<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 1-7850
SOUTHWEST GAS CORPORATION
(Exact name of registrant as specified in its charter)
California 88-0085720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5241 Spring Mountain Road
Post Office Box 98510
Las Vegas, Nevada 89193-8510
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 876-7237
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, $1 Par Value, 21,170,984 shares as of November 4, 1994
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<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein have been
prepared by Southwest Gas Corporation (the Company), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, all adjustments, consisting of normal recurring items
necessary for a fair presentation of the results for the interim periods, have
been made. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Company's 1993 Annual Report on Form 10-K, and 1994
quarterly reports on Form 10-Q.<PAGE>
<PAGE> 3
<TABLE>
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Thousands of dollars)
(Unaudited)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- -------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 115,208 $ 121,342
Debt securities available for sale (at fair value) 566,491 595,726
Debt securities held to maturity (fair value of $72,713 and $68,738) 74,730 69,660
Loans receivable, net of allowance for estimated losses of
$16,995 and $16,251 900,849 817,279
Loans receivable held for sale (fair value of $1,879 and $22,019) 1,868 20,051
Receivables, less reserves for uncollectibles 39,545 98,265
Gas utility property, net of accumulated depreciation 1,007,249 954,488
Real estate held for sale or development, net of allowance
for estimated losses of $906 and $935 292 4,088
Real estate acquired through foreclosure 8,053 9,707
Other property, net of accumulated depreciation 35,910 36,495
Excess of cost over net assets acquired 66,605 69,501
Other assets 138,656 147,347
------------- -------------
$ 2,955,456 $ 2,943,949
============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
Deposits $ 1,251,550 $ 1,207,852
Securities sold under agreements to repurchase 225,480 259,041
Deferred income taxes and tax credits, net 136,991 151,558
Accounts payable and other accrued liabilities 197,069 194,697
Notes payable 87,000 86,000
Long-term debt, including current maturities 726,010 692,865
------------- -------------
2,624,100 2,592,013
------------- -------------
Preferred and preference stocks, including current maturities 8,058 8,058
------------- -------------
Common stock
Authorized - 30,000,000 shares; issued and
outstanding - 21,128,654 shares and 20,997,319 shares 22,759 22,627
Additional paid-in capital 276,577 274,410
Capital stock expense (5,685) (5,685)
Unrealized gain (loss), net of tax, on debt securities available for sale (2,714) 8,761
Retained earnings 32,361 43,765
------------- -------------
323,298 343,878
------------- -------------
$ 2,955,456 $ 2,943,949
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.<PAGE>
<PAGE> 4
<TABLE>
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------ ------------------
1994 1993 1994 1993 1994 1993
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues:
Gas operating revenues $ 92,245 $ 84,291 $408,021 $367,046 $580,080 $534,018
Financial services interest income 29,894 31,881 87,063 102,854 116,534 138,252
Other 2,156 10,072 8,543 14,876 12,078 20,823
-------- -------- -------- -------- -------- --------
124,295 126,244 503,627 484,776 708,692 693,093
-------- -------- -------- -------- -------- --------
Operating expenses:
Net cost of gas purchased 34,411 29,765 179,846 156,202 235,934 213,087
Financial services interest expense, net 14,867 17,267 43,116 60,413 57,779 83,041
Operating expense 43,006 42,012 125,988 123,870 167,268 165,523
Maintenance expense 8,125 6,928 22,188 20,936 29,588 27,941
Provision for estimated credit losses 1,498 2,782 5,254 5,540 6,936 9,836
Depreciation, depletion and amortization 16,191 16,103 48,593 47,846 64,330 63,805
Taxes other than income taxes 6,314 6,067 19,055 18,491 25,324 24,099
Other 4,582 5,577 13,159 21,198 17,806 25,767
-------- -------- -------- -------- -------- --------
128,994 126,501 457,199 454,496 604,965 613,099
-------- -------- -------- -------- -------- --------
Operating income (loss) (4,699) (257) 46,428 30,280 103,727 79,994
-------- -------- -------- -------- -------- --------
Other income and (expenses):
Net interest deductions (14,677) (12,337) (42,087) (36,556) (55,238) (48,752)
Other income (deductions), net 386 (242) (994) (140) (15,105) (1,326)
-------- -------- -------- -------- -------- --------
(14,291) (12,579) (43,081) (36,696) (70,343) (50,078)
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes (18,990) (12,836) 3,347 (6,416) 33,384 29,916
Income tax expense (benefit) (7,825) (5,492) 1,583 (81) 12,923 11,556
-------- -------- -------- -------- -------- --------
Net income (loss) before cumulative effect of accounting change (11,165) (7,344) 1,764 (6,335) 20,461 18,360
Cumulative effect of change in method of accounting -- -- -- 3,045 -- 3,045
-------- -------- -------- -------- -------- --------
Net income (loss) (11,165) (7,344) 1,764 (3,290) 20,461 21,405
Preferred/preference stock dividend requirements 138 194 415 603 554 849
-------- -------- -------- -------- -------- --------
Net income (loss) applicable to common stock $(11,303) $ (7,538) $ 1,349 $ (3,893) $ 19,907 $ 20,556
======== ======== ======== ======== ======== ========
Earnings (loss) per share before cumulative effect of
accounting change $ (0.54) $ (0.37) $ 0.06 $ (0.34) $ 0.95 $ 0.85
Earnings per share from cumulative effect of change in method of
accounting -- -- -- 0.15 -- 0.15
-------- -------- -------- -------- -------- --------
Earnings (loss) per share of common stock $ (0.54) $ (0.37) $ 0.06 $ (0.19) $ 0.95 $ 1.00
======== ======== ======== ======== ======== ========
Dividends paid per share of common stock $ 0.205 $ 0.195 $ 0.595 $ 0.545 $ 0.79 $ 0.72
======== ======== ======== ======== ======== ========
Average number of common shares outstanding 21,067 20,769 21,040 20,667 21,008 20,649
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.<PAGE>
<PAGE> 5
<TABLE>
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
<CAPTION>
NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,764 $ (3,290) $ 20,461 $ 21,405
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization 48,593 47,846 64,330 63,805
Change in unrecovered purchased gas costs 11,000 (9,321) (13,250) (23,250)
Change in deferred income taxes (14,568) 23,501 (10,868) 20,331
Change in deferred charges and credits 7,929 (6,639) 12,013 (9,365)
Change in provision for estimated losses 5,254 5,540 6,936 9,836
Change in noncash working capital 42,794 17,793 28,502 18,772
Loss on sale of Arizona assets and services -- 6,800 (538) 6,800
Cumulative effect of change in method of
accounting for income taxes -- (3,045) -- (3,045)
Other 1,112 (7,893) 14,491 (9,804)
---------- ---------- ---------- ----------
Net cash provided by operating activities 103,878 71,292 122,077 95,485
---------- ---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Construction expenditures (99,873) (78,651) (136,645) (122,039)
Purchases of debt securities (205,351) (67,190) (251,239) (193,685)
Proceeds from sale of debt securities 5,074 355,755 10,172 370,679
Maturities and repayment of debt securities 226,961 209,481 311,268 287,542
Loan originations, net of repayments (113,370) (139,100) (160,879) (205,446)
Sales of loans and loan servicing rights 40,786 56,034 63,105 90,944
Proceeds from sales of real estate held for development 4,122 650 5,398 2,774
Proceeds from sales of real estate acquired through foreclosure 3,713 10,563 16,066 16,904
Acquisition of real estate held for development (378) (2,776) (813) (3,606)
Proceeds from sale of Arizona assets and services -- 6,718 -- 6,718
Other (4,659) (549) (6,520) (1,264)
---------- ---------- ---------- ----------
Net cash provided by (used in) investing activities (142,975) 350,935 (150,087) 249,521
---------- ---------- ---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) repurchase
agreements and other borrowings (33,561) (71,418) (79,961) 3,882
Change in deposit accounts 43,698 (102,656) 53,539 (126,751)
