
Expenditures
for Long-
Lived
Assets
CERC
As of and for the year ended December 31,
2017:
Electric Transmission & Distribution.............. $
Natural Gas Distribution .................................
Energy Services ...............................................
Midstream Investments (2)..............................
Other Operations .............................................
Eliminations.....................................................
Consolidated.................................................... $
2,997 (1) $
2,606
3,997
—
14
—
9,614
$
—
33
52
—
—
(85)
—
$
(in millions)
$
724
260
19
—
33
—
636
348
126
—
26
—
$
10,292
$
6,608
1,521
2,472
2,497 (3)
(654)
$
1,036
$
1,136
$
22,736
Reconciling items .......................................................................................................................................................................................................
924
523
11
—
36
—
1,494
(68)
Capital expenditures per Statements of
Consolidated Cash Flows....................................................................................................................................................................................... $
1,426
As of and for the year ended December 31,
2016:
Electric Transmission & Distribution.............. $
Natural Gas Distribution .................................
Energy Services ...............................................
Midstream Investments (2)..............................
Other Operations .............................................
Eliminations.....................................................
Consolidated.................................................... $
3,060 (1) $
2,380
2,073
—
15
—
7,528
$
—
29
26
—
—
(55)
—
$
10,211
$
$
$
838
242
7
—
39
—
653
321
21
—
28
—
$
1,126
$
1,023
$
6,099
1,102
2,505
2,681 (3)
(769)
21,829
Reconciling items .......................................................................................................................................................................................................
858
510
5
—
33
—
1,406
8
Capital expenditures per Statements of
Consolidated Cash Flows....................................................................................................................................................................................... $
1,414
(1) CenterPoint Energy’s and Houston Electric’s Electric Transmission & Distribution revenues from major customers are
as follows:
Year Ended December 31,
2018
2017
2016
(in millions)
Revenues
from
External
Customers
Intersegment
Revenues
Depreciation
and
Amortization
Operating
Income
Total
Assets (1)
Expenditures
for Long-
Lived
Assets
As of and for the year ended December
31, 2018:
Natural Gas Distribution ............................ $
Energy Services .........................................
Other Operations........................................
Eliminations ...............................................
Consolidated .............................................. $
2,931
4,411
1
—
7,343
$
$
(in millions)
$
277
$
16
—
—
36
110
—
(146)
—
$
293
$
266
(47)
3
—
222
$
$
6,956
$
1,558
66
(366)
8,214
Reconciling items.......................................................................................................................................................................................................
Capital expenditures per Statements of
Consolidated Cash Flows ...................................................................................................................................................................................... $
638
20
—
—
658
(25)
633
As of and for the year ended December
31, 2017:
Natural Gas Distribution ............................ $
Energy Services .........................................
Discontinued operations.............................
Other Operations........................................
Eliminations ...............................................
Consolidated .............................................. $
2,606
3,997
—
—
—
6,603
$
$
33
52
—
—
(85)
—
$
6,608
$
523
$
260
$
19
—
—
—
348
126
—
(7)
—
1,521
2,472 (1)
70
(559)
$
279
$
467
$
10,112
Reconciling items.......................................................................................................................................................................................................
Capital expenditures per Statements of
Consolidated Cash Flows ...................................................................................................................................................................................... $
As of and for the year ended December
31, 2016:
Natural Gas Distribution ............................ $
Energy Services .........................................
Discontinued operations.............................
Other Operations........................................
Eliminations ...............................................
Consolidated .............................................. $
2,380
2,073
—
1
—
4,454
$
$
29
26
—
—
(55)
—
$
242
$
321
$
6,099
$
510
7
—
—
—
21
—
(1)
—
$
249
$
341
$
1,102
2,505 (1)
75
(563)
9,218
11
—
—
—
534
(21)
513
5
—
—
—
515
2
517
Affiliates of NRG ..........................................................................................
Affiliates of Vistra Energy Corp....................................................................
$
$
705
251
$
713
229
698
220
Reconciling items.......................................................................................................................................................................................................
