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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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, 30,869,320 shares as of November 2, 1999.
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<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except par value)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- --------------
ASSETS (Unaudited)
<S> <C> <C>
Utility plant:
Gas plant $ 2,149,717 $ 2,020,139
Less: accumulated depreciation (650,853) (612,138)
Acquisition adjustments 3,597 3,881
Construction work in progress 43,917 47,480
-------------- --------------
Net utility plant 1,546,378 1,459,362
-------------- --------------
Other property and investments 84,721 73,926
-------------- --------------
Current assets:
Cash and cash equivalents 5,833 18,535
Accounts receivable, net of allowances 56,443 88,037
Accrued utility revenue 24,000 56,873
Deferred income taxes 6,021 -
Deferred purchased gas costs - 57,595
Prepaids and other current assets 32,178 26,346
-------------- --------------
Total current assets 124,475 247,386
-------------- --------------
Deferred charges and other assets 47,504 50,020
-------------- --------------
Total assets $ 1,803,078 $ 1,830,694
============== ==============
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $1 par (authorized - 45,000,000 shares; issued
and outstanding - 30,798,916 and 30,409,616 shares) $ 32,429 $ 32,040
Additional paid-in capital 434,196 424,840
Retained earnings 11,093 19,520
-------------- --------------
Total common equity 477,718 476,400
Redeemable preferred securities of Southwest Gas Capital I 60,000 60,000
Long-term debt, less current maturities 820,161 812,906
-------------- --------------
Total capitalization 1,357,879 1,349,306
-------------- --------------
Current liabilities:
Current maturities of long-term debt 7,081 5,270
Short-term debt 36,835 52,000
Accounts payable 38,945 64,295
Customer deposits 26,164 24,333
Accrued taxes 36,020 33,480
Accrued interest 13,127 13,872
Deferred taxes - 12,627
Deferred purchased gas costs 3,233 -
Other current liabilities 52,360 44,917
-------------- --------------
Total current liabilities 213,765 250,794
-------------- --------------
Deferred income taxes and other credits:
Deferred income taxes and investment tax credits 180,003 179,666
Other deferred credits 51,431 50,928
-------------- --------------
Total deferred income taxes and other credits 231,434 230,594
-------------- --------------
Total capitalization and liabilities $ 1,803,078 $ 1,830,694
============== ==============
The accompanying notes are an integral part of these statements.
</TABLE>
2
<PAGE>
<TABLE>
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
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,
----------------------- ----------------------- -----------------------
1999 1998 1999 1998 1999 1998
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues:
Gas operating revenues $ 125,190 $ 128,229 $ 570,979 $ 567,609 $ 802,967 $ 767,961
Construction revenues 41,099 34,279 103,627 80,397 140,942 111,188
----------- ----------- ----------- ----------- ----------- -----------
Total operating revenues 166,289 162,508 674,606 648,006 943,909 879,149
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Net cost of gas sold 46,711 51,499 254,436 246,254 338,031 305,762
Operations and maintenance 54,621 50,765 163,565 153,796 218,941 206,790
Depreciation and amortization 24,697 22,780 72,998 65,822 95,980 87,920
Taxes other than income taxes 7,075 7,699 21,586 23,516 29,716 30,427
Construction expenses 36,089 30,294 90,670 70,694 123,644 98,350
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses 169,193 163,037 603,255 560,082 806,312 729,249
----------- ----------- ----------- ----------- ----------- -----------
Operating income (2,904) (529) 71,351 87,924 137,597 149,900
----------- ----------- ----------- ----------- ----------- -----------
Other income and (expenses):
Net interest deductions (16,145) (15,760) (45,815) (47,579) (61,590) (64,435)
Preferred securities distributions (1,368) (1,368) (4,106) (4,106) (5,475) (5,475)
Other income (deductions) (1,674) (304) (1,439) 234 (3,063) (11,397)
----------- ----------- ----------- ----------- ----------- -----------
Total other income and (expenses) (19,187) (17,432) (51,360) (51,451) (70,128) (81,307)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes (22,091) (17,961) 19,991 36,473 67,469 68,593
Income tax expense (benefit) (7,903) (7,016) 9,509 13,979 31,944 22,764
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ (14,188) $ (10,945) $ 10,482 $ 22,494 $ 35,525 $ 45,829
=========== =========== =========== =========== =========== ===========
Basic earnings (loss) per share $ (0.46) $ (0.38) $ 0.34 $ 0.80 $ 1.16 $ 1.65
=========== =========== =========== =========== =========== ===========
Diluted earnings (loss) per share $ (0.46) $ (0.38) $ 0.34 $ 0.80 $ 1.15 $ 1.64
=========== =========== =========== =========== =========== ===========
Dividends paid per share $ 0.205 $ 0.205 $ 0.615 $ 0.615 $ 0.82 $ 0.82
=========== =========== =========== =========== =========== ===========
Average number of common shares outstanding 30,742 29,050 30,621 28,028 30,550 27,846
Average shares outstanding (assuming dilution) - - 30,902 28,216 30,824 28,022
The accompanying notes are an integral part of these statements.
</TABLE>
3
<PAGE>
<TABLE>
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
<CAPTION>
NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
--------------------------- --------------------------
1999 1998 1999 1998
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 10,482 $ 22,494 $ 35,525 $ 45,829
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 72,998 65,822 95,980 87,920
Deferred income taxes (18,311) (9,544) (8,919) 8,948
Changes in current assets and liabilities:
Accounts receivable, net of allowances 31,594 25,292 (3,719) (5,820)
Accrued utility revenue 32,873 31,873 (1,500) (775)
Deferred purchased gas costs 60,828 27,212 62,973 5,065
Accounts payable (25,350) (25,446) 2,067 3,446
Accrued taxes 2,540 22,223 12,097 33,760
Other current assets and liabilities 2,117 (3,503) 21,383 (15,241)
Other (645) 1,136 (803) 14,495
------------- ------------- ------------ -------------
Net cash provided by operating activities 169,126 157,559 215,084 177,627
------------- ------------- ------------ -------------
CASH FLOW FROM INVESTING ACTIVITIES:
Construction expenditures and property additions (150,336) (136,647) (208,310) (185,812)
Other (16,443) 902 (13,018) 4,568
------------- ------------- ------------ -------------
Net cash used in investing activities (166,779) (135,745) (221,328) (181,244)
------------- ------------- ------------ -------------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock, net 9,745 63,846 13,079 67,289
Dividends paid (18,830) (17,460) (25,046) (23,054)
Issuance of long-term debt, net 13,502 34,572 19,794 35,901
Retirement of long-term debt, net (4,301) (4,646) (6,278) (6,736)
Issuance (repayment) of short-term debt (15,165) (108,675) 3,510 (75,675)
------------- ------------- ------------ -------------
Net cash provided by (used in) financing activities (15,049) (32,363) 5,059 (2,275)
------------- ------------- ------------ -------------
Change in cash and temporary cash investments (12,702) (10,549) (1,185) (5,892)
Cash at beginning of period 18,535 17,567 7,018 12,910
------------- ------------- ------------ -------------
Cash at end of period $ 5,833 7,018 $ 5,833 7,018
============= ============= ============ =============
Supplemental information:
Interest paid, net of amounts capitalized $ 45,459 $ 46,108 $ 60,515 $ 60,753
============= ============= ============ =============
Income taxes paid (received), net $ 27,928 $ 6,666 $ 26,230 $ (24,594)
============= ============= ============ =============
The accompanying notes are an integral part of these statements.
