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' annual paid 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, 2015 and 2014 was $62.3 million and $61.9 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.

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 tables below sets forth information relating to the Company's Pension Plan and Other Benefits Plan for 2015 and 2014.

	(Thousands of Dollars)
	Pension Plan						Other Benefits Plan
	December 31,
	2015			2014			2015			2014
Change in Projected Benefit Obligation:
Beginning Balance	$	75,043		$	56,041		$	49,578		$	37,212
Service Cost		2,558			1,894			1,373			1,032
Interest Cost		2,894			2,682			1,921			1,792
Actuarial (Gain) Loss		(5,915	)		16,429			(6,062	)		10,092
Benefits Paid		(2,038	)		(2,003	)		(561	)		(550	)
Ending Balance	$	72,542		$	75,043		$	46,249		$	49,578

	(Thousands of Dollars)
	Pension Plan						Other Benefits Plan
	December 31,
	2015			2014			2015			2014
Change in Fair Value of Plan Assets:
Beginning Balance	$	51,623		$	46,443		$	27,535		$	25,145
Actual Return on Plan Assets		11			3,603			350			1,243
Employer Contributions		3,335			3,580			1,694			1,697
Benefits Paid		(2,038	)		(2,003	)		(561	)		(550	)
Ending Balance	$	52,931		$	51,623		$	29,018		$	27,535

Funded Status	$	(19,611	)	$	(23,420	)	$	(17,231	)	$	(22,043	)

	(Thousands of Dollars)
	Pension Plan				Other Benefits Plan
	December 31,
	2015		2014		2015		2014
Amounts Recognized in the Consolidated Balance Sheets consist of :
Current Liability		327		328		—		—
Noncurrent Liability		19,284		23,092		17,231		22,043
Net Liability Recognized	$	19,611	$	23,420	$	17,231	$	22,043

	(Thousands of Dollars)
	Pension Plan									Other Benefits Plan
	Years Ended December 31,
	2015			2014			2013			2015			2014			2013
Components of Net Periodic Benefit Cost
Service Cost	$	2,558		$	1,894		$	2,300		$	1,373		$	1,032		$	1,338
Interest Cost		2,894			2,682			2,468			1,921			1,792			1,594
Expected Return on Plan Assets		(3,919	)		(3,534	)		(2,894	)		(2,107	)		(1,937	)		(1,622	)
Amortization of Net Actuarial Loss		1,645			416			1,632			2,261			1,413			2,066
Amortization of Prior Service Cost/(Credit)		—			2			10			(1,728	)		(1,728	)		(1,728	)
Net Periodic Benefit Cost	$	3,178		$	1,460		$	3,516		$	1,720		$	572		$	1,648

Amounts that are expected to be amortized from Regulatory Assets into Net Periodic Benefit Cost in 2016 are as follows:

	(Thousands of Dollars)
	Pension Plan		Other Benefits Plan
Actuarial Loss	$	1,426	$	1,773
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, 2015, 2014 and 2013, respectively, are as follows:

	Pension Plan									Other Benefits Plan
	2015			2014			2013			2015			2014			2013
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		4.26	%		3.91	%		4.87	%		4.26	%		3.91	%		4.87	%
Benefit Cost		3.91	%		4.87	%		3.99	%		3.91	%		4.87	%		3.99	%
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 most recent Society of Actuaries' mortality table (RP 2014) (Mortality Improvement Scale MP2015 for the 2015 valuation). RP 2014 was first 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 and costs.

For the 2015 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 2016 with the annual rate of increase declining 1.0% per year for 2017-2019 and 0.5% per year for 2020-2021, resulting in an annual rate of increase in the per capita cost of covered healthcare benefits of 5% by year 2021.