Capital expenditures per Statements of
Consolidated Cash Flows ...................................................................................................................................................................................... $
(2) CenterPoint Energy’s Midstream Investments’ equity earnings, net are as follows:
(1) On September 4, 2018, CERC completed the Internal Spin. For further information regarding the Internal Spin, see Note
Year Ended December 31,
2018
2017
2016
(in millions)
Enable ............................................................................................................
$
307
$
265
$
208
(3) Total assets included pension and other postemployment-related regulatory assets of $665 million, $600 million and
$759 million as of December 31, 2018, 2017 and 2016, respectively. Additionally, total assets as of December 31, 2018
included $3.9 billion of temporary investments included in Cash and cash equivalents on CenterPoint Energy’s
Consolidated Balance Sheets.
11.
Revenues by Products
and Services:
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
2018
2017
2016
Year Ended December 31,
Electric delivery .............
$
Retail gas sales...............
Wholesale gas sales........
Gas transportation and
processing..................
Energy products and
services ......................
Total ............................
3,232
4,161
3,008
$ 3,234
—
—
$ — $
4,161
3,008
(in millions)
$ 2,998
—
—
2,997
3,634
2,811
$ — $
3,634
2,811
3,060
3,329
977
$ 3,059
—
—
$ —
3,329
977
32
—
32
29
—
29
23
—
23
156
$ 10,589
—
$ 3,234
142
$ 7,343
$
143
9,614
—
$ 2,998
129
$ 6,603
$
139
7,528
—
$ 3,059
125
$ 4,454
161
162
(20) Supplemental Disclosure of Cash Flow Information
Houston Electric and CERC affiliate-related net interest income (expense) were as follows:
$
105
$
378
$
205
$
116
$
406
$
$
116
(1) Interest income is included in Other, net and interest expense is included in Interest and other finance charges on Houston
The tables below provide supplemental disclosure of cash flow information:
2018
2017
2016
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
(in millions)
Cash Payments/Receipts:
Interest, net of capitalized
interest .............................. $
363
$
Income taxes (refunds), net...
89
200
154
Non-cash transactions:
Accounts payable related to
capital expenditures..........
Capital distribution
associated with the
Internal Spin .....................
3
80
15
76
144
104
201
124
—
—
1,473
—
—
4
56
—
(104)
87
—
209
128
65
—
3
35
—
The table below provides a reconciliation of cash, cash equivalents and restricted cash reported in the Consolidated Balance
Sheets to the amount reported in the Statements of Consolidated Cash Flows:
December 31, 2018
December 31, 2017
CenterPoint
Energy
Houston
Electric
CERC
CenterPoint
Energy
Houston
Electric
CERC
(in millions)
Cash and cash equivalents (1) (2) ............................................. $
4,231
$
335
$
14
$
260
$
238
$
Restricted cash included in Prepaid expenses and other
current assets.................................................................
Restricted cash included in Other ..........................................
Total cash, cash equivalents and restricted cash shown
46
1
34
1
11
—
35
1
35
1
in Statements of Consolidated Cash Flows ................. $
4,278
$
370
$
25
$
296
$
274
$
12
—
—
12
(1) CenterPoint Energy’s Cash and cash equivalents as of December 31, 2018 included $3.9 billion of temporary investments
resulting from the Merger financings. CenterPoint Energy recorded interest income of $28 million, $2 million and $1
million for the years ended December 31, 2018, 2017 and 2016, respectively, in Other, net on CenterPoint Energy’s
Statements of Consolidated Income. See Notes 13 and 14 for further details related to the Merger financings.
(2) Houston Electric’s Cash and cash equivalents as of December 31, 2018 and 2017 included $335 million and $230 million,
respectively, of cash related to the Bond Companies. Houston Electric recorded interest income of $4 million, $2 million
and $1 million for the years ended December 31, 2018, 2017 and 2016, respectively, in Other, net on Houston Electric’s
Statement of Consolidated Income.
(21) Related Party Transactions (Houston Electric and CERC)
Houston Electric and CERC participate in a money pool through which they can borrow or invest on a short-term basis.
