Page 64 - SWGas Annual Report 2015

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, the Company 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, if any, are generally made in increments of
25 basis points.

Due to a higher interest rate environment for high-quality fixed income investments, the Company increased the
discount rate at December 31, 2015 from 2014. The methodology utilized to determine the discount rate was
consistent with prior years. The weighted-average rate of compensation increase was also raised (consistent with
management’s expectations overall). The asset return assumption (which impacts the following year’s expense)
was lowered. The rates are presented in the table below:

December 31, 2015 December 31, 2014

Discount rate 4.50% 4.25%
Weighted-average rate of
3.25% 2.75%
compensation increase 7.25% 7.75%
Asset return assumption

Pension expense for 2016 is estimated to decrease by $6.7 million compared to 2015 notably due to the higher
discount rate and lower mortality projection. Future years expense level movements (up or down) will continue to
be greatly influenced by long-term interest rates, asset returns, and funding levels.

Southwest Gas Corporation