Roy R. Centrella, Vice President/Controller/Chief Accounting Officer
November
18, 2008
H.
Christopher Owings
Assistant
Director
Division
of Corporation Finance
United
States Securities and Exchange Commission
Mail Stop
3561
Washington,
D.C. 20549-7010
Re: Southwest
Gas Corporation
Form 10-K
Filed February 29, 2008
Definitive Proxy Statement on Schedule 14A
Filed
March 28, 2008
File No. 001-07850
Dear Mr.
Owings:
On behalf
of Southwest Gas Corporation (the “Company”), this
letter is being submitted in response to comments received from the Staff of the
Securities and Exchange Commission (the “SEC”) by letter dated
October 10, 2008. The October 10, 2008 letter includes comments
regarding the Company’s September 15, 2008 response to the Staff’s August 14,
2008 comment letter. The August 14, 2008 letter was regarding the
Company’s Form 10-K for the year ended December 31, 2007 filed with the SEC
on February 29, 2008 (the “Form 10-K”) and
the Company’s definitive proxy statement on Schedule 14A filed with the SEC on
March 28, 2008 (the “Proxy
Statement”). The numbering of the paragraphs below corresponds
to the numbering of the Staff’s letter, the text of which we have incorporated
into this response letter for convenience.
Annual Report on Form 10-K
for Fiscal Year Ended December 31, 2007
Item 1. Business, page
1
Competition, page
4
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1.
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We
note your response to comment 1 in our letter dated August 14,
2008. Please provide us with your intended disclosure for
future filings based on information for the above-referenced
documents.
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5241 Spring Mountain Road / Las Vegas, Nevada
89150-0002
P.O. Box 98510 / Las Vegas, Nevada 89193-8510 /
(702) 876-7083
www.swgas.com
H. Christopher Owings
United States Securities and Exchange Commission
November 18, 2008
Page 2 of 9
The same
follow-up comment applies to your response to comments 17, 18, 19, 20, 22, and
23 in our letter dated August 14, 2008.
Response:
In future
10-K filings, the “competition” paragraph for our construction services segment
(currently on page 5 of the 2007 Form 10-K) will be updated to include the
principal method or methods of competition for our construction services
segment. The following is an example of the enhanced paragraph for
2007.
“Competition
within the industry has traditionally been limited to several regional
competitors in what has been a largely fragmented industry. Several
national competitors also exist within the industry. NPL currently
operates in 19 major markets nationwide. NPL’s customers are the
primary LDCs in those markets. Pricing is the primary method of
competition in NPL’s markets. NPL’s safety record and the quality of
its work product are additional factors that play significant roles in obtaining
contract awards and/or retaining existing contracts. NPL’s reputation
for safety and quality of work can allow it to obtain “best cost” versus “low
cost” bids, which can enhance its profitability. During 2007, NPL
served 67 major customers, with Southwest accounting for approximately 21
percent of NPL revenues. With the exception of four other customers
that in total accounted for approximately 31 percent of revenue, no other
customer had a relatively significant contribution to NPL
revenues.”
Definitive Proxy Statement
on Schedule 14A
Compensation Discussion and
Analysis, page 16
General
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(17)
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Please
provide clear disclosure that addresses how decisions regarding particular
elements of your compensation program fit into your overall compensation
objectives and affect decisions regarding other elements. You
provide disclosure addressing each individual compensation element but, as
a general matter, your disclosure lacks qualitative or quantitative
discussion of how decisions regarding one type of award motivate the
Compensation Committee to award other elements of
compensation. Please revise the Compensation Discussion and
Analysis to explain and place in context the relationship among each
element of compensation and why determinations with respect to one element
may or may not have influenced the Committee’s decision with respect to
other allocated or contemplated awards. See Items
402(b)(1)(iv)-(vi) of Regulation
S-K.
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H. Christopher Owings
United States Securities and Exchange Commission
November 18, 2008
Page 3 of 9
Response:
The “Decision to Pay Each Element of
Compensation” section of the Compensation Discussion & Analysis, on
page 17 of the Proxy Statement, has been modified to explain and place in
context the relationship among each element of compensation and why
determinations with respect to one element may or may not have influenced the
Committee’s decision with respect to other allocated or contemplated
awards. The modified disclosure is reflected in Appendix
17.
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(18)
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Your
disclosure references a national focus group, a regional focus group, and
various peer groups, some of which list the names of the companies in the
group. Please specify (1) how overall compensation as well as
each element of compensation relate to the data you analyzed from each
focus group, (2) how overall compensation as well as each element of
compensation relates to the data you analyzed from the various peer
groups, and (3) why the company uses different groups of companies to
benchmark overall compensation as well as different elements of
compensation. Please include a specific discussion of where you
target each element of compensation against the focus group or peer group
companies, as the case may be, and where actual payments fall within
targeted parameters, in each case naming the focus or peer group
companies. Please also include a discussion of how the
Committee uses focus group information as compared to peer group
information. Refer to Item 402(b)(2)(xiv) of Regulation S-K. If
some elements of compensation are not targeted against any of the focus or
peer groups, please discuss how these amounts are
determined. Refer to Item 402(b)(1)(v) of Regulation
S-K.
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Response:
The
general discussion section of the “Determination of the Amount to be
Paid for Each Element of Compensation” section of the Compensation
Discussion & Analysis, on pages 17 and 18 of the Proxy Statement, has been
modified to address how the Company used focus groups in relation to the
elements of and overall compensation. The modified disclosure is
reflected in Appendix
18A.