Funding needs are aggregated and external borrowing or investing is based on the net cash position. The net funding requirements
of the money pool are expected to be met with borrowings under CenterPoint Energy’s revolving credit facility or the sale of
CenterPoint Energy’s commercial paper. The table below summarizes money pool activity:
Money pool investments (borrowings) (1) ............................................................ $
(1)
$
114
$
(60)
$
Weighted average interest rate ..............................................................................
2.42%
2.42%
1.90%
(570)
1.90%
December 31, 2018
December 31, 2017
Houston
Electric
CERC
Houston
Electric
CERC
(in millions)
Year Ended December 31,
2018
2017
2016
Houston
Electric
CERC
Houston
Electric
CERC
Houston
Electric
CERC
(in millions)
Interest income (expense), net (1)...................................................... $
1
$
— $
2
$
— $
(4) $
—
Electric’s and CERC’s respective Statements of Consolidated Income.
CenterPoint Energy provides some corporate services to Houston Electric and CERC. The costs of services have been charged
directly to Houston Electric and CERC using methods that management believes are reasonable. These methods include negotiated
usage rates, dedicated asset assignment and proportionate corporate formulas based on operating expenses, assets, gross margin,
employees and a composite of assets, gross margin and employees. Houston Electric provides certain services to CERC. These
services are billed at actual cost, either directly or as an allocation and include fleet services, shop services, geographic services,
surveying and right-of-way services, radio communications, data circuit management and field operations. Additionally, CERC
provides certain services to Houston Electric. These services are billed at actual cost, either directly or as an allocation and include
line locating and other miscellaneous services. These charges are not necessarily indicative of what would have been incurred
had Houston Electric and CERC not been affiliates.
Amounts charged for these services were as follows and are included primarily in operation and maintenance expenses:
Year Ended December 31,
2018
2017
2016
Houston
Electric
CERC
Houston
Electric
CERC
Houston
Electric
CERC
(in millions)
Corporate service charges .................................................................. $
190
$
147
$
188
$
128
$
179
$
Net affiliate service charges (billings) ...............................................
(17)
17
(9)
9
(8)
125
8
The table below presents transactions among Houston Electric, CERC and their parent, Utility Holding.
Year Ended December 31,
2018
2017
2016
Houston
Electric
CERC
Houston
Electric
CERC
Houston
Electric
CERC
Cash dividends paid to parent ............................................................ $
Cash contribution from parent ...........................................................
Capital distribution to parent associated with the Internal Spin ........
$
209
200
—
360
960
1,473
(in millions)
$
180
$
601
$
—
—
38
—
$
135
374
—
643
72
—
(22) Subsequent Events
Enable Distributions Declarations (CenterPoint Energy)
Equity Instrument
Declaration Date
Record Date
Payment Date
Per Unit
Distribution
Expected Cash
Distribution
Common units................................ February 8, 2019 ..... February 19, 2019 ... February 26, 2019 ...
$
0.318
$
Enable Series A Preferred Units..... February 8, 2019 ..... February 8, 2019 ..... February 14, 2019 ...
0.625
(in millions)
74
9
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
(1) Included in Accounts and notes receivable (payable)–affiliated companies in Houston Electric’s and CERC’s Consolidated
None.
Balance Sheets.
163
164
Item 9A. Controls and Procedures
Disclosure Controls And Procedures
In accordance with Exchange Act Rules 13a-15 and 15d-15, the Registrants carried out separate evaluations, under the
supervision and with the participation of each company’s management, including the principal executive officer and principal
financial officer, of the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report.
Based on those evaluations, the principal executive officer and principal financial officer, in each case, concluded that the disclosure
controls and procedures were effective as of December 31, 2018 to provide assurance that information required to be disclosed
in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms and such information is accumulated and communicated to management, including the
principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure.
There has been no change in the Registrants’ internal controls over financial reporting that occurred during the three months
ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, the Registrants’ internal controls
over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
The Registrants’ management is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act
of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers
and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles and includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions
of the assets of the company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and
•
•
•
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
CenterPoint Energy, Inc.
