NOTE 12: LONG-TERM COMPENSATION ARRANGEMENTS

The Company has accrued for the following long-term compensation arrangements as of December 31, 2012 and 2011:



(in thousands)	2012		2011
Defined Benefit Pension Plan	$	22,139	$	12,319
Post Retirement Benefit Other than Pension	6,243		6,431
Supplemental Executive Retirement Plan	6,224		4,843
Deferred Compensation	1,639		1,411
Other Long-Term Compensation	185		228
Total Long-Term Compensation Arrangements	$	36,430	$	25,232

Investment Strategy – The Corporate Finance and Investment Committee (the Committee) reviews and approves the investment strategy of the investments made on behalf of various pension and post-retirement benefit plans existing under the Company and certain of its subsidiaries. The Company uses a variety of mutual funds, managed by different fund managers, to achieve its investment goals. The Committee wants to ensure that the plans establish a target mix that is expected to achieve investment objectives, by assuring a broad diversification of investment assets among investment types, while avoiding short-term changes to the target asset mix, unless unusual market conditions make such a move appropriate to reduce risk.

The targeted asset allocation ratios for those plans as set by the Committee at December 31, 2012 and 2011:



	2012		2011
Equity	65	%	65	%
Fixed Income	35	%	35	%
Total	100	%	100	%

The Committee recognizes that a variation of up to 5% in either direction from its targeted asset allocation mix is acceptable due to market fluctuations.

Our expected long-term rate of return on the various benefit plan assets is based upon the plan’s expected asset allocation, expected returns on various classes of plan assets as well as historical returns. The expected long-term rate of return on the Company’s pension plan assets is 7.25%.

PENSION

Defined Benefit Plan – The Company and certain of its subsidiaries have a noncontributory defined benefit pension plan covering qualified employees. In general, the Company’s policy is to fund accrued pension costs as permitted by federal income tax and Employee Retirement Income Security Act of 1974 regulations. The Company amortizes actuarial gains and losses over the average remaining service period of active participants, without regard to a specified corridor of a percentage of the greater of the obligation or market-related value of assets. A contribution of $585,000 was made in 2012 for the 2011 plan year. The Company expects to make a contribution of $2,490,000 in 2013 for the 2012 plan year.

The Company has amended its pension plan to exclude employees hired after January 1, 2009.

The Company's pension plan was amended by the Board of Directors in 2012 primarily to admit current Maine Water and former Aqua Maine employees to participate under the terms and provisions in effect for Aqua Maine upon the purchase of Maine Water by the Company.

The following tables set forth the benefit obligation and fair value of the assets of the Company’s retirement plans at December 31, the latest valuation date:



Pension Benefits (in thousands)	2012			2011
Change in benefit obligation:
Benefit obligation, beginning of year	$	49,102		$	40,758
Service cost	2,020			1,523
Interest cost	2,570			2,134
Actuarial loss (gain)	14,494			5,878
Benefits paid	(1,685		)	(1,191		)
Benefit obligation, end of year	$	66,501		$	49,102
Change in plan assets:
Fair value, beginning of year	$	36,783		$	36,990
Actual return on plan assets	9,723			(216		)
Employer contributions	585			1,200
Benefits paid	(1,685		)	(1,191		)
Fair value, end of year	$	45,406		$	36,783
Funded Status	$	(21,095	)	$	(12,319	)
Amount Recognized in Consolidated Balance Sheets Consisted of:
Non-current asset	$	—		$	—
Current liability	—			—
Non-current liability	(21,095		)	(12,319		)
Net amount recognized	$	(21,095	)	$	(12,319	)

The accumulated benefit obligation for all defined benefit pension plans was approximately $56,967,000 and $41,855,000 at December 31, 2012 and 2011, respectively.



Weighted-average assumptions used to determine benefit obligations at December 31:	2012		2011
Discount rate	4.05	%	4.60	%
Rate of compensation increase	3.50	%	3.50	%



Weighted-average assumptions used to determine net periodic cost for years ended December 31:	2012		2011		2010
Discount rate	4.60	%	5.50	%	5.95	%
Expected long-term return on plan assets	7.25	%	7.25	%	8.00	%
Rate of compensation increase	3.50	%	3.50	%	4.50	%

Prior to the year ended December 31, 2007, the Company used Moody’s AA Corporate Bond Yields when selecting its Discount Rate for each of the pension plan. Beginning with the year ended December 31, 2007, in an attempt to move away from generic yield curves and indices, the Company used a spot yield curve that attempts to mimic expected benefit payments. Through December 31, 2010, the Company based its discount rate assumption on a single rate on the Citigroup Pension Discount Curve that approximated present value of the plan’s payment streams. Beginning with the year ended December 31, 2011, the Company began to use the Citigroup Above Median AA Pension Discount Curve under the assumption it would more closely replicate the yields of bonds if the Company were to pick individual issuances that matched estimated payment streams of the plans.

