NOTE 12: LONG-TERM COMPENSATION ARRANGEMENTS

The Company has accrued for long-term compensation arrangements as of December 31 as follows:



(in thousands)	2018		2017
Defined Benefit Pension Plan	$	12,599	$	15,486
Post-Retirement Benefit Other than Pension	5,204		5,060
Supplemental Executive Retirement Plan	9,144		8,796
Deferred Compensation	4,096		3,289
Other Long-Term Compensation	—		18
Total Long-Term Compensation Arrangements	$	31,043	$	32,649

Investment Strategy – The Corporate Finance and Investments Committee (the “Committee”) reviews and approves the investment strategy of the investments made on behalf of various pension and post-retirement benefit plans provided by 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:



	2018		2017
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 eligible employees (the “Retirement Plan”). In general, the Company’s funding policy is to contribute amounts as permitted by the applicable provisions of the Internal Revenue Code of 1986, as amended and the Employee Retirement Income Security Act of 1974, as amended, and as necessary on an actuarial basis to provide the Retirement Plan with assets sufficient to meet the pension benefits to be paid to the Retirement Plan’s participants; however, the contribution for any plan year is not less than the minimum required contribution nor greater than the maximum tax deductible contribution. The Company amortizes actuarial gains and losses over the average remaining service period of active participants. A contribution of $3,807,000 was made in 2018 for the 2017 plan year. The Company expects to make a contribution of approximately $4,050,000 in 2019 for the 2018 plan year.

The Retirement Plan was amended and restated effective January 1, 2015 to consolidate prior amendments and to comply with applicable legislative and regulatory developments. The amended and restated Retirement Plan was submitted to the IRS on January 29, 2016 with the Company’s application for a favorable determination letter. The Retirement Plan received a favorable determination letter from the IRS dated June 29, 2017. The January 1, 2015 amended and restated Retirement Plan was twice further amended, effective August 1, 2017 and effective December 1, 2018.

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



Pension Benefits (in thousands)	2018			2017
Change in benefit obligation:
Benefit obligation, beginning of year	$	88,598		$	79,307
Service cost	1,950			1,927
Interest cost	3,110			3,201
Actuarial loss (gain)	(7,853		)	7,533
Benefits paid	(2,750		)	(3,295		)
Administrative expenses	(108		)	(75		)
Benefit obligation, end of year	$	82,947		$	88,598
Change in plan assets:
Fair value, beginning of year	$	73,112		$	62,679
Actual return on plan assets	(3,713		)	10,832
Employer contributions	3,807			2,971
Benefits paid	(2,750		)	(3,295		)
Administrative expenses	(108		)	(75		)
Fair value, end of year	$	70,348		$	73,112
Funded Status	$	(12,599	)	$	(15,486	)
Amount Recognized in Consolidated Balance Sheets Consisted of:
Non-current asset	$	—		$	—
Current liability	—			—
Non-current liability	(12,599		)	(15,486		)
Net amount recognized	$	(12,599	)	$	(15,486	)

The accumulated benefit obligation for all defined benefit pension plans was approximately $75,688,000 and $79,352,000 at December 31, 2018 and 2017, respectively.



Weighted-average assumptions used to determine benefit obligations at December 31:	2018		2017
Discount rate	4.25	%	3.60	%
Rate of compensation increase	4.00	%	4.00	%



Weighted-average assumptions used to determine net periodic cost for years ended December 31:	2018		2017		2016
Discount rate	3.60	%	4.10	%	4.30	%
Expected long-term return on plan assets	7.25	%	7.25	%	7.25	%
Rate of compensation increase	4.00	%	4.00	%	4.00	%

The Company based its discount rate assumptions the FTSE Above Median AA Curve (formerly the Citigroup Above Median AA Curve).

