CenterPoint Energy 2014 Annual Report Download - page 77

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Because these instruments are fixed-
rate, they do not expose us to the risk of loss in earnings due to changes in market interest rates (please read
Note 12 to our consolidated financial statements). However, the fair value of these instruments would increase by approximately $232 million if
interest rates were to decline by 10% from their levels at December 31, 2014
. In general, such an increase in fair value would impact earnings
and cash flows only if we were to reacquire all or a portion of these instruments in the open market prior to their maturity.
As discussed in Note 10 to our consolidated financial statements, the ZENS obligation is bifurcated into a debt component and a derivative
component. The debt component of $152 million at December 31, 2014 was a fixed-
rate obligation and, therefore, did not expose us 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
$25 million if interest rates were to decline by 10% from levels at December 31, 2014
. Changes in the fair value of the derivative component, a
$541 million recorded liability at December 31, 2014
, are recorded in our Statements of Consolidated Income and, therefore, we are 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, 2014
levels, the fair value of the derivative component liability would increase by approximately
$9 million, which would be recorded as an unrealized loss in our Statements of Consolidated Income.
Equity Market Value Risk
We are exposed to equity market value risk through our ownership of 7.1 million shares of TW Common, 1.8 million shares of TWC
Common, 0.6 million shares of AOL Common and 0.9 million shares of Time Common, which we hold to facilitate our ability to meet our
obligations under the ZENS. Please read Note 10 to our consolidated financial statements for a discussion of our ZENS obligation. A decrease of
10% from the December 31, 2014
aggregate market value of these shares would result in a net loss of approximately $14 million, which would
be recorded as an unrealized loss in our Statements of Consolidated Income.
Commodity Price Risk From Non-Trading Activities
We use derivative instruments as economic hedges to offset the commodity price exposure inherent in our businesses. The stand-
alone
commodity risk created by these instruments, without regard to the offsetting effect of the underlying exposure these instruments are intended to
hedge, is described below. We measure the commodity risk of our non-
trading energy derivatives using a sensitivity analysis. The sensitivity
analysis performed on our non-
trading energy derivatives measures the potential loss in fair value based on a hypothetical 10% movement in
energy prices. At December 31, 2014 , the recorded fair value of our non-
trading energy derivatives was a net asset of $47 million (before
collateral), all of which is related to our Energy Services business segment. An increase of 10% in the market prices of energy commodities from
their December 31, 2014 levels would have decreased the fair value of our non-trading energy derivatives net asset by $7 million.
The above analysis of the non-
trading energy derivatives utilized for commodity price risk management purposes does not include the
favorable impact that the same hypothetical price movement would have on our non-
derivative physical purchases and sales of natural gas to
which the hedges relate. Furthermore, the non-
trading energy derivative portfolio is managed to complement the physical transaction portfolio,
reducing overall risks within limits. Therefore, the adverse impact to the fair value of the portfolio of non-
trading energy derivatives held for
hedging purposes associated with the hypothetical changes in commodity prices referenced above is expected to be substantially offset by a
favorable impact on the underlying hedged physical transactions.
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