Employee Benefit Plans

(a) Pension Plans

Substantially all of CERC’s employees participate in CenterPoint Energy’s qualified non-contributory defined benefit pension plan. Under the cash balance formula, participants accumulate a retirement benefit based upon 5% of eligible earnings and accrued interest.

CenterPoint Energy’s funding policy is to review amounts annually in accordance with applicable regulations in order to achieve adequate funding of projected benefit obligations. Pension expense is allocated to CERC based on covered employees. This calculation is intended to allocate pension costs in the same manner as a separate employer plan. Assets of the plan are not segregated or restricted by CenterPoint Energy’s participating subsidiaries. CERC recognized pension expense of $27 million, $29 million and $32 million for the years ended December 31, 2014, 2013 and 2012, respectively.

In addition to the plan, CERC participates in CenterPoint Energy’s non-qualified benefit restoration plans, which allow participants to receive the benefits to which they would have been entitled under CenterPoint Energy’s non-contributory pension plan except for federally mandated limits on qualified plan benefits or on the level of compensation on which qualified plan benefits may be calculated. The expense associated with the non-qualified pension plan was $2 million for each of the years ended December 31, 2014, 2013 and 2012, respectively.

(b) Savings Plan

CERC participates in CenterPoint Energy’s qualified savings plan, which includes a cash or deferred arrangement under Section 401(k) of the Internal Revenue Code of 1986, as amended. Under the plan, participating employees may contribute a portion of their compensation, on a pre-tax or after-tax basis, generally up to a maximum of 50% of eligible compensation. CERC matches 100% of the first 6% of each employee’s compensation contributed. The matching contributions are fully vested at all times. CenterPoint Energy allocates to CERC the savings plan benefit expense related to CERC’s employees. Savings plan benefit expense was $20 million, $19 million and $18 million for the years ended December 31, 2014, 2013 and 2012, respectively.

CERC’s employees participate in CenterPoint Energy’s plans, which provide certain healthcare and life insurance benefits for retired employees on both a contributory and non-contributory basis. Employees become eligible for these benefits if they have met certain age and service requirements at retirement, as defined in the plans. Under plan amendments effective in early 1999, healthcare benefits for future retirees were changed to limit employer contributions for medical coverage. Such benefit costs are accrued over the active service period of employees. CERC is required to fund a portion of its obligations in accordance with rate orders. All other obligations are funded on a pay-as-you-go basis.

The net postretirement benefit cost includes the following components:



	Year Ended December 31,
	2014			2013			2012
	(in millions)
Service cost — benefits earned during the period	$	1		$	1		$	1
Interest cost on accumulated benefit obligation	5			5			5
Expected return on plan assets	(1		)	(1		)	(1		)
Amortization of prior service cost	1			1			2
Amortization of net loss	1			2			3
Net postretirement benefit cost	$	7		$	8		$	10

CERC used the following assumptions to determine net postretirement benefit costs:



	Year Ended December 31,
	2014		2013		2012
Discount rate	4.75	%	3.90	%	4.80	%
Expected return on plan assets	3.10	%	3.10	%	3.10	%

In determining net periodic benefits cost, CERC uses fair value, as of the beginning of the year, as its basis for determining expected return on plan assets.

Following are reconciliations of CERC’s beginning and ending balances of its postretirement benefit plan’s benefit obligation, plan assets and funded status for 2014 and 2013. The measurement dates for plan assets and obligations were December 31, 2014 and 2013.



	December 31,
	2014			2013
	(in millions, except for actuarial assumptions)
Change in Benefit Obligation
Accumulated benefit obligation, beginning of year	$	116		$	133
Service cost	1			1
Interest cost	5			5
Benefits paid	(13		)	(13		)
Participant contributions	4			4
Medicare reimbursement	2			2
Plan amendment	1			—
Curtailment	(2		)	—
Actuarial (gain) loss	12			(16		)
Accumulated benefit obligation, end of year	$	126		$	116
Change in Plan Assets
Plan assets, beginning of year	$	26		$	24
Benefits paid	(13		)	(13		)
Employer contributions	8			9
Participant contributions	4			4
Actual investment return	1			2
Plan assets, end of year	$	26		$	26
Amounts Recognized in Balance Sheets
Current liabilities-other	$	(7	)	$	(7	)
Other liabilities-benefit obligations	(93		)	(83		)
Net liability, end of year	$	(100	)	$	(90	)
Actuarial Assumptions
Discount rate	3.90		%	4.75		%
Expected long-term return on assets	4.00		%	3.10		%
Healthcare cost trend rate assumed for the next year - Pre 65	7.25		%	7.00		%
Healthcare cost trend rate assumed for the next year - Post 65	8.50		%	7.50		%
Prescription cost trend rate assumed for the next year	6.50		%	7.00		%
Rate to which the cost trend rate is assumed to decline (ultimate trend rate)	5.00		%	5.50		%
Year that the healthcare rate reaches the ultimate trend rate	2024			2018
Year that the prescription drug rate reaches the ultimate trend rate	2024			2018

The discount rate assumption was determined by matching the projected cash flows of CenterPoint Energy’s plans against a hypothetical yield curve of high-quality corporate bonds represented by a series of annualized individual discount rates from one-half to 99 years.

The expected rate of return assumption was developed using the targeted asset allocation of CenterPoint Energy’s plans and the expected return for each asset class, based on the long-term capital market assumptions, adjusted for investment fees and diversification effects, in addition to expected inflation.

For measurement purposes, medical costs are assumed to increase to 7.25% and 8.50% for the pre-65 and post-65 retirees, respectively during 2015, and the prescription cost is assumed to increase 6.50% during 2015, after which these rates decrease until reaching the ultimate trend rate of 5.00% in 2024.