</TABLE>
4
<PAGE>
Note 1 - Summary of Significant Accounting Policies
Nature of Operations. Southwest Gas Corporation (the Company) is comprised of
two segments: natural gas operations (Southwest or the natural gas operations
segment) and construction services. Southwest purchases, transports, and
distributes natural gas to customers in portions of Arizona, Nevada, and
California. Southwest's public utility rates, practices, facilities, and service
territories are subject to regulatory oversight. The timing and amount of rate
relief can materially impact results of operations. Natural gas sales are
seasonal, peaking during the winter months. Variability in weather from normal
temperatures can materially impact results of operations. Northern Pipeline
Construction Co. (Northern or the construction services segment), a wholly owned
subsidiary, is a full-service underground piping contractor which provides
utility companies with trenching and installation, replacement, and maintenance
services for energy distribution systems.
Basis of Presentation. The consolidated financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. 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. The preparation of the
consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. In the opinion of
management, all adjustments, consisting of normal recurring items and estimates
necessary for a fair presentation of the results for the interim periods, have
been made. It is suggested that these consolidated financial statements be read
in conjunction with the financial statements and the notes thereto included in
the Company's 1998 Annual Report to Shareholders, which is incorporated by
reference into the Form 10-K, and the 1999 Quarterly Reports on Form 10-Q.
Intercompany Transactions. The construction services segment recognizes revenues
generated from contracts with Southwest (see Note 2 below). Accounts receivable
for these services were $4.6 million at September 30, 1999 and $5 million at
December 31, 1998. The accounts receivable balance, revenues, and associated
profits are included in the consolidated financial statements of the Company and
were not eliminated during consolidation. Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation," provides that intercompany profits on sales to regulated affiliates
should not be eliminated in consolidation if the sales price is reasonable and
if future revenues approximately equal to the sales price will result from the
rate-making process. Management believes these two criteria are being met.
Note 2 - Segment Information
The following tables list revenues from external customers, intersegment
revenues, and segment income (thousands of dollars):
<TABLE>
<CAPTION>
Natural Gas Construction
Operations Services Total
--------------- ---------------- -------------
<S> <C> <C> <C>
Nine months ended September 30, 1999
Revenues from external customers $ 570,979 $ 71,108 $ 642,087
Intersegment revenues -- 32,519 32,519
--------------- ---------------- -------------
Total $ 570,979 $ 103,627 $ 674,606
=============== ================ =============
Segment net income $ 7,385 $ 3,097 $ 10,482
=============== ================ =============
Nine months ended September 30, 1998
Revenues from external customers $ 567,609 $ 53,946 $ 621,555
Intersegment revenues -- 26,451 26,451
--------------- ---------------- -------------
Total $ 567,609 $ 80,397 $ 648,006
=============== ================ =============
Segment net income $ 20,637 $ 1,857 $ 22,494
=============== ================ =============
</TABLE>
5
<PAGE>
Note 3 - Merger Agreement with ONEOK, Inc.
In December 1998, the Boards of Directors of the Company and ONEOK, Inc.
(ONEOK), headquartered in Tulsa, Oklahoma, announced an agreement for the
Company to be acquired by ONEOK. The agreement called for ONEOK to pay $28.50 in
cash for each share of Company common stock outstanding. In April 1999, the
agreement was amended to reflect, among other things, a revised cash purchase
price of $30 per share.
In February 1999, the Company announced that it had received an unsolicited
proposal from Southern Union Company (Southern Union), headquartered in Austin,
Texas, offering to acquire the Company for $32 per share in cash. Under the
terms of the original agreement with ONEOK, and as a result of certain
preliminary determinations made by the Board of Directors of the Company, the
Board of Directors authorized management to commence substantive discussions
with Southern Union regarding its proposal. In April 1999, the Board of
Directors approved the amendment to the agreement with ONEOK and rejected the
unsolicited bid by Southern Union. Southern Union revised its offer to $33.50
per share in late April 1999. In May 1999, the Board of Directors rejected the
revised bid.
The merger agreement, as amended, with ONEOK remains in full force and effect.
The transaction is subject to customary conditions, including approvals from
shareholders of the Company and state regulators in Arizona, California, and
Nevada. In June 1999, regulatory approval was obtained from the Public Utilities
Commission of Nevada. The shareholders of the Company approved the principal
terms of the merger at the annual shareholders meeting held in August 1999.
Merger filings have been made with the Arizona and California regulatory bodies.
A hearing date has not been determined in California.
Hearings before the Arizona Corporation Commission (ACC), scheduled during the
third quarter, have been delayed several times. Most recently, in October 1999
the ACC staff requested eight weeks to review the voluminous information filed
(including additional testimony by the Company and ONEOK and the submission of
documents filed in certain of the merger-related litigation described in Part
II, Item 1), as well as conduct additional discovery. The ACC granted the staff
request and ordered a report and updated recommendations be filed by staff in
January 2000. Hearings are now scheduled for February 2000.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company is principally engaged in the business of purchasing, transporting,
and distributing natural gas. Southwest is the largest distributor in Arizona,
selling and transporting natural gas in most of southern, central, and
northwestern Arizona, including the Phoenix and Tucson metropolitan areas.
Southwest is also the largest distributor and transporter of natural gas in
Nevada, and serves the Las Vegas metropolitan area and northern Nevada. In
addition, Southwest distributes and transports natural gas in portions of
California, including the Lake Tahoe area in northern California and the high
desert and mountain areas in San Bernardino County.
Southwest purchases, transports, and distributes natural gas to approximately
1,246,000 residential, commercial, industrial and other customers, of which 57
percent are located in Arizona, 34 percent are in Nevada, and 9 percent are in
California. During the twelve months ended September 30, 1999, Southwest earned
56 percent of operating margin in Arizona, 34 percent in Nevada, and 10 percent
in California. During this same period, Southwest earned 84 percent of operating
margin from residential and small commercial customers, 4 percent from other
sales customers, and 12 percent from transportation customers. These patterns
are similar to prior years and are expected to continue.