Houston, Texas
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of CenterPoint Energy, Inc. and subsidiaries (the “Company”)
as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal
Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018, of the Company and our report
dated February 28, 2019, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
the company’s assets that could have a material effect on the financial statements.
Definition and Limitations of Internal Control over Financial Reporting
Management has designed its internal control over financial reporting to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements in accordance with accounting principles generally accepted in
the United States of America. Management’s assessment included review and testing of both the design effectiveness and operating
effectiveness of controls over all relevant assertions related to all significant accounts and disclosures in the financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of the Registrants’ management, including their respective principal executive
officers and principal financial officers, the Registrants conducted an evaluation of the effectiveness of their internal control over
financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on the Registrants’ evaluation under the framework in Internal
Control — Integrated Framework (2013), the Registrants’ management has concluded, in each case, that their internal control
over financial reporting was effective as of December 31, 2018.
Deloitte & Touche LLP, CenterPoint Energy’s independent registered public accounting firm, has issued an attestation report
on the effectiveness of CenterPoint Energy’s internal control over financial reporting as of December 31, 2018 which is set forth
below. This report is not applicable to Houston Electric or CERC as they are not accelerated or large accelerated filers.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 28, 2019
165
166
Item 9B. Other Information
Amended and Restated Short Term Incentive Plan
Effective January 1, 2019, the Board of Directors of CenterPoint Energy amended and restated the CenterPoint Energy, Inc.
Short Term Incentive Plan. The Short Term Incentive Plan, as amended and restated, includes, among other things, the following
changes:
• Revised eligibility requirements to provide clarity with respect to participants employed for a portion of the applicable
plan year;
• Amended methodology for calculating payments upon retirement;
For Houston Electric and CERC, the information called for by Item 12 is omitted pursuant to Instruction I(2) to Form 10-K
(Omission of Information by Certain Wholly-Owned Subsidiaries).
Item 13. Certain Relationships and Related Transactions, and Director Independence
For CenterPoint Energy, the information called for by Item 13 will be set forth in the definitive proxy statement relating to
CenterPoint Energy’s 2019 annual meeting of shareholders pursuant to SEC Regulation 14A. Such definitive proxy statement
relates to a meeting of shareholders involving the election of directors and the portions thereof called for by Item 13 are incorporated
herein by reference pursuant to Instruction G to Form 10-K. See Note 11 for information related to CenterPoint Energy’s affiliate
transactions.
• Removed manager discretion with respect to terminations after the plan year but before the payment date to conform to
operational practice; and
For Houston Electric and CERC, the information called for by Item 13 is omitted pursuant to Instruction I(2) to Form 10-K
(Omission of Information by Certain Wholly-Owned Subsidiaries).
• Deleted provisions related to Section 162(m) of the Internal Revenue Code to reflect current legislative changes.
Item 14. Principal Accounting Fees and Services
The foregoing description of the Short Term Incentive Plan does not purport to be complete and is subject to, and qualified
in its entirety by, reference to the complete text of the Short Term Incentive Plan, a copy of which is filed as Exhibit 10(m) to this
Annual Report on Form 10-K and incorporated by reference herein.
Termination of Certain Plans of Vectren
On February 26, 2019, the Board of Directors of Vectren terminated (i) the At Risk Compensation Plan, dated May 1, 2001,
as most recently amended and restated May 24, 2016, (ii) the Vectren Incentive Plan Guidelines and (iii) the Severance Plan for
Executive Officers, dated December 31, 2011, as most recently amended and restated February 21, 2017, the terminations of which
are effective as of February 26, 2019. With respect to the At Risk Compensation Plan and the Vectren Incentive Plan Guidelines,
there were no awards outstanding under each respective plan as of the termination. With respect to the Severance Plan for Executive
Officers, there were no participants under such plan upon the closing of the Merger.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
For CenterPoint Energy, the information called for by Item 10, to the extent not set forth in “Executive Officers” in Item 1,
will be set forth in the definitive proxy statement relating to CenterPoint Energy’s 2019 annual meeting of shareholders pursuant
to SEC Regulation 14A. Such definitive proxy statement relates to a meeting of shareholders involving the election of directors
and the portions thereof called for by Item 10 are incorporated herein by reference pursuant to Instruction G to Form 10-K.
