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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
Common Stock, $1 par value New York Stock Exchange, Inc.
Pacific Stock Exchange, Inc.
9.125% Trust Originated Preferred Securities New York Stock Exchange, Inc.
Pacific Stock Exchange, Inc.
Stock Purchase Rights New York Stock Exchange, Inc.
Pacific Stock Exchange, Inc.
</TABLE>
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 Y NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NONAFFILIATES OF THE REGISTRANT:
$824,362,704 at March 15, 1999
THE NUMBER OF SHARES OUTSTANDING OF COMMON STOCK:
Common Stock, $1 Par Value, 30,531,952 shares as of March 15, 1999
DOCUMENTS INCORPORATED BY REFERENCE
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<CAPTION>
DESCRIPTION PART INTO WHICH INCORPORATED
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<S> <C>
Annual Report to Shareholders for the Year Ended December 31, 1998 Parts I, II, and IV
</TABLE>
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TABLE OF CONTENTS
PART I
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PAGE
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ITEM 1. BUSINESS...................................................................... 1
Natural Gas Operations........................................................ 1
General Description......................................................... 2
Rates and Regulation........................................................ 2
Recent Regulatory and Legislative Developments.............................. 3
Competition................................................................. 4
Demand for Natural Gas...................................................... 5
Natural Gas Supply.......................................................... 5
Environmental Matters....................................................... 6
Employees................................................................... 6
Construction Services......................................................... 6
ITEM 2. PROPERTIES.................................................................... 7
ITEM 3. LEGAL PROCEEDINGS............................................................. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................... 9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................................... 9
ITEM 6. SELECTED FINANCIAL DATA....................................................... 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................................... 10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................... 10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................... 10
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...................................................... 10
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................ 10
ITEM 11. EXECUTIVE COMPENSATION........................................................ 15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................................... 20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................ 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K ..................................................................... 22
List of Exhibits............................................................ 23
SIGNATURES............................................................................. 27
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PART I
ITEM 1. BUSINESS
The registrant, Southwest Gas Corporation (the Company), is incorporated
under the laws of the State of California effective March 1931. The executive
offices of the Company are located at 5241 Spring Mountain Road, P.O. Box 98510,
Las Vegas, Nevada, 89193-8510, telephone number (702) 876-7237.
The Company is principally engaged in the business of purchasing,
transporting, and distributing natural gas to residential, commercial, and
industrial customers in geographically diverse portions of Arizona, Nevada, and
California (Southwest or the natural gas operations segment).
In April 1996, the Company acquired all of the outstanding stock of
Northern Pipeline Construction Co. (Northern or the construction services
segment) pursuant to a definitive agreement dated November 1995. The Company
issued approximately 1,439,000 shares of common stock valued at $24 million in
connection with the acquisition. The acquisition was accounted for as a
purchase. The construction services segment provides utility companies with
trenching and installation, replacement, and maintenance services for energy
distribution systems.
In July 1996, the Company completed the sale of the assets and liabilities
of PriMerit Bank, Federal Savings Bank (PriMerit), a wholly owned subsidiary, to
Norwest Corporation (Norwest) for $191 million pursuant to a definitive
agreement dated January 1996. For consolidated financial reporting purposes, the
financial services activities are disclosed as discontinued operations.
Financial information with respect to industry segments is included in Note
14 of the Notes to Consolidated Financial Statements which is included in the
1998 Annual Report to Shareholders and is incorporated herein by reference.
In December 1998, the Boards of Directors of the Company and ONEOK, Inc.
(ONEOK), headquartered in Tulsa, Oklahoma, announced a definitive agreement for
the Company to be merged into ONEOK. The agreement calls for ONEOK to pay cash
of $28.50 for each share of Company common stock outstanding. The transaction is
subject to customary conditions, including approvals from shareholders of the
Company and state regulators in Arizona, California, and Nevada. ONEOK expects
to account for the merger using the purchase method of accounting. If the merger
is consummated, the Company would operate as a division of ONEOK.
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. The
proposal is preliminary in nature and subject to a number of contingencies and
uncertainties. Under the terms of the agreement with ONEOK, as a result of
certain preliminary determinations made by the Board of Directors of the
Company, the Board of Directors has authorized management to commence
substantive discussions with Southern Union regarding its proposal. No
assurances can be given that any agreement will be reached with Southern Union.
The merger agreement with ONEOK remains in full force and effect.
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NATURAL GAS OPERATIONS
GENERAL DESCRIPTION
Southwest is subject to regulation by the Arizona Corporation Commission
(ACC), the Public Utilities Commission of Nevada (PUCN), and the California
Public Utilities Commission (CPUC). These commissions regulate public utility
rates, practices, facilities, and service territories in their respective
states. The CPUC also regulates the issuance of all securities by the Company,
with the exception of short-term borrowings. Certain accounting practices,
transmission facilities, and rates are subject to regulation by the Federal
Energy Regulatory Commission (FERC).
Southwest purchases, transports, and distributes natural gas to 1,209,000
residential, commercial, and industrial customers in geographically diverse
portions of Arizona, Nevada, and California. There were 58,000 customers added
to the system during 1998.
The table below lists the percentage of Southwest operating margin
(operating revenues less net cost of gas) by major customer class for the years
indicated:
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RESIDENTIAL AND OTHER
FOR THE YEAR ENDED SMALL COMMERCIAL SALES CUSTOMERS TRANSPORTATION
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<S> <C> <C> <C>
December 31, 1998 84% 5% 11%
December 31, 1997 83 5 12
December 31, 1996 80 6 14
</TABLE>
Southwest is not dependent on any one or a few customers to the extent that
the loss of any one or several would have a significant adverse impact on
earnings.
Transportation of customer-secured gas to end-users on the Southwest system
accounted for 48 percent of total system throughput in 1998. Although the
volumes were significant, these customers provide a much smaller proportionate
share of operating margin. In 1998, customers who utilized this service
transported 100 million dekatherms.
The demand for natural gas is seasonal. Variability in weather from normal
temperatures can materially impact results of operations. It is the opinion of
management that comparisons of earnings for interim periods do not reliably
reflect overall trends and changes in Southwest operations. Also, earnings for
interim periods can be significantly affected by the timing of general rate
relief.
RATES AND REGULATION
Rates that Southwest is authorized to charge its distribution system
customers are determined by the ACC, CPUC, and PUCN in general rate cases and
are derived using rate base, cost of service, and cost of capital experienced in
a historical test year, as adjusted in Arizona and Nevada, and projected for a
future test year in California. The FERC regulates the northern Nevada
transmission and liquefied natural gas (LNG) storage facilities of Paiute
Pipeline Company (Paiute), a wholly owned subsidiary, and the rates it charges
for transportation of gas directly to certain end-users and to various local
distribution companies (LDCs). The LDCs transporting on the Paiute system are:
Sierra Pacific Power Company (serving Reno and Sparks, Nevada), Avista Utilities
(serving South Lake Tahoe, California), and Southwest Gas Corporation (serving
North Lake Tahoe, California and various locations throughout northern Nevada).
Rates charged to customers vary according to customer class and are set at
levels allowing for the recovery of all prudently incurred costs, including a
return on rate base sufficient to pay interest on debt, preferred securities
distributions, and a reasonable return on common equity. Rate base consists
generally of the original cost of utility plant in service, plus certain other
assets such as working capital and inventories, less accumulated depreciation on
utility
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plant in service, net deferred income tax liabilities, and certain other
deductions. Rate schedules in all of the Southwest service areas contain
purchased gas adjustment (PGA) clauses which allow Southwest to file for rate
adjustments as the cost of purchased gas changes. Generally, Southwest tariffs
provide for annual adjustment dates for changes in purchased gas costs. However,
Southwest may request to adjust its rates more often than once each year, if
conditions warrant. These changes have no direct impact on profit margin.
Filings to change rates in accordance with PGA clauses are subject to audit by
state regulatory commission staffs. Information with respect to recent PGA
filings is included in the Rates and Regulatory Proceedings section of
Management's Discussion and Analysis (MD&A), which is included in the 1998
Annual Report to Shareholders.
The table below lists the docketed general rate filings last initiated
and/or completed within each ratemaking area:
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MONTH
FINAL RATES
RATEMAKING AREA TYPE OF FILING MONTH FILED EFFECTIVE
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<S> <C> <C> <C>
Arizona:
Central and Southern......... General rate case November 1996 September 1997
California:
Northern .................... Operational attrition November 1997 January 1998
Nevada:
Northern and Southern........ General rate case December 1995 July 1996
FERC:
Paiute....................... General rate case July 1996 January 1997
</TABLE>
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RECENT REGULATORY AND LEGISLATIVE DEVELOPMENTS
Nevada
In 1997, the Nevada Legislature passed, and the Governor signed into law,
Assembly Bill (AB) 366. AB 366 provides the statutory framework for
restructuring both the natural gas and electric industries in the State of
Nevada to allow competition. The legislature left most of the decision making on
restructuring to the PUCN. In addition to several organizational changes, AB 366
required the PUCN to create an alternative plan of regulation by July 1, 1998.
The PUCN issued two decisions during 1998. The first identified the distinct
components of natural gas service. The second established a procedure by which
parties may request that a service be classified as "potentially competitive."
Once a service has been considered potentially competitive and the PUCN has
authorized other companies to provide service under an alternative plan of
regulation, Southwest could continue to provide service under its regulated
rates, or set up a new subsidiary and file for an affiliate to offer service.
The details of the PUCN restructuring plan are not fully developed at this time.
Also remaining are numerous issues such as unbundling rates, licensing of
alternative sellers, the utility's obligation to serve, and recovery of stranded
costs.
California
In January 1998, the CPUC opened a rulemaking proceeding designed to reform
the California natural gas industry by expanding opportunities for residential
and small commercial customers to have access to competing natural gas
suppliers. To accomplish this, the CPUC requested comments from interested
parties, such as Southwest, to assess the current market and regulatory
framework for the California natural gas industry and to develop reforms which
emphasize market-oriented policies to benefit all California natural gas
consumers. Southwest filed written comments with the CPUC in February 1998
addressing such issues as regulatory streamlining, unbundling, consumer
protection and other competitive issues. The CPUC Division of Strategic Planning
recommended that gas utilities fully unbundle services and exit the gas merchant
(gas supply) business.
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The CPUC established working groups to address safety concerns associated
with introducing competition in providing billing, metering, and services on the
customer side of the meter, and to develop consistency in policies, programs,
tariffs, rules, and procedures used by gas utilities throughout the state.
Reports from the working groups were submitted in August 1998.
While the CPUC initially adopted an aggressive timetable for restructuring
the gas industry, legislation was enacted late in 1998 delaying the CPUC ability
to restructure the gas industry for residential customers until 2000 and
requiring the CPUC to report to the legislature whether such restructuring is in
the public interest. The CPUC will continue to hold hearings and take evidence
in preparation for the report to the legislature regarding natural gas
restructuring.
Arizona
Southwest agreed, as part of the 1997 Arizona rate case settlement, to
expand the eligibility for customers to qualify for transportation service.
Southwest also supported a proposal to open an investigation to address
competition in the natural gas industry, including the unbundling of rates and
services, which was filed in May 1998 by a potential competitor of Southwest. No
action has been taken on this proposal to date. In July 1998, Southwest filed a
proposal that would provide all customers with the option of choosing their own
gas suppliers by January 2000. The proposal was suspended into 1999 to allow gas
marketers and other interested parties additional time to study the proposal.
In May 1998, the Arizona Legislature approved House Bill 2663 (Bill),
providing for electric generation service competition and confirming the
authority of the ACC to open the service territories of the electric companies
within the state to competition. The customer choice provisions of the Bill
directed that during the initial construction of a residential structure,
electric and natural gas facilities, at a minimum, shall be installed in and to
the structure in a manner that provides the retail energy consumer with the
capability to choose between electricity and natural gas as an energy source for
each appliance application. Therefore, as a result of this provision of the
Bill, Southwest and other natural gas utilities in the state of Arizona are
assured that a natural gas option is available to all future customers.
COMPETITION
Electric utilities are Southwest's principal competitors for the
residential and small commercial markets throughout its service areas.
Competition for space heating, general household, and small commercial energy
needs generally occurs at the initial installation phase when the
customer/builder typically makes the decision as to which type of equipment to
install and operate. The customer will generally continue to use the chosen
energy source for the life of the equipment. As a result of its success in these
markets, Southwest has experienced consistent growth among the residential and
small commercial customer classes.
Unlike residential and small commercial customers, certain large
commercial, industrial, and electric generation customers have the capability to
switch to alternative energy sources. Southwest has been successful in retaining
these customers by setting rates at levels competitive with alternative energy
sources such as electricity, fuel oils, and coal. As a result, management does
not anticipate any material adverse impact on its operating margin from fuel
switching.
Southwest continues to compete with interstate transmission pipeline
companies, such as El Paso Natural Gas Company (El Paso), Kern River Gas
Transmission Company (Kern River), and Tuscarora Gas Transmission Company, to
provide service to large end-users. End-use customers located in close proximity
to these interstate pipelines pose a potential bypass threat and, therefore,
require Southwest to closely monitor each customer situation and provide
competitive service in order to retain the customer.
Southwest has maintained an intensive effort to mitigate these competitive
threats through the use of discounted transportation contract rates, special
long-term contracts with electric generation and cogeneration customers, and new
tariff programs. One such program provides an opportunity for potential bypass
customers in Arizona to purchase natural gas-related services as a bundled
package, including the procurement of gas supply. Southwest enters into gas
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supply contracts for eligible customers, which are not included in its system
supply portfolio, and provides nomination and balancing services on behalf of
the customer. This program, as well as other competitive response initiatives
and otherwise competitive rates, has helped mitigate the financial impact from
the threat of bypass and the potential loss of margin currently earned from
large customers.
DEMAND FOR NATURAL GAS
Deliveries of natural gas by Southwest are made under a priority system
established by each regulatory commission having jurisdiction over Southwest.
The priority system is intended to ensure that the gas requirements of
higher-priority customers, primarily residential customers and nonresidential
customers who use 500 therms of gas per day or less, are fully satisfied on a
daily basis before lower-priority customers, primarily electric utility and
large industrial customers able to use alternative fuels, are provided any
quantity of gas or capacity.
Demand for natural gas is greatly affected by temperature. On cold days,
use of gas by residential and commercial customers may be as much as eight times
greater than on warm days because of increased use of gas for space heating. To
fully satisfy this increased high-priority demand, gas is withdrawn from storage
or peaking supplies are purchased from suppliers. If necessary, service to
interruptible lower-priority customers may be curtailed to provide the needed
delivery system capacity. Southwest maintains no backlog on its orders for gas
service.
Natural gas vehicles (NGVs) represent a nontraditional source of demand for
natural gas. Southwest encourages the use of NGVs throughout its service
territories. As of December 31, 1998, there were 48 public- and nonpublic-access
fueling stations and approximately 5,500 NGVs in use throughout Southwest
service territories. As more public fueling stations come on-line and stricter
vehicle emission standards are adopted, the demand for NGVs should increase.