Issuance of long-term debt 36,400 70,000 53,309 77,451
Retirement of long-term debt (3,255) (48,644) (3,178) (69,891)
Issuance of notes payable 1,000 41,000 26,000 56,000
Dividends paid (12,932) (11,867) (17,204) (15,738)
Sale and assumption of Arizona deposit liabilities -- (320,902) -- (320,902)
Issuance of common stock 2,299 4,356 4,734 4,356
Other (686) (1,708) (7,050) (7,965)
---------- ---------- ---------- ----------
Net cash provided by (used in) financing activities 32,963 (441,839) 30,189 (399,558)
---------- ---------- ---------- ----------
Net change in cash and cash equivalents (6,134) (19,612) 2,179 (54,552)
Balance at beginning of period 121,342 132,641 113,029 167,581
---------- ---------- ---------- ----------
Balance at end of period $ 115,208 $ 113,029 $ 115,208 $ 113,029
========== ========== ========== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest, net of amounts capitalized $ 54,071 $ 54,579 $ 66,377 $ 66,006
Income taxes, net of refunds 2,425 16,121 (2,713) 5,032
</TABLE>
The accompanying notes are an integral part of these statements.<PAGE>
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summarized Consolidated Financial Statement Data
Summarized consolidated financial statement data for PriMerit Bank is presented
below:
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Thousands of dollars)
(Unaudited)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 46,188 $ 55,712
Cash equivalents 65,095 63,503
Debt securities available for sale (at fair value) 566,491 595,726
Debt securities held to maturity (fair value of $72,713 and $68,738) 74,730 69,660
Loans receivable, net of allowance for estimated credit losses
of $16,995 and $16,251 900,849 817,279
Loans receivable held for sale (fair value of $1,879 and $22,019) 1,868 20,051
Real estate held for sale or development, net of allowance for
estimated losses of $906 and $935 292 4,088
Real estate acquired through foreclosure 8,053 9,707
Excess of cost over net assets acquired 66,605 69,501
FHLB stock, at cost 17,055 16,501
Other assets 36,089 29,691
------------- -------------
$ 1,783,315 $ 1,751,419
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits $ 1,251,550 $ 1,207,852
Securities sold under agreements to repurchase 225,480 259,041
Advances from FHLB 74,400 71,000
Notes payable 8,200 8,265
Other liabilities 51,875 28,318
------------- -------------
1,611,505 1,574,476
Stockholder's equity 171,810 176,943
------------- -------------
$ 1,783,315 $ 1,751,419
============= =============
/TABLE
<PAGE>
<PAGE> 7
Note 1 - Summarized Consolidated Financial Statement Data (Continued)
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands of dollars)
(Unaudited)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------ ------------------
1994 1993 1994 1993 1994 1993
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 29,894 $ 31,881 $ 87,063 $102,854 $116,534 $138,252
Interest expense 14,867 17,267 43,116 60,413 57,779 83,041
-------- -------- -------- -------- -------- --------
Net interest income 15,027 14,614 43,947 42,441 58,755 55,211
Provision for estimated credit losses (1,493) (2,742) (5,202) (5,045) (6,369) (7,326)
-------- -------- -------- -------- -------- --------
Net interest income after provision for credit losses 13,534 11,872 38,745 37,396 52,386 47,885
-------- -------- -------- -------- -------- --------
Income from real estate operations (103) 97 54 183 (29) 360
Provision for estimated real estate losses (5) (40) (52) (495) (567) (2,510)
-------- -------- -------- -------- -------- --------
Net income (loss) from real estate operations (108) 57 2 (312) (596) (2,150)
Gain on sale of loans 179 538 543 1,521 857 2,144
Loss on sale of loans (20) (4) (289) (49) (324) (207)
Net gain on sale of debt securities 1 7,501 34 7,873 134 8,451
Gain on sale of mortgage loan servicing -- -- -- -- -- 1,930
Gain (loss) on secondary marketing hedging activity (6) (226) 316 (980) 328 (945)
Loan related fees 133 257 799 892 932 1,374
Deposit related fees 1,923 1,682 5,154 4,696 6,855 6,075
Gain on sale of credit cards -- -- 1,690 -- 1,690 --
Gain (loss) on sale - Arizona branches -- (640) -- (6,800) 538 (6,800)
Other income 49 227 242 740 1,635 1,641
-------- -------- -------- -------- -------- --------
15,685 21,264 47,236 44,977 64,435 59,398
General and administrative expenses 11,116 12,020 32,877 36,195 44,978 48,499
Amortization of cost in excess of net assets acquired 965 966 2,896 3,019 3,861 4,058
-------- -------- -------- -------- -------- --------
Income before income taxes 3,604 8,278 11,463 5,763 15,596 6,841
Income tax expense 1,627 2,937 5,121 4,530 6,936 5,082
-------- -------- -------- -------- -------- --------
Net income before cumulative effect of accounting change 1,977 5,341 6,342 1,233 8,660 1,759
Cumulative effect of change in method of accounting -- -- -- 3,045 -- 3,045
-------- -------- -------- -------- -------- --------
Net income $ 1,977 $ 5,341 $ 6,342 $ 4,278 $ 8,660 $ 4,804
======== ======== ======== ======== ======== ========
Contribution to consolidated net income (loss) (a) $ 746 $ 4,101 $ 2,676 $ 569 $ 3,763 $ (153)
======== ======== ======== ======== ======== ========
</TABLE>
(a) Includes after-tax allocation of costs from parent.<PAGE>
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company is comprised of two business segments; natural gas operations and
financial services. The gas segment purchases, transports and distributes
natural gas to residential, commercial and industrial customers in
geographically diverse portions of Arizona, Nevada and California. The
financial services segment consists of PriMerit Bank (the Bank), a wholly
owned subsidiary, which is engaged in retail and commercial banking. The
Bank's principal business is to attract deposits from the general public and
make consumer and commercial loans secured by real estate and other
collateral. For the twelve months ended September 30, 1994, the natural gas
operations segment contributed $16.7 million and the financial services
segment contributed $3.8 million, resulting in consolidated net income of
$20.5 million.
CONSOLIDATED CAPITAL RESOURCES AND LIQUIDITY
The capital requirements and resources of the Company generally are
determined independently for the natural gas operations and financial
services segments. Each segment is generally responsible for securing its
own financing sources.
The Company's unsecured debt is rated Ba1 by Moody's Investors Service, BBB-
by Standard and Poor's Ratings Group, and BB+ by Duff and Phelps Credit
Rating Company.
See separate discussions of the capital resources and liquidity for each
segment.
RESULTS OF CONSOLIDATED OPERATIONS
Quarterly Analysis
- ------------------
Contribution to Consolidated Net Loss
Three Months Ended September 30,
-------------------------------------
(Thousands of dollars)
1994 1993
---------- ----------
Natural gas operations segment $ (11,911) $ (11,445)
Financial services segment 746 4,101
---------- ----------
Consolidated net loss $ (11,165) $ (7,344)
========== ==========
See separate discussions of each business segment for an analysis of these
changes.
Nine-Month Analysis
- -------------------
Contribution to Consolidated Net Income (Loss)
Nine Months Ended September 30,
-------------------------------------
(Thousands of dollars)
1994 1993
---------- ----------
Natural gas operations segment $ (912) $ (3,859)
Financial services segment 2,676 (2,476)
Financial services segment cumulative
effect of accounting change -- 3,045
---------- ----------
Consolidated net income (loss) $ 1,764 $ (3,290)
========== ==========
See separate discussions of each business segment for an analysis of these
changes.<PAGE>
<PAGE> 9
Twelve-Month Analysis
- ---------------------
Contribution to Consolidated Net Income
Twelve Months Ended September 30,
-------------------------------------
(Thousands of dollars)
1994 1993
---------- ----------
Natural gas operations segment $ 16,698 $ 21,558
Financial services segment 3,763 (3,198)
Financial services segment cumulative
effect of accounting change -- 3,045
---------- ----------
Consolidated net income $ 20,461 $ 21,405
========== ==========
See separate discussions of each business segment for an analysis of these
changes.