The following table shows the components of periodic benefit costs:



Pension Benefits (in thousands)	2012			2011			2010
Components of net periodic benefit costs
Service cost	$	2,020		$	1,523		$	1,668
Interest cost	2,570			2,134			2,175
Expected return on plan assets	(2,693		)	(2,456		)	(2,507		)
Amortization of:
Net transition obligation	—			2			2
Prior service cost	74			69			69
Net loss	1,753			687			602
Net Periodic Pension Benefit Costs	$	3,724		$	1,959		$	2,009

The following table shows the other changes in plan assets and benefit obligations recognized as a regulatory asset:



Pension Benefits (in thousands)	2012			2011
Change in net loss (gain)	$	6,254		$	8,550
Change in prior service cost	14			—
Amortization of transition obligation	—			(2		)
Amortization of prior service cost	(74		)	(69		)
Amortization of net loss	(1,753		)	(687		)
Total recognized to Regulatory Asset	$	4,441		$	7,792



Amounts Recognized as a Regulatory Asset at December 31: (in thousands)	2012		2011
Transition obligation	$	—	$	—
Prior service cost	249		309
Net loss	18,069		13,553
Total Recognized as a Regulatory Asset	$	18,318	$	13,862



Amounts Recognized in Other Comprehensive Income at December 31: (in thousands)	2012		2011		2010
Transition obligation	$	—	$	—	$	—
Prior service cost	—		—		—
Net loss	538		554		327
Total Recognized in Other Comprehensive Income	$	538	$	554	$	327



Estimated Net Periodic Benefit Cost Amortizations for the periods January 1 - December 31,: (in thousands)	2013
Amortization of transition obligation	$	—
Amortization of prior service cost	74
Amortization of net loss	1,964
Total Estimated Net Periodic Benefit Cost Amortizations	$	2,038

Plan Assets

The Company’s pension plan weighted-average asset allocations at December 31, 2012 and 2011 by asset category were as follows:



	2012		2011
Equity	64	%	66	%
Fixed Income	36	%	34	%
Total	100	%	100	%

See Note 6 for discussion on how fair value is determined. The fair values of the Company’s pension plan assets at December 31, 2012 were as follows:



(in thousands)	Level 1		Level 2		Level 3
Asset Type:
Money Market Fund	$	483	$	—	$	—
Mutual Funds:
Fixed Income Funds (1)	15,769		—		—
Equity Funds (2)	29,154		—		—
Total	$	45,406	$	—	$	—

The fair values of the Company’s pension plan assets at December 31, 2011 were as follows:



(in thousands)	Level 1		Level 2		Level 3
Asset Type:
Money Market Fund	$	172	$	—	$	—
Mutual Funds:
Fixed Income Funds (1)	12,491		—		—
Equity Funds (2)	24,120		—		—
Total	$	36,783	$	—	$	—


(1)	Mutual funds consisting primarily of fixed income securities.


(2)	Mutual funds consisting primarily of equity securities.

The Plan’s expected future benefit payments are:



(in thousands)
2013	$	2,701
2014	2,880
2015	3,383
2016	3,723
2017	3,831
Years 2018 – 2022	25,124

BSWC provides its employees with its employees with a pension plan. For the period of December 10, 2012 through December 31, 2012, BSWC's net periodic benefit credit was $4,000. BSWC's projected benefit obligation at December 31, 2012 was $4,076,000, with plan assets totaling $2,985,000. BSWC utilized a discount rate of 4.25% to determine its benefit obligation at December 31, 2012. It also assumed an 8.5% expected return on plan assets.

POST-RETIREMENT BENEFITS OTHER THAN PENSION (PBOP) – In addition to providing pension benefits, Connecticut Water and Maine Water, provide certain medical, dental and life insurance benefits to retired employees partially funded by a 501(c)(9) Voluntary Employee Beneficiary Association Trust. Substantially all of their employees may become eligible for these benefits if they retire on or after age 55 with 10 years of service. The contribution for calendar years 2012 and 2011 was $22,000 and $235,000, respectively.

The Company has amended its PBOP to exclude employees hired after January 1, 2009. In addition, effective April 1, 2009, the Company will no longer provide prescription drug coverage for its retirees age 65 and over. Those retirees, who are entitled to Medicare coverage, will continue to receive the current non-prescription medical coverage.

On May 16, 2011, the Company notified participants in the PBOP plan of an amendment that would limit the life-time benefits of participants to $100,000, effective July 1, 2011. As of the date of the notice, May 16, 2011, the Company and its actuary began to account for the change in life-time benefits. The change in benefits resulted in a decrease in PBOP expense of approximately $488,000 from May 16 through December 31, 2011.

