Note 9: Retirement Benefit Plans

The Company sponsors the following retirement benefit plans to provide certain pension and post-retirement 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 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.

•

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:


	2012			2011			2010
Used to Determine Plan costs for years ended December 31:
Discount Rate		4.60	%		5.35	%		5.75	%
Rate of Compensation Increase		3.00	%		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		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)	$	981		$	909		$	728
Effect of 1% Decrease in Health Care Cost Trend Rate (000’s)	$	(756	)	$	(705	)	$	(565	)


Used to Determine Benefit Obligations at December 31:
Discount Rate		4.00	%		4.60	%		5.35	%
Rate of Compensation Increase		3.00	%		3.00	%		3.50	%
Health Care Cost Trend Rate Assumed for Next Year		8.00	%		6.50	%		7.00	%
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)	$	11,808		$	9,109		$	7,530
Effect of 1% Decrease in Health Care Cost Trend Rate (000’s)	$	(9,291	)	$	(7,217	)	$	(5,997	)

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 2012, 2011 and 2010, a change in the discount rate of 0.25% would have resulted in an increase or decrease of approximately $367,000, $325,000 and $300,000, respectively, in the Net Periodic Benefit Cost (NPBC). The Rate of Compensation Increase assumption used for 2012, 2011 and 2010 was 3.00%, 3.50% and 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
	2012			2011			2010			2012			2011			2010			2012		2011		2010

Service Cost	$	3,227		$	2,941		$	2,608		$	2,066		$	1,918		$	1,466		$	289	$	285	$	285

Interest Cost		4,633			4,684			4,457			2,303			2,279			2,016			211		227		227

Expected Return on Plan Assets		(5,390	)		(4,840	)		(4,181	)		(695	)		(818	)		(599	)		—		—		—

Prior Service Cost Amortization		188			249			253			1,729			1,729			1,579			11		11		2

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

Curtailment Loss		—			—			41			—			—			—			—		—		—

Actuarial Loss Amortization		3,617			3,132			2,406			129			—			—			64		78		133


Sub-total		6,275			6,166			5,584			5,553			5,129			4,483			575		601		647

Amounts Capitalized and Deferred		(2,726	)		(2,590	)		(2,240	)		(2,127	)		(1,622	)		(1,183	)		—		—		—

NPBC Recognized	$	3,549		$	3,576		$	3,344		$	3,426		$	3,507		$	3,300		$	575	$	601	$	647

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 $4.4 million, $2.5 million and $0.2 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 2012, 2011 and 2010 before capitalization and deferral was $6.3 million, $6.2 million and $5.6 million, respectively. Had the Company used the fair value of assets instead of the market-related value, pension expense for the years 2012, 2011 and 2010 would have been $6.7 million, $5.7 million and $6.2 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:	2012			2011			2012			2011			2012			2011

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

Actual Return on Plan Assets		7,780			225			837			108			—			—

Employer Contributions		9,387			8,813			2,190			—			53			53

Participant Contributions		—			—			18			13			—			—

Acquired Plan Assets		—			—			—			—			—			—

Benefits Paid		(4,456	)		(3,438	)		(2,083	)		(1,644	)		(53	)		(53	)

Plan Assets at End of Year	$	72,411		$	59,700		$	8,301		$	7,339		$	—		$	—


Change in PBO:

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

Service Cost		3,227			2,941			2,066			1,918			289			285

Interest Cost		4,633			4,684			2,303			2,279			211			227

Participant Contributions		—			—			18			13			—			—

Plan Amendments		617			—			(318	)		—			—			—

Curtailment Gain		—			—			—			—			—			—

Benefits Paid		(4,456	)		(3,438	)		(2,083	)		(1,644	)		(53	)		(53	)

Actuarial (Gain) or Loss		9,752			9,139			9,176			5,020			1,145			(107	)

PBO at End of Year	$	116,492		$	102,719		$	62,092		$	50,930		$	6,207		$	4,615

Funded Status: Assets vs PBO	$	(44,081	)	$	(43,019	)	$	(53,791	)	$	(43,591	)	$	(6,207	)	$	(4,615	)