NATURAL GAS OPERATIONS SEGMENT
The Company is engaged in the business of purchasing, transporting, and
distributing natural gas in portions of Arizona, Nevada and California. Its
several service areas are geographically as well as economically diverse.
The Company is the largest distributor in Arizona, selling and transporting
gas in most of southern, central, and northwestern Arizona. The Company is
the largest distributor and transporter of natural gas in Nevada. The
Company also distributes and transports gas in portions of California,
including the Lake Tahoe area and high desert and mountain areas in San
Bernardino County.
The Company purchases, transports and distributes natural gas to
approximately 950,000 residential, commercial and industrial customers within
its three state service territory, of which 60 percent were in Arizona,
29 percent were in Nevada, and 11 percent were in California. During the
twelve months ended September 30, 1994, the Company earned 56 percent of
operating margin from residential customers, 22 percent from commercial
customers, and 22 percent from industrial and other customers. During this
same period, the Company earned 57 percent of operating margin in Arizona,
32 percent in Nevada and 11 percent in California. This pattern is
consistent with prior years and is expected to continue.
For the twelve months ended September 30, 1994, the Company's natural gas
construction expenditures totaled $134 million, a 13 percent increase when
compared to $119 million of additions for the same period ended a year ago.
The increase is primarily attributable to the investment in new distribution
plant in Arizona and southern Nevada to meet the demand from the Company's
growing customer base.
CAPITAL RESOURCES AND LIQUIDITY
The Company currently estimates that gas segment construction expenditures
will be approximately $410 million for the period 1995 through 1997, and
approximately $40 million during the fourth quarter of 1994. Debt maturities
and repayments, and other cash requirements, are expected to approximate
$180 million during 1995 through 1997. Included in debt maturities are two
term loan facilities totaling $165 million which mature in April 1995. The
Company anticipates that these loans will be refinanced with comparable terms
and conditions. Exclusive of the term loan facilities, it is currently
estimated that cash flows from operating activities (net of dividends) will
generate approximately one-half of the gas segment's total financing
requirements during 1995 through 1997. A portion of the financing
requirements will be provided by $88 million of industrial development
revenue bond (IDRB) funds held in trust from the 1993 Series A issues. The
remaining requirements, including debt refinancings, are expected to be
provided by external financing sources. The timing, types, and amounts of
these additional external financings will be dependent on a number of
factors, including conditions in the capital markets, timing and amounts of
rate relief, and growth factors in the Company's service areas. These
external financings may include the issuance of both debt and equity<PAGE>
<PAGE> 10
securities, bank and other short-term borrowings, and other forms of
financing. In September 1994, the Company filed a shelf registration
statement with the Securities and Exchange Commission. The shelf
registration allows the Company to offer from time to time, in one or more
series, its unsecured debt securities, shares of preferred stock, $50 par
value, and shares of its common stock, $1 par value. These securities will
have a maximum aggregate offering price of $300 million and will be offered
on terms to be determined at the time of the sale.
RESULTS OF NATURAL GAS OPERATIONS
Quarterly Analysis
- ------------------
Three Months Ended
September 30,
---------------------------
(Thousands of dollars)
1994 1993
---------- ----------
Gas operating revenues $ 92,245 $ 84,291
Net cost of gas 34,411 29,765
---------- ----------
Operating margin 57,834 54,526
Operations and maintenance expense 45,624 43,083
Depreciation and amortization 14,293 14,058
Taxes other than income taxes 6,220 5,919
---------- ----------
Operating loss (8,303) (8,534)
Other income (expense), net 386 (242)
---------- ----------
Loss before interest and income taxes (7,917) (8,776)
Net interest deductions 14,677 12,337
Income tax expense (benefit) (9,452) (8,428)
---------- ----------
Net loss before allocation to the Bank (13,142) (12,685)
Costs allocated to the Bank, net of tax 1,231 1,240
---------- ----------
Contribution to consolidated net loss $ (11,911) $ (11,445)
========== ==========
Contribution to consolidated net loss increased $466,000 compared to the
third quarter of 1993. This was the result of increased operations and
maintenance expense, depreciation expense and net interest deductions,
partially offset by increased operating margin.
Operating margin increased $3.3 million, or six percent, when compared to the
same period ended a year ago. The increase is attributed to customer growth
in all service areas and rate relief in the Arizona and California rate
jurisdictions.
Operations and maintenance expenses increased $2.5 million, or six percent,
reflecting general cost increases in labor and additional costs associated
with meeting the needs of the Company's growing customer base.
Depreciation expense and taxes other than income taxes increased $536,000, or
three percent, primarily due to an increase in average gas plant in service
of $75 million, or six percent, compared to the third quarter of 1993. This
increase reflects ongoing capital expenditures for the upgrade of existing
operating facilities and the expansion of the system to accommodate continued
customer growth.
Net interest deductions increased $2.3 million, or 19 percent, over the prior
period. Average debt outstanding during the current quarter increased
13 percent compared to the third quarter of 1993, and consisted of a
$42 million increase in average long-term debt, net of funds held in trust, and
a $39 million increase in average short-term debt. The increase in debt is
attributed primarily to borrowings for construction expenditures, including
the drawdown of a portion of IDRB funds previously held in trust. Higher<PAGE>
<PAGE> 11
interest rates, on the variable-rate term loan facilities and short-term
debt, accounted for nearly $1 million of the increase in net interest
deductions.
Nine-Month Analysis
- -------------------
Nine Months Ended
September 30,
---------------------------
(Thousands of dollars)
1994 1993
---------- ----------
Gas operating revenues $ 408,021 $ 367,046
Net cost of gas 179,846 156,202
---------- ----------
Operating margin 228,175 210,844
Operations and maintenance expense 131,732 126,939
Depreciation and amortization 42,722 41,370
Taxes other than income taxes 18,756 18,018
---------- ----------
Operating income 34,965 24,517
Other income (expense), net (994) (140)
---------- ----------
Income before interest and income taxes 33,971 24,377
Net interest deductions 42,087 36,556
Income tax expense (benefit) (3,538) (4,611)
---------- ----------
Net loss before allocation to the Bank (4,578) (7,568)
Costs allocated to the Bank, net of tax 3,666 3,709
---------- ----------
Contribution to consolidated net income (loss) $ (912) $ (3,859)
========== ==========
Contribution to consolidated net income increased $2.9 million, compared to
the nine months ended September 1993. This was the result of increased
operating margin partially offset by increased operations and maintenance
expense, depreciation expense, taxes other than income taxes, and net
interest deductions.
Operating margin increased $17.3 million, or eight percent, compared to the
nine months ended September 1993. The increase in operating margin is
attributed to rate relief, in the Arizona, California, and federal rate
jurisdictions, and strong customer growth, particularly in Arizona and
southern Nevada.
Operations and maintenance expenses increased $4.8 million, or four percent,
reflecting general cost increases in labor and additional costs associated
with meeting the needs of the Company's growing customer base.
Depreciation expense and taxes other than income taxes increased
$2.1 million, or four percent, primarily due to an increase in average gas
plant in service of $78 million, or six percent. This increase reflects
capital expenditures for the upgrade of existing operating facilities and the
expansion of the system to accommodate continued customer growth within the
Company's various service areas.
