
12.	EMPLOYEE BENEFIT PLANS

Retirement and Other Postretirement Benefit Plans

Prior to separation, certain employees participated in the Plans sponsored by ONEOK. We accounted for the Plans as multiemployer benefit plans. Accordingly, we did not record an asset or liability to recognize the funded status of the Plans. We recognized a liability only for any required contributions to the Plans that were accrued and unpaid at the balance sheet date. These defined benefit pension and other postretirement benefit costs included amounts associated with vested participants who are no longer employees. As described in Note 2, prior to 2014, ONEOK also charged us for the allocated cost of certain employees of ONEOK who provided general and administrative services on our behalf. ONEOK included an allocation of the benefit costs associated with these ONEOK employees based upon its allocation methodology, not necessarily specific to the employees providing general and administrative services on our behalf.

Retirement Plans - We have a defined benefit pension plan covering nonbargaining-unit employees hired before January 1, 2005, and certain bargaining-unit employees hired before December 15, 2011. Nonbargaining unit employees hired after December 31, 2004; employees represented by Local No. 304 of the International Brotherhood of Electrical Workers (IBEW) hired on or after July 1, 2010; employees represented by the United Steelworkers hired on or after December 15, 2011; and employees who accepted a one-time opportunity to opt out of the defined benefit pension plan are covered by a profit-sharing plan. Certain employees of the Texas Gas Services division were entitled to benefits under a frozen cash-balance pension plan. In addition, we have a supplemental executive retirement plan for the benefit of certain officers. No new participants in the supplemental executive retirement plan have been approved since 2005, and it was formally closed to new participants as of January 1, 2014. We fund our defined benefit pension costs at a level needed to maintain or exceed the minimum funding levels required by the Employee Retirement Income Security Act of 1974, as amended, and the Pension Protection Act of 2006. Pension expense in 2014 was $27.1 million. Pension expense charged to us by ONEOK for employees directly supporting our operations totaled $35.0 million and $22.8 million for 2013 and 2012, respectively.

Other Postretirement Benefit Plans - We sponsor health and welfare plans that provide postretirement medical and life insurance benefits to certain employees who retire with at least five years of service. The postretirement medical plan is contributory based on hire date, age and years of service, with retiree contributions adjusted periodically, and contains other cost-sharing features such as deductibles and coinsurance. Other postretirement benefit expense in 2014 was $5.9 million. Other postretirement benefit expense charged to us by ONEOK for employees directly supporting our operations totaled $12.3 million and $16.6 million for 2013 and 2012, respectively.

Actuarial Assumptions - The following table sets forth the weighted-average assumptions used by us, and ONEOK prior to 2014, to determine the periodic benefit costs for the periods indicated:



	Years Ended December 31,
	2014	2013	2012
Discount rate - pension plans	5.25%	4.25%	5.00%
Discount rate - other postretirement plans	5.00%	4.00%	5.00%
Expected long-term return on plan assets	7.75%	8.25%	8.25%
Compensation increase rate	3.35% - 3.50%	3.45% - 3.50%	3.20% - 3.80%

We determine our overall expected long-term rate of return on plan assets, based on our review of historical returns and economic growth models. As of December 31, 2014, we updated our assumed mortality rates to incorporate the new set of mortality tables issued by the Society of Actuaries in October 2014.

We determine our discount rates annually. We estimate our discount rate based upon a comparison of the expected cash flows associated with our future payments under our defined benefit pension and other postretirement obligations to a hypothetical bond portfolio created using high-quality bonds that closely match expected cash flows. Bond portfolios are developed by selecting a bond for each of the next 60 years based on the maturity dates of the bonds. Bonds selected to be included in the portfolios are only those rated by Moody’s as AA- or better and exclude callable bonds, bonds with less than a minimum issue size, yield outliers and other filtering criteria to remove unsuitable bonds.