The “Performance-Based
Compensation” subsection of the “Determination of the Amount to be
Paid for Each Element of Compensation” section of the Compensation
Discussion & Analysis, on pages 18 and 19 of the Proxy Statement, has been
modified to address how the Company used peers groups in assessing
performance-based compensation and how the two performance measures not tied to
peer groups were determined. The modified disclosure is
H. Christopher Owings
United States Securities and Exchange Commission
November 18, 2008
Page 4 of 9
reflected
in Appendix
18B. With the change in performance measures for 2008, as
explained on page 19 of the Proxy Statement, peer groups will no longer be used
in determining whether any of the performance measures have been
satisfied.
Performance-Based
Compensation, page 18
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(19)
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We
note that you disclose how to calculate the threshold and maximum amounts
for your 2008 return on equity, customer-to-employee ratio and operating
costs performance measures, which is helpful to an investor’s
understanding of these measures, but that you do not disclose the actual
threshold and maximum amounts for these performance
measures. To enhance an investor’s understanding of these
performance measures, please disclose the threshold and maximum
numbers. Please also consider whether a tabular presentation of
these measures would be helpful to investors. Further, confirm
that you will include the grant of non-equity incentive plan compensation
in the grants of plan-based awards table for 2008 compensation and advise
us why you did not include that information in the 2007 compensation
disclosure. Refer to Item 402(d) of Regulation
S-K.
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Response:
The
portion of the “Performance-Based
Compensation” subsection of the “Determination of the Amount to be
Paid for Each Element of Compensation” section of the Compensation
Discussion & Analysis, on pages 19 and 20 of the Proxy Statement, addressing
the performance measures for 2008 has been modified to include the thresholds
and maximum amounts for each measure. Since the formulas for each
measure differ, a tabular format would not provide a clear presentation of the
individual measures. The modified disclosure is reflected in Appendix
19A.
The “GRANTS OF PLAN-BASED AWARDS”
table, modified consistent with the Company’s initial response to this comment,
is reflected in Appendix
19B.
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(20)
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You
state that “payment of the [performance] awards will be subject to
reduction depending upon satisfaction of . . . individual performance
goals.” Please disclose the individual performance goals for
your named executive officers. Please disclose if the Committee
(in the case of Mr. Shaw) or Mr. Shaw (in the case of the remaining named
executive officers) can reduce an award for one performance measure but
not
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H. Christopher Owings
United States Securities and Exchange Commission
November 18, 2008
Page 5 of 9
another. If
not, please disclose this fact. If so, please disclose how these
determinations are made by the Committee or Mr. Shaw, as the case may
be.
Response:
The
portion of the “Performance-Based
Compensation” subsection of the “Determination of the Amount to be
Paid for Each Element of Compensation” section of the Compensation
Discussion & Analysis, on page 20 of the Proxy Statement, addressing the
effect of failing to satisfy individual performance goals has been modified to
include such goals for the named executive officers, the impact of their failure
to satisfy such goals and their success in meeting the goals for
2007. The modified disclosure is reflected in Appendix
20.
Potential payments upon
termination or change-in-control, page 31
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(22)
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Please
describe and explain how the appropriate payment and benefit levels were
determined under the various circumstances that trigger payments or
provision of benefits for termination events prior to a change of control
and within two years after a change in control. Refer to Item
402(j)(3) of Regulation S-K and Instruction 1 to Item 402(j) of Regulation
S-K.
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Response:
The
portion of the “Post-Termination
Benefits” subsection of the “Determination of the Amount to be
Paid for Each Element of Compensation” section of the Compensation
Discussion & Analysis, on pages 21 and 22 of the Proxy Statement, has been
modified to address the determination of the payments and benefits levels with
an involuntary or good reason termination before and after a change in
control. The modified disclosure is reflected in Appendix
22.
Director compensation, page
32
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(23)
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Please
disclose by footnote to the appropriate column, the grant date fair value
of each equity award computed in accordance with FAS
123R. Refer to the instruction to Item 402(k)(2)(iii) of
Regulation S-K.
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Response:
The “2007 DIRECTORS COMPENSATION TABLE”
has been modified to add a footnote for the grant date fair value of each
equity award. The modified disclosure is reflected in Appendix
23.
H. Christopher Owings
United States Securities and Exchange Commission
November 18, 2008
Page 6 of 9
Exhibit 13. Portions of 2007
Annual Report to Shareholders
Management’s Discussion and
Analysis of Financial Condition and Results of Operations, page
36
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2.
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We
reviewed your response to comment 7 in our letter dated August 14,
2008. We understand that the capital requirements and liquidity
of the natural gas segment are significant. We also understand
that the capital requirements and resources of the construction services
segment are not material to the capital requirements and resources of the
business as a whole. However, where a discussion of segment
information is appropriate to an understanding of the business, the
discussion and analysis shall focus on each relevant reportable segment
and on the business as a whole. Refer to Item 303(a) of
Regulation S-K. Please consider revising your discussion and
analysis to focus on the business as a whole given your conclusion that a
separate discussion of the construction services segment is not relevant
to an understanding of the capital requirements and resources of the
business as a whole.
