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.

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


	2018			2017			2016
Used to Determine Plan costs for years ended December 31:

Discount Rate		3.60	%		4.10	%		4.30	%

Rate of Compensation Increase		3.00	%		3.00	%		3.00	%

Expected Long-term rate of return on plan assets		7.75	%		7.75	%		8.00	%

Health Care Cost Trend Rate Assumed for Next Year		7.50	%		8.00	%		7.00	%

Ultimate Health Care Cost Trend Rate		4.50	%		4.00	%		4.00	%

Year that Ultimate Health Care Cost Trend Rate is reached		2024			2025			2022


Used to Determine Benefit Obligations at December 31:

Discount Rate	4.25	%	3.60	%	4.10	%

Rate of Compensation Increase	3.00	%	3.00	%	3.00	%

Health Care Cost Trend Rate Assumed for Next Year	7.00	%	7.50	%	8.00	%

Ultimate Health Care Cost Trend Rate	4.50	%	4.50	%	4.00	%

Year that Ultimate Health Care Cost Trend Rate is reached	2024		2024		2025

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 2018, a change in the discount rate of 0.25% would have resulted in an increase or decrease of approximately $589,000 in the Net Periodic Benefit Cost (NPBC). The Rate of Compensation Increase assumption used for 2018 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
	2018			2017			2016			2018			2017			2016			2018		2017		2016

Service Cost	$	3,393		$	3,295		$	3,402		$	2,933		$	2,974		$	2,610		$	487	$	460	$	162

Interest Cost		5,878			6,057			5,945			3,404			3,913			3,232			404		392		386

Expected Return on Plan Assets		(7,785	)		(7,306	)		(7,257	)		(1,635	)		(1,347	)		(1,205	)		—		—		—

Prior Service Cost Amortization		324			263			263			1,309			1,399			1,486			189		189		189

Actuarial Loss Amortization		5,786			4,662			4,398			1,383			2,098			1,049			486		295		375


Sub-total		7,596			6,971			6,751			7,394			9,037			7,172			1,566		1,336		1,112

Amounts Capitalized or Deferred		(3,465	)		(3,122	)		(3,008	)		(3,416	)		(4,515	)		(3,351	)		(451)		(397)		(290)

NPBC Recognized	$	4,131		$	3,849		$	3,743		$	3,978		$	4,522		$	3,821		$	1,115	$	939	$	822

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 2018, 2017 and 2016 before capitalization and deferral was $7.6 million, $7.0 million and $6.8 million, respectively. Had the Company used the fair value of assets instead of the market-related value, pension expense for the years 2018, 2017 and 2016 would have been $7.2 million, $7.6 million and $7.7 million respectively, prior to amounts capitalized or deferred.

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:	2018			2017			2018			2017			2018			2017

Plan Assets at Beginning of Year	$	102,315		$	91,058		$	20,234		$	16,606		$	—		$	—

Actual Return on Plan Assets		(6,149	)		12,731			(1,085	)		1,907			—			—

Employer Contributions		16,628			4,100			4,000			4,000			401			34

Participant Contributions		—			—			153			126			—			—

Benefits Paid		(4,986	)		(5,574	)		(2,193	)		(2,405	)		(401	)		(34	)

Plan Assets at End of Year	$	107,808		$	102,315		$	21,109		$	20,234		$	—		$	—


Change in PBO:

PBO at Beginning of Year	$	166,921		$	150,439		$	94,122		$	96,659		$	11,723		$	9,566

Service Cost		3,393			3,295			2,933			2,974			487			460

Interest Cost		5,878			6,057			3,404			3,913			404			392

Participant Contributions		—			—			153			126			—			—

Plan Amendments		—			608			—			—			—			—

Benefits Paid		(4,986	)		(5,574	)		(2,193	)		(2,405	)		(401	)		(34	)

Actuarial (Gain) or Loss		(15,009	)		12,096			(17,414	)		(7,145	)		1,541			1,339

PBO at End of Year	$	156,197		$	166,921		$	81,005		$	94,122		$	13,754		$	11,723

Funded Status: Assets vs PBO	$	(48,389	)	$	(64,606	)	$	(59,896	)	$	(73,888	)	$	(13,754	)		(11,723	)

The decrease in the PBO for the Pension plan as of December 31, 2018 compared to December 31, 2017 reflects an increase in the assumed discount rate as of December 31, 2018. The decrease in the PBO for the PBOP plan as of December 31, 2018 compared to December 31, 2017 reflects an increase in the assumed discount rate as of December 31, 2018 and the rate of increase for medical premiums being less than the assumed rate of medical inflation.

