11. EMPLOYEE BENEFIT PLANS

Pension and Other Postemployment Benefit Plans

The Company has two trusteed, noncontributory defined benefit retirement plans covering eligible regular represented and nonrepresented employees with more than one year of service. Defined benefit plan benefits are based on years of service and average compensation during the highest 60 consecutive months of employment. The Company also provides postemployment medical and life insurance benefits to employees who meet certain eligibility requirements.

All represented employees of NJRHS hired on or after October 1, 2000, non-represented employees hired on or after October 1, 2009 and NJNG represented employees hired on or after January 1, 2012, are covered by an enhanced defined contribution plan instead of the defined benefit plan. Participation in the postemployment medical and life insurance plan was also frozen to new employees as of the same dates, with the exception of new NJRHS represented employees, for which benefits were frozen beginning April 3, 2012.

The Company maintains an unfunded nonqualified PEP that was established to provide employees with the full level of benefits as stated in the qualified plan without reductions due to various limitations imposed by the provisions of federal income tax laws and regulations. There were no plan assets in the nonqualified plan due to the nature of the plan.

The Company’s funding policy for its pension plans is to contribute at least the minimum amount required by the Employee Retirement Income Security Act of 1974, as amended. In fiscal 2017 and 2016, the Company had no minimum funding requirements. The Company made a discretionary contribution of $30 million during the first quarter of fiscal 2016 to improve the funded status of the pension plans based on current actuarial assumptions. The Company made no discretionary contributions to the pension plans in fiscal 2017. The Company does not expect to be required to make additional contributions to fund the pension plans over the following two fiscal years based on current actuarial assumptions; however, funding requirements are uncertain and can depend significantly on changes in actuarial assumptions, returns on plan assets and changes in the demographics of eligible employees and covered dependents.

There are no Federal requirements to pre-fund OPEB benefits. However, the Company is required to fund certain amounts due to regulatory agreements with the BPU. The Company contributed $6 million and $3.2 million, in fiscal 2017 and 2016, respectively, and estimates that it will contribute between $4 million to $7 million over each of the next five years. Additional contributions may be required based on market conditions and changes to assumptions.

The following summarizes the changes in the funded status of the plans and the related liabilities recognized on the Consolidated Balance Sheets as of September 30:



	Pension ⁽¹⁾						OPEB
(Thousands)	2017			2016			2017			2016
Change in Benefit Obligation
Benefit obligation at beginning of year	$	293,654		$	255,987		$	160,393		$	138,367
Service cost	8,347			7,591			4,380			4,521
Interest cost	9,771			11,342			5,545			6,256
Plan participants’ contributions ⁽²⁾	45			47			120			104
Actuarial (gain) loss	(5,995		)	26,369			8,985			15,590
Benefits paid, net of retiree subsidies received	(7,987		)	(7,682		)	(4,333		)	(4,445		)
Benefit obligation at end of year	$	297,835		$	293,654		$	175,090		$	160,393
Change in plan assets
Fair value of plan assets at beginning of year	$	249,875		$	199,123		$	62,035		$	57,269
Actual return on plan assets	29,736			28,316			7,953			5,872
Employer contributions	74			30,071			6,049			3,235
Benefits paid, net of plan participants’ contributions ⁽²⁾	(7,942		)	(7,635		)	(4,503		)	(4,341		)
Fair value of plan assets at end of year	$	271,743		$	249,875		$	71,534		$	62,035
Funded status	$	(26,092	)	$	(43,779	)	$	(103,556	)	$	(98,358	)
Amounts recognized on Consolidated Balance Sheets
Postemployment employee (liability)
Current	$	(158	)	$	(79	)	$	(602	)	$	(454	)
Noncurrent	(25,934		)	(43,700		)	(102,954		)	(97,904		)
Total	$	(26,092	)	$	(43,779	)	$	(103,556	)	$	(98,358	)


(1)	Includes the Company’s PEP.


(2)	Prior to July 1, 1998, employees were eligible to elect an additional participant contribution to enhance their benefits and contributions made during the periods were insignificant.

The actuarial gain on the Company’s pension plans is primarily due to an increase in the discount rate and the adoption of the MP-2016 mortality table. The actuarial loss related to the OPEB plans is primarily due to an increase in expected retiree healthcare claims, partially offset by an increase in the discount rate and the adoption of the MP-2016 mortality table.

The Company recognizes a liability for its underfunded benefit plans as required by the Compensation - Retirement Benefits Topic of the ASC. The Company records the offset to regulatory assets for the portion of liability relating to NJNG and to accumulated other comprehensive income for the portion of the liability related to its unregulated operations.