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Response:
In future
10-K and 10-Q filings, we will consider revising our discussion of liquidity and
capital resources to focus on the business as a whole as identified in Item
303(a) of Regulation S-K. As necessary, we will also provide
individual segment disclosures and identify segment trends to assist the reader
in understanding the liquidity and capital resources of each of the individual
businesses of the Company.
Financial Statements, page
50
Consolidated Statements of
Income, page 51
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3.
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We
reviewed your response to comment 9 in our letter dated August 14,
2008. We believe you should evaluate the materiality of other
income and expenses based on income before taxes as opposed to total
revenues. In addition, we believe you should disclose material
amounts of other income and expense included in the line item on the face
of the statement or in a note thereto in accordance with paragraphs 7 and
9 of Rule 5-03 of Regulation S-X. Please consider providing
tabular presentation of other income and expenses in the notes to
financial statements. Also, it appears that you should report
NPL gains on equipment sales in operating income in accordance with
paragraph 45 of SFAS 144. Please
advise.
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H. Christopher Owings
United States Securities and Exchange Commission
November 18, 2008
Page 7 of 9
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Response:
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We
continue to monitor items comprising other income and will disclose material
items, as applicable, and their amounts in the notes to the consolidated
financial statements (or on the face thereof) in future 10-Q and 10-K
filings. In assessing materiality, we will utilize qualitative and
quantitative measures (including income before income taxes) in making
disclosures and will consider providing tabular presentations in the notes, as
appropriate. In future 10-Q and 10-K filings, we will revise the
placement on the income statement of NPL gains on equipment sales so as to
include them in operating income.
Consolidated Statements of
Cash Flows, page 52
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4.
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We
reviewed your response to comment 10 in our letter dated August 14,
2008. We believe that you should separately report the effects
of changes in deferred credits and charges and the effects AFUDC and gains
on sales in the adjustments to reconcile net income to net cash provided
by operating activities in accordance with paragraphs 28 and 29 of SFAS
95. We also believe that investing cash inflows and outflows
that are separately reported in accordance with paragraph 31 of SFAS 95
should be determined on the significance of a particular item to total
investing cash flows. For example, we note that the South Lake
Tahoe acquisition approximated 5% of investing cash flows in 2005 and
other property investments approximated 6% of investing cash flows in
2007. Please separately report all major classes of reconciling
items in operating cash flows and each significant investing cash inflow
and outflow in investing cash
flows.
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Response:
In future
10-K and 10-Q filings, we will expand our cash flow disclosures to separately
report the effects of changes in deferred credits and charges, the effects of
AFUDC, and gains on sales, if they continue to be significant reconciling
items. We will also report all major classes of reconciling items in
operating cash flows and each significant investing cash inflow and outflow in
investing cash flows.
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5.
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We
reviewed your response to comment 12 in our letter dated August 14, 2008
and understand that stock-based compensation is included in financing cash
flows. We believe that stock-based compensation should be
included in adjustments to reconcile net income to net cash provided by
operating activities. Please tell us why you believe
stock-based compensation is properly classified in cash flows from
financing activities
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H. Christopher Owings
United States Securities and Exchange Commission
November 18, 2008
Page 8 of 9
citing
the relevant guidance in SFAS 95. Also tell us whether the net
increase in undistributed stock-based compensation in Appendix D to your
response represents the aggregate amount of stock-based compensation recognized
as additional paid-in capital and, if not, the amount of stock-based
compensation included in the other line items in the table. We assume
that stock-based compensation is not material to operating cash
flows. If our assumption is correct and you conclude that stock-based
compensation should be included in adjustments to reconcile net income to net
cash provided by operating activities, please correct the classification error
in future filings. Otherwise, please advise.
Response:
In
addition to the amounts identified as “net increase in undistributed stock-based
compensation” in Appendix D provided in response to the original comment letter,
approximately $2 million for each of the years 2007, 2006, and 2005 in
stock-based compensation-related amounts are included in the caption “Stock
Option/Management Incentive Plans (SIP and MIP)”. We concur that a
preferable presentation in the statements of cash flows would be to reflect the
non-cash stock-based compensation amounts as adjustments to operating cash flows
(instead of financing cash inflows). We believe these amounts are not
material to operating cash flows and we will make this classification correction
in future filings.
During a
subsequent review of the details of Appendix D, we noted that certain amounts in
the 2005 column had inadvertently been transposed between captions. A
revised Appendix D is attached hereto.
Notes to Consolidated
Financial Statements, page 54
Note 12 – Segment
Information, page 72
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6.
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We
reviewed your response to comment 16 in our letter dated August 14,
2008. It is unclear to us why paragraph 95 of SFAS 131 would
apply to your facts and circumstances since you are not [a] financial
services company. Given that paragraph 27 of SFAS 131 requires
disclosure of interest revenues when included in segment profit reviewed
by the chief operating decision maker, we continue to believe that
interest income should be disclosed in segment
information. Please tell us why you believe paragraph 95 of
SFAS 131 applies to your facts and circumstances. In any event,
we believe that you should consider the significance of interest revenue
in relation to segment income, as
opposed
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H. Christopher Owings
United States Securities and Exchange Commission
November 18, 2008
Page 9 of 9
to total
revenues, in determining whether interest revenue is material to segment
income.
