Employee Benefit Plans

(a) Pension Plans

Substantially all of Houston Electric’s employees participate in CenterPoint Energy’s non-contributory qualified defined benefit 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 Houston Electric 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. Houston Electric recognized pension expense of $44 million, $35 million and $26 million for the years ended December 31, 2016, 2015 and 2014, respectively.

In addition to the pension plan, Houston Electric 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 the 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 $1 million for each of the years ended December 31, 2016, 2015 and 2014.

(b) Savings Plan

Houston Electric 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 (the Code), and an Employee Stock Ownership Plan under Section 4975(e)(7) of the Code. 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. Houston Electric matches 100% of the first 6% of each employee’s compensation contributed. The matching contributions are fully vested at all times.

Participating employees may elect to invest all (prior to January 1, 2016) 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, 2016, 14,216,986 shares of CenterPoint Energy, Inc. common stock were held by the savings plan, which represented approximately 17% 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 Houston Electric the savings plan benefit expense related to Houston Electric’s employees. Savings plan benefit expense was $15 million, $14 million and $13 million for each of the years ended December 31, 2016, 2015 and 2014.

Houston Electric’s employees participate in CenterPoint Energy’s benefit 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. Such benefit costs are accrued over the active service period of employees. Effective January 1, 2017, members of the IBEW Local Union 66 who retire on or after January 1, 2017, and their dependents, will receive any retiree medical and prescription drug benefits exclusively through the NECA/IBEW Family Medical Care Plan pursuant to the terms of the renegotiated collective bargaining agreement entered into in May 2016.

Houston Electric is required to fund a portion of its obligations in accordance with rate orders. The net postretirement benefit cost includes the following components:



	Year Ended December 31,
	2016			2015			2014
	(in millions)
Service cost - benefits earned during the period	$	1		$	1		$	1
Interest cost on accumulated benefit obligation	10			13			14
Expected return on plan assets	(5		)	(6		)	(6		)
Amortization of transition obligation	—			—			4
Amortization of prior service credit	(4		)	(2		)	(2		)
Amortization of loss	1			3			1
Curtailment	(4		)	—			—
Net postretirement benefit cost (credit)	$	(1	)	$	9		$	12

Houston Electric used the following assumptions to determine net postretirement benefit costs:



	Year Ended December 31,
	2016		2015		2014
Discount rate	4.35	%	3.90	%	4.75	%
Expected return on plan assets	5.00	%	5.45	%	6.00	%

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

Following are reconciliations of Houston Electric’s beginning and ending balances of its postretirement benefit plan’s benefit obligation, plan assets and funded status for 2016 and 2015. The measurement dates for plan assets and obligations were December 31, 2016 and 2015.



	December 31,
	2016			2015
	(in millions)
Change in Benefit Obligation
Accumulated benefit obligation, beginning of year	$	283		$	347
Service cost	1			1
Interest cost	10			13
Benefits paid	(20		)	(17		)
Participant contributions	3			3
Medicare drug reimbursement	1			1
Plan amendment (1)	(65		)	(4		)
Actuarial (gain) loss	4			(61		)
Accumulated benefit obligation, end of year	$	217		$	283
Change in Plan Assets
Plan assets, beginning of year	$	110		$	115
Benefits paid	(20		)	(17		)
Employer contributions	10			9
Participant contributions	3			3
Actual investment return	5			—
Plan amendment (2)	(20		)	—
Plan assets, end of year	$	88		$	110
Amounts Recognized in Balance Sheets
Other liabilities-benefit obligations	$	(129	)	$	(173	)
Net liability, end of year	$	(129	)	$	(173	)
Actuarial Assumptions
Discount rate	4.15		%	4.35		%
Expected long-term return on assets	4.75		%	5.00		%
Healthcare cost trend rate assumed for the next year - Pre 65	5.75		%	6.00		%
Healthcare cost trend rate assumed for the next year - Post 65	10.65		%	5.50		%
Prescription drug cost trend rate assumed for the next year	10.75		%	11.00		%
Rate to which the cost trend rate is assumed to decline (ultimate trend rate)	4.50		%	5.00		%
Year that the healthcare rate reaches the ultimate trend rate	2024			2024
Year that the prescription drug rate reaches the ultimate trend rate	2024			2024

(1)

The Postretirement plan was amended during 2016 to change retiree medical coverage, effective January 1, 2017, as follows: (i) members of the IBEW Local Union 66 who retire on or after January 1, 2017, and their dependents, will receive any retiree medical and prescription drug coverage exclusively through the NECA/IBEW Family Medical Care Plan pursuant to the terms of the renegotiated collective bargaining agreement entered into in May 2016; and (ii) Medicare eligible post-65 retirees will receive coverage through a Medicare Advantage Program, an insured benefit, in lieu of the previous self-insured benefit. These changes resulted in a reduction in our Postretirement Plan liability of $65 million as of December 31, 2016.