The following table summarizes the amounts recognized in regulatory assets and accumulated other comprehensive income as of September 30:



	Regulatory Assets						Accumulated Other Comprehensive Income (Loss)
	Pension			OPEB			Pension			OPEB
Balance at September 30, 2015	$	86,960		$	50,737		$	25,640		$	1,242
Amounts arising during the period:
Net actuarial loss	13,696			11,274			4,475			3,289
Amounts amortized to net periodic costs:
Net actuarial (loss)	(5,607		)	(3,175		)	(1,676		)	(99		)
Prior service (cost) credit	(108		)	311			(3		)	54
Balance at September 30, 2016	$	94,941		$	59,147		$	28,436		$	4,486
Amounts arising during the period:
Net actuarial (gain) loss	(9,429		)	5,211			(6,990		)	587
Amounts amortized to net periodic costs:
Net actuarial (loss)	(6,799		)	(4,209		)	(2,028		)	(160		)
Prior service (cost) credit	(108		)	311			(3		)	54
Balance at September 30, 2017	$	78,605		$	60,460		$	19,415		$	4,967

The amounts in regulatory assets and accumulated other comprehensive income not yet recognized as components of net periodic benefit cost as of September 30 are:



	Regulatory Assets										Accumulated Other Comprehensive Income (Loss)
	Pension				OPEB						Pension				OPEB
(Thousands)	2017		2016		2017			2016			2017		2016		2017			2016
Net actuarial loss	$	77,930	$	94,158	$	61,563		$	60,561		$	19,414	$	28,432	$	5,113		$	4,686
Prior service cost (credit)	675		783		(1,103		)	(1,414		)	1		4		(146		)	(200		)
Total	$	78,605	$	94,941	$	60,460		$	59,147		$	19,415	$	28,436	$	4,967		$	4,486

To the extent the unrecognized amounts in accumulated other comprehensive income or regulatory assets exceed 10 percent of the greater of the benefit obligation or the fair value of plan assets, an amortized amount over the average expected future working lifetime of the active plan participants is recognized. Amounts included in regulatory assets and accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost in fiscal 2018 are as follows:



	Regulatory Assets					Accumulated Other Comprehensive Income (Loss)
(Thousands)	Pension		OPEB			Pension		OPEB
Net actuarial loss	$	6,177	$	4,464		$	1,360	$	196
Prior service cost (credit)	105		(311		)	1		(53		)
Total	$	6,282	$	4,153		$	1,361	$	143

The accumulated benefit obligation for the pension plans, including the PEP, exceeded the fair value of plan assets. The projected benefit and accumulated benefit obligations and the fair value of plan assets as of September 30, are as follows:



	Pension
(Thousands)	2017		2016
Projected benefit obligation	$	297,835	$	293,654
Accumulated benefit obligation	$	258,514	$	252,077
Fair value of plan assets	$	271,743	$	249,875

The components of the net periodic cost for pension benefits, including the Company’s PEP, and OPEB costs (principally health care and life insurance) for employees and covered dependents for fiscal years ended September 30, are as follows:



	Pension									OPEB
(Thousands)	2017			2016			2015			2017			2016			2015
Service cost	$	8,347		$	7,591		$	7,485		$	4,380		$	4,521		$	4,253
Interest cost	9,771			11,342			10,199			5,545			6,256			5,739
Expected return on plan assets	(19,313		)	(20,118		)	(17,090		)	(4,767		)	(4,845		)	(4,977		)
Recognized actuarial loss	8,827			7,281			6,985			4,370			3,274			2,943
Prior service cost (credit) amortization	111			111			111			(365		)	(365		)	(364		)
Net periodic benefit cost recognized as expense	$	7,743		$	6,207		$	7,690		$	9,163		$	8,841		$	7,594

Assumptions

The weighted average assumptions used to determine the Company’s benefit costs during the fiscal years below and obligations as of September 30, are as follows:



	Pension									OPEB
	2017			2016			2015			2017			2016			2015
Benefit costs:
Discount rate	3.96/3.94%			4.50	%		4.55	%		4.08/4.01%		⁽¹⁾	4.60/4.55%		⁽¹⁾	4.55	%
Expected asset return	7.75	%		8.75	%		8.75	%		7.75	%		8.75	%		8.75	%
Compensation increase	3.25/3.50%		⁽¹⁾	3.25/3.50%		⁽¹⁾	3.25	%		3.25/3.50%		⁽¹⁾	3.50	%		3.50	%
Obligations:
Discount rate	4.03	%		3.96/3.94%		⁽¹⁾	4.50	%		4.12/4.08%		⁽¹⁾	4.08/4.01%		⁽¹⁾	4.60/4.55%		⁽¹⁾
Compensation increase	3.25/3.50%		⁽¹⁾	3.25/3.50%		⁽¹⁾	3.25/3.50%		⁽¹⁾	3.25/3.50%		⁽¹⁾	3.50	%		3.50	%


(1)	Percentages for represented and nonrepresented plans, respectively.

When measuring its projected benefit obligations, the Company uses an aggregate discount rate at which its obligation could be effectively settled. The Company determines a single weighted average discount rate based on a yield curve comprised of rates of return on a population of high quality debt issuances (AA- or better) whose cash flows (via coupons or maturities) match the timing and amount of its expected future benefit payments. Prior to October 1, 2016, the Company used the same assumed rate to measure the service and interest cost components of its net periodic benefit costs. Effective October 1, 2016, the Company changed its method of measuring its service and interest costs from the aggregate approach to a disaggregated, or spot rate, approach. Under the new approach, the Company applies the duration specific spot rates from the full yield curve, as of the measurement date, to each year’s future benefit payments. The Company believes that the new method provides for a more precise measurement of its service and interest costs by aligning the timing of the plans’ separate future cash flows to the corresponding spot rates on the yield curve. Accordingly, the Company accounted for this change prospectively as a change in accounting estimate.