Response:
Our
purpose in referencing paragraph 95 of SFAS 131 was to support the assertion
that materiality should be a factor in determining the requirements of
separately disclosing interest revenues for segments with immaterial financial
operations. While we continue to believe that segment interest income
is not material as it relates to investment decisions of readers of the
financial statements, in the future we will evaluate interest revenue in
relation to segment income and add it to our segment disclosures when it is
material.
In
connection with our responses to your comments, the Company acknowledges
that:
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the
Company is responsible for the adequacy and accuracy of the disclosure in
the filings;
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·
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staff
comments or changes to disclosure in response to staff comments do not
foreclose the Commission from taking any action with respect to the
filings; and
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·
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the
Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
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Sincerely,
/s/ Roy
R. Centrella
sw
Attachments
APPENDIX
17
Decision
to Pay Each Element of Compensation
The
primary objective of our executive compensation program is to elicit long-term
employment commitments. To accomplish this, the program is designed
to respond to changing market conditions and offer a broad spectrum of
compensation opportunities. Performance is the critical component of
the program and both individual and overall Company performance can impact an
officer’s level of compensation on an annual basis.
Salaries
and performance-based compensation are linked to recognize each officer’s
responsibilities and individual contribution to the success of the
Company. As explained in greater detail below, an officer’s award
opportunity is based on a percentage of salary and, as a result will move in
relation to changes in salary. How an officer satisfies his or her
direct individual responsibilities can also impact the level of an individual
officer’s performance-based compensation. Exemplary performance is
expected and rewarded with the compensation elements of the program, while poor
performance will result in the reduction or possible elimination of a Management
Incentive Plan (the “MIP”) award.
Retirement
benefits are based on the salary and, to a lesser extent, on the cash component
of the MIP. The level of benefits and deferral opportunities under
the Company’s qualified and non-qualified plans, however, do not influence the
committee’s decisions regarding the appropriate level of overall
compensation. Welfare benefits and perquisites are also viewed by the
committee on a stand-alone basis, while post-termination benefits are influenced
by current salary levels.
APPENDIX
18A
Determination
of the Amount to be Paid for Each Element of Compensation
The
nature of our operations and competitive considerations have led the committee
to design and employ a compensation program that is comparable to compensation
programs widely used in industry, weighted for public utilities, and accepted by
various utility regulatory agencies. Salaries and performance-based compensation
paid to the named executive officers are determined by using a variety of
sources including the Hay Group for salary design, compensation surveys prepared
by the American Gas Association, Watson Wyatt, and William M. Mercer for overall
compensation components, and competitive market compensation to determine
reasonableness. The committee uses the focus groups consisting of
national and regional energy and natural gas utilities that share common factors
with the Company to establish both national and regional parameters for salaries
and performance-based compensation. Our national focus group
includes:
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AGL
Resources Inc.
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NICOR
Inc.
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*
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Atmos
Energy Corp.
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ONEOK
Inc.
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*
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Energy
East Corp.
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Questar
Corp.
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*
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Equitable
Resources Inc.
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Southern
Union Co.
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*
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MDU
Resources Group Inc.
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UGI
Corporation
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National
Fuel Gas Company
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WGL
Holdings, Inc.
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New
Jersey Resources
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Our
regional focus group includes:
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Avista
Corp.
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Edison
International
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NW
Natural Gas Company
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Pacific
Gas & Electric Company
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*
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Pinnacle
West Capital Corp.
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PNM
Resources Inc
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Portland
General Electric Co.
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Puget
Sound Energy
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*
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Questar
Corp.
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Sempra
Energy
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Sierra
Pacific Resources
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UniSource
Energy Services
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The
different focus groups are used to ensure that the Company’s overall
compensation program is competitive on both the national and regional
basis. Since the Company is primarily a natural gas distribution
company, similar companies throughout the nation were used to develop the
national focus group. This distinction, however, was not used to
establish the regional focus group. On a regional basis, utilities
that have any common elements with the Company (e.g., number of customers,
utility revenues, market capitalization, business lines, number of rate
jurisdictions and geographically diverse service areas) were used to construct
the focus group.
We set
salaries and overall compensation for our executive officers at amounts that
approximate the 50th
percentile of the amounts paid by the focus groups of
companies
discussed above. The selection of these parameters is designed to be
comparable and competitive with the relevant market, address the regulatory
environment in which we operate, and to provide a reasonable range of incentives
to reward performance.
Other
elements of overall compensation (perquisites, welfare benefits, retirement
benefits and post-termination benefits) were implemented at various times over
the past several years to remain competitive with the focus
groups. In determining the Company’s overall compensation, we
annually compare our elements of compensation and the level of benefits with
those of the focus groups to ensure we are remaining competitive with the focus
groups. For 2007, overall compensation for our executive officers
averaged 95% of the median for the national focus group and 94% of the median
for the regional focus group.
APPENDIX
18B
Performance-Based
Compensation. The performance
component of the Company’s executive compensation program is designed to reward
Company performance and consists of non-equity incentive plan compensation and
restricted stock awards provided through our Management Incentive Plan (“MIP”)
and our Restricted Stock/Unit Plan (the “RSUP,” and collectively, the “Incentive
Plans”). The committee has designed the Incentive Plans to focus on
specific annual and long-term Company financial and productivity performance
goals. Financial performance, productivity, and customer satisfaction
factors are incorporated in the Incentive Plans.
