Note 9: Retirement Benefit Plans

The Company sponsors the following retirement benefit plans to provide certain pension and postretirement benefits for its retirees and current employees as follows:

•

The Unitil Corporation Retirement Plan (Pension Plan)—The Pension Plan is a defined benefit pension plan. Under the Pension Plan, retirement benefits are based upon an employee's level of compensation and length of service. In September 2009, the Company amended the Pension Plan as follows:

•

The Pension Plan was closed to non-union employees hired on or after January 1, 2010.

•

All non-union employees hired before January 1, 2010 had a choice of either:

•

Remaining in the Pension Plan with the existing set of benefits, or

•

Electing to move to Unitil Corporation's enhanced Tax Deferred Savings and Investment Plan. Non-union employees who elected this option received a frozen benefit from the existing Pension Plan for all of the benefits that they had accrued to December 31, 2009. This frozen benefit will not grow with future salary increases or future service. Non-union employees who elected this option will receive an enhanced employer matching contribution as well as a Company contribution in the Unitil Corporation Tax Deferred Savings and Investment Plan.

•

Union employees were not affected by this amendment.

In September 2010, the Company amended the Pension Plan as follows:

•

The Pension Plan was closed to United Steelworker Local 12012-6 employees hired on or after January 1, 2011.

•

All United Steelworker Local 12012-6 employees hired before January 1, 2011 had a choice of either:

•

Remaining in the Pension Plan with the existing set of benefits, or

•

Electing to move to Unitil Corporation's enhanced Tax Deferred Savings and Investment Plan. The United Steelworker Local 12012-6 employees who elected this option received a frozen benefit from the existing Pension Plan for all of the benefits that they had accrued to December 31, 2010. This frozen benefit will not grow with future salary increases or future service. The employees who elected this option will receive an enhanced employer matching contribution as well as a Company contribution in the Unitil Corporation Tax Deferred Savings and Investment Plan.

•

All other union employees were not affected by this amendment.

•

The Unitil Retiree Health and Welfare Benefits Plan (PBOP Plan)—The PBOP Plan provides health care and life insurance benefits to retirees. The Company has established Voluntary Employee Benefit Trusts (VEBT), into which it funds contributions to the PBOP Plan. In 2009, the Company made the following changes to the PBOP Plan.

Changes to Utility Workers Union of America Local 341 Benefits

A new Collective Bargaining Agreement (Agreement) was entered into between Northern Utilities, Granite State and the Utility Workers Union of America Local 341 (UWUA) for the period April 1, 2009 through March 31, 2012. Included in the Agreement were changes to retiree medical benefits under the Plan. These changes are as follows:

•

Retirees under sixty-five (65) years and their dependents will be covered by the medical benefits provided by the PBOP Plan. Early retirees will be responsible for contributing 20% of the premium for medical insurance for themselves and their dependents until age sixty-five (65).

•

Retirees over sixty-five (65) years will be covered by a Supplement to Medicare Plan and will be responsible for a 20% premium cost sharing.

•

For all employees hired on or after April 1, 2009, no post-65 retiree medical coverage will be provided.

•

The Company is to determine post-65 drug coverage to be offered to all future retirees eligible for retiree medical.

These above-referenced retiree medical provisions were effective January 1, 2010.

Changes to United Steelworker Local 12012-6 Benefits

A new Collective Bargaining Agreement (Agreement) was entered into between Northern Utilities and United Steelworker Local 12012-6 (USW) for the period June 6, 2010 through June 5, 2014. Included in the Agreement were changes to retiree medical benefits under the Plan. These changes are as follows:

•

Retirees over sixty-five (65) years will be covered by a Supplement to Medicare Plan and will be responsible for a 20% premium cost sharing.

•

For all employees hired on or after June 6, 2010, no post-65 retiree medical coverage will be provided.

These above-referenced retiree medical provisions were effective June 6, 2010.

Changes to Non-Union Employee Benefits

In September 2009, the Company announced the following PBOP Plan changes, effective January 1, 2010, for non-union employees:

•

Employees who retire on or after January 1, 2010 will pay 20% of the cost of their retiree medical benefits.

