8. Retirement 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. 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 and healthcare cost trend rate 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 shown 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, 2012, consistent with previous years. See Note 1.

Pensions

Our noncontributory defined benefit pension plan includes all employees meeting minimum age and service requirements. The benefits are based on years of service and the employee's average annual basic earnings. 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 $13.7 million and $7.6 million in 2012 and 2011, respectively. This increase 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. Our contribution is estimated to be approximately $15.9 million for 2013. 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 2014, the performance of our pension assets during 2013.

Expected benefit payments are as follows (in millions):

Year	Payments from Trust		Payments from Company Funds

2013	$	10.1	$	0.3
2014		10.8		0.3
2015		11.5		0.3
2016		12.1		0.3
2017		12.6		0.3
2018 – 2022		71.2		1.6

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.

Our net liability increased $2.2 million and $0.6 million in 2012 and 2011, respectively. The increase 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. 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 $4.2 million in 2013.

Estimated benefit payments are as follows (in millions):

Year	Payments from Trust		Expected Federal Subsidy		Payments from Company Funds

2013	$	2.5	$	0.3	$	0.1
2014		2.8		0.3		0.2
2015		3.1		0.4		0.2
2016		3.4		0.4		0.2
2017		3.8		0.5		0.2
2018 – 2022		22.7		3.1		0.9

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

	2012			2011			2012			2011			2012			2011
Benefit obligation at beginning of year	$	215,088		$	186,840		$	4,863		$	2,895		$	83,226		$	80,938
Service cost		6,261			5,596			51			93			2,401			2,266
Interest cost		10,258			10,405			263			183			4,037			4,383
Net actuarial (gain)/loss		25,882			20,869			1,511			1,883			6,955			(2,136	)
Plan participant's contribution		—			—			—			—			910			863
Benefits and expenses paid		(9,485	)		(8,622	)		(323	)		(191	)		(3,156	)		(3,261	)
Federal subsidy		—			—			—			—			365			173

Benefit obligation at end of year	$	248,004		$	215,088		$	6,365		$	4,863		$	94,738		$	83,226

Reconciliation of Fair Value of Plan Assets:

	Pension						SERP				OPEB

	2012			2011			2012		2011		2012			2011
Fair value of plan assets at beginning of year	$	140,975		$	120,353		$	—	$	—	$	58,384		$	56,730
Actual return on plan assets — gain/(loss)		17,562			(625	)		—		—		7,148			279
Employer contribution		11,123			29,869			—		—		3,970			3,544
Benefits paid		(9,485	)		(8,622	)		—		—		(3,045	)		(3,160	)
Plan participant's contribution		—			—			—		—		864			826
Federal subsidy		—			—			—		—		346			165

Fair value of plan assets at end of year	$	160,175		$	140,975		$	—	$	—	$	67,667		$	58,384

Reconciliation of Funded Status:

	Pension						SERP						OPEB

	2012			2011			2012			2011			2012			2011
Fair value of plan assets	$	160,175		$	140,975		$	—		$	—		$	67,667		$	58,384
Projected benefit obligations		(248,004	)		(215,088	)		(6,365	)		(4,863	)		(94,738	)		(83,226	)

Funded status	$	(87,829	)	$	(74,113	)	$	(6,365	)	$	(4,863	)	$	(27,071	)	$	(24,842	)

The employee pension plan accumulated benefit obligation at December 31, 2012 and 2011 is presented in the following table (in thousands):

	Pension Benefits				SERP

	2012		2011		2012		2011
Accumulated benefit obligation	$	219,659	$	191,295	$	6,014	$	4,670

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

	Pension				SERP				OPEB

	2012		2011		2012		2011		2012		2011
Accounts Payable and Accrued Liabilities	$	—	$	—	$	313	$	311	$	144	$	136
Pension and other postretirement benefit obligation	$	87,829	$	74,113	$	6,052	$	4,552	$	26,927	$	24,706

Net periodic benefit pension cost for 2012, 2011 and 2010, 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

