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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) July 13, 1998
SOUTHWEST GAS CORPORATION
(Exact name of registrant as specified in its charter)
California 1-7850 88-0085720
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) 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
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ITEM 5. OTHER EVENTS
By order issued July 13, 1998, the California Public Utilities Commission
(CPUC) rejected an all-party settlement agreement executed in January 1998 to
resolve cost recovery issues associated with a Southwest Gas Corporation
(Southwest) expansion project in northern California. Southwest will petition
the CPUC for rehearing (Petition) and file a Motion for Stay (Motion) of order
within 30 days of the issuance date. Southwest will also pursue several
alternative regulatory and legal avenues while seeking the Petition and
Motion. The CPUC decision exposes Southwest to potentially material adverse
financial consequences if the legal and regulatory remedies are unsuccessful.
However, management believes it has meritorious options available, and
accordingly has not recorded any writeoffs in the second quarter of 1998 as a
result of the CPUC decision.
BACKGROUND
In December 1993, Southwest filed an application with the CPUC to expand its
northern California service territory and extend service into Truckee,
California. The application included a proposed regulatory mechanism for
recovering the cost of the expansion. In May 1994, rate and cost recovery
issues related to the expansion application were combined by the CPUC with a
January 1994 general rate application Southwest had filed with the CPUC. In
September 1994, a Joint Motion and Stipulation and Settlement Agreement
(Settlement) was presented to the CPUC which resolved the general rate case
and addressed the expansion related cost recovery issues. In December 1994,
the Settlement was approved. In April 1995, Southwest received CPUC approval
for the certificate of public convenience and necessity to serve the expansion
areas.
In its filing, Southwest had indicated that expansion into Truckee would occur
in three phases and result in the conversion of an estimated 9,200 customers
to natural gas service from their existing fuel, primarily propane. The CPUC
established a cost cap of $29.1 million for the project.
In 1995, Southwest completed Phase I of the expansion project, which involved
transmission system reinforcement and distribution system expansion to
accommodate approximately 940 customers. Construction costs of $7.1 million
were on target with the cost estimate approved by the CPUC.
Phase II of the project involved extending the transmission system to Truckee
and distribution system expansion to accommodate an estimated 4,200 customers.
The cost cap apportioned to Phase II was approximately $13.8 million. The
incurred cost of Phase II was $28.6 million. An estimated $9.2 million of the
Phase II cost overrun was due to changes in project scope, such as adjustments
for design changes required by governmental bodies, changes in facilities
necessitated by requirements beyond Southwest's control and costs incurred to
accommodate customer service requests.
Examples of adjustments for changes in project scope included the requirement
to haul excavated soil offsite to be screened whereas normal and anticipated
practice is to screen on site, asphalt repairs which were greater than
expected as a result of increased paving requirements imposed after
construction started, and the installation of more facilities under asphalt
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than anticipated. Other unanticipated or externally imposed costs pertained
to extended yard lines, underground boring, environmental studies, right-of-
way acquisitions, and engineering design work.
Due to the Phase II cost overruns and difficult construction environment
experienced, construction of Phase III was postponed to reevaluate the
economics of completing the project.
In July 1997, Southwest filed an application requesting authorization from the
CPUC to modify the terms and conditions of the certificate of public
convenience and necessity granted in 1995. In this application, Southwest
requested that the originally approved cost cap of $29.1 million be increased
to $46.8 million; that the scope of Phase III construction be revised to
include an estimated 2,900 of the initially estimated 4,200 customers; and
that customer applicants desiring service in the expansion area who were not
identified to receive service during the expansion phases as modified within
the new application be subject to the existing main and service extension
rules. Southwest proposed to recover the incremental costs above the original
cost cap through a surcharge mechanism. Concurrently, the Truckee town
manager, on behalf of the Truckee Town Council, wrote a letter to the CPUC in
support of the application.
In August 1997, the Office of Ratepayer Advocates (ORA) for the CPUC filed a
protest to the Southwest application indicating that the terms of the original
agreement should be adhered to. Southwest responded with written comments in
support of its application. In September 1997, a prehearing conference was
held to discuss the filing, the ORA protest, and Southwest comments. The
administrative law judge (ALJ) made a preliminary ruling in favor of the ORA
protest, but allowed the parties an additional 20 days to supplement their
comments. During this time, Southwest and the ORA, pursuant to direction from
the Commission, began to negotiate a settlement agreement, and the procedural
schedule was adjusted to allow the negotiations to continue beyond the 20 day
period. In January 1998, a settlement involving all parties to the proceeding
was executed and filed with the CPUC which redefined the terms and conditions
for completing the project and recovering the additional project costs.
