BENEFITS:

Postretirement Benefit Plans

The 2012 postretirement benefits expense reflects the impact of curtailment accounting as postretirement benefits for all active participants who did not meet certain criteria were eliminated. The Company previously had postretirement health care and life insurance plans (other postretirement plans) that covered substantially all employees. The health care plans provided for cost sharing between the Company and its retirees in the form of retiree contributions, deductibles and coinsurance on the amount the Company paid annually to provide future retiree health care coverage under certain of these plans.

Obligations and Funded Status

Other postretirement benefit liabilities are accrued on an actuarial basis during the years an employee provides services. The following tables contain information at the dates indicated about the obligations and funded status of the Company’s other postretirement plans.



	Successor			Predecessor
	December 31, 2012			March 25, 2012		December 31, 2011
Change in benefit obligation:
Benefit obligation at beginning of period	$	93		$	88	$	69
Service cost	—			1		3
Interest cost	1			1		4
Amendments	16			—		—
Actuarial loss and other	4			3		13
Benefits paid, net	(1		)	—		(1		)
Curtailments	(75		)	—		—
Benefit obligation at end of period	$	38		$	93	$	88
Change in plan assets:
Fair value of plan assets at beginning of period	$	82		$	75	$	68
Return on plan assets and other	3			5		—
Employer contributions	6			2		8
Benefits paid, net	(1		)	—		(1		)
Fair value of plan assets at end of period	$	90		$	82	$	75

Amount (overfunded) underfunded at end of period ⁽¹⁾	$	(52	)	$	11	$	13

Amounts recognized in accumulated other comprehensive income (pre-tax basis) consist of:
Net actuarial loss	$	(1	)	$	—	$	23
Prior service cost	16			—		1
	$	15		$	—	$	24


⁽¹⁾	Underfunded balance is recognized as a non-current liability in the consolidated balance sheets. Overfunded balance is recognized as a non-current asset in the consolidated balance sheets.

Components of Net Periodic Benefit Cost

The following tables set forth the components of net periodic benefit cost of the Company’s postretirement benefit plan for the periods presented:



	Successor			Predecessor
	Period from Acquisition (March 26, 2012) to December 31, 2012			Period from January 1, 2012 to March 25, 2012			Years Ended December 31,
				Period from January 1, 2012 to March 25, 2012			2011			2010
Service cost	$	—		$	1		$	2		$	3
Interest cost	1			1			4			4
Expected return on plan assets	(3		)	(1		)	(3		)	(3		)
Prior service credit amortization	—			(1		)	(2		)	(2		)
Curtailment recognition⁽¹⁾	(11		)	—			—			—
Net periodic benefit cost	$	(13	)	$	—		$	1		$	2

⁽¹⁾

Subsequent to the Merger, the Company amended certain of its other postretirement employee benefit plans to prospectively restrict participation in the plans for certain active employees. The plan amendments resulted in the plans becoming currently over-funded and, accordingly, the Company recorded a gross pre-tax curtailment gain of $70 million, $59 million of which is subject to refund to customers; thus, the net curtailment gain recognition was $11 million.

The estimated prior service credit for other postretirement plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost during 2013 is $1 million.

Assumptions. The weighted-average discount rate used in determining benefit obligations was 3.51%, 4.24% and 4.26% in the successor and predecessor periods in 2012 and at December 31, 2011, respectively.

The weighted-average assumptions used in determining net periodic benefit cost for the periods presented are shown in the table below:



	Successor		Predecessor
	Period from Acquisition (March 26, 2012) to December 31, 2012		Period from January 1, 2012 to March 25, 2012		Years Ended December 31,
			Period from January 1, 2012 to March 25, 2012		2011		2010
Discount rate	3.64	%	4.26	%	5.54	%	6.00	%
Expected return on assets:
Tax exempt accounts	7.00	%	7.00	%	7.00	%	7.00	%
Taxable accounts	4.50	%	4.50	%	4.50	%	5.00	%

The Company employs a building block approach in determining the expected long-term rate of return on the plans’ assets with proper consideration for diversification and rebalancing. Historical markets are studied and long-term historical relationships between equities and fixed-income are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term market assumptions are determined. Peer data and historical returns are reviewed to check for reasonableness and appropriateness.

