MANAGEMENT’S DISCUSSION AND ANALYSIS  Effect of Interest Rates Input Costs and Commodity Pricing Pension Plan RISK MANAGEMENT AND RISK FACTORS We have an Enterprise Risk Management (ERM) Program that aims at balancing business risks and returns. An enterprise-wide approach  enables regulatory, strategic, operational and financial risks to be managed and aligned with our strategic goals. Our ERM program helps  us to better understand uncertainty and its potential impact on our strategic goals. It sets out the uniform principles, processes and criteria for  identifying, assessing, evaluating, treating, monitoring and communicating risks across all lines of business. It supports our Board of Directors’  corporate governance needs and the due diligence responsibilities of senior management.  While our philosophy is that risk management is the responsibility of all employees, the Board of Directors annually reviews our company’s risk  tolerances, risk management policies, processes and accountabilities. Twice per year, the Board of Directors reviews our risk profile, which  is the list of key risks prepared by senior management, and represents the greatest threats to meeting our strategic objectives. The Board of  Directors’ committees review risks relevant to their mandate at every meeting. The Audit and Finance Committee of our Board of Directors  annually reviews the status of our internal control framework.  Our President and Chief Executive Officer (CEO) has ultimate accountability for risk management. Our Leadership Team provides senior  management oversight of our risk portfolio and our risk management processes. The leadership team provides direction on the evolution of these processes and identifies priority areas of focus for risk assessment and mitigation planning. 34 HYDRO ONE ANNUAL REPORT 2013 In 2013, we contributed approximately $160 million to our pension plan and incurred $287 million in net periodic pension benefit costs,  based on an actuarial valuation effective December 31, 2011. Actuarial valuations are minimally required to be filed every three years.  We currently estimate our total annual pension contributions to be approximately $160 million for 2014, based on the projected level of  pensionable earnings and the same actuarial valuation effective December 31, 2011. Future minimum contributions beyond 2014 will be  based on an actuarial valuation effective no later than December 31, 2014. Our pension plan experienced positive returns of approximately  17.91% in 2013. Our pension obligation is impacted by interest rates. The 0.5% increase in the discount rate, from 4.25% at December 31, 2012 to 4.75% at December 31, 2013, resulted in a decrease in the pension obligation of $443 million and an increase to our post- retirement and post-employment benefit obligation of $126 million. Our pension obligation is also impacted by mortality assumptions. The  changes in mortality assumptions at December 31, 2013, compared to December 31, 2012, resulted in an increase in the pension obligation  of $380 million and an increase to our post-retirement and post-employment benefit obligation of $136 million. Contribution increases are  being implemented for all segments of our company’s active employees. In support of our ongoing work programs, we are required to procure materials, supplies and services. To manage our total costs, we regularly  establish security of supply, strategic material and services contracts, general outline agreements, and vendor alliances and we also manage a stock of commonly used items. Such arrangements are for a defined period of time and are monitored. Where advantageous, we develop long-term contractual relationships with suppliers to optimize the cost of goods and services and to ensure the availability and timely supply  of critical items. As a result of our strategic sourcing practices, we do not foresee any adverse impacts on our business from current economic  conditions in respect of adequacy and timing of supply and credit risk of our counterparties. Further, we have been able to realize significant  savings through our strategic sourcing initiatives. Changes in interest rates will impact the calculation of the revenue requirements upon which our rates are based. The first component impacted  by interest rates is our return on equity (ROE). The OEB-approved adjustment formula for calculating ROE will increase or decrease by 50% of  the change between the current Long Canada Bond Forecast and the risk-free rate established at 4.25% and 50% of the change in the spread  in 30-year “A”-rated Canadian utility bonds over the 30-year benchmark Government of Canada bond yield established at 1.415%. All other  things being equal, we estimate that a 1% decrease in the forecasted long-term Government of Canada bond yield used in determining our  ROE would reduce Hydro One Networks’ transmission and distribution businesses’ 2014 results of operations by approximately $20 million  and $10 million, respectively. As interest rates decline, there is more risk of a decline in our net income. The second component of revenue  requirement that would be impacted by interest rates is the return on debt. The difference between actual interest rates on new debt issuances  and those approved for return by the OEB would impact our results of operations. 