The Company has recorded on its consolidated balance sheets as a liability the underfunded status of its and its subsidiaries’ retirement benefit obligations based on the projected benefit obligation. The Company has recognized Regulatory Assets of $62.5 million and $55.3 million at December 31, 2012 and 2011, respectively, to account for 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 $103.4 million and $91.3 million as of December 31, 2012 and 2011, respectively. The ABO for the SERP was $4.8 million and $0.5 million as of December 31, 2012 and 2011, 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 was 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 evaluated the two alternative shortfall amortization periods under the Relief Act and made the decision to continue with the seven year amortization period.

On July 6, 2012, the Moving Ahead for Progress in the 21st Century Act (MAP-21) was signed into law. MAP-21 increased the interest rates used to determine pension liability. The Company elected to apply the provisions of MAP-21 for purposes of determining pension liability for minimum funding purposes for the 2012 plan year. As part of this decision, the Company contributed $3.1 million in additional contributions in 2012 for the 2011 plan year to achieve 100% funding on the MAP-21 basis as of January 1, 2012. This eliminated the amortization payments created in prior years, discussed above. In addition, the minimum required contribution for the 2012 plan year decreased from $6.1 million to $1.0 million. Of the $9.4 million contributed during 2012, $8.3 million was attributed to the 2011 plan year and $1.1 million was attributed to the 2012 plan year.

The Company, along with its subsidiaries, expects to continue to make contributions to its Pension Plan in 2013 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
	2012		2011		2010		2012		2011		2010		2012		2011		2010
Employer Contributions	$	9,387	$	8,813	$	4,302	$	2,190	$	—	$	3,482	$	53	$	53	$	53
Participant Contributions	$	—	$	—	$	—	$	18	$	13	$	—	$	—	$	—	$	—
Benefit Payments	$	4,456	$	3,438	$	3,185	$	2,083	$	1,644	$	1,848	$	53	$	53	$	53

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


Estimated Future Benefit Payments
	Pension		PBOP		SERP
2013	$	4,698	$	1,811	$	357
2014		4,448		1,960		353
2015		4,567		2,083		349
2016		4,908		2,156		344
2017		5,121		2,284		339
2018 - 2022	$	30,278	$	13,535	$	1,767

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 2013			Actual Allocation at December 31,
	Target Allocation 2013			2012			2011			2010
Equity Funds		48	%		48	%		49	%		58	%
Debt Funds		47	%		47	%		46	%		42	%
Asset Allocation Fund⁽¹⁾		5	%		5	%		5	%		0	%

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 2013			Actual Allocation at December 31,
PBOP Plan	Target Allocation 2013			2012			2011			2010
Equity Funds		55	%		56	%		55	%		56	%
Debt Funds		45	%		44	%		45	%		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 2012. 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.

Assets measured at fair value on a recurring basis for the Pension Plan as of December 31, 2012 and 2011 are as follows ($000’s):


	Fair Value Measurements at Reporting Date Using
Description	Balance as of December 31, 2012		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	$	34,742	$	34,742	$	—	$	—
Fixed Income Funds		34,251		34,251		—		—
Asset Allocation Fund		3,418		3,418		—		—

Total Assets	$	72,411	$	72,411	$	—	$	—


	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	$	—	$	—

Assets measured at fair value on a recurring basis for the PBOP Plan as of December 31, 2012 and 2011 are as follows ($000’s):


	Fair Value Measurements at Reporting Date Using
Description	Balance as of December 31, 2012		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	$	3,670	$	3,670	$	—	$	—
Index Funds		3,357		3,357
Equity Funds		1,274		1,274

Total Assets	$	8,301	$	8,301	$	—	$	—


	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	$	—	$	—

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.

The Company’s contributions to the 401(k) Plan were $1,387,000, $1,190,000 and $980,000 for the years ended December 31, 2012, 2011, and 2010, respectively.