CenterPoint Energy 2014 Annual Report Download - page 76

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 our plan.
Pension cost for 2015 , including the benefit restoration plan, is estimated to be $80 million, of which we expect $55 million to impact pre-
tax earnings, based on an expected return on plan assets of 6.50% and a discount rate of 4.05% as of December 31, 2014
. If the expected return
assumption were lowered by 0.50% from 6.50% to 6.00%, 2015 pension cost would increase by approximately $9 million.
As of December 31, 2014
, the pension plan projected benefit obligation, including the unfunded benefit restoration plan, exceeded plan
assets by $478 million. If the discount rate were lowered by 0.50% from 4.05% to 3.55%, the assumption change would increase our projected
benefit obligation by approximately $130 million and decrease our pension expense by approximately $3 million. The expected reduction in
pension expense 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 our Consolidated Balance Sheet by increasing the regulatory asset recorded as of December 31, 2014
by $113 million and
would result in a charge to comprehensive income in 2014 of $11 million, net of tax.
Future changes in plan asset returns, assumed discount rates and various other factors related to the pension plan will impact our future
pension expense and liabilities. We cannot predict with certainty what these factors will be.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Impact of Changes in Interest Rates and Energy Commodity Prices
We are exposed to various market risks. These risks arise from transactions entered into in the normal course of business and are inherent in
our consolidated financial statements. Most of the revenues and income from our 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:
Management has established comprehensive risk management policies to monitor and manage these market risks. We manage these risk
exposures through the implementation of our risk management policies and framework. We manage our commodity price risk exposures through
the use of derivative financial instruments and derivative commodity instrument contracts. During the normal course of business, we review our
hedging strategies and determine the hedging approach we deem appropriate based upon the circumstances of each situation.
Derivative instruments such as futures, forward contracts, swaps and options derive their value from underlying assets, indices, reference
rates or a combination of these factors. These derivative instruments include negotiated contracts, which are referred to as over-the-
counter
derivatives, and instruments that are listed and traded on an exchange.
Derivative transactions are entered into in our non-
trading operations to manage and hedge certain exposures, such as exposure to changes
in natural gas prices. We believe that the associated market risk of these instruments can best be understood relative to the underlying assets or
risk being hedged.
Interest Rate Risk
As of December 31, 2014 , we had outstanding long-
term debt, lease obligations and obligations under our ZENS that subject us to the risk
of loss associated with movements in market interest rates.
Our floating rate obligations aggregated $532 million and $118 million at December 31, 2014 and 2013, respectively.
As of December 31, 2014 and 2013 , we had outstanding fixed-
rate debt (excluding indexed debt securities) aggregating $8.2 billion and
$8.1 billion, respectively, in principal amount and having a fair value of $8.9 billion and $8.6 billion, respectively.
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•
Commodity price risk results from exposures to changes in spot prices, forward prices and price volatilities of commodities, such as
natural gas, natural gas liquids and other energy commodities.
•
Interest rate risk primarily results from exposures to changes in the level of borrowings and changes in interest rates.
•
Equity price risk results from exposures to changes in prices of individual equity securities.