Note 7 - Employee Benefit Plans

Pension Benefits

The Company's Pension Plan covers all active employees hired prior to April 1, 2007. Employees hired after March 31, 2007 are not eligible to participate in this plan, but can participate in a defined contribution profit sharing plan that provides an annual contribution at the discretion of the Company, based upon a percentage of the participants' compensation. In order to be eligible for contribution, the eligible employee must be employed by the Company on December 31^st of the year to which the contribution relates. In addition, the Company maintains an unfunded supplemental plan for its executive officers. The Accumulated Benefit Obligation for the Company's Pension Plan at December 31, 2014 and 2013 was $61.9 million and $47.5 million, respectively.

Other Benefits

The Company's Other Benefits Plan covers substantially all of its current retired employees. Employees hired after March 31, 2007 are not eligible to participate in this plan. Coverage includes healthcare and life insurance. Accrued retirement benefit costs are recorded each year. Effective January 1, 2013, the Company amended a provision of the Other Benefits Plan that requires employees retiring in 2013 and beyond to contribute a higher percentage towards their healthcare insurance premiums. The amendment resulted in a $10.2 million decrease in the Company's Employee Benefit Plans' Liability, and related Regulatory Asset, as of January 1, 2013.

Regulatory Treatment of Over/Underfunded Retirement Obligations

Because the Company is subject to regulation in the states in which it operates, it is required to maintain its accounts in accordance with the regulatory authority's rules and guidelines, which may differ from other authoritative accounting pronouncements. In those instances, the Company follows the guidance of ASC 980, Regulated Operations. Based on prior regulatory practice, and in accordance with the guidance in ASC 980, Regulated Operations, the Company records underfunded Pension Plan and Other Benefits Plan obligation costs, which otherwise would be recognized in Other Comprehensive Income under ASC 715, Compensation – Retirement Benefits, as a Regulatory Asset, and expects to recover those costs in rates charged to customers.

The Company uses a December 31 measurement date for all of its employee benefit plans. The table below sets forth information relating to the Company's Pension Plan and Other Benefits Plan for 2014 and 2013.

	(Thousands of Dollars)
	Pension Plan						Other Benefits Plan
	December 31,
	2014			2013			2014			2013
Change in Projected Benefit Obligation:
Beginning Balance	$	56,041		$	62,817		$	37,212		$	50,608
Plan Amendment*		—			—			—			(10,244	)
Service Cost		1,894			2,300			1,032			1,338
Interest Cost		2,682			2,468			1,792			1,594
Actuarial (Gain) Loss		16,429			(9,694	)		10,092			(5,595	)
Benefits Paid		(2,003	)		(1,850	)		(550	)		(489	)
Ending Balance	$	75,043		$	56,041		$	49,578		$	37,212
* See discussion of Other Benefits Plan amendment in “Other Benefits” above.
		(Thousands of Dollars)
	Pension Plan						Other Benefits Plan
		December 31,
		2014			2013			2014			2013
Change in Fair Value of Plan Assets:
Beginning Balance	$	46,443		$	37,904		$	25,145		$	20,408
Actual Return on Plan Assets		3,603			6,779			1,243			2,553
Employer Contributions		3,580			3,610			1,697			2,673
Benefits Paid		(2,003	)		(1,850	)		(550	)		(489	)
Ending Balance	$	51,623		$	46,443		$	27,535		$	25,145

Funded Status	$	(23,420	)	$	(9,598	)	$	(22,043	)	$	(12,067	)

Amounts Recognized in the Consolidated Balance Sheets consist of:
Current Liability		328		330		—		—
Noncurrent Liability		23,092		9,268		22,043		12,067
Net Liability Recognized	$	23,420	$	9,598	$	22,043	$	12,067

	Years Ended December 31,
	(Thousands of Dollars)
	Pension Plan									Other Benefits Plan
	2014			2013			2012			2014			2013			2012
Components of Net Periodic Benefit Cost
Service Cost	$	1,894		$	2,300		$	2,198		$	1,032		$	1,338		$	1,784
Interest Cost		2,682			2,468			2,417			1,792			1,594			1,868
Expected Return on Plan Assets		(3,534	)		(2,894	)		(2,458	)		(1,937	)		(1,622	)		(1,258	)
Amortization of Net Transition Obligation		—			—			—			—			—			135
Amortization of Net Actuarial Loss		416			1,632			1,549			1,413			2,066			1,765
Amortization of Prior Service Cost/(Credit)		2			10			10			(1,728	)		(1,728	)		—
Net Periodic Benefit Cost	$	1,460		$	3,516		$	3,716		$	572		$	1,648		$	4,294

