7. RETIREMENT AND OTHER EMPLOYEE BENEFITS

We record retirement benefits in accordance with the ASC guidance on accounting for pension and other postretirement benefits, and have recorded the appropriate liabilities to reflect the unfunded status of our benefit plans, with offsetting entries to a regulatory asset, because we believe it is probable the unfunded amount of these plans will be afforded rate recovery. Additionally, the MPSC agreed that the effects of purchase accounting entries related to pension and other post-retirement benefits would be recoverable in future rate proceedings. These amounts, which are related to EDG, were recorded as regulatory assets and are being amortized. The tax effects of these entries are reflected as deferred tax assets and liabilities and regulatory liabilities.

Annually we evaluate the discount rate, retirement age, compensation rate increases, expected return on plan assets, healthcare cost trend rate, and other actuarial assumptions related to pension benefit and post-retirement medical plan. We utilize an interest rate yield curve to determine an appropriate discount rate. The yield curve is constructed based on the yields on over 500 high-quality, non-callable corporate bonds with maturities between zero and thirty years. A theoretical spot rate curve constructed from this yield curve is then used to discount the annual benefit cash flows of the Empire pension plan and develop a single point discount rate matching the plan's payout structure. In evaluating these assumptions, many factors are considered, including, current market conditions, asset allocations, changes in demographics and the views of leading financial advisors and economists. In evaluating the expected retirement age assumption, we consider the retirement ages of past employees eligible for pension and medical benefits together with expectations of future retirement ages. It is reasonably possible that changes in these assumptions will occur in the near term and, due to the uncertainties inherent in setting assumptions, the effect of such changes could be material to the Company's consolidated financial statements. A roll forward technique is used to value the year ending pension obligations. The roll forward technique values the year-end obligation by rolling forward the beginning-of-year obligation using the demographic assumptions disclosed below. The economic assumptions are updated as of the end of the year. All of the benefit plans have been measured as of December 31, 2014, consistent with previous years. See Note 1.

Pensions

Our noncontributory defined benefit pension plan includes all employees meeting minimum age and service requirements. Effective on January 1, 2014, the plan was amended to include a cash balance benefit formula. Employees hired on or after January 1, 2014 will accrue benefits based on a cash balance methodology. Employees hired prior to January 1, 2014 were given a one-time option to convert to the cash balance methodology, or remain with our traditional average annual basic earnings formula, by December 31, 2014. Both benefit formulas allow for a lump sum distribution of vested benefits. Lump sum distributions totaled approximately $9.0 million and $7.0 million during 2014 and 2013, respectively, and did not require settlement accounting according to ASC 715.

Annual contributions to the plan are at least equal to the greater of either minimum funding requirements of ERISA or the accrued cost of the Plan, as required by the Missouri Public Service Commission. We also have a supplemental retirement program ("SERP") for designated officers of the Company, which we fund from Company funds as the benefits are paid.

Our net pension liability increased $20.6 million in 2014, which was recorded as an increase in regulatory assets as we believe it is probable of recovery through customer rates based on rate orders received in our jurisdictions. The increase in the liability is primarily due to a significant actuarial loss resulting from decreases in discount rates and the adoption of a new mortality table. Our contribution is estimated to be approximately $12.8 million for 2015. We expect future pension funding commitments to continue at least at the level of our accrued cost, as required by our regulator. The actual minimum funding requirements will be determined based on the results of the actuarial valuations and, in the case of 2016, the performance of our pension assets during 2015.

Expected benefit payments are as follows (in millions):

Year	Payments from Trust		Payments from Company Funds
2015	$	25.0	$	0.5
2016		22.0		0.5
2017		22.1		0.5
2018		20.8		0.5
2019		19.5		0.5
2020 – 2024		97.3		3.0

Other Postretirement Benefits (OPEB)

We provide certain healthcare and life insurance benefits to eligible retired employees, their dependents and survivors through trusts we have established. Participants generally become eligible for retiree healthcare benefits after reaching age 55 with 5 years of service. Employees hired after January 1, 2014 will be offered unsubsidized retiree healthcare benefits upon retirement.

