Retirement Plans & Other Postretirement Benefits

At December 31, 2017, the Company maintains three closed qualified defined benefit pension plans, a nonqualified supplemental executive retirement plan (SERP), and a postretirement benefit plan. The defined benefit pension plans and postretirement benefit plan, which cover eligible full-time regular employees, are primarily noncontributory. The postretirement benefit plan includes health care and life insurance benefits which are a combination of self-insured and fully insured programs. The qualified pension plans and the SERP are aggregated under the heading “Pension Benefits.” The postretirement benefit plan is presented under the heading “Other Benefits.”

Net Periodic Benefit Costs

A summary of the components of net periodic benefit cost for the three years ended December 31, 2017 follows:



	Pension Benefits									Other Benefits
(In millions)	2017			2016			2015			2017			2016			2015
Service cost	$	6.5		$	7.0		$	7.9		$	0.2		$	0.3		$	0.4
Interest cost	13.7			14.7			14.6			1.5			1.7			2.0
Expected return on plan assets	(21.0		)	(22.8		)	(22.5		)	—			—			—
Amortization of prior service cost (benefit)	0.4			0.4			0.7			(2.4		)	(2.9		)	(3.0		)
Amortization of actuarial loss	7.4			7.2			8.5			—			—			0.7
Settlement charge	2.1			—			0.6			—			—			—
Net periodic benefit cost (benefit)	$	9.1		$	6.5		$	9.8		$	(0.7	)	$	(0.9	)	$	0.1

A portion of the net periodic benefit cost disclosed in the table above is capitalized as Utility Plant following the allocation of current employee labor costs. Costs capitalized in 2017, 2016, and 2015 are estimated at $3.0 million, $1.9 million, and $3.1 million, respectively.

The Company decreased the weighted average discount rate used to measure periodic cost from 4.31 percent in 2016 to 4.07 percent in 2017 due to lower benchmark interest rates that approximated the expected duration of the Company’s benefit obligations as of that valuation date. The Company derives its discount rate by identifying a theoretical settlement portfolio of high quality corporate bonds sufficient to provide for the plans' projected benefit payments. For fiscal year 2018, the weighted average discount rate assumption will decrease to 3.61 percent for the defined benefit pension plans, based on decreased benchmark interest rates.

The weighted averages of significant assumptions used to determine net periodic benefit costs follow:



	Pension Benefits						Other Benefits
	2017		2016		2015		2017		2016		2015
Discount rate	4.07	%	4.31	%	4.05	%	4.04	%	4.21	%	3.95	%
Rate of compensation increase	3.50	%	3.50	%	3.50	%	N/A		N/A		N/A
Expected return on plan assets	7.00	%	7.50	%	7.50	%	N/A		N/A		N/A
Expected increase in Consumer Price Index	N/A		N/A		N/A		2.50	%	2.50	%	2.50	%

The Company uses a "building block" approach to develop an expected long-term rate of return. In 2017, the Company lowered to 7.0 percent this long-term assumption based on continued lower interest rates. The 2018 assumption is also 7.0 percent. Health care cost trend rate assumptions do not have a material effect on the service and interest cost components of benefit costs. The Company’s plans limit its exposure to increases in health care costs to annual changes in the Consumer Price Index (CPI). Any increase in health care costs in excess of the CPI increase is the responsibility of the plan participants.

