Employee Benefit Plans

12 Months Ended

Dec. 31, 2017

EMPLOYEE BENEFIT PLANS

Pension and Post-Retirement Benefit Plans

We maintain a qualified non-contributory defined benefit pension plan covering substantially all of our employees. For the majority of our employees, pension benefits are based on years of service and an employee’s compensation during the 60 highest paid consecutive months out of 120 before retirement. Non-union employees hired after December 31, 2001, and union employees hired after December 31, 2011, are covered by the same defined benefit pension plan; however, their benefits are derived from a cash balance account formula. We also maintain a non-qualified Executive Salary Continuation Plan for the benefit of certain retired executive officers. We have discontinued accruing any future benefits under this non-qualified plan.

The amount we contribute to our pension plan for future periods is not yet known, however, we expect to fund our pension plan each year at least to a level equal to current year pension expense. We must also meet minimum funding requirements under the Employee Retirement Income Security Act, as amended by the Pension Protection Act. We may contribute additional amounts from time to time as deemed appropriate.

In addition to providing pension benefits, we provide certain post-retirement health care and life insurance benefits for substantially all retired employees. We accrue and recover in our prices the costs of post-retirement benefits during an employee’s years of service.

As a co-owner of Wolf Creek, KGE is indirectly responsible for 47% of the liabilities and expenses associated with the Wolf Creek pension and post-retirement benefit plans. See Note 13, “Wolf Creek Employee Benefit Plans,” for information about Wolf Creek’s benefit plans.

The following tables summarize the status of our pension and post-retirement benefit plans.



	Pension Benefits						Post-retirement Benefits
As of December 31,	2017			2016			2017			2016
	(In Thousands)
Change in Benefit Obligation:
Benefit obligation, beginning of year	$	1,012,024		$	965,193		$	129,563		$	126,284
Service cost	20,874			18,563			1,084			1,084
Interest cost	42,482			43,723			5,255			5,571
Plan participants’ contributions	—			—			362			395
Benefits paid	(53,704		)	(63,540		)	(7,614		)	(7,697		)
Actuarial losses	83,553			51,482			2,899			3,926
Amendments	—			(3,397		)	—			—
Benefit obligation, end of year (a)	$	1,105,229		$	1,012,024		$	131,549		$	129,563

Change in Plan Assets:
Fair value of plan assets, beginning of year	$	658,474		$	653,945		$	115,619		$	115,416
Actual return on plan assets	88,030			45,181			15,498			7,274
Employer contributions	24,300			20,200			—			—
Plan participants’ contributions	—			—			327			356
Benefits paid	(51,472		)	(60,852		)	(7,374		)	(7,427		)
Fair value of plan assets, end of year	$	719,332		$	658,474		$	124,070		$	115,619

Funded status, end of year	$	(385,897	)	$	(353,550	)	$	(7,479	)	$	(13,944	)

Amounts Recognized in the Balance Sheets Consist of:
Current liability	$	(2,223	)	$	(2,260	)	$	(255	)	$	(284	)
Noncurrent liability	(383,674		)	(351,290		)	(7,224		)	(13,660		)
Net amount recognized	$	(385,897	)	$	(353,550	)	$	(7,479	)	$	(13,944	)

Amounts Recognized in Regulatory Assets (Liabilities) Consist of:
Net actuarial loss (gain)	$	299,068		$	282,462		$	(12,549	)	$	(7,603	)
Prior service cost	3,231			3,913			2,219			2,674
Net amount recognized	$	302,299		$	286,375		$	(10,330	)	$	(4,929	)

_______________

(a)

As of December 31, 2017 and 2016, pension benefits include non-qualified benefit obligations of $27.4 million and $26.8 million, respectively, which are funded by a trust containing assets of $34.3 million and $34.5 million, respectively, classified as trading securities. The assets in the aforementioned trust are not included in the table above. See Notes 5 and 6, “Financial Instruments and Trading Securities” and “Financial Investments,” respectively, for additional information regarding these amounts.