For Houston Electric and CERC, the information called for by Item 10 is omitted pursuant to Instruction I(2) to Form 10-K
(Omission of Information by Certain Wholly-Owned Subsidiaries).
Item 11. Executive Compensation
For CenterPoint Energy, the information called for by Item 11 will be set forth in the definitive proxy statement relating to
CenterPoint Energy’s 2019 annual meeting of shareholders pursuant to SEC Regulation 14A. Such definitive proxy statement
relates to a meeting of shareholders involving the election of directors and the portions thereof called for by Item 11 are incorporated
herein by reference pursuant to Instruction G to Form 10-K.
For Houston Electric and CERC, the information called for by Item 11 is omitted pursuant to Instruction I(2) to Form 10-K
(Omission of Information by Certain Wholly-Owned Subsidiaries).
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
For CenterPoint Energy, the information called for by Item 12 will be set forth in the definitive proxy statement relating to
CenterPoint Energy’s 2019 annual meeting of shareholders pursuant to SEC Regulation 14A. Such definitive proxy statement
relates to a meeting of shareholders involving the election of directors and the portions thereof called for by Item 12 are incorporated
herein by reference pursuant to Instruction G to Form 10-K.
For CenterPoint Energy, the information called for by Item 14 will be set forth in the definitive proxy statement relating to
CenterPoint Energy’s 2019 annual meeting of shareholders pursuant to SEC Regulation 14A. Such definitive proxy statement
relates to a meeting of shareholders involving the election of directors and the portions thereof called for by Item 14 are incorporated
herein by reference pursuant to Instruction G to Form 10-K.
Aggregate fees billed to Houston Electric and CERC during the year ended December 31, 2018 and 2017 by their principal
accounting firm, Deloitte & Touche LLP, are set forth below.
Year Ended December 31,
2018
2017
Audit fees (1) ................................................................ $
Audit-related fees (2) ....................................................
Total audit and audit-related fees ..............................
Tax fees........................................................................
All other fees ...............................................................
Total fees ................................................................... $
Houston Electric
859,950
529,000
1,388,950
—
—
1,388,950
CERC
1,360,800
121,000
1,481,800
—
—
1,481,800
Houston Electric
819,364
$
516,000
1,335,364
—
—
1,335,364
$
$
$
CERC
1,296,576
106,000
1,402,576
—
—
1,402,576
$
$
(1) For 2018 and 2017, amounts include fees for services provided by the principal accounting firm relating to the integrated
audit of financial statements and internal control over financial reporting, statutory audits, attest services, and regulatory
filings.
(2) For 2018 and 2017, includes fees for consultations concerning financial accounting and reporting standards and various
agreed-upon or expanded procedures related to accounting records to comply with financial accounting or regulatory
reporting matters.
Houston Electric and CERC each are not required to have, and do not have, an audit committee.
167
168
PART IV
SIGNATURES
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements.
CenterPoint Energy
Report of Independent Registered Public Accounting Firm.............................................................................................
Statements of Consolidated Income for the Three Years Ended December 31, 2018......................................................
Statements of Consolidated Comprehensive Income for the Three Years Ended December 31, 2018............................
Consolidated Balance Sheets as of December 31, 2018 and 2017 ...................................................................................
Statements of Consolidated Cash Flows for the Three Years Ended December 31, 2018 ...............................................
Statements of Consolidated Changes in Equity for the Three Years Ended December 31, 2018.....................................
Houston Electric
Report of Independent Registered Public Accounting Firm.............................................................................................
Statements of Consolidated Income for the Three Years Ended December 31, 2018......................................................
Statements of Consolidated Comprehensive Income for the Three Years Ended December 31, 2018............................
Consolidated Balance Sheets as of December 31, 2018 and 2017 ...................................................................................
Statements of Consolidated Cash Flows for the Three Years Ended December 31, 2018 ...............................................
