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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 June 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, 30,718,216 shares as of August 4, 1999.
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except par value)
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Utility plant:
Gas plant $ 2,107,897 $ 2,020,139
Less: accumulated depreciation (633,942) (612,138)
Acquisition adjustments 3,692 3,881
Construction work in progress 35,107 47,480
------------- -------------
Net utility plant 1,512,754 1,459,362
------------- -------------
Other property and investments 84,527 73,926
------------- -------------
Current assets:
Cash and cash equivalents 9,559 18,535
Accounts receivable, net of allowances 57,986 88,037
Accrued utility revenue 23,000 56,873
Deferred income taxes 4,249 -
Deferred purchased gas costs - 57,595
Prepaids and other current assets 28,303 26,346
------------- -------------
Total current assets 123,097 247,386
------------- -------------
Deferred charges and other assets 49,360 50,020
------------- -------------
Total assets $ 1,769,738 $ 1,830,694
============= =============
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $1 par (authorized - 45,000,000 shares; issued
and outstanding - 30,682,623 and 30,409,616 shares) $ 32,312 $ 32,040
Additional paid-in capital 431,015 424,840
Retained earnings 31,606 19,520
------------- -------------
Total common equity 494,933 476,400
Redeemable preferred securities of Southwest Gas Capital I 60,000 60,000
Long-term debt, less current maturities 793,477 812,906
------------- -------------
Total capitalization 1,348,410 1,349,306
------------- -------------
Current liabilities:
Current maturities of long-term debt 6,742 5,270
Short-term debt 8,370 52,000
Accounts payable 39,357 64,295
Customer deposits 25,519 24,333
Accrued taxes 48,529 33,480
Accrued interest 12,838 13,872
Deferred taxes - 12,627
Deferred purchased gas costs 3,006 -
Other current liabilities 45,812 44,917
------------- -------------
Total current liabilities 190,173 250,794
------------- -------------
Deferred income taxes and other credits:
Deferred income taxes and investment tax credits 179,439 179,666
Other deferred credits 51,716 50,928
------------- -------------
Total deferred income taxes and other credits 231,155 230,594
------------- -------------
Total capitalization and liabilities $ 1,769,738 $ 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 SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
------------------------ ------------------------ ------------------------
1999 1998 1999 1998 1999 1998
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues:
Gas operating revenues $ 166,679 $ 165,017 $ 445,789 $ 439,380 $ 806,006 $ 734,741
Construction revenues 33,613 27,880 62,528 46,118 134,122 110,598
----------- ----------- ----------- ----------- ----------- -----------
Total operating revenues 200,292 192,897 508,317 485,498 940,128 845,339
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Net cost of gas sold 71,839 73,768 207,725 194,755 342,819 282,771
Operations and maintenance 55,378 52,181 108,944 103,031 215,085 206,335
Depreciation and amortization 24,134 21,658 48,301 43,042 94,063 86,776
Taxes other than income taxes 7,299 7,845 14,511 15,817 30,340 30,099
Construction expenses 30,112 24,494 54,581 40,400 117,849 96,177
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses 188,762 179,946 434,062 397,045 800,156 702,158
----------- ----------- ----------- ----------- ----------- -----------
Operating income 11,530 12,951 74,255 88,453 139,972 143,181
----------- ----------- ----------- ----------- ----------- -----------
Other income and (expenses):
Net interest deductions (14,800) (15,539) (29,670) (31,819) (61,205) (64,790)
Preferred securities distributions (1,369) (1,369) (2,738) (2,738) (5,475) (5,475)
Other income (deductions) (42) (64) 235 538 (1,693) (11,560)
----------- ----------- ----------- ----------- ----------- -----------
Total other income and (expenses) (16,211) (16,972) (32,173) (34,019) (68,373) (81,825)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes (4,681) (4,021) 42,082 54,434 71,599 61,356
Income tax expense (benefit) (1,085) (1,507) 17,412 20,995 32,831 20,268
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ (3,596) $ (2,514) $ 24,670 $ 33,439 $ 38,768 $ 41,088
=========== =========== =========== =========== =========== ===========
Basic earnings (loss) per share $ (0.12) $ (0.09) $ 0.81 $ 1.22 $ 1.29 $ 1.50
=========== =========== =========== =========== =========== ===========
Diluted earnings (loss) per share $ (0.12) $ (0.09) $ 0.80 $ 1.21 $ 1.28 $ 1.49
=========== =========== =========== =========== =========== ===========
Dividends paid per share $ 0.205 $ 0.205 $ 0.41 $ 0.41 $ 0.82 $ 0.82
=========== =========== =========== =========== =========== ===========
Average number of common shares outstanding 30,621 27,570 30,559 27,509 30,123 27,366
Average shares outstanding (assuming dilution) - - 30,830 27,691 30,372 27,525
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>
SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1999 1998 1999 1998
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 24,670 $ 33,439 $ 38,768 $ 41,088
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 48,301 43,042 94,063 86,776
Deferred income taxes (17,103) (4,919) (12,336) 15,236
Changes in current assets and liabilities:
Accounts receivable, net of allowances 30,051 21,360 (1,330) (6,992)
Accrued utility revenue 33,873 32,873 (1,500) (959)
Deferred purchased gas costs 60,601 23,650 66,308 (5,826)
Accounts payable (24,938) (27,093) 4,126 5,693
Accrued taxes 15,049 23,591 23,238 29,709
Other current assets and liabilities (2,610) 6,597 6,556 769
Other (517) 1,062 (601) 13,882
------------- ------------ ------------ -------------
Net cash provided by operating activities 167,377 153,602 217,292 179,376
------------- ------------ ------------ -------------
CASH FLOW FROM INVESTING ACTIVITIES:
Construction expenditures and property additions (111,626) (87,543) (218,704) (176,124)
Other 2,833 (7,169) 14,329 (4,974)
------------- ------------ ------------ -------------
Net cash used in investing activities (108,793) (94,712) (204,375) (181,098)
------------- ------------ ------------ -------------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock, net 6,447 4,632 68,995 10,671
Dividends paid (12,529) (11,274) (24,931) (22,431)