•

Employees who retire on or after January 1, 2010 will not receive any cash payments towards their Medicare premiums.

•

Employees who are hired on or after January 1, 2010 will only be provided with company subsidized medical insurance until they reach age 65 and will not receive a Medicare supplement plan after age 65.

•

The Unitil Corporation Supplemental Executive Retirement Plan (SERP)—The SERP is an unfunded retirement plan, with participation limited to executives selected by the Board of Directors.

Effective with the acquisitions of Northern Utilities and Granite State, the Company assumed the assets and obligations of the Northern Utilities and Granite State pension plans with respect to active union employees. All other active employees of Northern Utilities and Granite State effectively became members of the Company's Pension Plan as of the acquisitions closing date.

Certain employees of Northern Utilities qualified for participation in the Company's PBOP Plan effective with the acquisition closing date.

The following table includes the key assumptions used in determining the Company's benefit plan costs and obligations:


	2011			2010			2009
Used to Determine Plan costs for years ended December 31:
Discount Rate ⁽¹⁾		5.35	%		5.75	%		6.25	%
Rate of Compensation Increase		3.50	%		3.50	%		3.50	%
Expected Long-term rate of return on plan assets		8.50	%		8.50	%		8.50	%
Health Care Cost Trend Rate Assumed for Next Year		7.00	%		7.50	%		8.00	%
Ultimate Health Care Cost Trend Rate		4.00	%		4.00	%		4.00	%
Year that Ultimate Health Care Cost Trend Rate is reached		2017			2017			2017
Effect of 1% Increase in Health Care Cost Trend Rate (000's)	$	909		$	728		$	735
Effect of 1% Decrease in Health Care Cost Trend Rate (000's)	$	(705	)	$	(565	)	$	(576	)

⁽¹⁾

As a result of the changes to the PBOP Plan in September 2009 discussed above, the Company was required to update the discount rate used in determining the PBOP Plan costs for the remainder of 2009. Based on the market rates for long-term bonds at that time, the Company assumed a discount rate of 5.50% for the PBOP Plan from September through December of 2009.


Used to Determine Benefit Obligations at December 31:
Discount Rate		4.60	%		5.35	%		5.75	%
Rate of Compensation Increase		3.00	%		3.50	%		3.50	%
Health Care Cost Trend Rate Assumed for Next Year		6.50	%		7.00	%		7.50	%
Ultimate Health Care Cost Trend Rate		4.00	%		4.00	%		4.00	%
Year that Ultimate Health care Cost Trend Rate is reached		2017			2017			2017
Effect of 1% Increase in Health Care Cost Trend Rate (000's)	$	9,109		$	7,530		$	5,887
Effect of 1% Decrease in Health Care Cost Trend Rate (000's)	$	(7,217	)	$	(5,997	)	$	(4,704	)

The Discount Rate assumptions used in determining retirement plan costs and retirement plan obligations are based on an assessment of current market conditions using high quality corporate bond interest rate indices and pension yield curves. For 2011, 2010 and 2009, a change in the discount rate of 0.25% would have resulted in an increase or decrease of approximately $325,000, $300,000 and $300,000, respectively, in the Net Periodic Benefit Cost (NPBC). The Rate of Compensation Increase assumption used for 2011, 2010 and 2009 was 3.50%, based on the expected long-term increase in compensation costs for personnel covered by the plans.

The following table provides the components of the Company's Retirement plan costs ($000's):


	Pension Plan									PBOP Plan									SERP
	2011			2010			2009			2011			2010			2009			2011		2010		2009

Service Cost	$	2,941		$	2,608		$	2,282		$	1,918		$	1,466		$	1,417		$	285	$	285	$	217

Interest Cost		4,684			4,457			4,294			2,279			2,016			2,269			227		227		181

Expected Return on Plan Assets		(4,840	)		(4,181	)		(4,432	)		(818	)		(599	)		(440	)		—		—		—

Prior Service Cost Amortization		249			253			264			1,729			1,579			1,634			11		2		(2	)