Annually,
we establish incentive opportunities under the MIP, expressed as a percentage of
each individual’s salary at year-end (after taking into account any mid-year
salary increases), corresponding with each individual’s position and
responsibilities with the Company, and determine the performance goals to be
measured against these opportunities. For 2007, the incentive
opportunities for the named executive officers were set at the following
percentages of salary:
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Incentive
Opportunities
(% of salary)
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Jeffrey
W. Shaw
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115%
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George
C. Biehl
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90%
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James
P. Kane
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100%
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Thomas
R. Sheets
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75%
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Dudley
S. Sondeno
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75%
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The
performance measures for 2007 were tied to our financial performance,
productivity, and customer satisfaction. This mix of performance
goals is designed to address shareholder and customer interests through the
Company’s financial performance and increased productivity and customer
interests through the measurement of customer satisfaction. In prior regulatory
proceedings, the regulatory commissions have insisted that productivity measures
and customer satisfaction goals be included in the MIP in order to recover any
of the costs of the program in our natural gas rates.
Specific
peer groups of natural gas utilities with comparable financial and productivity
characteristics, rather than the national or regional focus groups listed above,
were constructed to determine the success in achieving the annual financial and
productivity performance measures tied to peer group comparisons in the MIP for
2007.
The two
financial performance measures selected by the committee address the Company’s
average return-on-equity performance over the last three years (which is
weighted and adjusted for inflation) and the Company’s current utility return on
equity performance in comparison to a peer group of natural gas distribution
companies, which
when
initially established would be classified as local natural gas distribution
companies. The 2007 target for the Company’s three-year average
return on equity, before weighting and adjusting for inflation, was 8%, which
was established at the time the MIP was originally adopted and is designed to
represent the goal of earning a return on equity of 800 basis points over
inflation. The target for the comparison of the Company’s 2007 return
on equity relative to the peer group of utilities was set at the 50th
percentile. The peer group consisted of the following distribution
companies.
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South
Jersey Industries, Inc.
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Nicor
Inc.
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*
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NW
Natural Gas Company
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AGL
Resources, Inc.
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The
Laclede Group
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Piedmont
Natural Gas Co., Inc.
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Vectren
Corporation
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WGL
Holdings, Inc.
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*
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New
Jersey Resources Corp.
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Atmos
Energy Corp.
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*
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Avista
Corp.
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*
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SEMCO
Energy, Inc.
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The
productivity performance measures address a specific customer-to-employee ratio
target and actual customer-to-employee ratios in comparison to a peer group of
natural gas distribution companies, consisting of those listed above and Cascade
Natural Gas Corporation. The target for 2007 for the Company’s
customer-to-employee ratio was set at 609 customers per employee, which
represents the long-term 3% annual growth rate in the number of customers to
employees from the inception of the MIP. The target for the
comparison of the Company’s 2007 customer-to-employee ratio relative to the peer
group of utilities was set at the 76th
percentile. Our customer service satisfaction level target for 2007
was set at 85% and measured individually for each of our operating
divisions.
APPENDIX
19A
Performance-Based
Compensation.
. .
..
The
committee has modified the performance measures for 2008. Changes in
the energy industry, as a result of consolidation and economic conditions,
caused the committee to re-evaluate the current performance
measures. The five measures previously used will be replaced with
four measures—one financial and three related to productivity. The
financial measure, a return-on-equity (“ROE”), is designed to reward our
success in reaching our average authorized ROE. The productivity
measures are designed to reward our success in reaching a predetermined customer
satisfaction percentage, a percentage improvement in the customer-to-employee
ratio, and a predetermined percentage of cost containment for operating
costs. The performance measure targets for 2008 are as
follows:
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*
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ROE
– The target for the ROE component of the MIP for 2008 is 8.06%, which
represents 80% of the company-wide authorized weighted average ROE of
10.075%. The threshold for an award for this measure is reached
at 70% of target (a 5.645% ROE) and a maximum award is reached at 140% of
target (an 11.28% ROE). Achieving the company-wide authorized
weighted average ROE will result in a performance award equal to 125% for
this measure.
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*
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Customer
Satisfaction – This component is unchanged from the previous year, with
the target set at 85% and measured individually for each of our operating
divisions. The threshold for an award for this measure is
reached at 75% and a maximum award is achieved at a customer satisfaction
level of 95%.
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*
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Customer-to-Employee
Ratio – The target for this component of the MIP for 2008 is set at 735
customers per employee. This target represents a
three percent improvement over the actual 2007 ratio of 714 customers
per employee. A one percent improvement in the ratio, 721
customers per employee, will satisfy the award opportunity threshold and a
five percent increase, 750 customers per employee, will satisfy the
maximum payout for this measure.
|
|
*
|
Operating
Costs – The operating cost component of the MIP is based on a percentage
of a rolling ten-year average of annual operating cost percentage
increases. The target for 2008 is set at 4.78%, which
represents 85% of the rolling ten-year average increase. New
mandated programs and incidents occurring during the year that
individually result in a reserve in excess of $1 million will be excluded
in determining the annual operating cost. The minimum target is
set at the rolling ten-year average increase of 5.62% and the maximum
award is achieved by experiencing an annual increase of 3.94% or 70% of
the rolling ten-year average.
|
Each of
the performance measures is equally weighted and the actual performance award
can range from 70% to 140% of the assigned incentive opportunity for each
measure. If the threshold percentage for any measure is achieved, a
percentage of annual performance awards will have been
earned. Regardless of whether such awards are earned, no awards will
be paid in any year unless dividends paid on our common stock for such year
equal or exceed the prior year’s dividends. The success in achieving
the performance measures for 2007 is discussed in the narrative following the
Summary Compensation Table.