Issuance of long-term debt, net 12,002 3,300 49,566 30,750
Retirement of long-term debt, net (29,850) (3,576) (32,897) (7,451)
Repayment of short-term debt (43,630) (63,950) (69,680) (10,370)
Other - 1 (1) 1
------------- ------------ ------------ -------------
Net cash provided by (used in) financing activities (67,560) (70,867) (8,948) 1,170
------------- ------------ ------------ -------------
Change in cash and temporary cash investments (8,976) (11,977) 3,969 (552)
Cash at beginning of period 18,535 17,567 5,590 6,142
------------- ------------ ------------ -------------
Cash at end of period $ 9,559 $ 5,590 $ 9,559 $ 5,590
============= ============ ============ =============
Supplemental information:
Interest paid, net of amounts capitalized $ 29,512 $ 30,711 $ 59,965 $ 60,378
============= ============ ============ =============
Income taxes paid (received), net $ 16,851 $ 1,474 $ 20,345 $ (29,798)
============= ============ ============ =============
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 First Quarter Report 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 $5.7 million at June 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>
SIX MONTHS ENDED JUNE 30, 1999
Revenues from external customers $ 445,789 $ 40,184 $ 485,973
Intersegment revenues -- 22,344 22,344
--------------- ---------------- -------------
Total $ 445,789 $ 62,528 $ 508,317
=============== ================ =============
Segment income $ 22,689 $ 1,981 $ 24,670
=============== ================ =============
SIX MONTHS ENDED JUNE 30, 1998
Revenues from external customers $ 439,380 $ 28,561 $ 467,941
Intersegment revenues -- 17,557 17,557
--------------- ---------------- -------------
Total $ 439,380 $ 46,118 $ 485,498
=============== ================ =============
Segment income $ 32,431 $ 1,008 $ 33,439
=============== ================ =============
</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 $32.00 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. Merger filings have been made and discussions are in
process with the Arizona and California regulatory bodies. At the annual
shareholders meeting held on August 10, 1999, the shareholders of the Company
approved the principal terms of the merger.
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
1,234,000 residential, commercial, industrial and other customers, of which 57
percent are located in Arizona, 33 percent are in Nevada, and 10 percent are in
California. During the twelve months ended June 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 83 percent of operating
margin from residential and small commercial customers, 5 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 June
30, 1999, natural gas construction expenditures totaled $195 million.
Approximately 76 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 $182
million for the twelve months ended June 30, 1999. Operating cash flows exceeded
expected levels due to higher earnings and 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 June 30,
-------------------------------------------
1999 1998
------------ ------------
(Thousands of dollars)
Natural gas operations $ (4,376) $ (3,226)
Construction services 780 712
------------ ------------
Net income (loss) $ (3,596) $ (2,514)
============ ============
Net loss for the quarter ended June 30, 1999 was $0.12 per share, compared to a
loss of $0.09 per share recorded during the corresponding quarter of the prior
year. Natural gas operations results declined $0.02 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 3.1 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.
Six-Month Analysis
- ------------------
Contribution to Net Income
Six Months Ended June 30,
------------------------------------------
1999 1998
----------- -----------
(Thousands of dollars)
Natural gas operations $ 22,689 $ 32,431
Construction services 1,981 1,008
----------- -----------
Net income $ 24,670 $ 33,439
=========== ===========
Net income for the six months ended June 30, 1999 was $0.81 per share, compared
to $1.22 per share recorded during the corresponding period of the prior year.
Earnings from natural gas operations decreased $0.44 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 $0.07, a
$0.03 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 3.1
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 June 30,
------------------------------------------
1999 1998
----------- -----------
(Thousands of dollars)
Natural gas operations $ 35,088 $ 38,467
Construction services 3,680 2,621
----------- -----------
Net income $ 38,768 $ 41,088
=========== ===========
Earnings per share for the twelve months ended June 30, 1999 were $1.29, a $0.21
decrease from per share earnings of $1.50 recorded during the prior twelve-month
period. Earnings contributed from natural gas operations decreased $0.24 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 $0.12, a $0.03 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 and the first quarter
8
<PAGE>
of 1999. Average shares outstanding increased 2.8 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
----------------------------------------
June 30, December 31,
1999 1998
------------- -------------
Ratios of earnings to fixed charges 1.94 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
June 30,
-------------------------------
1999 1998
------------ ------------
(Thousands of dollars)
<S> <C> <C>
Gas operating revenues $ 166,679 $ 165,017
Net cost of gas sold 71,839 73,768
------------ ------------
Operating margin 94,840 91,249
Operations and maintenance expense 55,378 52,181
Depreciation and amortization 21,652 19,674
Taxes other than income taxes 7,299 7,845
------------ ------------
Operating income 10,511 11,549
Other income (expense) (799) (102)
------------ ------------
Income before interest and income taxes 9,712 11,447
Net interest deductions 14,431 15,314
Preferred securities distributions 1,369 1,369
Income tax expense (benefit) (1,712) (2,010)
------------ ------------
Contribution to consolidated net income (loss) $ (4,376) $ (3,226)
============ ============
</TABLE>
Contribution from natural gas operations declined approximately $1.2 million
compared to the second quarter of 1998. The decline was principally the result
of higher operating expenses incurred as a result of the expansion and upgrading
of the gas system to accommodate continued customer growth, partially offset by
higher operating margin and reduced financing costs.