In January 2012, the Board of Directors of the Company amended its PBOP plan to include former Aqua Maine and current Maine Water employees to participate in a benefit equal to that provided by Aqua Maine.

The Company amortizes actuarial gains and losses over the average remaining service period of active participants, without regard to a specified corridor of a percentage of the greater of the obligation or market-related value of assets. Connecticut Water has elected to recognize the transition obligation on a delayed basis over a period equal to the plan participants' 21.6 years of average future service.

Another subsidiary company, Barnstable Water, also provides certain health care benefits to eligible retired employees. Barnstable Water employees became eligible for these benefits if they retired on or after age 65 with at least 15 years of service. Post-65 medical coverage is provided for retired employees up to a maximum coverage of $500 per quarter. Barnstable Water’s PBOP currently is not funded. Barnstable Water no longer has any employees; therefore, no new participants will be entering Barnstable Water’s PBOP. The tables below do not include Barnstable Water’s PBOP. Barnstable Water’s PBOP had a Benefit Obligation of $54,000 and $54,000 at December 31, 2012 and 2011, respectively. Additionally, this plan did not hold any assets as of December 31, 2012 and 2011. Barnstable Water’s PBOP’s net periodic benefit costs were less than $1,000 in 2012 and 2011.

The following tables set forth the benefit obligation and fair value of the assets of Connecticut Water and Maine Water’s post-retirement health care benefits at December 31, the latest valuation date:



PBOP Benefits (in thousands)	2012			2011
Change in benefit obligation:
Benefit obligation, beginning of year	$	12,842		$	13,443
Service cost	548			599
Interest cost	538			623
Plan participant contributions	93			85
Plan amendments	—			(2,433		)
Actuarial (gain) loss	(275		)	901
Benefits paid	(424		)	(376		)
Benefit obligation, end of year	$	13,322		$	12,842
Change in plan assets:
Fair value, beginning of year	$	6,465		$	6,475
Actual return on plan assets	977			46
Employer contributions	22			235
Plan participant contributions	93			85
Benefits paid	(424		)	(376		)
Fair value, end of year	$	7,133		$	6,465
Funded Status	$	(6,189	)	$	(6,377	)
Amount Recognized in Consolidated Balance Sheets Consisted of:
Non-current asset	$	—		$	—
Current liability	—			—
Non-current liability	(6,189		)	(6,377		)
Net amount recognized	$	(6,189	)	$	(6,377	)



Weighted-average assumptions used to determine benefit obligations at December 31:	2012		2011
Discount rate	3.80	%	4.40	%



Weighted-average assumptions used to determine net periodic cost for years ended December 31:	2012		2011		2010
Discount rate	4.40	%	5.35	%	5.80	%
Expected long-term return on plan assets	4.50	%	4.50	%	5.00	%

Prior to the year ended December 31, 2007, the Company used Moody’s AA Corporate Bond Yields when selecting its Discount Rate for each of the PBOP. Beginning with the year ended December 31, 2007, in an attempt to move away from generic yield curves and indices, the Company used a spot yield curve that attempts to mimic expected benefit payments. Through December 31, 2010, the Company based its discount rate assumption on a single rate on the Citigroup Pension Discount Curve that approximated present value of the plan’s payment streams. Beginning with the year ended December 31, 2011, the Company began to use the Citigroup Above Median AA Pension Discount Curve under the assumption it would more closely replicate the yields of bonds if the Company were to pick individual issuances that matched estimated payment streams of the plans.

The following table shows the components of periodic benefit costs:



PBOP Benefits (in thousands)	2012			2011			2010
Components of net periodic benefit costs
Service cost	$	548		$	599		$	567
Interest cost	538			623			574
Expected return on plan assets	(269		)	(267		)	(306		)
Other	225			225			225
Amortization of:
Prior service cost	(806		)	(665		)	(406		)
Recognized net loss	615			613			329
Net Periodic Post Retirement Benefit Costs	$	851		$	1,128		$	983

The following table shows the other changes in plan assets and benefit obligations recognized as a regulatory asset:



PBOP Benefits (in thousands)	2012			2011
Change in net loss (gain)	$	(1,028	)	$	1,123
Change in transition credit	(10		)	(2,433		)
Amortization of transition obligation	—			—
Amortization of prior service credit	806			665
Amortization of net loss	(615		)	(613		)
Total recognized to Regulatory Asset	$	(847	)	$	(1,258	)



Amounts Recognized as a Regulatory Asset at December 31: (in thousands)	2012			2011
Transition obligation	$	—		$	—
Prior service cost	(2,766		)	(3,563		)
Net (gain) loss	4,590			6,234
Total Recognized as a Regulatory Asset	$	1,824		$	2,671

There were no other changes in plan assets and benefit obligations recognized as a regulatory asset.