CERC’s changes in accumulated comprehensive income (loss) related to postretirement and other postemployment plans are as follows (in millions):



	Year Ended December 31,
	2014			2013
Beginning Balance	$	5		$	(1	)
Other comprehensive income (loss) before reclassifications (1)	(5		)	10
Amounts reclassified from accumulated other comprehensive income:
Prior service cost (2)	—			1
Actuarial gains (2)	—			1
Total reclassifications from accumulated other comprehensive income	—			2
Tax expense	1			(6		)
Net current period other comprehensive income (loss)	(4		)	6
Ending Balance	$	1		$	5

________________


(1)	Total other comprehensive income related to the re-measurement of pension, postretirement and other postemployment plans.


(2)	These accumulated other comprehensive components are included in the computation of net periodic cost.

Amounts recognized in accumulated other comprehensive (income) loss consist of the following:



	December 31,
	2014			2013
	(in millions)
Unrecognized actuarial loss	$	13		$	9
Unrecognized prior service cost	2			1
Total recognized in accumulated other comprehensive loss	15			10
Less: deferred tax benefit (1)	(16		)	(15		)
Net amount recognized in accumulated other comprehensive (income) loss	$	(1	)	$	(5	)

________________


(1)	CERC’s postretirement benefit obligation is reduced by the impact of previously non-taxable government subsidies under the Medicare Prescription Drug Act. Because the subsidies were non-taxable, the temporary difference used in measuring the deferred tax impact was determined on the unrecognized losses excluding such subsidies.

The changes in plan assets and benefit obligations recognized in other comprehensive loss during 2014 are as follows:



	Postretirement Benefits
	(in millions)
Net loss	$	(4	)
Amortization of prior service cost	(1		)
Total recognized in other comprehensive loss	$	(5	)

The total expense recognized in net periodic costs and other comprehensive loss was $12 million for postretirement benefits for the year ended December 31, 2014.

The amounts in accumulated other comprehensive loss expected to be recognized as components of net periodic benefit cost during 2015 are as follows:



	Postretirement Benefits
	(in millions)
Unrecognized actuarial loss	$	1
Unrecognized prior service cost	—
Amounts in accumulated other comprehensive loss to be recognized as net periodic cost	$	1

Assumed healthcare cost trend rates have a significant effect on the reported amounts for CERC’s postretirement benefit plans. A 1% change in the assumed healthcare cost trend rate would have the following effects:



	1% Increase		1% Decrease
	(in millions)
Effect on the postretirement benefit obligation	$	3	$	3
Effect on the total of service and interest cost	—		—

In managing the investments associated with the postretirement benefit plan, CERC’s objective is to preserve and enhance the value of plan assets while maintaining an acceptable level of volatility. These objectives are expected to be achieved through an investment strategy that manages liquidity requirements while maintaining a long-term horizon in making investment decisions and efficient and effective management of plan assets.

As part of the investment strategy discussed above, CERC maintained the following asset allocation ranges for its postretirement benefit plan as of December 31, 2014:



U.S. equity	15-25%
International equity	2-12%
Fixed income	68-78%
Cash	0-2%

The fair values of CERC’s postretirement plan assets at December 31, 2014 and 2013, by asset category are as follows:



	Fair Value Measurements at December 31, 2014 (in millions)
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Mutual funds (1)	$	26	$	26	$	—	$	—
Total	$	26	$	26	$	—	$	—

________________


(1)	70% of the amount invested in mutual funds was in fixed income securities; 23% was in U.S. equities and 7% was in international equities.



	Fair Value Measurements at December 31, 2013 (in millions)
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Mutual funds (1)	$	26	$	26	$	—	$	—
Total	$	26	$	26	$	—	$	—

________________


(1)	73% of the amount invested in mutual funds was in fixed income securities; 20% was in U.S. equities and 7% was in international equities.

CERC expects to contribute $7 million to its postretirement benefits plan in 2015. The following benefit payments are expected to be made by the postretirement benefit plan:



	Postretirement Benefit Plan
	Benefit Payments		Medicare Subsidy Receipts
	(in millions)
2015	$	10	$	(2	)
2016	11		(2		)
2017	11		(2		)
2018	12		(2		)
2019	12		(2		)
2020-2024	65		(17		)

(d) Postemployment Benefits

CERC participates in CenterPoint Energy’s plan that provides postemployment benefits for former or inactive employees, their beneficiaries and covered dependents, after employment but before retirement (primarily healthcare and life insurance benefits for participants in the long-term disability plan). CERC recorded postemployment benefit expense of $2 million, $1 million and $5 million for the years ended December 31, 2014, 2013 and 2012, respectively. Amounts relating to postemployment benefits included in “Benefit Obligations” in the accompanying Consolidated Balance Sheets at December 31, 2014 and 2013, were $12 million and $13 million, respectively.

(e) Other Non-Qualified Plans

CERC participates in CenterPoint Energy’s deferred compensation plans that provide benefits payable to directors, officers and certain key employees or their designated beneficiaries at specified future dates, upon termination, retirement or death. Benefit payments are made from the general assets of CERC. During 2014, 2013 and 2012, the benefit expense relating to these plans was less than $1 million each year. Amounts relating to deferred compensation plans included in “Benefit Obligations” in the accompanying Consolidated Balance Sheets at both December 31, 2014 and 2013 were $3 million.

(f) Other Employee Matters

As of December 31, 2014, approximately 26% of CERC’s employees were covered by collective bargaining agreements. The collective bargaining agreements with the Gas Workers Local Union 340 and International Brotherhood of Electrical Workers Local 949 in Minnesota, which collectively cover approximately 14% of CERC’s employees, are scheduled to expire in April and December 2015, respectively. CERC believes it has good relationships with these bargaining units and expects to negotiate new agreements in 2015.