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, net of deferred tax benefits, of $72.0 million and $84.5 million at December 31, 2018 and 2017, 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 $142.8 million and $150.6 million as of December 31, 2018 and 2017, respectively. The ABO for the SERP was $10.8 million and $9.5 million as of December 31, 2018 and 2017, 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 2019 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
	2018		2017		2016		2018		2017		2016		2018		2017		2016
Employer Contributions	$	16,628	$	4,100	$	5,146	$	4,000	$	4,000	$	4,000	$	401	$	34	$	34
Participant Contributions	$	—	$	—	$	—	$	153	$	126	$	61		$—	$	—	$	—
Benefit Payments	$	4,986	$	5,574	$	4,900	$	2,193	$	2,405	$	2,421	$	401	$	34	$	34

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


Estimated Future Benefit Payments
	Pension		PBOP		SERP
2019	$	5,888	$	2,314	$	522
2020		6,484		2,520		521
2021		6,949		2,780		681
2022		6,853		2,955		678
2022		7,588		3,106		675
2024 - 2028		46,942		19,244		4,904

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 53% in common stock equities, 37% in fixed income securities and 10% in real estate securities. 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 2019			Actual Allocation at December 31,
	Target Allocation 2019			2018			2017			2016
Equity Funds		53	%		49	%		49	%		46	%
Debt Funds		37	%		40	%		34	%		37	%
Real Estate Fund		10	%		10	%		10	%		10	%
Asset Allocation Fund⁽¹⁾		—			—			6	%		7	%
Other⁽²⁾		—			1	%		1	%		—

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, 2018 pending payment of benefits.


PBOP Plan	Target Allocation 2019			Actual Allocation at December 31,
	Target Allocation 2019			2018			2017			2016
Equity Funds		55	%		53	%		56	%		55	%
Debt Funds		45	%		47	%		42	%		43	%
Other⁽¹⁾		—			—			2	%		2	%

Total					100	%		100	%		100	%

(1)

Represents investments being held in cash equivalents as of December 31, 2017 and 2016 pending transfer into debt and equity funds.

The combination of these target allocations and expected returns resulted in the overall assumed long-term rate of return of 7.75% for 2018. 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, 2018 and 2017. 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. In accordance with FASB Codification Topic 820, “Fair Value Measurement”, these investments have not been classified in the fair value hierarchy. The fair value amounts presented in the tables below for the Real Estate Fund are intended to permit reconciliation of the fair value hierarchy to the “Plan Assets at End of Year” line item shown in the “Change in Plan Assets” table above.

Assets measured at fair value on a recurring basis for the Pension Plan as of December 31, 2018 and 2017 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)
2018
Pension Plan Assets:
Mutual Funds:
Equity Funds	$	52,884	$	52,884	$	—	$	—
Fixed Income Funds		43,281		43,281		—		—

Total Mutual Funds		96,165		96,165		—		—
Cash Equivalents		1,202		1,202		—

Total Assets in the Fair Value Hierarchy	$	97,367	$	97,367	$	—	$	—

Real Estate Fund–Measured at Net Asset Value		10,441

Total Assets	$	107,808


2017
Pension Plan Assets:
Mutual Funds:
Equity Funds	$	50,373	$	50,373	$	—	$	—
Fixed Income Funds		34,757		34,757		—		—
Asset Allocation Fund		6,398		6,398		—		—

Total Mutual Funds		91,528		91,528		—		—
Cash Equivalents		1,200		1,200		—

Total Assets in the Fair Value Hierarchy	$	92,728	$	92,728	$	—	$	—

Real Estate Fund–Measured at Net Asset Value		9,587

Total Assets	$	102,315

Redemptions of the Real Estate Fund are subject to a sixty-five day notice period and the fund is valued quarterly. There are no unfunded commitments.

Assets measured at fair value on a recurring basis for the PBOP Plan as of December 31, 2018 and 2017 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)
2018
PBOP Plan Assets:
Mutual Funds:
Fixed Income Funds	$	9,905	$	9,905	$	—	$	—
Equity Funds		11,204		11,204

Total Assets	$	21,109	$	21,109	$	—	$	—


2017
PBOP Plan Assets:
Mutual Funds:
Fixed Income Funds	$	8,419	$	8,419	$	—	$	—
Equity Funds		11,415		11,415

Total Mutual Funds		19,834		19,834
Cash Equivalents		400		400

Total Assets	$	20,234	$	20,234	$	—	$	—

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 $2.7 million, $2.4 million and $2.3 million for the years ended December 31, 2018, 2017 and 2016, respectively.