	Pension Benefits						Post-retirement Benefits
As of December 31,	2017			2016			2017			2016
	(Dollars in Thousands)
Pension Plans With a Projected Benefit Obligation In Excess of Plan Assets:
Projected benefit obligation	$	1,105,229		$	1,012,024		$	—		$	—
Fair value of plan assets	719,332			658,474			—			—

Pension Plans With an Accumulated Benefit Obligation In Excess of Plan Assets:
Accumulated benefit obligation	$	989,688		$	905,661		$	—		$	—
Fair value of plan assets	719,332			658,474			—			—

Post-retirement Plans With an Accumulated Post-retirement Benefit Obligation In Excess of Plan Assets:
Accumulated post-retirement benefit obligation	$	—		$	—		$	131,549		$	129,563
Fair value of plan assets	—			—			124,070			115,619

Weighted-Average Actuarial Assumptions used to Determine Net Periodic Benefit Obligation:
Discount rate	3.73		%	4.25		%	3.68		%	4.15		%
Compensation rate increase	4.00		%	4.00		%	—			—

We use a measurement date of December 31 for our pension and post-retirement benefit plans. The discount rate used to determine the current year pension obligation and the following year’s pension expense is based on a bond selection-settlement portfolio approach. This approach develops a discount rate by selecting a portfolio of high quality, non-callable corporate bonds that generate sufficient cash flow to provide for the projected benefit payments of the plan. After the bond portfolio is selected, a single interest rate is determined that equates the present value of the plan’s projected benefit payments discounted at this rate with the market value of the bonds selected. The decrease in the discount rates used as of December 31, 2017, increased the pension and post-retirement benefit obligations by approximately $79.0 million and $7.0 million, respectively.

We amortize prior service cost on a straight-line basis over the average future service of the active employees (plan participants) benefiting under the plan at the time of the amendment. We amortize the net actuarial gain or loss on a straight-line basis over the average future service of active plan participants benefiting under the plan without application of an amortization corridor. The KCC allows us to record a regulatory asset or liability to track the cumulative difference between current year pension and post-retirement benefits expense and the amount of such expense recognized in setting our prices. We accumulate such regulatory asset or liability between general rate reviews and amortize the accumulated amount as part of resetting our base prices. Following is additional information regarding our pension and post-retirement benefit plans.



	Pension Benefits									Post-retirement Benefits
Year Ended December 31,	2017			2016			2015			2017			2016			2015
	(Dollars in Thousands)
Components of Net Periodic Cost (Benefit):
Service cost	$	20,874		$	18,563		$	21,392		$	1,084		$	1,084		$	1,443
Interest cost	42,482			43,723			43,014			5,255			5,571			5,691
Expected return on plan assets	(43,039		)	(42,653		)	(40,236		)	(6,873		)	(6,835		)	(6,614		)
Amortization of unrecognized:
Prior service costs	682			768			520			455			455			455
Actuarial loss (gain), net	21,956			20,577			32,131			(780		)	(1,118		)	379
Net periodic cost (benefit) before regulatory adjustment	42,955			40,978			56,821			(859		)	(843		)	1,354
Regulatory adjustment (a)	13,425			14,528			6,886			(1,917		)	(1,922		)	4,096
Net periodic cost (benefit)	$	56,380		$	55,506		$	63,707		$	(2,776	)	$	(2,765	)	$	5,450

Other Changes in Plan Assets and Benefit Obligations Recognized in Regulatory Assets and Liabilities:
Current year actuarial loss (gain)	$	38,562		$	48,954		$	(43,459	)	$	(5,726	)	$	3,486		$	(9,576	)
Amortization of actuarial (loss) gain	(21,956		)	(20,577		)	(32,379		)	780			1,118			(379		)
Current year prior service cost	—			(3,397		)	5,730			—			—			—
Amortization of prior service costs	(682		)	(768		)	(520		)	(455		)	(455		)	(455		)
Other adjustments	—			—			352			—			—			—
Total recognized in regulatory assets and liabilities	$	15,924		$	24,212		$	(70,276	)	$	(5,401	)	$	4,149		$	(10,410	)

Total recognized in net periodic cost and regulatory assets and liabilities	$	72,304		$	79,718		$	(6,569	)	$	(8,177	)	$	1,384		$	(4,960	)

Weighted-Average Actuarial Assumptions used to Determine Net Periodic Cost (Benefit):
Discount rate	4.25		%	4.60		%	4.17		%	4.15		%	4.51		%	4.10		%
Expected long-term return on plan assets	6.50		%	6.50		%	6.50		%	6.00		%	6.00		%	6.00		%
Compensation rate increase	4.00		%	4.00		%	4.00		%	4.00		%	4.00		%	4.00		%

_______________


(a)	The regulatory adjustment represents the difference between current period pension or post-retirement benefit expense and the amount of such expense recognized in setting our prices.

We estimate that we will amortize the following amounts from regulatory assets and regulatory liabilities into net periodic cost in 2018.