Operating margin increased $3.6 million, or four percent, in the second quarter
of 1999 compared to the same period a year ago. The increase was attributed to
customer growth, as Southwest served 63,000, or five percent, more customers
than a year ago. There were no significant weather-related differences between
periods as both periods experienced colder-than-normal temperatures.
Operations and maintenance expenses increased $3.2 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.
9
<PAGE>
Depreciation expense and general taxes increased a net $1.4 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 second quarter of
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.
Net interest deductions decreased $883,000, or six percent, resulting primarily
from lower average short-term debt balances. Strong cash flows coupled with a
2.5 million share common stock offering during the third quarter of 1998 were
the primary reasons for the reduction.
<TABLE>
Six-Month Analysis
- ------------------
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1999 1998
------------ ------------
(Thousands of dollars)
<S> <C> <C>
Gas operating revenues $ 445,789 $ 439,380
Net cost of gas sold 207,725 194,755
------------ ------------
Operating margin 238,064 244,625
Operations and maintenance expense 108,944 103,031
Depreciation and amortization 43,563 38,976
Taxes other than income taxes 14,511 15,817
------------ ------------
Operating income 71,046 86,801
Other income (expense) (682) (91)
------------ ------------
Income before interest and income taxes 70,364 86,710
Net interest deductions 29,063 31,339
Preferred securities distributions 2,738 2,738
Income tax expense 15,874 20,202
------------ ------------
Contribution to consolidated net income $ 22,689 $ 32,431
============ ============
</TABLE>
Contribution to consolidated net income declined approximately $9.7 million
compared to the first six months of 1998. The decline was principally the result
of lower operating margin and higher operating expenses incurred as a result of
the expansion and upgrading of the gas system to accommodate continued customer
growth, partially offset by reduced financing costs.
Operating margin decreased $6.6 million, or three percent, in the first six
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 prior period. Partially offsetting the weather-related impacts was an
increase of approximately $6 million in operating margin due to customer growth.
Operations and maintenance expenses increased $5.9 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 $3.3 million, or six
percent, as a result of construction activities. Average gas plant in service
increased $157 million, or eight percent, as compared to the six month period
ended June 30, 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.
Net interest deductions decreased $2.3 million, or seven 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
June 30,
-------------------------------
1999 1998
------------ ------------
(Thousands of dollars)
<S> <C> <C>
Gas operating revenues $ 806,006 $ 734,741
Net cost of gas sold 342,819 282,771
------------ ------------
Operating margin 463,187 451,970
Operations and maintenance expense 215,085 206,335
Depreciation and amortization 84,818 77,189
Taxes other than income taxes 30,340 30,099
------------ ------------
Operating income 132,944 138,347
Other income (expense) (2,706) (12,422)
------------ ------------
Income before interest and income taxes 130,238 125,925
Net interest deductions 60,008 63,634
Preferred securities distributions 5,475 5,475
Income tax expense 29,667 18,349
------------ ------------
Contribution to consolidated net income $ 35,088 $ 38,467
============ ============
</TABLE>
Contribution to consolidated net income decreased $3.4 million compared to the
corresponding twelve-month period ended June 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. These transactions had approximately the same net impact
on operating results in both periods.
Operating margin increased $11.2 million, or two percent, due to customer growth
and rate relief, partially offset by weather-related differences between
periods. Customer growth and rate relief contributed $22 million of incremental
margin. Overall colder conditions in the prior period resulted in an $11 million
margin difference between periods.
Operations and maintenance expenses increased $8.8 million, or four 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 $7.9 million, or seven percent,
as a result of additional plant in service. Average gas plant in service for the
current twelve-month period increased $147 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.
Net interest deductions decreased $3.6 million, or six percent, during the
twelve months ended June 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.
Other income (expense) improved $9.7 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
11
<PAGE>
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 $4 million (pretax) of
financial advisor, legal, and other costs, which are included in Other income
(expense) for the twelve-month period ended June 30, 1999.
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.
In June 1999, Southwest filed the Agreement as part of a new application with
the CPUC to modify the certificate of public convenience and necessity granted
in 1995. A decision related to this application is expected by year end.
Management believes there is a reasonable possibility the CPUC will approve the
new application. If approved, Southwest would reduce its regulatory disallowance
exposure from approximately $24 million to approximately $2 million, pretax,
based on current estimates to complete the project. If not approved, Southwest
will continue to pursue regulatory and legal proceedings with the intent of
reversing or mitigating the effects of the July 1998 CPUC order to complete the
project under its original terms and scope. As a result, 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
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.