APPENDIX
19B
Grants
of Plan-Based Awards (2007)
The
following table sets forth information regarding each grant of an award made
under any of our Incentive Plans to our named executive officers during the
fiscal year ended December 31, 2007.
GRANTS
OF PLAN-BASED AWARDS (2007)
|
Estimated
Possible Payouts Under
Non-Equity Incentive Plan Awards
|
Estimated Possible Payouts Under
Equity
Incentive Plan Awards
|
|||||||||||||||||||||||||||
|
Name
|
Award
Type
|
Grant
Date
|
Threshold
($)
|
Target
($)
|
Maximum
($)
|
Threshold
(#)
|
Target
(#)
|
Maximum
(#)
|
||||||||||||||||||||
|
Jeffrey
W. Shaw
|
MIP(1)
|
01/16/07
|
$ | 193,200 | $ | 276,000 | $ | 386,400 | 9,886 | 14,123 | 19,773 | |||||||||||||||||
|
RSUP(2)
|
01/16/07
|
— | — | — | 4,954 | 9,908 | 14,862 | |||||||||||||||||||||
|
George
C. Biehl
|
MIP(1)
|
01/16/07
|
$ | 90,972 | $ | 129,960 | $ | 181,944 | 4,655 | 6,650 | 9,310 | |||||||||||||||||
|
RSUP(2)
|
01/16/07
|
— | — | — | 1,655 | 3,311 | 4,967 | |||||||||||||||||||||
|
James
P. Kane
|
MIP(1)
|
01/16/07
|
$ | 109,200 | $ | 156,000 | $ | 218,400 | 5,588 | 7,983 | 11,176 | |||||||||||||||||
|
RSUP(2)
|
01/16/07
|
— | — | — | 2,146 | 4,293 | 6,440 | |||||||||||||||||||||
|
Thomas
R. Sheets
|
MIP(1)
|
01/16/07
|
$ | 56,910 | $ | 81,300 | $ | 113,820 | 2,912 | 4,160 | 5,824 | |||||||||||||||||
|
RSUP(2)
|
01/16/07
|
— | — | — | 994 | 1,988 | 2,983 | |||||||||||||||||||||
|
Dudley
J. Sondeno
|
MIP(1)
|
01/16/07
|
$ | 56,070 | $ | 80,100 | $ | 112,140 | 2,869 | 4,099 | 5,738 | |||||||||||||||||
|
RSUP(2)
|
01/16/07
|
— | — | — | 979 | 1,959 | 2,939 | |||||||||||||||||||||
(1) Represents
the annual awards granted under the MIP for the 2007 fiscal year, 40% of which
is paid in cash and 60% of which is paid in performance shares. The
number of performance shares is determined by dividing the applicable
“Threshold,” “Target” and “Maximum” amounts by a share price that is determined
by the five-day average price of the Company’s common stock ending on January 8,
2008. For the 2007 MIP awards, this five-day average was
$29.312. The award amount under the MIP is based upon the Company
achieving a percentage of the target levels under the MIP, as described under
“Compensation Discussion and Analysis – Elements of Compensation –
Performance-Based Compensation.” “Threshold” represents achieving at
least 70% of all five of the established target levels under the MIP, and equals
70% of the named executive officer’s incentive opportunity under the MIP;
“target” represents achieving 100% of all five of the established target levels
under the MIP, and equals 100% of the named executive officer’s incentive
opportunity under the MIP; and “maximum” represents achieving 140% or more of
all five of the established target levels under the MIP, and equals 140% of the
named executive officer’s incentive opportunity under the MIP. If
less than all five of the target levels are achieved, then the “Threshold,”
“Target” and “Maximum” amounts will be proportionally reduced by an amount equal
to the percentage of targets that were achieved. The MIP awards vest
three years after grant. Since Messrs. Biehl, Kane, Sheets, and
Sondeno are over age 55 and are able to retire under the Incentive Plans, the
awards will fully vest at their termination of employment.
(2) Represents
the annual awards granted under the RSUP for the 2007 fiscal
year. The number of performance shares is determined by dividing the
applicable “Threshold,” “Target” and “Maximum” amounts by the closing share
price on the date of determination of the award. For the 2007 RSUP
awards, the date of determination was January 22, 2008 and the closing price for
the Company’s common stock on that date was $27.25. The award amount
under the RSUP is based upon the average MIP payout percentage for the three
years immediately preceding the RSUP award determination date, as described
under “Compensation Discussion and Analysis – Elements of Compensation –
Performance-Based Compensation.” “Threshold” represents a MIP average
payout percentage of at least 90%, and equals 50% of the named executive
officer’s incentive opportunity under the RSUP; “target” represents a MIP
average
payout
percentage of at least 100%, and equals 100% of the named executive officer’s
incentive opportunity under the RSUP; and “maximum” represents a MIP average
payout percentage of at least 120%, and equals 150% of the named executive
officer’s incentive opportunity under the RSUP. No award will be
earned under the RSUP unless the MIP average payout percentage is at least
90%. A percentage of the RSUP awards vest each year over the next
three years. Since Messrs. Biehl, Kane, Sheets, and Sondeno are over
age 55 and are able to retire under the Incentive Plans, the awards will fully
vest at their termination of employment.
