13. Pension and Other Post-Retirement Benefit Plans

The following table sets forth the defined benefit pension and other post-retirement benefit plans’ funded status and amounts recognized for those plans in the Company’s Consolidated Balance Sheets. Refer to Note 2 for further information related to the Equitable Gas Transaction.

	For the Years Ended December 31,
	2013			2012			2013			2012
	Pension Benefits						Other Benefits
	(Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year	$	63,270		$	61,885		$	36,255		$	35,293
Service cost	500			500			905			737
Interest cost	1,935			2,448			1,110			1,427
Amendments	–			(126		)	–			–
Actuarial loss	(3,038		)	5,733			(2,355		)	2,656
Benefits paid	(5,269		)	(5,571		)	(3,961		)	(3,858		)
Expenses paid	(493		)	(511		)	–			–
Divestitures	(34,410		)	–			(13,701		)	–
Settlements	(667		)	(1,088		)	–			–
Subtotal	21,828			63,270			18,253			36,255
Benefit obligation included in discontinued operations	–			42,835			–			15,577
Benefit obligation at end of year	$	21,828		$	20,435		$	18,253		$	20,678

Change in plan assets:
Fair value of plan assets at beginning of year	$	46,984		$	45,951		$	165		$	19
Actual gain on plan assets	7,304			5,346			–			–
Contributions	2,639			2,857			328			146
Benefits paid	(5,269		)	(5,571		)	–			–
Expenses paid	(493		)	(511		)	–			–
Divestitures	(30,409		)	–			–			–
Settlements	(667		)	(1,088		)	–			–
Subtotal	20,089			46,984			493			165
Fair value of plan assets included in discontinued operations	–			30,428			–			–
Fair value of plan assets at end of year	20,089			16,556			493			165
Funded status at end of year	$	(1,739	)	$	(3,879	)	$	(17,760	)	$	(20,513	)

Amounts recognized in the statement of financial position consist of:
Current liabilities	$	–		$	–		$	(1,341	)	$	(3,353	)
Noncurrent liabilities	(1,739		)	(3,879		)	(16,419		)	(17,160		)
Net amounts recognized	$	(1,739	)	$	(3,879	)	$	(17,760	)	$	(20,513	)

Amounts recognized in accumulated OCI, net of tax, consist of:
Net loss	$	7,524		$	24,634		$	8,234		$	14,291
Net prior service (credit)	–			–			106			(1,560		)
Net amount recognized	$	7,524		$	24,634		$	8,340		$	12,731

The accumulated benefit obligation for the Company’s defined benefit pension plans was $21.8 million and $20.4 million at December 31, 2013 and 2012, respectively. The Company uses a December 31 measurement date for its defined benefit pension and other post-retirement benefit plans.

The Company’s costs related to its defined benefit pension and other post-retirement benefit plans were as follows:

	For the Years Ended December 31,
	2013			2012			2011			2013			2012			2011
	Pension Benefits									Other Benefits
	(Thousands)
Components of net periodic benefit cost:
Service cost	$	500		$	500		$	500		$	905		$	737		$	620
Interest cost	1,935			2,448			3,115			1,110			1,427			1,771
Expected return on plan assets	(3,323		)	(3,712		)	(4,070		)	–			–			–
Amortization of prior service cost	–			–			–			(845		)	(845		)	(902		)
Recognized net actuarial loss	2,306			1,880			1,471			1,760			1,671			1,605
Settlement loss and special termination benefits	381			725			530			–			–			–
Subtotal	1,799			1,841			1,546			2,930			2,990			3,094
Net periodic benefit cost of discontinued operations	1,552			1,586			1,387			1,356			1,288			1,427
Net periodic benefit cost	$	247		$	255		$	159		$	1,574		$	1,702		$	1,667

Currently, the Company recognizes expense for on-going post-retirement benefits other than pensions, a portion of which expense is subject to recovery in the approved rates of its rate-regulated Midstream business.