12
<PAGE>
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 - substantially 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. All of 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. Of
these devices, approximately 97 percent are Year 2000 compliant. Remediation or
replacement of the remaining noncompliant devices is expected to be completed by
September 1999.
Nearly all of the Company's business-critical computer systems are Year 2000
compliant. For example, 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. In total
approximately 99 percent (including work-in-progress) of the Company's computer
applications are currently Year 2000 compliant. The Company has also assessed
its other computer components, such as computer equipment and software, and
determined that approximately 95 percent of these components are Year 2000
compliant. The Company projects that both the computer application systems and
the other computer components will be Year 2000 compliant by October 1999.
The Company has initiated communications 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. All of the companies contacted have
responded that efforts are underway to become compliant.
The Company is also assessing and remediating 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. Most of theses areas are Year 2000 compliant, and the
Company expects the areas that are not currently compliant to be compliant by
September 1999.
The Company is in the process of developing 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" systems, operations, and devices. This process will
culminate in the development of a "Contingency Plan Operations Guide." This
guide will document 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 Contingency Plan Operations Guide
is scheduled for completion by September 1999.
13
<PAGE>
The Company estimates that the cost of remediation will be approximately $2
million. Expenditures of approximately $1.2 million have already been incurred
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, including costs and completion schedules, 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 (see Note 3).
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
pursuant to which the Company would merge with a wholly owned subsidiary of
ONEOK, Inc. Litigation is pending in California, Nevada, Oklahoma, and Arizona
relating to this proposed merger which is described below.
California Litigation
- ---------------------
On December 16, 1998, Arthur Klein filed a purported class action complaint on
behalf of himself and all 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
original complaint alleges one cause of action for breach of fiduciary duty.
Plaintiff alleged that the consideration for the proposed Merger with ONEOK was
unfair and inadequate because the Company's Board of Directors approved the
Merger Agreement with ONEOK without conducting an auction or using another
"market check" mechanism. On March 22, 1999, plaintiff amended his complaint to
allege causes of action for breach of fiduciary duty, duty of loyalty and due
care and breach of duty of candor. Plaintiff filed a second amended complaint on
May 5, 1999 alleging causes of action for breach of the duties of loyalty, due
care, candor and good faith and fair dealing.
The shareholder plaintiffs' second amended complaint seeks
- - to enjoin the Merger with 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, which is substantially identical to Arthur Klein's second amended
complaint. On May 4, 1999, Southern Union intervened in the purported
shareholder class action and filed a complaint in intervention against the
Company seeking a declaration from the Court that it is entitled to solicit
directly the Company's shareholders to oppose the Merger with ONEOK and to seek
approval of a proposed merger with Southern Union, rescinding portions of the
confidentiality and standstill agreement between Southern Union and the Company
dated February 21, 1999 and a temporary restraining order and a preliminary
injunction to prevent the Company from conducting a proxy solicitation in
support of the Merger during the course of the litigation. In addition, Southern
Union is seeking compensatory and punitive damages.
On June 9, 1999, the Company signed a Memorandum of Understanding (MOU) with the
shareholder plaintiffs' counsel to settle this action as to all plaintiffs,
except Southern Union. 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 Merger, including any 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 plaintiffs' 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 Merger and the entry of
a final judgment of dismissal with prejudice by a U.S. district court that is
binding on all shareholders from December 14, 1998, through the date that the
shareholders approve the Merger. On June 25, 1999, the shareholders filed a
third amended complaint setting forth the shareholders' claims relating to the
proxy statement which were resolved as described.
The Company removed the combined shareholder and Southern Union lawsuit from the
California Superior Court in San Diego to the U.S. District Court for the
Southern District of California. On August 2, 1999, the U.S. District Court for
the Southern District of California remanded the case to the California Superior
Court. On August 3, 1999, Southern Union filed a motion for a temporary
restraining order and preliminary injunction to prevent the Company from holding
15
<PAGE>
its annual meeting of shareholders on August 10, 1999 and from participating in
any regulatory approval procedures in California. This motion was denied on
August 5, 1999.
Southern Union has also filed a motion to sever its claims from the purported
class action lawsuit. This motion is scheduled to be heard on August 16, 1999.
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
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 Exchange Act. The Company has filed a motion to transfer
this case to the Northern District of Oklahoma. Southern Union has filed an
answer in the Nevada action and has opposed the Company's motion to transfer.
The District Court of Nevada has not ruled on the Company's motion.
On July 22, 1999, Southern Union filed a motion to amend its answer in the
Nevada federal action and assert counterclaims against the Company. The
counterclaims mirror the counterclaims filed by Southern Union in the California
action and the contractual claims asserted by Southern Union in the Arizona
action.
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 not been ruled
upon.
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 merger with the Company.
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. The Tenth Circuit received Southern Union's
filing on May 18, 1999 and has issued an order staying the injunction for the
sole purpose of permitting Southern Union the opportunity to oppose the
Company's motion to transfer the related California lawsuit to the Northern
District of Oklahoma and to file a motion to remand the California lawsuit to
the San Diego Superior Court. 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 of the
District Court's injunction insofar as it pertains to state public utility
commission proceedings. On June 9, 1999, Southern Union filed a motion with the
Northern District of Oklahoma to dismiss the lawsuit on the grounds of lack of
personal jurisdiction and improper venue and a motion to transfer the Oklahoma
action to the District of Nevada, or alternatively to stay the Oklahoma action
pending the final disposition of the Nevada action brought by the Company
against Southern Union. The Northern District of Oklahoma has yet to rule on
either of these motions.
