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 a non-qualified 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:


	2015			2014			2013
Used to Determine Plan costs for years ended December 31:
Discount Rate⁽¹⁾		4.00	%		4.80	%		4.00	%
Rate of Compensation Increase		3.00	%		3.00	%		3.00	%
Expected Long-term rate of return on plan assets		8.00	%		8.00	%		8.50	%
Health Care Cost Trend Rate Assumed for Next Year		7.00	%		8.00	%		8.00	%
Ultimate Health Care Cost Trend Rate		4.00	%		4.00	%		4.00	%
Year that Ultimate Health Care Cost Trend Rate is reached		2018			2018			2017
Effect of 1% Increase in Health Care Cost Trend Rate (000’s)	$	1,383		$	989		$	1,169
Effect of 1% Decrease in Health Care Cost Trend Rate (000’s)	$	(1,040	)	$	(771	)	$	(895	)

⁽¹⁾

As a result of the addition of a plan participant to the SERP in July 2015, the Company was required to update the discount rate used in determining SERP costs for the remainder of 2015. Based on an assessment of current market conditions using high quality corporate bond interest rate indices and pension yield curves at that time, the Company assumed a discount rate of 4.30% for the SERP from July through December of 2015.


Used to Determine Benefit Obligations at December 31:
Discount Rate		4.30	%		4.00	%		4.80	%
Rate of Compensation Increase		3.00	%		3.00	%		3.00	%
Health Care Cost Trend Rate Assumed for Next Year		7.00	%		7.00	%		8.00	%
Ultimate Health Care Cost Trend Rate		4.00	%		4.00	%		4.00	%
Year that Ultimate Health care Cost Trend Rate is reached		2022			2018			2018
Effect of 1% Increase in Health Care Cost Trend Rate (000’s)	$	14,877		$	15,325		$	9,957
Effect of 1% Decrease in Health Care Cost Trend Rate (000’s)	$	(11,611	)	$	(11,829	)	$	(7,942	)

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 2015, a change in the discount rate of 0.25% would have resulted in an increase or decrease of approximately $472,000 in the Net Periodic Benefit Cost (NPBC). The Rate of Compensation Increase assumption used for 2015 was 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
	2015			2014			2013			2015			2014			2013			2015		2014		2013

Service Cost	$	3,689		$	3,006		$	3,573		$	2,622		$	1,988		$	2,523		$	120	$	57	$	73

Interest Cost		5,392			5,092			4,567			2,918			2,686			2,448			330		272		241

Expected Return on Plan Assets		(6,779	)		(6,245	)		(5,955	)		(1,093	)		(920	)		(722	)		—		—		—

Prior Service Cost Amortization		265			211			208			1,682			1,682			1,701			85		11		11

Actuarial Loss Amortization		4,714			2,847			4,229			1,150			56			786			327		100		184


Sub-total		7,281			4,911			6,622			7,279			5,492			6,736			862		440		509

Amounts Capitalized or Deferred		(3,397	)		(1,881	)		(2,929	)		(3,423	)		(2,270	)		(3,010	)		—		—		—

NPBC Recognized	$	3,884		$	3,030		$	3,693		$	3,856		$	3,222		$	3,726		$	862	$	440	$	509

The estimated amortizations related to Actuarial Loss and Prior Service Cost included in the Company’s Retirement plan costs or as a reduction of regulatory assets over the next fiscal year is $4.7 million, $2.5 million and $0.3 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 2015, 2014 and 2013 before capitalization and deferral was $7.3 million, $4.9 million and $6.6 million, respectively. Had the Company used the fair value of assets instead of the market-related value, pension expense for the years 2015, 2014 and 2013 would have been $7.3 million, $4.3 million and $6.6 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:	2015			2014			2015			2014			2015			2014

Plan Assets at Beginning of Year	$	86,744		$	82,551		$	12,840		$	10,829		$	—		$	—

Actual Return on Plan Assets		645			4,248			(214	)		486			—			—

Employer Contributions		4,215			4,191			4,000			3,650			40			53

Participant Contributions		—			—			63			59			—			—

Benefits Paid		(4,410	)		(4,246	)		(2,515	)		(2,184	)		(40	)		(53	)

Plan Assets at End of Year	$	87,194		$	86,744		$	14,174		$	12,840		$	—		$	—


Change in PBO:

PBO at Beginning of Year	$	136,662		$	108,295		$	73,923		$	56,899		$	7,965		$	5,857

Service Cost		3,689			3,006			2,622			1,988			120			57

Interest Cost		5,392			5,092			2,918			2,686			330			272

Participant Contributions		—			—			63			59			—			—

Plan Amendments		474			—			—			—			608			—

Benefits Paid		(4,410	)		(4,246	)		(2,515	)		(2,184	)		(40	)		(53	)

Actuarial (Gain) or Loss		(991	)		24,515			(762	)		14,475			194			1,832

PBO at End of Year	$	140,816		$	136,662		$	76,249		$	73,923		$	9,177		$	7,965

Funded Status: Assets vs PBO	$	(53,622	)	$	(49,918	)	$	(62,075	)	$	(61,083	)	$	(9,177	)	$	(7,965	)

The funded status of the Pension, PBOP and SERP Plans is calculated based on the difference between the benefit obligation and the fair value of plan assets and is recorded on the balance sheets as an asset or a liability. Because the Company recovers the retiree benefit costs from customers through rates, regulatory assets are recorded in lieu of an adjustment to Accumulated Other Comprehensive Income/(Loss).