	For the Years Ended December 31,
	2013		2012		2011		2013		2012		2011
	Pension Benefits						Other Benefits
	(Thousands)
Other changes in plan assets and benefit obligations recognized in OCI, net of tax:
Net (gain) loss	$	712	$	261	$	3,378	$	2,147	$	494	$	181
Net prior service cost	–		–		–		416		330		915
Total recognized in OCI, net of tax	$	712	$	261	$	3,378	$	2,563	$	824	$	1,096
Total recognized in net periodic benefit cost and OCI, net of tax	$	959	$	2,102	$	4,924	$	4,137	$	3,814	$	4,190

The net loss and prior service cost associated with the disposal group of the Equitable Gas Transaction totaled $17.3 million, net of tax, at the closing date of the Equitable Gas Transaction. The Company recognized the full amount in income from discontinued operations in the Statements of Consolidated Income for the year ended December 31, 2013.

The estimated net loss for the defined benefit pension plans that will be amortized from accumulated OCI, net of tax, into net periodic benefit cost during 2014 is $0.4 million. The estimated net loss and net prior service (credit) for the other post-retirement benefit plans that will be amortized from accumulated OCI, net of tax, into net periodic benefit cost during 2014 are $0.4 million and $(0.3 million), respectively.

The following weighted average assumptions were used to determine the benefit obligations for the Company’s defined benefit pension and other post-retirement benefit plans:

	December 31,
	2013	2012	2013	2012
	Pension Benefits		Other Benefits

Discount rate	4.00%	3.25%	4.00%	3.25%
Rate of compensation increase	N/A	N/A	N/A	N/A

The following weighted average assumptions were used to determine the net periodic benefit cost for the Company’s defined benefit pension and other post-retirement benefit plans:

For the Years Ended December 31,

2013

2012

2013

2012

Pension Benefits

Other Benefits

Discount rate

3.25%

4.25%

3.25%

4.25%

Expected return on plan assets

7.75%

N/A

Rate of compensation increase

N/A

The expected rate of return is established at the beginning of the fiscal year to which it relates based upon information available to the Company at that time, including the plans’ investment mix and the forecasted rates of return on the types of securities held. The Company considered the historical rates of return earned on plan assets, an expected return percentage by asset class based upon a survey of investment managers and the Company’s actual and targeted investment mix. Any differences between actual experience and assumed experience are deferred as an unrecognized actuarial gain or loss. The unrecognized actuarial gains or losses are amortized into the Company’s net periodic benefit cost. The expected rate of return determined as of January 1, 2014 is 7.75%. This assumption will be used to derive the Company’s 2014 net periodic benefit cost. The rate of compensation increase is not applicable in determining future benefit obligations as a result of plan design. Pension expense increases or decreases as the expected rate of return or discount rate is changed.

For measurement purposes, the annual rate of increase in the per capita cost of covered health care benefits in 2013 was 7.00% for both the Pre-65 and Post-65 medical charges. The rates were assumed to decrease gradually to ultimate rates of 5.00% in 2018.

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

	One-Percentage-Point Increase						One-Percentage-Point Decrease
	2013		2012		2011		2013		2012		2011
	(Thousands)
Increase (decrease) to total of service and interest cost components	$	25	$	32	$	40	$	(26)	$	(32)	$	(39)
Increase (decrease) to post-retirement benefit obligation	$	220	$	711	$	730	$	(223)	$	(688)	$	(702)

The Company’s pension asset allocation at December 31, 2013 and 2012 and target allocation for 2014 by asset category are as follows:

		Percentage of Plan Assets
	Target	at December 31,
Asset Category	Allocation 2014	2013		2012

Domestic broadly diversified equity securities	40% - 60%	42	%	53	%
Fixed income securities	20% - 50%	29	%	32	%
International broadly diversified equity securities	5% - 15%	7	%	10	%
Alternative fixed income securities	0% - 10%	4	%	4	%
Cash and equivalent investments	0% - 15%	18	%	1	%
		100	%	100	%