The following table shows the components of periodic benefit costs:



Pension Benefits (in thousands)	2018			2017			2016
Components of net periodic benefit costs
Service cost	$	1,950		$	1,927		$	1,895
Interest cost	3,110			3,201			3,212
Expected return on plan assets	(4,662		)	(4,291		)	(4,080		)
Amortization of:
Prior service cost	15			16			16
Net loss	2,598			2,064			2,049
Net Periodic Pension Benefit Costs	$	3,011		$	2,917		$	3,092

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



Pension Benefits (in thousands)	2018			2017
Change in net loss	$	560		$	1,104
Change in prior service cost	—			—
Other - regulatory action	—			—
Amortization of prior service cost	(15		)	(16		)
Amortization of net loss	(2,547		)	(2,015		)
Total recognized to Regulatory Asset	$	(2,002	)	$	(927	)

The following table shows the other changes in plan assets and benefit obligations recognized in Other Comprehensive Income (“OCI”):



Pension Benefits (in thousands)	2018			2017
Change in net (gain) loss	$	(38	)	$	(112	)
Change in prior service cost	—			—
Amortization of prior service cost	—			—
Amortization of net loss	(51		)	(49		)
Total recognized to OCI	$	(89	)	$	(161	)



Amounts Recognized as a Regulatory Asset at December 31: (in thousands)	2018		2017
Prior service cost	$	39	$	55
Net loss	9,298		11,284
Total Recognized as a Regulatory Asset	$	9,337	$	11,339



Amounts Recognized in OCI at December 31: (in thousands)	2018		2017		2016
Transition obligation	$	—	$	—	$	—
Prior service cost	—		—		—
Net loss	65		154		315
Total Recognized in Other Comprehensive Income	$	65	$	154	$	315



Estimated Net Periodic Benefit Cost Amortizations for the periods January 1 - December 31,: (in thousands)	2019
Amortization of transition obligation	$	—
Amortization of prior service cost	15
Amortization of net loss	1,572
Total Estimated Net Periodic Benefit Cost Amortizations	$	1,587

Plan Assets

The Company’s pension plan weighted-average asset allocations at December 31, 2018 and 2017 by asset category were as follows:



	2018		2017
Equity	61	%	65	%
Fixed Income	39	%	35	%
Total	100	%	100	%

See Note 6, “Fair Value of Financial Instruments”, for discussion on how fair value is determined. The fair values of the Company’s pension plan assets at December 31, 2018 and 2017 were as follows:



2018
(in thousands)	Level 1		Level 2		Level 3
Asset Type:
Money Market Fund	$	1,452	$	—	$	—
Mutual Funds:
Fixed Income Funds (1)	25,645		—		—
Equity Funds (2)	43,251		—		—
Total	$	70,348	$	—	$	—



2017
(in thousands)	Level 1		Level 2		Level 3
Asset Type:
Money Market Fund	$	1,579	$	—	$	—
Mutual Funds:
Fixed Income Funds (1)	23,752		—		—
Equity Funds (2)	47,781		—		—
Total	$	73,112	$	—	$	—


(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)
2019	$	4,881
2020	5,132
2021	5,194
2022	5,129
2023	5,166
Years 2024 – 2028	27,908

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. Covered 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 2018 and 2017 was $11,000 and $12,000, 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.

The Company amortizes actuarial gains and losses over the average remaining service period of active participants. 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.

A former subsidiary company, Barnstable Holding, which was dissolved effective December 29, 2016, also provided certain health care benefits to eligible retired employees. These health care benefits to former employees are now the responsibility of the Company. Former employees of Barnstable Holding became eligible for these benefits if they retired on or after age 65 with at least 15 years of service. Post-65 medical coverage was provided for retired employees up to a maximum coverage of $500 per quarter. Barnstable Holding’s PBOP currently is not funded. Barnstable Holding no longer has any employees; therefore, no new participants will be entering Barnstable Holding’s PBOP. The tables below do not include Barnstable Holding’s PBOP. Barnstable Holding’s PBOP had a Benefit Obligation of $28,000 and $47,000 at December 31, 2018 and 2017, respectively. Additionally, this plan did not hold any assets as of December 31, 2018 and 2017. Barnstable Holding’s PBOP’s net periodic benefit costs were less than $1,000 in 2018 and 2017.

