Note 10: 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.

•

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:


	2013			2012			2011
Used to Determine Plan costs for years ended December 31:
Discount Rate		4.00	%		4.60	%		5.35	%
Rate of Compensation Increase		3.00	%		3.00	%		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		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)	$	1,169		$	981		$	909
Effect of 1% Decrease in Health Care Cost Trend Rate (000’s)	$	(895	)	$	(756	)	$	(705	)

Used to Determine Benefit Obligations at December 31:
Discount Rate		4.80	%		4.00	%		4.60	%
Rate of Compensation Increase		3.00	%		3.00	%		3.00	%
Health Care Cost Trend Rate Assumed for Next Year		8.00	%		8.00	%		6.50	%
Ultimate Health Care Cost Trend Rate		4.00	%		4.00	%		4.00	%
Year that Ultimate Health care Cost Trend Rate is reached		2018			2017			2017
Effect of 1% Increase in Health Care Cost Trend Rate (000’s)	$	9,957		$	11,808		$	9,109
Effect of 1% Decrease in Health Care Cost Trend Rate (000’s)	$	(7,942	)	$	(9,291	)	$	(7,217	)

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 2013, 2012 and 2011, a change in the discount rate of 0.25% would have resulted in an increase or decrease of approximately $431,000, $367,000 and $325,000, respectively, in the Net Periodic Benefit Cost (NPBC). The Rate of Compensation Increase assumption used for 2013, 2012 and 2011 was 3.00%, 3.00% 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
	2013			2012			2011			2013			2012			2011			2013		2012		2011

Service Cost	$	3,573		$	3,227		$	2,941		$	2,523		$	2,066		$	1,918		$	73	$	289	$	285

Interest Cost		4,567			4,633			4,684			2,448			2,303			2,279			241		211		227

Expected Return on Plan Assets		(5,955	)		(5,390	)		(4,840	)		(722	)		(695	)		(818	)		—		—		—

Prior Service Cost Amortization		208			188			249			1,701			1,729			1,729			11		11		11

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

Actuarial Loss Amortization		4,229			3,617			3,132			786			129			—			184		64		78


Sub-total		6,622			6,275			6,166			6,736			5,553			5,129			509		575		601

Amounts Capitalized and Deferred		(2,929	)		(2,726	)		(2,590	)		(3,010	)		(2,127	)		(1,622	)		—		—		—

NPBC Recognized	$	3,693		$	3,549		$	3,576		$	3,726		$	3,426		$	3,507		$	509	$	575	$	601

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 $3.1 million, $1.7 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 2013, 2012 and 2011 before capitalization and deferral was $6.6 million, $6.3 million and $6.2 million, respectively. Had the Company used the fair value of assets instead of the market-related value, pension expense for the years 2013, 2012 and 2011 would have been $6.6 million, $6.7 million and $5.7 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:	2013			2012			2013			2012			2013			2012

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

Actual Return on Plan Assets		10,204			7,780			1,154			837			—			—

Employer Contributions		3,700			9,387			3,280			2,190			53			53

Participant Contributions		—			—			36			18			—			—

Acquired Plan Assets		—			—			—			—			—			—

Benefits Paid		(3,764	)		(4,456	)		(1,942	)		(2,083	)		(53	)		(53	)

Plan Assets at End of Year	$	82,551		$	72,411		$	10,829		$	8,301		$	—		$	—


Change in PBO:

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

Service Cost		3,573			3,227			2,523			2,066			73			289

Interest Cost		4,567			4,633			2,448			2,303			241			211

Participant Contributions		—			—			36			18			—			—

Plan Amendments		—			617			(183	)		(318	)		—			—

Benefits Paid		(3,764	)		(4,456	)		(1,942	)		(2,083	)		(53	)		(53	)

Actuarial (Gain) or Loss		(12,573	)		9,752			(8,075	)		9,176			(611	)		1,145

PBO at End of Year	$	108,295		$	116,492		$	56,899		$	62,092		$	5,857		$	6,207

Funded Status: Assets vs PBO	$	(25,744	)	$	(44,081	)	$	(46,070	)	$	(53,791	)	$	(5,857	)	$	(6,207	)

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 $42.6 million and $62.5 million at December 31, 2013 and 2012, 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 $96.9 million and $103.4 million as of December 31, 2013 and 2012, respectively. The ABO for the SERP was $5.1 million and $4.8 million as of December 31, 2013 and 2012, 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 payment for 2011 is 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.