Statements of Consolidated Changes in Equity for the Three Years Ended December 31, 2018.....................................
CERC
Report of Independent Registered Public Accounting Firm.............................................................................................
Statements of Consolidated Income for the Three Years Ended December 31, 2018......................................................
Statements of Consolidated Comprehensive Income for the Three Years Ended December 31, 2018............................
Consolidated Balance Sheets as of December 31, 2018 and 2017 ...................................................................................
Statements of Consolidated Cash Flows for the Three Years Ended December 31, 2018 ...............................................
Statements of Consolidated Changes in Equity for the Three Years Ended December 31, 2018.....................................
Combined Notes to Consolidated Financial Statements..........................................................................................................
84
85
86
87
89
90
91
92
93
94
95
95
97
98
99
100
102
103
104
The financial statements of Enable Midstream Partners, LP required pursuant to Rule 3-09 of Regulation S-X are included in
this filing for CenterPoint Energy as Exhibit 99.1.
(a)(2) Financial Statement Schedules for the Three Years Ended December 31, 2018.
The following schedules are omitted by the Registrants because of the absence of the conditions under which they are required
or because the required information is included in the financial statements:
I, II, III, IV and V.
(a)(3) Exhibits.
See Index of Exhibits in CenterPoint Energy’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with
the SEC on February 28, 2019, which can be found on CenterPoint Energy’s website at www.centerpointenergy.com/investors
and at www.sec.gov.
Item 16. Form 10-K Summary
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrants have duly caused
this report to be signed on their behalf by the undersigned, thereunto duly authorized, in the City of Houston, the State of Texas,
on the 28th day of February, 2019.
CENTERPOINT ENERGY, INC.
(Registrant)
By: /s/ Scott M. Prochazka
Scott M. Prochazka
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated on February 28, 2019.
Signature
/s/ SCOTT M. PROCHAZKA
Scott M. Prochazka
/s/ WILLIAM D. ROGERS
William D. Rogers
/s/ KRISTIE L. COLVIN
Kristie L. Colvin
/s/ MILTON CARROLL
Milton Carroll
/s/ LESLIE D. BIDDLE
Leslie D. Biddle
/s/ SCOTT J. MCLEAN
Scott J. McLean
/s/ MARTIN H. NESBITT
Martin H. Nesbitt
/s/ THEODORE F. POUND
Theodore F. Pound
/s/ SUSAN O. RHENEY
Susan O. Rheney
/s/ PHILLIP R. SMITH
Phillip R. Smith
/s/ JOHN W. SOMERHALDER II
John W. Somerhalder II
/s/ PETER S. WAREING
Peter S. Wareing
Title
President, Chief Executive Officer and
Director (Principal Executive Officer and Director)
Executive Vice President and Chief
Financial Officer (Principal Financial Officer)
Senior Vice President and Chief
Accounting Officer (Principal Accounting Officer)
Executive Chairman of the Board of Directors
Director
Director
Director
Director
Director
Director
Director
Director
169
170
CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC
(Registrant)
Investor Information
By:
/s/ SCOTT M. PROCHAZKA
Scott M. Prochazka
Manager
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated on February 28, 2019.
Signature
Title
/s/ SCOTT M. PROCHAZKA
(Scott M. Prochazka)
/s/ WILLIAM D. ROGERS
(William D. Rogers)
/s/ KRISTIE L. COLVIN
(Kristie L. Colvin)
Manager and Chairman
(Principal Executive Officer)
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)
CENTERPOINT ENERGY RESOURCES CORP.
(Registrant)
By:
/s/ SCOTT M. PROCHAZKA
Scott M. Prochazka
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated on February 28, 2019.
Signature
Title
/s/ SCOTT M. PROCHAZKA
(Scott M. Prochazka)
Chairman, President and Chief Executive Officer
(Principal Executive Officer and Director)
/s/ WILLIAM D. ROGERS
(William D. Rogers)
/s/ KRISTIE L. COLVIN
(Kristie L. Colvin)
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)
Annual Meeting
The 2019 Annual Meeting of Shareholders will be held on
Thursday, April 25, at 9 a.m. CDT in the CenterPoint Energy
Tower auditorium, 1111 Louisiana Street, Houston, TX.