(2)

In May 2016, Houston Electric entered into a renegotiated collective bargaining agreement with the IBEW Local Union 66 and amended the Houston Electric Union Postretirement Trust. The amendment resulted in a split of the trust into two segregated and restricted accounts, one holds assets for the benefit of current, retired on or before December 31, 2016, union retirees and one holds assets for the benefit of post-2016 union retirees who are now covered exclusively by the NECA/IBEW Family Medical Care Plan. Accordingly, $20 million was transferred to the account for post-2016 union retirees.

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 by a weighted-average return analysis of the targeted asset allocation of CenterPoint Energy’s plans and the expected real 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 5.75% and 10.65% for the pre-65 and post-65 retirees during 2017, respectively, and the prescription cost is assumed to increase to 10.75% during 2017, after which these rates decrease until reaching the ultimate trend rate of 4.50% in 2024.

Houston Electric does not have amounts recognized in accumulated other comprehensive income related to its postretirement benefit plans as of December 31, 2016 and 2015. Unrecognized costs were recorded as a regulatory asset because Houston Electric historically and currently recovers postretirement expenses in rates.

Assumed healthcare cost trend rates have a significant effect on the reported amounts for Houston Electric’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	$	10	$	10
Effect on total of service and interest cost	1		—

In managing the investments associated with the postretirement benefit plans, Houston Electric’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, Houston Electric has adopted and maintained the following asset allocation ranges for its postretirement benefit plans:



U.S. equity	13–23%
International equity	3–13%
Fixed income	69–79%
Cash	0–2%

The following tables present by level, within the fair value hierarchy, Houston Electric’s postretirement plan assets as of December 31, 2016 and 2015, by asset category as follows:



	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)	$	88	$	—	$	—	$	88
Total	$	88	$	—	$	—	$	88


(1)	73% of the amount invested in mutual funds was in fixed income securities; 19% was in U.S. equities and 8% was in international equities.



	Fair Value Measurements as of December 31, 2015
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total

Mutual funds (1)	$	110	$	—	$	—	$	110
Total	$	110	$	—	$	—	$	110


(1)	73% of the amount invested in mutual funds was in fixed income securities; 19% was in U.S. equities and 8% was in international equities.

Houston Electric expects to contribute $9 million to its postretirement benefits plan in 2017. The following benefit payments are expected to be paid by the postretirement benefit plan:



	Benefit Payments
	(in millions)
2017	$	11
2018	12
2019	13
2020	15
2021	16
2022-2026	90

(d) Postemployment Benefits

Houston Electric participates in CenterPoint Energy’s plan which provides postemployment benefits for certain former or inactive employees, their beneficiaries and covered dependents, after employment but before retirement (primarily health care and life insurance benefits for participants in the long-term disability plan). Houston Electric recorded a postemployment expense of $3 million, credit of $1 million and expense of $1 million for the years ended December 31, 2016, 2015 and 2014, respectively. Amounts relating to postemployment obligations included in Benefit Obligations in the accompanying Consolidated Balance Sheets as of both December 31, 2016 and 2015 were $6 million.

(e) Other Non-Qualified Plans

Houston Electric 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 Houston Electric. Houston Electric recorded benefit expense relating to these plans of $1 million in each of the years ended December 31, 2016, 2015 and 2014. Amounts relating to deferred compensation plans included in Benefit Obligations in the accompanying Consolidated Balance Sheets as of both December 31, 2016 and 2015 were $11 million.

(f) Other Employee Matters

As of December 31, 2016, Houston Electric had 2,738 full-time employees, of which approximately 51% were subject to a collective bargaining agreement. The collective bargaining agreement with the IBEW Local 66 expired in May of 2016. Houston Electric successfully negotiated the follow-on agreement in 2016. The new collective bargaining agreement with the IBEW Local 66 expires in May of 2020.