Our net liability increased $19.9 million in 2014, which was recorded as an increase in regulatory assets as we believe it is probable of recovery through customer rates based on rate orders received in our jurisdictions. The increase in the liability is primarily due to a significant actuarial loss resulting from decreases in discount rates and the adoption of a new mortality table. Our funding policy is to contribute annually an amount at least equal to the actuarial cost of postretirement benefits. We expect to be required to fund approximately $5.0 million in 2015.

Estimated benefit payments are as follows (in millions):

Year	Payments from Trust		Expected Federal Subsidy		Payments from Company Funds
2015	$	2.8	$	0.3	$	0.1
2016		3.1		0.4		0.2
2017		3.4		0.4		0.1
2018		3.7		0.5		0.2
2019		4.0		0.5		0.1
2020 – 2024		24.4		3.3		0.8

The following tables set forth the Company's benefit plans' projected benefit obligations, the fair value of the plans' assets and the funded status (in thousands).

Reconciliation of Projected Benefit Obligations:

	Pension						SERP						OPEB
	2014			2013			2014			2013			2014			2013
Benefit obligation at beginning of year	$	225,131		$	248,004		$	7,108		$	6,365		$	85,332		$	94,738
Service cost		6,467			7,454			153			135			2,601			2,941
Interest cost		10,819			10,063			387			315			4,360			3,827
Amendments		(7,753	)					(45	)					—
Net actuarial (gain)/loss		36,742			(23,300	)		1,890			604			20,347			(12,767	)
Plan participant's contribution		—			—			—			—			850			949
Benefits and expenses paid		(19,527	)		(17,090	)		(338	)		(311	)		(3,897	)		(4,396	)
Federal subsidy		—			—			—			—			306			40

Benefit obligation at end of year	$	251,879		$	225,131		$	9,155		$	7,108		$	109,899		$	85,332

Reconciliation of Fair Value of Plan Assets:

	Pension						SERP				OPEB
	2014			2013			2014		2013		2014			2013
Fair value of plan assets at beginning of year	$	186,547		$	160,175		$	—	$	—	$	79,098		$	67,667
Actual return on plan assets — gain/(loss)		14,319			27,260			—		—		5,030			10,361
Employer contribution		11,335			16,202			—		—		2,258			4,360
Benefits paid		(19,527	)		(17,090	)		—		—		(3,707	)		(4,229	)
Plan participant's contribution		—			—			—		—		804			901
Federal subsidy		—			—			—		—		293			38

Fair value of plan assets at end of year	$	192,674		$	186,547		$	—	$	—	$	83,776		$	79,098

Reconciliation of Funded Status:

	Pension						SERP						OPEB
	2014			2013			2014			2013			2014			2013
Fair value of plan assets	$	192,674		$	186,547		$	—		$	—		$	83,776		$	79,098
Projected benefit obligations		(251,879	)		(225,131	)		(9155	)		(7,108	)		(109,899	)		(85,332	)

Funded status	$	(59,205	)	$	(38,584	)	$	(9,155	)	$	(7,108	)	$	(26,123	)	$	(6,234	)

The employee pension plan accumulated benefit obligation at December 31, 2014 and 2013 is presented in the following table (in thousands):

	Pension Benefits				SERP
	2014		2013		2014		2013
Accumulated benefit obligation	$	227,928	$	201,258	$	7,160	$	5,702

Amounts recognized in the balance sheet consist of (in thousands):

	Pension				SERP				OPEB
	2014		2013		2014		2013		2014		2013
Accounts Payable and Accrued Liabilities	$	—	$	—	$	481	$	372	$	139	$	147
Pension and other postretirement benefit obligation	$	59,205	$	38,584	$	8,674	$	6,736	$	25,984	$	6,087