The investment activities of the Company’s pension plan are supervised and monitored by the Benefits Investment Committee (BIC). The BIC reports to the Management Development and Compensation Committee (the Compensation Committee) of the Board of Directors and consists of the Chief Financial Officer and other officers and employees of the Company. The BIC has developed an investment strategy that focuses on asset allocation, diversification and quality guidelines. The investment goals of the BIC are to minimize high levels of risk at the total pension investment fund level. The BIC monitors the asset allocation on a quarterly basis and adjustments are made, as needed, to rebalance the assets within the prescribed target ranges. Comparative market and peer group benchmarks are utilized to ensure that each of the firm’s investment managers is performing satisfactorily.

The cash and equivalent investments category is outside of the target allocation as a result of liquidating investments for transfer to the Peoples Natural Gas Company LLC DB Plan for Former Employees of Equitable Gas Company based upon a preliminary asset allocation calculation in connection with the Equitable Gas Transaction. The excess cash investment balance is temporary and a portion will be re-invested in other assets in the first quarter of 2014, which will realign the investment balances with the target allocation.

The Company made cash contributions of approximately $2.6 million, $2.9 million and $4.3 million to its pension plan during 2013, 2012 and 2011, respectively, to meet certain funding targets. The Company expects to make cash payments of at least $0.4 million related to its pensions during 2014, which will meet minimum required contributions and the 80% funding obligation on the pension plan. Pension plan cash contributions are designed to at least meet requirements of the 80% funding level. The dollar amount of a cash contribution made in any particular year will vary as a result of gains or losses sustained by the pension plan during the year due to market conditions. The Company does not expect these variations to have a significant effect on its financial position, results of operations or liquidity.

The following pension benefit payments, which reflect expected future service, are expected to be paid by the plan during each of the next five years and the five years thereafter: $2.5 million in 2014; $2.2 million in 2015; $2.0 million in 2016; $1.8 million in 2017; $1.9 million in 2018; and $8.4 million in the five years thereafter.

The following benefit payments for post-retirement benefits other than pensions, which reflect expected future service, are expected to be paid by the Company during each of the next five years and the five years thereafter: $1.9 million in 2014; $1.8 million in 2015; $1.8 million in 2016; $1.7 million in 2017; $1.7 million in 2018; and $7.7 million in the five years thereafter.

Expense recognized by the Company related to its defined contribution plans totaled $14.6 million in 2013, $12.0 million in 2012 and $10.1 million in 2011.

The Company reports defined benefit plan assets at fair value which is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The disclosure below categorizes the assets by a fair value hierarchy. Assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The three levels of the hierarchy are defined as follows:

Level 1 – Observable inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 – Observable inputs, other than those included in Level 1, based on quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets and liabilities in inactive markets.

Level 3 – Unobservable inputs that reflect an entity’s own assumptions about what inputs a market participant would use in pricing the asset or liability based on the best information available in the circumstances.

Defined benefit plan asset investments include mutual funds with a fair value of $6.9 million and $8.8 million as of December 31, 2013 and 2012, respectively. These investments are based upon daily unadjusted quoted prices and therefore are considered Level 1.

Defined benefit plan asset investments also include common/collective trusts with a fair value of $13.2 million and $38.2 million as of December 31, 2013 and 2012, respectively. These investments are valued at current market value of the underlying assets of the fund and therefore are considered Level 2.

Assets classified as Level 1 transferred to Level 2 during the year ended December 31, 2012 were $9.8 million due to the plan severing its investment in a bond mutual fund and investing in a bond portfolio. This change provided the ability to manage these investments by individual performance. There were no changes in risk, exposure or asset allocation.

As of December 31, 2013 and 2012, the defined benefit plan did not hold any assets whose fair value was determined using unobservable inputs and therefore would be considered Level 3.