Projected Benefit Obligations

A reconciliation of the Company’s benefit obligations at December 31, 2017 and 2016 follows:



	Pension Benefits						Other Benefits
(In millions)	2017			2016			2017			2016
Projected benefit obligation, beginning of period	$	350.4		$	348.3		$	40.5		$	43.5
Service cost – benefits earned during the period	6.5			7.0			0.2			0.3
Interest cost on projected benefit obligation	13.7			14.7			1.5			1.7
Plan participants' contributions	—			—			1.2			1.1
Plan amendments	1.4			—			—			—
Actuarial loss (gain)	25.4			8.7			1.3			(1.6		)
Settlement loss	0.5			—			—			—
Benefit payments	(31.4		)	(28.3		)	(4.7		)	(4.5		)
Projected benefit obligation, end of period	$	366.5		$	350.4		$	40.0		$	40.5

The increase in the projected benefit obligation in 2017 is primarily due to a decrease in the discount rate used to measure the obligation at year end. The accumulated benefit obligation for all defined benefit pension plans was $356.5 million and $339.8 million at December 31, 2017 and 2016, respectively. The accumulated benefit obligation as of a date is the actuarial present value of benefits attributed by the pension benefit formula to employee service rendered prior to that date and based on current and past compensation levels. The accumulated benefit obligation differs from the projected benefit obligation disclosed in the table above in that it includes no assumptions about future compensation levels.

Material Assumptions

The benefit obligation as of December 31, 2017 and 2016 was calculated using the following weighted average assumptions:



	Pension Benefits				Other Benefits
	2017		2016		2017		2016
Discount rate	3.61	%	4.07	%	3.57	%	4.04	%
Rate of compensation increase	3.50	%	3.50	%	N/A		N/A
Expected increase in Consumer Price Index	N/A		N/A		2.50	%	2.50	%

For the projected benefit obligation calculation at December 31, 2017, the mortality assumed for determining future lump sums reflects the latest IRS mortality table (2019) and the latest mortality improvement scales released by the Society of Actuaries. To calculate the 2017 ending postretirement benefit obligation, medical claims costs in 2018 were assumed to be 7.0 percent higher than those incurred in 2017. That trend, beginning at 7.0 percent in 2018, is assumed to reach its ultimate trending increase of 5.0 percent by 2025 and remain level thereafter. A one-percentage point increase or decrease in assumed health care cost trend rates would have changed the benefit obligation by approximately $0.2 million.

Plan Assets

A reconciliation of the Company’s plan assets at December 31, 2017 and 2016 follows:



	Pension Benefits						Other Benefits
(In millions)	2017			2016			2017			2016
Plan assets at fair value, beginning of period	$	304.5		$	296.9		$	—		$	—
Actual return on plan assets	41.9			19.7			—			—
Employer contributions	1.1			16.2			3.5			3.4
Plan participants' contributions	—			—			1.2			1.1
Benefit payments	(31.4		)	(28.3		)	(4.7		)	(4.5		)
Fair value of plan assets, end of period	$	316.1		$	304.5		$	—		$	—

The Company’s overall investment strategy for its retirement plan trusts is to maintain investments in a diversified portfolio, comprised of primarily equity and fixed income investments, which are further diversified among various asset classes. The diversification is designed to minimize the risk of large losses while maximizing total return within reasonable and prudent levels of risk. The investment objectives specify a targeted investment allocation for the pension plans of 60 percent equities, 35 percent debt, and 5 percent for other investments, including real estate. Both the equity and debt securities have a blend of domestic and international exposures. Objectives do not target a specific return by asset class. The portfolios’ return is monitored in total. Following is a description of the valuation methodologies used for trust assets measured at fair value.

Mutual Funds

The fair values of mutual funds are derived from the daily closing price as reported by the fund as these instruments have active markets (Level 1 inputs).

Common Collective Trust Funds (CTF’s)

The Company’s plans have investments in trust funds similar to mutual funds in that they are created by pooling of funds from investors into a common trust and such funds are managed by a third party investment manager. These trust funds typically give investors a wider range of investment options through this pooling of funds than those generally available to investors on an individual basis. However, unlike mutual funds, these trusts are not publicly traded in an active market. The funds are valued at the net asset value of the underlying investments. The net asset value is used as a practical expedient to estimate fair value. In relation to these investments, there are no unfunded commitments. Also, the Plan can exchange shares with minimal restrictions, however, certain events may exist where share exchanges are restricted for up to 31 days.

