Defined Benefit Pension Plans

We have defined benefit pension plans covering certain current and retired U.S. employees. Plans include: (i) the Employee Retirement Plan (“ERP”) for employees hired prior to January 1, 2009, (ii) a Supplemental Executive Retirement Plan (“SERP”) for which future benefit accruals were frozen effective at the end of the second quarter 2015; and, (iii) a Benefit Restoration Pension Plan (“Restoration Plan”) for certain key employees hired prior to January 1, 2009.

Both the SERP and the Restoration Plan are defined benefit plans under which nonqualifed supplemental pension benefits will be paid in addition to amounts paid under our qualified retirement defined benefit pension plans, which are subject to Internal Revenue Service limitations on covered compensation.

Effective December 31, 2008, enhanced benefits were implemented to our defined contribution savings plan--The Davey 401KSOP and ESOP--at which time, the Board of Directors approved an amendment to freeze the ERP and the Restoration Plan. The ERP was closed to new participants after December 2008. In connection with the freeze of the ERP, the Restoration Plan and the SERP, (a) benefits currently being paid to retirees continue and (b) benefits accrued through December 31, 2008 for employees covered by the ERP were not affected. All ERP, Restoration Plan and SERP balances remain intact and participant account balances, as well as service credits for vesting and retirement eligibility, remain intact and continue in accordance with the terms of the plans. Only future accruals were eliminated with the: (i) the 2008 freeze of the ERP and Restoration Plan; and (ii) the 2015 freeze of the SERP.

During the first quarter 2016, the Company terminated the plan for bargaining employees not covered by union pension plans ("SPP") for which future benefit accruals were frozen effective December 31, 2013. We purchased a guaranteed group annuity contract from a third-party insurance company, which unconditionally and irrevocably guarantees the full payment of all annuity payments to the 94 participants. In connection with the plan termination, we made cash contributions of $522 to fully fund the SPP obligation and recorded a settlement charge of $453.

The change in benefit obligations and the fair value of plans assets follows:



	December 31,
	2016			2015
Change in benefit obligation
Projected benefit obligation at beginning of year	$	27,228		$	35,876
Service cost	370			35
Interest cost	1,243			1,486
Actuarial (gains)/losses	1,150			(2,445		)
New longevity assumptions	(447		)	(340		)
Amendments	341			—
Curtailments	—			(404		)
Settlements	(4,873		)	(6,186		)
Benefits paid	(179		)	(794		)
Projected benefit obligation at end of year	$	24,833		$	27,228
Accumulated benefit obligation at end of year	$	24,833		$	27,228


P.	Defined Benefit Pension Plans (continued)



	December 31,
	2016			2015
Change in fair value of plan assets
Fair value of plan assets at beginning of year	$	15,216		$	21,567
Actual return on plan assets	400			(135		)
Plan expenses, including PBGC premiums	(727		)	(536		)
Employer contributions	1,672			1,300
Settlements	(4,873		)	(6,186		)
Benefits paid	(179		)	(794		)
Fair value of plan assets at end of year	$	11,509		$	15,216

The settlements in the change in benefit obligation and in the change in fair value of plan assets arise from: (i) termination of the SPP plan during the first quarter 2016; (ii) lump sum offering to 224 participants in our ERP plan during the fourth quarter 2016 and (iii) purchase during the fourth quarter 2015 of a guaranteed group annuity contract from a third-party insurance company which unconditionally and irrevocably guarantees the full payment of all annuity payments to the participants that were receiving payments from the ERP plan, with the third-party insurance company having assumed all investment risk associated with funding participant payments.



	December 31,
	2016			2015
Funded status of the plans
Fair value of plan assets	$	11,509		$	15,216
Projected benefit obligation	24,833			27,228
Funded status of the plans	$	(13,324	)	$	(12,012	)



	December 31,
	2016			2015
Amounts reported in the consolidated balance sheets
Current liability	$	(83	)	$	(499	)
Noncurrent liability	(13,241		)	(11,513		)
Funded status of the plans	$	(13,324	)	$	(12,012	)

Amounts included in accumulated other comprehensive income (loss), related to our defined benefit pension plans follow:



	At December 31, 2016				At December 31, 2015
	Pretax		Net of Tax		Pretax		Net of Tax
Amounts reported in accumulated other comprehensive income
Unrecognized net actuarial loss	$	10,675	$	6,456	$	11,836	$	7,150
Unrecognized prior service cost	341		206		—		—
	$	11,016	$	6,662	$	11,836	$	7,150