NATURAL GAS SUPPLY
Southwest is responsible to acquire (purchase) and arrange delivery of
(transport) natural gas to its system for all sales customers. Southwest
believes that natural gas supplies and pipeline capacity for transportation will
remain plentiful and readily available.
The primary objective of Southwest with respect to gas supply is to ensure
that adequate, as well as economical, supplies of natural gas are available from
reliable sources. Gas is acquired from a wide variety of sources, including
suppliers on the spot market and those who provide firm supplies over short-term
and longer-term durations. During 1998, Southwest acquired gas supplies from
approximately 70 suppliers. This practice provides security against
nonperformance by any one supplier.
Balancing firm supply assurances against the associated costs dictates a
continually changing natural gas purchasing mix within the supply portfolios.
The current purchasing strategy of Southwest primarily involves
competitively-bid firm volumetric contracts with variable or index-based
pricing. This strategy allows Southwest to acquire gas at current market prices
but can result in price volatility. In managing its gas supply portfolio,
Southwest does not currently utilize stand-alone derivative financial
instruments, but may do so in the future to hedge against possible price
increases and help mitigate the regulatory risk of a gas cost disallowance
during periods of rising prices. Any such change would be undertaken only with
regulatory commission authorization.
Natural gas prices have historically demonstrated seasonal volatility with
higher prices in the heating season and lower prices during the summer or
off-peak consumption period. The latter part of 1996 and early 1997 witnessed
particularly steep price increases, whereas the two most recent winter periods
experienced more typical seasonal price volatility.
Gas supplies for the Southwest southern system (Arizona, southern Nevada,
and southern California properties) are primarily obtained from producing
regions in New Mexico (San Juan basin), Texas (Permian basin), and Rocky
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Mountain areas. For its northern system (northern Nevada and northern California
properties), Southwest primarily obtains gas from Rocky Mountain producing areas
and from Canada.
Southwest arranges for transportation of gas to its Arizona, Nevada, and
California service territories through the pipeline systems of El Paso, Kern
River, Northwest Pipeline Corporation, and Southern California Gas Company.
Supply and pipeline capacity availability on both short- and long-term bases are
continually monitored by Southwest to ensure the continued reliability of
service to its customers. Southwest currently receives firm transportation
service, both on a short- and long-term basis, for all of its service
territories on the four pipeline systems noted above, and has interruptible
contracts in place that allow additional capacity to be acquired as needed.
The current level of contracted firm interstate capacity is sufficient to
serve each of the service territories. As the need arises to acquire additional
capacity on one of the interstate pipeline transmission systems, primarily due
to customer growth, Southwest considers available options to obtain the
capacity, either through the use of firm contracts with a pipeline company or by
purchasing capacity on the open market. While firm contracts provide stability
and guaranteed rights to capacity, they are generally a more expensive
alternative.
Southwest continues to evaluate natural gas storage as an option to enable
it to take advantage of seasonal price differentials in obtaining natural gas
from a variety of sources to meet the growing demand of its customers.
ENVIRONMENTAL MATTERS
Federal, state, and local laws and regulations governing the discharge of
materials into the environment have had little direct impact upon Southwest.
Environmental efforts, with respect to matters such as protection of endangered
species and archeological finds, have increased the complexity and time required
to obtain pipeline rights-of-way and construction permits. However, increased
environmental legislation and regulation are also beneficial to the natural gas
industry. Because natural gas is one of the most environmentally safe fossil
fuels currently available, its use helps energy users to comply with stricter
environmental standards.
EMPLOYEES
At December 31, 1998, the natural gas operations segment had 2,429 regular
full-time equivalent employees. Southwest believes it has a good relationship
with its employees. No employees are represented by a union.
Reference is hereby made to Item 10 in Part III of this report on Form 10-K
for information relative to the executive officers of the Company.
CONSTRUCTION SERVICES
Northern Pipeline Construction Co. (Northern or the construction services
segment) is a full-service underground piping contractor which provides utility
companies with trenching and installation, replacement, and maintenance services
for energy distribution systems. Northern contracts primarily with LDCs to
install, repair, and maintain energy distribution systems from the town border
station to the end-user meter. The primary focus of business operations is main
and service replacement as well as new business installations. Construction work
varies from relatively small projects to the piping of entire communities.
Construction activity is seasonal. Peak construction periods are the summer and
fall months in colder climate areas, such as the Midwest. In the warmer climate
areas, such as the southwestern United States, construction continues year
round.
Northern business activities are often concentrated in utility service
territories where existing gas lines are scheduled for replacement. An LDC will
typically contract with Northern to provide pipe replacement services and new
line installations. Contract terms generally specify unit price or fixed-price
arrangements. Unit price contracts establish prices for all of the various
services to be performed during the contract period. These contracts often have
annual
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pricing reviews. During 1998, more than 89 percent of revenue was earned under
unit price contracts. As of December 31, 1998 no significant backlog exists with
respect to outstanding construction contracts.
Competition within the industry is limited to several regional competitors
in what can be characterized as a largely fragmented industry. Northern
currently operates in approximately 15 major markets nationwide. Its customers
are the primary LDCs in those markets. Construction companies typically depend
on a few customers for their business. During 1998, Southwest accounted for 32
percent of Northern revenues. No other customers contributed more than 10
percent of revenues.
Employment fluctuates between seasonal construction periods, which are
normally heaviest in the summer and fall months. At December 31, 1998, Northern
had 1,267 regular full-time equivalent employees. Employment peaked in November
1998 when there were 1,621 employees. The majority of the employees are
represented by collective bargaining agreements which is typical of the utility
construction industry.
Operations are conducted from 17 field locations with corporate
headquarters located in Phoenix, Arizona. All buildings are leased from third
parties. The lease terms are typically two to three years. Field location
facilities consist of a small building for repairs and acreage to store
equipment.
ITEM 2. PROPERTIES
The plant investment of Southwest consists primarily of transmission and
distribution mains, compressor stations, peak shaving/storage plants, service
lines, meters, and regulators which comprise the pipeline systems and facilities
located in and around the communities served. Southwest also includes other
properties such as land, buildings, furnishings, work equipment, and vehicles in
plant investment. The northern Nevada and northern California properties of
Southwest are referred to as the northern system; the Arizona, southern Nevada,
and southern California properties are referred to as the southern system.
Several properties are leased by Southwest, including an LNG storage plant on
its northern Nevada system and a portion of the corporate headquarters office
complex located in Las Vegas, Nevada. Total gas plant, exclusive of leased
property, at December 31, 1998, was $2.1 billion, including construction work in
progress. It is the opinion of management that the properties of Southwest are
suitable and adequate for its purposes.
Substantially all gas main and service lines of Southwest are constructed
across property owned by others under right-of-way grants obtained from the
record owners thereof, on the streets and grounds of municipalities under
authority conferred by franchises or otherwise, or on public highways or public
lands under authority of various federal and state statutes. None of the
numerous county and municipal franchises are exclusive, and some are of limited
duration. These franchises are renewed regularly as they expire, and Southwest
anticipates no serious difficulties in obtaining future renewals.
With respect to the right-of-way grants, Southwest has had continuous and
uninterrupted possession and use of all such rights-of-way, and the associated
gas mains and service lines, commencing with the initial stages of the
construction of such facilities. Permits have been obtained from public
authorities in certain instances to cross, or to lay facilities along, roads and
highways. These permits typically are revocable at the election of the grantor,
and Southwest occasionally must relocate its facilities when requested to do so
by the grantor. Permits have also been obtained from railroad companies to cross
over or under railroad lands or rights-of-way, which in some instances require
annual or other periodic payments and are revocable at the grantors' elections.
Southwest operates two primary pipeline transmission systems: (i) a system
owned by Paiute, a wholly owned subsidiary, extending from the Idaho-Nevada
border to the Reno, Sparks, and Carson City areas and communities in the Lake
Tahoe area in both California and Nevada and other communities in northern and
western Nevada; and (ii) a system extending from the Colorado River at the
southern tip of Nevada to the Las Vegas distribution area.
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The map below shows the locations of major Southwest facilities and
transmission lines, and principal communities to which Southwest supplies gas
either as a wholesaler or distributor. The map also shows major supplier
transmission lines that are interconnected with the Southwest systems.
[MAP]
[THE FOLLOWING TEXT TO BE INSERTED IN EDGAR VERSION ONLY]
[DESCRIPTION: Map of Arizona, Nevada, and California indicating the
location of Southwest service areas. Service areas in Arizona include most of
the central and southern areas of the state including Phoenix, Tucson, Yuma, and
surrounding communities. Service areas in northern Nevada include Carson City,
Yerington, Fallon, Lovelock, Winnemucca, and Elko. Service areas in southern
Nevada include the Las Vegas valley (including Henderson and Boulder City) and
Laughlin. Service areas in southern California include Barstow, Big Bear,
Needles, and Victorville. Service areas in northern California include the north
shore of Lake Tahoe and portions of Truckee. Companies providing gas
transportation services for the Company are indicated by showing the location of
their pipelines. Major transporters include El Paso Natural Gas Company, Kern
River Gas Transmission Company, Northwest Pipeline Corporation, and Southern
California Gas Company. The location of the Paiute Pipeline Company transmission
pipeline (extending from the Idaho/Nevada border to the Reno/Tahoe area) and
Southwest's pipeline (extending from Laughlin/Bullhead City to the Las Vegas
valley) are indicated. The LNG facility is located near Lovelock, Nevada.]
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The information appearing in Part I, Item 1, pages 6 and 7 with respect to
the construction services segment is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as defendant in various legal proceedings. The
ultimate dispositions of these proceedings are not presently determinable;
however, it is the opinion of management that no litigation to which the Company
is subject will have a material adverse impact on its financial position or
results of operations.
On December 16, 1998, Arthur Klein, a purported shareholder of the Company,
filed a Complaint in the Superior Court of the State of California in San Diego
County (Case No. 726615) against the Company and its directors alleging one
cause of action for breach of fiduciary duty. The plaintiff alleges that the
consideration for the proposed merger with ONEOK is unfair and inadequate
because the Company's Board of Directors approved the definitive agreement with
ONEOK without conducting any auction or using another "market check" mechanism.
Plaintiff is proposing to represent a class of all shareholders of the Company
(excluding defendants and their affiliates and families). On March 22, 1999, the
plaintiff filed an Amended Complaint in which he alleges causes of action for
breach of fiduciary duty of loyalty and due care and breach of duty of candor.
By his Amended Complaint, plaintiff seeks
* to enjoin the merger with ONEOK,
* to rescind the definitive agreement with ONEOK,
* to implement an auction of the Company or similar process,
* to void the $30 million termination fee in the definitive agreement
with ONEOK in the event the definitive agreement with ONEOK is
terminated, the Company's Board of Directors recommends another
transaction, such as the merger proposed by Southern Union Company, or
in other similar circumstances, and
* unspecified damages.
The court has ordered the parties to conduct limited discovery and set a
preliminary injunction schedule, which, if followed, would result in a
telephonic ruling on plaintiff's motion for a preliminary injunction in May
1999.
The Company believes that it has valid defenses to plaintiff's claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal markets on which the common stock of the Company is traded
are the New York Stock Exchange and the Pacific Stock Exchange. At March 15,
1999, there were 24,186 holders of record of common stock, and the market price
of the common stock was $27. The quarterly market price of and dividends on
Company common stock required by this item are included in the 1998 Annual
Report to Shareholders and are incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Information required by this item is included in the 1998 Annual Report to
Shareholders and is incorporated herein by reference.
9
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information required by this item is included in the 1998 Annual Report to
Shareholders and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Southwest Gas Corporation and
Notes thereto, together with the report of Arthur Andersen LLP, Independent
Public Accountants, are included in the 1998 Annual Report to Shareholders and
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors. The names of the members of the Board of
Directors, the principal occupation of each member and his or her employer for
the last five years or longer, and the principal business of the corporation or
other organization, if any, in which such occupation or employment is carried
on, follow.
GEORGE C. BIEHL
Senior Vice President, Chief Financial Officer & Corporate Secretary
Southwest Gas Corporation
Director Since: 1998
Board Committees: Finance
Mr. Biehl, 51, joined the Company in 1990 as Senior Vice President and
Chief Financial Officer after serving in a number of capacities with Deloitte
Haskins & Sells (now Deloitte & Touche) for sixteen years and as chief financial
officer for PriMerit Bank for the five years before joining the Company. He also
assumed the responsibilities as Corporate Secretary for the Company in 1996. Mr.
Biehl graduated from Ohio State University with a degree in accounting and
earned his MBA with an emphasis in finance from Columbia University. He is a
licenced CPA in several states and is a member of the American Institute of
Certified Public Accountants. He is also a member of the Las Vegas Chamber of
Commerce Leadership Las Vegas Program, and serves on the finance committees of
several trade association groups.
10
<PAGE> 13
MANUEL J. CORTEZ
President and Chief Executive Officer
Las Vegas Convention and Visitors Authority
Director Since: 1991
Board Committees: Audit (Chairman), Compensation, Pension Plan Investment
Mr. Cortez, 60, served four terms (1977-1990) on the Clark County
Commission and is a former chairman of the Commission. He has been active on
various boards, including the Environmental Quality Policy Review Board, the Las
Vegas Valley Water District Board of Directors, and the University Medical
Center Board of Trustees, and served as chairman of the Liquor and Gaming
Licensing Board and the Clark County Sanitation District. He has also held
leadership roles with numerous civic and charitable organizations such as Boys
and Girls Clubs of Clark County, Lied Discovery Childrens Museum, and Boys Town.
Currently, Mr. Cortez holds professional memberships in the American Society of
Association Executives, the Professional Convention Managers Association, the
International Association of Convention and Visitors Bureaus, the American
Society of Travel Agents, and is on the board of directors for the Travel
Industry Association of America.
LLOYD T. DYER
Retired President and Chief Executive Officer
Harrah's
Director Since: 1978
Board Committees: Executive, Compensation (Chairman), Nominating
Mr. Dyer, 71, obtained a degree in banking and finance from the University
of Utah prior to his employment with Harrah's, a hotel/gaming corporation with
its principal facilities in Reno and Lake Tahoe, in 1957. He was elected
president and chief operating officer of Harrah's in 1975, and elected president
and chief executive officer in 1978. He remained in those positions with
Harrah's until his retirement in April 1980. Mr. Dyer is a trustee of the
William F. Harrah Trusts.