Net periodic benefit pension cost for 2014, 2013 and 2012, some of which is capitalized as a component of labor cost and some of which is deferred as a regulatory asset (see Note 3), is comprised of the following components (in thousands):

Net Periodic Pension Benefit Cost:

	Pension									OPEB
	2014			2013			2012			2014			2013			2012
Service cost	$	6,467		$	7,454		$	6,261		$	2,601		$	2,941		$	2,401
Interest cost		10,819			10,063			10,258			4,360			3,827			4,037
Expected return on plan assets		(13,105	)		(12,428	)		(12,309	)		(4,801	)		(4,353	)		(4,135	)
Amortization of prior service cost/(benefit)(1)		418			532			531			(1,011	)		(1,011	)		(1,011	)
Amortization of actuarial loss(1)		6,611			10,445			7,935			967			2,261			1,661

Net periodic benefit cost	$	11,210		$	16,066		$	12,676		$	2,116		$	3,665		$	2,953

Net Periodic Pension Benefit Cost:

	SERP
	2014			2013			2012
Service cost	$	153		$	135		$	51
Interest cost		387			315			263
Expected return on plan assets		—			—			—
Amortization of prior service cost/(benefit)(1)		(8	)		(8	)		(8	)
Amortization of actuarial loss(1)		504			567			389

Net periodic benefit cost	$	1,036		$	1,009		$	695

(1)	Amounts are amortized from our regulatory asset originally recorded upon recognizing our net pension liability on the balance sheet.

The tables below present other changes in plan assets and benefit obligations recognized in the regulatory asset accounts for the year (in thousands).

			Amount Recognized
Regulatory Assets	Beginning Balance 12/31/13		Current Year Actuarial Loss		Amortization of Actuarial Loss			Current Year Prior Service Credit			Amortization of Prior Service (Cost)/Credit			Ending Balance 12/31/14
Pension	$	56,709		35,529		(6,611	)		(7,753	)		(418	)	$	77,456
SERP	$	4,188		1,890		(504	)		(45	)		8		$	5,537
OPEB	$	285		20,117		(967	)		—			1,011		$	20,446

			Amount Recognized
Regulatory Assets	Beginning Balance 12/31/12		Current Year Actuarial (Gain)/Loss			Amortization of Actuarial Loss			Amortization of Prior Service (Cost)/Credit			Ending Balance 12/31/13
Pension	$	105,818		(38,132	)		(10,445	)		(532	)	$	56,709
SERP	$	4,143		604			(567	)		8		$	4,188
OPEB	$	20,311		(18,776	)		(2,261	)		1,011		$	285

The following table presents the amount of net actuarial gains / losses, transition obligations / assets and prior period service costs in regulatory assets not yet recognized as a component of net periodic benefit cost. It also shows the amounts expected to be recognized in the subsequent year. The following table presents those items for the employee pension plan and other benefits plan at December 31, 2014, and the subsequent twelve-month period (in thousands):

	Pension Benefits						SERP						OPEB
	2014			Subsequent Period			2014			Subsequent Period			2014			Subsequent Period
Net actuarial loss	$	84,178		$	9,380		$	5,595		$	560		$	23,030		$	2,725
Prior service cost (benefit)		(6,722	)		(630	)		(58	)		(43	)		(2,584	)		(1,011	)

Total	$	77,456		$	8,750		$	5,537		$	517		$	20,446		$	1,714

The measurement date used to determine the pension and other postretirement benefits is December 31. The assumptions used to determine the benefit obligation and the periodic costs are as follows:

Weighted-average assumptions used to determine the benefit obligation as of December 31:

	Pension Benefits						OPEB
	2014			2013			2014			2013
Discount rate		4.06	%		4.90	%		4.15	%		5.00	%
Rate of compensation increase		3.50	%		3.50	%		3.50	%		3.50	%

Weighted-average assumptions used to determine the net benefit cost (income) as of January 1:

