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 $33 million, $35 million and $24 million for the years ended December 31, 2017, 2016 and 2015, 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 qualified 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, $3 million and $2 million for the years ended December 31, 2017, 2016 and 2015, respectively.

(b) Savings Plan

CERC participates in CenterPoint Energy’s tax-qualified employee savings plan, which includes a cash or deferred arrangement under Section 401(k) of the Internal Revenue Code of 1986, as amended (the Code), and an employee stock ownership plan under Section 4975(e)(7) of the Code. Under the plan, participating employees may make pre-tax or Roth contributions up to 50%, and after tax contributions up to 16%, of their eligible compensation, not to exceed certain federally mandated limits. CERC matches 100% of the first 6% of each employee’s compensation contributed. The matching contributions are fully vested at all times.

Prior to January 1, 2016, participating employees could elect to invest all or a portion of their contributions to the plan in CenterPoint Energy, Inc. common stock, to have dividends reinvested in additional shares or to receive dividend payments in cash on any investment in CenterPoint Energy, Inc. common stock, and to transfer all or part of their investment in CenterPoint Energy, Inc. common stock to other investment options offered by the plan.

Effective January 1, 2016, the savings plan was amended to limit the percentage of future contributions that could be invested in CenterPoint Energy, Inc. common stock to 25% and to prohibit transfers of account balances where the transfer would result in more than 25% of a participant’s total account balance invested in CenterPoint Energy, Inc. common stock.

The savings plan has significant holdings of CenterPoint Energy, Inc. common stock. As of December 31, 2017, 12,806,085 shares of CenterPoint Energy, Inc. common stock were held by the savings plan, which represented approximately 16% of its investments. Given the concentration of the investments in CenterPoint Energy, Inc. common stock, the savings plan and its participants have market risk related to this investment.

CenterPoint Energy allocates to CERC the savings plan benefit expense related to CERC’s employees. Savings plan benefit expense was $17 million, $16 million and $14 million for the years ended December 31, 2017, 2016 and 2015, 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 hired before January 1, 2018 become eligible for these benefits if they have met certain age and service requirements at retirement, as defined in the plans. Employees hired on or after January 1, 2018 are not eligible for these benefits. 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,
	2017			2016			2015
	(in millions)
Service cost — benefits earned during the period	$	1		$	1		$	1
Interest cost on accumulated benefit obligation	5			4			5
Expected return on plan assets	(1		)	(1		)	(1		)
Amortization of prior service cost	1			—			1
Amortization of net loss	—			1			1
Curtailment (1)	—			(1		)	—
Net postretirement benefit cost	$	6		$	4		$	7


(1)	Effective January 1, 2017, a change in retiree medical coverage for Medicare eligible post-65 retirees from self-insured to a Medicare Advantage Program, an insured benefit, was implemented. A curtailment gain was recognized in October 2016 related to this implementation.

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



	Year Ended December 31,
	2017		2016		2015
Discount rate	4.15	%	4.35	%	3.90	%
Expected return on plan assets	3.60	%	3.95	%	4.05	%

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 2017 and 2016. The measurement dates for plan assets and obligations were December 31, 2017 and 2016.



	December 31,
	2017			2016
	(in millions, except for actuarial assumptions)
Change in Benefit Obligation
Accumulated benefit obligation, beginning of year	$	115		$	101
Service cost	1			1
Interest cost	5			4
Benefits paid	(9		)	(13		)
Participant contributions	3			5
Medicare reimbursement	—			1
Plan amendment (1)	—			10
Actuarial (gain) loss	(6		)	6
Accumulated benefit obligation, end of year	$	109		$	115
Change in Plan Assets
Plan assets, beginning of year	$	25		$	25
Benefits paid	(9		)	(13		)
Employer contributions	5			7
Participant contributions	3			5
Actual investment return	2			1
Plan assets, end of year	$	26		$	25
Amounts Recognized in Balance Sheets
Current liabilities-other	$	(4	)	$	(4	)
Other liabilities-benefit obligations	(79		)	(86		)
Net liability, end of year	$	(83	)	$	(90	)
Actuarial Assumptions
Discount rate	3.60		%	4.15		%
Expected long-term return on assets	3.85		%	3.60		%
Medical cost trend rate assumed for the next year - Pre-65	6.15		%	5.75		%
Medical/prescription drug cost trend rate assumed for the next year - Post-65	23.85		%	10.65		%
Prescription drug cost trend rate assumed for the next year - Pre-65	9.85		%	10.75		%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)	4.50		%	4.50		%
Year that the cost trend rates reach the ultimate trend rate - Pre-65	2026			2024
Year that the cost trend rates reach the ultimate trend rate - Post-65	2024			2024


(1)	The postretirement plan was amended in 2016 to change the retiree medical coverage for Medicare eligible post-65 retirees from self-insured to a Medicare Advantage Program, an insured benefit which became effective January 1, 2017.