THOMAS Y. HARTLEY
Chairman of the Board, Southwest Gas Corporation
President and Chief Operating Officer, Colbert Golf Design and Development
Director Since: 1991
Board Committees: Executive (Chairman), Compensation, Nominating
Mr. Hartley, 65, obtained his degree in business from Ohio University in
1955, and was employed in various capacities by Deloitte Haskins & Sells (now
Deloitte & Touche) from 1959 until his retirement as an area managing partner in
1988. He joined Southwest Gas Corporation as Director in 1991 and was elected
Chairman of the Board of Directors in 1997. Mr. Hartley is actively involved in
numerous business and civic activities. He is a past chairman of the UNLV
Foundation and the Nevada Development Authority, and past president of the Las
Vegas Founders Club. He has also held voluntary executive positions with the Las
Vegas Founders Golf Foundation, the Las Vegas Chamber of Commerce, and the
Boulder Dam Area Council of the Boy Scouts of America. He is a director of
Sierra Health Services, Inc. and AmeriTrade Holdings Corporation.
11
<PAGE> 14
MICHAEL B. JAGER
Private Investor
Director Since: 1989
Board Committees: Audit, Finance, Pension Plan Investment (Chairman)
Mr. Jager, 67, obtained a degree in petroleum geology from Stanford
University in 1955. After a four-year employment with the Richfield Oil
Corporation as a petroleum geologist, he joined Frank H. Ayres & Son
Construction Company and was involved in the construction of subdivisions and
homes in southern California until 1979. Since that time he has consulted in the
single family residential development industry, and owns and manages a number of
businesses in Nevada.
LEONARD R. JUDD
Former President, Chief Operating Officer, and Director
Phelps Dodge Corporation
Director Since: 1988
Board Committees: Executive, Compensation, Nominating (Chairman)
Mr. Judd, 60, former president, chief operating officer, and director of
Phelps Dodge Corporation, joined Phelps Dodge in 1963 and worked at that
company's operations in Arizona, New Mexico, and New York City. He was elected
to the Phelps Dodge board of directors in 1987, president of Phelps Dodge Mining
Company in 1988, and became president and chief operating officer of Phelps
Dodge in 1989. He remained in those positions until the end of 1991. Mr. Judd is
a member of various professional organizations and is active in numerous civic
groups. He serves as a director of Morrison-Knudsen Corporation.
JAMES J. KROPID
President of James J. Kropid Investments
Director Since: 1997
Board Committees: Executive, Compensation, Finance
Mr. Kropid, 61, received his undergraduate degree from DePaul University
and participated in the executive development program at the University of
Illinois. He joined Centel Corporation in 1961 and became president of its
Central Telephone Company-Nevada/Texas division in 1987. In 1993, the Governor
of Nevada appointed him to the position of general manager of the Nevada State
Industrial Insurance System, a position in which he served for almost two years.
He is currently president of his own investment company. Mr. Kropid holds
executive and board positions with various civic and charitable organizations
including the National Conference for Community and Justice (formerly known as
the National Conference of Christians and Jews), Las Vegas YMCA, and the Boy
Scouts of America. He was formerly a board member for the Nevada Development
Authority, United Way of Southern Nevada, and treasurer of St. Jude's Ranch for
Children. He is a director of the Golf Company of Nevada.
12
<PAGE> 15
MICHAEL O. MAFFIE
President and Chief Executive Officer
Southwest Gas Corporation
Director Since: 1988
Board Committees: Executive
Mr. Maffie, 51, joined the Company in 1978 as Treasurer after seven years
with Arthur Andersen & Co. He was named Vice President/Finance and Treasurer in
1982, Senior Vice President and Chief Financial Officer in 1984, Executive Vice
President in 1987, President and Chief Operating Officer in 1988, and President
and Chief Executive Officer in 1993. He received his undergraduate degree in
accounting and his MBA degree in finance from the University of Southern
California. He serves as a director of Del Webb Corporation, Boyd Gaming
Corporation, and Norwest Bank/Nevada Division. A member of various civic and
professional organizations, he serves as chairman of the board of United Way of
Southern Nevada and trustee and treasurer of the UNLV Foundation. He also is a
director of the Pacific Coast Gas Association and the Institute of Gas
Technology.
CAROLYN M. SPARKS
Co-Founder
International Insurance Services, Ltd.
Director Since: 1988
Board Committees: Audit, Finance (Chairperson), Pension Plan Investment
Mrs. Sparks, 57, graduated from the University of California Berkeley in
1963, and with her husband, co-founded International Insurance Services, Ltd.,
in 1966 in Las Vegas. She served on the University and Community College System
of Nevada Board of Regents from 1984 to 1996, and in 1991 was elected to a
two-year term as chair of the Board of Regents. Mrs. Sparks is actively involved
with numerous charitable and civic organizations, including founding and
chairing the University Medical Center Foundation and the Children's Miracle
Network Telethon. She is currently chair of the Nevada Children's Center
Foundation and has been elected to the Foundation Boards of the University of
Nevada Las Vegas and the Community College of Southern Nevada.
ROBERT S. SUNDT
Retired President
Sundt Corp.
Director Since: 1987
Board Committees: Executive, Finance, Nominating, Pension Plan Investment
Mr. Sundt, 72, has been associated with Sundt Corp. in a variety of
positions since 1948. He was named President of Sundt Corp. in 1983. He is now
retired and has no continuing association with Sundt Corp. He is a member of the
American Institute of Constructors, Consulting Constructors Council of America,
and a life director of the Associated General Contractors of America. He was a
member of the American Arbitration Association and has served as an arbitrator
on disputes concerning the construction industry. He is a past member of the
Construction Industry Presidents Forum. Mr. Sundt is affiliated with a number of
community organizations and is past chairman of the Tucson Metropolitan Chamber
of Commerce.
13
<PAGE> 16
TERRANCE "TERRY" L. WRIGHT
President and Chief Executive Officer
Nevada Title Insurance Company
Director Since: 1997
Board Committees: Audit, Compensation, Pension Plan Investment
Mr. Wright, 49, received his undergraduate degree in business
administration and his juris doctorate from DePaul University. He joined Chicago
Title Insurance Company while in law school and after graduation remained with
the company and eventually moved to the Las Vegas, Nevada office. In 1978, he
acquired the assets of Western Title to form what is now known as Nevada Title
Insurance Company. Mr. Wright is also associate general counsel for A.G. Spanos
Enterprises, Inc., one of the nation's largest apartment complex builders. He is
a member of the California and Illinois bar associations and is affiliated
professionally with the Las Vegas Board of Realtors, Nevada Land Title
Association, Las Vegas Executives, Opportunity Village, TPC board of governors,
Young President's Organization, and is past-chairman of the Nevada Development
Authority. Mr. Wright is also a trustee and an executive committee member of the
UNLV Foundation.
(b) Identification of Executive Officers. The name, age, position and
period position held during the last five years for each of the Executive
Officers of the Company are as follows:
<TABLE>
<CAPTION>
PERIOD POSITION
NAME AGE POSITION HELD
---- --- -------- ---------------
<S> <C> <C> <C>
Michael O. Maffie 51 President and Chief Executive Officer 1994-Present
George C. Biehl 51 Senior Vice President/Chief Financial Officer and 1996-Present
Corporate Secretary
Senior Vice President and Chief Financial Officer 1994-1996
James P. Kane 52 Senior Vice President/Operations 1997-Present
Vice President/Southern Arizona Division 1994-1997
James F. Lowman 52 Senior Vice President/Central Arizona Division 1994-Present
Dudley J. Sondeno 46 Senior Vice President/Chief Knowledge and
Technology Officer 1994-Present
Edward S. Zub 50 Senior Vice President/Regulation and Product Pricing 1996-Present
Vice President/Rates & Regulation 1994-1996
</TABLE>
(c) Identification of Certain Significant Employees. None.
(d) Family Relationships. None of the Directors or Executive Officers are
related to any other either by blood, marriage or adoption.
(e) Business Experience. Information with respect to Directors is described
in (a) above. All Executive Officers have held responsible positions with the
Company for at least five years as described in (b) above.
(f) Involvement in Certain Legal Proceedings. None.
(g) Promoters and Control Persons. None.
Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of
the Securities Exchange Act of 1934 requires officers and directors, and persons
who own more than ten percent of a registered class of equity securities, to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission (SEC) and the New York Stock Exchange. Officers, directors,
and beneficial owners of more than ten percent of any class of equity securities
are required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
14
<PAGE> 17
The Company has adopted procedures to assist its directors and executive
officers in complying with Section 16(a) of the Securities and Exchange Act of
1934, as amended, which includes assisting in the preparation of forms for
filing. For 1998 all but one of the required reports were filed timely. The Form
4 listing acquisitions by Carolyn Sparks, as trustee and beneficiary of the
Sparks Family Trust, of 4,000 shares of Common Stock was not filed timely. An
amended Form 4 for Mrs. Sparks listing the August 1998 purchase was filed in
January 1999.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTORS COMPENSATION
Outside directors receive an annual retainer of $24,000, plus $1,000 for
each Board of Directors or committee meeting attended. Committee chairpersons
receive an additional $500 for each committee meeting attended. The Chairman of
the Board of Directors receives an additional $50,000 annually for serving in
that capacity. Directors who are full-time employees of the Company or its
subsidiaries receive no additional compensation for service on the Board.
Each outside director received in May 1998, options to purchase 2,000
shares of the Common Stock under the provisions of the Option Plan. Under the
terms of the Option Plan, each outside director is entitled to receive
additional options to purchase 2,000 shares of the Common Stock on the date of
each Annual Meeting during the ten-year term of the Option Plan. The purchase
price for the options is the market price of the Common Stock on the date of the
grant and will become exercisable, in increments over three years, commencing
with the first anniversary of the grant. All options granted to the outside
directors will expire ten years after the date of each grant. The Option Plan
contains change in control provisions.
Outside directors may defer their compensation until retirement or
termination of their status as directors. Any cash they receive from the
cancellation of any outstanding options as a result of a change in control of
the Company may also be deferred. At retirement or termination, amounts deferred
will be paid out over 5, 10, 15, or 20 years. Amounts deferred receive interest
at 150 percent of the Moody's Composite Bond Rate.
The Company also provides a retirement plan for its outside directors. With
a minimum of 10 years of service, an outside director can retire and receive an
annual benefit for life equal to the annual retainer, at retirement, for serving
on the Company's Board. Directors who retire before age 65, after satisfying the
minimum service obligation, will receive retirement benefits upon reaching age
65. Upon a change in control of the Company, each of the directors of the
Company with at least eight years of service will be entitled to receive
retirement benefits.
15
<PAGE> 18
EXECUTIVE COMPENSATION
The following table provides compensation earned by the Company's Chief
Executive Officer and each of the four most highly compensated executive
officers of the Company, at year-end 1998, for the years ended December 31,
1998, 1997, and 1996.
SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION ---------------------- --------------------
------------------------------------------------------ RESTRICTED
BONUS ($) STOCK LTIP ALL OTHER
NAME AND ---------------------- OTHER ANNUAL AWARD(S) OPTIONS/ PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) UTILITY(2) NON-UTILITY COMPENSATION($) ($)(2)(3)(4) SARS(#) ($) ($) (5)
------------------ ---- -------- ---------- ----------- --------------- ------------ -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Michael O. Maffie 1998 486,301 234,005 0 0 350,997 25,000 N/A 59,410
President & C.E.O. 1997 462,192 132,015 0 0 198,022 25,000 N/A 54,036
1996 435,479 129,602 500,000 0 194,403 90,000 N/A 46,210
George C. Biehl 1998 225,425 72,385 0 0 108,577 7,500 N/A 19,830
Senior Vice President/ 1997 214,877 40,762 0 0 61,143 7,500 N/A 17,329
Chief Financial Officer 1996 204,773 40,324 200,000 0 60,485 30,000 N/A 13,700
& Corporate Secretary
Edward S. Zub 1998 180,137 59,283 0 0 88,928 7,500 N/A 20,352
Senior Vice President/ 1997 160,729 56,871 0 0 47,807 7,500 N/A 16,583
Regulation & Product 1996 138,484 28,802 0 0 43,223 25,000 N/A 12,723
Pricing
James F. Lowman 1998 169,116 54,136 0 0 81,206 3,750 N/A 13,702
Senior Vice President/ 1997 161,401 35,665 0 0 45,998 3,750 N/A 12,279
Central Arizona Division 1996 154,015 29,336 0 0 44,004 15,000 N/A 10,316
Dudley J. Sondeno 1998 167,616 53,669 0 0 80,514 6,250 N/A 14,218
Senior Vice President/ 1997 159,901 30,387 0 0 45,581 6,250 N/A 13,983
Chief Knowledge & 1996 152,529 29,952 0 0 44,928 25,000 N/A 11,209
Technology Officer
</TABLE>
(1) All compensation reflected in the Summary Compensation Table is reported
on an earned basis for each fiscal year.
(2) Utility bonuses and restricted stock awards earned for calendar years
1996, 1997, and 1998 were paid and awarded in 1997, 1998, and 1999,
respectively. Restricted stock awards are paid in Common Stock following
successful completion of a three-year restriction period.
(3) Dividends equal to the dividends paid on the Common Stock will be
accrued on the restricted stock during the restriction period.
(4) The total number of restricted stock awards granted in 1996, 1997, and
1998, for calendar years 1995, 1996, and 1997, and their value based on
the closing price of the Common Stock on the New York Stock Exchange on
December 31, 1998, for the named executive officers are as follows:
<TABLE>
<CAPTION>
Shares Value
------ -----
<S> <C> <C>
Mr. Maffie 33,564 $893,642
Mr. Biehl 10,465 278,631
Mr. Zub 7,504 199,794
Mr. Lowman 7,737 205,998
Mr. Sondeno 7,777 207,063
</TABLE>
(5) The amounts shown in this column for each year consist of above-market
interest on deferred compensation (in excess of 120 percent of the
Applicable Federal Long-term Rate) and matching contributions under the
Company's executive deferral plan. Under the plan, executive officers
may defer up to 100 percent of their annual cash compensation. Interest
on such deferrals is set at 150 percent of the Moody's Seasoned
Corporate Bond Rate. As part of the plan, the Company provides matching
contributions that parallel the contributions
16
<PAGE> 19
made under the Company's 401(k) plan, which is available to all Company
employees, equal to one-half of the deferred amount, up to six percent
of their annual salary. The breakdown of this compensation for each
named executive officer is as follows:
<TABLE>
<CAPTION>
Above-market Matching
Interest Contributions
-------- -------------
<S> <C> <C>
Mr. Maffie $44,842 $14,568
Mr. Biehl 13,078 6,752
Mr. Zub 14,963 5,389
Mr. Lowman 8,635 5,067
Mr. Sondeno 9,196 5,022
</TABLE>
- ----------------
OPTIONS/SARS GRANTED IN 1998
The following table sets forth the number of shares of the Company's Common
Stock subject to stock options granted under the 1996 Stock Incentive Plan
(Option Plan) to the named executive officers listed in the Summary Compensation
Table during 1998, together with related information.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------------ ANNUAL RATES
NUMBER OF PERCENT OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS/SARS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM (2)
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED (#) (1) FISCAL YEAR ($/SH) DATE 5 PERCENT 10 PERCENT
---- --------------- ---------------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael O. Maffie 25,000 25.00 $23.06 7/20/08 $363,234 $916,734
George C. Biehl 7,500 7.50 23.06 7/20/08 108,970 275,020
Edward S. Zub 7,500 7.50 23.06 7/20/08 108,970 275,020
James F. Lowman 3,750 3.75 23.06 7/20/08 54,485 137,510
Dudley J. Sondeno 6,250 6.25 23.06 7/20/08 90,809 229,184
- ---------------
</TABLE>
(1) Forty percent of the options become exercisable one year after the
grant. Thirty percent of the options become exercisable two years after
the grant, with the remaining becoming exercisable on the third
anniversary of the grant.