Net interest deductions increased $5.5 million, or 15 percent, over the prior
period. Average debt outstanding during the current period increased 12 percent
compared to the corresponding period in 1993, and consisted of a $34 million
increase in average long-term debt, net of funds held in trust, and a
$42 million increase in average short-term debt. The increase in debt is
attributed primarily to borrowings for construction expenditures, including the
drawdown of a portion of IDRB funds previously held in trust. Higher interest
rates, on the variable-rate term loan facilities and short-term debt, accounted
for approximately $1.2 million of the increase in net interest deductions.<PAGE>
<PAGE> 12
Twelve-Month Analysis
- ---------------------
Twelve Months Ended
September 30,
---------------------------
(Thousands of dollars)
1994 1993
---------- ----------
Gas operating revenues $ 580,080 $ 534,018
Net cost of gas 235,934 213,087
---------- ----------
Operating margin 344,146 320,931
Operations and maintenance expense 174,715 169,605
Depreciation and amortization 56,439 54,696
Taxes other than income taxes 24,862 23,476
---------- ----------
Operating income 88,130 73,154
Other income (expense), net (15,105) (1,326)
---------- ----------
Income before interest and income taxes 73,025 71,828
Net interest deductions 55,238 48,752
Income tax expense 5,986 6,475
---------- ----------
Net income before allocation to the Bank 11,801 16,601
Costs allocated to the Bank, net of tax 4,897 4,957
---------- ----------
Contribution to consolidated net income $ 16,698 $ 21,558
========== ==========
Contribution to consolidated net income decreased $4.9 million, or 23 percent,
compared to the twelve months ended September 1993. The recognition of the
Arizona pipe replacement program disallowances caused the decrease in
contribution.
Operating margin increased $23.2 million, or seven percent, compared to the
twelve months ended September 1993. This increase was due to continued
customer growth in the Company's service areas, increased revenue from
transportation customers, and rate relief in the Company's Arizona,
California, and federal rate jurisdictions, partially offset by warmer
weather.
Operations and maintenance expenses increased $5.1 million, or three percent,
resulting primarily from general cost increases in labor and materials over
the same period ended a year ago. These increases are the direct result of
higher costs to provide service to the Company's growing customer base.
Depreciation expense and taxes other than income taxes increased
$3.1 million, or four percent, primarily due to an increase in average gas
plant in service of $86 million, or seven percent. This increase reflects
the upgrade of existing operating facilities and the expansion of the system
to accommodate continued customer growth.
Other expenses increased $13.8 million during the twelve months ended
September 1994, principally the result of regulatory mandates to write off
gross plant related to the central and southern Arizona pipe replacement
programs. In December 1993, the Company wrote off $15.9 million of gross
plant related to the pipe replacement programs. The impact of these
disallowances, net of accumulated depreciation, tax benefits and other
related items, was a noncash reduction to net income of $9.3 million. See
Note 17 of the Notes to Consolidated Financial Statements of the 1993 Form
10-K for further discussion. In June 1994, the Company recorded an
additional write-off relating to the southern Arizona settlement as discussed
in Rates and Regulatory Proceedings--Arizona.
Net interest deductions increased $6.5 million, or 13 percent, over the prior
period. Average debt outstanding during the current period increased 13 percent
compared to the corresponding period in 1993, and consisted of a $32 million
increase in average long-term debt, net of funds held in trust, and a
$49 million increase in average short-term debt. The increase in debt<PAGE>
<PAGE> 13
is attributed primarily to borrowings for construction expenditures,
including the drawdown of a portion of IDRB funds previously held in trust.
RATES AND REGULATORY PROCEEDINGS
California
Effective January 1, 1994, the Company received approval of an attrition
allowance to increase annual margin by $1.5 million in its southern and
northern California rate jurisdictions. Pursuant to the California Public
Utilities Commission rate case processing plan, the Company filed a general
rate application in January 1994 to increase annual margin by $1.1 million
effective January 1995 for its southern and northern California rate
jurisdictions. A final order is expected in December 1994.
Nevada
In March 1993, the Company filed general rate cases with the Public Service
Commission of Nevada (PSCN) seeking approval to increase revenues for its
southern and northern Nevada rate jurisdictions. The PSCN issued its rate
order in October 1993 and ordered the Company to reduce general rates by
$648,000 in southern Nevada and authorized a $799,000 increase in northern
Nevada. The Company filed a motion for reconsideration and rehearing on
several issues following the issuance of the rate order. In January 1994,
the PSCN granted the rehearing of certain rate case issues. Hearings
commenced in July 1994. A final order is expected in the fourth quarter of
1994. The resolution of these issues is not expected to have a material
effect on the Company's results of operations.
Arizona
In October 1993, the Company filed a rate application with the Arizona
Corporation Commission (ACC) seeking approval to increase annual revenues by
$10 million, or 9.3 percent, for its southern Arizona jurisdiction. In July
1994, the ACC approved a settlement agreement of the southern Arizona general
rate case. The agreement was reached through negotiations between the
Company, the ACC staff, and the Residential Utility Consumer Office. The
agreement calls for a $4.3 million, or 3.9 percent, rate increase which
became effective July 1994. The Company also agreed not to file another
general rate request for its southern Arizona jurisdiction before November
1996. The settlement established a disallowance formula to be used in future
rate cases for expenditures related to defective materials and/or
installation. As part of the settlement, the Company agreed to write off
$3.2 million of gross plant in service related to southern Arizona pipe
replacement programs in addition to the $1.3 million disallowance previously
written off in December 1993. Cumulatively, the Company has written off
$19.1 million in gross plant related to both central and southern Arizona
pipe replacement programs. See Note 17 of the Notes to Consolidated
Financial Statements of the 1993 Form 10-K for further discussion of Arizona
pipe replacement program disallowances. The impact of these disallowances,
net of accumulated depreciation, tax benefits and other related items, was a
noncash reduction to net income of $9.6 million, or $0.45 per share,
$9.3 million of which was recognized in December 1993. The Company believes
this settlement effectively resolves all financial issues associated with
currently challenged Arizona pipe replacement programs, that it has
adequately provided for future disallowances and does not anticipate further
material effects on results of operations as a result of gross plant
disallowances related to these pipe replacement programs.
FERC
In October 1992, Paiute filed a general rate case with the Federal Energy
Regulatory Commission (FERC) requesting approval to increase revenues by
$6.8 million annually. Paiute is seeking recovery of increased costs
associated with its capacity expansion project that was placed into service
in February 1993. Interim rates reflecting the increased revenues became
effective in April 1993 and are subject to refund until a final order is
issued. A final decision from the FERC is expected in late 1994.<PAGE>
<PAGE> 14
FINANCIAL SERVICES SEGMENT
PriMerit Bank (the Bank) is a federally chartered stock savings bank conducting
business through branch offices in Nevada. The Bank's deposit accounts
are insured to the maximum extent permitted by law by the Federal Deposit
Insurance Corporation (FDIC) through the Savings Association Insurance Fund
(SAIF). The Bank is regulated by the Office of Thrift Supervision (OTS) and
the FDIC, and is a member of the Federal Home Loan Bank (FHLB) system.
The Bank's principal business is to attract deposits from the general public
and make loans secured by real estate and other collateral to enable borrowers
to purchase, refinance, construct or improve such property. Revenues
are derived from interest on real estate loans and debt securities and, to a
lesser extent, from interest on nonmortgage loans, gains on sales of loans
and debt securities, and fees received in connection with loans and deposits.
The Bank's major expense is the interest paid on savings deposits and
borrowings.
CAPITAL RESOURCES AND LIQUIDITY
In accordance with OTS regulations, the Bank is required to maintain an
average daily balance of liquid assets equal to at least five percent of its
liquidity base (savings deposits and borrowings due in one year or less)
during the preceding calendar month. The liquidity ratio was 14 percent for
the month of September 1994. The Bank's ratio is substantially higher than
the requirement due to an increased level of transaction accounts.
Management considers the Bank's liquidity position to be adequate. At
September 30, 1994, the Bank maintained in excess of $319 million of
unencumbered assets which could be borrowed against or sold to increase
liquidity levels.
