Southwest Gas CEO to get $16.6 million after merger

David Strow

Friday, July 2, 1999 | 11:28 a.m.

Leaving Southwest Gas Corp. after its merger with ONEOK Inc. wasn't Chief Executive Michael Maffie's idea. But he will be handsomely compensated for his exit from the Las Vegas company he's run since 1993.

Maffie will receive at least $16.6 million in compensation over the next five years if the merger is completed, nearly triple the amount of severance for all other Southwest executives combined. The 51-year-old Maffie's compensation package includes $642,000 a year for life in retirement benefits.

George Biehl, Southwest's chief financial officer, will remain with the company, but will still receive $3.61 million -- $1.12 million in compensation for a "change in duties," and $2.49 million from stock and options.

Biehl will become vice president of finance and administration of ONEOK's Southwest division, comprised of the former Southwest Gas, at a minimum annual salary of $232,000 a year. If he leaves the company, Biehl will receive a parachute payment of at least $1.25 million, and will be eligible for retirement payments of $135,000 per year.

The retirement plans are standard for top Southwest executives leaving the company, Southwest indicated, and represent the highest annual pay received by that executive during his or her employment with the company. Maffie became eligible for the plan in 1986, while Biehl became eligible in 1989.

The "parachute" payments were disclosed in Southwest's merger proxy statement, filed Wednesday with the Securities and Exchange Commission. Southwest's shareholders are scheduled to vote on the proposed merger with ONEOK on Aug. 10 in Las Vegas. Maffie is expected to leave in the fourth quarter, when the deal is expected to close, and he is the only top executive whose departure was noted in the proxy.

On Nov. 16, when the Southwest board met to consider ONEOK's offer, Maffie told the board "that ONEOK had asked that he resign on the effective date of the proposed merger." The proxy indicated that Maffie had off-and-on talks with ONEOK executives regarding a merger starting in February 1997, but that these early talks broke off in May 1998.

No further information was provided.

Maffie's parachute consists of an immediate severance payment of $3.23 million, equal to 210 percent of his current base pay for three years, moving expenses, office space and secretarial services.

Upon his termination, he will begin a five-year, $3 million consulting contract with ONEOK, which calls for him to "provid(e) support and cooperat(e) with ONEOK in public matters and regulatory matters, and assisting and advising ONEOK on the business and affairs of ONEOK." As part of the agreement, Maffie is barred from joining another natural gas company in Nevada or Arizona without ONEOK's consent.

Maffie's stock and options will vest immediately upon the closure of the merger, resulting in a payment of $7.17 million. He will be eligible to immediately begin drawing retirement pay upon his departure.

Maffie and Biehl aren't the only beneficiaries. Southwest disclosed that Edward Zub, senior vice president of regulation and pricing, is eligible for $930,000 in parachute payments; James Lowman, senior vice president of the Arizona division, $701,000; and Dudley Sondeno, senior vice president and chief technology officer, $694,000. The proxy didn't indicate if any of the three were leaving the company; the parachutes only kick in if the executives depart within two years.

But because of stock and options vesting, Zub will receive $2.06 million; Lowman, $1.43 million; and Sondeno, $1.85 million.

All outside directors will receive a cash payment of $85,125, and will be eligible to receive annual benefits of $24,000 for life. Only three of Southwest's 11 directors will join ONEOK's board; those directors haven't been specified.

In total, Southwest's executives are eligible for $12.45 million in parachute payments. That total does not include retirement benefits or gains from stock and options vesting.

It is unlikely Southwest's top executives were swayed toward ONEOK because of the parachutes, as ONEOK rival Southern Union Co. has offered to match all severance packages. ONEOK is offering $1.8 billion for Southwest, including $920 million in cash.

Zach Wagner, an analyst who covers Southwest Gas for Edward Jones & Co. in St. Louis, believes the payments are fair, given Maffie's performance.

"I don't find it that unusual," Wagner said. "It needs to be compared with the value he created for shareholders over his term as chief executive."

Maffie took over as CEO in 1993. From June 1993 to June 1999, Southwest recorded a return of 117.9 percent, including dividends, Wagner said. That compares to a 64.6 percent return for similar natural gas companies.

Most of that boost was the direct result of the bidding war for Southwest. At the end of 1997 -- the year before the ONEOK merger was announced -- Southwest's return was 41 percent since 1993, according to the company's proxy. By comparison, Southwest's peer group had a return over those four years of 85.2 percent.

A critic of high executive pay called the Southwest parachutes "excessive."

"You have executives who are well-compensated over time leaving with these large sums of money while lower paid workers have uncertainty," said Scott Klinger, co-director of Responsible Wealth of Boston.

ONEOK's offer of $30 per share represents a 54 percent premium over the closing price of Southwest on Sept. 15, 1998, the date Southwest began serious merger talks with ONEOK.

The parachutes are far from the largest ever seen in Las Vegas. When Starwood Hotels & Resorts Inc. took over ITT Corp. in 1998, the top four executives at that company negotiated a total of $68 million in severance packages. That takeover, which included Caesars Palace and its sister casinos, was valued at $13.3 billion.