Amounts that are expected to be amortized from Regulatory Assets into Net Periodic Benefit Cost in 2015 are as follows:

	(Thousands of Dollars)
	Pension Plan		Other Benefits Plan
Actuarial Loss	$	1,646	$	2,261
Prior Service Credit		—		(1,728	)

The discount rate and compensation increase rate for determining our postretirement benefit plans' benefit obligations and costs as of December 31, 2014, 2013 and 2012, respectively, are as follows:

	Pension Plan									Other Benefits Plan
	2014			2013			2012			2014			2013			2012
Weighted Average Assumptions:
Expected Return on Plan Assets		7.50	%		7.50	%		7.50	%		7.50	%		7.50	%		7.50	%
Discount Rate for:
Benefit Obligation		3.91	%		4.87	%		3.99	%		3.91	%		4.87	%		3.99	%
Benefit Cost		4.87	%		3.99	%		4.37	%		4.87	%		3.99	%		4.37	%
Compensation Increase for:
Benefit Obligation		3.00	%		3.00	%		3.00	%		3.00	%		3.00	%		3.00	%
Benefit Cost		3.00	%		3.00	%		3.00	%		3.00	%		3.00	%		3.00	%

The compensation increase assumption for the Other Benefits Plan is attributable to life insurance provided to qualifying employees upon their retirement. The insurance coverage will be determined based on the employee's base compensation as of their retirement date.

The Company adopted the use of the recently issued Society of Actuaries' mortality table (RP 2014). RP 2014 was used in the determination of our postretirement benefit obligations as of December 31, 2014 and costs for 2015. Use of the RP 2014 mortality table, which extends the assumed life expectancies of our postretirement benefit plan participants, resulted in significant increases to our postretirement benefit obligations as of December 31, 2014 and is expected to increase our costs in 2015.

For the 2014 valuation, costs and obligations for our Other Benefits Plan assumed a 9.0% annual rate of increase in the per capita cost of covered healthcare benefits in 2015 with the annual rate of increase declining 1.0% per year for 2016-2018 and 0.5% per year for 2019-2020, resulting in an annual rate of increase in the per capita cost of covered healthcare benefits of 5% by year 2020.

A one-percentage point change in assumed healthcare cost trend rates would have the following effects on the Other Benefits Plan:

	(Thousands of Dollars)
	1 Percentage Point
	Increase		Decrease
Effect on Current Year's Service and Interest Cost	$	570	$	(443	)
Effect on Projected Benefit Obligation	$	9,404	$	(7,298	)

The following benefit payments, which reflect expected future service, are expected to be paid:

	(Thousands of Dollars)
Year	Pension Plan		Other Benefits Plan
2015	$	2,056	$	885
2016		2,031		1,051
2017		2,315		1,269
2018		2,392		1,443
2019		2,405		1,629
2020-2024		17,554		10,060
Totals	$	28,753	$	16,337

Benefit Plans Assets

The allocation of plan assets at December 31, 2014 and 2013 by asset category is as follows:

	Pension Plan					Other Benefits Plan
Asset Category		2014		2013			2014		2013		Target		Range
Equity Securities		60.7	%	65.4	%		49.5	%	47.8	%	60	%	30-70%
Debt Securities		35.8	%	32.1	%		47.5	%	47.9	%	38	%	25-70%
Cash		1.2	%	0.8	%		2.8	%	3.6	%	2	%	0-10%
Real Estate/Commodities		2.3	%	1.7	%		0.2	%	0.7	%	0	%	0-5%
Total		100.0	%	100.0	%		100.0	%	100.0	%

Two outside investment firms each manage a portion of the Pension Plan asset portfolio. One of those investment firms also manages the Other Benefits Plan asset portfolio. Quarterly meetings are held between the Company's Pension Committee of the Board of Directors and the investment managers to review their performance and asset allocation. If the actual asset allocation is outside the targeted range, the Pension Committee reviews current market conditions and advice provided by the investment managers to determine the appropriateness of rebalancing the portfolio.