(2) The 5 percent and 10 percent growth rates for the period ending July 20,
2008, which were determined in accordance with the rules of the SEC,
illustrate that the potential future value of the granted options is
linked to future increases in growth of the price of the Common Stock.
Because the exercise price for the options equals the market price of
the Common Stock on the date of the grant, there will be no gain to the
named executive officers without an increase in the stock price. The 5
percent and 10 percent growth rates are for illustration only and are
not intended to be predictive of future growth.
- -------------------
17
<PAGE> 20
OPTIONS/SAR EXERCISES AND YEAR-END VALUES
Shown below is information with respect to unexercised options granted
under the Option Plan to the named executive officers and held by them at
December 31, 1998.
AGGREGATED OPTION/SAR EXERCISES IN 1998 AND
YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NO. OF NO. OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS/SARS AT OPTIONS/SARS AT
ON VALUES DECEMBER 31, 1998 DECEMBER 31, 1998 (1)
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE (2)
---- -------- -------- ----------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Michael O. Maffie 0 $0 73,000 67,000 $807,375 $515,438
George C. Biehl 0 0 24,000 21,000 266,625 165,094
Edward S. Zub 0 0 20,500 19,500 225,938 147,656
James F. Lowman 0 0 12,000 10,500 133,313 82,547
Dudley J. Sondeno 0 0 20,000 17,500 222,188 137,578
</TABLE>
- ----------------
(1) Represents the difference between the exercise prices for in-the-money
options and the closing price of $26.63 for the Company's Common Stock
on the New York Stock Exchange on December 31, 1998, times the number of
in-the-money options.
(2) Unexercisable options are those options which have been granted but
cannot yet be exercised due to the Code restrictions on the value of
incentive options, restrictions incorporated into the Option Plan, and
the specific option agreements.
- -----------------
BENEFIT PLANS
Southwest Gas Basic Retirement Plan. The named executive officers
participate in the Company's non-contributory, defined benefit retirement plan,
which is available to all employees of the Company and its subsidiaries (other
than Northern Pipeline Construction Co.). Benefits are based upon an employee's
years of service, up to a maximum of 30 years, and the employee's highest 5
consecutive years salary, excluding bonuses, within the final 10 years of
service.
18
<PAGE> 21
PENSION PLAN TABLE (1)
<TABLE>
<CAPTION>
YEARS OF SERVICE
ANNUAL --------------------------------------------------------------
COMPENSATION 10 15 20 25 30 (2)
------------ -- -- -- -- ------
<S> <C> <C> <C> <C> <C>
$50,000 $ 8,750 $13,125 $ 17,500 $21,875 $26,250
100,000 17,500 26,250 35,000 43,750 52,500
150,000 26,250 39,375 52,500 65,625 78,750
200,000 35,000 52,500 70,000 87,500 105,000
250,000 43,750 65,625 87,500 109,375 131,250
300,000 52,500 78,750 105,000 131,250 157,500
350,000 61,250 91,875 122,500 153,125 183,750
400,000 70,000 105,000 140,000 175,000 210,000
450,000 78,750 118,125 157,500 196,875 236,250
500,000 87,500 131,250 175,000 218,750 262,500
550,000 96,250 144,375 192,500 240,625 288,750
600,000 105,000 157,500 210,000 262,500 315,000
</TABLE>
- ------------------
(1) For 1999, the maximum annual compensation that can be considered in
determining benefits under the Plan is $160,000. For future years the
maximum annual compensation will be adjusted to reflect changes in the
cost of living as established by the Internal Revenue Service.
(2) Years of service beyond 30 years will not increase benefits under the
basic retirement plan.
- -----------------
Compensation covered under the basic retirement plan is based on salary
depicted in the Summary Compensation Table. As of December 31, 1998, the
credited years of service for the named executive officers shown in the Summary
Compensation Table are as follows: Mr. Maffie, 20 years; Mr. Biehl, 13 years;
Mr. Zub, 20 years; Mr. Lowman, 29 years; and Mr. Sondeno, 19 years.
Amounts shown in the pension plan table are straight life annuity amounts
notwithstanding the availability of joint survivorship benefit provisions.
Benefits paid under the basic and supplemental retirement plans are not reduced
by any Social Security benefits received.
Supplemental Retirement Plan. The named executive officers also participate
in the Company's supplemental retirement plan (SERP). Such officers with 10 or
more years of service may retire at age 55 or older and will receive benefits
under the SERP. Benefits from the SERP, when added to benefits received under
the basic retirement plan, will equal 60 percent of each officer's highest
12-months of salary, as depicted in the Summary Compensation Table. For Mr.
Maffie, compensation used to determine such benefits includes salary, cash
bonuses other than the 1996 non-utility bonus, and the payment of restrictive
stock awards depicted in the Summary Compensation Table. The cost to the Company
for benefits under the SERP for any one of the named executive officers cannot
generally be properly allocated or determined because of the overall plan
assumptions and options available.
SEVERANCE AND CHANGE IN CONTROL ARRANGEMENTS
In July 1998, the Company amended the existing employment agreements with
seven of its designated officers (including the named executive officers), and
entered into change in control agreements with its remaining officers. The
employment agreements generally provide for the payment, upon termination of
employment by the Company without cause, as defined therein, of up to one and
one-half years of the amount of total annual compensation (base salary, a
predetermined level of incentive compensation and fringe benefits), and up to
three years of total annual compensation for Mr. Maffie. The employment
agreements further provide for the payment, upon the termination of employment
for
19
<PAGE> 22
"good reason," as defined therein, within two years following a change in
control of the Company, of an amount equal to two to two and one-half times
total annual compensation for each of these officers, other than Mr. Maffie who
would receive three times total annual compensation. The change in control
agreements for the other officers parallel the change in control provisions of
the employment agreements.
Restricted stock awards, stock options, or stock appreciation rights will
vest and become immediately exercisable upon a change in control. Benefits under
the SERP will also vest and/or accelerate. If any payment under these agreements
would constitute a "parachute payment" subject to excise tax under the Code, the
officer will be entitled to an additional "gross-up" payment. The terms of these
agreements are for 24 months for each of the officers, other than Mr. Maffie
whose agreement is for 36 months. Each of the agreements will be automatically
extended annually for successive one-year periods, unless canceled by the
Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The directors who served on the Company's Compensation Committee during
1998 were Lloyd T. Dyer (Chairman), Manuel J. Cortez, Thomas Y. Hartley, Leonard
R. Judd, James J. Kropid, and James R. Lincicome. Director Kropid joined the
committee after the retirement of James R. Lincicome at last year's Annual
Meeting of Shareholders. Mr. Lincicome served on the committee during 1998 until
his retirement in May 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners. A group of investment
companies headed by Mario J. Gabelli reported in February 1999, that it owned
3,023,883 shares of the Common Stock (approximately 9.9 percent as of March 15,
1999). The Company has been advised that the investment companies hold the
shares as investment advisors for other beneficial owners.
(b) Security Ownership of Management. The following table discloses all
Common Stock of the Company beneficially owned by the directors and the
executive officers of the Company, as of March 15, 1999.
<TABLE>
<CAPTION>
NO. OF SHARES PERCENT OF OUTSTANDING
DIRECTOR/EXECUTIVE OFFICER BENEFICIALLY OWNED (1) COMMON STOCK (2)
-------------------------- ---------------------- ----------------------
<S> <C> <C>
George C. Biehl 49,220 (3)(4) *
Manuel J. Cortez 6,259 (5) *
Lloyd T. Dyer 8,881 (5)(6) *
Thomas Y. Hartley 17,630 (5)(7) *
Michael B. Jager 8,620 (5)(8) *
Leonard R. Judd 6,300 (5)(9) *
James J. Kropid 3,098 (10) *
Michael O. Maffie 134,276 (3)(11) *
Carolyn M. Sparks 10,820 (5)(12) *
Robert S. Sundt 9,300 (5)(13) *
Terrance L. Wright 1,714 (14) *
James F. Lowman 30,811 (15) *
Dudley J. Sondeno 33,392 (16) *
Edward S. Zub 38,893 (17) *
Other Executive Officers 70,560 (18) *
-------
Total 429,774 1.4
======= ===
</TABLE>
- ---------------
20
<PAGE> 23
(1) The Common Stock holdings listed in this column include performance
shares granted to the Company's executive officers under the Company's
Management Incentive Plan (MIP) for 1996, 1997, and 1998 and exercisable
options issued under the 1996 Stock Incentive Plan (Option Plan).
(2) As of March 15, 1999, the directors and executive officers of the
Company beneficially owned, including exercisable options and MIP
performance shares, 429,774 shares, which represent 1.4 percent of the
Company's outstanding shares. No individual officer or director owned
more than 1 percent of the Common Stock.
(3) Number of shares does not include 6,618 shares held by the Southwest Gas
Corporation Foundation, which is a charitable trust. Messrs. Maffie and
Biehl are trustees of the Foundation but disclaim beneficial ownership
of said shares.
(4) The holdings include 24,000 shares which Mr. Biehl has the right to
acquire through the exercise of options under the Option Plan.
(5) The holdings include 4,300 shares which the non-employee directors have
the right to acquire through the exercise of options under the Option
Plan.
(6) Number of shares include 4,581 shares over which Mr. Dyer has shared
voting and investment control with his spouse through a family trust.
(7) Number of shares include 311 shares over which Mr. Hartley has shared
voting and investment control with his spouse through a family trust.
(8) Number of shares includes 2,320 shares over which Mr. Jager has shared
voting and investment control with his spouse through a family trust and
2,000 shares held in trust for Mr. Jager's spouse, over which Mr. Jager
has no control.
(9) Number of shares includes 2,000 shares over which Mr. Judd has shared
voting and investment control with his spouse.
(10) The holdings include 1,464 shares which Mr. Kropid has the right to
acquire through the exercise of options under the Option Plan and 1,634
shares over which he has shared voting and investment power with his
spouse through a family trust. The family trust also holds 1,500 shares
of Trust Originated Preferred Securities issued by the Company's
financing subsidiary, Southwest Gas Capital I.
(11) The holdings include 73,000 shares which Mr. Maffie has the right to
acquire through the exercise of options under the Option Plan and 3,044
shares over which he has shared voting and investment control with his
spouse.
(12) Number of shares includes 5,000 shares over which Mrs. Sparks has shared
voting and investment control with her spouse through a family trust and
1,520 shares held as joint tenants with her spouse.
(13) Number of shares includes 5,000 shares over which Mr. Sundt has shared
voting and investment control with his spouse.
(14) The holdings include 1,464 shares which Mr. Wright has the right to
acquire through the exercise of options under the Option Plan.
(15) The holdings include 12,000 shares which Mr. Lowman has the right to
acquire through the exercise of options under the Option Plan.
21
<PAGE> 24
(16) The holdings include 20,000 shares which Mr. Sondeno has the right to
acquire through the exercise of options under the Option Plan.
(17) The holdings include 20,500 shares which Mr. Zub has the right to
acquire through the exercise of options under the Option Plan and 105
shares held solely by his spouse.
(18) The holdings of other executive officers include 42,000 shares that can
be acquired through the exercise of options under the Option Plan.
- ----------------
(c) Changes in Control. In December 1998, the Company announced a
definitive agreement to be acquired by ONEOK, Inc. See ITEM 1. BUSINESS.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report on Form 10-K:
(1) The Consolidated Financial Statements of the Company (including the
Report of Independent Public Accountants) required to be reported
herein are incorporated by reference to the information reported in
the 1998 Annual Report to Shareholders under the following
captions:
Report of Independent Public Accountants.....................39
Consolidated Balance Sheets..................................40
Consolidated Statements of Income............................41
Consolidated Statements of Cash Flows........................42
Consolidated Statements of Stockholders' Equity..............43
Notes to Consolidated Financial Statements...................44
(2) All schedules have been omitted because the required information is
either inapplicable or included in the Notes to Consolidated
Financial Statements.
(3) See List of exhibits.
(b) Reports on Form 8-K.
The Company filed a Form 8-K, dated February 10, 1999, reporting
summary financial information for the year ended December 31, 1998.
(c) See List of exhibits.
22
<PAGE> 25
LIST OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
2.01(15) Agreement between Southwest Gas Corporation, The Southwest
Companies and PriMerit Bank, Federal Savings Bank, as sellers and
Norwest Corporation as buyer, dated April 10, 1996, regarding sale
of assets and liabilities of PriMerit Bank.
2.02(24) Agreement and Plan of Merger by and among ONEOK, Inc., Oasis
Acquisition Corporation, and Southwest Gas Corporation dated as of
December 14, 1998.
3(i)(20) Restated Articles of Incorporation, as amended.
3(ii) Amended Bylaws of Southwest Gas Corporation.
4.01(1) Indenture between the Company and Bank of America National Trust
and Savings Association, as successor by merger to Security Pacific
National Bank, as Trustee, dated August 1, 1986, with respect to 9%
Series A and Series B and 8 3/4% Series C Debentures.
4.02(6) Sixth Supplemental Indenture of the Company to Bank of America
National Trust and Savings Association, as successor by merger to
Security Pacific National Bank, as Trustee, dated as of June 16,
1992, supplementing and amending the Indenture dated as of August
1, 1986, with respect to 9 3/4% Debentures, Series F, due 2002.
4.03(7) Indenture between Clark County, Nevada, and Bank of America Nevada
as Trustee, dated September 1, 1992, with respect to the issuance
of $130,000,000 Industrial Development Revenue Bonds (Southwest Gas
Corporation), $30,000,000 1992 Series A, due 2027, and $100,000,000
1992 Series B, due 2032.
4.04(8) Indenture between Clark County, Nevada, and Harris Trust and
Savings Bank as Trustee, dated December 1, 1993, with respect to
the issuance of $75,000,000 Industrial Development Revenue Bonds
(Southwest Gas Corporation), 1993 Series A, due 2033.
4.05(8) Indenture between City of Big Bear Lake, California, and Harris
Trust and Savings Bank as Trustee, dated December 1, 1993, with
respect to the issuance of $50,000,000 Industrial Development
Revenue Bonds (Southwest Gas Corporation Project), 1993 Series A,
due 2028.