APPENDIX
20
Performance-Based
Compensation.
. .
..
If annual
performance awards are earned and payable, payment of the awards will be subject
to a reduction depending upon satisfaction of the MIP participants’ individual
performance goals. Any reductions would be tied to an individual’s
overall award and not any one specific performance measure. The
committee reviews the PEO’s individual performance. The PEO, in turn,
will make a like determination for the other executive officers. For
2007/2008, individual performance goals for the PEO centered on (i) planning for
and making timely general rate cases filings in each service jurisdiction, (ii)
striving to control operating expenses to within the rate of inflation, (iii)
striving to improve the Company’s financial metrics in order to achieve higher
credit ratings, (iv) maintaining succession planning for each key executive
position, and (v) presenting strategic alternatives to the Board and pursuing
agreed to strategies.
The goals
of the other named executive officers are designed to reflect the individual
responsibilities and to compliment the goals of the PEO. Mr. Biehl’s
goals are centered on the Company’s financial planning activities, maintaining
regulatory compliance and striving to improve the Company’s credit
profile. Mr. Kane’s goals are directed to maintaining system safety,
controlling operating costs and achieving maximum profitability on new
growth. Mr. Sheet’s goals address identifying, monitoring and
mitigating risk and overseeing all legal matters affecting the Company and its
subsidiaries. Mr. Sondeno’s goals are directed to introducing new
technologies to promote the efficient use of natural gas and to pursue “green”
technologies that compliment the uses of natural gas.
The
individual performance goals for the PEO and other named executive officers
were satisfied and there were no reductions in their MIP awards for
2007.
Further,
the annual awards will be split, with 40% paid in cash (which are disclosed as
non-equity incentive plan compensation in the Summary Compensation Table) and
the remaining 60% converted into performance shares (which are disclosed as
stock awards in the Summary Compensation and Grants of Plan-Based Compensation
Tables Narrative) tied to a 5-day average value of our common stock for the
first five trading days in January. The performance shares are
restricted for three years and the ultimate payout in our common stock is
subject to continued employment during this restricted period.
APPENDIX
22
Post-Termination
Benefits. We have entered into employment agreements with our
senior officers, including each of the named executive officers, and change in
control agreements with our remaining officers. We offer employment
agreements to the Company’s senior officers to help ensure long-term employment
commitments. We believe that through our change in control provisions
we help further align the interests of our executives with those of our
shareholders. Providing change in control benefits is designed to
reduce the reluctance of management to pursue potential change in control
transactions that may be in the best interests of our shareholders, and helps
ensure stability during the protracted process of merging or acquiring a
regulated utility.
The
employment agreements provide compensation and benefit levels that are at or
below market levels, in comparison to industry and service companies identified
by Hewitt Associates with change in control arrangements, and are limited to
payment upon termination without cause or a significant reduction in an
officer’s duties, responsibilities, location, or compensation (collectively,
referred to as “Termination Event”). No compensation would be
provided for termination for cause, death, retirement or
disability. If a Termination Event occurs, compensation would
continue to be paid to the named executive officer, other than the PEO, for up
to eighteen months. Compensation for the PEO would continue for up to
three years. Compensation includes salary, a predetermined level of
incentive compensation and welfare benefits, re-employment/relocation expense,
office, and secretarial support expense. All unvested restricted
stock and any remaining stock option awards will vest and the options will
remain exercisable for 90 days after a Termination Event. Additional
credits will also be provided that may affect eligibility, vesting and
calculation of benefits under the SRP.
The
employment agreements also provide for a lump sum payment upon a Termination
Event occurring within two years following a change in control of the
Company. The committee believes that this double-trigger feature
provides appropriate incentives and job security for management while helping to
protect shareholder value in the event of a change in control of the
Company. The compensation payable officers, other than Messrs. Biehl,
Kane and Shaw, would equal two times their salary, incentive compensation and
other benefits. For Messrs. Biehl and Kane the compensation would
equal two and one-half times their compensation. The PEO would be
entitled to a payment equal to three times his total compensation if he incurs a
Termination Event within two years of a change in control.
The
change in control agreements for the remaining officers parallel the change in
control provisions of the employment agreements, and provide that such officers
would be entitled to an amount equal to two times their annual compensation as
defined above. A change in control event under both forms of
agreements is generally defined to include an acquisition by one person (or
group of persons) of at least 20% of the ownership of the Company, the
replacement of the majority of the members of the incumbent Board
of
Directors
(excluding replacement directors nominated by the incumbent Board), or mergers
and similar transactions which result in more than a 50% change in
ownership. Restricted stock awards and any remaining stock options
may vest and become immediately exercisable upon a change in control
event.
If any
payment under these agreements or plans would constitute a “parachute payment”
subject to any excise tax under the Code, the Company will pay the tax to ensure
that our executive officers will receive the full value of these
agreements.
These
agreements are for 24 months for each of the officers other than the PEO, whose
agreement is for 36 months. The length of the employment agreement
for the PEO is set at 36 months recognizing the importance of the position to
the Company on a continuous basis and to maintain the Company’s direction during
a change in control period. Annually, the agreements automatically
extend for successive one-year periods, unless canceled by the
Company.