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 $64.7 million and $65.1 million at December 31, 2015 and 2014, 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 $126.8 million and $121.8 million as of December 31, 2015 and 2014, respectively. The ABO for the SERP was $7.0 million and $6.3 million as of December 31, 2015 and 2014, respectively. For the PBOP Plan, the ABO and PBO are the same.

The Company, along with its subsidiaries, expects to continue to make contributions to its Pension Plan in 2016 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
	2015		2014		2013		2015		2014		2013		2015		2014		2013
Employer Contributions	$	4,215	$	4,191	$	3,700	$	4,000	$	3,650	$	3,280	$	40	$	53	$	53
Participant Contributions	$	—	$	—	$	—	$	63	$	59	$	36	$	—	$	—	$	—
Benefit Payments	$	4,410	$	4,246	$	3,764	$	2,515	$	2,184	$	1,942	$	40	$	53	$	53

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


Estimated Future Benefit Payments
	Pension		PBOP		SERP
2016	$	5,181	$	2,178	$	426
2017		5,522		2,318		421
2018		5,560		2,503		416
2019		6,086		2,700		475
2020		6,345		2,866		469
2021 - 2025		37,857		17,932		3,027

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 47% in common stock equities, 37% in fixed income securities, 10% in real estate securities and 6% 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 2016			Actual Allocation at December 31,
	Target Allocation 2016			2015			2014			2013
Equity Funds		47	%		46	%		49	%		54	%
Debt Funds		37	%		37	%		36	%		32	%
Real Estate Fund		10	%		11	%		10	%		1	%
Asset Allocation Fund⁽¹⁾		6	%		6	%		5	%		5	%
Other⁽²⁾		0	%		0	%		0	%		8	%

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 2016			Actual Allocation at December 31,
PBOP Plan	Target Allocation 2016			2015			2014			2013
Equity Funds		55	%		53	%		56	%		57	%
Debt Funds		45	%		47	%		44	%		43	%

Total					100	%		100	%		100	%

The combination of these target allocations and expected returns resulted in the overall assumed long-term rate of return of 8.00% for 2015. 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, 2015 and 2014. 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, 2015 and 2014 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)
2015
Pension Plan Assets:
Equity Funds	$	40,124	$	40,124	$	—	$	—
Fixed Income Funds		32,192		32,192		—		—
Asset Allocation Fund		5,527		5,527		—		—
Real Estate Fund		9,351		—		—		9,351

Total Assets	$	87,194	$	77,843	$	—	$	9,351


2014
Pension Plan Assets:
Equity Funds	$	42,760	$	42,760	$	—	$	—
Fixed Income Funds		31,136		31,136		—		—
Asset Allocation Fund		4,676		4,676		—		—
Real Estate Fund		8,172		—		—		8,172

Total Assets	$	86,744	$	78,572	$	—	$	8,172

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, 2015 and 2014 (000’s):

Fair Value Estimated Using NAV Per Share

Description

Fair
Value

Unfunded
Commitment

Redemption
Frequency

Redemption
Notice
Period

December 31, 2015

SEI Core Property Collective Investment Trust Fund⁽¹⁾

9,351

—

Quarterly

65 days

December 31, 2014

SEI Core Property Collective Investment Trust Fund⁽¹⁾

8,172

—

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 years ended December 31, 2015 and 2014 (000’s):


Level 3 Assets—SEI Core Property Collective Investment Trust Fund
	December 31,
	2015		2014
Beginning Balance	$	8,172	$	1,125
Actual Return on Investments:
Related to Investments Held at Year-End		1,179		672
Related to Investments Sold During the Year		—		—

Total Return on Investments		1,179		672
Purchases, Sales and Settlements		—		6,375

Ending Balance	$	9,351	$	8,172

Assets measured at fair value on a recurring basis for the PBOP Plan as of December 31, 2015 and 2014 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)
2015
PBOP Plan Assets:
Mutual Funds:
Fixed Income Funds	$	6,620	$	6,620	$	—	$	—
Equity Funds		7,554		7,554

Total Assets	$	14,174	$	14,174	$	—	$	—


2014
PBOP Plan Assets:
Mutual Funds:
Fixed Income Funds	$	5,661	$	5,661	$	—	$	—
Index Funds		5,313		5,313
Equity Funds		1,866		1,866

Total Assets	$	12,840	$	12,840	$	—	$	—

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 $2,098,000, $1,877,000 and $1,678,000 for the years ended December 31, 2015, 2014 and 2013, respectively.