Note 2 – Components of Net Periodic Benefit Cost

As of January 1, 2018, the Company and Southwest adopted “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The update requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations and be appropriately described. The update also allows only the service cost component (and not the other components of periodic benefit costs) to be eligible for capitalization when applicable, making no exception for specialized industries, including rate-regulatedindustries. This guidance is required to be applied on a retrospective basis for the presentation of the service cost component and the other components of net benefit cost and on a prospective basis for the capitalization of only the service cost component of net benefit cost. Amounts capitalized as part of assets prior to the date of adoption were not adjusted through a cumulative effect adjustment. The guidance allows a practical expedient for the retrospective application that permits use of the amounts disclosed for the various components of net benefit cost in the pension and other postretirement benefit plans footnote as the basis for the retrospective application. This is in lieu of determining how much of the various components of net benefit cost were actually reflected in the income statement each period as a result of capitalization of certain costs into assets and their subsequent amortization. The Company and Southwest have elected to utilize the practical expedient. Therefore, upon adoption, amounts presented in the Condensed Consolidated Statements of Income for operations and maintenance for the three-, six-, and twelve-month periods ended June 30, 2017 were reclassified. The Operations and maintenance line item of the Southwest Gas Holdings, Inc. Condensed Consolidated Statements of Income was revised from $103.1 million to $98.2 million for the three months ended June 30, 2017, from $212.2 million to $202.5 million for the six months ended June 30, 2017, and from $414.4 million to $394.8 million for the twelve months ended June 30, 2017. The Operations and maintenance line item of the Southwest Gas Corporation Condensed Consolidated Statements of Income was revised from $102.5 million to $97.6 million for the three months ended June 30, 2017, from $211.2 million to $201.5 million for the six months ended June 30, 2017, and from $413.4 million to $393.8 million for the twelve months ended June 30, 2017. The Other income (deductions) line item of the Southwest Gas Holdings, Inc. Condensed Consolidated Statements of Income was revised from $2.1 million to ($2.8) million for the three months ended June 30, 2017, from $5.9 million to ($3.8) million for the six months ended June 30, 2017, and from $11.2 million to ($8.4) million for the twelve months ended June 30, 2017. The Other income (deductions) line item of the Southwest Gas Corporation Condensed Consolidated Statements of Income was revised from $2.1 million to ($2.8) million for the three months ended June 30, 2017, from $5.7 million to ($4.0) million for the six months ended June 30, 2017, and from $9.8 million to ($9.8) million for the twelve months ended June 30, 2017. Net income overall was not impacted by this reclassification for either the Company or Southwest.

Southwest has a noncontributory qualified retirement plan with defined benefits covering substantially all employees and a separate unfunded supplemental retirement plan (“SERP”) which is limited to officers. Southwest also provides postretirement benefits other than pensions (“PBOP”) to its qualified retirees for health care, dental, and life insurance.

During the first quarter of 2018, qualifying term-vested participants were offered a lump-sum present value payout of their pensions. The offer was primarily intended to reduce insurance and ongoing maintenance costs associated with qualifying participant balances. About one-quarter of the approximate 385 eligible participants accepted the offer, resulting in an approximate $6.8 million payment from pension assets in July 2018. The lump sum payout will have no impact on net periodic benefit cost or pension funding requirements during 2018.

The service cost component of net periodic benefit costs included in the table below are components of an overhead loading process associated with the cost of labor (refer to discussion above related to the update to Topic 715). The overhead process ultimately results in allocation of that portion of overall net periodic benefit costs to the same accounts to which productive labor is charged. As a result, service costs become components of various accounts, primarily operations and maintenance expense, net utility plant, and deferred charges and other assets for both the Company and Southwest. Refer also to the practical expedient elected related to amounts capitalized as part of assets prior to the adoption date.


	Qualified Retirement Plan
	Period Ended June 30,
	Three Months						Six Months						Twelve Months
	2018			2017			2018			2017			2018			2017
(Thousands of dollars)
Service cost	$	7,139		$	5,848		$	14,278		$	11,696		$	25,974		$	23,112
Interest cost		11,044			11,521			22,087			23,041			45,129			46,055
Expected return on plan assets		(14,688	)		(13,799	)		(29,377	)		(27,598	)		(56,975	)		(55,877	)
Amortization of net actuarial loss		8,028			6,001			16,057			12,002			28,059			24,635

Net periodic benefit cost	$	11,523		$	9,571		$	23,045		$	19,141		$	42,187		$	37,925


	SERP
	Period Ended June 30,
	Three Months						Six Months						Twelve Months
	2018			2017			2018			2017			2018			2017
(Thousands of dollars)
Service cost	$	61		$	77		$	122		$	155		$	276		$	321
Interest cost		414			471			829			942			1,770			1,871
Amortization of net actuarial loss		376			360			751			720			1,472			1,411

Net periodic benefit cost	$	851		$	908		$	1,702		$	1,817		$	3,518		$	3,603


	PBOP
	Period Ended June 30,
	Three Months						Six Months						Twelve Months
	2018			2017			2018			2017			2018			2017
(Thousands of dollars)
Service cost	$	369		$	367		$	737		$	734		$	1,471		$	1,484
Interest cost		687			808			1,374			1,616			2,990			3,205
Expected return on plan assets		(930	)		(839	)		(1,860	)		(1,679	)		(3,539	)		(3,253	)
Amortization of prior service costs		334			334			668			668			1,335			1,335
Amortization of net actuarial loss		—			—			—			—			—			209

Net periodic benefit cost	$	460		$	670		$	919		$	1,339		$	2,257		$	2,980