Regulatory Treatment - The OCC, KCC and regulatory authorities in Texas have approved the recovery of pension costs and other postretirement benefits costs through rates for Oklahoma Natural Gas, Kansas Gas Service and Texas Gas Service, respectively. The costs recovered through rates are based on current funding requirements and the net periodic benefit cost for defined benefit pension and other postretirement costs. Differences, if any, between the expense and the amount recovered through rates would be reflected in earnings, net of authorized deferrals. The KCC has authorized Kansas Gas Service’s recovery of defined benefit pension and other postretirement benefit costs in excess of the amounts included in rates over a period of 5 years.

We historically have recovered defined benefit pension and other postretirement benefit costs through rates. We believe it is probable that regulators will continue to include the net periodic pension and other postretirement benefit costs in our cost of service.

Obligations and Funded Status - In connection with the separation from ONEOK, we entered into an Employee Matters Agreement with ONEOK, which provides that our employees no longer participate in benefit plans sponsored or maintained by ONEOK as of the separation date. Effective January 1, 2014, the ONEOK defined benefit pension plans and other postretirement benefit plans transferred assets and obligations related to those employees transferring to ONE Gas and vested participants who are no longer employees to the new ONE Gas plans. As a result, we recorded sponsored pension and other postretirement plan obligations of approximately $1.1 billion, and sponsored defined benefit pension and other postretirement plan assets of approximately $1.0 billion, which are reflected below as our balances at the beginning of the period. Additionally, as a result of the transfer of unrecognized losses from ONEOK, our regulatory assets and deferred income taxes increased $331 million and $86 million, respectively.

The following table sets forth our defined benefit pension and other postretirement benefit plans, benefit obligations and fair value of plan assets for the periods indicated:



	Pension Benefits			Other Postretirement Benefits
	Year Ended December 31, 2014
Changes in Benefit Obligation	(Thousands of dollars)
Benefit obligation, beginning of period	$	863,620		$	239,171
Service cost	11,620			3,468
Interest cost	43,791			11,605
Plan participants’ contributions	—			2,642
Actuarial loss	159,275			14,998
Benefits paid	(50,135		)	(14,196		)
Benefit obligation, end of period	1,028,171			257,688

Change in Plan Assets
Fair value of plan assets, beginning of period	840,699			147,237
Actual return on plan assets	53,907			6,912
Employer contributions	925			9,182
Plan participants’ contributions	—			2,642
Benefits paid	(50,135		)	(14,196		)
Fair value of assets, end of period	845,396			151,777
Balance at December 31	$	(182,775	)	$	(105,911	)

Current liabilities	$	(907	)	$	—
Noncurrent liabilities	(181,868		)	(105,911		)
Balance at December 31	$	(182,775	)	$	(105,911	)

The accumulated benefit obligation for our defined benefit pension plans was $970.7 million at December 31, 2014.

There are no plan assets expected to be withdrawn and returned to us in 2015.

Components of Net Periodic Benefit Cost - The following table sets forth the components of net periodic benefit cost for our defined benefit pension and other postretirement benefit plans for the period indicated:



	Pension Benefits			Other Postretirement Benefits
	Year Ended December 31, 2014
	(Thousands of dollars)
Components of net periodic benefit cost
Service cost	$	11,620		$	3,468
Interest cost	43,791			11,605
Expected return on assets	(59,862		)	(11,393		)
Amortization of unrecognized prior service cost	549			(1,760		)
Amortization of net loss	30,200			3,969
Settlements	773			—
Net periodic benefit cost	$	27,071		$	5,889

Other Comprehensive Income (Loss) - The following table sets forth the amounts recognized in other comprehensive income (loss) related to our defined benefit pension benefits and other postretirement benefits for the period indicated:



	Pension Benefits			Other Postretirement Benefits
	Year Ended December 31, 2014
	(Thousands of dollars)
Net loss arising during the period	$	(3,543	)	$	—
Amortization of loss	518			—
Deferred income taxes	1,244			—
Total recognized in other comprehensive income (loss)	$	(1,781	)	$	—

The table below sets forth the amounts in accumulated other comprehensive income (loss) that had not yet been recognized as components of net periodic benefit expense for the period indicated:



	Pension Benefits			Other Postretirement Benefits
	December 31, 2014
	(Thousands of dollars)
Prior service credit (cost)	$	(266	)	$	4,337
Accumulated loss	(426,862		)	(64,861		)
Accumulated other comprehensive loss before regulatory assets	(427,128		)	(60,524		)
Regulatory asset for regulated entities	418,699			60,524
Accumulated other comprehensive loss after regulatory assets	(8,429		)	—
Deferred income taxes	3,255			—
Accumulated other comprehensive loss, net of tax	$	(5,174	)	$	—

The following tables set forth the amounts recognized in either accumulated comprehensive income (loss) or regulatory assets expected to be recognized as components of net periodic benefit expense in the next fiscal year:



	Pension Benefits		Other Postretirement Benefits
Amounts to be recognized in 2015	(Thousands of dollars)
Prior service credit (cost)	$	266	$	(1,760	)
Actuarial net loss	$	44,219	$	6,040

Health Care Cost Trend Rates - The following table sets forth the assumed health care cost-trend rates for the periods indicated:



	2014
Health care cost-trend rate assumed for next year	4.00% - 7.75%
Rate to which the cost-trend rate is assumed to decline (the ultimate trend rate)	4.00% - 5.00%
Year that the rate reaches the ultimate trend rate	2022

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



	One Percentage		One Percentage
	Point Increase		Point Decrease
	(Thousands of dollars)
Effect on total of service and interest cost	$	484	$	(463	)
Effect on other postretirement benefit obligation	$	6,903	$	(6,675	)

Plan Assets - Our investment strategy is to invest plan assets in accordance with sound investment practices that emphasize long-term fundamentals. The goal of this strategy is to maximize investment returns while managing risk in order to meet the plan’s current and projected financial obligations. To achieve this strategy, we have established a liability-driven investment strategy to change the allocations as the plan reaches certain funded status. The plan’s investments include a diverse blend of various domestic and international equities, investment-grade debt securities which mirror the cash flows of our liability, insurance contracts and alternative investments. The current target allocation for the assets of our defined benefit pension plan is as follows:



U.S. large-cap equities	37.4	%
Investment-grade bonds	30.0	%
Developed foreign large-cap equities	10.6	%
Alternative investments	7.7	%
Mid-cap equities	5.6	%
Emerging markets equities	5.0	%
Small-cap equities	3.7	%
Total	100	%

As part of our risk management for the plans, minimums and maximums have been set for each of the asset classes listed above. All investment managers for the plan are subject to certain restrictions on the securities they purchase and, with the exception of indexing purposes, are prohibited from owning our stock.

The following tables set forth our pension benefits and other postretirement benefits plan assets by fair value category as of the measurement date:



	Pension Benefits
	December 31, 2014
Asset Category	Level 1		Level 2		Level 3		Total
	(Thousands of dollars)
Investments:
Equity Securities (a)	$	439,165	$	66,766	$	—	$	505,931
Government obligations	—		47,769		—		47,769
Corporate obligations (b)	—		153,412		—		153,412
Cash and money market funds (c)	4,152		16,341		—		20,493
Insurance contracts and group annuity contracts	—		—		59,877		59,877
Other investments (d)	—		—		57,914		57,914
Total assets	$	443,317	$	284,288	$	117,791	$	845,396

(a) - This category represents securities of the respective market sector from diverse industries.

(b) - This category represents bonds from diverse industries.

(d) - This category represents alternative investments such as hedge funds.



	Other Postretirement Benefits
	December 31, 2014
Asset Category	Level 1		Level 2		Level 3		Total
	(Thousands of dollars)
Investments:
Equity Securities (a)	$	49,553	$	12,589	$	—	$	62,142
Government obligations	—		78		—		78
Corporate obligations (b)	—		251		—		251
Cash and money market funds (c)	964		5,894		—		6,858
Insurance contracts and group annuity contracts	—		82,353		—		82,353
Other investments (d)	—		—		95		95
Total assets	$	50,517	$	101,165	$	95	$	151,777

(a) - This category represents securities of the respective market sector from diverse industries.