Northern is a full-service underground piping contractor, which provides utility
companies with trenching and installation, replacement, and maintenance services
for energy distribution systems.
Capital Resources and Liquidity
The capital requirements and resources of the Company generally are determined
independently for the natural gas operations and construction services segments.
Each business activity is generally responsible for securing its own financing
sources. The capital requirements and resources of the construction services
segment are not material to the overall capital requirements and resources of
the Company.
Southwest continues to experience significant population growth throughout its
service territories. This growth has required large amounts of capital to
finance the investment in infrastructure, in the form of new transmission and
distribution plant, to satisfy consumer demand. For the twelve months ended
September 30, 1999, natural gas construction expenditures totaled $205 million.
Approximately 75 percent of these current-period expenditures represented new
construction and the balance represented costs associated with routine
replacement of existing transmission, distribution, and general plant. Cash
flows from operating activities of Southwest (net of dividends) were $178
million for the twelve months ended September 30, 1999. Operating cash flows
exceeded expected levels primarily due to deferred purchased gas cost
recoveries.
Southwest estimates construction expenditures during the three-year period
ending December 31, 2001 will be approximately $580 million. During the
three-year period, cash flow from operating activities (net of dividends) is
estimated to fund approximately 60 percent of the gas operations total
construction expenditures. A portion of the construction expenditure funding
will be provided by $20 million of funds held in trust, at December 31, 1998,
from the issuance of industrial development revenue bonds (IDRB). The remaining
cash requirements 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, growth factors in Southwest service areas,
and merger-related developments (see Note 3). These external financings may
include the issuance of both debt and equity securities, bank and other
short-term borrowings, and other forms of financing. Under the agreement with
ONEOK, common stock issuances are currently limited to those necessary under
employee benefit and dividend reinvestment plans.
7
<PAGE>
Results of Consolidated Operations
Quarterly Analysis
- ------------------
Contribution to Net Income (Loss)
Three Months Ended September 30,
------------------------------------------
1999 1998
----------- -----------
(Thousands of dollars)
Natural gas operations $ (15,304) $ (11,794)
Construction services 1,116 849
----------- -----------
Net income (loss) $ (14,188) $ (10,945)
=========== ===========
Net loss for the quarter ended September 30, 1999 was $0.46 per share, compared
to a loss of $0.38 per share recorded during the corresponding quarter of the
prior year. Natural gas operations results declined $0.09 per share. See
separate discussion at Results of Natural Gas Operations for changes as they
relate to gas operations. The contribution from construction services for the
current quarter remained relatively consistent to that of the corresponding
quarter of the prior year. Average shares outstanding increased 1.7 million
shares between periods primarily due to a 2.5 million share issuance of common
stock in August 1998 and continuing issuances under the Dividend Reinvestment
and Stock Purchase Plan.
Nine-Month Analysis
- -------------------
Contribution to Net Income
Nine Months Ended September 30,
------------------------------------------
1999 1998
----------- -----------
(Thousands of dollars)
Natural gas operations $ 7,385 $ 20,637
Construction services 3,097 1,857
----------- -----------
Net income $ 10,482 $ 22,494
=========== ===========
Net income for the nine months ended September 30, 1999 was $0.34 per share,
compared to $0.80 per share recorded during the corresponding period of the
prior year. Earnings from natural gas operations decreased $0.50 per share. See
separate discussion at Results of Natural Gas Operations for changes as they
relate to gas operations. Construction services contributed per share earnings
of $0.10, a $0.04 per share increase from the corresponding period of the prior
year. The improvement is attributed to a high volume of work experienced during
the first quarter of 1999 that resulted from unseasonably warm, dry weather
conditions in several cold-climate operating areas. Average shares outstanding
increased 2.6 million shares between periods primarily due to a 2.5 million
share issuance of common stock in August 1998 and continuing issuances under the
Dividend Reinvestment and Stock Purchase Plan.
Twelve-Month Analysis
- ---------------------
Contribution to Net Income
Twelve Months Ended September 30,
------------------------------------------
1999 1998
----------- -----------
(Thousands of dollars)
Natural gas operations $ 31,578 $ 43,444
Construction services 3,947 2,385
----------- -----------
Net income $ 35,525 $ 45,829
=========== ===========
Earnings per share for the twelve months ended September 30, 1999 were $1.16, a
$0.49 decrease from per share earnings of $1.65 recorded during the prior
twelve-month period. Earnings contributed from natural gas operations decreased
$0.53 per share. See separate discussion at Results of Natural Gas Operations
for changes as they relate to gas operations. Construction services activities
contributed per share earnings of $0.13, a $0.04 per share improvement over the
prior twelve-month period. The improvement is attributable to
better-than-expected weather conditions in several cold-climate operating areas
which prevented the normal slow down in work during the fourth quarter of 1998
8
<PAGE>
and the first quarter of 1999. Average shares outstanding increased 2.7 million
shares between periods primarily due to a 2.5 million share issuance of common
stock in August 1998 and continuing issuances under the Dividend Reinvestment
and Stock Purchase Plan.
The following table sets forth the ratios of earnings to fixed charges for the
Company:
For the Twelve Months Ended
September 30, December 31,
1999 1998
--------------- ---------------
Ratios of earnings to fixed charges 1.88 2.08
Earnings are defined as the sum of pretax income plus fixed charges. Fixed
charges consist of all interest expense including capitalized interest,
one-third of rent expense (which approximates the interest component of such
expense), preferred securities distributions, and amortized debt costs.
Results of Natural Gas Operations
<TABLE>
Quarterly Analysis
- ------------------
<CAPTION>
Three Months Ended
September 30,
------------------------------
1999 1998
----------- -----------
(Thousands of dollars)
<S> <C> <C>
Gas operating revenues $ 125,190 $ 128,229
Net cost of gas sold 46,711 51,499
----------- -----------
Operating margin 78,479 76,730
Operations and maintenance expense 54,621 50,765
Depreciation and amortization 21,918 20,563
Taxes other than income taxes 7,074 7,699
----------- -----------
Operating loss (5,134) (2,297)
Other income (expense) (1,918) (341)
----------- -----------
Loss before interest and income taxes (7,052) (2,638)
Net interest deductions 15,657 15,467
Preferred securities distributions 1,368 1,368
Income tax expense (benefit) (8,773) (7,679)
----------- -----------
Contribution to consolidated net income (loss) $ (15,304) $ (11,794)
=========== ===========
</TABLE>
Contribution from natural gas operations declined approximately $3.5 million
compared to the third quarter of 1998. The decline was principally the result of
merger-related costs and higher operating expenses partially offset by increased
operating margin.
Operating margin increased $1.7 million, or two percent, in the third quarter of
1999 compared to the same period a year ago. The increase was attributed to
customer growth as both quarters have little heating demand and there was no
significant change in rates charged to customers.