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 and prescription drug costs are assumed to increase to 6.15% and 9.85%, respectively, for the pre-65 retirees, and the combined medical/prescription drug cost increase is assumed to be 23.85% for the post-65 retirees during 2018, after which these rates decrease until reaching the ultimate trend rate of 4.50% in 2026 and 2024 for the pre-65 and post-65 retirees, respectively.

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



	Year Ended December 31,
	2017			2016
	(in millions)
Beginning Balance	$	3		$	9
Other comprehensive income (loss) before reclassifications (1)	7			(10		)
Amounts reclassified from accumulated other comprehensive income:
Prior service cost (2)	1			—
Tax benefit (expense)	(4		)	4
Net current period other comprehensive income (loss)	4			(6		)
Ending Balance	$	7		$	3


(1)	Total other comprehensive income (loss) related to the remeasurement of pension, postretirement and other postemployment plans.


(2)	This accumulated other comprehensive component is included in the computation of net periodic cost.

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



	December 31,
	2017			2016
	(in millions)
Unrecognized actuarial loss (gain)	$	(2	)	$	5
Unrecognized prior service cost	6			7
Total recognized in accumulated other comprehensive loss	4			12
Less: deferred tax benefit (1)	(11		)	(15		)
Net amount recognized in accumulated other comprehensive income	$	(7	)	$	(3	)


(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 2017 are as follows:



	Postretirement Benefits
	(in millions)
Net gain	$	(7	)
Amortization of prior service cost	(1		)
Total recognized in other comprehensive income	$	(8	)

The total expense recognized in net periodic costs and other comprehensive income was $2 million for postretirement benefits for the year ended December 31, 2017.

CERC expects to recognize $1 million of amortization of prior service cost in accumulated other comprehensive loss as components of net periodic benefit cost during 2018. Upon adoption of ASU 2017-07 on January 1, 2018, these amounts will be recognized as Other Income (Expense) in CERC’s Statements of Consolidated Income.

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 postretirement benefit obligation	$	3	$	2
Effect on 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, 2017:



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

The fair values of CERC’s postretirement plan assets at December 31, 2017 and 2016, by asset category are as follows:



	Fair Value Measurements as of December 31, 2017
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total

Mutual funds (1)	$	26	$	—	$	—	$	26
Total	$	26	$	—	$	—	$	26


(1)	71% of the amount invested in mutual funds was in fixed income securities; 21% was in U.S. equities and 8% was in international equities.



	Fair Value Measurements as of December 31, 2016
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total

Mutual funds (1)	$	25	$	—	$	—	$	25
Total	$	25	$	—	$	—	$	25


(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 $5 million to its postretirement benefits plan in 2018. The following benefit payments are expected to be made by the postretirement benefit plan:



	Benefit Payments
	(in millions)
2018	$	6
2019	6
2020	7
2021	8
2022	8
2023-2027	42

(d) Postemployment Benefits

CERC participates in CenterPoint Energy’s plan that provides postemployment benefits for certain 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 $4 million, $3 million and $4 million for the years ended December 31, 2017, 2016 and 2015, respectively. Amounts relating to postemployment benefits included in Benefit Obligations in the accompanying Consolidated Balance Sheets as of both December 31, 2017 and 2016 was $14 million.

(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 or upon termination, retirement or death. Benefit payments are made from the general assets of CERC. During 2017, 2016 and 2015, 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 as of both December 31, 2017 and 2016 were $3 million.

(f) Other Employee Matters

As of December 31, 2017, approximately 33% of CERC’s employees were covered by collective bargaining agreements. The collective bargaining agreement with the Professional Employees International Union Local 12, covering approximately 3% of CERC’s employees, will expire in May of 2021. This agreement was last negotiated in 2016.

The collective bargaining agreements with Gas Workers Union, Local 340 and the IBEW Local 949, covering approximately 19% of CERC’s employees, will expire in April and December of 2020, respectively. These two agreements were last negotiated in 2015.

The two collective bargaining agreements with the United Steelworkers Union, Locals 13-227 and 13-1, which cover approximately 12% of CERC’s employees, were successfully negotiated in 2017. The new agreements will expire in June and July of 2022 for the Local 13-227 and Local 13-1, respectively.