4.06(16) Indenture between the Company and Harris Trust and Savings Bank
dated July 15, 1996, with respect to Debt Securities.
4.07(17) First Supplemental Indenture of the Company to Harris Trust and
Savings Bank dated August 1, 1996, supplementing and amending the
Indenture dated as of July 15, 1996, with respect to 7 1/2% and 8%
Debentures, due 2006 and 2026, respectively.
4.08(19) Second Supplemental Indenture of the Company to Harris Trust and
Savings Bank dated December 30, 1996, supplementing and amending
the Indenture dated as of July 15, 1996, with respect to
Medium-Term Notes.
4.09(3) Certificate of Trust of Southwest Gas Capital I.
4.10(11) Amended and Restated Declaration of Trust of Southwest Gas
Capital I.
23
<PAGE> 26
4.11(11) Form of Preferred Security (attached as Annex I to Exhibit A to the
Amended and Restated Declaration of Trust of Southwest Gas Capital
I included as Exhibit 4.10 hereto).
4.12(4) Form of Guarantee with respect to Preferred Securities.
4.13(10) Southwest Gas Capital I Preferred Securities Guarantee by the
Company and Harris Trust and Savings Bank, dated as of October 31,
1995.
4.14(10) Form of Subordinated Debt Security (included in the First
Supplemental Indenture included as Exhibit 4.16 hereto).
4.15(10) Subordinated Debt Securities Indenture between the Company and
Harris Trust and Savings Bank, dated as of October 31, 1995.
4.16(10) First Supplemental Indenture between the Company and Harris Trust
and Savings Bank, dated as of October 31, 1995, supplementing and
amending the Indenture dated as of October 31, 1995, with respect
to the 9.125% Subordinated Debt Securities.
4.17(2) Form of Deposit Agreement.
4.18(2) Form of Depositary Receipt (attached as Exhibit A to Deposit
Agreement included as Exhibit 4.17 hereto).
4.19 Amended and Restated Rights Agreement between the Company and
Harris Trust Company, as Rights Agent, dated as of February 9,
1999.
4.20 The Company hereby agrees to furnish to the SEC, upon request, a
copy of any instruments defining the rights of holders of long-term
debt issued by Southwest Gas Corporation or its subsidiaries.
10.01(5) Participation Agreement among the Company and General Electric
Credit Corporation, Prudential Insurance Company of America, Aetna
Life Insurance Company, Merrill Lynch Interfunding, Bank of America
through purchase of Valley Bank of Nevada, Bankers Trust Company
and First Interstate Bank of Nevada, dated as of July 1, 1982.
10.02(18) Amended and Restated Lease Agreement between the Company and Spring
Mountain Road Associates, dated as of July 1, 1996.
10.03(8) Financing Agreement between the Company and Clark County, Nevada,
dated September 1, 1992.
10.04(8) Financing Agreement between the Company and Clark County, Nevada,
dated as of December 1, 1993.
10.05(8) Project Agreement between the Company and City of Big Bear Lake,
California, dated as of December 1, 1993.
10.06(9) Southwest Gas Corporation Executive Deferral Plan, amended and
restated as of May 10, 1994.
10.07(14) Southwest Gas Corporation Directors Deferral Plan, together with
first amendment dated March 5, 1996.
10.08(8) Southwest Gas Corporation Board of Directors Retirement Plan,
amended and restated as of October 1, 1993.
10.09(22) Southwest Gas Corporation Management Incentive Plan, amended and
restated January 1, 1995.
24
<PAGE> 27
10.10(9) Southwest Gas Corporation Supplemental Retirement Plan, amended and
restated as of May 10, 1994.
10.11(23) Form of Employment Agreement with Company Officers.
10.12(23) Form of Change in Control Agreement with Company Officers.
10.13(12) Merger Agreement among the Company and Northern Pipeline
Construction Co., dated as of November 13, 1995.
10.14(13) Southwest Gas Corporation 1996 Stock Incentive Plan.
10.15(21) $350 million Revolving Credit Agreement among the Company, Union
Bank of Switzerland, et al., dated as of June 12, 1997.
12.01 Computation of Ratios of Earnings to Fixed Charges and Ratios of
Earnings to Combined Fixed Charges and Preferred Stock Dividends of
the Company.
13.01 Portions of 1998 Annual Report incorporated by reference to the
Form 10-K.
21.01 List of subsidiaries of Southwest Gas Corporation.
23.01 Consent of Arthur Andersen LLP, Independent Public Accountants.
27.01 Financial Data Schedule (filed electronically only).
- -----------------
(1) Incorporated herein by reference to the Registration Statement on Form S-3,
No. 33-7931.
(2) Incorporated herein by reference to the Registration Statement on Form S-3,
No. 33-55621.
(3) Incorporated herein by reference to the Registration Statement on Form S-3,
No. 33-62143.
(4) Incorporated herein by reference to Amendment No. 1 to Registration
Statement on Form S-3, No. 33-62143.
(5) Incorporated herein by reference to the report on Form 10-K for the year
ended December 31, 1982.
(6) Incorporated herein by reference to the report on Form 10-Q for the quarter
ended June 30, 1992.
(7) Incorporated herein by reference to the report on Form 10-Q for the quarter
ended September 30, 1992.
(8) Incorporated herein by reference to the report on Form 10-K for the year
ended December 31, 1993.
(9) Incorporated herein by reference to the report on Form 10-Q for the quarter
ended June 30, 1994
(10) Incorporated herein by reference to the report on Form 10-Q for the quarter
ended September 30, 1995.
(11) Incorporated herein by reference to the report on Form 8-K dated October
26, 1995.
(12) Incorporated herein by reference to the report on Form 10-K for the year
ended December 31, 1995.
25
<PAGE> 28
(13) Incorporated herein by reference to the Proxy Statement dated May 30, 1996.
(14) Incorporated herein by reference to the report on Form 10-Q for the quarter
ended June 30, 1996.
(15) Incorporated herein by reference to the report on Form 8-K dated July 19,
1996.
(16) Incorporated herein by reference to the report on Form 8-K dated July 26,
1996.
(17) Incorporated herein by reference to the report on Form 8-K dated July 31,
1996.
(18) Incorporated herein by reference to the report on Form 10-Q for the quarter
ended September 30, 1996.
(19) Incorporated herein by reference to the report on Form 8-K dated December
30, 1996.
(20) Incorporated herein by reference to the report on Form 10-Q for the quarter
ended March 31, 1997.
(21) Incorporated herein by reference to the report on Form 10-Q for the quarter
ended June 30, 1997.
(22) Incorporated herein by reference to the report on Form 10-K for the year
ended December 31, 1997.
(23) Incorporated herein by reference to the report on Form 10-Q for the quarter
ended September 30, 1998.
(24) Incorporated herein by reference to the report on Form 8-K dated December
14, 1998.
26
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 25, 1999 By /s/ MICHAEL O. MAFFIE
----------------------------
Michael O. Maffie,
President and Chief
Executive Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ GEORGE C. BIEHL Senior Vice President, March 25, 1999
- ------------------------------------ Chief Financial Officer and
(George C. Biehl) Corporate Secretary
/s/ EDWARD A. JANOV Vice President, Controller and March 25, 1999
- ------------------------------------ Chief Accounting Officer
(Edward A. Janov)
</TABLE>
27
<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ GEORGE C. BIEHL Director, Senior Vice President, March 25, 1999
-------------------- Chief Financial Officer and
(George C. Biehl) Corporate Secretary
/s/ MANUEL J. CORTEZ Director March 25, 1999
--------------------
(Manuel J. Cortez)
/s/ LLOYD T. DYER Director March 25, 1999
-----------------
(Lloyd T. Dyer)
/s/ THOMAS Y. HARTLEY Chairman of the Board March 25, 1999
--------------------- of Directors
(Thomas Y. Hartley)
/s/ MICHAEL B. JAGER Director March 25, 1999
--------------------
(Michael B. Jager)
/s/ LEONARD R. JUDD Director March 25, 1999
-------------------
(Leonard R. Judd)
/s/ JAMES J. KROPID Director March 25, 1999
-------------------
(James J. Kropid)
/s/ MICHAEL O. MAFFIE Director, President and March 25, 1999
--------------------- Chief Executive Officer
(Michael O. Maffie)
/s/ CAROLYN M. SPARKS Director March 25, 1999
---------------------
(Carolyn M. Sparks)
/s/ ROBERT S. SUNDT Director March 25, 1999
-------------------
(Robert S. Sundt)
/s/ TERRANCE L. WRIGHT Director March 25, 1999
----------------------
(Terrance L. Wright)
</TABLE>
28
<PAGE> 31
EXHIBITS INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
3(ii) Amended Bylaws of Southwest Gas Corporation.
4.19 Amended and Restated Rights Agreement between the Company and
Harris Trust Company, as Rights Agent, dated as of February 9,
1999.
12.01 Computation of Ratios of Earnings to Fixed Charges and Ratios of
Earnings to Combined Fixed Charges and Preferred Stock Dividends of
the Company.
13.01 Portions of 1998 Annual Report incorporated by reference to the
Form 10-K.
21.01 List of subsidiaries of Southwest Gas Corporation.
23.01 Consent of Arthur Andersen LLP, Independent Public Accountants.
27.01 Financial Data Schedule (filed electronically only).
<PAGE> 1
EXHIBIT 3(ii)
BYLAWS
OF
SOUTHWEST GAS CORPORATION
ARTICLE I
Section 1. Principal Office
The principal office for the transaction of the business of the corporation is
hereby fixed and located at 5241 Spring Mountain Road, in the City of Las Vegas,
County of Clark, State of Nevada.
Section 2. Other Offices
Branch or subordinate offices may at any time be established by the Board of
Directors at any place or places where the corporation is qualified to do
business.
Section 3. Terminology
All personal pronouns used herein are employed in a generic sense and are
intended and deemed to be neutral in gender.
ARTICLE II
MEETING OF SHAREHOLDERS
Section l. Regular Meeting
Commencing in May, 1988, the regular annual meeting of the shareholders shall be
held at the principal office of the corporation, or at such other place within
or without the State of California as the officers of the corporation may deem
convenient and appropriate, at 10 a.m. on the second Thursday of May of each
year, if not a legal holiday, and if a legal holiday, then at 10 a.m. on the
next succeeding business day, for the purpose of electing a Board of Directors
and transacting such other business as properly may come before the meeting;
provided, however, that the Board of Directors may, by resolution, establish a
different date not more than 120 days thereafter if, in its sole discretion, it
deems such postponement appropriate.
- 1 -
<PAGE> 2
Section 2. Special Meetings
Except in those instances where a particular manner of calling a meeting of the
shareholders is prescribed by law or elsewhere in these Bylaws, a special
meeting of the shareholders may be called at any time by the Chief Executive
Officer or other officers acting for him or by the Board of Directors, or by the
holders of not less than one-third of the voting shares then issued and
outstanding. Each call for a special meeting of the shareholders shall state the
time, place, and the purpose of such meeting; if made by the Board of Directors,
it shall be by resolution duly adopted by a majority vote and entered in the
minutes; if made by an authorized officer or by the shareholders, it shall be in
writing and signed by the person or persons making the same, and unless the
office of Secretary be vacant, delivered to the Secretary. No business shall be
transacted at a special meeting other than as is stated in the call and the
notice based thereon.
Section 3. Notice of Regular and Special Meetings
of the Shareholders
Notice of each regular and special meeting of the shareholders of the
corporation shall be given by mailing to each shareholder a notice of the time,
place and purpose of such meeting addressed to him at his address as it appears
upon the books of the corporation. Each such notice shall be deposited in the
United States Mail with the postage thereon prepaid at least ten days prior to
the time fixed for such meeting. If the address of any such shareholder does not
appear on the books of the corporation and his post office address is unknown to
the person mailing such notices, the notice shall be addressed to him at the
principal office of the corporation.
Section 4. Quorum
At any meeting of the shareholders, the presence in person or by proxy of the
holders of a majority of the shares entitled to vote at any meeting shall
constitute a quorum for the transaction of business, except when it is otherwise
provided by law. Any regular or special meeting of the shareholders may adjourn
from day to day or from time to time if, for any reason, there are not present
in person or by proxy the holders of a majority of the shares entitled to vote
at said meeting. Such adjournment and the reasons therefor shall be recorded in
the minutes of the proceedings.
Section 5. Waiver of Notice
When all the shareholders of the corporation are present at any meeting, or when
the shareholders not represented thereat give their written consent to the
holding thereof at the time and place the meeting is held, and such written
consent is made a part of the
- 2 -
<PAGE> 3
records of such meeting, the proceedings had at such meeting are valid,
irrespective of the manner in which the meeting is called or the place where it
is held.
Section 6. Proper Business for Shareholder Meetings
1. At a meeting of the shareholders, only such business shall be proper as shall
be brought before the meeting: (i) pursuant to the corporation's notice of
meeting; (ii) by or at the direction of the Board of Directors of the
corporation; or (iii) by any shareholder of the corporation who is a shareholder
of record at the time of giving the notice provided for herein, who shall be
entitled to vote at such meeting and who complies with the notice procedures set
forth herein.
2. For business to be properly brought before a meeting by a shareholder
pursuant to clause (iii) above, the shareholder must have given timely notice
thereof in writing to the Secretary. To be timely as to an annual meeting of
shareholders, a shareholder's notice must be received at the principal executive
office of the corporation not less than 120 calendar days before the date of the
corporation's proxy statement released to shareholders in connection with the
previous year's annual meeting; provided however, that if the date of the
meeting is changed by more than 30 days from the date of the previous year's
meeting, notice by shareholder to be timely must be received no later than the
close of business on the 10th day following the earlier of the day on which
notice of the date of the meeting was mailed to shareholders or public
disclosure of such date was made. To be timely as to a special meeting of
shareholders, a shareholder notice must be received not later than the call of
the meeting as provided for in Section 2 of this Article II. Such shareholder
notice shall set forth as to each matter the shareholder proposes to bring
before the meeting: (a) a brief description of and the reasons for proposing
such matter at the meeting; (b) the name and address, as they appear on the
corporation's books, and the name and address of the beneficial owner, if any,
on whose behalf the proposal is made; (c) the class and number of shares of the
corporation which are owned beneficially and of record by such shareholder of
record and by the beneficial owner, if any, on whose behalf the proposal is
made; and (d) any material interest of such shareholder of record and the
beneficial owner, if any, on whose behalf the proposal is made, in such
proposal.
3. Notwithstanding anything in these Bylaws to the contrary, no business shall
be proper at a meeting unless brought before it in accordance with the
procedures set forth herein.
Further, a shareholder shall also comply with all applicable requirements of
the Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder with respect to the matters set forth herein.
4. The Chairman of the Board of Directors of the corporation or the individual
designated as chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting
- 3 -
<PAGE> 4
that business was not properly brought before the meeting and in accordance with
the procedures proscribed herein, and if the chairman should so determine, that
any such business not properly brought before the meeting shall not be
transacted.
