EMPLOYEE BENEFIT PLANS

We measure the assets and obligations of the defined benefit pension plans and other postretirement benefits plans to determine the plans’ funded status as of the end of the year as an asset or a liability on our consolidated balance sheets. We record as a component of other comprehensive income/loss or a regulatory asset the changes in funded status that occurred during the year that are not recognized as part of net periodic benefit costs.

Defined Benefit Pension Plans

We sponsor three defined benefit pension plans: the Chesapeake Pension Plan, the FPU Pension Plan and the Chesapeake SERP.

The Chesapeake Pension Plan was closed to new participants, effective January 1, 1999, and was frozen with respect to additional years of service and additional compensation, effective January 1, 2005. Benefits under the Chesapeake Pension Plan were based on each participant’s years of service and highest average compensation, prior to the freezing of the plan. Active participants on the date the Chesapeake Pension Plan was frozen were credited with two additional years of service. The unfunded liability for the Chesapeake Pension Plan of approximately $2.7 million at December 31, 2016 and 2015, is included in the other pension and benefit costs liability in our consolidated balance sheets.

The FPU Pension Plan covers eligible FPU non-union employees hired before January 1, 2005 and union employees hired before the respective union contract expiration dates in 2005 and 2006. Prior to the FPU merger, the FPU Pension Plan was frozen with respect to additional years of service and additional compensation, effective December 31, 2009. The unfunded liability for the FPU Pension Plan of approximately $20.6 million and $22.2 million at December 31, 2016 and 2015, respectively, is included in the other pension and benefit costs liability in our consolidated balance sheets.

The Chesapeake SERP was frozen with respect to additional years of service and additional compensation as of December 31, 2004. Benefits under the Chesapeake SERP were based on each participant’s years of service and highest average compensation, prior to the freezing of the plan. Active participants on the date the Chesapeake SERP was frozen were credited with two additional years of service. The unfunded liability for the Chesapeake SERP of approximately $2.4 million and $2.5 million at December 31, 2016 and 2015, respectively, is included in the Other pension and benefit costs liability in our consolidated balance sheets.

The following schedule sets forth the funded status at December 31, 2016 and 2015 and the net periodic cost for the years ended December 31, 2016, 2015 and 2014 for the Chesapeake and FPU Pension Plans:



	Chesapeake Pension Plan						FPU Pension Plan
At December 31,	2016			2015			2016			2015
(in thousands)
Change in benefit obligation:
Benefit obligation — beginning of year	$	11,501		$	11,981		$	64,435		$	68,173
Interest cost	421			407			2,525			2,504
Actuarial loss (gain)	330			(401		)	(216		)	(3,374		)
Effect of settlement	(433		)	—			—			—
Benefits paid	(464		)	(486		)	(2,912		)	(2,868		)
Benefit obligation — end of year	11,355			11,501			63,832			64,435
Change in plan assets:
Fair value of plan assets — beginning of year	8,752			9,078			42,207			45,077
Actual return on plan assets	424			(289		)	2,343			(1,464		)
Employer contributions	389			449			1,634			1,462
Benefits paid	(464		)	(486		)	(2,912		)	(2,868		)
Effect of settlement	(433		)	—			—			—
Fair value of plan assets — end of year	8,668			8,752			43,272			42,207
Reconciliation:
Funded status	(2,687		)	(2,749		)	(20,560		)	(22,228		)
Accrued pension cost	$	(2,687	)	$	(2,749	)	$	(20,560	)	$	(22,228	)
Assumptions:
Discount rate	3.75		%	3.75		%	4.00		%	4.00		%
Expected return on plan assets	6.00		%	6.00		%	6.50		%	7.00		%