Debt securities available for sale have declined $29.2 million since
December 31, 1993 primarily due to prepayments on the underlying loans and the
decline in the unrealized gains on these securities due to the rising interest
rate environment.
The Bank's deposits increased $24.3 million during the quarter and
$43.7 million for the year. The third quarter increase in 1994 is
principally due to a $27.3 million increase in transaction accounts,
partially offset by a $1 million decrease in certificate of deposit accounts
and a $2 million decline in public funds. The increase for the first nine
months of 1994 is due primarily to a $30.5 million increase in money market
transaction accounts, a $7.2 million increase in certificate of deposit
accounts, and a $6 million net increase in other transaction accounts.
FINANCIAL AND REGULATORY CAPITAL
The Bank exceeded all three minimum capital requirements--tangible, core and
risk-based--applicable at September 30, 1994 and all three fully phased-in
capital requirements which will be applicable at July 1, 1996 under current
regulations. During the first nine months of 1994, all three of the Bank's
regulatory capital ratios declined as a result of the $11.5 million decline
in the unrealized gain, net of tax, on debt securities available for sale
offset partially by year-to-date net income of $6.3 million. The Bank's core
and risk-based capital ratios also declined as a result of the deduction from
capital of an additional $4.8 million of supervisory goodwill at
September 30, 1994. The OTS requires the phase-out of supervisory goodwill
includable in capital. The includable supervisory goodwill was 0.75 percent
and 0.375 percent of total assets on December 31, 1993 and
September 30, 1994, respectively. No supervisory goodwill will be includable
beginning January 1, 1995. The Bank continues to be classified as "well
capitalized" under the FDIC Improvement Act of 1991 (FDICIA).<PAGE>
<PAGE> 15
A reconciliation of stockholder's equity to the three regulatory capital
standards and the Bank's resulting ratios are set forth in the table below
(thousands of dollars):
<TABLE>
<CAPTION>
September 30, 1994 December 31, 1993
--------------------------------------- ---------------------------------------
Tangible Core Risk-based Tangible Core Risk-based
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Stockholder's equity $ 171,810 $ 171,810 $ 171,810 $ 176,943 $ 176,943 $ 176,943
Capital adjustments:
Nonsupervisory goodwill (40,898) (40,898) (40,898) (42,464) (42,464) (42,464)
Supervisory goodwill (25,707) (19,267) (19,267) (27,037) (14,422) (14,422)
Real estate investments -- -- -- -- -- (478)
General loan loss reserves -- -- 11,322 -- -- 11,008
----------- ----------- ----------- ----------- ----------- -----------
Regulatory capital 105,205 111,645 122,967 107,442 120,057 130,587
Minimum required capital 25,759 51,519 72,008 25,229 50,459 70,031
----------- ----------- ----------- ----------- ----------- -----------
Excess $ 79,446 $ 60,126 $ 50,959 $ 82,213 $ 69,598 $ 60,556
=========== =========== =========== =========== =========== ===========
Regulatory capital ratio 6.13% 6.50% 13.66% 6.39% 7.14% 14.92%
Minimum required ratio 1.50% 3.00% 8.00% 1.50% 3.00% 8.00%
----------- ----------- ----------- ----------- ----------- -----------
Excess 4.63% 3.50% 5.66% 4.89% 4.14% 6.92%
=========== =========== =========== =========== =========== ===========
Asset base $ 1,717,291 $ 1,717,291 $ 900,104 $ 1,681,952 $ 1,681,952 $ 875,387
=========== =========== =========== =========== =========== ===========
</TABLE>
At September 30, 1994 under fully phased-in capital rules applicable at
July 1, 1996, the Bank would have exceeded its fully phased-in tangible, core
and risk-based capital requirements by $79.4 million, $53.7 million and
$44.3 million, respectively.
The OTS issued a regulation which added a component to an institution's risk-
based capital calculation effective in the third quarter of 1994. The
regulation requires a reduction of an institution's risk-based capital by
50 percent of the decline in the institution's net portfolio value (NPV)
exceeding two percent of assets under a hypothetical 200 basis point increase
or decrease in market interest rates. Based upon OTS measurement of the
Bank's interest rate risk (IRR) exposure at December 31, 1993, March 31, 1994
and June 30, 1994, and management's estimate of its IRR exposure at
September 30, 1994, the Bank is not subject to a reduction of its risk-based
capital as a result of the implementation of this regulation. The FDIC and the
Office of the Comptroller of the Currency have proposed similar regulations
which may result in a more stringent capital requirement for IRR than the
current OTS regulations. OTS regulations can be no less stringent than those
applicable to national banks. Therefore, the impact of this proposed
regulation on the Bank is unknown at this time.
The Bank enters into various interest rate swaps in managing its interest
rate risk. In these swaps, the Bank agrees with other parties to exchange,
at specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated on an agreed-upon notional principal amount.
Because the Bank's interest-earning assets tend to be long-term fixed-rate
instruments while its interest-bearing liabilities tend to be shorter term or
floating-rate obligations, interest rate swaps, in which the Bank pays a
fixed rate and receives a floating rate, are used to transform fixed-rate
loans into adjustable-rate loans and hence, reduce the impact of market
fluctuations on the Bank's net interest income.
The Bank does not use interest rate swaps for speculative or trading
purposes, but does use interest rate swaps to hedge specific assets or
liabilities. The Bank accounts for the swaps by accruing for the cash flows
which are contractually receivable and payable under the agreements. These
net costs are included as cost of hedging activities in the consolidated
statements of income.
The Bank mitigates the credit risk associated with interest rate swaps by
limiting itself to transactions with counterparties who are U.S. Government
Securities dealers registered with the Securities and Exchange Commission
(SEC) and are in full compliance with the SEC's Net Capital Rule for Brokers
and Dealers. Additionally, the Bank's policy limits the maximum notional
amount outstanding per dealer and in total.<PAGE>
<PAGE> 16
The following table summarizes the terms of the Bank's outstanding interest
rate swaps as of the dates indicated (thousands of dollars):
September 30, December 31,
1994 1993
------------- -------------
Notional principal $ 68,900 $ 7,500
Weighted average remaining term (months) 62 83
Weighted average fixed-rate payable 6.88% 5.45%
Weighted average variable-rate receivable 5.23% 3.55%
Unrealized gains $ 1,652 $ 169
Unrealized losses -- --
RESULTS OF FINANCIAL SERVICES OPERATIONS
Quarterly Analysis
- ------------------
The Bank recorded net income of $2 million for the three months ended
September 30, 1994 compared to net income of $5.3 million for the same period
in 1993. After-tax components of 1994 third quarter net income were
comprised of $3.2 million from core banking operations offset partially by
$71,000 in real estate losses, $964,000 in goodwill amortization and a
$170,000 loss from credit card charge-offs. After-tax components of 1993
third quarter net income were comprised of income of $1.4 million from core
banking operations, a $4.9 million gain on the sale of debt securities
related to the sale of the Bank's Arizona-based deposit liabilities, $35,000
in income from real estate operations, and a $400,000 deferred income tax
benefit due to the increased corporate federal tax rate, partially offset by
a $419,000 additional loss from the sale of the Bank's Arizona-based deposit
liabilities (Arizona sale) and $965,000 in goodwill amortization.