P.	Defined Benefit Pension Plans (continued)

To the extent actuarial losses exceed the greater of 10% of the projected benefit obligation or market-related value of plan assets, the unrecognized actuarial losses will be amortized straight-line on a plan-by-plan basis, over the remaining expected future working lifetime of active participants, except for the SERP, which, after the plan freeze, is being amortized based on the remaining life expectancy of plan participants. The total amount of unrecognized prior service cost was amortized straight-line on a plan-by-plan basis. The total amortization associated with these amounts that is expected to be recognized in net periodic benefit expense for 2017 follows:



	Year ending December 31, 2017
	Pretax		Net of Tax
Amortization of Costs Expected to be Recognized Next Year
Unrecognized net actuarial loss	$	949	$	569
Unrecognized prior service cost	64		38
	$	1,013	$	607

The aggregate projected benefit obligation, accumulated benefit obligation and fair value of plan assets for plans in which the fair value of plan assets is less than either the projected benefit obligation or accumulated benefit obligation follow:



	December 31,
	2016		2015
For pension plans with accumulated benefit obligations in excess of plan assets
Projected benefit obligation	$	24,833	$	27,228
Accumulated benefit obligation	24,833		27,228
Fair value of plan assets	11,509		15,216

The actuarial assumptions follow. The discount rates were used to measure the year-end benefit obligation and compute pension expense for the subsequent year.



	December 31,
	2016		2015		2014
Actuarial assumptions
Discount rate	4.20	%	4.70	%	4.30	%
Expected long-term rate of return on plan assets	5.00		7.25		7.50


P.	Defined Benefit Pension Plans (continued)

Net periodic benefit expense (income) associated with the defined benefit pension plans included the following components:



	Year Ended December 31,
	2016			2015			2014
Components of pension expense (income)
Service costs--increase in benefit obligation earned	$	370		$	35		$	51
Interest cost on projected benefit obligation	1,243			1,486			1,618
Expected return on plan assets	(1,044		)	(1,576		)	(1,993		)
Curtailment loss	—			49			—
Settlement loss	2,346			2,915			2,065
Amortization of net actuarial loss	951			1,400			708
Amortization of prior service cost	—			6			14
Net pension expense of defined benefit pension plans	$	3,866		$	4,315		$	2,463

Investment Strategy and Risk Management for Plan Assets--Our investment strategy is to manage the plan assets in order to pay retirement benefits to plan participants while minimizing our cash contributions over the life of the plans. This is accomplished by preserving capital through diversification in high-quality investments through the use of investment managers and mutual funds. Performance of all investment managers and mutual funds is monitored quarterly and evaluated over rolling three-to-five year periods.

The plan assets are divided into asset classes that include equity, fixed income, and alternative investments and allocated among target allocations to include: (a) equities of a minimum 20% to a maximum of 40%; (b) fixed income and cash of a minimum 50% to a maximum of 70%; and, (c) alternative investments of a minimum of zero to a maximum of 15%. The purpose of the equity asset class is to provide a total return that simultaneously provides for growth in principal and current income while at the same time preserving the purchasing power of the plan assets, even though assets invested in equities have greater market volatility and risk. The purpose of the fixed income asset class is to provide a deflation hedge, to reduce the overall volatility of plan assets and to produce current income in support of the needs of the plan. The purpose of alternative investments is the diversification benefit of alternative strategies.

Equity assets are to be allocated within certain ranges among the asset categories of large cap growth and value; small/midcap growth and value; and international growth and value. Each of the equity asset categories are assigned to an appropriate asset manager or mutual fund. Fixed income assets are allocated within a certain range to mutual funds of fixed income securities. Alternative investment assets are allocated within a certain range to mutual funds and may include the use of leverage. Short-selling, securities lending, financial futures, margins, options, and derivatives are not used. Investments in nonmarketable securities, commodities, or direct ownership of real estate are prohibited.

Rate-of-return-on-assets assumptions are made by major category of plan assets according to historical analysis, tempered for an assessment of possible future influences that could cause the returns to exceed or trail long-term patterns. The overall expected long-term rate-of-return-on-plan assets net of investment manager fees as at December 31, 2016, was 5.00%.