	Chesapeake Pension Plan									FPU Pension Plan
For the Years Ended December 31,	2016			2015			2014			2016			2015			2014
(in thousands)
Components of net periodic pension cost:
Interest cost	$	421		$	407		$	425		$	2,525		$	2,504		$	2,613
Expected return on assets	(501		)	(530		)	(516		)	(2,702		)	(3,107		)	(3,089		)
Amortization of actuarial loss	459			392			176			519			456			8
Settlement expense	161			—			—			—			—			—
Net periodic pension cost	540			269			85			342			(147		)	(468		)
Amortization of pre-merger regulatory asset	—			—			—			761			761			761
Total periodic cost	$	540		$	269		$	85		$	1,103		$	614		$	293
Assumptions:
Discount rate	3.75		%	3.50		%	4.25		%	4.00		%	3.75		%	4.75		%
Expected return on plan assets	6.00		%	6.00		%	6.00		%	6.50		%	7.00		%	7.00		%

Included in the net periodic costs for the FPU Pension Plan is continued amortization of the FPU pension regulatory asset, which represents the portion attributable to FPU's regulated operations for the changes in funded status that occurred, but were not recognized as part of net periodic cost, prior to the merger with Chesapeake Utilities in October 2009. This was previously deferred as a regulatory asset by FPU prior to the merger to be recovered through rates pursuant to an order by the Florida PSC. The unamortized balance of this regulatory asset was $2.1 million and $2.8 million at December 31, 2016 and 2015, respectively.

The following sets forth the funded status at December 31, 2016 and 2015 and the net periodic cost for the years ended December 31, 2016, 2015 and 2014 for the Chesapeake SERP:



At December 31,	2016			2015
(in thousands)
Change in benefit obligation:
Benefit obligation — beginning of year	$	2,510		$	2,650
Interest cost	91			91
Actuarial gain	(21		)	(85		)
Benefits paid	(152		)	(146		)
Benefit obligation — end of year	2,428			2,510
Change in plan assets:
Fair value of plan assets — beginning of year	—			—
Employer contributions	152			146
Benefits paid	(152		)	(146		)
Fair value of plan assets — end of year	—			—
Reconciliation:
Funded status	(2,428		)	(2,510		)
Accrued pension cost	$	(2,428	)	$	(2,510	)
Assumptions:
Discount rate	3.75		%	3.75		%



For the Years Ended December 31,	2016			2015			2014
(in thousands)
Components of net periodic pension cost:
Interest cost	$	91		$	91		$	92
Amortization of prior service cost	—			9			19
Amortization of actuarial loss	87			99			47
Net periodic pension cost	$	178		$	199		$	158
Assumptions:
Discount rate	3.75		%	3.50		%	4.25		%

Our funding policy provides that payments to the trustee of each qualified plan shall be equal to at least the minimum funding requirements of the Employee Retirement Income Security Act of 1974. The following schedule summarizes the assets of the Chesapeake Pension Plan and the FPU Pension Plan, by investment type, at December 31, 2016, 2015 and 2014:



	Chesapeake Pension Plan						FPU Pension Plan
At December 31,	2016		2015		2014		2016		2015		2014
Asset Category
Equity securities	52.93	%	48.01	%	51.42	%	53.18	%	48.56	%	52.62	%
Debt securities	37.64	%	39.62	%	37.31	%	37.74	%	41.74	%	37.69	%
Other	9.43	%	12.37	%	11.27	%	9.08	%	9.70	%	9.69	%
Total	100.00	%	100.00	%	100.00	%	100.00	%	100.00	%	100.00	%

The investment policy of both the Chesapeake and FPU Pension Plans is designed to provide the capital assets necessary to meet the financial obligations of the plans. The investment goals and objectives are to achieve investment returns that, together with contributions, will provide funds adequate to pay promised benefits to present and future beneficiaries of the plans, earn a long-term investment return in excess of the growth of the plans’ retirement liabilities, minimize pension expense and cumulative contributions resulting from liability measurement and asset performance, and maintain a diversified portfolio to reduce the risk of large losses.