Transition Obligation Amortization		—			—			—			21			21			21			—		—		—

Curtailment Loss		—			41			32			—			—			—			—		—		—

Actuarial Loss Amortization		3,132			2,406			1,598			—			—			—			78		133		70


Sub-total		6,166			5,584			4,038			5,129			4,483			4,901			601		647		466

Amounts Capitalized and Deferred		(2,590)			(2,240	)		(1,409	)		(1,622	)		(1,183	)		(1,642	)		—		—		—

NPBC Recognized	$	3,576		$	3,344		$	2,629		$	3,507		$	3,300		$	3,259		$	601	$	647	$	466

The estimated amortizations related to Actuarial Loss and Prior Service Cost included in the Company's Retirement plan costs over the next fiscal year is $3.8 million, $1.9 million and $0.1 million for the Pension, PBOP and SERP plans, respectively.

The Company bases the actuarial determination of pension expense on a market-related valuation of assets, which reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a three-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the fair value of assets. Since the market-related value of assets recognizes gains or losses over a three-year period, the future value of the market-related assets will be impacted as previously deferred gains or losses are recognized. The Company's pension expense for the years 2011, 2010 and 2009 before capitalization and deferral was $6.2 million, $5.6 million and $4.0 million, respectively. Had the Company used the fair value of assets instead of the market-related value, pension expense for the years 2011, 2010 and 2009 would have been $5.7 million, $6.2 million and $6.3 million respectively.

The following table represents information on the plans' assets, projected benefit obligations (PBO), and funded status ($000's):


	Pension Plan						PBOP Plan						SERP
Change in Plan Assets:	2011			2010			2011			2010			2011			2010

Plan Assets at Beginning of Year	$	54,100		$	47,082		$	8,862		$	6,306		$	—		$	—

Actual Return on Plan Assets		225			5,901			108			922			—			—

Employer Contributions		8,813			4,302			—			3,482			53			53

Participant Contributions		—			—			13			—			—			—

Acquired Plan Assets		—			—			—			—			—			—

Benefits Paid		(3,438	)		(3,185	)		(1,644	)		(1,848	)		(53	)		(53	)

Plan Assets at End of Year	$	59,700		$	54,100		$	7,339		$	8,862		$	—		$	—


Change in PBO:

PBO at Beginning of Year	$	89,393		$	79,288		$	43,344		$	35,694		$	4,263		$	3,979

Service Cost		2,941			2,608			1,918			1,466			285			285

Interest Cost		4,684			4,457			2,279			2,016			227			227

Participant Contributions		—			—			13			—			—			—

Plan Amendments		—			—			—			1,683			—			138

Curtailment Gain		—			(1	)		—			—			—			—

Benefits Paid		(3,438	)		(3,185	)		(1,644	)		(1,848	)		(53	)		(53	)

Actuarial (Gain) or Loss		9,139			6,226			5,020			4,333			(107	)		(313	)

PBO at End of Year	$	102,719		$	89,393		$	50,930		$	43,344		$	4,615		$	4,263

Funded Status: Assets vs PBO	$	(43,019	)	$	(35,293	)	$	(43,591	)	$	(34,482	)	$	(4,615	)	$	(4,263	)

The Company has recorded on its consolidated balance sheets as a liability the underfunded status of their retirement benefit obligations based on the projected benefit obligation. The Company has recognized Regulatory Assets of $55.3 million and $47.1 million at December 31, 2011 and 2010, respectively, to recognize the future collection of these plan obligations in electric and gas rates.

The Accumulated Benefit Obligation (ABO) is required to be disclosed for all plans where the ABO is in excess of plan assets. The difference between the PBO and the ABO is that the PBO includes projected compensation increases. The ABO for the Pension Plan was $91.3 million and $78.4 million as of December 31, 2011 and 2010, respectively. The ABO for the SERP was $0.5 million and $0.5 million as of December 31, 2011 and 2010, respectively. For the PBOP Plan, the ABO and PBO are the same.