The fair values of the Company’s pension and other retirement plan assets at December 31, 2017 and December 31, 2016 by asset category and by fair value hierarchy are as follows:



	As of December 31, 2017
(In millions)	Level 1		Level 2		Level 3		Total
Domestic equity funds	$	140.2	$	—	$	—	$	140.2
International equity funds	46.8		—		—		46.8
Bond funds	43.6		—		—		43.6
Real estate, commodity & other funds	6.2		—		4.5		10.7
Investments measured at net asset value (a)	—		—		—		74.8
Total plan investments	$	236.8	$	—	$	4.5	$	316.1



	As of December 31, 2016
(In millions)	Level 1		Level 2		Level 3		Total
Domestic equity funds	$	135.1	$	—	$	—	$	135.1
International equity funds	42.0		—		—		42.0
Bond funds	44.6		—		—		44.6
Real estate, commodity & other funds	6.0		—		4.4		10.4
Investments measured at net asset value (a)	—		—		—		72.4
Total plan investments	$	227.7	$	—	$	4.4	$	304.5

(a) In accordance with Subtopic 820-10, certain investments that were measured at net asset value per share, or its equivalent, have not been classified in the fair value hierarchy.

Guaranteed Annuity Contract

One of the Company’s pension plans is party to a group annuity contract with John Hancock Life Insurance Company (John Hancock). At December 31, 2017 and 2016, the estimate of undiscounted funds necessary to satisfy John Hancock’s remaining obligation was $4.2 million and $4.0 million, respectively. If funds retained by John Hancock are not sufficient to satisfy retirement payments due to these retirees, the shortfall must be funded by the Company. The composite investment return, net of manager fees and other charges for the years ended December 31, 2017 and 2016 was 3.25 percent and 3.60 percent, respectively. The Company values this illiquid investment using long-term interest rate and mortality assumptions, among others, and is therefore considered a Level 3 investment. There is no unfunded commitment related to this investment.

A roll forward of the fair value of the guaranteed annuity contract calculated using Level 3 valuation assumptions follows:



(In millions)	2017			2016
Fair value, beginning of year	$	4.4		$	4.3
Unrealized gains related to investments still held at reporting date	0.2			0.2
Purchases, sales & settlements, net	(0.1		)	(0.1		)
Fair value, end of year	$	4.5		$	4.4

Funded Status

The funded status of the plans as of December 31, 2017 and 2016 follows:



	Pension Benefits						Other Benefits
(In millions)	2017			2016			2017			2016
Qualified Plans
Projected benefit obligation, end of period	$	(343.4	)	$	(329.7	)	$	(40.0	)	$	(40.5	)
Fair value of plan assets, end of period	316.1			304.5			—			—
Funded Status of Qualified Plans, end of period	(27.3		)	(25.2		)	(40.0		)	(40.5		)
Projected benefit obligation of SERP Plan, end of period	(22.9		)	(20.6		)	—			—
Total funded status, end of period	$	(50.2	)	$	(45.8	)	$	(40.0	)	$	(40.5	)
Accrued liabilities	$	1.1		$	1.2		$	4.1		$	4.5
Deferred credits & other liabilities	$	49.1		$	44.6		$	35.9		$	36.0

Expected Cash Flows

The Company expects to make contributions totaling $3.5 million to the qualified pension plans in 2018. In addition, the Company expects to make contributions totaling approximately $1.1 million into the SERP plan and approximately $2.9 million into the postretirement plan.

Estimated retiree pension benefit payments, including the SERP, projected to be required during the years following 2017 are approximately (in millions) $28.8 in 2018, $43.0 in 2019, $30.1 in 2020, $27.3 in 2021, $28.6 in 2022, and $132.7 in years 2023-2027. Expected benefit payments projected to be required for postretirement benefits during the years following 2017 (in millions) are approximately $4.1 in 2018, $4.4 in 2019, $4.7 in 2020, $4.9 in 2021, $4.9 in 2022, and $23.1 in years 2023-2027.