The following tables set forth the benefit obligation and fair value of the assets of Connecticut Water and Maine Water’s PBOP at December 31, the latest valuation date:



PBOP Benefits (in thousands)	2018			2017
Change in benefit obligation:
Benefit obligation, beginning of year	$	14,473		$	13,542
Service cost	322			335
Interest cost	504			511
Plan participant contributions	148			163
Actuarial (gain) loss	(1,196		)	384
Benefits paid	(425		)	(462		)
Benefit obligation, end of year	$	13,826		$	14,473
Change in plan assets:
Fair value, beginning of year	$	9,460		$	8,345
Actual return on plan assets	(544		)	1,402
Employer contributions	11			12
Plan participant contributions	148			163
Benefits paid	(425		)	(462		)
Fair value, end of year	$	8,650		$	9,460
Funded Status	$	(5,176	)	$	(5,013	)
Amount Recognized in Consolidated Balance Sheets Consisted of:
Non-current asset	$	—		$	—
Current liability	—			—
Non-current liability	(5,176		)	(5,013		)
Net amount recognized	$	(5,176	)	$	(5,013	)



Weighted-average assumptions used to determine benefit obligations at December 31:	2018		2017
Discount rate	4.15	%	3.50	%



Weighted-average assumptions used to determine net periodic cost for years ended December 31:	2018		2017		2016
Discount rate	3.50	%	3.95	%	4.15	%
Expected long-term return on plan assets	4.50	%	4.50	%	4.50	%

The Company based its discount rate assumptions the FTSE Above Median AA Curve (formerly the Citigroup Above Median AA Curve).

The following table shows the components of periodic benefit costs:



PBOP Benefits (in thousands)	2018			2017			2016
Components of net periodic benefit costs
Service cost	$	322		$	335		$	376
Interest cost	504			511			541
Expected return on plan assets	(372		)	(354		)	(341		)
Other	—			225			225
Amortization of:
Prior service credit	(1		)	(181		)	(400		)
Recognized net loss	(1		)	(78		)	39
Net Periodic Post Retirement Benefit Costs	$	452		$	458		$	440

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



PBOP Benefits (in thousands)	2018			2017
Change in net gain	$	(279	)	$	(664	)
Amortization of prior service cost	1			181
Amortization of net loss	1			78
Other regulatory amortization	3			(67		)
Total recognized to Regulatory Liability	$	(274	)	$	(472	)



Amounts Recognized as a Regulatory Liability at December 31: (in thousands)	2018			2017
Transition obligation	$	—		$	—
Prior service cost	—			(1		)
Net loss	(1,395		)	(1,116		)
Other regulatory asset	190			186
Total Recognized as a Regulatory Liability	$	(1,205	)	$	(931	)

The “Other regulatory amortization” and “Other regulatory asset” shown above refers to costs whose recovery was authorized by PURA and MPUC with the adoption of Statement of Financial Accounting Standard 106, “Employers’ Accounting for Post-Retirement Benefits Other than Pension”, now Topic No. 715. 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)	2019
Amortization of transition obligation	$	—
Amortization of prior service credit	—
Amortization of net loss	(147		)
Total Estimated Net Periodic Benefit Cost Amortizations	$	(147	)



Assumed health care cost trend rates at December 31:	2018				2017
	Medical		Dental		Medical		Dental
Health care cost trend rate assumed for next year ⁽¹⁾	8.00	%	8.00	%	8.25	%	8.25	%
Rate to which the cost trend rate is assumed to decline	4.50	%	4.50	%	4.75	%	4.75	%
Year that the rate reaches the ultimate trend rate	2026		2026		2025		2025

⁽¹⁾ – Twenty-five basis point trend rate from 2017 to 2018.