General and administrative expenses decreased by $904,000, or eight percent,
in the third quarter of 1994 compared to the same period in 1993, due
primarily to the effects of the Arizona sale during the third quarter of 1993
and continued emphasis on expense control.<PAGE>
<PAGE> 17
The following table sets forth information with respect to interest rate
spread for the periods shown (thousands of dollars):
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------------------------------------------------------
1994 1993
--------------------------------------- ---------------------------------------
Average Average Average Average
Balance Interest Yield (%) Balance Interest Yield (%)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Cash equivalents $ 44,297 $ 514 4.64 $ 31,147 $ 253 3.25
Debt securities held
to maturity 74,775 1,286 6.88 97,503 1,621 6.65
Debt securities available
for sale 533,065 8,547 6.41 793,978 11,756 5.92
Loans receivable 892,465 19,275 8.64 804,654 18,057 8.98
FHLB stock 17,020 272 6.39 16,360 194 4.74
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets $ 1,561,622 29,894 7.66 $ 1,743,642 31,881 7.31
=========== ----------- ----------- =========== ----------- -----------
Interest-bearing liabilities:
Deposits $ 1,240,284 11,252 3.60 $ 1,373,417 13,229 3.82
Securities sold under
agreements to repurchase 185,897 2,406 5.13 288,378 3,090 4.25
Advances from FHLB 74,144 899 4.81 54,366 642 4.69
Notes payable 8,200 165 7.98 11,501 236 8.21
Unsecured senior notes -- -- -- 5,108 82 6.42
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing
liabilities $ 1,508,525 14,722 3.87 $ 1,732,770 17,279 3.96
=========== ===========
Cost of hedging activities 147 .04 -- --
----------- ----------- ----------- -----------
Cost of funds 14,869 3.91 17,279 3.96
Capitalized and
transferred interest (2) -- (12) --
----------- ----------- ----------- -----------
Net interest income $ 15,027 3.75 $ 14,614 3.35
=========== =========== =========== ===========
Net yield on interest-
earning assets 3.85 3.35
=========== ===========
</TABLE>
The decrease in average interest-earning assets and average interest-bearing
liabilities resulted primarily from the sale of $334 million of lower
yielding mortgage-backed securities (MBS) to fund the sale of $321 million of
higher costing Arizona-based deposit liabilities in the third quarter of
1993. Despite a decrease in average interest-earning assets, net interest
income increased $413,000, or three percent.
Nine-Month Analysis
- -------------------
Net income of $6.3 million was recorded for the first nine months of 1994
compared to net income of $4.3 million ($1.2 million before cumulative effect
of accounting change) for the nine months ended September 30, 1993. After-
tax components of the first nine months of 1994's net income were comprised
of $8.5 million from core banking operations, and a gain of $742,000 from the
Bank's credit card portfolio sale, net of credit card charge-offs, partially
offset by $2.9 million in goodwill amortization. After-tax components of the
first nine months of the Bank's 1993 net income were comprised of
$5.4 million from core banking operations, $3.4 million from the cumulative
effect of the accounting change for taxes and a tax rate change, a
$4.9 million gain as the result of the sale of debt securities to fund the
Arizona sale; offset partially by the write-off of goodwill of $6.2 million
as the result of the Arizona-sale in 1993, goodwill amortization of
$3 million and a $189,000 loss on real estate operations.
General and administrative expenses declined $3.3 million, or nine percent,
for the first nine months of 1994 versus the same period in 1993 due to
decreased overall operating expenses as a result of the Arizona sale and
continued expense control.<PAGE>
<PAGE> 18
The following table sets forth information with respect to interest rate
spread for the periods shown (thousands of dollars):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------------------------------------------------
1994 1993
--------------------------------------- ---------------------------------------
Average Average Average Average
Balance Interest Yield (%) Balance Interest Yield (%)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Cash equivalents $ 54,847 $ 1,579 3.84 $ 31,011 $ 780 3.35
Debt securities held
to maturity 69,701 3,448 6.60 544,855 25,680 6.28
Debt securities available
for sale 560,444 25,351 6.03 525,527 21,551 5.47
Loans receivable, net 877,048 56,072 8.52 776,620 54,395 9.34
FHLB stock 16,812 613 4.86 16,473 448 3.63
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets $ 1,578,852 87,063 7.35 $ 1,894,486 102,854 7.24
=========== ----------- ----------- =========== ----------- -----------
Interest-bearing liabilities:
Deposits $ 1,224,978 32,275 3.52 $ 1,526,707 46,995 4.12
Securities sold under
agreements to repurchase 218,790 7,582 4.63 313,497 10,126 4.32
Advances from FHLB 72,048 2,553 4.74 28,196 1,306 6.19
Notes payable 8,222 479 7.79 16,217 1,013 8.33
Unsecured senior notes -- -- -- 18,369 1,022 7.42
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing
liabilities $ 1,524,038 42,889 3.76 $ 1,902,986 60,462 4.25
=========== ===========
Cost of hedging activities 240 0.02 -- --
----------- ----------- ----------- -----------
Cost of funds 43,129 3.78 60,462 4.25
Capitalized and
transferred interest (13) -- (49) --
----------- ----------- ----------- -----------
Net interest income $ 43,947 3.57 $ 42,441 2.99
=========== =========== =========== ===========
Net yield on interest-
earning assets 3.71 2.99
=========== ===========
</TABLE>
The decrease in average interest-earning assets and average interest-bearing
liabilities resulted from sales and principal repayments of loans and lower
yielding debt securities exceeding origination and purchases, and the sale of
the Bank's higher costing Arizona-based deposit liabilities in the third
quarter of 1993. Despite the decline in average interest-earning assets, net
interest income increased $1.5 million.
Twelve-Month Analysis
- ---------------------
The Bank recorded net income of $8.7 million for the twelve months ended
September 30, 1994 compared to net income of $4.8 million ($1.8 million
before cumulative effect of accounting change) for the twelve months ended
September 30, 1993. After-tax components of net income for the twelve months
ended September 30, 1994 were comprised of $11 million from core banking
operations, a gain of $348,000 from the sale of debt securities used to fund
the Arizona sale, a gain of $742,000 from the sale of the Bank's credit card
portfolio, net of credit card charge-offs, a $780,000 gain from a legal
settlement, offset partially by a loss of $387,000 from real estate
operations, and $3.8 million of goodwill amortization. After-tax components
of net income for the twelve months ended September 30, 1993 were comprised
of income of $6.9 million from core banking operations, a $3.4 million gain
as the result of the cumulative effect of a change in method of accounting
for income taxes and a change in tax rate, and a gain of $1.3 million on the
sale of loan servicing rights, offset by a $1.4 million loss from real estate
operations, a $1.3 million net loss on the Arizona sale, and $4.1 million of
goodwill amortization.<PAGE>
<PAGE> 19
Net interest income increased $3.5 million due to the following factors:
(i) Total interest income decreased $21.7 million, or 16 percent, due to a
decrease in interest income on debt securities of $25.4 million, or
40 percent, caused by a $437 million decrease in the average balance
partially offset by a 12 basis point increase in the average yield;
offset partially by an increase in interest income on loans of
$2.3 million due to an increase of $95.6 million in the average
portfolio balance partially offset by a 78 basis point decrease in the
average yield. In May 1993, $638 million of MBS were designated as MBS
held for sale in connection with the Arizona sale and in anticipation
of implementation of SFAS No. 115, thus causing changes in the average
balances of the available for sale and held to maturity categories.
The net decrease in total MBS was due primarily to $334 million of MBS
sold during August of 1993 to fund the Arizona sale. In addition,
interest income from cash equivalents and dividends from FHLB stock
increased $1.4 million, or 90 percent, due to an increase of
$29.1 million in the average portfolio balance and an increase of 59 basis
points in the yield.
(ii) Total interest expense decreased $25.2 million, or 30 percent, due to a
decrease in interest on deposits of $22.3 million, or 34 percent,
caused by a decrease of 68 basis points in the average interest rate,
and a decrease of $333 million in the average balance outstanding as a
result of the Arizona sale; and, a decrease in interest on borrowings
of $3.3 million, or 18 percent, due to a 39 basis point decrease in the
average borrowing rate, and a decrease of $41 million in the average
balance outstanding. Cost of hedging activities increased $264,000 due
to increased hedging activity for the 12 months ended
September 30, 1994 while no similar activity occurred for the same
period in 1993. Capitalized and transferred interest decreased $83,000
due to the decline in the real estate portfolio.