Prior Service Cost and Actuarial Gains and Losses

Following is a roll forward of prior service cost and actuarial gains and losses.



	Pensions						Other Benefits
(In millions)	Prior Service Cost			Net (Gain) or Loss			Prior Service Cost			Net (Gain) or Loss
Balance at January 1, 2015	$	2.0		$	111.7		$	(17.1	)	$	10.9
Amounts arising during the period	0.5			6.9			—			(8.6		)
Reclassification to benefit costs	(0.7		)	(8.5		)	3.0			(0.7		)
Balance at December 31, 2015	$	1.8		$	110.1		$	(14.1	)	$	1.6
Amounts arising during the period	—			11.7			—			(1.6		)
Reclassification to benefit costs	(0.4		)	(7.2		)	2.9			—
Balance at December 31, 2016	$	1.4		$	114.6		$	(11.2	)	$	—
Amounts arising during the period	1.3			3.1			—			1.2
Reclassification to benefit costs	(0.4		)	(7.4		)	2.4			—
Balance at December 31, 2017	$	2.3		$	110.3		$	(8.8	)	$	1.2

Following is a reconciliation of the amounts in Accumulated other comprehensive income (AOCI) and Regulatory assets related to retirement plan obligations at December 31, 2017 and 2016.



(In millions)	2017						2016
	Pensions			Other Benefits			Pensions			Other Benefits
Prior service cost	$	2.3		$	(8.8	)	$	1.4		$	(11.2	)
Unamortized actuarial loss	110.3			1.2			114.6			—
	112.6			(7.6		)	116.0			(11.2		)
Less: Regulatory asset deferral	(110.2		)	7.4			(113.6		)	11.0
AOCI before taxes	$	2.4		$	(0.2	)	$	2.4		$	(0.2	)

Related to pension plans, $0.5 million of prior service cost and $8.5 million of actuarial gain/loss is expected to be amortized to cost in 2018. Related to other benefits, no actuarial gain/loss is expected to be amortized to periodic cost in 2018, and $2.2 million of prior service cost is expected to reduce costs in 2018.

Multiemployer Benefit Plan

The Company, through its Infrastructure Services operating segment, participates in several industry wide multiemployer pension plans for its union employees which provide for monthly benefits based on length of service. The risks of participating in multiemployer pension plans are different from the risks of participating in single-employer pension plans in the following respects: 1) assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers, 2) if a participating employer stops contributing to the plan, the unfunded obligations of the plan allocable to such withdrawing employer may be borne by the remaining participating employers, and 3) if the Company ceases its participation in its multiemployer pension plans, the Company may be required to pay those plans an amount based on its allocable share of the underfunded status of the plan, referred to as a withdrawal liability.

Expense is recognized as payments are accrued for work performed or when withdrawal liabilities are probable and estimable. Expense associated with multiemployer plans was $42.1 million, $35.0 million and $32.7 million for the years ended December 31, 2017, 2016, and 2015, respectively. During 2017, the Company made contributions to these multiemployer plans on behalf of employees that participate in approximately 250 local unions. Contracts with these unions are negotiated with trade agreements through two primary contractor associations. These trade agreements have varying expiration dates ranging from 2017 through 2021. The average contribution related to these local unions was less than $0.2 million, and the largest contribution was $4.8 million. Multiple unions can contribute to a single multiemployer plan. The Company made contributions to at least 50 plans in 2017, six of which are considered significant plans based on, among other things, the amount of the contributions, the number of employees participating in the plan, and the funded status of the plan.