On August 17, 2006, the Pension Protection Act of 2006 (PPA) was signed into law. Included in the PPA were new minimum funding rules which went into effect for plan years beginning in 2008. The funding target was 100% of a plan's liability (as determined under the PPA) with any shortfall amortized over seven years, with lower (92% – 100%) funding targets available to well-funded plans during the transition period. Due to the significant declines in the valuation of capital markets during 2008, the Worker, Retiree, and Employer Recovery Act of 2008 (Recovery Act) was signed into law on December 23, 2008. Included in the Recovery Act are temporary modifications to the minimum funding rules set forth in the PPA such that all plans, except those that were subject to deficit reduction contribution requirements in 2007, are allowed to amortize any shortfall from the lower funding targets, rather than the 100% target, for the 2008 – 2010 plan years. The Company's Pension Plan was 80% funded under the requirements of the Employee Retirement Income Security Act of 1974 (ERISA) as of January 1, 2010 which resulted in a shortfall of $10.2 million. This shortfall is being amortized over seven years with annual payments of $1.7 million, beginning in 2010. The $1.7 million payments for 2010 and 2011 are included in the Employer Contributions amounts shown in the table below. On June 25, 2010, the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (Relief Act) was signed into law. The pension relief portion of the Relief Act provides two alternative shortfall amortization periods to the seven year amortization period required under the PPA. The Company has evaluated the two alternative shortfall amortization periods under the Relief Act and made the decision to continue with the seven year amortization period. The Company, along with its subsidiaries, expects to continue to make contributions to its Pension Plan in 2012 and future years at minimum required and discretionary funding levels consistent with the amounts recovered in the distribution utilities' rates for these Pension Plan costs.

The following table represents employer contributions, participant contributions and benefit payments ($000's).


	Pension Plan						PBOP Plan						SERP
	2011		2010		2009		2011		2010		2009		2011		2010		2009
Employer Contributions	$	8,813	$	4,302	$	4,227	$	—	$	3,482	$	2,800	$	53	$	53	$	53
Participant Contributions	$	—	$	—	$	—	$	13	$	—	$	—	$	—	$	—	$	—
Benefit Payments	$	3,438	$	3,185	$	3,742	$	1,644	$	1,848	$	1,731	$	53	$	53	$	53

The following table represents estimated future benefit payments ($000's).


Estimated Future Benefit Payments
	Pension		PBOP		SERP
2012	$	4,040	$	1,762	$	52
2013		4,197		1,835		302
2014		4,466		1,941		301
2015		4,570		2,035		299
2016		4,738		2,088		298
2017 - 2021	$	28,659	$	12,214	$	1,497

The Expected Long-Term Rate of Return on Pension Plan assets assumption used by the Company is developed based on input from actuaries and investment managers. The Company's Expected Long-Term Rate of Return on Pension Plan assets is based on target investment allocation of 48% in common stock equities, 47% in fixed income securities and 5% in a combined equity and debt fund. The Company's Expected Long-Term Rate of Return on PBOP Plan assets is based on target investment allocation of 55% in common stock equities and 45% in fixed income securities. The actual investment allocations are shown in the tables below.


Pension Plan	Target Allocation 2012			Actual Allocation at December 31,
	Target Allocation 2012			2011			2010			2009
Equity Funds		48	%		49	%		58	%		59	%
Debt Funds		47	%		46	%		42	%		40	%
Asset Allocation Fund⁽¹⁾		5	%		5	%		0	%		1	%

Total					100	%		100	%		100	%

⁽¹⁾

Represents investments in an asset allocation fund. This fund invests in both equity and debt securities.


PBOP Plan	Target Allocation 2012			Actual Allocation at December 31,
PBOP Plan	Target Allocation 2012			2011			2010			2009
Equity Funds		55	%		55	%		56	%		56	%
Debt Funds		45	%		45	%		44	%		44	%

Total					100	%		100	%		100	%

The combination of these target allocations and expected returns resulted in the overall assumed long-term rate of return of 8.50% for 2011. The Company evaluates the actuarial assumptions, including the expected rate of return, at least annually. The desired investment objective is a long-term rate of return on assets that is approximately 5 – 6% greater than the assumed rate of inflation as measured by the Consumer Price Index. The target rate of return for the Plans has been based upon an analysis of historical returns supplemented with an economic and structural review for each asset class.