The assumed health care cost trend rates used to measure the expected cost of benefits covered by the plans are shown in the table below:



	Successor		Predecessor
	December 31, 2012		March 25, 2012		December 31, 2011
Health care cost trend rate assumed for next year	8.50	%	8.00	%	8.50	%
Rate to which the cost trend is assumed to decline (the ultimate trend rate)	4.50	%	4.75	%	4.75	%
Year that the rate reaches the ultimate trend rate	2020		2019		2019

Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:



	One Percentage Point Increase		One Percentage Point Decrease
Effect on accumulated postretirement benefit obligation	$	4	$	(3	)

Plan Assets. The Company’s overall investment strategy is to maintain an appropriate balance of actively managed investments with the objective of optimizing longer-term returns while maintaining a high standard of portfolio quality and achieving proper diversification. To achieve diversity within its other postretirement plan asset portfolio, the Company has targeted the following asset allocations: equity of 25% to 35%, fixed income of 65% to 75% and cash and cash equivalents of up to 10%. These target allocations are monitored by the Investment Committee of Southern Union’s Board of Directors in conjunction with an external investment advisor. On occasion, the asset allocations may fluctuate as compared to these guidelines as a result of Investment Committee actions.

The fair value of the Company’s other postretirement plan assets at the dates indicated by asset category is as follows:



	Successor		Predecessor
	December 31, 2012		December 31, 2011
Cash and cash equivalents	$	2	$	2
Mutual fund ⁽¹⁾	88		73
Total	$	90	$	75

⁽¹⁾

This fund of funds invests primarily in a diversified portfolio of equity, fixed income and short-term mutual funds. As of December 31, 2012, the fund was primarily comprised of approximately 17% large-cap U.S. equities, 3% small-cap U.S. equities, 10% international equities, 53% fixed income securities, 10% cash, and 7% in other investments. As of December 31, 2011, the fund was primarily comprised of approximately 19% large-cap U.S. equities, 2% small-cap U.S. equities, 10% international equities, 55% fixed income securities, 8% cash and 6% in other investments.

The other postretirement plan assets are classified as Level 1 assets within the fair-value hierarchy as their fair values are based on active market quotes. See Note 2 for information related to the framework used by the Company to measure the fair value of its other postretirement plan assets.

Contributions. The Company expects to contribute approximately $8 million to its other postretirement plans in 2013 and approximately $8 million annually thereafter until modified by rate case proceedings.

Benefit Payments. The Company’s estimate of expected benefit payments, which reflect expected future service, as appropriate, in each of the next five years and in the aggregate for the five years thereafter are shown in the table below:



Years	Expected Benefits Before Effect of Medicare Part D		Payments Medicare Part D Subsidy Receipts		Net
2013	$	3	$	—	$	3
2014	3		—		3
2015	3		—		3
2016	3		—		3
2017	3		—		3
2018 – 2022	12		2		10

The Medicare Prescription Drug Act provides for a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a prescription drug benefit that is at least actuarially equivalent to Medicare Part D.

Defined Contribution Plan

The Company sponsors a defined contribution savings plan (Savings Plan) that is available to all employees. The Company provided matching contributions of 100% of the first 5% of the participant’s compensation paid into the Savings Plan. Company contributions are 100% vested after five years of continuous service. Company contributions to the Savings Plan during the period from Acquisition (March 26, 2012) to December 31, 2012, the period from January 1, 2012 to March 25, 2012, and the years ended December 31, 2011 and 2010 were $3 million, $1 million, $5 million and $5 million, respectively.

In addition, the Company makes employer contributions to separate accounts, referred to as Retirement Power Accounts, within the defined contribution plan. The contribution amounts are determined as a percentage of compensation with the amount generally varying based on age and years of service. Company contributions are 100% vested after five years of continuous service. Company contributions to Retirement Power Accounts during the period from Acquisition (March 26, 2012) to December 31, 2012, the period from January 1, 2012 to March 25, 2012, and the years ended December 31, 2011 and 2010 were $2 million, $1 million, $6 million and $5 million, respectively.