Estimated Benefit Cost Amortizations for the periods January 1 - December 31,: (in thousands)	2013
Amortization of transition obligation	$	—
Amortization of prior service cost	(806		)
Amortization of net loss (gain)	394
Total Estimated Net Periodic Benefit Cost Amortizations	$	(412	)



Assumed health care cost trend rates at December 31:	2012				2011
	Medical		Dental		Medical		Dental
Health care cost trend rate assumed for next year ⁽¹⁾	10.0	%	10.0	%	10.0	%	10.0	%
Rate to which the cost trend rate is assumed to decline	5.0	%	5.0	%	5.0	%	5.0	%
Year that the rate reaches the ultimate trend rate	2023		2023		2022		2022

⁽¹⁾ – Zero percent trend rate from 2011 to 2012.

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects on Connecticut Water and Maine Water’s plan and would have no impact on the Barnstable Water plan:



(in thousands)	1 Percentage-Point
	Increase		Decrease
Effect on total of service and interest cost components	$	70	$	(66	)
Effect on post-retirement benefit obligation	$	957	$	(893	)

Plan Assets

Connecticut Water and Maine Water’s other post-retirement benefit plan weighted-average asset allocations at December 31, 2012 and 2011 by asset category were as follows:



	2012		2011
Equity	65	%	63	%
Fixed Income	35	%	37	%
Total	100	%	100	%

See Note 6 for discussion on how fair value is determined. The fair value of the Company’s PBOP assets at December 31, 2012 are as follows:



(in thousands)	Level 1		Level 2		Level 3
Asset Type:
Money Market	$	116	$	—	$	—
Mutual Funds:
Fixed Income Funds (1)	2,379		—		—
Equity Funds (2)	4,638		—		—
Total	$	7,133	$	—	$	—

The fair value of the Company’s PBOP assets at December 31, 2011 are as follows:



(in thousands)	Level 1		Level 2		Level 3
Asset Type:
Money Market	$	160	$	—	$	—
Mutual Funds:
Fixed Income Funds (1)	2,234		—		—
Equity Funds (2)	4,071		—		—
Total	$	6,465	$	—	$	—


(1)	Mutual funds consisting primarily of fixed income securities.


(2)	Mutual funds consisting primarily of equity securities.

Cash Flows

The Company contributed $22,000 to its other post-retirement benefit plan in 2012 for plan year 2012. The Company expects to make a contribution of approximately $850,000 in 2013 for plan year 2013.

Expected future benefit payments are:



(in thousands)
2013	$	354
2014	382
2015	414
2016	44
2017	505
Years 2018 – 2022	3,363

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (SERP) – The Company and certain of its subsidiaries provide additional pension benefits to senior management through supplemental executive retirement contracts. At December 31, 2012 and 2011, the actuarial present values of the projected benefit obligation of these contracts were $5,887,000 and $4,495,000, respectively. Expense associated with these contracts was approximately $634,000 for 2012, $409,000 for 2011, and $423,000 for 2010 and is reflected in Other Income (Deductions) in the Statements of Income.

Included in Other Property and Investments at December 31, 2012 and 2011 is $3,612,000 and $3,149,000 of investments purchased by the Company to fund these obligations, primarily consisting of life insurance contracts. The remaining assets are carried at fair value and are considered Level 1 within the fair value hierarchy as outlined under FASB ASC 820 and are included in the table shown in Note 6.

SAVINGS PLAN (401(k)) – The Company and certain of its subsidiaries maintain an employee savings plan which allows participants to contribute from 1% to 50% of pre-tax compensation plus for those aged 50 years and older, catch-up contributions as allowed by law. Effective January 1, 2009, the Company changed its 401(k) plan to meet the requirements of a special IRS safe harbor. Under the provisions of this safe harbor plan, the Company will make an automatic contribution of 3% of compensation for all eligible employees, even if employees do not make their own contributions. For employees hired after January 1, 2009 and ineligible to participate in the Company’s pension plan, the Company will contribute an additional 1.5% of compensation. Prior to January 1, 2009, the Company matches 50 cents for each dollar contributed by the employee up to 4% of the employee’s compensation. The savings plan was amended by the Board of Directors in January 2012 to admit eligible Maine Water employees. The Company contribution charged to expense in 2012, 2011, and 2010 was $485,000, $419,000, and $446,000, respectively.

The Plan creates the possibility for an “incentive bonus” contribution to the 401(k) plan tied to the attainment of a specific goal or goals to be identified each year. If the specific goal or goals are attained by the end of the year, all eligible employees, except officers and certain key employees, may receive up to an additional 1% of their annual base salary as a direct contribution to their 401(k) account. No incentive bonus was awarded in 2012, 2011 or 2010.