The following allocation range of asset classes is intended to produce a rate of return sufficient to meet the plans’ goals and objectives:



Asset Allocation Strategy
Asset Class	Minimum Allocation Percentage		Maximum Allocation Percentage
Domestic Equities (Large Cap, Mid Cap and Small Cap)	14	%	32	%
Foreign Equities (Developed and Emerging Markets)	13	%	25	%
Fixed Income (Inflation Bond and Taxable Fixed)	26	%	40	%
Alternative Strategies (Long/Short Equity and Hedge Fund of Funds)	6	%	14	%
Diversifying Assets (High Yield Fixed Income, Commodities, and Real Estate)	7	%	19	%
Cash	0	%	5	%

Due to periodic contributions and different asset classes producing varying returns, the actual asset values may temporarily move outside of the intended ranges. The investments are monitored on a quarterly basis, at a minimum, for asset allocation and performance.

At December 31, 2016 and 2015, the assets of the Chesapeake Pension Plan and the FPU Pension Plan were comprised of the following investments:



	Fair Value Measurement Hierarchy

	December 31, 2016								December 31, 2015
Asset Category	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
(in thousands)
Mutual Funds - Equity securities
U.S. Large Cap ⁽¹⁾	$	4,031	$	—	$	—	$	4,031	$	3,641	$	—	$	—	$	3,641
U.S. Mid Cap ⁽¹⁾	1,677		—		—		1,677		1,577		—		—		1,577
U.S. Small Cap ⁽¹⁾	845		—		—		845		865		—		—		865
International ⁽²⁾	9,574		—		—		9,574		9,416		—		—		9,416
Alternative Strategies ⁽³⁾	5,238		—		—		5,238		2,737		—		—		2,737
	21,365		—		—		21,365		18,236		—		—		18,236
Mutual Funds - Debt securities
Fixed income ⁽⁴⁾	16,958		—		—		16,958		18,565		—		—		18,565
High Yield ⁽⁴⁾	2,636		—		—		2,636		2,521		—		—		2,521
	19,594		—		—		19,594		21,086		—		—		21,086
Mutual Funds - Other
Commodities ⁽⁵⁾	2,134		—		—		2,134		1,365		—		—		1,365
Real Estate ⁽⁶⁾	2,116		—		—		2,116		2,529		—		—		2,529
Guaranteed deposit ⁽⁷⁾	—		—		498		498		—		—		1,286		1,286
	4,250		—		498		4,748		3,894		—		1,286		5,180
Total Pension Plan Assets in fair value hierarchy	$	45,209	$	—	$	498	45,707		$	43,216	$	—	$	1,286	44,502
Investments measured at net asset value ⁽⁸⁾							6,233								6,457
Total Pension Plan Assets							$	51,940							$	50,959


⁽¹⁾	Includes funds that invest primarily in United States common stocks.


⁽²⁾	Includes funds that invest primarily in foreign equities and emerging markets equities.


⁽³⁾	Includes funds that actively invest in both equity and debt securities, funds that sell short securities and funds that provide long-term capital appreciation. The funds may invest in debt securities below investment grade.


⁽⁴⁾	Includes funds that invest in investment grade and fixed income securities.


⁽⁵⁾	Includes funds that invest primarily in commodity-linked derivative instruments and fixed income securities.


⁽⁶⁾	Includes funds that invest primarily in real estate.


⁽⁷⁾	Includes investment in a group annuity product issued by an insurance company.


⁽⁸⁾	Certain investments that were measured at net asset value per share have not been classified in the fair value hierarchy. These amounts are presented to reconcile to total pension plan assets.