	Pension Benefits									OPEB
	2014			2013			2012			2014			2013			2012
Discount rate		4.90	%		4.00	%		4.70	%		5.00	%		4.11	%		4.90	%
Expected return on plan assets		7.75	%		7.75	%		7.90	%		6.52	%		6.52	%		6.65	%
Rate of compensation increase		3.50	%		3.50	%		3.50	%		3.50	%		3.50	%		3.50	%

The expected long-term rate of return assumption was based on historical return and adjusted to estimate the potential range of returns for the current asset allocation. The assumed 2014 cost trend rate used to measure the expected cost of healthcare benefits and benefit obligation is 7.0%. Each trend rate decreases 0.50% through 2019 to an ultimate rate of 5.0% in 2019 and subsequent years.

The healthcare cost trend rate affects projected benefit obligations. A 1% change in assumed healthcare cost growth rates would have the following effects (in thousands):

	1% Increase		1% Decrease
Effect on total of service and interest cost	$	1,395	$	(1,084	)
Effect on post-retirement benefit obligation	$	19,135	$	(14,983	)

Fair value measurements of plan assets

See Note 15 for a discussion of fair value measurements. The Company believes that it is appropriate for the pension fund to assume a moderate degree of investment risk with diversification of fund assets among different classes (or types) of investments, as appropriate, as a means of reducing risk. Although the pension fund can and will tolerate some variability in market value and rates of return in order to achieve a greater long-term rate of return, primary emphasis is placed on preserving the pension fund's principal. Full discretion is delegated to the investment managers to carry out investment policy within stated guidelines. The guidelines and performance of the managers are monitored by the Company's Investment Committee. The following is a description of the valuation methodologies used for assets measured at fair value using significant other observable, or significant unobservable inputs.

Short-term investments: Valued at cost, which approximates fair value.

Common/Collective trusts: Valued at the fair value based on audited financials of the trusts.

U.S. corporate and foreign issue debt: Valued at quoted market prices when available in an active market. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.

Equity long/short hedge funds: Valued at the net asset value reported in the annual audited financial statements and updated monthly based on changes in the value of the underlying funds reported by the fund manager.

Pension plan assets

We utilize fair value in determining the market-related values for the different classes of our pension plan assets. The market-related value is determined based on smoothing actual asset returns in excess of (or less than) expected return on assets over a 5-year period.

The Company's primary investment goals for pension fund assets are based around four basic elements:

1.	Preserve capital,
2.	Maintain a minimum level of return equal to the actuarial interest rate assumption,
3.	Maintain a high degree of flexibility and a low degree of volatility, and
4.	Maximize the rate of return while operating within the confines of prudence and safety.

Asset Allocation

We have adopted an investment strategy referred to as a de-risking glide path to increase the fixed income allocation as the plan's funded status improves. As the pension plan reaches set funded status milestones, the plan's assets will be rebalanced to shift more assets from equity to fixed income. Based on the plan's progress with this strategy, the target investment allocation for pension fund assets is approximately 72% equities and 28% fixed income securities. However, these allocations are permitted to vary within the following ranges: 60% – 80% for equities and 20% – 40% for fixed income securities. Money market funds are permitted within the fixed income category. Investment managers may generally hold up to 10% cash in their portfolios although this limit may be exceeded if market conditions warrant.

The following fair value hierarchy table presents information about the pension fund assets measured at fair value as of December 31, 2014 and December 31, 2013 (in thousands):

	Fair Value Measurements as of December 31, 2014
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Percentage of Plan Assets
Short term investments	$	—	$	70	$	—	$	70		0.0	%
Equity securities
Common collective trusts		—		91,530		—		91,530		47.5	%
Fixed income
Common collective trust		—		62,646		—		62,646		32.5	%
Other types of investments
Equity long/short hedge funds		—		—		38,428		38,428		20.0	%