The FASB Codification defines fair value, and establishes 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 under the FASB Codification are described below:

Level 1 – Inputs

are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 – Valuations

based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 – Prices

or valuations that require inputs that are both significant to the fair value measurement and unobservable.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company's own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3.

Valuation Techniques

There have been no changes in the valuation techniques used during the current period.

Assets measured at fair value on a recurring basis for the Pension Plan as of December 31, 2011 and 2010 are as follows ($000's):


	Fair Value Measurements at Reporting Date Using
Description	Balance 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)
Pension Plan Assets:
Mutual Funds:
Equity Funds	$	29,094	$	29,094	$	—	$	—
Fixed Income Funds		27,697		27,697		—		—
Asset Allocation Fund		2,909		2,909		—		—

Total Assets	$	59,700	$	59,700	$	—	$	—


	Fair Value Measurements at Reporting Date Using
Description	Balance as of December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Pension Plan Assets:
Mutual Funds:
Equity Funds	$	31,625	$	31,625	$	—	$	—
Fixed Income Funds		22,475		22,475		—		—

Total Assets	$	54,100	$	54,100	$	—	$	—

Assets measured at fair value on a recurring basis for the PBOP Plan as of December 31, 2011 and 2010 are as follows ($000's):


	Fair Value Measurements at Reporting Date Using
Description	Balance 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)
PBOP Plan Assets:
Mutual Funds:
Fixed Income Funds	$	3,311	$	3,311	$	—	$	—
Index Funds		2,977		2,977
Equity Funds		1,051		1,051

Total Assets	$	7,339	$	7,339	$	—	$	—


	Fair Value Measurements at Reporting Date Using
Description	Balance as of December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
PBOP Plan Assets:
Mutual Funds:
Fixed Income Funds	$	3,936	$	3,936	$	—	$	—
Index Funds		3,580		3,580
Equity Funds		1,346		1,346

Total Assets	$	8,862	$	8,862	$	—	$	—

Employee 401(k) Tax Deferred Savings Plan—The Company sponsors the Unitil Corporation Tax Deferred Savings and Investment Plan (the 401(k) Plan) under Section 401(k) of the Internal Revenue Code and covering substantially all of the Company's employees. Participants may elect to defer current compensation by contributing to the plan. Employees may direct, at their sole discretion, the investment of their savings plan balances (both the employer and employee portions) into a variety of investment options, including a Company common stock fund.

In September 2009, the Company amended the Plan as follows:

For current non-union employees who elect to stay with the Company's existing Pension Plan, there will be no changes in the 401(k) Plan. For those employees, the Company will continue to match contributions, with a maximum matching contribution of 3% of current compensation and those participants will be 100% vested in these company matching contributions once they have completed three years of service.

For non-union employees who are hired on or after January 1, 2010, and for non-union employees who elect to move from the Company's existing Pension Plan and accept a frozen pension benefit, the Company will provide the following enhancements to the 401(k) Plan:

•

The Company will contribute 4% of base pay each year, regardless of whether or not the non-union employee elects to contribute to the 401(k) Plan.

•

The Company will increase the matching contributions from 3% of base pay to 6% of base pay. This will be a 100% match of the first 6% of the non-union employee's contributions.

•

All Company contributions will be 100% vested at all times.

•

New non-union employees will be automatically enrolled in the 401(k) Plan following the completion of 1,000 hours of service, with the automatic contribution rate of 3%. This contribution rate will automatically increase by 1% on January 1 of each year until the non-union employee's contribution is 10% of pay. Non-union employees may elect to opt-out of the automatic enrollment and/or automatic increase features of the enhanced 401(k) Plan.

The Company's contributions to the 401(k) Plan were $1,190,000, $980,000 and $671,000 for the years ended December 31, 2011, 2010, and 2009, respectively.