Employee Benefit Plans

Defined Benefit Retirement Plan

We have a trusteed, noncontributory, defined benefit retirement plan covering all eligible employees hired prior to May 9, 2008. Retirement income is based on the number of years of service and annual rates of compensation. The Company has historically made annual contributions to fund the plan adequately.

Generally accepted accounting principles (“GAAP”) require employers who sponsor defined benefit retirement plans to recognize the funded status of a defined benefit retirement plan on the balance sheet and to recognize through comprehensive income the changes in the funded status in the year in which the changes occur. However, regulatory accounting standards provide that regulated entities can defer recoverable costs that would otherwise be charged to expense or equity by non-regulated entities. Current cost-of-service ratemaking in Kentucky allows recovery of net periodic benefit cost as determined under GAAP. The Kentucky Public Service Commission has been clear and consistent with its historical treatment of such rate recovery; therefore, we have recorded a regulatory asset representing the probable recovery of the portion of the change in funded status of the defined benefit retirement plan that is expected to be recognized in future net periodic benefit cost. The regulatory asset is adjusted annually as prior service cost and actuarial losses are recognized in net periodic benefit cost.

Our obligations and the funded status of our plan, measured at June 30, 2016 and June 30, 2015, respectively, are as follows:



($000)	2016		2015

Change in Benefit Obligation
Benefit obligation at beginning of year	28,838		26,383
Service cost	1,004		990
Interest cost	1,157		1,056
Actuarial loss	1,517		1,219
Benefits paid	(944	)	(810	)
Benefit obligation at end of year	31,572		28,838

Change in Plan Assets
Fair value of plan assets at beginning of year	30,984		29,675
Actual return on plan assets	(802	)	1,119
Employer contributions	500		1,000
Benefits paid	(944	)	(810	)
Fair value of plan assets at end of year	29,738		30,984

Recognized Amounts
Projected benefit obligation	(31,572	)	(28,838	)
Plan assets at fair value	29,738		30,984
Funded status	(1,834	)	2,146

Net amount recognized as (accrued) prepaid pension on the Consolidated Balance Sheets	(1,834	)	2,146



Items Not Yet Recognized as a Component of Net Periodic Benefit Cost
Prior service cost	(144	)	(230	)
Accumulated net losses	10,972		7,391
Amounts recognized as regulatory assets	10,828		7,161

The accumulated benefit obligation was $28,124,000 and $25,012,000 for 2016 and 2015, respectively.



($000)	2016		2015		2014

Components of Net Periodic Benefit Cost
Service cost	1,004		990		1,023
Interest cost	1,157		1,056		1,038
Expected return on plan assets	(1,636	)	(1,711	)	(1,567	)
Amortization of unrecognized net loss	373		244		342
Amortization of prior service cost	(86	)	(86	)	(86	)
Net periodic benefit cost	812		493		750

(%)

Weighted-Average Assumptions Used to Determine Benefit Obligations
Discount rate	3.5		4.25		4.25
Rate of compensation increase	4.0		4.0		4.0

Weighted-Average Assumptions Used to Determine Net Periodic Benefit Cost
Discount rate	4.25		4.25		4.5
Expected long-term return on plan assets	5.5		6.0		6.0
Rate of compensation increase	4.0		4.0		4.0

Plan Assets

Our target investment allocations have been developed using an asset allocation model which weighs risk versus return of various investment indices to create a target asset allocation to maximize return subject to a moderate amount of portfolio risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status and corporate financial condition. The investment portfolios contain a diversified blend of equity and fixed income investments. Our target investment allocations are approximately 70% equity investments and 30% fixed income investments. Our equity investment target allocations are heavily weighted toward domestic equity securities, with allocations to domestic real estate securities and foreign equity securities for the purposes of diversification. Fixed income securities primarily include U.S. government obligations and corporate debt securities. For additional diversification, we invest in absolute return strategy mutual funds, which include both equity and fixed income securities, with the objective of providing a return greater than inflation. The plan has amended its investment policy to allow for liability driven investments which, over time, will match a portion of the plan's liability with the underlying assets. We regularly review our asset allocation and periodically rebalance our investments to our targeted allocations as appropriate.

The assets of the plan are comprised of investments in individual securities and mutual funds.