	2012			2011			2010			2012			2011			2010
Service cost	$	6,261		$	5,596		$	4,887		$	2,401		$	2,266		$	2,138
Interest cost		10,258			10,405			10,115			4,037			4,383			4,329
Expected return on plan assets		(12,309	)		(11,139	)		(9,847	)		(4,135	)		(4,157	)		(3,844	)
Amortization of prior service cost⁽¹⁾		531			532			531			(1,011	)		(1,011	)		(1,011	)
Amortization of actuarial loss⁽¹⁾		7,935			5,494			3,996			1,661			1,762			1,499

Net periodic benefit cost	$	12,676		$	10,888		$	9,682		$	2,953		$	3,243		$	3,111

Net Periodic Pension Benefit Cost:

	SERP

	2012			2011			2010
Service cost	$	51		$	93		$	70
Interest cost		263			183			153
Expected return on plan assets		—			—			—
Amortization of prior service cost⁽¹⁾		(8	)		(8	)		(8	)
Amortization of actuarial loss⁽¹⁾		389			171			96

Net periodic benefit cost	$	695		$	439		$	311

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

The tables below present the activity in the regulatory asset accounts for the year (in thousands).

			Amount Recognized

Regulatory Assets	Beginning Balance 12/31/11		Current Year Actuarial Loss		Amortization of Actuarial Loss			Amortization of Prior Service (Cost)/Credit			Ending Balance 12/31/12
Pension	$	93,656		20,628		(7,935	)		(531	)	$	105,818
SERP	$	3,012		1,512		(389	)		8		$	4,143
OPEB	$	17,020		3,941		(1,661	)		1,011		$	20,311

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, 2012, and the subsequent twelve-month period (in thousands):

	Pension Benefits				SERP						OPEB

	2012		Subsequent Period		2012			Subsequent Period			2012			Subsequent Period
Net actuarial loss	$	103,838	$	10,361	$	4,174		$	416		$	24,917		$	2,598
Prior service cost (benefit)		1,980		531		(31	)		(8	)		(4,606	)		(1,011	)

Total	$	105,818	$	10,892	$	4,143		$	408		$	20,311		$	1,587

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

	2012			2011			2012			2011
Discount rate		4.00	%		4.70	%		4.11	%		4.90	%
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

	2012			2011			2010			2012			2011			2010
Discount rate		4.70	%		5.50	%		6.00	%		4.90	%		5.50	%		6.00	%
Expected return on plan assets		7.90	%		8.00	%		8.00	%		6.65	%		7.00	%		7.00	%
Rate of compensation increase		3.50	%		4.50	%		4.50	%		3.50	%		4.50	%		4.50	%

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 2012 cost trend rate used to measure the expected cost of healthcare benefits and benefit obligation is 7.5%. 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	$	1,285	$	(1,001	)
Effect on post-retirement benefit obligation	$	14,789	$	(11,882	)

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 estimated by Wells Fargo Bank, N.A. 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

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.

The target allocations for plan assets are 60% – 80% equity securities, 20% – 40% debt securities, and 0% – 15% in all other types of investments.

The following fair value hierarchy table presents information about the pension fund assets measured at fair value as of December 31, 2012 and December 31, 2011 (in thousands):

	Fair Value Measurements as of December 31, 2012

	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	$	—	$	2,398	$	—	$	2,398		1.5	%
Equity securities
U.S. equity		63,655		—		—		63,655		39.7	%
International equity		22,074		—		—		22,074		13.8	%
Fixed income
Common collective trust		—		26,110		—		26,110		16.3	%
U.S. corporate debt		—		15,518		—		15,518		9.7	%
U.S. government debt		1,535		—		—		1,535		1.0	%
Other types of investments
Equity long/short hedge funds		—		—		28,885		28,885		18.0	%