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	$	781	$	(589	)
Effect on Projected Benefit Obligation	$	8,267	$	(6,482	)

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

	(Thousands of Dollars)
Year	Pension Plan		Other Benefits Plan
2016	$	2,123	$	876
2017		2,342		1,119
2018		2,393		1,315
2019		2,411		1,512
2020		2,795		1,645
2021-2025		19,641		10,473
Totals	$	31,705	$	16,940

Benefit Plans Assets

The allocation of plan assets at December 31, 2015 and 2014 by asset category is as follows:

	Pension Plan									Other Benefits Plan
Asset Category	2015			2014			Target			2015			2014			Target
Equity Securities		59.1	%		60.7	%		55	%		50.0	%		49.5	%		43	%
Debt Securities		37.8	%		35.8	%		38	%		47.4	%		47.5	%		50	%
Cash		1.3	%		1.2	%		2	%		2.4	%		2.8	%		2	%
Real Estate/Commodities		1.8	%		2.3	%		5	%		0.2	%		0.2	%		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 $1.0 million (2.0% of total Pension Plan assets) and $0.9 million (1.8 % of total Pension Plan assets) as of December 31, 2015 and 2014, 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, 2015 (amounts in thousands):

	Level 1		Level 2		Level 3		Total
Mutual Funds:
Small Cap Core	$	251	$	—	$	—		251
Small Cap Growth		217		—		—		217
Small Cap Value		1,107		—		—		1,107
Mid Cap Core		998		—		—		998
Mid Cap Value		606		—		—		606
Large Cap Blend		955		—		—		955
Large Cap Core		15,432		—		—		15,432
Foreign Large Core		284		—		—		284
Foreign Large Blend		3,775		—		—		3,775
Intermediate Term Bond		8,707		—		—		8,707
World Bond		11,291		—		—		11,291
Money Market Funds:
Cash and Cash Equivalents		652		—		—		652
Common Equity Securities:
Non-Financial Services		202		—		—		202
Financial Services		1,704		—		—		1,704
Utilities		1,754		—		—		1,754
Consumer Growth		1,191		—		—		1,191
Consumer Staples		553		—		—		553
Consumer Cyclicals		946		—		—		946
Industrial Resources		284		—		—		284
Capital Equipment		527		—		—		527
Technology		1,118		—		—		1,118
Energy		377		—		—		377
Total Investments	$	52,931	$	—	$	—	$	52,931

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 Other Benefits Plan assets measured and recorded at fair value within the fair value hierarchy as of December 31, 2015 (amounts in thousands):

	Level 1		Level 2		Level 3		Total
Mutual Funds:
Small Cap Core		594	$	—	$	—	$	594
Small Cap Growth		40		—		—		40
Small Cap Value		101						101
Mid Cap Core		295		—		—		295
Mid Cap Growth		135		—		—		135
Mid Cap Value		762		—		—		762
Large Cap Core		10,912		—		—		10,912
Foreign Small Mid Growth		116		—		—		116
Foreign Large Blend		413						413
Foreign Large Core		666		—		—		666
Foreign Large Growth		138		—		—		138
Diversified Emerging Markets		339		—		—		339
Real Estate Index		61		—		—		61
Money Market Funds:
Cash and Cash Equivalents		688				—		688
Preferred Equity Securities		224		—		—		224
Agency/US/State/Municipal Debt				13,534		—		13,534
Total Investments	$	15,484	$	13,534	$	—	$	29,018

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

Benefit Plans Contributions

For the Pension Plan, Middlesex made total cash contributions of $3.3 million in 2015 and expects to make approximately $3.3 million of cash contributions in 2016.

For the Other Benefits Plan, Middlesex made total cash contributions of $1.7 million in 2015 and expects to make approximately $1.5 million of cash contributions in 2016.

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, $0.6 million and $0.5 million for the years ended December 31, 2015, 2014 and 2013, respectively.

For those employees hired after March 31, 2007, and still actively employed on December 31, 2015, the Company approved, and will fund, a discretionary contribution of $0.4 million which was based on 5.0% of eligible 2015 compensation. For both of the years ended December 31, 2014 and 2013, the Company made discretionary contributions of $0.3 million 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 0.1 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, 2013		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
Granted		33			741		$	22.65
Vested		(12	)		—
Forfeited		—			—
Amortization of Compensation Expense		—			(528	)
Balance, December 31, 2015		148		$	1,696

The fair value of vested restricted shares was $0.3 million, $0.5 million and $0.5 million for the years ended December 31, 2015, 2014 and 2013, respectively.