At December 31, 2016 and 2015, all of the investments were classified under the same fair value measurement hierarchy (Level 1 through Level 3) described under Note 8, Fair Value of Financial Instruments. The Level 3 investments were recorded at fair value based on the contract value of annuity products underlining guaranteed deposit accounts, which was calculated using discounted cash flow models. The contract value of these products represented deposits made to the contract, plus earnings at guaranteed crediting rates, less withdrawals and fees. The following table sets forth the summary of the changes in the fair value of Level 3 investments for the years ended December 31, 2016 and 2015:



	For the Year Ended December 31,
	2016			2015
(in thousands)
Balance, beginning of year	$	1,286		$	1,144
Purchases	2,023			1,926
Transfers in	1,435			1,900
Disbursements	(4,268		)	(3,688		)
Investment income	22			4
Balance, end of year	$	498		$	1,286

Other Postretirement Benefits Plans

We sponsor two defined benefit plans: the Chesapeake Postretirement Plan and the FPU Medical Plan. The following table sets forth the funded status at December 31, 2016 and 2015 and the net periodic cost for the years ended December 31, 2016, 2015, and 2014:



	Chesapeake Postretirement Plan						FPU Medical Plan
At December 31,	2016			2015			2016			2015
(in thousands)
Change in benefit obligation:
Benefit obligation — beginning of year	$	1,153		$	1,238		$	1,444		$	1,712
Interest cost	43			42			55			57
Plan participants contributions	90			108			64			75
Actuarial loss (gain)	20			(58		)	(41		)	(132		)
Benefits paid	(174		)	(177		)	(173		)	(268		)
Benefit obligation — end of year	1,132			1,153			1,349			1,444
Change in plan assets:
Fair value of plan assets — beginning of year	—			—			—			—
Employer contributions⁽¹⁾	84			69			109			193
Plan participants contributions	90			108			64			75
Benefits paid	(174		)	(177		)	(173		)	(268		)
Fair value of plan assets — end of year	—			—			—			—
Reconciliation:
Funded status	(1,132		)	(1,153		)	(1,349		)	(1,444		)
Accrued postretirement cost	$	(1,132	)	$	(1,153	)	$	(1,349	)	$	(1,444	)
Assumptions:
Discount rate	3.75		%	3.75		%	4.00		%	4.00		%


⁽¹⁾	The Chesapeake Postretirement Plan does not receive a Medicare Part-D subsidy. The FPU Medical Plan did not receive a significant subsidy for the post-merger period.

Net periodic postretirement benefit costs for 2016, 2015, and 2014 include the following components:



	Chesapeake Postretirement Plan									FPU Medical Plan
For the Years Ended December 31,	2016			2015			2014			2016			2015			2014
(in thousands)
Components of net periodic postretirement cost:
Interest cost	$	43		$	42		$	39		$	55		$	57		$	69
Amortization of:
Actuarial loss	64			72			55			—			—			—
Prior service cost	(77		)	(77		)	(77		)	—			—			—
Net periodic cost	30			37			17			55			57			69
Amortization of pre-merger regulatory asset	—			—			—			8			8			8
Net periodic cost	$	30		$	37		$	17		$	63		$	65		$	77
Assumptions
Discount rate	3.75		%	3.50		%	4.25		%	4.00		%	3.75		%	4.75		%

Similar to the FPU Pension Plan, continued amortization of the FPU Medical Plan regulatory asset related to the unrecognized cost prior to the merger with Chesapeake Utilities was included in the net periodic cost. The unamortized balance of this regulatory asset was $30,000 and $38,000 at December 31, 2016 and 2015, respectively.

The following table presents the amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive loss or as a regulatory asset as of December 31, 2016:



(in thousands)	Chesapeake Pension Plan		FPU Pension Plan		Chesapeake SERP		Chesapeake Postretirement Plan			FPU Medical Plan		Total
Prior service cost (credit)	$	—	$	—	$	—	$	(678	)	$	—	$	(678	)
Net loss	4,223		20,043		757		748			58		25,829
Total	$	4,223	$	20,043	$	757	$	70		$	58	$	25,151

Accumulated other comprehensive loss pre-tax⁽¹⁾	$	4,223	$	3,808	$	757	$	70		$	11	$	8,869
Post-merger regulatory asset	—		16,235		—		—			47		16,282
Subtotal	4,223		20,043		757		70			58		25,151
Pre-merger regulatory asset	—		2,065		—		—			30		2,095
Total unrecognized cost	$	4,223	$	22,108	$	757	$	70		$	88	$	27,246


⁽¹⁾	The total amount of accumulated other comprehensive loss recorded on our consolidated balance sheet as of December 31, 2016 is net of income tax benefits of $3.5 million.