	Pension Benefits		Post-retirement Benefits
	(In Thousands)
Actuarial loss (gain)	$	25,941	$	(539	)
Prior service cost	666		455
Total	$	26,607	$	(84	)

We base the expected long-term rate of return on plan assets on historical and projected rates of return for current and planned asset classes in the plans’ investment portfolios. We select assumed projected rates of return for each asset class after analyzing long-term historical experience and future expectations of the volatility of the various asset classes. Based on target asset allocations for each asset class, we develop an overall expected rate of return for the portfolios, adjusted for historical and expected experience of active portfolio management results compared to benchmark returns and for the effect of expenses paid from plan assets.

Plan Assets

We believe we manage pension and post-retirement benefit plan assets in a prudent manner with regard to preserving principal while providing reasonable returns. We have adopted a long-term investment horizon such that the chances and duration of investment losses are weighed against the long-term potential for appreciation of assets. Part of our strategy includes managing interest rate sensitivity of plan assets relative to the associated liabilities. The primary objective of the pension plan is to provide a source of retirement income for its participants and beneficiaries, and the primary financial objective of the plan is to improve its funded status. The primary objective of the post-retirement benefit plan is growth in assets and preservation of principal, while minimizing interim volatility, to meet anticipated claims of plan participants. We delegate the management of our pension and post-retirement benefit plan assets to independent investment advisors who hire and dismiss investment managers based upon various factors. The investment advisors are instructed to diversify investments across asset classes, sectors and manager styles to minimize the risk of large losses, based upon objectives and risk tolerance specified by management, which include allowable and/or prohibited investment types. We measure and monitor investment risk on an ongoing basis through quarterly investment portfolio reviews and annual liability measurements.

We have established certain prohibited investments for our pension and post-retirement benefit plans. Such prohibited investments include loans to the company or its officers and directors as well as investments in the company’s debt or equity securities, except as may occur indirectly through investments in diversified mutual funds. In addition, to reduce concentration of risk, the pension plan will not invest in any fund that holds more than 25% of its total assets to be invested in the securities of one or more issuers conducting their principal business activities in the same industry. This restriction does not apply to investments in securities issued or guaranteed by the U.S. government or its agencies.

Target allocations for our pension plan assets are approximately 39% to debt securities, 39% to equity securities, 12% to alternative investments such as real estate securities, hedge funds and private equity investments, and the remaining 10% to a fund, which provides tactical portfolio overlay by investing in futures related to debt, equity and foreign currency. Our investments in equity include investment funds with underlying investments in domestic and foreign large-, mid- and small-cap companies, derivatives related to such holdings, private equity investments including late-stage venture investments and other investments. Our investments in debt include core and high-yield bonds. Core bonds are comprised of investment funds with underlying investments in investment grade debt securities of corporate entities, obligations of U.S. and foreign governments and their agencies and other debt securities. High-yield bonds include investment funds with underlying investments in non-investment grade debt securities of corporate entities, obligations of foreign governments and their agencies, private debt securities and other debt securities. Real estate securities consist primarily of funds invested in core real estate throughout the U.S. while alternative funds invest in wide ranging investments including equity and debt securities of domestic and foreign corporations, debt securities issued by U.S. and foreign governments and their agencies, structured debt, warrants, exchange-traded funds, derivative instruments, private investment funds and other investments.

Target allocations for our post-retirement benefit plan assets are 65% to equity securities and 35% to debt securities. Our investments in equity securities include investment funds with underlying investments primarily in domestic and foreign large-, mid- and small-cap companies. Our investments in debt securities include a core bond fund with underlying investments in investment grade debt securities of domestic and foreign corporate entities, obligations of U.S. and foreign governments and their agencies, private placement securities and other investments.

Similar to other assets measured at fair value, GAAP establishes a hierarchal framework for disclosing the transparency of the inputs utilized in measuring pension and post-retirement benefit plan assets at fair value. From time to time, the pension and post-retirement benefits trusts may buy and sell investments resulting in changes within the hierarchy. See Note 5, “Financial Instruments and Trading Securities,” for a description of the hierarchal framework.

The following table provides the fair value of our pension plan assets and the corresponding level of hierarchy as of December 31, 2017 and 2016.