(b) - This category represents bonds from diverse industries.

(d) - This category represents alternative investments such as hedge funds.

The following table sets forth the reconciliation of Level 3 fair value measurements of our pension plans:



	Pension Benefits
	December 31, 2014
	Insurance Contracts			Other Investments			Total
	(Thousands of dollars)
January 1, 2014	$	63,454		$	73,590		$	137,044
Net realized and unrealized gains (losses)	3,446			(15,676		)	(12,230		)
Settlements	(7,023		)	—			(7,023		)
December 31, 2014	$	59,877		$	57,914		$	117,791

Contributions - During 2014, we contributed $0.9 million to our defined benefit pension plans and we contributed $9.2 million to our other postretirement benefit plans. In 2015, we expect to contribute $0.9 million to our defined benefit pension plans and expect to contribute $3.9 million to our other postretirement benefit plans.

Pension and Other Postretirement Benefit Payments - Benefit payments for our defined benefit pension and other postretirement benefit plans for the period ended December 31, 2014 were $50.1 million and $14.2 million, respectively. The following table sets forth the pension benefits and other postretirement benefits payments expected to be paid in 2015-2024:



	Pension Benefits		Other Postretirement Benefits
Benefits to be paid in:	(Thousands of dollars)
2015	$	51,253	$	13,611
2016	$	52,366	$	14,283
2017	$	53,622	$	15,084
2018	$	55,068	$	15,776
2019	$	56,236	$	16,398
2020 through 2024	$	301,502	$	88,596

The expected benefits to be paid are based on the same assumptions used to measure our benefit obligation at December 31, 2014, and include estimated future employee service.

Other Employee Benefit Plans

401(k) Plan - We have a 401(k) Plan which covers all full-time employees, and employee contributions are discretionary. We match 100 percent of each participant’s eligible contribution up to 6 percent of each participant’s eligible compensation, subject to certain limits. Our contributions made to the plan were $9.7 million in 2014. Prior to our separation, ONEOK maintained a similar 401(k) Plan and compensation expense charged to us for employees who directly supported our operations by ONEOK totaled $8.3 million and $8.4 million in 2013 and 2012, respectively for ONEOK’s matching contributions to this plan.

Profit-Sharing Plan - We have a profit-sharing plan for all nonbargaining unit employees hired after December 31, 2004, and employees covered by the IBEW collective bargaining agreement hired after June 30, 2010, and employees covered by USW collective bargaining agreement hired after December 15, 2011. Nonbargaining unit employees who were employed prior to January 1, 2005, employees covered by the IBEW collective bargaining agreement employed prior to July 1, 2010, and employees covered by the United Steelworker collective bargaining agreement employed prior to December 16, 2011, were given a one-time opportunity to make an irrevocable election to participate in the profit-sharing plan and not accrue any additional benefits under ONEOK’s defined benefit pension plan after December 31, 2004, and June 30, 2010, respectively. We plan to make a contribution to the profit-sharing plan each quarter equal to 1 percent of each participant’s eligible compensation during the quarter. Additional discretionary employer contributions may be made at the end of each year. Employee contributions are not allowed under the plan. Our contributions made to the plan were $4.0 million in 2014. ONEOK maintained a similar Profit-Sharing Plan and compensation expense associated with ONEOK’s contributions made to the plan for employees who directly supported our operations prior to the separation were $1.6 million and $2.1 million in 2013 and 2012, respectively.

Employee Deferred Compensation Plan - Our Nonqualified Deferred Compensation Plan provides select employees, as approved by our Board of Directors, with the option to defer portions of their compensation and provides nonqualified deferred compensation benefits that are not available due to limitations on employer and employee contributions to qualified defined contribution plans under the federal tax laws. Contributions made to the plan were not material in 2014. ONEOK maintained a similar plan and contributions made to the plan for employees who directly supported our operations prior to the separation were not material in 2013 and 2012.