	$	87,264	$	44,026	$	28,885	$	160,175		100.0	%

	Fair Value Measurements as of December 31, 2011

	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	$	—	$	1,787	$	—	$	1,787		1.2	%
Equity securities
U.S. equity		57,228		—		—		57,228		40.6	%
International equity		19,151		—		—		19,151		13.6	%
Fixed income
Common collective trust		—		22,904		—		22,904		16.3	%
U.S. corporate debt		—		11,692		—		11,692		8.3	%
U.S. government debt		794		—		—		794		0.6	%
Other types of investments
Equity long/short hedge funds		—		—		27,419		27,419		19.4	%

	$	77,173	$	36,383	$	27,419	$	140,975		100.0	%

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

	2012		2011

	Equity long/short hedge funds		Equity long/short hedge funds
Beginning Balance, January 1,	$	27,419	$	22,338
Actual return on plan assets:
Relating to assets still held at the reporting date		1,466		(669	)
Relating to assets sold during the period		—		—
Purchases		—		5,750
Sales		—		—
Settlements		—		—
Transfers into and (out of) Level 3		—		—

Ending Balance, December 31,	$	28,885	$	27,419

Permissible Investments

Listed below are the investment vehicles specifically permitted:

Permissible Investments

Equity Oriented		Fixed Income Oriented and Real Estate

•	Common Stocks	•	Bonds
•	Preferred Stocks	•	GICs, BICs
•	Convertible Preferred Stocks	•	Corporate Bonds (minimum quality rating
•	Convertible Bonds		of Baa or BBB)
•	Covered Options	•	Cash-Equivalent Securities (e.g., U.S.
•	Hedged Equity Funds of Funds		T-Bills, Commercial Paper, etc.)
		•	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	•	Warrants
•	Commodities Futures	•	Short Sales
•	Securities of Empire District	•	Index Options
•	Derivatives

OPEB

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 allocations for plan assets are 0% – 10% cash and cash equivalents, 40% – 60% fixed income securities and 40% – 60% in equity. The following fair value hierarchy table presents information about the OPEB fund assets measured at fair value as of December 31, 2012 and December 31, 2011 (in thousands):

	Fair Value Measurements as of December 31, 2012

	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	$	895	$	—	$	—	$	895		1.3	%
Fixed income
U.S. government debt		729		—		—		729		1.1	%
U.S. corporate debt		—		19,437		—		19,437		28.7	%
Foreign debt		—		2,250		—		2,250		3.3	%
Mutual funds — fixed income		3,914		—		—		3,914		5.8	%
Equity securities
U.S. equity		20,795		—		—		20,795		30.7	%
International equity		1,548		—		—		1,548		2.3	%
Mutual funds — equity		17,818		—		—		17,818		26.3	%

	$	45,699	$	21,687	$	—		67,836

Accrued interest & dividends								281		0.5	%

							$	67,667		100	%

	Fair Value Measurements as of December 31, 2011

	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	$	1,536	$	—	$	—	$	1,536		2.6	%
Fixed income
U.S. government debt		1,839		—		—		1,839		3.1	%
U.S. corporate debt		—		17,232		—		17,232		29.5	%
Foreign debt		—		1,460		—		1,460		2.5	%
Mutual funds — fixed income		2,107		—		—		2,107		3.6	%
Equity securities
U.S. equity		21,080		—		—		21,080		36.1	%
International equity		1,784		—		—		1,784		3.1	%
Mutual funds — equity		11,075		—		—		11,075		19.0	%

	$	39,421	$	18,692		—		58,113

Accrued interest & dividends								271		0.5	%

							$	58,384		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	•	Cash-Equivalent Securities with a maturity
•	Preferred Stocks		of one-year or less
		•	Bonds
		•	Money Market Funds / Bank STIF Funds
		•	Certificates of Deposit in institutions with FDIC protection
		•	Corporate Bonds (minimum quality rating of A)

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	•	Margin Transactions
•	Commodities Futures	•	Short Sales
•	Securities of Empire District	•	Index Options
•	Derivatives	•	Real Estate and Real Property
•	Instrumentalities in violation of the Prohibited Transactions Standards of ERISA	•	Restricted Stock