As of December 31, 2017	Level 1		Level 2		Level 3		NAV		Total
	(In Thousands)
Assets:
Domestic equity funds	$	—	$	188,850	$	—	$	23,896	$	212,746
International equity fund	—		98,646		—		—		98,646
Emerging market equity fund	—		26,804		—		—		26,804
Domestic bond fund	—		100,687		—		—		100,687
Core bond fund	—		98,874		—		—		98,874
High-yield bond fund	—		31,692		—		—		31,692
Emerging market bond fund	—		25,959		—		—		25,959
Combination debt/equity/other fund	—		36,167		—		—		36,167
Alternative investment fund	—		—		—		48,906		48,906
Real estate securities fund	—		—		—		34,421		34,421
Cash equivalents	—		4,430		—		—		4,430
Total Assets Measured at Fair Value	$	—	$	612,109	$	—	$	107,223	$	719,332

As of December 31, 2016	Level 1		Level 2		Level 3		NAV		Total
Assets:	(In Thousands)
Domestic equity funds	$	—	$	168,407	$	—	$	23,580	$	191,987
International equity fund	—		83,738		—		—		83,738
Emerging market equity fund	—		21,055		—		—		21,055
Domestic bond fund	—		101,200		—		—		101,200
Core bond fund	—		86,109		—		—		86,109
High-yield bond fund	—		30,729		—		—		30,729
Emerging market bond fund	—		23,584		—		—		23,584
Combination debt/equity/other fund	—		37,851		—		—		37,851
Alternative investment fund	—		—		—		43,686		43,686
Real estate securities fund	—		—		—		32,390		32,390
Cash equivalents	—		6,145		—		—		6,145
Total Assets Measured at Fair Value	$	—	$	558,818	$	—	$	99,656	$	658,474

The following table provides the fair value of our post-retirement benefit plan assets and the corresponding level of hierarchy as of December 31, 2017 and 2016.



As of December 31, 2017	Level 1		Level 2		Level 3		NAV		Total
	(In Thousands)
Assets:
Domestic equity funds	$	—	$	65,187	$	—	$	—	$	65,187
International equity fund	—		16,217		—		—		16,217
Core bond fund	—		42,083		—		—		42,083
Cash equivalents	—		583		—		—		583
Total Assets Measured at Fair Value	$	—	$	124,070	$	—	$	—	$	124,070

As of December 31, 2016	Level 1		Level 2		Level 3		NAV		Total
	(In Thousands)
Assets:
Domestic equity funds	$	—	$	61,055	$	—	$	—	$	61,055
International equity fund	—		15,034		—		—		15,034
Core bond fund	—		38,952		—		—		38,952
Cash equivalents	—		578		—		—		578
Total Assets Measured at Fair Value	$	—	$	115,619	$	—	$	—	$	115,619

Cash Flows

The following table shows the expected cash flows for our pension and post-retirement benefit plans for future years.



	Pension Benefits						Post-retirement Benefits
	To/(From) Trust			(From) Company Assets			To/(From) Trust			(From) Company Assets
	(In Millions)
Expected contributions:
2018	$	32.4					$	—

Expected benefit payments:
2018	$	(57.6	)	$	(2.3	)	$	(7.9	)	$	(0.3	)
2019	(60.1		)	(2.3		)	(8.0		)	(0.3		)
2020	(62.8		)	(2.2		)	(8.0		)	(0.2		)
2021	(65.4		)	(2.2		)	(8.1		)	(0.2		)
2022	(65.1		)	(2.2		)	(8.1		)	(0.2		)
2023-2027	(331.5		)	(10.8		)	(38.7		)	(0.9		)

Savings Plans

We maintain a qualified 401(k) savings plan in which most of our employees participate. We match employees’ contributions in cash up to specified maximum limits. Our contributions to the plan are deposited with a trustee and invested at the direction of plan participants into one or more of the investment alternatives we provide under the plan. Our contributions totaled $8.3 million in 2017, $8.0 million in 2016 and $7.7 million in 2015.

Stock-Based Compensation Plans

We have a long-term incentive and share award plan (LTISA Plan), which is a stock-based compensation plan in which employees and directors are eligible for awards. The LTISA Plan was implemented as a means to attract, retain and motivate employees and directors. Under the LTISA Plan, we may grant awards in the form of stock options, dividend equivalents, share appreciation rights, RSUs, performance shares and performance share units to plan participants. Up to 8.3 million shares of common stock may be granted under the LTISA Plan. As of December 31, 2017, awards of approximately 5.4 million shares of common stock had been made under the plan.

All stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as an expense in the consolidated statement of income over the requisite service period. The requisite service periods range from one to four years. However, upon consummation of the merger, all unrecognized compensation costs for outstanding RSU awards will be expensed on our income statement. The table below shows compensation expense and income tax benefits related to stock-based compensation arrangements that are included in our net income.



	Year Ended December 31,
	2017		2016		2015
	(In Thousands)
Compensation expense	$	8,869	$	9,237	$	8,250
Income tax benefits related to stock-based compensation arrangements	3,508		3,653		3,263

We use RSU awards for our stock-based compensation awards. RSU awards are grants that entitle the holder to receive shares of common stock as the awards vest. These RSU awards are defined as nonvested shares and do not include restrictions once the awards have vested.