Pursuant to a Florida PSC order, FPU continues to record as a regulatory asset a portion of the unrecognized pension and postretirement benefit costs after the merger with Chesapeake Utilities related to its regulated operations, which is included in the above table as a post-merger regulatory asset. FPU also continues to maintain and amortize a portion of the unrecognized pension and postretirement benefit costs prior to the merger with Chesapeake Utilities related to its regulated operations, which is shown as a pre-merger regulatory asset.

The amounts in accumulated other comprehensive loss and recorded as a regulatory asset for our pension and postretirement benefits plans that are expected to be recognized as a component of net periodic benefit cost in 2017 are set forth in the following table:



(in thousands)	Chesapeake Pension Plan		FPU Pension Plan		Chesapeake SERP		Chesapeake Postretirement Plan			FPU Medical Plan		Total
Prior service cost (credit)	$	—	$	—	$	—	$	(77	)	$	—	$	(77	)
Net loss	$	426	$	523	$	87	$	65		$	—	$	1,101
Amortization of pre-merger regulatory asset	$	—	$	761	$	—	$	—		$	8	$	769

Assumptions

The assumptions used for the discount rate to calculate the benefit obligations of all the plans were based on the interest rates of high-quality bonds in 2016, reflecting the expected lives of the plans. In determining the average expected return on plan assets for each applicable plan, various factors, such as historical long-term return experience, investment policy and current and expected allocation, were considered. Since Chesapeake Utilities' plans and FPU’s plans have different expected plan lives, particularly in light of the lump-sum-payment option provided in the Chesapeake Pension Plan, different assumptions regarding discount rate and expected return on plan assets were selected for Chesapeake Utilities' and FPU’s plans. Since both pension plans are frozen with respect to additional years of service and compensation, the rate of assumed compensation increases is not applicable.

The health care inflation rate for 2016 used to calculate the benefit obligation is 5.0 percent for medical and 6.0 percent for prescription drugs for the Chesapeake Postretirement Plan; and 5.0 percent for both medical and prescription drugs for the FPU Medical Plan. A one -percentage point increase in the health care inflation rate from the assumed rate would increase the accumulated postretirement benefit obligation by approximately $321,000 as of December 31, 2016, and would increase the aggregate of the service cost and interest cost components of the net periodic postretirement benefit cost for 2016 by approximately $12,000. A one-percentage point decrease in the health care inflation rate from the assumed rate would decrease the accumulated postretirement benefit obligation by approximately $257,000 as of December 31, 2016, and would decrease the aggregate of the service cost and interest cost components of the net periodic postretirement benefit cost for 2016 by approximately $10,000.

Estimated Future Benefit Payments

In 2017, we expect to contribute $323,000 and $2.6 million to the Chesapeake Pension Plan and FPU Pension Plan, respectively, and $151,000 to the Chesapeake SERP. We also expect to contribute $83,000 and $129,000 to the Chesapeake Postretirement Plan and FPU Medical Plan, respectively, in 2017. The schedule below shows the estimated future benefit payments for each of the plans previously described:



	Chesapeake Pension Plan⁽¹⁾		FPU Pension Plan⁽¹⁾		Chesapeake SERP⁽²⁾		Chesapeake Postretirement Plan⁽²⁾		FPU Medical Plan⁽²⁾
(in thousands)
2017	$	746	$	3,041	$	151	$	83	$	129
2018	$	664	$	3,128	$	150	$	82	$	93
2019	$	713	$	3,235	$	149	$	82	$	99
2020	$	649	$	3,319	$	148	$	76	$	93
2021	$	902	$	3,370	$	376	$	72	$	95
Years 2022 through 2026	$	5,020	$	18,447	$	732	$	319	$	405


⁽¹⁾	The pension plan is funded; therefore, benefit payments are expected to be paid out of the plan assets.