16
<PAGE>
On July 19, 1999, Southern Union also 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 Arizona Complaint. Southern Union's
motion was denied on July 23, 1999 on the grounds that the court lacked
jurisdiction to consider Southern Union's motion.
Arizona Litigation
- ------------------
On July 19, 1999, Southern Union Company filed a complaint in the United States
District Court of Arizona (Civ '99 1294 PHX ROS) alleging that the Company,
Michael O. Maffie, President and Chief Executive Officer of the Company, Thomas
Hartley, Chairman of the Board of the Company, and Thomas Sheets, Vice
President/General Counsel of the Company, ONEOK, Inc., Gene Dubay, President and
Chief Operating Officer of Kansas Gas Service, a division of ONEOK, John
Gaberino, Senior Vice President and General Counsel 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 to acquire the Company and to ensure that the
Company's Board of Directors would approve and recommend to shareholders the
ONEOK offer in violation of state and federal criminal laws. The Complaint
further alleges that the defendants, other than the Company, intentionally
interfered with business relationships between the Company and Southern Union,
and tortiously interfered with contractual relationships of the Company and
Southern Union. The Complaint repeats allegations previously made by Southern
Union in its complaint in intervention filed against the Company in the
shareholder class action in California. In addition, Southern Union alleges that
the Company's proxy statement dated June 30, 1999 and the Company's press
releases concerning Southern Union's ability to obtain regulatory approvals for
its proposed merger with the Company are false and misleading.
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.
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 its financial position or results of operations.
ITEMS 2-3. NONE
17
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on August
10, 1999. Matters voted upon and the results of the voting were
as follows:
(1) The eleven directors nominated (George C. Biehl,
Manuel J. Cortez, Lloyd T. Dyer, Thomas Y. Hartley,
Michael B. Jager, Leonard R. Judd, James J. Kropid,
Michael O. Maffie, Carolyn M. Sparks, Robert S. Sundt,
and Terrance L. Wright) were reelected.
(2) The proposal to approve the principal terms of an Agreement
and Plan of Merger of the Company into ONEOK was approved.
Shareholders voted 19,103,265 shares in favor, 4,852,950
opposed, and 270,855 abstentions. There were 3,855,747
broker non-votes.
(3) The proposal to ratify the selection of Arthur Andersen LLP
as independent public accountants for the Company was
approved. Shareholders voted 24,084,922 shares in favor,
3,225,051 opposed, and 772,845 abstentions.
ITEM 5. OTHER INFORMATION
In May 1999, non-exempt employees in the Central Arizona Division
voted to have the International Brotherhood of Electrical Workers
(IBEW) represent them in employee-related matters with the
Company. Nearly half of the approximately 500 eligible employees
in the Central Arizona Division voted against representation by
the IBEW. The Company has filed objections to the union's conduct
during the organizing effort and has appealed to the National
Labor Relations Board (NLRB) in Washington, D.C. to set aside the
election. This process could take up to two years to complete.
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).
Exhibit 99.1 - Financial Analyst Report - Second
Quarter 1999.
(b) Reports on Form 8-K
The Company filed a Form 8-K, dated July 21, 1999,
indicating operating results for the quarter ended June 30,
1999 would exceed analysts' estimates.
The Company filed a Form 8-K, dated July 19, 1999, reporting
a merger-related lawsuit brought against the Company and
certain officers and directors of the Company by Southern
Union.