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 Holding plan:



(in thousands)	1 Percentage-Point
	Increase		Decrease
Effect on total of service and interest cost components	$	40	$	(36	)
Effect on post-retirement benefit obligation	$	581	$	(550	)

Plan Assets

Connecticut Water and Maine Water’s other post-retirement benefit plan weighted-average asset allocations at December 31, 2018 and 2017 by asset category were as follows:



	2018		2017
Equity	65	%	69	%
Fixed Income	35	%	31	%
Total	100	%	100	%

See Note 6, “Fair Value of Financial Instruments”, for discussion on how fair value is determined. The fair values of the Company’s PBOP assets at December 31, 2018 and 2017 were as follows:



2018
(in thousands)	Level 1		Level 2		Level 3
Asset Type:
Money Market	$	302	$	—	$	—
Mutual Funds:
Fixed Income Funds (1)	2,758		—		—
Equity Funds (2)	5,590		—		—
Total	$	8,650	$	—	$	—



2017
(in thousands)	Level 1		Level 2		Level 3
Asset Type:
Money Market	$	139	$	—	$	—
Mutual Funds:
Fixed Income Funds (1)	2,821		—		—
Equity Funds (2)	6,500		—		—
Total	$	9,460	$	—	$	—


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


(2)	Mutual funds consisting primarily of equity securities.

Cash Flows

The Company contributed $11,000 to its other post-retirement benefit plan in 2018 for plan year 2018. The Company does not expect to make a contribution in 2019 for plan year 2019.

Expected future benefit payments are:



(in thousands)
2019	$	556
2020	630
2021	703
2022	751
2023	839
Years 2024 – 2028	5,027

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (“SERP”) – The Company and certain of its subsidiaries provide additional pension benefits to senior management through supplemental executive retirement contracts. The additional pension supplement from the SERP results in participants receiving the same overall relative benefit as other eligible employees enrolled in the Company’s pension plan. At December 31, 2018 and 2017, the actuarial present values of the projected benefit obligation of these contracts were $9,087,000 and $8,718,000, respectively. Expense associated with these contracts was approximately $865,000 for 2018, $970,000 for 2017, and $1,012,000 for 2016 and is reflected in “Other Income (Deductions), Net of Taxes” in the Consolidated Statements of Income.

Included in “Other Property and Investments” at December 31, 2018 and 2017 is $6,073,000 and $6,688,000 of investments purchased by the Company to fund these obligations, primarily consisting of life insurance contracts. The remaining assets are carried at cash surrender value and are included in Note 6, “Fair Value of Financial Instruments”.

SAVINGS PLAN (“401(k)”) – The Company and certain of its subsidiaries maintain the Savings Plan of the Connecticut Water Company (the “Savings Plan”), a 401(k) employee savings plan which allows participants to contribute on a pre-tax basis between 1% and 50% of pre-tax compensation, plus for those aged 50 years and older before the end of the plan year, catch-up contributions as allowed by law. Effective January 1, 2009, the Company changed the Savings Plan to meet the requirements of a special IRC safe harbor. Under the provisions of the safe harbor Savings Plan, as amended and restated effective January 1, 2012, the Company makes an automatic contribution of 3% of eligible compensation for all eligible employees, even if the employees do not elect to make their own contributions. For employees hired on or after January 1, 2009 and ineligible to participate in the Company’s defined benefit pension plan, the Company contributes an additional 1.5% of eligible compensation. The Savings Plan was amended and restated, effective as of January 1, 2016, in order to bring all previous amendments under one, updated plan document. The Savings Plan was amended effective February 27, 2017 and July 1, 2017, to allow eligible employees of HVWC and Avon Water, respectively, to participate. The Savings Plan was amended effective May 1, 2018 to add an automatic enrollment feature, automatic escalation of salary deferrals, and a Roth contribution feature, and to reduce the service required to make elective deferrals from six months to 30 days. The Company’s Board of Directors has approved certain changes to the Savings Plan’s hardship distribution provisions, effective January 1, 2019, pursuant to the applicable provisions of the Bipartisan Budget Act of 2018, and those changes will be memorialized in a written plan amendment to be prepared by the Savings Plan’s volume submitter plan document provider. The Company contribution charged to expense in 2018, 2017, and 2016 was $786,000, $750,000, and $663,000, respectively.