Although CPUC approval of the settlement was still required, management
anticipated approval of the all-party settlement. In February 1998, a
prehearing conference was held before the ALJ and the assigned Commissioner
for the purpose of taking public comment on the settlement agreement. There
was no opposition to the settlement agreement from the Truckee Town Council at
the conference, or in a letter written by the Truckee town manager to the CPUC
subsequent to the conference.
Under the proposed settlement, Southwest agreed, among other things, to absorb
$8 million in cost overruns experienced in Phase II of the project. Southwest
also agreed to an $11 million cost cap (with a maximum of $3,800 per customer)
for Phase III of the project. The Phase III project scope would be modified
as requested in the July 1997 application. In addition, Southwest agreed not
to file its next general rate case until Phase III is complete. Based on the
proposed settlement agreement, Southwest recognized an $8 million pretax
charge in the fourth quarter of 1997.
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RECENT DEVELOPMENTS
In May 1998, the ALJ issued an unexpected Proposed Decision (PD) rejecting the
all-party settlement and directing Southwest to complete the project under the
terms and conditions of the 1995 certificate. A PD, which ignores an all-
party settlement, is rare and inconsistent with CPUC policies and procedures
established in 1992. Subsequent to the PD, the Truckee Town Council took a
formal position in opposition to the settlement, although they were not a
party to the proceeding, and had not previously opposed the settlement.
In July 1998, the CPUC voted to adopt the PD and ordered Southwest to proceed
with all deliberate speed to complete the project under the terms and scope of
the 1995 certificate. Southwest will petition the CPUC for rehearing and file
a Motion for Stay of order within 30 days of the issuance date. If the CPUC
does not act within 60 days, or if the CPUC rejects the Petition, Southwest
will petition the Supreme Court of the State of California for review. Such a
petition is discretionary with the Supreme Court, and if accepted, could take
up to two years to be heard.
Southwest will pursue several alternative regulatory and legal avenues while
seeking the Motion and Petition from the CPUC regarding the July 1998
decision. First, Southwest will petition the CPUC to hold hearings to modify
the original Settlement approved in December 1994. Second, Southwest will
seek to reopen the prior California general rate case and certificate
proceeding to readdress, among other items, the scope and costs of the Truckee
project. Because approval of the settlement agreement was expected, no
evidentiary hearings were conducted. Management strongly believes Southwest
is entitled to an evidentiary hearing before the CPUC, because the recent
proceedings effectively denied Southwest its fundamental due process rights.
Third, Southwest may seek to partially abandon its certificate to serve
certain Phase III geographic locales. Finally, Southwest contemplates
undertaking civil litigation against those parties whose actions materially
contributed to unanticipated changes in project cost and scope.
PHASE III COSTS
In the January 1998 all-party settlement agreement, Southwest proposed to
modify Phase III of the project to exclude certain areas from the original
certificate application. The excluded areas are the most distant points from
existing mains and present some of the most challenging geographic conditions
in the expansion area. Extension of mains to serve the estimated 1,300
customers in the excluded areas would be considerably more expensive than the
service areas in Phases I and II. Furthermore, these areas have significantly
lower customer density than the remainder of the expansion project; therefore,
expected revenues would be insufficient to justify the anticipated
construction costs.
Detailed engineering studies of the excluded areas have not been performed,
because of the proposed settlement. However, preliminary estimates indicate
that it could cost an additional $12 million to $14 million to extend service
to these 1,300 potential customers. The cost to extend service to the
remaining 2,900 potential Phase III customers is estimated at $11 million.
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Based on these forecasts, an additional pretax writeoff of up to $24 million
could be recorded if Southwest is ultimately required to complete the project
under the terms of the 1995 certificate without modification. This estimate
is comprised of approximately $7 million related to costs incurred through
Phase II, and up to $17 million for the forecasted construction costs.
However, Southwest will vigorously prosecute the described regulatory and
legal proceedings with the intent of reversing or mitigating the effects of
the July 1998 CPUC action. Management believes that a reasonable possibility
of modifying the existing CPUC orders pertaining to the expansion project
exists through pursuit of the legal and regulatory remedies which have been
outlined. Management also believes civil litigation offers a reasonable
possibility of recovering certain amounts spent to deal with changes in scope
necessitated by unanticipated third party actions. As a result, Southwest has
not recorded any additional writeoffs beyond the $8 million recognized in the
fourth quarter of 1997.
SIGNATURES
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 hereunto duly authorized.
SOUTHWEST GAS CORPORATION
Date: July 16, 1998 /s/ EDWARD A. JANOV
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Edward A. Janov
Vice President/Controller and
Chief Accounting Officer
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