5. Notwithstanding anything provided herein to the contrary, the procedures for
submission of shareholder proposals have not expended, altered or affected in
any manner, whatever rights or limitations may exist regarding the ability of a
shareholder of the corporation to submit to a proposal for consideration by
shareholders of the corporation under California or federal law.
ARTICLE III
BOARD OF DIRECTORS
Section 1. Number--Quorum
The business of the corporation shall be managed by a Board of Directors, whose
number shall be not fewer than eleven (11) nor greater than fourteen (14), as
the Board of Directors or the shareholders by amendment of these Bylaws may
establish, provided, however, that a reduction in the authorized number of
directors shall not remove any director prior to the expiration of his term of
office, and provided further that the shareholders may, pursuant to law,
establish a different and definite number of directors or different maximum and
minimum numbers of directors by amendment of the Articles of Incorporation or by
a duly adopted amendment to these Bylaws. A majority of the prescribed number of
directors shall be necessary to constitute a quorum for the transaction of
business. At a meeting at which a quorum is present, every decision or act of a
majority of the directors present made or done when duly assembled shall be
valid as the act of the Board of Directors, provided that a minority of the
directors, in the absence of a quorum, may adjourn from day to day but may
transact no business.
Section 2. Exact Number of Directors
The number of directors of the corporation is hereby established, pursuant to
the provisions of Section 1 of this Article III, as eleven (11).
Section 3. Election and Term of Office
The directors shall be elected at each annual meeting of shareholders, but if
any such annual meeting is not held, or the directors are not elected thereat,
the directors may be elected at any special meeting of shareholders held for
that purpose. All directors shall hold office until their respective successors
are elected and qualified.
- 4 -
<PAGE> 5
Section 4. Vacancies
Vacancies in the Board of Directors may be filled by a majority of the remaining
directors, though they be less than a quorum, and each director so elected shall
hold office until his successor is qualified following the election at the next
annual meeting of the shareholders or at any special meeting of shareholders
duly called for that purpose prior to such annual meeting. A vacancy shall be
deemed to exist in case the shareholders (or the Board of Directors, within the
provisions of Section 1 of this Article III) shall increase the authorized
number of directors, but shall fail, for a period of thirty days from the
effective date of such increase, to elect the additional directors so provided
for, or in case the shareholders fail at any time to elect the full number of
authorized directors. When one or more of the directors shall give notice to the
Board of Directors of his or their resignation from said Board, effective at a
future date, the Board of Directors shall have the power to fill such vacancy or
vacancies to take effect when such resignation or resignations become effective.
Each director so appointed shall hold office during the remainder of the term of
office of the resigning director or directors or until their successors are
appointed and qualify.
Section 5. First Meeting of Directors
Immediately following each annual meeting of shareholders, the Board of
Directors shall hold a regular meeting for the purpose of organization, election
of officers, and the transaction of other business. Notice of such meeting is
hereby dispensed with.
Section 6. Regular Meetings
Commencing in 1991, the time for other regular meetings of the Board of
Directors, when held, shall be 8 a.m. on the third Tuesday of January, July,
September and November, the first Tuesday of March and the second Wednesday of
May, unless a different schedule is established by a resolution of the Board. If
any regular meeting date shall fall on a legal holiday, then the regular meeting
date shall be the business day next following.
Section 7. Special Meetings
A special meeting of the Board of Directors shall be held whenever called by the
Chief Executive Officer or other officer acting for him, or by three directors.
Any and all business may be transacted at a special meeting. Each call for a
special meeting shall be in writing, signed by the person or persons making the
same, addressed and delivered to the Secretary, and shall state the time and
place of such meeting.
Section 8. Notice of Regular and Special Meetings of the Directors
No notice shall be required to be given of any regular meeting of the Board of
Directors,
- 5 -
<PAGE> 6
but each director shall take notice thereof. Notice of each special
meeting of the Board of Directors shall be given to each of the directors by:
(i) mailing to each of them a copy of such notice at least five days; or (ii)
delivering personally or by telephone, including voice messaging system or other
system or technology designed to record and communicate messages, telegraph,
facsimile, electronic mail or other electronic means such notice at least 48
hours, prior to the time affixed for such meeting to the address of such
director as shown on the books of the corporation. If his address does not
appear on the books of the corporation, then such notice shall be addressed to
him at the principal office of the corporation.
Section 9. Waiver of Notice
When all the directors of the corporation are present at any meeting of the
Board of Directors, however called or noticed, and sign a written consent
thereto on the record of such meeting, or if the majority of the directors are
present, and if those not present sign in writing a waiver of notice of such
meeting, whether prior to or after the holding of such meeting, which waiver
shall be filed with the Secretary of the corporation, the transactions of such
meeting are as valid as if had at a meeting regularly called and noticed.
Section 10. Action by Unanimous Consent of Directors
Any action required or permitted to be taken by the Board of Directors may be
taken without a meeting if all members of the Board shall individually or
collectively consent in writing to such action. Such written consent or consents
shall be filed with the minutes of the proceedings of the Board, and such action
by written consent shall have the same force and effect as if approved or taken
at a regular meeting duly held. Any certificate or other document which relates
to action so taken shall state that the action was taken by unanimous written
consent of the Board of Directors without a meeting, and that these Bylaws
authorize the directors to so act.
Section 11. Telephonic Participation in Meetings
Members of the Board may participate in a meeting through use of conference
telephone or similar communications equipment, so long as all members
participating in such meeting can hear one another. Participation in a meeting
pursuant to this section shall constitute presence in person at such meeting.
ARTICLE IV
POWERS OF DIRECTORS
Section 1. The directors shall have power:
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<PAGE> 7
1. To call special meetings of the shareholders when they deem it necessary, and
they shall call a meeting at any time upon the written request of shareholders
holding one-third of all the voting shares:
2. To appoint and remove at pleasure all officers and agents of the corporation,
prescribe their duties, fix their compensation, and require from them as
necessary security for faithful service;
3. To create and appoint committees, offices, officers and agents of the
corporation, and to prescribe and from time to time change their duties and
compensation, but no committee shall be created and no member appointed thereto
except upon approval of a majority of the whole Board of Directors; and
4. To conduct, manage, and control the affairs and business of the corporation
and to make rules and regulations not inconsistent with the laws of the State of
California, or the Bylaws of the corporation, for the guidance of the officers
and management of the affairs of the corporation.
ARTICLE V
DUTIES OF DIRECTORS
Section 1. It shall be the duty of the directors:
1. To cause to be kept a complete record of all their minutes and acts, and of
the proceedings of the shareholders, and present a full statement at the regular
annual meeting of the shareholders, showing in detail the assets and liabilities
of the corporation, and generally the condition of its affairs. A similar
statement shall be presented at any other meeting of the shareholders when
theretofore required by persons holding at least one-half of the voting shares
of the corporation;
2. To declare dividends out of the profits arising from the conduct of the
business, whenever such profits shall, in the opinion of the directors, warrant
the same;
3. To oversee the actions of all officers and agents of the corporation, see
that their duties are properly performed; and
4. To cause to be issued to the shareholders, in proportion to their several
interests, certificates of stock.
ARTICLE VI
OFFICERS
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<PAGE> 8
Section 1. The officers shall include a Chairman of the Board of Directors, a
Chief Executive Officer, who may be designated Chairman, a President, a
Secretary, a Treasurer, a Controller, and may include one or more Executive Vice
Presidents, Senior Vice Presidents, Vice Presidents, Assistant Vice Presidents,
Assistant Secretaries, and Assistant Treasurers. All such officers shall be
elected by and hold office at the pleasure of the Board of Directors, provided
that the Chief Executive Officer shall have authority to dismiss any other
officer. Any director shall be eligible to be the Chairman of the Board of
Directors and any two or more of such offices may be held by the same person,
except that the Chief Executive Officer or President may not also hold the
office of Secretary. Any officer may exercise any of the powers of any other
officer in the manner specified in these Bylaws, as specified from time to time
by the Board of Directors, and/or as specified from time to time by the Chief
Executive Officer or senior officer acting in his or her absence or incapacity,
and any such acting officer shall perform such duties as may be assigned to him
or her.
ARTICLE VII
FEES AND COMPENSATION
Section 1. Directors shall be reimbursed for their expenses, and shall be
compensated for their services as directors in such amounts as the Board may fix
by resolution. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise, and receiving compensation therefor.
ARTICLE VIII
INDEMNIFICATION
Section 1. Indemnification of Directors and Officers
Each person who was or is a party or is threatened to be made a party to or is
involved in any threatened, pending or completed action, suit or proceeding,
formal or informal, whether brought in the name of the corporation or otherwise
and whether of a civil, criminal, administrative or investigative nature
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer
of the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is an alleged
action or inaction in an official capacity or in any other capacity while
serving as a director or officer, shall, subject to the terms of any agreement
between the corporation and such person, be indemnified and held harmless by the
corporation to the fullest extent permissible under California law and the
corporation's Articles of Incorporation, against all costs, charges, expenses,
liabilities and
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<PAGE> 9
losses (including attorneys' fees, judgments, fines, ERISA excise tax or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith, and such indemnification shall
continue as to a person who has ceased to be a director or officer and shall
inure to the benefit of his or her heirs, executors and administrators;
provided, however, that (a) the corporation shall indemnify any such person
seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the Board of the corporation, (b) the corporation shall indemnify
such person seeking indemnification in connection with a proceeding (or part
thereof) other than a proceeding by or in the name of the corporation to procure
a judgment in its favor only if any settlement of such a proceeding is approved
in writing by the corporation, and (c) that no such person shall be indemnified
(i) except to the extent that the aggregate of losses to be indemnified exceeds
the amount of such losses for which the director or officer is paid pursuant to
any directors' and officers' liability insurance policy maintained by the
corporation; (ii) on account of any suit in which judgment is rendered against
such person for an accounting of profits made from the purchase or sale by such
person of securities of the corporation pursuant to the provisions of Section
16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar
provisions of any federal, state or local statutory law; (iii) if a court of
competent jurisdiction finally determines that any indemnification hereunder is
unlawful; (iv) for acts or omissions involving intentional misconduct or knowing
and culpable violation of law; (v) for acts or omissions that the director or
officer believes to be contrary to the best interests of the corporation or its
shareholders or that involve the absence of good faith on the part of the
director or officer; (vi) for any transaction for which the director or officer
derived an improper personal benefit; (vii) for acts or omissions that show a
reckless disregard for the director's or officer's duty to the corporation or
its shareholders in circumstances in which the director or officer was aware, or
should have been aware, in the ordinary course of performing his or her duties,
of a risk of serious injury to the corporation or its shareholders; (viii) for
acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's or officer's duties to the
corporation or its shareholders; (ix) for costs, charges, expenses, liabilities
and losses arising under Section 310 or 316 of the General Corporation Law of
California (the "Law"); and (x) as to circumstances in which indemnity is
expressly prohibited by Section 317 of the Law. The right to indemnification
conferred in this Article shall be a contract right and shall include the right
to be paid by the corporation expenses incurred in defending any proceeding in
advance of its final disposition; provided, however, that if the Law requires
the payment of such expenses incurred by a director or officer in his or her
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding, such advances shall be made only upon
delivery to the corporation of an undertaking, by or on behalf of such director
or officer, to repay all amounts to the corporation if it shall be ultimately
determined that such person is not entitled to be indemnified.
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<PAGE> 10
Section 2. Indemnification of Employees and Agents
A person who was or is a party or is threatened to be made a party to or is
involved in any proceedings by reason of the fact that he or she is or was an
employee or agent of the corporation or is or was serving at the request of the
corporation as an employee or agent of another enterprise, including service
with respect to employee benefit plans, whether the basis of such action is an
alleged action or inaction in an official capacity or in any other capacity
while serving as an employee or agent, may, subject to the terms of any
agreement between the corporation and such person, be indemnified and held
harmless by the corporation to the fullest extent permitted by California law
and the corporation's Articles of Incorporation, against all costs, charges,
expenses, liabilities and losses (including attorneys' fees, judgments, fines,
ERISA excise taxes or penalties and amounts paid or to be paid in settlement),
reasonably incurred or suffered by such person in connection therewith. The
immediately preceding sentence is not intended to be and shall not be considered
to confer a contract right on any employee or agent (other than directors and
officers) of the corporation.
Section 3. Right of Directors and Officers to Bring Suit
If a claim under Section 1 of this Article is not paid in full by the
corporation within 30 days after a written claim has been received by the
corporation, the claimant may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall also be entitled to be paid the expense of
prosecuting such claim. Neither the failure of the corporation (including its
Board, independent legal counsel, or its shareholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is permissible in the circumstances because he or she has met the
applicable standard of conduct, if any, nor an actual determination by the
corporation (including its Board, independent legal counsel, or its
shareholders) that the claimant has not met the applicable standard of conduct,
shall be a defense to the action or create a presumption for the purpose of an
action that the claimant has not met the applicable standard of conduct.
Section 4. Successful Defense
Notwithstanding any other provision of this Article, to the extent that a
director or officer has been successful on the merits or otherwise (including
the dismissal of an action without prejudice or the settlement of a proceeding
or action without admission of liability) in defense of any proceeding referred
to in Section 1 or in defense of any claim, issue or matter therein, he or she
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred in connection therewith.
Section 5. Non-Exclusivity of Rights
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<PAGE> 11
The right to indemnification provided by this Article shall not be exclusive of
any other right which any person may have or hereafter acquire under any
statute, bylaw, agreement, vote of shareholders or disinterested directors or
otherwise.
Section 6. Insurance
The corporation may maintain insurance, at its expense, to protect itself and
any director, officer, employee or agent of the corporation or another
corporation, partnership, joint venture, trust or other enterprise against any
expense, liability or loss, whether or not the corporation would have the power
to indemnify such person against such expense, liability or loss under the law.
Section 7. Expenses as a Witness
To the extent that any director, officer, employee or agent of the corporation
is by reason of such position, or a position with another entity at the request
of the corporation, a witness in any action, suit or proceeding, he or she shall
be indemnified against all costs and expenses actually and reasonably incurred
by him or her on his or her behalf in connection therewith.
Section 8. Indemnity Agreements
The corporation may enter into agreements with any director, officer, employee
or agent of the corporation providing for indemnification to the fullest extent
permissible under the law and the corporation's Articles of Incorporation.
Section 9. Separability
Each and every paragraph, sentence, term and provision of this Article is
separate and distinct so that if any paragraph, sentence, term or provision
hereof shall be held to be invalid or unenforceable for any reason, such
invalidity or unenforceability shall not affect the validity or unenforceability
of any other paragraph, sentence, term or provision hereof. To the extent
required, any paragraph, sentence, term or provision of this Article may be
modified by a court of competent jurisdiction to preserve its validity and to
provide the claimant with, subject to the limitations set forth in this Article
and any agreement between the corporation and claimant, the broadest possible
indemnification permitted under applicable law.