	Target	Actual Allocations
(%)	Allocations	2016	2015
Asset Class
Cash and cash equivalents	3	3	3

Equity Securities
U.S. equity securities	54	48	47
Foreign equity securities	21	10	12
	75	58	59

Fixed Income Securities
U. S. fixed income security	13	22	18
Foreign fixed income security	2	3	6
	15	25	24

Other Securities
Absolute return strategy mutual funds	7	14	14
	100	100	100

Individual exchange traded equity securities, exchange traded mutual funds and treasury securities are categorized as Level 1 in the fair value hierarchy as the fair value of the investments is determined based on the quoted market price of each investment. Mutual funds are categorized based on their primary investment strategy. The respective level within the fair value hierarchy is determined as described in Note 1 of the Notes to Consolidated Financial Statements. Corporate bonds, municipal bonds and U.S. agency securities are valued based on a calculation using interest rate curves and credit spreads applied to the terms of the debt (maturity and coupon rate) supported by observable transactions and are categorized as Level 2 in the fair value hierarchy. The following represents the fair value of the plan assets:



($000)	2016	Level 1	Level 2	Level 3
Asset Class
Cash	807	807	—	—

Equity Securities
U.S. equity securities	14,398	14,398	—	—
Foreign equity securities	2,993	2,993	—	—
	17,391	17,391	—	—

Fixed Income Securities
U.S. treasury securities	387	387	—	—
U.S. corporate bonds	990	—	990	—
High yield funds	4,397	4,397	—	—
Foreign bond funds	624	624	—	—
Other	842	—	842	—
	7,240	5,408	1,832	—

Other
Absolute return strategy mutual funds	4,300	4,300	—	—

Total investments at fair value	29,738	27,906	1,832	—


($000)	2015	Level 1	Level 2	Level 3
Asset Class
Cash	1,072	1,072	—	—

Equity Securities
U.S. equity securities	14,602	14,602	—	—
Foreign equity securities	3,690	3,690	—	—
	18,292	18,292	—	—
Fixed Income Securities
U.S. treasury securities	524	524	—	—
U.S. corporate bonds	902	—	902	—
High yield funds	3,284	3,284	—	—
Foreign bond funds	1,857	1,857	—	—
Other	734	—	734	—
	7,301	5,665	1,636	—

Other
Absolute return strategy mutual funds	4,319	4,319	—	—

Total investments at fair value	30,984	29,348	1,636	—

We determined the expected long-term rate of return for plan assets with input from plan actuaries and investment consultants based upon many factors including asset allocations, historical asset returns and expected future market conditions. The discount rates used by the Company for valuing pension liabilities are based on a review of high-quality corporate bond yields with maturities approximating the remaining life of the projected benefit obligations.

We made a $500,000 discretionary contribution to the defined benefit retirement plan in fiscal 2016. In August, 2016, we made a $1,000,000 discretionary contribution to the defined benefit retirement plan and expect to make an additional $500,000 discretionary contribution to the defined benefit retirement plan in fiscal 2017.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:



($000)

2017	3,020
2018	1,556
2019	1,639
2020	1,244
2021	1,155
2022 - 2026	8,365

Effective May 9, 2008, any employees hired on and after that date were not eligible to participate in our defined benefit retirement plan. Freezing the defined benefit retirement plan for new entrants did not impact the level of benefits for existing participants.

We do not provide postretirement or postemployment benefits other than the defined benefit retirement plan for retired employees and the supplemental retirement agreement described below.

Employee Savings Plan

We have an employee savings plan under which eligible employees may elect to contribute a portion of their annual compensation up to the maximum amount permitted by law. The Company matches 100% of the employee's contribution up to a maximum company contribution of 4% of the employee's annual compensation. Employees hired after May 9, 2008, who are not eligible to participate in the defined benefit retirement plan, annually receive an additional 4% non-elective contribution into their employee savings plan account. Company contributions are discretionary and subject to change with approval from our Board of Directors. For 2016, 2015 and 2014, our employee savings plan expense was $379,000, $359,000 and $350,000, respectively.

Supplemental Retirement Agreement

We sponsor a nonqualified defined contribution supplemental retirement agreement for Glenn R. Jennings, Delta's Chairman of the Board, President and Chief Executive Officer. Delta makes discretionary contributions into an irrevocable trust until Mr. Jennings' retirement. At retirement, the trustee will make annual payments of $100,000 to Mr. Jennings until the trust is depleted. For 2016, 2015 and 2014, Delta contributed $60,000 each year to the trust. As of June 30, 2016 and 2015, the irrevocable trust assets are $1,034,000 and $977,000, respectively. These amounts are included in other non-current assets on the accompanying Consolidated Balance Sheets. Liabilities, in corresponding amounts, are included in other long-term liabilities on the accompanying Consolidated Balance Sheets.