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: August 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
--------------------------------------------------------------------------------
June 30, December 31,
-------------------------------------------------------------------
Continuing operations 1999 1998 1997 1996 1995 1994
------------ ------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
1. Fixed charges:
A) Interest expense $ 61,182 $ 63,416 $ 63,247 $ 54,674 $ 52,844 $ 48,688
B) Amortization 1,301 1,243 1,164 1,494 1,569 1,426
C) Interest portion of rentals 7,991 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 $ 75,949 $ 77,665 $ 76,859 $ 68,272 $ 59,761 $ 54,857
============ ============= ============= ============ ============= ============
2. Earnings (as defined):
E) Pretax income from
continuing operations $ 71,599 $ 83,951 $ 21,328 $ 10,448 $ 3,493 $ 38,119
Fixed Charges (1. above) 75,949 77,665 76,859 68,272 59,761 54,857
------------ ------------- ------------- ------------ ------------- ------------
Total earnings as defined $ 147,548 $ 161,616 $ 98,187 $ 78,720 $ 63,254 $ 92,976
============ ============= ============= ============ ============= ============
1.94 2.08 1.28 1.15 1.06 1.69
============ ============= ============= ============ ============= ============
<CAPTION>
For the Twelve Months Ended
--------------------------------------------------------------------------------
June 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 $ 61,182 $ 63,416 $ 63,247 $ 54,674 $ 52,844 $ 48,688
B) Amortization 1,301 1,243 1,164 1,494 1,569 1,426
C) Interest portion of rentals 7,991 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 $ 75,949 $ 77,665 $ 76,859 $ 68,272 $ 69,397 $ 62,731
============ ============= ============= ============ ============= ============
2. Earnings (as defined):
F) Pretax income from
continuing operations $ 71,599 $ 83,951 $ 21,328 $ 10,448 $ 3,493 $ 38,119
Fixed Charges (1. above) 75,949 77,665 76,859 68,272 69,397 62,731
------------ ------------- ------------- ------------ ------------- ------------
Total earnings as defined $ 147,548 $ 161,616 $ 98,187 $ 78,720 $ 72,890 $ 100,850
============ ============= ============= ============ ============= ============
3. Ratio of earnings to fixed charges 1.94 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
--------------------------------------------------------------------------------------
June 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 $ 75,949 $ 77,665 $ 76,859 $ 68,272 $ 59,761 $ 54,857
B) Preferred dividends [1] - - - - 404 826
-------------- ------------- -------------- ------------- -------------- -------------
Total fixed charges and
preferred dividends $ 75,949 $ 77,665 $ 76,859 $ 68,272 $ 60,165 $ 55,683
============== ============= ============== ============= ============== =============
2. Earnings $ 147,548 $ 161,616 $ 98,187 $ 78,720 $ 63,254 $ 92,976
============== ============= ============== ============= ============== =============
3. Ratio of earnings to fixed charges
and preferred dividends 1.94 2.08 1.28 1.15 1.05 1.67
============== ============= ============== ============= ============== =============
<CAPTION>
For the Twelve Months Ended
--------------------------------------------------------------------------------------
June 30, December 31,
Adjusted for interest allocated to -----------------------------------------------------------------------
discontinued operations 1999 1998 1997 1996 1995 1994
-------------- ------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1. Combined fixed charges:
A) Total fixed charges $ 75,949 $ 77,665 $ 76,859 $ 68,272 $ 69,397 $ 62,731
B) Preferred dividends [1] - - - - 404 826
-------------- ------------- -------------- ------------- -------------- -------------
Total fixed charges and
preferred dividends $ 75,949 $ 77,665 $ 76,859 $ 68,272 $ 69,801 $ 63,557
============== ============= ============== ============= ============== =============
2. Earnings $ 147,548 $ 161,616 $ 98,187 $ 78,720 $ 72,890 $ 100,850
============== ============= ============== ============= ============== =============
3. Ratio of earnings to fixed charges
and preferred dividends 1.94 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>
EXHIBIT 99.1
SOUTHWEST GAS CORPORATION
SUMMARY STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
---------------------- ----------------------- -----------------------
1999 1998 1999 1998 1999 1998
---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gas operating revenues $ 166,679 $ 165,017 $ 445,789 $ 439,380 $ 806,006 $ 734,741
Net cost of gas sold 71,839 73,768 207,725 194,755 342,819 282,771
---------- ---------- ----------- ----------- ----------- -----------
Operating margin 94,840 91,249 238,064 244,625 463,187 451,970
Operations and maintenance expenses 55,378 52,181 108,944 103,031 215,085 206,335
Depreciation, amortization, and general taxes 28,951 27,519 58,074 54,793 115,158 107,288
---------- ---------- ----------- ----------- ----------- -----------
Operating income (loss) 10,511 11,549 71,046 86,801 132,944 138,347
Net interest deductions 14,431 15,314 29,063 31,339 60,008 63,634
Preferred securities distribution 1,369 1,369 2,738 2,738 5,475 5,475
---------- ---------- ----------- ----------- ----------- -----------
Pretax utility income (loss) (5,289) (5,134) 39,245 52,724 67,461 69,238
Utility income tax expense (benefit) (2,196) (1,962) 15,189 20,292 28,361 22,886
---------- ---------- ----------- ----------- ----------- -----------
Net utility income (loss) (3,093) (3,172) 24,056 32,432 39,100 46,352
Other income (expense), net (1,283) (54) (1,367) (1) (4,012) (7,885)
---------- ---------- ----------- ----------- ----------- -----------
Contribution to net income (loss) - gas operations (4,376) (3,226) 22,689 32,431 35,088 38,467
Contribution to net income (loss) - construction services 780 712 1,981 1,008 3,680 2,621
---------- ---------- ----------- ----------- ----------- -----------
Net income (loss) $ (3,596) $ (2,514) $ 24,670 $ 33,439 $ 38,768 $ 41,088
========== ========== =========== =========== =========== ===========
Earnings (loss) per share - gas operations $ (0.14) $ (0.12) $ 0.74 $ 1.18 $ 1.17 $ 1.41
Earnings per share - construction services 0.02 0.03 0.07 0.04 0.12 0.09
---------- ---------- ----------- ----------- ----------- -----------
Basic earnings (loss) per share $ (0.12) $ (0.09) $ 0.81 $ 1.22 $ 1.29 $ 1.50
========== ========== =========== =========== =========== ===========
Diluted earnings (loss) per share $ (0.12) $ (0.09) $ 0.80 $ 1.21 $ 1.28 $ 1.49
========== ========== =========== =========== =========== ===========
Average outstanding common shares 30,621 27,570 30,559 27,509 30,123 27,366
Average shares outstanding (assuming dilution) -- -- 30,830 27,691 30,372 27,525
The summary statements of income have been prepared by Southwest Gas Corporation
(the Company) using the equity method of accounting for its construction
services subsidiary. This presentation is not in accordance with generally
accepted accounting principles (GAAP). However, it produces the same net income
as the consolidated financial statements and, in management's opinion, is a fair
representation of the operations and contributions to net income of the
Company's operating segments.