Section 10. Effect of Repeal or Modification
Any repeal or modification of this Article shall not adversely affect any right
of indemnification of a director or officer existing at the time of such repeal
or modification with respect to any action or omission occurring prior to such
repeal or modification."
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<PAGE> 12
ARTICLE IX
CHAIRMAN OF THE BOARD
Section 1. If there shall be a Chairman of the Board of Directors, he shall,
when present, preside at all meetings of the stockholders and the Board of
Directors, and perform such other duties as the Bylaws or the Board of Directors
shall require of him.
ARTICLE X
CHIEF EXECUTIVE OFFICER; OTHER EXECUTIVE OFFICERS
Section 1. The Board of Directors shall, at their first regular meeting, elect
such officers as are required by Article VI hereof and such additional officers
authorized by Article VI hereof as the Board, in its discretion, may choose to
elect. If at any time the Chief Executive Officer shall be unable to act, the
President (if there shall be one who is not also the Chief Executive Officer)
shall act in his place and perform his duties; if the President or next most
senior officer is unable to perform such duties, then the vice presidents, in
such sequence as the Board of Directors may specify, shall act. If all the
foregoing shall be unable to act, the senior officer among them shall appoint
some other person in whom shall be vested, for the time being, all the duties
and functions of Chief Executive Officer, to act until the Board of Directors
can be convened and elect appropriate officers. The Chief Executive Officer (or
person acting as such) shall:
1. Preside (if there shall be no Chairman of the Board of Directors or in his
absence) over all meetings of the shareholders and directors;
2. Sign in behalf of the corporation contracts and other instruments in writing
within the scope of his authority or if, when, and as directed so to do by the
Board of Directors, but nothing herein shall limit the power of the Board of
Directors to authorize such contracts and other instruments in writing to be
signed by any other officer or person or limit the power of the Chief Executive
Officer to delegate his authority in any such matter to another officer or other
officers of the corporation. The Chief Executive Officer or any other officer
specified by the Board of Directors may sign certificates of stock as provided
in Article XIII hereof;
3. Delegate duties and responsibilities to any other officers and/or employees
of the corporation in any manner not prohibited by these Bylaws or by the Board
of Directors, and change such duties and responsibilities so delegated from time
to time at will;
4. Call the directors together when he deems it necessary, and have, subject to
the advice of the directors, direction of the affairs of the corporation; and
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<PAGE> 13
5. Generally discharge such other duties as may be required of him by the Bylaws
of the corporation.
ARTICLE XI
SECRETARY
Section 1. The Board of Directors shall elect a Secretary:
1. It shall be the duty of the Secretary to keep a record of proceedings of the
Board of Directors and of the shareholders, and to keep the corporate seal of
the corporation. He shall be responsible for maintaining proper records showing
the number of shares of stock of all classes and series issued and transferred
by any shareholder, and the dates of such issuance and transfer;
2. Whenever it is provided in these Bylaws that notice shall be given either of
regular or special meetings of the shareholders, regular or special meetings of
the directors, or otherwise, such notice shall be given by the Secretary or by
the Chief Executive Officer or by any person designated by either of them, or by
any authorized person who shall have signed the call for such meeting. Any
notice which the Secretary may give or serve, or act required to be done by him,
may with like effect be given or served or done by or under the direction of an
Assistant Secretary;
3. The Secretary shall discharge such other duties as pertain to his office or
which may be prescribed by the Board of Directors.
ARTICLE XII
TREASURER
Section 1. The Treasurer shall receive and keep all the funds of the corporation
and pay them out only on checks or otherwise, as directed by the Board of
Directors; provided, however, that the Board of Directors may provide for a
depository of the funds of the corporation, and may by resolution prescribe the
manner in which said funds shall be drawn from said depository.
ARTICLE XIII
CERTIFICATES OF STOCK
Section 1. Certificates of stock shall be of such form and device as the Board
of Directors may direct, and shall be signed by the genuine or facsimile
signatures of the Chairman and
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<PAGE> 14
Chief Executive Officer or the President or any authorized Vice President and
the Secretary or an Assistant Secretary. Each certificate shall express on its
face its number, date of issuance, the number of shares for which and the person
to whom it is issued, the kind of shares represented by said certificate, and
such other matters as may be required by law. Certificates of stock may be
issued prior to full payment, in harmony with all permits issued by regulatory
authorities having jurisdiction in the premises, or as is otherwise allowed by
law, but any certificate issued prior to full payment must show on its face what
amount has been paid thereon.
ARTICLE XIV
TRANSFER OF STOCK
Section 1. Shares of stock of the corporation may be transferred at any time by
the holders, or by power of attorney, or by their legal representative, by
endorsement on the certificate of stock, but no transfer is valid until the
surrender of the endorsed certificate. A surrendered certificate shall be
delivered up for cancellation before a new one is issued in lieu thereof, and
the Secretary shall preserve the certificate so canceled or a suitable record
thereof. If, however, a certificate is lost or destroyed, the Board of Directors
may order a new certificate issued as is by law required or permitted.
ARTICLE XV
VOTING
Section 1. At all corporate meetings, each shareholder, either in person or by
proxy, shall be entitled to as many votes as he owns shares of stock; however,
every shareholder entitled to vote at any election for directors shall have the
right to cumulate his votes.
Section 2. Proxies
Every person entitled to vote or execute consents shall have the right to do so
either in person or by one or more agents authorized by a written proxy executed
by such person or his duly authorized agent and filed with the Secretary of the
corporation; provided that no such proxy shall be valid after the expiration of
eleven (11) months from the date of its execution, unless the person executing
it specifies therein the length of time for which such proxy is to continue in
force, which in no case shall exceed seven (7) years from the date of its
execution.
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<PAGE> 15
ARTICLE XVI
INDEBTEDNESS
Section 1. The Board of Directors shall have power to incur indebtedness, and
the terms and amount thereof shall be entered in the minutes. The Board of
Directors shall have the power to secure said indebtedness, or any obligation or
obligations of the corporation, by pledge, mortgage, deed of trust, or other
security given upon any property owned by it or in which it has any interest.
ARTICLE XVII
REGISTRAR AND/OR TRANSFER AGENT
Section 1. The Board of Directors may designate and appoint one or more
registrars and/or transfer agents for the registration of the stock of the
corporation, and make such rules and regulations for the registrations of stock
at the office of such registrars and/or transfer agents as may to the Board of
Directors seem desirable. The corporation may act as its own transfer agent, at
the direction of the Board of Directors. The Board of Directors may, in its
discretion, fix a transfer fee for transfer of stock certificates.
ARTICLE XVIII
MISCELLANEOUS
Section 1. Meetings. Notice. When Conclusive.
An entry made in the minutes of the directors or shareholders, pursuant to
resolution or recital, to the effect that the notice of such meeting required by
these Bylaws to be given has been given, shall be conclusive upon the
corporation, its directors, shareholders, and all other persons that such notice
has been duly given in proper form and substance to the proper persons and for
the requisite length of time.
ARTICLE XIX
SEAL
Section 1. The Board of Directors shall provide a suitable seal containing the
name of the corporation, the years of its creation, and other appropriate words,
and may alter the same at pleasure.
ARTICLE XX
AMENDMENTS TO BYLAWS
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<PAGE> 16
Section 1. Power of Shareholders
New Bylaws may be adopted or these Bylaws may be amended or repealed by the vote
of shareholders entitled to exercise a majority of the voting power of the
corporation or by the written assent of such shareholders, except as otherwise
provided by law or by the Articles of Incorporation.
Section 2. Power of Directors
Subject to the right of the shareholders as provided in Section 1 of this
Article XX to adopt, amend or repeal Bylaws, the Board of Directors may adopt,
amend or repeal any of the Bylaws of this corporation, except that the powers of
the Board of Directors to change, and/or establish the authorized number of
directors of this corporation shall be as set forth in Article III of these
Bylaws.
- - - - - - - - - - - - - - - - -
I hereby certify that the foregoing is a full, true, and correct copy of the
Bylaws of Southwest Gas Corporation, a California corporation, as in effect on
the date hereof.
WITNESS my hand this 8th day of February, 1999.
-------------------------------------
George C. Biehl
Senior Vice President/Chief Financial
Officer and Corporate Secretary
BYLAWS
OF
SOUTHWEST GAS CORPORATION
(AS AMENDED 2/8/99)
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<PAGE> 1
EXHIBIT 4.19
SOUTHWEST GAS CORPORATION,
a California corporation
and
HARRIS TRUST COMPANY OF CALIFORNIA,
Rights Agent
----------------------
AMENDED AND RESTATED RIGHTS AGREEMENT
Dated as of February 9, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Section 1. Certain Definitions............................................................1
Section 2. Appointment of Rights Agent....................................................4
Section 3. Issuance of Right Certificates.................................................4
Section 4. Form of Right Certificates.....................................................6
Section 5. Counter signature and Registration.............................................6
Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates;
Mutilated, Destroyed, Lost or Stolen Right Certificates........................7
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights..................8
Section 8. Cancellation and Destruction of Right Certificates............................10
Section 9. Reservation and Availability of Shares; Registration..........................10
Section 10. Record Date...................................................................11
Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights............11
Section 12. Certification of Adjusted Purchase Price or Number of Shares..................17
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power..........18
Section 14. Fractional Rights and Fractional Shares.......................................20
Section 15. Rights of Action..............................................................21
Section 16. Agreement of Right Holders....................................................22
Section 17. Right Certificate Holder Not Deemed a Shareholder.............................22
Section 18. Concerning the Rights Agent...................................................22
Section 19. Merger or Consolidation or Change of Name of Rights Agent.....................23
Section 20. Duties of Rights Agent........................................................23
Section 21. Change of Rights Agent........................................................25
Section 22. Issuance of New Right Certificates............................................26
Section 23. Redemption....................................................................26
Section 24. Notice of Proposed Actions....................................................26
Section 25. Notices.......................................................................27
Section 26. Supplements and Amendments....................................................27
Section 27. Exchange......................................................................28
Section 28. Successors....................................................................29
Section 29. Determination and Actions Taken by the Board of Directors.....................29
Section 30. Conditions to the Agreement...................................................29
Section 31. Benefits of this Agreement....................................................29
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C> <C>
Section 32. Governing Law.................................................................29
Section 33. Counterparts..................................................................30
Section 34. Section Headings..............................................................30
Section 35. Severability..................................................................30
Exhibit A Form of Right Certificate...............................................A-1
Exhibit B Form of Summary of Rights...............................................B-1
Exhibit C Certificate re Junior Participating Preference Stock....................C-1
</TABLE>
ii
<PAGE> 4
AMENDED AND RESTATED RIGHTS AGREEMENT
AMENDED AND RESTATED RIGHTS AGREEMENT, dated as of February 9,
1999 between Southwest Gas Corporation, a California corporation (the
"Company"), and Harris Trust Company of California, as Rights Agent.
W I T N E S S E T H
WHEREAS, the Board of Directors of the Company has authorized and
declared the distribution of one right for (i) each share of Common Stock of the
Company ("Common Stock") outstanding at the Close of Business (as hereinafter
defined) on April 15, 1996 (the "Rights Record Date"), each right representing
the right to purchase one Unit consisting, initially, of one one-hundredth of a
share of Junior Participating Preference Stock, and (ii) each additional share
of Common Stock which shall become outstanding between the Rights Record Date
and the earliest of the Distribution Date, the Expiration Date (as such terms
are hereinafter defined) and the date, if any, on which such rights may be
redeemed, all upon the terms and subject to the conditions hereinafter set forth
(each such right being hereinafter referred to as a "Right");
NOW, THEREFORE, the parties agree as follows:
Section 1. Certain Definitions.
(a) For purposes of this Agreement, the following terms have the
meanings indicated:
"Acquiring Person" shall mean any Person who or which,
alone or together with all Affiliates and Associates of such
Person, shall be the Beneficial Owner (within the meaning of
Section 1(b)) of a Substantial Block of Voting Stock, but shall
not include (i) an Exempt Person or (ii) any Person who or which
acquires a Substantial Block of Voting Stock in connection with a
transaction or series of transactions approved prior to such
transaction or transactions by the Board of Directors of the
Company; provided that no person shall become an Acquiring Person
solely as a result of a reduction in the number of shares of
Voting Stock outstanding, unless and until such Person shall
thereafter become the Beneficial Owner of additional shares
constituting 1% or more of the general voting power of the
Company.
"Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General
Rules and Regulations under the Exchange Act, as in effect as of
the date hereof.
"Business Day" shall mean any day other than a Saturday,
Sunday or day on which banking institutions in the States of
California, New York or Nevada are authorized or obligated by law
or executive order to close.
<PAGE> 5
"Close of Business" on any given date shall mean 5:00
p.m., Las Vegas time, on such date; provided, however, that if
such date is not a Business Day it shall mean 5:00 p.m., Las
Vegas time, on the next succeeding Business Day.
"Common Stock" shall have the meaning assigned to it in
the preamble; and "common stock" when used with reference to
Persons other than the Company shall mean: (i) in the case of
Persons organized in corporate form, the capital stock or equity
security with the greatest voting power of such Person or, if
such Person is a Subsidiary of another Person, of the Person or
Persons which ultimately control such first-mentioned Person; and
(ii) in the case of Persons not organized in corporate form, the
units of beneficial interest which (A) represent the right to
participate generally in the profits and losses of such Person
(including without limitation any flow-through tax benefits
resulting from an ownership interest in such Person) and (B) are
entitled to exercise the greatest voting power of such Person or,
in the case of a limited partnership, shall have the power to
remove the general partner or partners.
"Distribution Date" shall have the meaning assigned to it
in Section 3(a).
"Equivalent Stock" shall have the meaning assigned to it
in Section 7(a).
"Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time.
"Exempt Person" shall mean the Company, any Subsidiary of
the Company and any employee benefit plan or employee stock plan
of the Company or of any Subsidiary of the Company, or any trust
or other entity organized, established or holding shares of
Common Stock by, for or pursuant to, the terms of any such plan.
"Expiration Date" shall have the meaning assigned to it in
Section 7(a).
"Offer Date" shall have the meaning assigned to it in
Section 3(a).
"Person" shall mean any individual, firm, corporation,
partnership, limited liability company, association, group (as
such term is used in Rule 13d-5 promulgated under the Exchange
Act as in effect on the date hereof), trust or other entity and
shall include any successor by merger (or otherwise) of any of
the foregoing.
"Principal Party" shall have the meaning assigned to it in
Section 13(b).
"Purchase Price" shall mean the price payable for one Unit
upon exercise of a Right.
"Qualified Offer" shall mean a tender or exchange offer
for all outstanding Common Stock at a price and on terms
determined to be adequate and otherwise in the best interests of
the Company and its shareholders (other than the Person or
2
<PAGE> 6
an Affiliate or Associate thereof on whose behalf the offer is
made) by at least a majority of the Directors who are not
representatives of or affiliated with the Person making such
offer or any Affiliate or Associate of such Person.
