CenterPoint Energy 2013 Annual Report Download - page 120

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(8) Fair Value Measurements
Assets and liabilities that are recorded at fair value in the Consolidated Balance Sheets are categorized based upon the level
of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined below and directly related to
the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, are as follows:
Level 1: Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. The
types of assets carried at Level 1 fair value generally are exchange-traded derivatives and equity securities.
Level 2: Inputs, other than quoted prices included in Level 1, are observable for the asset or liability, either directly or indirectly.
Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are
observable for the asset or liability. Fair value assets and liabilities that are generally included in this category are derivatives
with fair values based on inputs from actively quoted markets. A market approach is utilized to value CenterPoint Energy’s
Level 2 assets or liabilities.
Level 3: Inputs are unobservable for the asset or liability, and include situations where there is little, if any, market activity
for the asset or liability. Unobservable inputs reflect CenterPoint Energy’s judgments about the assumptions market participants
would use in pricing the asset or liability since limited market data exists. CenterPoint Energy develops these inputs based
on the best information available, including CenterPoint Energy’s own data. A market approach is utilized to value CenterPoint
Energy’s Level 3 assets or liabilities. At December 31, 2013, CenterPoint Energy’ s Level 3 assets and liabilities are comprised
of physical forward contracts and options. Level 3 physical forward contracts are valued using a discounted cash flow model
which includes illiquid forward price curve locations (ranging from $3.79 to $4.94 per one million British thermal units (Btu))
as an unobservable input. Level 3 options are valued through Black-Scholes (including forward start) option models which
include option volatilities (ranging from 0 to 53%) as an unobservable input. CenterPoint Energy’s Level 3 derivative assets
and liabilities consist of both long and short positions (forwards and options) and their fair value is sensitive to forward prices
and volatilities. If forward prices decrease, CenterPoint Energy’s long forwards lose value whereas its short forwards gain
in value. If volatility decreases, CenterPoint Energy’s long options lose value whereas its short options gain in value.
CenterPoint Energy determines the appropriate level for each financial asset and liability on a quarterly basis and recognizes
transfers between levels at the end of the reporting period. For the year ended December 31, 2013, there were no transfers between
Level 1 and 2. CenterPoint Energy also recognizes purchases of Level 3 financial assets and liabilities at their fair market value
at the end of the reporting period.
The following tables present information about CenterPoint Energy’s assets and liabilities (including derivatives that are
presented net) measured at fair value on a recurring basis as of December 31, 2013 and 2012, and indicate the fair value hierarchy
of the valuation techniques utilized by CenterPoint Energy to determine such fair value.
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3) Netting Adjustments (1)
Balance at
December 31,
2013
(in millions)
Assets
Corporate equities.................................. $770$—$—$—$770
Investments, including money market
funds................................................... 61———61
Natural gas derivatives (2)..................... 533 5 (9)34
Total assets........................................ $ 836$ 33$ 5$ (9) $ 865
Liabilities
Indexed debt securities derivative ......... $—$455$—$—$455
Natural gas derivatives .......................... 127 2 (9)21
Total liabilities.................................. $1$482$2$
(9) $ 476
(1) Amounts represent the impact of legally enforceable master netting agreements that allow CenterPoint Energy to settle
positive and negative positions and also include cash collateral of less than $1 million posted with the same counterparties.