P.	Defined Benefit Pension Plans (continued)

Plan Assets--The fair values of our pension plan assets at December 31, 2016 by asset category, using the three-level hierarchy of fair value inputs, were as follows:



			Fair Value Measurements at December 31, 2016 Using:
Description	Total Carrying Value at December 31, 2016		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Asset Category
Money market funds	$	2,882	$	—	$	2,882	$	—
U.S. large-cap equities
Growth	687		687		—		—
Value	729		729		—		—
U.S. small/mid-cap equities
Growth	339		339		—		—
Value	339		339		—		—
International equities
Growth	443		443		—		—
Value	514		514		—		—
Fixed income	4,669		4,669		—		—
Multiclass world-allocation mutual funds	907		907		—		—
	$	11,509	$	8,627	$	2,882	$	—

The fair values of our pension plan assets at December 31, 2015 by asset category, using the three-level hierarchy of fair value inputs, were as follows:



			Fair Value Measurements at December 31, 2015 Using:
Description	Total Carrying Value at December 31, 2015		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Asset Category
Money market funds	$	2,794	$	—	$	2,794	$	—
U.S. large-cap equities
Growth	1,869		1,869		—		—
Value	1,492		1,492		—		—
U.S. small/mid-cap equities
Growth	781		781		—		—
Value	1,003		1,003		—		—
International equities
Growth	1,270		1,270		—		—
Value	1,183		1,183		—		—
Fixed income	3,035		3,035		—		—
Multiclass world-allocation mutual funds	1,789		1,789		—		—
	$	15,216	$	12,422	$	2,794	$	—


P.	Defined Benefit Pension Plans (continued)

Within the pension plan asset categories, the Level 1 investments are publicly traded in active markets and are valued using the net asset value or closing price of the investment at the measurement date. Securities held by a money market fund are generally high quality and liquid; however, they are reflected as Level 2 because the inputs used to determine fair value are not quoted prices in an active market.

Expected Benefit Plan Contributions--It is our practice to make contributions to comply with the minimum funding requirements of ERISA. In accordance with such practice, contributions totaling $1,504 are required for 2017; however, we may make additional discretionary contributions.

Expected Benefit Plan Payments--The benefits, as of December 31, 2016, expected to be paid to defined-benefit plan participants in each of the next five years, and in the aggregate for the five years thereafter, follow:



	Participants Benefits
Estimated future payments
Year ending December 31, 2017	$	659
2018	878
2019	981
2020	1,088
2021	1,167
Years 2022 to 2026	6,677

Multiemployer Defined Benefit Pension Plans--In providing services to our Utility Services customers, we contribute to multiemployer defined benefit pension plans under the terms of collective-bargaining agreements that cover certain of our union-represented employees.

These plans generally provide retirement benefits to participants based on their service to contributing employers. We do not administer these multiemployer plans. In general, these plans are managed by a board of trustees with the unions appointing certain trustees and other contributing employers of the plan appointing certain members. We generally are not represented on the board of trustees.

The risks of participating in these multiemployer plans are different from single-employer plans in that: (a) assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; (b) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be assumed by the remaining participating employers; and, (c) if we choose to stop participating in a multiemployer plan, we may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.

Our participation in the multiemployer defined benefit pension plans is summarized in the table below. The “EIN/Pension Plan Number” column provides the Employer Identification Number (“EIN”) and the three-digit plan number. The most recent Pension Protection Act of 2006 (the “PPA”) zone status is from the Form 5500, “Annual Return/Report of Employee Benefit Plan,” filed by the plan and certified by the plan's actuary. The PPA zone status describes plans that are underfunded. Among other factors, plans in the “critical” red zone are generally less than 65% funded; plans in the “endangered” yellow zone are less than 80% funded; and, plans in the “safe” green zone are at least 80% funded.


P.	Defined Benefit Pension Plans (continued)



Pension Fund	EIN/Pension Plan Number	Pension Protection Act Zone Status		FIP/RP Status Pending Implemented	Davey Tree Contributions						Surcharge Imposed	Expiration Dates of Bargaining Agreement
Pension Fund	EIN/Pension Plan Number	2016	2015	FIP/RP Status Pending Implemented	2016		2015		2014		Surcharge Imposed	Expiration Dates of Bargaining Agreement
National Electric Benefit Fund	53-0181657/001	Green	Green	No	$	712	$	774	$	743	No	Ranging from June 30, 2017 to December 31, 2018
Eighth District Electrical Pension Fund	84-6100393/001	Green	Green	No	90		119		105		No	December 31, 2017
					$	802	$	893	$	848

We were not listed in the Form 5500 for either plan as having provided more than 5% of the total contributions.

Both the National Electric Benefit Fund and the Eighth District Electrical Pension Fund are green zone status--safe--which represents at least 80% funded and does not require a “financial improvement plan” (“FIP”) or a “rehabilitation plan” (“RP”).

We are party to nine collective-bargaining agreements with the National Electric Benefit Fund, with expiration dates ranging from June 30, 2017 to December 31, 2018, and one collective-bargaining agreement with Eighth District Electrical Pension Fund with an expiration date of December 31, 2017.