RSU awards with only service requirements vest solely upon the passage of time. We measure the fair value of these RSU awards based on the market price of the underlying common stock as of the grant date. RSU awards with only service conditions that have a graded vesting schedule are recognized as an expense in the consolidated statement of income on a straight-line basis over the requisite service period for the entire award. Nonforfeitable dividend equivalents, or the rights to receive cash equal to the value of dividends paid on Westar Energy’s common stock, are paid on these RSUs during the vesting period. Nonforfeitable dividend equivalents are recorded directly to retained earnings.

RSU awards with performance measures vest upon expiration of the award term. The number of shares of common stock awarded upon vesting will vary from 0% to 200% of the RSU award, with performance tied to our total shareholder return relative to the total shareholder return of our peer group. We measure the fair value of these RSU awards using a Monte Carlo simulation technique that uses the closing stock price at the valuation date and incorporates assumptions for inputs of the expected volatility and risk-free interest rates. Expected volatility is based on historical volatility over three years using daily stock price observations. The risk-free interest rate is based on treasury constant maturity yields as reported by the Federal Reserve and the length of the performance period. For the 2017 valuation, inputs for expected volatility ranged from 17.6% to 22.7% and the risk-free interest rate was approximately 1.5%. For the 2016 valuation, inputs for expected volatility ranged from 16.9% to 22.4% and the risk-free interest rate was approximately 0.9%. For these RSU awards, dividend equivalents accumulate over the vesting period and are paid in cash based on the number of shares of common stock awarded upon vesting.

During the years ended December 31, 2017, 2016 and 2015, our RSU activity for awards with only service requirements was as follows.



	As of December 31,
	2017				2016				2015
	Shares		Weighted- Average Grant Date Fair Value		Shares		Weighted- Average Grant Date Fair Value		Shares		Weighted- Average Grant Date Fair Value
	(Shares In Thousands)
Nonvested balance, beginning of year	289.4		$	40.11	309.9		$	35.21	342.2		$	31.38
Granted	79.8		53.25		99.3		46.35		115.7		39.50
Vested	(109.4	)	35.56		(115.9	)	32.33		(115.4	)	28.77
Forfeited	(3.8	)	44.08		(3.9	)	40.95		(32.6	)	33.07
Nonvested balance, end of year	256.0		46.09		289.4		40.11		309.9		35.21

Total unrecognized compensation cost related to RSU awards with only service requirements was $4.7 million and $5.0 million as of December 31, 2017 and 2016, respectively. Absent the merger, we expect to recognize these costs over a remaining weighted-average period of 1.7 years. The total fair value of RSUs with only service requirements that vested during the years ended December 31, 2017, 2016 and 2015, was $6.1 million, $5.2 million and $4.7 million, respectively.

During the years ended December 31, 2017, 2016 and 2015, our RSU activity for awards with performance measures was as follows.



	As of December 31,
	2017				2016				2015
	Shares		Weighted- Average Grant Date Fair Value		Shares		Weighted- Average Grant Date Fair Value		Shares		Weighted- Average Grant Date Fair Value
	(Shares In Thousands)
Nonvested balance, beginning of year	297.7		$	40.79	299.1		$	36.00	345.1		$	32.31
Granted	76.4		37.08		100.9		46.03		94.8		40.26
Vested	(106.7	)	36.38		(98.5	)	31.59		(109.0	)	28.99
Forfeited	(2.0	)	42.16		(3.8	)	41.57		(31.8	)	34.03
Nonvested balance, end of year	265.4		41.48		297.7		40.79		299.1		36.00

As of December 31, 2017 and 2016, total unrecognized compensation cost related to RSU awards with performance measures was $3.6 million and $4.5 million, respectively. Absent the merger, we expect to recognize these costs over a remaining weighted-average period of 1.6 years. The total fair value of RSUs with performance measures that vested during the years ended December 31, 2017, 2016 and 2015, was $12.0 million, $7.5 million and $3.1 million, respectively.

Another component of the LTISA Plan is the Executive Stock for Compensation program under which, in the past, eligible employees were entitled to receive deferred common stock in lieu of current cash compensation. Although this plan was discontinued in 2001, dividends will continue to be paid to plan participants on their outstanding plan balance until distribution. Plan participants were awarded 124 shares of common stock for dividends in 2017, 170 shares in 2016 and 296 shares in 2015. Participants received common stock distributions of 1,325 shares in 2017, 2,110 shares in 2016 and 2,024 shares in 2015.

WESTAR ENERGY INC /KS 10-K