Operations and maintenance expenses increased $3.9 million, or eight percent,
reflecting general increases in labor and maintenance costs along with
incremental operating expenses associated with providing service to a steadily
growing customer base.
Depreciation expense and general taxes increased a net $730,000, or three
percent, as a result of construction activities. Average gas plant in service
increased $165 million, or eight percent, as compared to the third quarter of
1998. The increase reflects ongoing capital expenditures for the upgrade of
9
<PAGE>
existing operating facilities and the expansion of the system to accommodate
continued customer growth.
Other expenses increased $1.6 million primarily due to merger-related costs.
<TABLE>
Nine-Month Analysis
- -------------------
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1999 1998
----------- -----------
(Thousands of dollars)
<S> <C> <C>
Gas operating revenues $ 570,979 $ 567,609
Net cost of gas sold 254,436 246,254
----------- -----------
Operating margin 316,543 321,355
Operations and maintenance expense 163,565 153,796
Depreciation and amortization 65,481 59,539
Taxes other than income taxes 21,585 23,516
----------- -----------
Operating income 65,912 84,504
Other income (expense) (2,600) (432)
----------- -----------
Income before interest and income taxes 63,312 84,072
Net interest deductions 44,720 46,806
Preferred securities distributions 4,106 4,106
Income tax expense 7,101 12,523
----------- -----------
Contribution to consolidated net income $ 7,385 $ 20,637
=========== ===========
</TABLE>
Contribution to consolidated net income declined approximately $13.3 million
compared to the first nine months of 1998. The decline was principally the
result of merger-related costs, lower operating margin, and higher operating
expenses partially offset by reduced financing costs.
Operating margin decreased $4.8 million, or one percent, in the first nine
months of 1999 compared to the same period a year ago. Differences in heating
demand caused by weather variations between periods resulted in a $13 million
decrease, much of which was attributed to colder-than-normal temperatures during
the first half of 1998. Partially offsetting the weather-related impacts was an
increase of approximately $8 million in operating margin due to customer growth.
Operations and maintenance expenses increased $9.8 million, or six percent,
reflecting general increases in labor and maintenance costs along with
incremental operating expenses associated with providing service to a steadily
growing customer base.
Depreciation expense and general taxes increased a net $4 million, or five
percent, as a result of construction activities. Average gas plant in service
increased $159 million, or eight percent, as compared to the nine-month period
ended September 1998. The increase reflects ongoing capital expenditures for the
upgrade of existing operating facilities and the expansion of the system to
accommodate continued customer growth.
Other expense includes $4.4 million (pretax) of merger-related costs.
Net interest deductions decreased $2.1 million, or four percent. Strong cash
flows coupled with a 2.5 million share common stock offering during the third
quarter of 1998 combined to reduce average debt outstanding between periods.
10
<PAGE>
<TABLE>
Twelve-Month Analysis
- ---------------------
<CAPTION>
Twelve Months Ended
September 30,
------------------------------
1999 1998
----------- -----------
(Thousands of dollars)
<S> <C> <C>
Gas operating revenues $ 802,967 $ 767,961
Net cost of gas sold 338,031 305,762
----------- -----------
Operating margin 464,936 462,199
Operations and maintenance expense 218,941 206,790
Depreciation and amortization 86,173 78,879
Taxes other than income taxes 29,715 30,427
----------- -----------
Operating income 130,107 146,103
Other income (expense) (4,283) (12,761)
----------- -----------
Income before interest and income taxes 125,824 133,342
Net interest deductions 60,198 63,365
Preferred securities distributions 5,475 5,475
Income tax expense 28,573 21,058
----------- -----------
Contribution to consolidated net income $ 31,578 $ 43,444
=========== ===========
</TABLE>
Contribution to consolidated net income decreased $11.9 million compared to the
corresponding twelve-month period ended September 1998. The decrease was the
result of higher operating expenses, partially offset by improvements in
operating margin and reduced financing costs. In addition, current-period
results were negatively impacted by the incurrence of merger-related costs.
Prior-period results included the effects of several nonrecurring events
recorded during the fourth quarter of 1997, which are described below.
Operating margin increased $2.7 million, or one percent. Customer growth
contributed $15 million of incremental margin. However, differences in heating
demand between periods resulted in a $12 million reduction in operating margin
as colder-than-normal weather conditions in the prior period returned to more
normal conditions during the most recent twelve months.
Operations and maintenance expenses increased $12.2 million, or six percent,
reflecting general increases in labor and maintenance costs along with
incremental operating expenses associated with providing service to a steadily
growing customer base.
Depreciation expense and general taxes increased a net $6.6 million, or six
percent, as a result of additional plant in service. Average gas plant in
service for the current twelve-month period increased $154 million, or eight
percent, compared to the corresponding period a year ago. This was attributable
to the upgrade of existing operating facilities and the expansion of the system
to accommodate new customers being added to the system.
Other income (expense) improved $8.5 million. During the fourth quarter of 1997,
Southwest recognized nonrecurring charges to income related to cost overruns on
two separate construction projects. These charges are reflected in Other income
(expense). An $8 million pretax charge resulted from cost overruns experienced
during expansion of the northern California service territory. See Rates and
Regulatory Proceedings herein. A second pretax charge, for $5 million, related
to cost overruns on a nonutility construction project. See Note 11 of the Notes
to Consolidated Financial Statements in the 1998 Annual Report to Shareholders
for additional disclosures related to this charge. Partially offsetting these
charges was the recognition of a $3.4 million income tax benefit related to the
successful settlement in November 1997 of open tax issues dating back as far as
1988. The combined impact of these three events was a $4.1 million, or $0.15 per
share, after-tax reduction to earnings. In connection with the proposed merger
into ONEOK, Southwest has incurred approximately $5.5 million (pretax) of
financial advisor, legal, and other costs, which are included in Other income
(expense) for the twelve-month period ended September 1999. These costs resulted
in an after-tax reduction to earnings of $0.16 per share.
11
<PAGE>
Net interest deductions decreased $3.2 million, or five percent, during the
twelve months ended September 1999 compared to the corresponding prior
twelve-month period. Strong cash flows, coupled with a 2.5 million share common
stock offering during the third quarter of 1998, reduced the need for new
borrowings and also lowered the average amount of debt outstanding.
Rates and Regulatory Proceedings
Northern California Expansion Project. In 1995, Southwest initiated a
multi-year, three-phase construction project to expand its northern California
service territory and extend service into Truckee, California. The California
Public Utilities Commission (CPUC) established a $29.1 million cost cap for the
project. Cost overruns experienced during the construction of Phase II of the
project have led Southwest to pursue regulatory and legal avenues aimed at
minimizing its regulatory disallowance exposure. See Note 11 of the Notes to
Consolidated Financial Statements in the 1998 Annual Report to Shareholders for
additional background information.