The Company, along with its subsidiaries, expects to continue to make contributions to its Pension Plan in 2014 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
	2013		2012		2011		2013		2012		2011		2013		2012		2011
Employer Contributions	$	3,700	$	9,387	$	8,813	$	3,280	$	2,190	$	—	$	53	$	53	$	53
Participant Contributions	$	—	$	—	$	—	$	36	$	18	$	13	$	—	$	—	$	—
Benefit Payments	$	3,764	$	4,456	$	3,438	$	1,942	$	2,083	$	1,644	$	53	$	53	$	53

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


Estimated Future Benefit Payments
	Pension		PBOP		SERP
2014	$	4,495	$	1,914	$	384
2015		4,617		2,056		380
2016		4,742		2,129		375
2017		5,050		2,277		369
2018		5,188		2,404		364
2019 - 2023	$	31,826	$	14,496	$	1,925

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, 37% in fixed income securities, 10% in real estate 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 2014			Actual Allocation at December 31,
	Target Allocation 2014			2013			2012			2011
Equity Funds		48	%		54	%		48	%		49	%
Debt Funds		37	%		32	%		47	%		46	%
Real Estate Fund		10	%		1	%		0	%		0	%
Asset Allocation Fund⁽¹⁾		5	%		5	%		5	%		5	%
Other⁽²⁾		0	%		8	%		0	%		0	%

Total					100	%		100	%		100	%

⁽¹⁾

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

⁽²⁾

Represents investments being held in cash equivalents as of December 31, 2013 pending transfer into a Real Estate Fund.


PBOP Plan	Target Allocation 2014			Actual Allocation at December 31,
PBOP Plan	Target Allocation 2014			2013			2012			2011
Equity Funds		55	%		57	%		56	%		55	%
Debt Funds		45	%		43	%		44	%		45	%

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 2013. 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.

Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2013 and 2012. Please also see Note 1 for a discussion of the Company’s fair value accounting policy.

Equity, Fixed Income, Index and Asset Allocation Funds

These investments are valued based on quoted prices from active markets. These securities are categorized in Level 1 as they are actively traded and no valuation adjustments have been applied.

Cash Equivalents

These investments are valued at cost, which approximates fair value, and are categorized in Level 1.

Real Estate Fund

These investments are valued at net asset value (NAV) per unit based on a combination of market- and income-based models utilizing market discount rates, projected cash flows and the estimated value into perpetuity and are categorized in Level 3.

Assets measured at fair value on a recurring basis for the Pension Plan as of December 31, 2013 and 2012 are as follows ($000’s):


	Fair Value Measurements at Reporting Date Using
Description	Balance as of December 31,		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
2013
Pension Plan Assets:
Equity Funds	$	44,201	$	44,201	$	—	$	—
Fixed Income Funds		26,276		26,276		—		—
Asset Allocation Fund		4,574		4,574		—		—
Real Estate Fund		1,125		—		—		1,125
Cash Equivalents		6,375		6,375		—		—

Total Assets	$	82,551	$	81,426	$	—	$	1,125


2012
Pension Plan Assets:
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	$	—	$	—

The following tables set forth additional disclosures of Pension Plan investments whose fair value is estimated using net asset value per share as of December 31, 2013. There were no Pension Plan investments whose fair value is estimated using net asset value per share as of December 31, 2012:


	Fair Value Estimated Using NAV Per Share
	December 31, 2013
Description	Fair Value	Unfunded Commitment	Redemption Frequency	Redemption Notice Period

SEI Core Property Collective Investment Trust Fund⁽¹⁾	$1,125,000	$—	Quarterly	65 days

⁽¹⁾

The SEI Core Property Collective Investment Trust Fund, through the SEI Core Property Fund, seeks both current income and long-term capital appreciation through investing in underlying funds that acquire, manage, and dispose of commercial real estate properties.

The table below sets forth a summary of changes in the fair value of the Pension Plan’s Level 3 assets for the year ended December 31, 2013:


	Level 3 Assets
	SEI Core Property Collective Investment Trust Fund
Balance at December 31, 2012	$	—
Purchases		1,125,000

Balance at December 31, 2013	$	1,125,000

Amount of Total Gains or Losses for the Year Attributable to the Change in Unrealized Gains or Losses Relating to Assets Still Held at December 31, 2013	$	—

Assets measured at fair value on a recurring basis for the PBOP Plan as of December 31, 2013 and 2012 are as follows ($000’s):


	Fair Value Measurements at Reporting Date Using
Description	Balance as of December 31,		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
2013
PBOP Plan Assets:
Mutual Funds:
Fixed Income Funds	$	4,689	$	4,689	$	—	$	—
Index Funds		4,467		4,467
Equity Funds		1,673		1,673

Total Assets	$	10,829	$	10,829	$	—	$	—


2012
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	$	—	$	—

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 $1,678,000, $1,387,000 and $1,190,000 for the years ended December 31, 2013, 2012, and 2011, respectively.