</TABLE>
<PAGE>
<TABLE>
SOUTHWEST GAS CORPORATION
SUMMARY STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gas operating revenues $ 445,789 $ 439,380 $ 806,006 $ 734,741
Net cost of gas sold 207,725 194,755 342,819 282,771
- -----------------------------------------------------------------------------------------------------------------------------------
Operating margin 238,064 244,625 463,187 451,970
Operations and maintenance expenses 108,944 103,031 215,085 206,335
Depreciation, amortization, and general taxes 58,074 54,793 115,158 107,288
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 71,046 86,801 132,944 138,347
Net interest deductions 29,063 31,339 60,008 63,634
Preferred securities distribution 2,738 2,738 5,475 5,475
- -----------------------------------------------------------------------------------------------------------------------------------
Pretax utility income 39,245 52,724 67,461 69,238
Utility income tax expense 15,189 20,292 28,361 22,886
- -----------------------------------------------------------------------------------------------------------------------------------
Net utility income 24,056 32,432 39,100 46,352
Other income (expense), net (1,367) (1) (4,012) (7,885)
- -----------------------------------------------------------------------------------------------------------------------------------
Contribution to net income - gas operations 22,689 32,431 35,088 38,467
Contribution to net income - construction services 1,981 1,008 3,680 2,621
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 24,670 $ 33,439 $ 38,768 $ 41,088
===================================================================================================================================
Earnings per share - gas operations $ 0.74 $ 1.18 $ 1.17 $ 1.41
Earnings per share - construction services 0.07 0.04 0.12 0.09
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.81 $ 1.22 $ 1.29 $ 1.50
===================================================================================================================================
Diluted earnings per share $ 0.80 $ 1.21 $ 1.28 $ 1.49
===================================================================================================================================
Average outstanding common shares 30,559 27,509 30,123 27,366
Average shares outstanding (assuming dilution) 30,830 27,691 30,372 27,525
See Notes to Summary Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SOUTHWEST GAS CORPORATION
SUMMARY BALANCE SHEET
AT JUNE 30, 1999
(In thousands)
(Unaudited)
ASSETS
UTILITY PLANT
<S> <C> <C>
Gas plant, net of accumulated depreciation $ 1,477,647
Construction work in progress 35,107
--------------
Net utility plant 1,512,754
--------------
OTHER PROPERTY AND INVESTMENTS
Investment in construction services subsidiary 28,977
Other 43,859
--------------
Total other property and investments 72,836
--------------
CURRENT AND ACCRUED ASSETS
Cash, working funds and temporary cash investments 8,549
Receivables - less reserve of $1,664 for uncollectibles 37,210
Accrued utility revenue 23,000
Other 31,261
--------------
Total current and accrued assets 100,020
--------------
DEFERRED DEBITS
Unamortized debt expense 17,905
Other deferred debits 25,577
--------------
Total deferred debits 43,482
--------------
TOTAL ASSETS $ 1,729,092
==============
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common stockholders' equity
Common stock equity, $1 par, 30,683 shares outstanding $ 463,327
Retained earnings 31,606
--------------
Total common stockholders' equity 494,933 37.1 %
Preferred securities of Southwest Gas Capital I, 9.125% 60,000 4.5
Long-term debt - NOTE 2 780,307 58.4
-------------- -----------------
Total capitalization 1,335,240 100.0 %
-------------- =================
CURRENT AND ACCRUED LIABILITIES
Notes payable 4,320
Accounts payable 34,556
Customer deposits 25,519
Taxes accrued (including income taxes) 48,445
Deferred purchased gas costs 3,006
Other 50,494
--------------
Total current and accrued liabilities 166,340
--------------
DEFERRED CREDITS
Deferred investment tax credits 16,837
Deferred income taxes 160,302
Other 50,373
--------------
Total deferred credits 227,512
--------------
TOTAL CAPITALIZATION AND LIABILITIES $ 1,729,092
==============
See Notes to Summary Financial Statements.
</TABLE>
<PAGE>
SOUTHWEST GAS CORPORATION
SUMMARY STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999
(In thousands)
(Unaudited)
CASH FLOWS FROM OPERATIONS:
Net income $ 24,670
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 43,563
Change in receivables and payables 40,677
Change in gas cost related balancing items 60,669
Change in accrued taxes 14,744
Change in deferred taxes (18,077)
Allowance for funds used during construction (1,040)
Other (2,061)
------------
Net cash provided by operating activities 163,145
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (94,709)
Other 3,523
------------
Net cash used in investing activities (91,186)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock issuances 6,447
Dividends paid (12,529)
Change in notes payable (47,680)
Long-term debt issuances, net 4,000
Retirement of long-term debt (27,000)
------------
Net cash used in financing activities (76,762)
------------
Change in cash and temporary cash investments (4,803)
Cash at beginning of period 13,352
------------
Cash at end of period $ 8,549
============
SUPPLEMENTAL INFORMATION:
Interest paid, net of amounts capitalized $ 29,433
Income taxes, net of refunds $ 16,807
See Notes to Summary Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
SOUTHWEST GAS CORPORATION
NOTES TO SUMMARY FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The summary financial statements have been prepared by Southwest Gas
Corporation (the Company) using the equity method of accounting for its
construction services subsidiary. This presentation is not in accordance
with generally accepted accounting principles (GAAP), and certain
information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been omitted. The summary
financial statement presentation in this report produces the same net
income as the consolidated financial statements and, in management's
opinion, is a fair representation of the operations and contributions to
net income of the Company's operating segments.