In February 1999, Southwest petitioned the Supreme Court of the state of
California for review of the July 1998 CPUC decision ordering Southwest to
complete the project under the terms and scope of the 1995 certificate. In
June 1999, the petition for review was denied.
In April 1999, following six months of mediation, Southwest and the Truckee Town
Council negotiated a Settlement Agreement and Mutual Release (Agreement) which
reconciled disputes and claims against each other. The Agreement addresses the
civil suit against the town of Truckee, the remaining project scope, recovery of
project costs, and the timing of the next California general rate case, among
other items.
During the summer of 1999, Southwest resumed construction on the project. Due to
the short construction season, the project will not be completed until 2003.
Southwest expects to incur approximately $4 million of construction expenditures
in 1999.
In June 1999, Southwest and the town of Truckee filed the Agreement as part of a
Joint Petition with the CPUC to modify the certificate of public convenience and
necessity granted in 1995 and the related cost recovery mechanism. In this
filing, Southwest reduced the estimated remaining cost to complete the project
from $25 million to approximately $18 million based on construction bids
received. On November 2, 1999, the assigned Administrative Law Judge issued a
Draft Decision recommending denial of the Joint Petition and addressing certain
issues regarding compliance with existing orders. The parties to the proceeding
have 20 days to file comments on the Draft Decision. The Draft Decision is
scheduled to be on the agenda at the December 2, 1999 CPUC meeting at which time
the CPUC may act on the Draft Decision, postpone action, or consider other
alternatives. Both Southwest and representatives of the town of Truckee will be
filing comments and working with the CPUC, as allowed under CPUC rules, to
obtain approval of the Joint Petition as filed.
Management believes there is a reasonable possibility these efforts will be
successful and the CPUC will ultimately approve the Joint Petition. If the Joint
Petition is approved, Southwest would reduce its regulatory disallowance
exposure from approximately $17 million to approximately $2 million, pretax,
based on current estimates to complete the project. If not approved, Southwest
will resume its pursuit of other regulatory and legal avenues with the intent of
reversing or mitigating the effects of the CPUC decisions to complete the
project under its original terms and scope. Once a final order is issued, an
evaluation of the likelihood of success of these other avenues can be made.
Pending a final decision by the CPUC, Southwest has not recorded any additional
write-offs for this project beyond an $8 million charge recognized in the fourth
quarter of 1997.
Year 2000 Readiness Disclosure
Most companies have computer systems that use two digits to identify a year in
the date field (e.g. "98" for 1998). These systems must be modified to handle
turn-of-the-century calculations. If not corrected, system failures or
miscalculations could occur, potentially causing disruptions of operations,
including, among other things the inability to process transactions, send
12
<PAGE>
invoices, or engage in other normal business activities. The Year 2000 issue
also threatens disruptions in government services, telecommunications, and other
essential industries. This creates potential risk for all companies, even if
their own computer systems are Year 2000 compliant.
In 1994, the Company initiated a comprehensive review of its computer systems to
identify processes that could be adversely affected by Year 2000 issues. By
early 1995, the Company identified computer application systems that required
modification or replacement. Since that time, the Company has focused on
converting all business-critical systems to be Year 2000 compliant.
In addition to the evaluation and remediation of computer application systems
and components, the Company has also developed a comprehensive Year 2000
compliance plan. As part of this plan, the Company has formed a Year 2000
project team with the mission of ensuring that all critical systems, facilities,
and processes are identified and analyzed for Year 2000 compliance. The project
team consists of representatives from several strategic departments of the
Company.
The Year 2000 plan includes specific timetables for categories of tasks for each
department as follows:
(1) Assess Year 2000 issues - complete;
(2) Analyze, prioritize, and catalog Year 2000 issues - complete;
(3) Create action plans - complete;
(4) Implement plans and validate compliance - complete.
The Company's top priority is to ensure that natural gas can be received from
suppliers and delivered to customers. To accomplish this, the Company has sent
inquiries to its five major providers of interstate natural gas transportation
service. These providers have responded to the inquiries indicating that they
intend to be Year 2000 compliant before the end of 1999. The Company has also
evaluated its gas pipeline delivery systems, which are the systems used to
distribute natural gas from the interstate pipelines to the customer. These
systems utilize an extensive network of hardware and software devices that
schedule, regulate, measure, or otherwise facilitate the flow of natural gas.
Remediation or replacement of any noncompliant devices has been completed making
the gas supply delivery systems Year 2000 compliant.
The Company's business-critical computer systems are Year 2000 compliant. The
customer service system which supports customer billing, accounts receivable,
and other customer service functions is Year 2000 compliant. In addition, the
accounts payable, purchasing, human resources, general ledger, and payroll
systems are Year 2000 compliant. The Company has also assessed, and fixed where
necessary, its other computer components, such as computer equipment and
software, and these components are Year 2000 compliant.
The Company has been communicating with suppliers and vendors to determine the
extent to which those companies are addressing Year 2000 compliance issues. The
Company is requiring business-critical suppliers and vendors to certify
compliance in order to continue doing business with the Company. In addition,
the Company is identifying and contacting alternate suppliers and vendors as
part of a Year 2000 contingency plan. The companies contacted have responded
that efforts are underway to become compliant.
The Company has also assessed and remediated Year 2000 issues related to
embedded system devices (such as microcontrollers used in equipment and
machinery), data exchange functions, networks, telecommunications, security
access and building control systems, forms, reports, and other business
processes and activities. These areas are now Year 2000 compliant.
The Company has developed contingency plan scenarios for each district and
division. In developing these scenarios, the Company has identified the systems,
operations, and devices that are at risk for failure. The Company has attempted
to forecast what failures might occur and the impact of these failures. As part
of this process, the Company has identified the most reasonably likely worst
case Year 2000 scenario, and has prepared contingency plans for all "high risk"
13
<PAGE>
systems, operations, and devices. This process has culminated in the development
of a "Contingency Plan Operations Guide." This guide documents specific items
associated with the Company's Year 2000 contingency plans including
personnel-related items, non-labor resources required by the plan, command and
decision authority roles, and location and function of a contingency command
center.
The Company estimates that the cost of remediation will be approximately
$2 million. Expenditures of approximately $1.6 million have been incurred
through September 1999 in connection with systems that have been converted. The
remediation costs include internal labor costs, as well as fees and expenses
paid to outside contractors, specifically associated with reprogramming or
replacing noncompliant components. The Company does not expect that such
expenditures will have a material impact on results of operations or financial
condition.
The Company's Year 2000 plans are based on management's best estimates. These
estimates were derived using numerous assumptions of future events including,
but not limited to, third party modification plans, availability of qualified
personnel, support of software vendors, and other factors. The Company is also
relying on the representations made by significant third party suppliers and
vendors.
