| Pension and Other Postretirement Benefits | Note 11 – Pension and Other
Postretirement Benefits An
Employees’ Investment Plan is offered to eligible employees
of Southwest through deduction of a percentage of base
compensation, subject to IRS limitations. The Employees’
Investment Plan provides for purchases of various mutual fund
investments and Company common stock. One-half
2017
2016
2015
Employee Investment Plan cost $ 5,112 $ 4,976 $ 5,072 Centuri has a
separate plan, the cost and liability of which are not
significant. A deferred
compensation plan is offered to all officers of Southwest and a
separate deferred compensation plan for members of the
Company’s Board of Directors. The plans provide the
opportunity to defer up to 100% of annual cash compensation.
One-half
A noncontributory
qualified retirement plan with defined benefits covering
substantially all Southwest employees is available in addition to a
separate unfunded supplemental executive retirement plan
(“SERP”) which is limited to Southwest’s
officers. Postretirement benefits other than pensions
(“PBOP”) are provided to qualified retirees for health
care, dental, and life insurance benefits. The overfunded or
underfunded positions of defined benefit postretirement plans,
including pension plans, are recognized in the Consolidated Balance
Sheets. Any actuarial gains and losses, prior service costs and
transition assets or obligations are recognized in Accumulated
other comprehensive income under Stockholders’ equity, net of
tax, until they are amortized as a component of net periodic
benefit cost. A regulatory asset
has been established for the portion of the total amounts otherwise
chargeable to accumulated other comprehensive income that are
expected to be recovered through rates in future periods. Changes
in actuarial gains and losses and prior service costs pertaining to
the regulatory asset will be recognized as an adjustment to the
regulatory asset account as these amounts are amortized and
recognized as components of net periodic pension costs each
year. The qualified
retirement plan invests the majority of its plan assets in common
collective trusts which includes a well-diversified portfolio of
domestic and international equity securities and fixed income
securities, which are managed by a professional investment manager
appointed by Southwest. The investment manager has full
discretionary authority to direct the investment of plan assets
held in trust within the specific guidelines prescribed by
Southwest through the plan’s investment policy statement. In
2016, Southwest adopted a liability driven investment
(“LDI”) strategy for part of the portfolio, a form of
investing designed to better match the movement in pension plan
assets with the impact of interest rate changes and inflation
assumption changes on the pension plan liability. The
implementation of the LDI strategy will be phased in over time by
using a glide path. The glide path is designed to increase the
allocation of the plan’s assets to fixed income securities,
as the funded status of the plan increases, in order to more
closely match the duration of the plan assets to that of the plan
liability. Pension plan assets are held in a Master Trust. The
pension plan funding policy is in compliance with the federal
government’s funding requirements. Pension costs for
these plans are affected by the amount and timing of cash
contributions to the plans, the return on plan assets, discount
rates, and by employee demographics, including age, compensation,
and length of service. Changes made to the provisions of the plans
may also impact current and future pension costs. Actuarial
formulas are used in the determination of pension costs and are
affected by actual plan experience and assumptions about future
experience. Key actuarial assumptions include the expected return
on plan assets, the discount rate used in determining the projected
benefit obligation and pension costs, and the assumed rate of
increase in employee compensation. Relatively small changes in
these assumptions, particularly the discount rate, may
significantly affect pension costs and plan obligations for the
qualified retirement plan. In determining the discount rate,
management matches the plan’s projected cash flows to a
spot-rate yield curve based on highly rated corporate bonds.
Changes to the discount rate from year-to-year, There was a 75
basis point reduction in the discount rate between years, as
reflected below. The methodology utilized to determine the discount
rate was consistent with prior years. The weighted-average rate of
compensation increase remained the same (consistent with
management’s expectations overall). The asset return
assumption (which impacts the following year’s expense)
remained unchanged. The rates are presented in the table
below:
December 31, 2017
December 31, 2016
Discount rate 3.75 % 4.50 %
Weighted-average rate of compensation increase 3.25 % 3.25 %
Asset return assumption 7.00 % 7.00 % Pension expense
for 2018 is estimated to be greater than that experienced in 2017.
Future years’ expense level movements (up or down) will
continue to be greatly influenced by long-term interest rates,
asset returns, and funding levels. The following
table sets forth the retirement plan, SERP, and PBOP funded
statuses and amounts recognized on the Consolidated Balance Sheets
and Consolidated Statements of Income.