⁽²⁾	Benefit payments are expected to be paid out of our general funds.

Retirement Savings Plan

For the years ended December 31, 2016, 2015 and 2014, we sponsored a 401(k) Retirement Savings Plan. This Plan is offered to all eligible employees who have completed 3 months of service, except for employees represented by a collective bargaining agreement that does not specifically provide for participation in the plan, non-resident aliens with no U.S. source income and individuals classified as consultants, independent contractors or leased employees. We match 100 percent of eligible participants’ pre-tax contributions to the Retirement Savings Plan up to a maximum of six percent of eligible compensation. The employer matching contribution is made in cash and is invested based on a participant’s investment directions. In addition, we may make a discretionary supplemental contribution to participants in the plan, without regard to whether or not they make pre-tax contributions. Any supplemental employer contribution is generally made in our common stock. With respect to the employer match and supplemental employer contribution, employees are 100 percent vested after two years of service or upon reaching 55 years of age while still employed by us. Employees with one year of service are 20 percent vested and will become 100 percent vested after two years of service. Employees who do not make an election to contribute or do not opt out of the Retirement Savings Plan will be automatically enrolled at a deferral rate of three percent, and the automatic deferral rate will increase by one percent per year up to a maximum of six percent. All contributions and matched funds can be invested among the mutual funds available for investment.

Employer contributions to our retirement savings plan totaled $4.5 million for the year ended December 31, 2016, and $4.1 million for the years ended December 31, 2015 and 2014, respectively. As of December 31, 2016, there were 831,183 shares of our common stock reserved to fund future contributions to the Retirement Savings Plan.

Non-Qualified Deferred Compensation Plan

Members of our Board of Directors, and executive officers designated by the Compensation Committee, are eligible to participate in the Non-Qualified Deferred Compensation Plan. Directors can elect to defer any portion of their cash or stock compensation and executive officers can defer up to 80 percent of their base compensation, cash bonuses or any amount of their stock bonuses (net of required withholdings). Executive officers may receive a matching contribution on their cash compensation deferrals up to six percent of their compensation, provided it does not duplicate a match they receive in the Retirement Savings Plan. Stock bonuses are not eligible for matching contributions. Participants are able to elect the payment of benefits to begin on a specified future date, after the election is made, in the form of a lump sum or annual installments for up to 15 years.

All obligations arising under the Non-Qualified Deferred Compensation Plan are payable from our general assets, although we have established a Rabbi Trust to informally fund the plan. Deferrals of cash compensation may be invested by the participants in various mutual funds (the same options that are available in the 401(k) Retirement Savings Plan). The participants are credited with gains or losses on those investments. Deferred stock compensation may not be diversified. The participants are credited with dividends on our common stock in the same amount that is received by all other stockholders. Such dividends are reinvested into our common stock. Assets held in the Rabbi Trust had a fair value of $4.9 million and $3.6 million at December 31, 2016 and 2015, respectively. (See Note 9, Investments, for further details). The assets of the Rabbi Trust are at all times subject to the claims of our general creditors.

Deferrals of executive base compensation and cash bonuses and directors’ retainers and fees are paid in cash. All deferrals of executive performance shares, which represent deferred stock units, and directors’ stock retainers are paid in shares of our common stock, except that cash is paid in lieu of fractional shares. The value of our stock held in the Rabbi Trust is classified within the stockholders’ equity section of the consolidated balance sheets and has been accounted for in a manner similar to treasury stock. The amounts recorded under the Non-Qualified Deferred Compensation Plan totaled $2.4 million and $1.9 million at December 31, 2016 and 2015, respectively.