Forward-Looking Statements
This report contains statements which constitute "forward-looking statements"
within the meaning of the Securities Litigation Reform Act of 1995 (Reform Act).
All such forward-looking statements are intended to be subject to the safe
harbor protection provided by the Reform Act. A number of important factors
affecting the business and financial results of the Company could cause actual
results to differ materially from those stated in the forward-looking
statements. These factors include, but are not limited to, the impact of weather
variations on customer usage, natural gas prices, the effects of
regulation/deregulation, the timing of rate relief, the outcome of Southwest's
challenges to regulatory actions, changes in capital requirements and funding,
Year 2000 remediation efforts, acquisitions, competition, and merger-related
developments and litigation (see Note 3 and Part II, Item 1).
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
an entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133 also requires that changes in the fair value of derivative
instruments be recognized currently in earnings in the income statement unless
specific hedge accounting criteria are met. Special hedge accounting for
qualified hedges allows changes in the fair value of derivative instruments to
be offset in the income statement in the period in which the related changes in
the fair value of the item being hedged occurs. Hedge accounting requires an
entity to formally document, designate, and assess hedge effectiveness. The
Company does not currently utilize stand-alone derivatives for speculative
purposes or for hedging, and does not have foreign currency exposure. However,
the Company is reviewing gas supply and other contracts for potential embedded
derivatives that may need to be recognized and disclosed under the requirements
of this complex statement.
In June 1999, the FASB issued SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No. 133." SFAS No. 137 postpones the effective date of SFAS No. 133
from quarters of fiscal years beginning after June 15, 1999 to quarters of
fiscal years beginning after June 15, 2000 (i.e., first quarter of 2001).
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December 1998, the Company entered into an Agreement and Plan of Merger (the
Merger Agreement) pursuant to which the Company agreed to be acquired by ONEOK,
Inc (ONEOK). The Merger Agreement was amended on April 25, 1999 following the
receipt of unsolicited offers to acquire the Company from Southern Union Company
(Southern Union) which were rejected by the Company. Litigation is pending in
California, Nevada, Oklahoma, and Arizona relating to the proposed acquisition
of the Company by ONEOK and the Company's rejection of Southern Union's
unsolicited offers which is described below.
California Litigation
- ---------------------
On December 16, 1998, Arthur Klein filed a purported class action complaint on
behalf of himself and shareholders of the Company (excluding defendants and
their affiliates and families) in the Superior Court of the State of California
in San Diego County (Case No. 726615) against the Company and its directors. The
complaint has been amended three times. As amended, the complaint alleges breach
of the duties of loyalty, due care, candor and good faith and fair dealing and
sets forth claims relating to the Company's proxy statement for its annual
meeting of shareholders in 1999, including allegations of misrepresentations or
omissions relating to the proposed acquisition of the Company by ONEOK and the
rejection of the Southern Union offers. The complaint, as amended, further seeks
to enjoin the acquisition of the Company by ONEOK, to rescind the Merger
Agreement with ONEOK or portions thereof, to implement an auction of the Company
or similar process, to void the $30 million termination fee in the Merger
Agreement with ONEOK, unspecified damages, and a declaration that the action is
properly maintainable as a class action on behalf of all shareholders.
On March 31, 1999, the Court allowed John Mauricio to file a complaint in
intervention. On May 4, 1999, Southern Union intervened in the purported
shareholder class action and filed a complaint in intervention. Southern Union's
complaint was thereafter severed from the purported shareholder class action and
has been dismissed.
On June 9, 1999, the Company signed a Memorandum of Understanding (MOU) with the
shareholder plaintiffs' counsel to settle the purported shareholder class
action. The MOU sets forth the parties' agreement in principle settling all of
the shareholders' claims arising out of the actions of the Company and its
directors relating to the proposed acquisition of the Company by ONEOK,
including allegations of misrepresentations or omissions in the proxy statement,
and will be incorporated into a final Stipulation of Settlement. The MOU is not
an admission of any of the plaintiff's allegations. The Company and its
directors have denied and continue to deny that they have committed or attempted
to commit any wrongdoing or breached any duty owed to the Company or its
shareholders. The MOU is subject to several conditions, including the
consummation of the acquisition of the Company by ONEOK and the entry of a final
judgment of dismissal with prejudice by a U.S. district court that is binding on
all shareholders of the Company during the period from December 14, 1998 through
the date of consummation of the proposed acquisition.
The case has been removed from the California Superior Court in San Diego
to the U.S. District Court for the Southern District of California
(Case No. 99 cv 1891B (JAH)). On October 6, 1999, GAMCO Investors, Inc. and
Gabelli Funds LLC filed a notice of appearance in this matter.
Nevada Litigation
- -----------------
On April 30, 1999, the Company filed a complaint against Southern Union in the
U.S. District Court, District of Nevada (Case No. CV-99-0530-JBF-LRL) alleging a
breach of the confidentiality and standstill agreement between the Company and
Southern Union, breach of the implied covenant of good faith and fair dealing,
misappropriation of trade secrets, intentional interference with contract,
intentional interference with prospective economic advantage and other
violations of California and Nevada law. The Company amended its complaint on
May 6, 1999, adding an additional claim against Southern Union pursuant to
Section 14(a) of the Securities Exchange Act of 1934. On June 30, 1999, Southern
Union filed a motion for judgment on the pleadings. The court has not yet ruled
on this motion.
15
<PAGE>
On July 22, 1999, Southern Union filed a motion for leave to amend its answer in
the Nevada federal action and to assert counterclaims against the Company. The
counterclaims mirror the contractual claims filed by Southern Union in the
Arizona action described below. Southern Union's motion for leave to amend has
been granted. No motions or answers have been filed by the Company in response
to an amended answer or counterclaims.
On August 4, 1999, the Company filed a motion for a temporary restraining order
and preliminary injunction to prevent Southern Union from prosecuting any claims
stemming from the February 21, 1999 confidentiality and standstill agreement in
the United States District Court of Arizona. This motion has been denied.
Oklahoma Litigation
- -------------------
On May 5, 1999, ONEOK filed a complaint against Southern Union for breaching the
February 21, 1999 confidentiality and standstill agreement in the United States
District Court for the Northern District of Oklahoma (Case No. 99-CV-345H(M)).
ONEOK's third party beneficiary claims against Southern Union in the Oklahoma
action are similar to those asserted by the Company against Southern Union in
the Nevada action. ONEOK also sought to enjoin Southern Union from breaching the
February 21, 1999 confidentiality and standstill agreement and from taking any
other wrongful actions to disrupt the proposed acquisition of the Company by
ONEOK.
