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:


	2016			2015			2014
Used to Determine Plan costs for years ended December 31:
Discount Rate⁽¹⁾		4.30	%		4.00	%		4.80	%
Rate of Compensation Increase		3.00	%		3.00	%		3.00	%
Expected Long-term rate of return on plan assets		8.00	%		8.00	%		8.00	%
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)	$	1,352		$	1,383		$	989
Effect of 1% Decrease in Health Care Cost Trend Rate (000’s)	$	(1,032	)	$	(1,040	)	$	(771	)

⁽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		4.10	%		4.30	%		4.00	%
Rate of Compensation Increase		3.00	%		3.00	%		3.00	%
Health Care Cost Trend Rate Assumed for Next Year		8.00	%		7.00	%		7.00	%
Ultimate Health Care Cost Trend Rate		4.00	%		4.00	%		4.00	%
Year that Ultimate Health care Cost Trend Rate is reached		2025			2022			2018
Effect of 1% Increase in Health Care Cost Trend Rate (000’s)	$	19,471		$	14,877		$	15,325
Effect of 1% Decrease in Health Care Cost Trend Rate (000’s)	$	(15,153	)	$	(11,611	)	$	(11,829	)

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 2016, a change in the discount rate of 0.25% would have resulted in an increase or decrease of approximately $524,000 in the Net Periodic Benefit Cost (NPBC). The Rate of Compensation Increase assumption used for 2016 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
	2016			2015			2014			2016			2015			2014			2016		2015		2014

Service Cost	$	3,402		$	3,689		$	3,006		$	2,610		$	2,622		$	1,988		$	162	$	120	$	57

Interest Cost		5,945			5,392			5,092			3,232			2,918			2,686			386		330		272

Expected Return on Plan Assets		(7,257	)		(6,779	)		(6,245	)		(1,205	)		(1,093	)		(920	)		—		—		—

Prior Service Cost Amortization		263			265			211			1,486			1,682			1,682			189		85		11

Actuarial Loss Amortization		4,398			4,714			2,847			1,049			1,150			56			375		327		100


Sub-total		6,751			7,281			4,911			7,172			7,279			5,492			1,112		862		440

Amounts Capitalized or Deferred		(3,008	)		(3,397	)		(1,881	)		(3,351	)		(3,423	)		(2,270	)		—		—		—

NPBC Recognized	$	3,743		$	3,884		$	3,030		$	3,821		$	3,856		$	3,222		$	1,112	$	862	$	440

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 $5.0 million, $3.5 million and $0.5 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 2016, 2015 and 2014 before capitalization and deferral was $6.8 million, $7.3 million and $4.9 million, respectively. Had the Company used the fair value of assets instead of the market-related value, pension expense for the years 2016, 2015 and 2014 would have been $7.7 million, $7.3 million and $4.3 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:	2016			2015			2016			2015			2016			2015

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

Actual Return on Plan Assets		3,618			645			792			(214	)		—			—

Employer Contributions		5,146			4,215			4,000			4,000			34			40

Participant Contributions		—			—			61			63			—			—

Benefits Paid		(4,900	)		(4,410	)		(2,421	)		(2,515	)		(34	)		(40	)

Plan Assets at End of Year	$	91,058		$	87,194		$	16,606		$	14,174		$	—		$	—


	Pension Plan						PBOP Plan						SERP
Change in Plan Assets:	2016			2015			2016			2015			2016			2015
Change in PBO:

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

Service Cost		3,402			3,689			2,610			2,622			162			120

Interest Cost		5,945			5,392			3,232			2,918			386			330

Participant Contributions		—			—			61			63			—			—

Plan Amendments		—			474			—			—			—			608

Benefits Paid		(4,900	)		(4,410	)		(2,421	)		(2,515	)		(34	)		(40	)

Actuarial (Gain) or Loss		5,176			(991	)		16,928			(762	)		(125	)		194

PBO at End of Year	$	150,439		$	140,816		$	96,659		$	76,249		$	9,566		$	9,177

Funded Status: Assets vs PBO	$	(59,381	)	$	(53,622	)	$	(80,053	)	$	(62,075	)	$	(9,566	)	$	(9,177	)

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 $75.9 million and $64.7 million at December 31, 2016 and 2015, 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 $135.2 million and $126.8 million as of December 31, 2016 and 2015, respectively. The ABO for the SERP was $6.9 million and $7.0 million as of December 31, 2016 and 2015, 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 2017 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
	2016		2015		2014		2016		2015		2014		2016		2015		2014
Employer Contributions	$	5,146	$	4,215	$	4,191	$	4,000	$	4,000	$	3,650	$	34	$	40	$	53
Participant Contributions	$	—	$	—	$	—	$	61	$	63	$	59	$	—	$	—	$	—
Benefit Payments	$	4,900	$	4,410	$	4,246	$	2,421	$	2,515	$	2,184	$	34	$	40	$	53

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


Estimated Future Benefit Payments
	Pension		PBOP		SERP
2017	$	5,451	$	2,439	$	34
2018		5,475		2,690		33
2019		6,035		2,922		578
2020		6,288		3,138		569
2021		6,759		3,470		703
2022 - 2026		40,623		21,533		3,753

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 2017			Actual Allocation at December 31,
	Target Allocation 2017			2016			2015			2014
Equity Funds		47	%		46	%		46	%		49	%
Debt Funds		37	%		37	%		37	%		36	%
Real Estate Fund		10	%		10	%		11	%		10	%
Asset Allocation Fund⁽¹⁾		6	%		7	%		6	%		5	%

Total					100	%		100	%		100	%

(1)

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


PBOP Plan	Target Allocation 2017			Actual Allocation at December 31,
PBOP Plan	Target Allocation 2017			2016			2015			2014
Equity Funds		55	%		55	%		53	%		56	%
Debt Funds		45	%		43	%		47	%		44	%
Other⁽¹⁾		0	%		2	%		0	%		0	%

Total					100	%		100	%		100	%

(1)

Represents investments being held in cash equivalents as of December 31, 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 8.00% for 2016. 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, 2016 and 2015. 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, 2016 and 2015 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)
2016
Pension Plan Assets:
Equity Funds	$	42,134	$	42,134	$	—	$	—
Fixed Income Funds		33,924		33,924		—		—
Asset Allocation Fund		6,172		6,172		—		—

Total Assets in the Fair Value Hierarchy	$	82,230	$	82,230	$	—	$	—

Real Estate Fund–Measured at Net Asset Value		8,828

Total Assets	$	91,058


2015
Pension Plan Assets:
Equity Funds	$	40,124	$	40,124	$	—	$	—
Fixed Income Funds		32,192		32,192		—		—
Asset Allocation Fund		5,527		5,527		—		—

Total Assets in the Fair Value Hierarchy	$	77,843	$	77,843	$	—	$	—

Real Estate Fund–Measured at Net Asset Value		9,351

Total Assets	$	87,194

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, 2016 and 2015 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)
2016
PBOP Plan Assets:
Mutual Funds:
Fixed Income Funds	$	7,078	$	7,078	$	—	$	—
Equity Funds		9,128		9,128

Total Mutual Funds		16,206		16,206
Cash Equivalents		400		400

Total Assets	$	16,606	$	16,606	$	—	$	—


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	$	—	$	—

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 $2,304,000, $2,098,000 and $1,877,000 for the years ended December 31, 2016, 2015 and 2014, respectively.