NOTE 2 - LONG-TERM DEBT:
<S> <C>
Revolving credit facility, variable rate $ 173,000
Debentures and notes:
Debentures, 9.75% series F, due 2002 100,000
Debentures, 7.50% series, due 2006 75,000
Debentures, 8% series, due 2026 75,000
Medium-term notes, 7.59% series, due 2017 25,000
Medium-term notes, 7.78% series, due 2022 25,000
Medium-term notes, 7.92% series, due 2027 25,000
Medium-term notes, 6.89% series, due 2007 17,500
Medium-term notes, 6.76% series, due 2027 7,500
Medium-term notes, 6.27% series, due 2008 25,000
Industrial development revenue bonds:
Variable-rate bonds, Series A, due 2028 - net of funds held in trust 33,992
7.30% 1992 Series A, due 2027 30,000
7.50% 1992 Series B, due 2032 100,000
6.50% 1993 Series A, due 2033 75,000
Unamortized discount on long-term debt (6,685)
-------------
TOTAL LONG-TERM DEBT $ 780,307
=============
ESTIMATED CURRENT MATURITIES $ --
=============
</TABLE>
<PAGE>
<TABLE>
SOUTHWEST GAS CORPORATION
SELECTED STATISTICAL DATA
JUNE 30, 1999
FINANCIAL STATISTICS
Market value to book value per share at quarter end 177%
Twelve months to date return on equity -- total company 8.2%
-- gas segment 7.8%
Common stock dividend yield at quarter end 2.9%
GAS OPERATIONS SEGMENT
<CAPTION>
Authorized
Authorized Authorized Return on
Rate Base Rate of Common
Rate Jurisdiction (In thousands) Return Equity
- -------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Arizona (1) $ 541,104 9.38% 11.25%
Southern Nevada (1) 237,165 9.50 11.55
Northern Nevada (1) 63,986 9.67 11.55
Southern California 69,486 9.94 11.35
Northern California 21,959 10.02 11.35
Paiute Pipeline Company (1) 72,054 9.69 11.60
(1) Estimated amounts based on rate case settlements.
<CAPTION>
SYSTEM THROUGHPUT BY CUSTOMER CLASS SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ --------------------------------
(In dekatherms) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Residential 37,051,568 39,760,871 55,984,863 57,895,319
Small commercial 15,957,431 16,426,936 26,524,178 26,596,665
Large commercial 3,583,670 4,117,306 7,398,927 7,726,751
Industrial / Other 6,820,395 5,898,152 17,628,228 10,842,440
Transportation 56,621,625 43,892,841 112,865,980 101,434,426
- -----------------------------------------------------------------------------------------------------------------------------------
Total system throughput 120,034,689 110,096,106 220,402,176 204,495,601
===================================================================================================================================
HEATING DEGREE DAY COMPARISON
- -----------------------------------------------------------------------------------------------------------------------------------
Actual 1,432 1,709 2,038 2,358
Ten-year average 1,418 1,414 2,042 2,035
===================================================================================================================================
</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 June 30, 1999
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,512,754
<OTHER-PROPERTY-AND-INVEST> 84,527
<TOTAL-CURRENT-ASSETS> 123,097
<TOTAL-DEFERRED-CHARGES> 0
<OTHER-ASSETS> 49,360
<TOTAL-ASSETS> 1,769,738
<COMMON> 32,312
<CAPITAL-SURPLUS-PAID-IN> 431,015
<RETAINED-EARNINGS> 31,606
<TOTAL-COMMON-STOCKHOLDERS-EQ> 494,933
0
0
<LONG-TERM-DEBT-NET> 793,477
<SHORT-TERM-NOTES> 8,370
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 6,742
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 466,216 <F1>
<TOT-CAPITALIZATION-AND-LIAB> 1,769,738
<GROSS-OPERATING-REVENUE> 508,317
<INCOME-TAX-EXPENSE> 17,412
<OTHER-OPERATING-EXPENSES> 434,062
<TOTAL-OPERATING-EXPENSES> 434,062
<OPERATING-INCOME-LOSS> 74,255
<OTHER-INCOME-NET> (2,503)<F2>
<INCOME-BEFORE-INTEREST-EXPEN> 71,752
<TOTAL-INTEREST-EXPENSE> (29,670)
<NET-INCOME> 24,670
0
<EARNINGS-AVAILABLE-FOR-COMM> 24,670
<COMMON-STOCK-DIVIDENDS> 12,529
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 167,377
<EPS-BASIC> 0.81
<EPS-DILUTED> 0.80
<FN>
<F1> Includes: trust originated preferred securities of $60,000, current liabilities, net of current long-term
debt maturities and short-term debt, of $175,061 and deferred income taxes and other credits of $231,155
<F2> Includes distributions related to trust originated preferred securities of $2,738
</FN>
</TABLE>