2017
2016
Qualified
SERP
PBOP
Qualified
SERP
PBOP
(Thousands of dollars)
Change in benefit obligations
Benefit obligation for service rendered to date at beginning of
year (PBO/PBO/APBO) $ 1,048,353 $ 43,311 $ 73,865 $ 1,044,817 $ 42,720 $ 72,632
Service cost 23,392 309 1,468 22,833 331 1,499
Interest cost 46,083 1,883 3,232 46,027 1,859 3,180
Actuarial loss (gain) 133,017 3,334 (71 ) 8,550 1,347 (2,060 )
Benefits paid (47,361 ) (3,110 ) (3,172 ) (73,874 ) (2,946 ) (1,386 )
Benefit obligation at end of year (PBO/PBO/APBO) 1,203,484 45,727 75,322 1,048,353 43,311 73,865
Change in plan assets
Market value of plan assets at beginning of year 738,962 — 48,113 736,880 — 43,584
Actual return on plan assets 144,064 — 7,742 39,956 — 4,818
Employer contributions 36,000 3,110 — 36,000 2,946 —
Benefits paid (47,361 ) (3,110 ) (1,247 ) (73,874 ) (2,946 ) (289 )
Market value of plan assets at end of year 871,665 — 54,608 738,962 — 48,113
Funded status at year end $ (331,819 ) $ (45,727 ) $ (20,714 ) $ (309,391 ) $ (43,311 ) $ (25,752 )
Weighted-average assumptions (benefit obligation)
Discount rate 3.75 % 3.75 % 3.75 % 4.50 % 4.50 % 4.50 %
Weighted-average rate of compensation increase 3.25 % 3.25 % N/A 3.25 % 3.25 % N/A Estimated funding
for the plans above during calendar year 2018 is approximately
$47 million, of which $44 million pertains to the
retirement plan. Management monitors plan assets and liabilities
and could, at its discretion, increase plan funding levels above
the minimum in order to achieve a desired funded status and avoid
or minimize potential benefit restrictions. The accumulated
benefit obligation for the retirement plan and the SERP is
presented below (in thousands):
December 31, 2017
December 31, 2016
Retirement plan $ 1,088,203 $ 939,002
SERP 44,343 40,852 Benefits expected
to be paid for pension, SERP, and PBOP over the next 10 years are
as follows (in millions):
2018
2019
2020
2021
2022
2023-2027
Pension $ 51.0 $ 52.2 $ 53.6 $ 55.1 $ 56.6 $ 308.3
SERP 3.0 3.0 3.0 2.9 2.9 14.1
PBOP 4.1 4.2 4.3 4.3 4.2 19.6 No assurance can
be made that actual funding and benefits paid will match these
estimates. For PBOP
measurement purposes, the per capita cost of the covered health
care benefits medical rate trend assumption is 6.5% declining
to 4.5%. Fixed contributions are made for health care benefits of
employees who retire after 1988, but Southwest pays all covered
health care costs for employees who retired prior to 1989. The
medical trend rate assumption noted above applies to the benefit
obligations of pre-1989 Components of net
periodic benefit cost
Qualified Retirement Plan
SERP
PBOP
2017
2016
2015
2017
2016
2015
2017
2016
2015
(Thousands of dollars)
Service cost $ 23,392 $ 22,833 $ 25,123 $ 309 $ 331 $ 320 $ 1,468 $ 1,499 $ 1,641
Interest cost 46,083 46,027 44,229 1,883 1,859 1,695 3,232 3,180 2,999
Expected return on plan assets (55,196 ) (56,558 ) (57,808 ) — — — (3,358 ) (3,149 ) (3,464 )
Amortization of prior service cost — — — — — — 1,335 1,335 1,335
Amortization of net actuarial loss 24,004 25,266 32,743 1,441 1,383 1,293 — 417 345
Net periodic benefit cost $ 38,283 $ 37,568 $ 44,287 $ 3,633 $ 3,573 $ 3,308 $ 2,677 $ 3,282 $ 2,856
Weighted-average
Discount rate 4.50 % 4.50 % 4.25 % 4.50 % 4.50 % 4.25 % 4.50 % 4.50 % 4.25 %
Expected return on plan assets 7.00 % 7.25 % 7.75 % N/A N/A N/A 7.00 % 7.25 % 7.75 %
Weighted-average rate of compensation increase 3.25 % 3.25 % 2.75 % 3.25 % 3.25 % 2.75 % N/A N/A N/A
Other Changes in
Plan Assets and Benefit Obligations Recognized in Net Periodic
Benefit Cost and Other Comprehensive Income
2017 2016 2015
Total
Qualified
SERP
PBOP
Total
Qualified
SERP
PBOP
Total
Qualified
SERP
PBOP
(Thousands of dollars)
Net actuarial loss (gain) (a) $ 43,027 $ 44,149 $ 3,334 $ (4,456 ) $ 22,770 $ 25,153 $ 1,347 $ (3,730 ) $ 30,519 $ 26,949 $ 2,322 $ 1,248
Amortization of prior (1,335 ) — — (1,335 ) (1,335 ) — — (1,335 ) (1,335 ) — — (1,335 )
