CenterPoint Energy 2013 Annual Report Download - page 89

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67
term capital market assumptions, adjusted for investment fees and diversification effects, in addition to expected inflation. We
regularly review our actual asset allocation and periodically rebalance plan assets to reduce volatility and better match plan assets
and liabilities.
As of December 31, 2013, the projected benefit obligation was calculated assuming a discount rate of 4.80%, which is a 0.80%
increase from the 4.00% discount rate assumed in 2012. 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 our plan.
Pension cost for 2014, including the benefit restoration plan, is estimated to be $71 million, of which we expect $63 million
to impact pre-tax earnings, based on an expected return on plan assets of 7.00% and a discount rate of 4.80% as of
December 31, 2013. If the expected return assumption were lowered by 0.50% from 7.00% to 6.50%, 2014 pension cost would
increase by approximately $9 million.
As of December 31, 2013, the pension plan projected benefit obligation, including the unfunded benefit restoration plan,
exceeded plan assets by $350 million. If the discount rate were lowered by 0.50% from 4.80% to 4.30%, the assumption change
would increase our projected benefit obligation and 2014 pension expense by approximately $103 million and $5 million,
respectively. In addition, the assumption change would impact our Consolidated Balance Sheet by increasing the regulatory asset
recorded as of December 31, 2013 by $84 million and would result in a charge to comprehensive income in 2013 of $12 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:
• 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.
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, 2013, 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.