The objective of the Company is to maximize the long-term return on retirement plan assets, relative to a reasonable level of risk, maintain a diversified investment portfolio and maintain compliance with the Employee Retirement Income Security Act of 1974. The expected long-term rate of return is based on the various asset categories in which plan assets are invested and the current expectations and historical performance for these categories.

Equity securities include Middlesex common stock in the amounts of $0.9 million (1.8% of total Pension Plan assets) and $0.8 million (1.8 % of total Pension Plan assets) as of December 31, 2014 and 2013, respectively.

Fair Value Measurements

Accounting guidance provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:

•

Level 1 – Inputs to the valuation methodology are unadjusted quoted market prices for identical assets or liabilities in accessible active markets.

•

Level 2 – Inputs to the valuation methodology that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. If the asset or liability has a specified contractual term, the Level 2 input must be observable for substantially the full term of the asset or liability.

•

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Certain investments in cash and cash equivalents, equity securities, and commodities are valued based on quoted market prices in active markets and are classified as Level 1 investments. Certain investments in cash and cash equivalents, equity securities and fixed income securities are valued using prices received from pricing vendors that utilize observable inputs and are therefore classified as Level 2 investments.

The following table presents Middlesex's Pension Plan assets measured and recorded at fair value within the fair value hierarchy as of December 31, 2014 (amounts in thousands):

	Level 1		Level 2		Level 3		Total
Mutual Funds:
Small Cap Core	$	261	$	—	$	—		261
Small Cap Value		876		—		—		876
Mid Cap Core		1,013		—		—		1,013
Mid Cap Value		627		—		—		627
Large Cap Blend		1,187		—		—		1,187
Large Cap Core		15,321		—		—		15,321
Foreign Large Core		989		—		—		989
Foreign Large Growth		449						449
Foreign Large Blend		2,566		—		—		2,566
Diversified Emerging Markets		737		—		—		737
Intermediate Term Bond		9,824		—		—		9,824
World Bond		8,668		—		—		8,668
Money Market Funds:
Cash and Cash Equivalents		127		386		—		513
Common Equity Securities:
Non-Financial Services		280		—		—		280
Financial Services		1,656		—		—		1,656
Utilities		1,504		—		—		1,504
Consumer Growth		1,123		—		—		1,123
Consumer Staples		459		—		—		459
Consumer Cyclicals		922		—		—		922
Industrial Resources		155		—		—		155
Capital Equipment		453		—		—		453
Technology		1,328		—		—		1,328
Energy		712		—		—		712
Total Investments	$	51,237	$	386	$	—	$	51,623

The following table presents Middlesex's Pension Plan assets measured and recorded at fair value within the fair value hierarchy as of December 31, 2013 (amounts in thousands):

	Level 1		Level 2		Level 3		Total
Mutual Funds:
Small Cap Core	$	191	$	—	$	—		191
Small Cap Value		278		—		—		278
Mid Cap Growth		1,015		—		—		1,015
Mid Cap Value		555		—		—		555
Large Cap Core		13,916		—		—		13,916
Foreign Small Mid Growth		298		—		—		298
Foreign Large Core		863		—		—		863
Foreign Large Growth		457						457
Foreign Large Blend		2,439		—		—		2,439
Pacific Asia/ex-Japan Stock		157						157
Diversified Emerging Markets		590		—		—		590
Intermediate Term Bond		14,909		—		—		14,909
Real Asset		1,074		—		—		1,074
Money Market Funds:
Cash and Cash Equivalents		44		313		—		357
Common Equity Securities:
Non-Financial Services		147		—		—		147
Financial Services		1,882		—		—		1,882
Utilities		1,433		—		—		1,433
Consumer Growth		1,665		—		—		1,665
Consumer Staples		392		—		—		392
Consumer Cyclicals		1,063		—		—		1,063
Industrial Resources		149		—		—		149
Capital Equipment		419		—		—		419
Technology		1,319		—		—		1,319
Energy		875		—		—		875
Total Investments	$	46,130	$	313	$	—	$	46,443

The following table presents Middlesex's Other Benefits Plan assets measured and recorded at fair value within the fair value hierarchy as of December 31, 2014 (amounts in thousands):