Information relating to the assumed HCCTR used to determine expected OPEB benefits as of September 30, and the effect of a one percent change in the rate, are as follows:



($ in thousands)	2017			2016			2015
HCCTR	8.3		%	8.5		%	6.7		%
Ultimate HCCTR	4.5		%	4.5		%	4.8		%
Year ultimate HCCTR reached	2025			2025			2022
Effect of a 1 percentage point increase in the HCCTR on:
Year-end benefit obligation	$	32,019		$	28,803		$	26,025
Total service and interest cost	$	2,468		$	2,331		$	2,026
Effect of a 1 percentage point decrease in the HCCTR on:
Year-end benefit obligation	$	(25,466	)	$	(22,862	)	$	(20,427	)
Total service and interest costs	$	(1,909	)	$	(1,801	)	$	(1,593	)

The Company’s investment objective is a long-term real rate of return on assets before permissible expenses that is approximately 5 percent greater than the assumed rate of inflation, as measured by the consumer price index. The expected long-term rate of return is based on the asset categories in which the Company invests and the current expectations and historical performance for these categories.

The mix and targeted allocation of the pension and OPEB plans’ assets are as follows:



	2018		Assets at
	Target		September 30,
Asset Allocation	Allocation		2017		2016
U.S. equity securities	40	%	39	%	38	%
International equity securities	20		21		20
Fixed income	40		40		42
Total	100	%	100	%	100	%

The Company adopted the revised mortality assumptions published by the Society of Actuaries for its pension and other postemployment benefit obligations, which reflected increased life expectancies in the United States. The adoption of the new mortality tables resulted in an increase to the projected benefit obligation for the plans.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid during the following years:



(Thousands)	Pension		OPEB
2018	$	8,928	$	4,230
2019	$	9,712	$	4,807
2020	$	10,549	$	5,435
2021	$	11,502	$	6,061
2022	$	12,469	$	6,755
2023 - 2027	$	79,081	$	43,267

The Company’s OPEB plans provide prescription drug benefits that are actuarially equivalent to those provided by Medicare Part D. Therefore, under the Medicare Prescription Drug, Improvement and Modernization Act of 2003, the Company qualifies for federal subsidies.

The estimated subsidy payments are as follows:



	Estimated Subsidy Payment
Fiscal Year	(Thousands)
2018	$262
2019	$283
2020	$311
2021	$342
2022	$373
2023 - 2027	$2,574

Pension and OPEB assets held in the master trust, measured at fair value, as of September 30, are summarized as follows:



	Quoted Prices in Active Markets for Identical Assets (Level 1)
(Thousands)	Pension				OPEB
Assets	2017		2016		2017		2016
Money market funds	$	—	$	—	$	11	$	9
Registered Investment Companies:
Equity Funds:
Large Cap Index	88,321		78,306		23,986		19,532
Extended Market Index	16,329		16,250		4,409		4,114
International Stock	56,446		50,702		15,000		12,997
Fixed Income Funds:
Emerging Markets	13,516		12,906		3,551		3,294
Core Fixed Income	—		—		8,082		7,177
Opportunistic Income	—		—		4,744		4,155
Ultra Short Duration	—		—		4,673		4,082
High Yield Bond Fund	26,540		25,976		7,078		6,675
Long Duration Fund	70,591		65,735		—		—
Total assets at fair value	$	271,743	$	249,875	$	71,534	$	62,035

The Plan had no Level 2 or Level 3 fair value measurements during fiscal 2017 and 2016, and there have been no changes in valuation methodologies as of September 30, 2017. The following is a description of the valuation methodologies used for assets measured at fair value:

Money Market funds — Represents bank balances and money market funds that are valued based on the net asset value of shares held at year end.

Registered Investment Companies — Equity and fixed income funds valued at the net asset value of shares held by the plan at year end as reported on the active market on which the individual securities are traded.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

Defined Contribution Plan

The Company offers a Savings Plan to eligible employees. As of January 1, 2015, the Company matches 65 percent of participants’ contributions up to 6 percent of base compensation. Represented NJRHS employees, non-represented employees hired on or after October 1, 2009, and NJNG represented employees hired on or after January 1, 2012, are eligible for an employer special contribution of between 3 and 4 percent of base compensation, depending on years of service, into the Savings Plan on their behalf. The amount expensed and contributed for the matching provision of the Savings Plan was $2.9 million in fiscal 2017, $2.8 million in fiscal 2016 and $2.6 million in fiscal 2015. The amount contributed for the employer special contribution of the Savings Plan was $781,000 in fiscal 2017, $571,000 in fiscal 2016 and $461,000 in fiscal 2015.