Net gains on the sale of loans decreased $1.4 million for the twelve months
ended September 30, 1994 compared to the same period ended September 30,
1993, principally due to a greater volume of loan sales during 1993 as part
of the Bank's balance sheet restructuring.
Loss on the Arizona sale was $6.8 million for the twelve months ended
September 30, 1993. Net gains on the sale of MBS for the twelve months ended
September 30, 1993 were $8.5 million. The MBS were sold primarily to fund
the sale of the Arizona-based deposit liabilities to World Savings and Loan
Association. Net gains on the sale of MBS for the twelve months ended
September 30, 1994 were $134,000.
Loan related fees decreased $442,000 due to a lower level of loans serviced
for others as a result of the sale of mortgage loan servicing rights which
resulted in a $1.9 million gain in 1993, and payoffs within the loan
servicing portfolio. Deposit related fees and other income increased by
$774,000 due to a higher deposit fee structure and the increased level of
transaction accounts subject to fee assessment. Gain on sale of credit cards
of $1.7 million occurred in the first quarter of 1994 while no similar sale
occurred in 1993.
General and administrative expenses declined $3.5 million, or seven percent,
for the twelve months ended September 30, 1994 compared to the same period in
1993 due to the Arizona sale and an increased focus on efficiency.
ASSET QUALITY
NONPERFORMING ASSETS. Nonperforming assets are comprised of nonaccrual
assets, restructured loans and real estate acquired through foreclosure.
Nonaccrual assets are those on which management believes the timely
collection of interest is doubtful. Loans are transferred to nonaccrual
status when payments of interest or principal are 90 days past due or if, in
management's opinion, the accrual of interest should be ceased sooner. There
were no loans on accrual status which were over 90 days delinquent or past
maturity as of September 30, 1994. Interest income for loans on nonaccrual
status is generally recorded on a cash basis.<PAGE>
<PAGE> 20
The following table summarizes nonperforming assets as of the dates indicated
(thousands of dollars):
September 30, December 31,
1994 1993
------------- -------------
Nonaccrual loans past due 90 days or more:
Mortgage loans:
Construction and land $ 845 $ 1,233
Permanent single-family residences 5,501 6,636
Other mortgage loans 6,103 6,728
------------- -------------
12,449 14,597
Nonmortgage loans 272 184
Restructured loans 16,762 2,842
------------- -------------
Total nonperforming loans 29,483 17,623
Real estate acquired through foreclosure 8,053 9,707
------------- -------------
Total nonperforming assets $ 37,536 $ 27,330
============= =============
Allowance for estimated credit losses $ 16,995 $ 16,251
============= =============
Allowance for estimated credit losses as a
percentage of nonperforming loans 57.64% 92.21%
============= =============
Allowance for estimated credit losses as a
percentage of nonperforming assets 45.28% 59.46%
============= =============
The increase in restructured loans is a result of the classification of
$14.1 million of single-family residential loan modifications made for
borrowers with earthquake-related damage in California. Federal agencies
encouraged financial institutions to modify loan terms for certain borrowers
who were affected by the earthquake which occurred in January 1994. The
terms of these modifications were generally three- to six-month payment
extensions with no negative credit reporting regarding the borrower. These
loans were on a nonaccrual basis during the extension period. Current
interpretation by the OTS concerning modifications made on these loans
requires the loans to be classified as "troubled debt restructured" until
they are either paid off or sold.
The decrease in real estate acquired through foreclosure of $1.7 million is
due primarily to pay-downs of four single-family residential construction
loans in California for $1.7 million, and $544,000 of consumer and single-
family residential loan payoffs and sales, partially offset by increases of
$581,000 in land-related loans.
CLASSIFIED ASSETS. OTS regulations require the Bank to classify certain
assets and establish prudent valuation allowances. Classified assets are
categorized as "substandard," "doubtful," and "loss." In addition, the Bank
can designate an asset as "special mention."<PAGE>
<PAGE> 21
The following table sets forth the amounts of the Bank's classified assets
and ratio of classified assets to total assets, net of allowances and charge-
offs, as of the dates indicated (thousands of dollars):
<TABLE>
<CAPTION>
September 30, 1994 December 31, 1993
------------------------- -------------------------
% of Total % of Total
Balance Assets Balance Assets
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Substandard assets:
Loans:
Single-family residential $ 7,114 0.40 $ 7,339 0.42
Consumer 764 0.04 134 0.01
Commercial and multi-family mortgage 19,945 1.12 25,522 1.47
Construction and land 2,583 0.14 4,581 0.26
Other 42 -- 310 0.02
Foreclosed real estate (net) 8,053 0.45 9,707 0.55
Real estate held for investment 1,198 0.07 2,166 0.12
Investments 23,845 1.34 29,509 1.68
Doubtful assets -- -- -- --
Loss assets -- -- -- --
---------- ---------- ---------- ----------
Total $ 63,544 3.56 $ 79,268 4.53
========== ========== ========== ==========
</TABLE>
Classified assets decreased $15.7 million from December 31, 1993 to
September 30, 1994 primarily as a result of the upgrades of $4.9 million in
commercial mortgage properties, sales and upgrades of $1.5 million of
construction and land loans, repayments of $5.7 million of investments,
additional sales of $3 million in commercial mortgage properties, a decrease of
$968,000 in real estate held for investment due to sales, and a $1.7 million
decrease in foreclosed real estate. The decreases were partially offset by the
substandard classification of a Nevada hotel loan for $2.6 million. The
investment security classified as substandard represents a privately issued
MBS collateralized by apartments, office buildings, town homes, shopping
centers and day care centers located in various states along the southeastern
seaboard and is further supported by a credit enhancement feature. The
single A credit rating of this security was withdrawn in the first half of
1993, due to a large number of delinquencies underlying the security. Based
on extensive credit reviews, the Bank determined that only a portion of the
underlying loans met the criteria for substandard classification. However,
the entire investment security is classified as substandard because the OTS
does not have a policy for the "split rating" of a security. The investment
security may be upgraded once improvement in the level of delinquencies in
the loans underlying the security occurs.
Substandard loans decreased $7.4 million due primarily to the upgrades of a
$2.1 million shopping center loan in Nevada and a $2.8 million office complex
loan, sales of $3 million in commercial mortgage properties, sales and
upgrades of $1.5 million in construction and land loans; partially offset by
the downgrade of a $2.6 million hotel loan in Nevada. The largest substandard
loan at September 30, 1994 was an $8.3 million multi-family real estate loan
in Nevada. The Bank had three additional substandard loans at September 30,
1994 in excess of $1 million: two hotel loans in Nevada and one single-family
residential construction land loan in California.
The largest foreclosed real estate asset held by the Bank at September 30,
1994 was a $1.6 million apartment complex in Nevada. The Bank also owned
three parcels of foreclosed real estate at September 30, 1994 with book
values in excess of $1 million: one land parcel and two single-family
residential real estate construction properties located in California.
The Bank's largest investment in real estate classified as substandard at
September 30, 1994, was a former bank branch in Arizona with a current book
value of $869,000. The Bank's remaining real estate development projects
classified as substandard have current book values of $195,000 and $135,000.<PAGE>
<PAGE> 22
Special mention assets increased from $27.6 million at December 31, 1993 to
$49.5 million at September 30, 1994, primarily due to the addition of
$13.2 million in California single-family residential loans with earthquake-
related problems which were modified and a Nevada apartment loan for
$9 million. The geographic concentration of the Bank's classified assets at
September 30, 1994 was 42 percent in Nevada, 17 percent in California, 3 percent
in Arizona, and 38 percent in the southeastern seaboard states.
It is the Bank's practice to charge off all assets or portions thereof which
it considers to be "loss." As a result, none of the Bank's assets, net of
charge-offs, were classified as "loss" at September 30, 1994.