Shareholders who hold shares of CenterPoint Energy
common stock at the close of business on March 1, 2019,
will receive notice of the meeting and will be eligible to vote.
Cautionary Statement and Risk Factors
Certain disclosures in this annual report may be considered “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. The “cautionary statement” on page vii of CenterPoint Energy’s Form 10-K for the
fiscal year ended December 31, 2018, and the disclosure referenced therein should be read in conjunction with the forward-
looking statements. Our business is subject to risk and uncertainty. Please refer to our risk factors beginning on page 19 of
our Form 10-K.
Company Headquarters
Street Address
CenterPoint Energy, Inc.
1111 Louisiana Street
Houston, TX 77002
Mailing Address
P.O. Box 4567
Houston, TX 77210-4567
Telephone: 713-207-1111
CenterPointEnergy.com
Auditors
Independent Registered Public Accounting Firm
Deloitte & Touche LLP
Houston, TX
Investor Services
If you have questions about your CenterPoint Energy
investor account, please contact our Transfer Agent:
Broadridge Corporate Issuer Solutions, Inc.
P.O. Box 1342
Brentwood, NY 11717
http://shareholder.broadridge.com/cnp
Toll free: 800-231-6406
Investor Services, online tools and a list of publications
can be found on the company’s website at
Investors.CenterPointEnergy.com.
Investor Services representatives are available from
8 a.m. to 5 p.m. CDT, Monday through Friday, to assist
with questions about CenterPoint Energy common
stock or enrollment in the CenterPoint Energy Investor’s
Choice Plan.
The Investor’s Choice Plan provides easy, inexpensive
investment options, including direct purchase and sale of
CenterPoint Energy common stock; dividend reinvestment;
statement-based accounting; and monthly or quarterly
automatic investing by electronic transfer. You can become
a registered CenterPoint Energy shareholder by making an
initial investment of at least $250 through Investor’s Choice.
Information Requests
Download or call 888-468-3020 toll free for additional
copies of our:
2018 Annual Report and Form 10-K
2019 Proxy Statement
Dividend Payments
Common stock dividends are generally paid quarterly in
March, June, September and December. Dividends are
subject to declaration by the board of directors, which
establishes the amount of each quarterly common stock
dividend and fixes the record and payment dates.
Institutional Investors
Security analysts and other investment professionals
should contact David Mordy, Investor Relations director,
at 713-207-6500.
Stock Listing
CenterPoint Energy, Inc. common stock is traded under
the symbol CNP on the New York Stock Exchange and
Chicago Stock Exchange.
Reconciliation of Income and Diluted EPS to Adjusted Income and
Adjusted Diluted EPS Used in Providing Annual Earnings Guidance
Consolidated income available to common shareholders
and diluted EPS
Midstream Investments
Utility Operations
(1)
TWELVE MONTHS ENDED
DECEMBER 31, 2018
DECEMBER 31, 2017
DOLLARS
IN MILLIONS
DILUTED
EPS
DOLLARS
IN MILLIONS
DILUTED
EPS
$ 333
$ 0.74
$ 1,792
(223)
(0.49)
(675)
$ 4.13
(1.56)
110
0.25
1,117
2.57
Timing effects impacting CES(2):
Mark-to-market (gains) losses (net of taxes of $26 and $29)(3)
84
0.18
(50)
(0.12)
ZENS-related mark-to-market (gains) losses:
Marketable securities (net of taxes of $5 and $3)(3) (4)
Indexed debt securities (net of taxes of $49 and $17)(3) (5)
17
183
0.04
0.40
(4)
(32)
(0.01)
(0.01)
Utility operations earnings on an adjusted guidance basis
$ 394
$ 0.87
$ 1,031
$ 2.37
Adjusted income and adjusted diluted EPS used in providing
earnings guidance:
Utility Operations on a guidance basis
Midstream Investments
Consolidated on a guidance basis
Impacts associated with the Vectren merger:
Merger impacts other than the increase in share count
(3)
(net of taxes of $12)
Impact of increased share count on Utility EPS
Impact of increased share count on Midstream EPS
Total Merger Impacts
Gain from tax reform(6)
Utility
Midstream
Total gain from tax reform
$ 394
223
$ 0.87
0.49
$ 1,031
675
$ 2.37
1.56
$ 617
$
1.36
$ 1,706
$ 3.93
81
–
–
81
–
–
–
0.18
0.04
0.02
0.24
–
–
–
–
–
–
–
–
–
–
–
(599)
(514)
(1.38)
(1.18)
(1,113)
(2.56)
Utility Operations on a guidance basis, excluding impacts