The Company's participation in the significant plans is outlined in the following table. The Employer Identification Number (EIN) / Pension Plan Number column provides the EIN and three digit pension plan numbers. The most recent Pension Protection Act Zone Status available in 2017 and 2016 is for the plan year end at January 31, 2017 and 2016 for the Central Pension Fund, May 31, 2017 and 2016 for the Indiana Laborers Fund, December 31, 2016 and 2015 for the Pipeline Industry Benefit Fund, December 31, 2016 and 2015 for the Laborers District Council & Contractors’ Pension Fund of Ohio, July 31, 2016 and 2015 for the Ohio Operating Engineers Pension Fund and April 30, 2017 and 2016 for the Operating Engineers Local 324 Fringe Benefit Fund respectively. The Company's participation in the significant plans is outlined in the following table. Generally, plans in the red zone are less than 65 percent funded, plans in the yellow zone are less than 80 percent funded and plans in the green zone are at least 80 percent funded. The FIP/RP Status Pending / Implemented column indicates plans for which a funding improvement plan ("FIP") or rehabilitation plan ("RP") is either pending or has been implemented. The multiemployer contributions listed in the table below are the Company's multiemployer contributions made in 2017, 2016, and 2015.

Federal law requires pension plans in endangered status to adopt a FIP aimed at restoring the financial health of the plan. In December 2014, the Multiemployer Pension Reform Act of 2014 was passed and permanently extended the Pension Protection Act of 2006 multiemployer plan critical and endangered status funding rules, among other things, including providing a provision for a plan sponsor to suspend or reduce benefit payments to preserve plans in critical and declining status.



(In millions)
		Pension Protection Act Zone Status			Multiemployer Contributions
Pension Fund	EIN/Pension Plan Number	2017	2016	FIP/RP Status Pending/Implemented	2017	2016	2015	Surcharge Imposed
Central Pension Fund	36-6052390-001	Green	Green	No	$9.3	$7.4	$7.2	No
Indiana Laborers Pension Fund (1)	35-6027150-001	Yellow	Yellow	Implemented	5.0	4.4	4.1	No
Pipeline Industry Benefit Fund	73-6146433-001	Green	Green	No	4.9	3.0	4.0	No
Laborers District Fund of Ohio	31-6129964-001	Green	Green	No	3.3	2.0	1.5	No
Ohio Operating Engineers Pension Fund	31-6129968-001	Green	Green	No	2.8	2.1	2.2	No
Operating Eng. Local 324 Fund (2)	38-1900637-001	Red	Yellow	Implemented	2.5	1.6	1.6	No
Other					14.3	14.5	12.1
Total Contributions					$42.1	$35.0	$32.7

(1) The Indiana Laborers Pension Fund was in “endangered” status for the Plan Year ending May 31, 2017. In an effort to improve the Plan’s funding situation, the trustees adopted a FIP on December 17, 2015 and updated on December 20, 2016. The funding improvement period is June 1, 2017 to May 31, 2027 or the date the Fund’s actuary certifies it has emerged from endangered status.

(2) The Operating Engineers Local #324 Fringe Benefits Fund was certified to be in "critical” status for the plan year ending April 30, 2017. In an effort to improve the Plan's funding situation, on March 17, 2011, the trustees adopted a Plan Amendment, which reduced benefit accruals, eliminated some ancillary benefits, and adopted a rehabilitation plan that will be effective from May 1, 2013 through April 30, 2023 or until the Plan is no longer in critical status. On April 27, 2015, the trustees updated the rehabilitation plan to change the annual standard for meeting the requirements of the rehabilitation plan. The annual standard is that actuarial projections updated for each year show the Fund is expected to remain solvent for a 20-year projection period.

While not considered significant to the Company, there are two plans in red zone status receiving Company contributions. There are five plans where Company contributions exceed 5 percent of each plan's total contributions and one of these plans was considered significant to the Company.

Defined Contribution Plan

The Company also has defined contribution retirement savings plans qualified under sections 401(a) and 401(k) of the Internal Revenue Code and include an option to invest in Vectren common stock, among other alternatives. During 2017, 2016 and 2015, the Company made contributions to these plans of $13.2 million, $12.1 million, and $11.0 million, respectively.