	Level 1		Level 2		Level 3		Total
Mutual Funds:
Small Cap Core	$	491	$	—	$	—	$	491
Small Cap Growth		82		—		—		82
Mid Cap Core		292		—		—		292
Mid Cap Growth		121		—		—		121
Mid Cap Value		768		—		—		768
Large Cap Core		10,516		—		—		10,516
Foreign Small Mid Growth		119		—		—		119
Foreign Large Core		735		—		—		735
Foreign Large Value		113		—		—		113
Diversified Emerging Markets		371		—		—		371
Real Estate Index		62		—		—		62
Money Market Funds:
Cash and Cash Equivalents		450		332		—		782
Preferred Equity Securities		221		—		—		221
Agency/US/State/Municipal Debt		—		12,862		—		12,862
Total Investments	$	14,341	$	13,194	$	—	$	27,535

The following table presents Middlesex's Other Benefits Plan assets measured and recorded at fair value within the fair value hierarchy as of December 31, 2013 (amounts in thousands):

	Level 1		Level 2		Level 3		Total
Mutual Funds:
Small Cap Core	$	290	$	—	$	—	$	290
Mid Cap Core		264		—		—		264
Mid Cap Growth		470		—		—		470
Mid Cap Value		658		—		—		658
Large Cap Core		8,650		—		—		8,650
Foreign Small Mid Growth		361		—		—		361
Foreign Large Core		780		—		—		780
Foreign Large Growth		151		—		—		151
Foreign Large Value		86		—		—		86
Pacific Asia/ex-Japan Stock		125						125
Diversified Emerging Markets		195		—		—		195
Preferred Stock Index		110		—		—		110
Real Estate Index		59		—		—		59
Money Market Funds:
Cash and Cash Equivalents		—		895		—		895
Agency/US/State/Municipal Debt		767		11,161		—		11,928
Commodities		123		—		—		123
Total Investments	$	13,089	$	12,056	$	—	$	25,145

Benefit Plans Contributions

For the Pension Plan, Middlesex made total cash contributions of $3.6 million in 2014 and expects to make approximately $3.3 million of cash contributions in 2015.

For the Other Benefits Plan, Middlesex made total cash contributions of $1.7 million in 2014 and expects to make approximately $1.7 million of cash contributions in 2015.

401(k) Plan

The Company has a 401(k) defined contribution plan, which covers substantially all employees with more than 1,000 hours of service. Under the terms of the Plan, the Company matches 100% of a participant's contributions, which do not exceed 1% of a participant's compensation, plus 50% of a participant's contributions exceeding 1%, but not more than 6%. The Company's matching contributions were $0.6 million, $0.5 million and $0.5 million for the years ended December 31, 2014, 2013 and 2012, respectively.

For those employees hired after March 31, 2007 and still actively employed on December 31, 2014, the Company approved and will fund discretionary contribution of $0.3 million, which was based on 5.0% of eligible 2014 compensation. For the years ended December 31, 2013 and 2012, the Company made discretionary contributions of $0.3 million and $0.2 million, respectively, for those qualifying employees.

Stock-Based Compensation

The Company has a stock compensation plan for certain management employees (the 2008 Restricted Stock Plan). The Company maintains an escrow account for 0.1 million shares of the Company's common stock for the 2008 Restricted Stock Plan. Such stock is subject to an agreement requiring forfeiture by the employee in the event of termination of employment within five years of the award other than as a result of retirement, death, disability or change in control. The maximum number of shares authorized for grant under the 2008 Restricted Stock Plan is 0.3 million shares, for which 0.2 million remain as unissued shares.

The Company recognizes compensation expense at fair value for the restricted stock awards in accordance with

ASC 718, Compensation – Stock Compensation. Compensation expense is determined by the market value of the stock on the date of the award and is being amortized over a five-year period.

The following table presents information on the 2008 Restricted Stock Plan:

	Shares (thousands)			Unearned Compensation (thousands)			Weighted Average Grant Price
Balance, January 1, 2012		108		$	1,079
Granted		21			408		$	19.35
Vested		(15	)		—
Forfeited		—			—
Amortization of Compensation Expense		—			(448	)
Balance, December 31, 2012		114		$	1,039
Granted		28			589		$	21.20
Vested		(24	)		—
Forfeited		(1	)		(12	)
Amortization of Compensation Expense		—			(400	)
Balance, December 31, 2013		117		$	1,216
Granted		33			711		$	21.46
Vested		(22	)		—
Forfeited		(1	)		(10	)
Amortization of Compensation Expense		—			(434	)
Balance, December 31, 2014		127		$	1,483

The fair value of vested restricted shares was $0.5 million, $0.5 million, and $0.3 million for the years ended December 31, 2014, 2013, and 2012, respectively.