On May 11, 1999, the Northern District of Oklahoma granted ONEOK's requested
injunction and issued a temporary restraining order enjoining Southern Union
from any future violation of the February 21, 1999 confidentiality and
standstill agreement, including soliciting proxies from the Company's
shareholders. ONEOK and Southern Union then stipulated that the temporary
restraining order could be entered as a preliminary injunction and that Southern
Union would be deemed to have sought and been denied a stay of the injunction.
The Northern District of Oklahoma entered the parties' stipulation and Southern
Union filed a Notice of Appeal and Request for a Stay of the injunction with the
Tenth Circuit on May 17, 1999. With certain limited exceptions, this request for
a stay was denied. Southern Union subsequently filed supplements to its motion
for stay seeking the opportunity to participate in ongoing administrative
proceedings before state public utility commissions, including proceedings in
Arizona, California and Nevada. On June 10, 1999, the Tenth Circuit Court of
Appeals denied Southern Union's request for a stay in order to enable it to
participate in state public utility proceedings. On July 19, 1999, Southern
Union filed a motion to vacate the preliminary injunction issued by the Northern
District of Oklahoma in May 1999 on the basis of the same allegations contained
in the complaint filed in Arizona in July 1999. Southern Union's motion was
denied on July 23, 1999 on the grounds that the court lacked jurisdiction to
consider Southern Union's motion.
Discovery is proceeding in this case. The Company is not, however, a party to
this case.
Arizona Litigation
- ------------------
On July 19, 1999, Southern Union filed a complaint in the United States District
Court of Arizona (Civ '99 1294 PHX ROS), which was amended on October 11, 1999.
As amended, the complaint alleges that the Company, Michael O. Maffie, President
and Chief Executive Officer of the Company, Thomas Y. Hartley, Chairman of the
Board of the Company, and Edward Zub, Senior Vice President Regulation and
Pricing of the Company, ONEOK, Larry W. Brummett, Chairman of the Board and
Chief Executive Officer of ONEOK, James C. Kneale, Chief Financial Officer and
Treasurer of ONEOK, John A. Gaberino, Jr., Senior Vice President and General
Counsel of ONEOK, Eugene Dubay, President and Chief Operating Officer of Kansas
Gas Service, a division of ONEOK, James Irvin, a Commissioner of the Arizona
Corporation Commission, and Jack Rose, a resident of the State of Arizona, have
conspired to block the Company's shareholders from voting upon Southern Union's
offer and have acted to ensure that the Company's Board of Directors would
approve and recommend the ONEOK offer to the Company's shareholders and to
influence the vote of members of regulatory commissions required to approve the
proposed acquisition of the Company by ONEOK in violation of state and federal
criminal laws. The complaint, as amended, further alleges that the defendants
fraudulently induced Southern Union to enter into the February 21, 1999
confidentiality and standstill agreement, Southwest breached the terms of that
agreement and its covenant of good faith and fair dealing, and all defendants,
other than Southwest and Mr. Hartley, intentionally interfered with a business
16
<PAGE>
relationship between the Company and Southern Union and tortiously interfered
with contractual relations between the Company and Southern Union.
Southern Union seeks damages in an amount not less than $750 million to be
trebled for the alleged violations of state and federal criminal law,
compensatory damages in an amount not less than $750 million, plus interest,
rescission of the confidentiality and standstill agreement between the Company
and Southern Union and punitive damages.
On August 2, 1999, Southern Union filed a motion for a temporary restraining
order and preliminary injunction seeking to prevent the Company and ONEOK from
participating in any regulatory approval proceedings in California and Arizona.
This motion was denied on August 5, 1999.
The defendants have filed motions to dismiss the first complaint filed by
Southern Union. No answers or motions have yet been filed by any of the
defendants in response to Southern Union's amended complaint.
Other Proceedings
- -----------------
The Company has been named as defendant in various other legal proceedings. The
ultimate dispositions of these proceedings are not presently determinable;
however, it is the opinion of management that none of this litigation will have
a material adverse impact on the Company's financial position or results of
operations.
ITEMS 2-4. None
ITEM 5. OTHER INFORMATION
Shareholders are advised that any shareholder proposal intended for
consideration at the Company's regularly scheduled Annual Meeting, if the
meeting is held, and inclusion in the Company's proxy materials for the meeting
must be received in writing by the Company on or before December 31, 1999. If a
shareholder intends to offer any proposal at such meeting without using the
proxy materials, notice of such intended action has to be provided to the
Company on or before December 31, 1999, in order for the proposal to be
presented for shareholder consideration at the Annual Meeting. All proposals
must comply with applicable SEC rules. It is recommended that shareholders
submitting proposals for inclusion in the proxy materials or notices to the
Company, direct such proposals or notices to the Corporate Secretary of the
Company and utilize Certified Mail-Return Receipt Requested in order to ensure
timely delivery.
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as part of this report on
Form 10-Q:
Exhibit 12.1 - Computation of Ratios of Earnings to Fixed
Charges and Ratios of Earnings to Combined Fixed Charges and
Preferred Stock Dividends.
Exhibit 27.1 - Financial Data Schedule (filed electronically
only).
(b) Reports on Form 8-K
The Company filed a Form 8-K, dated September 9, 1999,
reporting that the Arizona Corporation Commission delayed
hearings regarding the proposed merger between Southwest Gas
Corporation and ONEOK from September 1, 1999 until
November 4, 1999.
The Company filed a Form 8-K, dated October 7, 1999,
reporting that the Arizona Corporation Commission delayed
hearings regarding the proposed merger between Southwest Gas
Corporation and ONEOK from November 4, 1999 until
December 2, 1999.
The Company filed a Form 8-K, dated October 27, 1999,
reporting that the Arizona Corporation Commission delayed
hearings regarding the proposed merger between Southwest Gas
Corporation and ONEOK from December 2, 1999 until February
11, 2000.
The Company filed a Form 8-K, dated October 28, 1999,
reporting operating results for the quarter ended September
30, 1999.
The Company filed a Form 8-K, dated November 2, 1999,
reporting that a Draft Decision recommending denial of the
Joint Petition relating to the Northern California Expansion
Project was issued by the assigned Administrative Law Judge.
18
<PAGE>
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.