	$	—	$	154,246	$	38,428	$	192,674		100.0	%

	Fair Value Measurements as of December 31, 2013
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Percentage of Plan Assets
Short term investments	$	74	$	—	$	—	$	74		0.1	%
Equity securities
Common collective trusts		—		104,713		—		104,713		56.1	%
Fixed income
Common collective trust		—		45,031		—		45,031		24.1	%
Other types of investments
Equity long/short hedge funds		—				36,729		36,729		19.7	%

	$	74	$	149,744	$	36,729	$	186,547		100.0	%

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) — December 31,

	2014			2013
	Equity long/short hedge funds			Equity long/short hedge funds
Beginning Balance, January 1,	$	36,729		$	28,885
Actual return on plan assets:
Relating to assets still held at the reporting date		1,382			(356	)
Relating to assets sold during the period		1,491			4,583
Purchases		9,700			26,500
Sales		(10,874	)		(22,883	)
Settlements		—			—
Transfers into and (out of) Level 3		—			—

Ending Balance, December 31,	$	38,428		$	36,729

Permissible Investments

Listed below are the investment vehicles specifically permitted:

Permissible Investments

Equity Oriented

Fixed Income Oriented and Real Estate



Common Stocks



Preferred Stocks (minimum "A-rated" by Moody's or S&P)



American Depository Receipts



Convertible Preferred Stocks



Convertible Bonds



Covered Options



Hedged Equity Funds of Funds



Bonds (including US Government and Agencies)



Corporate Bonds (minimum quality rating of Baa by Moody's or BBB by S&P)



Comingled bond funds (25% max. allocation to high yield)



Foreign Government Bonds



GIC's, BIC's



Commercial Paper (rated A1 by S&P or P1 by Moody's)



Certificates of Deposit in institutions with FDIC/FSLIC protection



Money Market Funds/Bank STIF Funds



Real Estate — Publicly Traded

The above assets can be held in commingled (mutual) funds as well as privately managed separate accounts.

Those investments prohibited by the Investment Committee without prior approval are:

Prohibited Investments Requiring Pre-approval



Privately Placed Securities



Commodities Futures



Securities of Empire District (except in the hedged equity funds of funds or commingled funds)



Restricted Stock



Warrants



Short Sales



Index Options



Letter Stock

OPEB plan assets

The Company's primary investment goals for the component of the OPEB fund used to pay current benefits are liquidity and safety. The primary investment goals for the component of the OPEB fund used to accumulate funds to provide for payment of benefits after the retirement of plan participants are preservation of the fund with a reasonable rate of return. The target allocation for plan assets is 60% equities and 40% fixed income, although, at any given time, up to 10% of either category may be invested in cash equivalents. The 10% cash limitation may be exceeded if market conditions warrant. Allocations may also vary within the following ranges: 44% – 76% equities and 36% – 44% fixed income securities. The following fair value hierarchy table presents information about the OPEB fund assets measured at fair value as of December 31, 2014 and December 31, 2013 (in thousands):

	Fair Value Measurements as of December 31, 2014
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total			Percentage of Plan Assets
Equity securities
Common collective trusts	$	—	$	47,690	$	—	$	47,690			56.9	%
Fixed income
Common collective trusts		—		33,708		—		33,708			40.2	%
Other types of investments
Common collective trusts		—		2,453		—		2,453			2.9	%

	$	—	$	83,851	$	—	$	83,851

Payable for securities purchased								(75	)		0.0	%

							$	83,776			100	%

	Fair Value Measurements as of December 31, 2013
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Percentage of Plan Assets
Cash and cash equivalents	$	1,317	$	—	$	—	$	1,317		1.7	%
Fixed income
U.S. corporate debt		—		17,592		—		17,592		22.2	%
Foreign debt		—		2,871		—		2,871		3.6	%
Mutual funds — fixed income		8,325		—		—		8,325		10.5	%
Equity securities
U.S. equity		27,779		—		—		27,779		35.1	%
International equity		9,316		—		—		9,316		11.8	%
Mutual funds — equity		11,633		—		—		11,633		14.7	%

	$	58,370	$	20,463	$	—		78,833

Accrued interest & dividends								265		0.4	%

							$	79,098		100	%

The Company's guideline in the management of this fund is to endorse a long-term approach, but not expose the fund to levels of volatility that might adversely affect the value of the assets. Full discretion is delegated to the investment managers to carry out investment policy within stated guidelines. The guidelines and performance of the managers are monitored by the Company's Investment Committee.