The following tables set forth the Bank's charge-off experience for loans
receivable and real estate acquired through foreclosure by loan type
(thousands of dollars):
<TABLE>
<CAPTION>
Net
Charge-Offs Recoveries Charge-Offs
----------- ------------ -----------
<S> <C> <C> <C>
Nine Months Ended September 30, 1994:
- -------------------------------------
Single-family residential $ 1,337 $ (692) $ 645
Commercial and multi-family mortgage 661 (101) 560
Construction/land 1,263 (115) 1,148
Nonmortgage 2,845 (740) 2,105
----------- ----------- -----------
Total net charge-offs $ 6,106 $ (1,648) $ 4,458
=========== =========== ===========
Nine Months Ended September 30, 1993:
- -------------------------------------
Single-family residential $ 952 $ (250) $ 702
Commercial and multi-family mortgage 953 (99) 854
Construction/land 2,771 (259) 2,512
Nonmortgage 2,046 (581) 1,465
----------- ----------- -----------
Total net charge-offs $ 6,722 $ (1,189) $ 5,533
=========== =========== ===========
</TABLE>
PROVISIONS AND ALLOWANCES FOR LOAN AND REAL ESTATE LOSSES. On a regular
basis, management evaluates the adequacy of the allowances for estimated
losses on loans, investments, and real estate and establishes additions to
the allowances through provisions to expense. The Bank utilizes a comprehensive
internal asset review system and general valuation allowance methodology.
General valuation allowances are established for each of the loan, investment,
and real estate portfolios for unforeseen losses. Factors taken into account in
determining the adequacy of allowances include review of existing risks in the
portfolios, prevailing and anticipated economic conditions, actual loss
experience and delinquencies. Regular reviews of the quality of the Bank's
loan, investment, and real estate portfolios by the Risk Management Committee
and examinations by regulatory authorities are performed periodically.
Charge-offs are recorded on particular assets when it is determined that the
fair or net realizable value of an asset is below the carrying value. When a
loan is foreclosed, the asset is written down to fair value based on a
current appraisal of the subject property.<PAGE>
<PAGE> 23
Activity in the allowances for losses on loans and investments in real estate
is summarized as follows (thousands of dollars):
<TABLE>
<CAPTION>
Total Investments
Loans and in
Foreclosed Real
Real Estate Estate Total
----------- ----------- -----------
<S> <C> <C> <C>
Balance at June 30, 1994 $ 16,443 $ 485 $ 16,928
Provisions for estimated losses 1,493 5 1,498
Charge-offs, net of recoveries (941) 416 (525)
----------- ----------- -----------
Balance at September 30, 1994 $ 16,995 $ 906 $ 17,901
=========== =========== ===========
Balance at December 31, 1993 $ 16,251 $ 935 $ 17,186
Provisions for estimated losses 5,202 52 5,254
Charge-offs, net of recoveries (4,458) (81) (4,539)
----------- ----------- -----------
Balance at September 30, 1994 $ 16,995 $ 906 $ 17,901
=========== =========== ===========
Balance at June 30, 1993 $ 16,742 $ 840 $ 17,582
Provisions for estimated losses 2,742 40 2,782
Charge-offs, net of recoveries (2,744) (430) (3,174)
----------- ----------- -----------
Balance at September 30, 1993 $ 16,740 $ 450 $ 17,190
=========== =========== ===========
Balance at December 31, 1992 $ 17,228 $ 1,463 $ 18,691
Provisions for estimated losses 5,045 495 5,540
Charge-offs, net of recoveries (5,533) (1,508) (7,041)
----------- ----------- -----------
Balance at September 30, 1993 $ 16,740 $ 450 $ 17,190
=========== =========== ===========
</TABLE>
The loan and foreclosed real estate charge-offs for the third quarter of 1994
were primarily attributable to the partial charge-offs of two single-family
residential construction properties located in California and other consumer
loan charge-offs. The Bank's quarterly analysis required no significant
change in the allowance for estimated credit losses at September 30, 1994
from the December 31, 1993 level.
Included in net real estate write-downs of $81,000 for 1994 was a write-down
of $519,000 related to the Bank's two previous branches in Arizona, which
were subsequently transferred to investment in real estate from premises and
equipment in conjunction with the Arizona sale in the second quarter of 1993.
This write-down was offset by a recovery of $498,000 on a real estate project
in California during the third quarter of 1994, which was previously written
down.<PAGE>
<PAGE> 24
PART II - OTHER INFORMATION
---------------------------
Items 1-5 None
Item 6 Exhibits and Reports on Form 8-K
(a) The following document is filed as part of this report on
Form 10-Q:
Exhibit 27 - Financial Data Schedule (filed electronically
only)
(b) Reports on Form 8-K - None<PAGE>
<PAGE> 25
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 8, 1994 /s/ Edward A. Janov
---------------------------------------
Edward A. Janov
Controller and Chief Accounting Officer
and on behalf of the Registrant
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUTHWEST
GAS CORPORATION'S FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 46,188<F1>
<INT-BEARING-DEPOSITS> 0<F1>
<FED-FUNDS-SOLD> 65,095<F1>
<TRADING-ASSETS> 0<F1>
<INVESTMENTS-HELD-FOR-SALE> 566,491<F1>
<INVESTMENTS-CARRYING> 74,730<F1>
<INVESTMENTS-MARKET> 72,713<F1>
<LOANS> 919,712<F1>
<ALLOWANCE> 16,995<F1>
<TOTAL-ASSETS> 2,955,456<F2><F3>
<DEPOSITS> 1,251,550<F1>
<SHORT-TERM> 225,480<F1>
<LIABILITIES-OTHER> 334,060<F4>
<LONG-TERM> 726,010<F2>
<COMMON> 22,759<F2>
8,058<F2>
0
<OTHER-SE> 300,539<F2><F6>
<TOTAL-LIABILITIES-AND-EQUITY> 2,955,456<F2>
<INTEREST-LOAN> 56,072<F1>
<INTEREST-INVEST> 28,799<F1>
<INTEREST-OTHER> 2,192<F1>
<INTEREST-TOTAL> 87,063<F1>
<INTEREST-DEPOSIT> 32,275<F1>
<INTEREST-EXPENSE> 43,116<F1>
<INTEREST-INCOME-NET> 43,947<F1>
<LOAN-LOSSES> 5,202<F1>
<SECURITIES-GAINS> 34<F1>
<EXPENSE-OTHER> 35,771<F5>
<INCOME-PRETAX> 3,347<F2>
<INCOME-PRE-EXTRAORDINARY> 1,764<F2>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,764<F2>
<EPS-PRIMARY> 0.06<F2>
<EPS-DILUTED> 0.06<F2>
<YIELD-ACTUAL> 3.71<F1>
<LOANS-NON> 12,721<F1>
<LOANS-PAST> 0<F1>
<LOANS-TROUBLED> 16,762<F1>
<LOANS-PROBLEM> 49,500<F1>
<ALLOWANCE-OPEN> 16,251<F1>
<CHARGE-OFFS> 6,106<F1>
<RECOVERIES> 1,648<F1>
<ALLOWANCE-CLOSE> 16,995<F1>
<ALLOWANCE-DOMESTIC> 16,995<F1>
<ALLOWANCE-FOREIGN> 0<F1>
<ALLOWANCE-UNALLOCATED> 0<F1>
<FN>
<F1>Balance specific to financial services segment
<F2>Consolidated financial statement balance
<F3>Includes gas plant in service, net: $1,007,249
<F4>Balance includes: consolidated deferred income taxes and tax credits, net;
and accounts payable and other accrued liabilities
<F5>Bank specific items including general and administrative expense,
amortization of cost in excess of net assets acquired and income from real
estate operations
<F6>Includes: additional paid-in capital; capital stock expense; unrealized
gain (loss), net of tax, on debt securities available for sale; and retained
earnings
</FN>
</TABLE>