Southwest Gas Corporation
-------------------------------------------------------
(Registrant)
Date: November 12, 1999
/s/ Edward A. Janov
------------------------------------------------------
Edward A. Janov
Vice President/Controller and Chief Accounting Officer
19
<TABLE>
EXHIBIT 12.1
SOUTHWEST GAS CORPORATION
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Thousands of dollars)
<CAPTION>
For the Twelve Months Ended
-----------------------------------------------------------------------------------
September 30, December 31,
---------------------------------------------------------------------
Continuing operations 1999 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1. Fixed charges:
A) Interest expense $ 61,487 $ 63,416 $ 63,247 $ 54,674 $ 52,844 $ 48,688
B) Amortization 1,330 1,243 1,164 1,494 1,569 1,426
C) Interest portion of rentals 8,463 7,531 6,973 6,629 4,435 4,743
D) Preferred securities distributions 5,475 5,475 5,475 5,475 913 -
------------ ------------ ------------ ------------ ------------- -------------
Total fixed charges $ 76,755 $ 77,665 $ 76,859 $ 68,272 $ 59,761 $ 54,857
============ ============ ============ ============ ============= =============
2. Earnings (as defined):
E) Pretax income from
continuing operations $ 67,469 $ 83,951 $ 21,328 $ 10,448 $ 3,493 $ 38,119
Fixed Charges (1. above) 76,755 77,665 76,859 68,272 59,761 54,857
------------ ------------ ------------ ------------ ------------- -------------
Total earnings as defined $ 144,224 $ 161,616 $ 98,187 $ 78,720 $ 63,254 $ 92,976
============ ============ ============ ============ ============= =============
1.88 2.08 1.28 1.15 1.06 1.69
============ ============ ============ ============ ============= =============
<CAPTION>
For the Twelve Months Ended
-----------------------------------------------------------------------------------
September 30, December 31,
Adjusted for interest allocated to ---------------------------------------------------------------------
discontinued operations 1999 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1. Fixed charges:
A) Interest expense $ 61,487 $ 63,416 $ 63,247 $ 54,674 $ 52,844 $ 48,688
B) Amortization 1,330 1,243 1,164 1,494 1,569 1,426
C) Interest portion of rentals 8,463 7,531 6,973 6,629 4,435 4,743
D) Preferred securities distributions 5,475 5,475 5,475 5,475 913 -
E) Allocated interest [1] - - - - 9,636 7,874
------------ ------------ ------------ ------------ ------------- -------------
Total fixed charges $ 76,755 $ 77,665 $ 76,859 $ 68,272 $ 69,397 $ 62,731
============ ============ ============ ============ ============= =============
2. Earnings (as defined):
F) Pretax income from
continuing operations $ 67,469 $ 83,951 $ 21,328 $ 10,448 $ 3,493 $ 38,119
Fixed Charges (1. above) 76,755 77,665 76,859 68,272 69,397 62,731
------------ ------------ ------------ ------------ ------------- -------------
Total earnings as defined $ 144,224 $ 161,616 $ 98,187 $ 78,720 $ 72,890 $ 100,850
============ ============ ============ ============ ============= =============
3. Ratio of earnings to fixed charges 1.88 2.08 1.28 1.15 1.05 1.61
============ ============ ============ ============ ============= =============
[1] Represents allocated interest through the period ended December 31, 1995. Carrying costs for the
period subsequent to year end through the disposition of the discontinued operations were accrued and
recorded as disposal costs.
</TABLE>
<PAGE>
<TABLE>
EXHIBIT 12.1
SOUTHWEST GAS CORPORATION
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
(Thousands of dollars)
<CAPTION>
For the Twelve Months Ended
-------------------------------------------------------------------------------------
September 30, December 31,
-----------------------------------------------------------------------
Continuing operations 1999 1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1. Combined fixed charges:
A) Total fixed charges $ 76,755 $ 77,665 $ 76,859 $ 68,272 $ 59,761 $ 54,857
B) Preferred dividends [1] - - - - 404 826
------------- ------------- ------------- ------------- ------------- -------------
Total fixed charges and
preferred dividends $ 76,755 $ 77,665 $ 76,859 $ 68,272 $ 60,165 $ 55,683
============= ============= ============= ============= ============= =============
2. Earnings $ 144,224 $ 161,616 $ 98,187 $ 78,720 $ 63,254 $ 92,976
============= ============= ============= ============= ============= =============
3. Ratio of earnings to fixed charges
and preferred dividends 1.88 2.08 1.28 1.15 1.05 1.67
============= ============= ============= ============= ============= =============
<CAPTION>
For the Twelve Months Ended
-------------------------------------------------------------------------------------
Adjusted for interest allocated to September 30, December 31,
-----------------------------------------------------------------------
discontinued operations 1999 1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1. Combined fixed charges:
A) Total fixed charges $ 76,755 $ 77,665 $ 76,859 $ 68,272 $ 69,397 $ 62,731
B) Preferred dividends [1] - - - - 404 826
------------- ------------- ------------- ------------- ------------- -------------
Total fixed charges and
preferred dividends $ 76,755 $ 77,665 $ 76,859 $ 68,272 $ 69,801 $ 63,557
============= ============= ============= ============= ============= =============
2. Earnings $ 144,224 $ 161,616 $ 98,187 $ 78,720 $ 72,890 $ 100,850
============= ============= ============= ============= ============= =============
3. Ratio of earnings to fixed charges
and preferred dividends 1.88 2.08 1.28 1.15 1.04 1.59
============= ============= ============= ============= ============= =============
[1] Preferred and preference dividends have been adjusted to represent the pretax earnings necessary
to cover such dividend requirements.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from
Southwest Gas Corporation's Form 10-Q for the quarter ended September 30, 1999
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-31-1999
<PERIOD-END> SEP-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,546,378
<OTHER-PROPERTY-AND-INVEST> 84,721
<TOTAL-CURRENT-ASSETS> 124,475
<TOTAL-DEFERRED-CHARGES> 0
<OTHER-ASSETS> 47,504
<TOTAL-ASSETS> 1,803,078
<COMMON> 32,429
<CAPITAL-SURPLUS-PAID-IN> 434,196
<RETAINED-EARNINGS> 11,093
<TOTAL-COMMON-STOCKHOLDERS-EQ> 477,718
0
0
<LONG-TERM-DEBT-NET> 820,161
<SHORT-TERM-NOTES> 36,835
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 7,081
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 461,283 <F1>
<TOT-CAPITALIZATION-AND-LIAB> 1,803,078
<GROSS-OPERATING-REVENUE> 674,606
<INCOME-TAX-EXPENSE> 9,509
<OTHER-OPERATING-EXPENSES> 603,255
<TOTAL-OPERATING-EXPENSES> 603,255
<OPERATING-INCOME-LOSS> 71,351
<OTHER-INCOME-NET> (5,545)<F2>
<INCOME-BEFORE-INTEREST-EXPEN> 65,806
<TOTAL-INTEREST-EXPENSE> (45,815)
<NET-INCOME> 10,482
0
<EARNINGS-AVAILABLE-FOR-COMM> 10,482
<COMMON-STOCK-DIVIDENDS> 18,830
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 169,126
<EPS-BASIC> 0.34
<EPS-DILUTED> 0.34
<FN>
<F1> Includes: trust originated preferred securities of $60,000, current liabilities, net of current long-term
debt maturities and short-term debt, of $169,849 and deferred income taxes and other credits of $231,434
<F2> Includes distributions related to trust originated preferred securities of $4,106
</FN>
</TABLE>