Permissible Investments

Listed below are the investment vehicles specifically permitted:

Permissible Investments

Equity

Fixed Income



Common Stocks



Preferred Stocks



Cash-Equivalent Securities with a maturity of one-year or less, including: money market funds, US Government and Agency securities, certificates of deposit or banker's acceptances issued by domestic banks with FDIC protection and commercial paper rated A1 by S&P or P1 by Moody's



Government Bonds



Money Market Funds / Bank STIF Funds



Certificates of Deposit in institutions with FDIC protection



Corporate Bonds (minimum quality rating of A Baa by Moody's or BBB by S&P at time of issuance)

The above assets can be held in commingled (mutual) funds as well as privately managed separate accounts.

Listed below are those investments prohibited by the Investment Committee:

Prohibited Investments



Privately Placed Securities



Securities of Empire District



Derivatives



Instrumentalities in violation of the Prohibited Transactions Standards of ERISA



Margin Transactions



Options (other than "covered call options")



Lettered or Restricted Stock



Any other investment security which, in the opinion of the investment manager produces an imprudent risk to the fund

Employee Stock Purchase Plan

Our Employee Stock Purchase Plan (ESPP) permits the grant to eligible employees of options to purchase common stock at 90% of the lower of market value at date of grant or at date of exercise. The lookback feature of this plan is valued at 90% of the Black-Scholes methodology plus 10% of the maximum subscription price. As of December 31, 2014 and 2013, there were 820,838 and 127,774 shares available for issuance in this plan, respectively.

	2014			2013		2012
Subscriptions outstanding at December 31,		57,369			60,413		70,850
Maximum subscription price	$	21.43	(1)	$	19.58	$	17.95
Shares of stock issued		56,942			68,099		65,919
Stock issuance price	$	19.58		$	17.95	$	17.27

(1)	Stock will be issued on the closing date of the purchase period, which runs from June 1, 2014 to May 31, 2015.

Assumptions for valuation of these shares are shown in the table below.

	2014			2013			2012
Weighted average fair value of grants	$	3.07		$	2.78		$	3.19
Risk-free interest rate		0.10	%		0.14	%		0.17	%
Dividend yield		4.30	%		4.60	%		5.00	%
Expected volatility(1)		14.00	%		14.00	%		24.00	%
Expected life in months		12			12			12
Grant date		6/2/14			6/1/13			6/1/12

(1)	One-year historic volatility

401(k) Plan and ESOP

Our Employee 401(k) Plan and ESOP (the 401(k) Plan) allows participating employees to defer up to 25% of their annual compensation up to an Internal Revenue Service specified limit. For employees participating in the cash balance formula of the pension plan, discussed above, we match 100% of their deferrals, not to exceed 6% of the employee's eligible compensation. The first 3% of the matching contribution is made in shares of our common stock with the remaining portion made by contributing cash. For employees remaining with the traditional average annual basic earnings formula of the pension plan, we match 50% of their deferrals by contributing shares of our common stock, with such matching contributions not to exceed 3% of the employee's eligible compensation. We record the compensation expense at the time the quarterly matching contributions are made to the plan. At December 31, 2014 and 2013, there were 196,399 and 256,448 shares available to be issued, respectively.

		2014			2013			2012
Shares contributed			60,049			64,128			65,502

Deferred Compensation

Effective January 2015, we established a non-qualified Deferred Compensation Plan for the purpose of allowing executive officers who elect to participate in the qualifying cash balance option of the Pension plan to obtain retirement savings that are not available to them under the 401(k) plan.