APPENDIX
23
DIRECTORS
COMPENSATION
2007
DIRECTORS COMPENSATION TABLE
|
Name
|
Fees
Earned
or
Paid
in
Cash($)
|
Stock
Awards
($)(1)(2)
(3)
|
Option
Awards
($)(1)(3)
|
Change
in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
($)(4)
|
All
Other
Compensation
($)(5)
|
Total($)
|
||||||||||||||||||
|
Thomas
E. Chestnut
|
73,050 | 7,739 | 9,037 | 9,804 | 207 | 99,837 | ||||||||||||||||||
|
Stephen
C. Comer
|
54,750 | 7,739 | 0 | 3,468 | 190 | 66,147 | ||||||||||||||||||
|
Richard
M. Gardner
|
78,050 | 7,739 | 9,037 | 0 | 207 | 95,033 | ||||||||||||||||||
|
LeRoy C.
Hanneman, Jr.(6)
|
113,100 | 7,739 | 9,037 | 0 | 207 | 130,083 | ||||||||||||||||||
|
James
J. Kropid
|
71,400 | 19,347 | 9,037 | 26,950 | 207 | 126,941 | ||||||||||||||||||
|
Michael
O. Maffie
|
56,500 | 19,347 | 8,529 | 0 | 0 | 84,376 | ||||||||||||||||||
|
Anne
L. Mariucci
|
64,750 | 7,739 | 5,101 | 5,282 | 207 | 83,079 | ||||||||||||||||||
|
Michael
J. Melarkey
|
65,600 | 7,739 | 9,037 | 5,188 | 207 | 87,771 | ||||||||||||||||||
|
Carolyn
M. Sparks
|
66,400 | 19,347 | 9,037 | 39,540 | 207 | 134,531 | ||||||||||||||||||
|
Terrence
L. Wright
|
65,600 | 19,347 | 9,037 | 26,397 | 207 | 120,588 | ||||||||||||||||||
|
(1)
|
The
amounts in these columns for 2007 represent amounts recognized by the
Company during 2007 for restricted stock units granted in 2007 under the
RSUP and options granted in 2004, 2005, and 2006 under the Option Plan, in
each case, in accordance with SFAS No. 123R. No options
were granted in 2007. Options and restricted stock units vest
40% at the end of the first year and 30% at the end of years two and three
and costs are recognized in the same proportions. Grants under the Option
Plan and RSUP to retirement-eligible participants are expensed on the date
of grant.
|
|
(2)
|
The grant date fair value
of the restricted stock units granted in 2007 was based on the closing
price of $38.57 on the date of grant, January 16,
2007.
|
|
(3)
|
Stock
and option awards outstanding at year-end 2007, for each of the listed
directors are as follows:
|
|
Stock Awards
|
Options
|
|||
|
Mr.
Chestnut
|
513
|
9,000
|
||
|
Mr.
Comer
|
513
|
0
|
||
|
Mr.
Gardner
|
513
|
9,000
|
||
|
Mr.
Hanneman
|
513
|
9,000
|
||
|
Mr.
Kropid
|
513
|
23,000
|
||
|
Mr.
Maffie
|
513
|
6,000
|
||
|
Ms.
Mariucci
|
513
|
3,000
|
||
|
Mr.
Melarkey
|
513
|
9,000
|
||
|
Ms.
Sparks
|
513
|
21,000
|
||
|
Mr.
Wright
|
513
|
10,000
|
|
(4)
|
There
was no increase in pension values for 2007 for the participants in the
Directors Retirement Plan. The amounts in this column reflect
above-market interest on nonqualified deferred compensation earnings for
2007.
|
|
(5)
|
Since
Mr. Maffie retired from the Company, he does not receive life insurance
benefits for serving as a director.
|
|
(6)
|
Mr.
Hanneman resigned from the Board on March 14,
2008.
|
|
APPENDIX
D
|
||||||||||||||||||||||||
|
(REVISED)
|
||||||||||||||||||||||||
|
SOUTHWEST
GAS CORPORATION
|
||||||||||||||||||||||||
|
COMMON
STOCK ISSUANCES
|
||||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||
|
YEAR
TO DATE DECEMBER
|
||||||||||||||||||||||||
|
Common
Stock Issuances
|
2007
|
2006
|
2005
|
|||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||||||||
|
Equity
Shelf Program (ESP)
|
- | $ | - | 947 | $ | 28,290 | 1,013 | $ | 25,852 | |||||||||||||||
|
Stock
Option/Management Incentive Plans (SIP and MIP)
|
238 | 6,818 | 843 | 22,430 | 575 | 13,458 | ||||||||||||||||||
|
Employee
Investment Plan (EIP)
|
440 | 14,746 | 257 | 7,786 | 476 | 12,220 | ||||||||||||||||||
|
Dividend
Reinvestment and Stock Purchase Plan (DRSPP)
|
358 | 11,971 | 395 | 12,401 | 470 | 12,179 | ||||||||||||||||||
|
Net
increase in undistributed stock-based compensation
|
- | 1,605 | - | 2,118 | - | 739 | ||||||||||||||||||
|
Stock
issuance expenses
|
- | (43 | ) | - | (573 | ) | - | (312 | ) | |||||||||||||||
|
Total
common stock issuances
|
1,036 | $ | 35,097 | 2,442 | $ | 72,452 | 2,534 | $ | 64,136 | |||||||||||||||