Amortization of net (25,445 ) (24,004 ) (1,441 ) — (27,066 ) (25,266 ) (1,383 ) (417 ) (34,381 ) (32,743 ) (1,293 ) (345 )
Regulatory adjustment (12,340 ) (18,131 ) — 5,791 5,584 102 — 5,482 5,646 5,214 — 432
Recognized in other comprehensive (income) loss 3,907 2,014 1,893 — (47 ) (11 ) (36 ) — 449 (580 ) 1,029 —
Net periodic benefit costs recognized in net income 44,593 38,283 3,633 2,677 44,423 37,568 3,573 3,282 50,451 44,287 3,308 2,856
Total of amount $ 48,500 $ 40,297 $ 5,526 $ 2,677 $ 44,376 $ 37,557 $ 3,537 $ 3,282 $ 50,900 $ 43,707 $ 4,337 $ 2,856
The table above
discloses the net gain or loss and prior service cost recognized in
other comprehensive income, separated into (a) amounts
initially recognized in other comprehensive income, and
(b) amounts subsequently recognized as adjustments to other
comprehensive income as those amounts are amortized as components
of net periodic benefit cost. See also
Note 6 – Other
Comprehensive Income and Accumulated Other Comprehensive Income
(“AOCI”) . U.S. GAAP states
that a fair value measurement should be based on the assumptions
that market participants would use in pricing the asset or
liability and establishes a fair value hierarchy that ranks the
inputs used to measure fair value by their reliability. The three
levels of the fair value hierarchy are as follows: Level 1 – quoted prices (unadjusted) in active
markets for identical assets or liabilities that a company has the
ability to access at the measurement date. Level 2 – inputs other than quoted prices
included within Level 1 that are observable for similar assets
or liabilities, either directly or indirectly. Level 3 – unobservable inputs for the asset or
liability. Unobservable inputs are used to measure fair value to
the extent that observable inputs are not available, thereby
allowing for situations in which there is little, if any, market
activity for the asset or liability at the measurement
date.
The following
table sets forth, by level within the three-level fair value
hierarchy, the fair values of the assets of the qualified pension
plan and the PBOP as of December 31, 2017 and
December 31, 2016. The SERP has no assets.
December 31, 2017
December 31, 2016
Qualified
PBOP
Total
Qualified
PBOP
Total
Assets at fair value (thousands of
dollars):
Level 1 – Quoted prices in active markets for identical
financial assets
Mutual funds $ — $ 27,020 $ 27,020 $ — $ 24,922 $ 24,922
Total Level 1 Assets (1) $ — $ 27,020 $ 27,020 $ — $ 24,922 $ 24,922
Level 2 – Significant other observable inputs
Private commingled equity funds (2)
International $ 340,217 $ 10,577 $ 350,794 $ 290,668 $ 9,140 $ 299,808
Large and medium capitalization 136,982 4,258 141,240 121,434 3,819 125,253
Small capitalization 28,955 900 29,855 25,947 816 26,763
Emerging markets 56,259 1,749 58,008 45,309 1,424 46,733
Private commingled fixed income funds (3)
U.S. corporate bonds 157,460 4,895 162,355 161,086 5,066 166,152
U.S. debt market long duration 59,986 1,865 61,851 77,349 2,432 79,781
U.S. Treasury securities 83,771 2,604 86,375 8,665 272 8,937
Pooled funds and mutual funds 4,676 735 5,411 4,889 216 5,105
Government fixed income and mortgage backed securities 172 5 177 167 5 172
Total Level 2 assets (4) $ 868,478 $ 27,588 $ 896,066 $ 735,514 $ 23,190 $ 758,704
Total Plan assets at fair value $ 868,478 $ 54,608 $ 923,086 $ 735,514 $ 48,112 $ 783,626
Insurance company general account contracts (5) 3,187 — 3,187 3,448 — 3,448
Total Plan assets $ 871,665 $ 54,608 $ 926,273 $ 738,962 $ 48,112 $ 787,074
(1)
The Mutual funds category above is an
intermediate-term bond fund whose manager employs multiple
concurrent strategies and takes only moderate risk in each, thereby
reducing the risk of poor performance arising from any single
source, and a balanced fund that invests in a diversified portfolio
of common stocks, preferred stocks and fixed-income securities.