associated with the Vectren merger and gain from tax reform
Midstream Investments excluding impacts associated with the
$ 475
$
1.09
$ 432
$ 0.99
Vectren merger and gain from tax reform
223
0.51
161
0.38
Consolidated on a guidance basis, excluding impacts associated
with the Vectren merger and gain from tax reform
$ 698
$
1.60
$ 593
$
1.37
(1) CenterPoint Energy earnings excluding Midstream Investments
(2) Energy Services segment
(3) Taxes are computed based on the impact removing such item would have on tax expense
(4) As of June 14, 2018, comprised of AT&T Inc. and Charter Communications, Inc. Prior to June 14, 2018, comprised of Time Warner Inc. and
Charter Communications, Inc. Results prior to January 31, 2018 also included Time Inc.
(5) 2018 includes amounts associated with the acquisition of Time Warner Inc. by AT&T Inc. as well as the Meredith tender offer for Time Inc.
common stock
(6) Tax reform legislation informally called the Tax Cuts and Jobs Act of 2017
Use of Non-GAAP Financial Measures
In addition to presenting its financial results in accordance with generally accepted accounting principles (GAAP), including presentation of income
available to common shareholders and diluted earnings per share, CenterPoint Energy also provides guidance based on adjusted income and adjusted
diluted earnings per share, which are non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical measure of a company’s
historical or future financial performance that excludes or includes amounts that are not normally excluded or included in the most directly comparable
GAAP financial measure. CenterPoint Energy’s adjusted income and adjusted diluted earnings per share calculation excludes from income available
to common shareholders and diluted earnings per share, respectively, the impact of ZENS and related securities and mark-to-market gains or losses
resulting from the company’s Energy Services business. CenterPoint Energy’s guidance for 2019 also does not reflect certain impacts associated with
the Vectren merger, which are integration and transaction-related fees and expenses, including severance and other costs to achieve anticipated cost
savings as a result of the merger and merger financing impacts in January, prior to the completion of the merger due to the issuance of debt and equity
securities to fund the merger that resulted in higher net interest expense and higher common stock share count. CenterPoint Energy is unable to
present a quantitative reconciliation of forward looking adjusted net income and adjusted diluted earnings per share because changes in the value of
ZENS and related securities and mark-to-market gains or losses resulting from the company’s Energy Services business are not estimable as they are
highly variable and difficult to predict due to various factors outside of management’s control. These excluded items, along with the excluded impacts
associated with the merger, could have a material impact on GAAP reported results for the applicable guidance period.
Management evaluates the company’s financial performance in part based on adjusted income and adjusted diluted earnings per share. Management
believes that presenting these non-GAAP financial measures enhances an investor’s understanding of CenterPoint Energy’s overall financial performance
by providing them with an additional meaningful and relevant comparison of current and anticipated future results across periods. The adjustments made
in these non-GAAP financial measures exclude items that Management believes does not most accurately reflect the company’s fundamental business
performance. These excluded items are reflected in the reconciliation tables of this news release, where applicable. CenterPoint Energy’s adjusted income
and adjusted diluted earnings per share non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to,
income available to common shareholders and diluted earnings per share, which respectively are the most directly comparable GAAP financial measures.
These non-GAAP financial measures also may be different than non-GAAP financial measures used by other companies.
171
Design: Savage Brands, Houston, TX
Company Headquarters
1111 Louisiana Street
Houston, TX 77002
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