Strategies utilized by the bond fund include duration management,
yield curve or maturity structuring, sector rotation, and all
bottom-up in-house
(2)
The private commingled equity funds include common
collective trusts that invest in a diversified portfolio of
domestic and international securities regularly traded on
securities exchanges. These funds are shown in the above table at
net asset value (“NAV”), which is the value of
securities in the fund less the amount of any liabilities
outstanding. Investment strategies employed by the funds
include:
•
Domestic equities
•
International developed countries equities
•
Emerging markets equities Shares in the
private equity commingled funds may be redeemed given one business
day notice. While they are private equity funds and reported at
NAV, due to the short redemption notice period, the lack of
significant redemption fees, the fact that the underlying
investments are exchange-traded, and that substantial liabilities
do not exist subject to the NAV calculation, these investments are
viewed as indirectly observable (level 2) and are also therefore,
not excluded from the body of the fair value table as a reconciling
item. Two funds are
classified as international funds. One invests in international
financial markets, primarily those of developed economies in Europe
and the Pacific Basin. The fund invests primarily in equity
securities issued by foreign corporations, but may invest in other
securities perceived as offering attractive investment return
opportunities. The other provides diversified exposure to global
equity markets. The fund seeks to provide long-term capital growth
by investing primarily in securities listed on the major developed
equity markets of the United States, Europe, and Asia, as well as
within those listed on emerging country equity markets on a
tactical basis. The large and
medium capitalization fund is designed to track the performance of
the large and medium capitalization companies contained in the
index, which represents approximately 90% of the market
capitalization of the United States stock market. The small
capitalization fund is designed to provide maximum long-term
appreciation through investments that are well diversified by
industry. The emerging
markets fund was developed to invest in emerging market equities
worldwide. The purposes of the fund’s operations,
“emerging market countries” include every country in
the world except the developed markets of the United States,
Canada, Japan, Australia, New Zealand, Hong Kong and Singapore, and
most countries located in Western Europe. Fund investments are made
directly in each country or, where direct investment is inefficient
or prohibited, through appropriate financial instruments or
participation in commingled funds.
(3)
The private commingled fixed income funds include
domestic fixed income securities. These funds are shown in the
above table at NAV. Shares in the private commingled fixed equity
funds may be redeemed given one business day notice. While they are
private equity funds and reported at NAV, due to the short
redemption notice period, the lack of significant redemption fees,
the fact that the underlying investments are exchange-traded, and
that substantial liabilities do not exist subject to the NAV
calculation, these investments are viewed as indirectly observable
(level 2) and are also therefore, not excluded from the body of the
fair value table as a reconciling item. The U.S. corporate
bond fund seeks to provide high quality, mostly corporate
bond-based exposure to fixed income securities which closely match
those found in discount curves used to value United States pension
liabilities. The United States
debt market long duration fund provides participation in the full
spectrum of investment opportunities in primarily United States
debt markets with longer maturities. The fund seeks to offer
effective diversification against equities, take advantage of
market trading opportunities, and provide a competitive rate of
return on assets. The fund’s current duration is close to 14
years. The United States
Treasuries securities fund seeks to replicate the risk and return
characteristics of the Barclays Treasury U.S. Separate Trading of
Registered Interest and Principal of Securities
(“STRIPS”) 28-29
(4)
With the exception of items (2) and (3), which
are discussed in detail above, the Level 2 assets consist
mainly of pooled funds and mutual funds. These funds are collective
short-term funds that invest in Treasury bills and money market
funds and are used as a temporary cash repository.
(5)
The insurance company general account contracts are
annuity insurance contracts used to pay the pensions of employees
who retired prior to 1989. The balance of the account disclosed in
the above table is the contract value, which is the result of
deposits, withdrawals, and interest credits. |