"Redemption Price" shall have the meaning assigned to it
in Section 23(a).
"Right" shall have the meaning assigned to it in the
preamble.
"Rights Record Date" shall have the meaning assigned to it
in the preamble.
"Subject Shares" shall mean the class or series of shares
then issuable on exercise of the Rights.
"Stock Acquisition Date" shall mean the date of the first
public announcement by the Company or an Acquiring Person (which,
for purposes of this definition, shall include, without
limitation, a report filed pursuant to Section 13(d) under the
Exchange Act) that an Acquiring Person has become such.
"Subsidiary" shall mean, with respect to any Person, a
corporation or other entity the securities or other ownership
interests of which having ordinary voting power sufficient to
elect a majority of the board of directors or other persons
performing similar functions are at the time directly or
indirectly owned by such Person and any Affiliate of such Person.
"Substantial Block" shall mean a number of shares of
Voting Stock having in the aggregate 20 percent or more of the
general voting power.
"Trading Day" shall have the meaning assigned to it in
Section 11(d).
"Unit" shall mean the shares or other securities issuable
upon exercise of one Right, initially one one-hundredth of a
share of Junior Participating Preference Stock of the Company
having the rights and preferences set forth in Exhibit C, before
any adjustment pursuant to Section 11(a)(ii) or Section 13.
"Voting Stock" shall mean shares of the Company's capital
stock the holders of which have general voting power.
(b) For purposes of this Agreement, a Person shall be deemed the
"Beneficial Owner" of any securities:
(i) which such Person or any of such Person's Affiliates
or Associates beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Affiliates
or Associates has (A) the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant to
any agreement, arrangement or understanding, (whether or not in writing)
or upon the exercise of any conversion, exchange or purchase rights
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<PAGE> 7
(other than the Rights), warrants or options, or otherwise; provided,
however, that a Person shall not be deemed the "Beneficial Owner" of
securities tendered pursuant to a tender or exchange offer made by or on
behalf of such Person or any of such Person's Affiliates or Associates
until such tendered securities are accepted for payment or exchange; or
(B) the right to vote or to direct the voting of, pursuant to any
agreement, arrangement or understanding (whether or not in writing); or
(C) the right to dispose or to direct the disposition of, pursuant to
any agreement, arrangement or understanding (whether or not in writing);
or
(iii) which are beneficially owned, directly or
indirectly, by any other Person with which such Person or any of such
Person's Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or disposing
of any securities of the Company;
provided, however, that a Person shall not be deemed the Beneficial Owner of, or
to Beneficially Own, any security if the agreement, arrangement or understanding
to vote such security (1) arises solely from the grant of a revocable proxy or
consent given to such Person in connection with a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable rules and
regulations under the Exchange Act, and (2) is not also then reportable on
Schedule 13D (or any comparable or successor report) under the Exchange Act;
provided, further, that a Person engaged in business as an underwriter of
securities shall not be deemed the "Beneficial Owner" of securities acquired
through such person's participation in good faith in a firm commitment
underwriting until the expiration of the 40-day period immediately following the
date of such acquisition.
Section 2. Appointment of Rights Agent. The Company hereby
appoints the Rights Agent to act as agent for the Company and the holders of the
Rights in accordance with the terms and conditions hereof, and the Rights Agent
hereby accepts such appointment. The Company may from time to time appoint such
Co-Rights Agent or Agents as it may deem necessary or desirable and determine
the respective duties of the Rights Agent and the Co-Rights Agents.
Section 3. Issuance of Right Certificates.
(a) Until the Close of Business on the earlier of (i) the tenth
Business Day after a Stock Acquisition Date or (ii) the tenth Business Day (or
such later date as the Company's Board of Directors shall determine) after the
date of the commencement by any Person (other than an Exempt Person) of, or the
date of the first public announcement (such commencement date or announcement
date being herein referred to as the "Offer Date") of the intent of any Person
(other than an Exempt Person) to commence, a tender or exchange offer upon the
successful consummation of which such Person, together with its Affiliates and
Associates, would be the Beneficial Owner of 20 percent or more of the then
outstanding Voting Stock (irrespective of whether any shares are actually
purchased pursuant to such offer) (the tenth Business Day after the first to
occur of a Stock Acquisition Date or an Offer Date being herein referred to as
the "Distribution Date"),
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<PAGE> 8
(i) the Rights will automatically attach to, and be
evidenced by, the certificates for Common Stock registered in the names
of the holders of Common Stock (which certificates for Common Stock
shall be deemed also to be Right Certificates) and not by separate Right
Certificates, and
(ii) each Right will be transferable only in connection
with the transfer of the underlying shares of Common Stock.
As soon as practicable after the Distribution Date, the Rights
Agent will mail, by first-class, insured, postage prepaid mail, to each record
holder of Common Stock as of the Close of Business on the Distribution Date, as
shown by the records of the Company at the Close of Business on the Distribution
Date, at the address of such holder shown on such records, a Right Certificate,
in substantially the form of Exhibit A hereto, evidencing one Right for each
share of Common Stock so held.
(b) As soon as practicable after the Rights Record Date, the
Company will send a copy of a Summary of Rights, in substantially the form
attached hereto as Exhibit B, by first-class mail, postage prepaid, to each
record holder of Common Stock as of the Close of Business on the Rights Record
Date, at the address of such holder shown on the records of the Company.
(c) The Company will cause certificates for Common Stock issued
after the Rights Record Date (including replacement certificates for shares of
Common Stock outstanding on or prior to the Rights Record Date), but prior to
the earliest of (i) the Distribution Date, (ii) the Expiration Date and (iii)
the date, if any, on which the Rights may be redeemed, to have impressed on,
printed on, written on or otherwise affixed to them the following legend:
This certificate also entitles the holder hereof to certain
Rights as set forth in the Rights Agreement between the Company
and Harris Trust Company of California, as Rights Agent, as the
same shall be amended from time to time (the "Rights Agreement"),
the terms of which are hereby incorporated herein by reference
and a copy of which is on file at the principal executive offices
of the Company. Under certain circumstances, as set forth in the
Rights Agreement, such Rights will be evidenced by separate
certificates and will no longer be evidenced by this certificate.
The Company will mail to the holder of this certificate a copy of
the Rights Agreement without charge after receipt of a written
request therefor. Under certain circumstances set forth in the
Rights Agreement, Rights issued to, or held by, any Person who
is, was or becomes an Acquiring Person or any Affiliate or
Associate thereof (as such terms are defined in the Rights
Agreement) or certain transferees of any thereof, whether
currently held by or on behalf of such Person or by any
subsequent holder, may be limited as provided in Section 7(f) of
the Rights Agreement.
With respect to such certificates containing the foregoing legend, until the
Distribution Date, the Rights associated with Common Stock represented by such
certificates shall be evidenced by
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<PAGE> 9
such certificates alone, and the surrender for transfer of any such certificates
shall also constitute the transfer of the Rights associated with the Common
Stock represented by such certificate.
(d) Until the Distribution Date, the surrender for transfer of
any of the certificates for Common Stock outstanding on or after the Rights
Record Date, with or without a copy of the Summary of Rights attached thereto
and with or without the legend set forth in subsection (c) above, shall also
constitute the transfer of the Rights associated with such Common Stock. After
the Distribution Date, the Rights will be evidenced solely by the Right
Certificates.
Section 4. Form of Right Certificates.
(a) The Right Certificates (and the forms of assignment and
certification and of election to purchase shares to be printed on the reverse
thereof) shall be in substantially the form of Exhibit A hereto and may have
such marks of identification or designation and such legends, summaries or
endorsements printed thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any law or with any rule or regulation made pursuant thereto or with
any rule or regulation of any stock exchange on which the Rights may from time
to time be listed, or to conform to usage.
(b) Any Right Certificate issued pursuant to Section 3(a) or
Section 22 that represents Rights Beneficially Owned by: (i) an Acquiring Person
or any Associate or Affiliate of any Acquiring Person, (ii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee after the Acquiring Person becomes such, or (iii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee prior to or concurrently with the Acquiring Person becoming such and
receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person to holders of equity interests in such
Acquiring Person or to any Person with whom such Acquiring Person has any
continuing agreement, arrangement or understanding regarding the transferred
Rights, or (B) a transfer which the Board of Directors of the Company has
determined is part of a plan, arrangement or understanding which has as a
primary purpose or effect avoidance of Section 7(f), and any Right Certificate
issued pursuant to Section 6 or Section 11 upon transfer, exchange, replacement
or adjustment of any other Right Certificate referred to in this sentence, shall
contain (to the extent feasible and reasonably identifiable as such) the
following legend:
The Rights represented by this Right Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person or
an Affiliate or Associate of an Acquiring Person (as such terms are
defined in the Rights Agreement) or certain transferees thereof.
Accordingly, under certain circumstances as provided in the Rights
Agreement, this Right Certificate and the Rights represented hereby may
be limited as provided in Section 7(f) of such Agreement.
Section 5. Countersignature and Registration.
(a) The Right Certificates shall be executed on behalf of the
Company by its President or any of its Vice Presidents, either manually or by
facsimile signature, and have
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<PAGE> 10
affixed thereto the Company's seal or a facsimile thereof which shall be
attested by the Secretary or an Assistant Secretary of the Company, either
manually or by facsimile signature. The Right Certificates shall be manually
countersigned by the Rights Agent and shall not be valid for any purpose unless
so countersigned. In case any officer of the Company who shall have signed any
of the Right Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Right Certificates, nevertheless, may be countersigned by the Rights Agent,
issued and delivered with the same force and effect as though the person who
signed such Right Certificates had not ceased to be such officer of the Company;
and any Right Certificate may be signed on behalf of the Company by any person
who, at the actual date of the execution of such Right Certificate, shall be a
proper officer (as specified above) of the Company to sign such Right
Certificate, although at the date of the execution of this Rights Agreement any
such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep
or cause to be kept books for registration and transfer of the Right
Certificates issued hereunder. Such books shall show the names and addresses of
the respective holders of the Right Certificates, the number of Rights evidenced
on its face by each Right Certificate, the date of each Right Certificate and
the number of each Right Certificate.
Section 6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates.
(a) Subject to the provisions of Section 4(b), Section 7(f) and
Section 14, at any time after the Close of Business on the Distribution Date,
and prior to the Close of Business on the Expiration Date or the day prior to
the day, if any, on which the Rights are to be redeemed pursuant to Section 23,
any Right Certificate or Certificates may be transferred, split up, combined or
exchanged for another Right Certificate or Right Certificates, entitling the
registered holder to purchase such number of Units as the Right Certificate or
Right Certificates surrendered then entitled such holder to purchase. Any
registered holder desiring to transfer, split up, combine or exchange any Right
Certificate shall make such request in writing delivered to the Rights Agent,
and shall surrender the Right Certificate(s) to be transferred, split up,
combined or exchanged, with the form of assignment on the reverse side(s)
thereof duly completed and executed, at the stock transfer office of the Rights
Agent. Thereupon the Rights Agent shall countersign and deliver to the persons
entitled thereto the Right Certificate(s) requested. The Company may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer, split up, combination or exchange of
Right Certificates. Notwithstanding the foregoing, neither the Rights Agent nor
the Company shall be obligated to take any action whatsoever with respect to the
transfer of any such surrendered Right Certificate unless and until the
registered holder shall have completed and signed the certificate contained in
the form of assignment on the reverse side of such Right Certificate and shall
have provided such additional evidence of the identity of the Beneficial Owner
(or former Beneficial Owner) or Affiliates or Associates thereof as the Company
shall reasonably request.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Right Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them,
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<PAGE> 11
and reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Right Certificate, if mutilated, the Company will execute and deliver a new
Right Certificate of like tenor to the Rights Agent for delivery to the
registered owner in lieu of the Right Certificate so lost, stolen, destroyed or
mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights.
(a) Subject to Section 7(f), and unless earlier redeemed as
provided in Section 23, the registered holder of any Right Certificate may
exercise the Rights evidenced thereby in whole or in part at any time after the
Distribution Date upon surrender of the Right Certificate, with the form of
election to purchase on the reverse side thereof duly completed and executed, to
the Rights Agent at the stock transfer office of the Rights Agent, together with
payment of the Purchase Price for each Unit as to which the Rights are
exercised, at or prior to the Close of Business on the tenth anniversary of the
Rights Record Date or such other date to which the Rights may be extended as
provided in this Agreement (the latest of such dates being herein referred to as
the "Expiration Date"). If at any time after the Distribution Date but prior to
the Expiration Date the Company is unable, under its Articles of Incorporation,
to issue the number and class of shares required to be issued upon the exercise
of all of the outstanding Rights, the Company may issue upon exercise of any of
the Rights shares of capital stock or other securities of the Company of
equivalent value to the shares so required to be issued ("Equivalent Stock"), as
determined by the Board of Directors.
(b) The Purchase Price for each Unit pursuant to the exercise of
a Right shall initially be $45.00, shall be subject to adjustment from time to
time as provided in Sections 11 and 13 and shall be payable in lawful money of
the United States of America.
(c) Upon receipt of a Right Certificate, with the form of
election to purchase duly executed, accompanied by payment of the Purchase Price
for the Units to be purchased and an amount equal to any applicable transfer tax
in cash, or by certified check, bank draft or money order payable to the order
of the Company, the Rights Agent shall thereupon promptly (i) requisition from
the Company or any transfer agent of the Company a certificate for the number of
shares to be purchased and the Company will comply, and hereby irrevocably
authorizes its transfer agent to comply, with all such requests, (ii)
requisition from the Company the amount of cash to be paid in lieu of issuance
of a fractional share, when appropriate, in accordance with Section 14, and
(iii) promptly after receipt of such certificate from any such transfer agent,
cause the same to be delivered to or upon the order of the registered holder of
such Right Certificate, registered in such name or names as may be designated by
such holder, and, when appropriate, after receipt promptly deliver such cash in
lieu of a fractional share to or upon the order of the registered holder of such
Right Certificate; provided, however, that in the case of the purchase, in
connection with the exercise of a Right, of securities other than shares of
stock, the Rights Agent shall promptly take the appropriate actions with respect
thereto as shall as nearly as practicable correspond to the actions described in
the foregoing clauses (i) through (iii).
(d) The Company shall not be required to pay any transfer tax
which may be payable in respect of any transfer involved in the transfer or
delivery of Right Certificates, or the
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<PAGE> 12
issuance or delivery of certificates in a name other than that of the registered
holder of the Right Certificate evidencing Rights surrendered for exercise, or
to issue or deliver any certificates upon the exercise of any Rights, until any
such tax shall have been paid (any such tax being payable by the holder of such
Right Certificate at the time of surrender) or until it has been established to
the Company's satisfaction that no such tax is due.
(e) In case the registered holder of any Right Certificate shall
exercise less than all the Rights evidenced thereby, a new Right Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent to the registered holder of such Right Certificate or to his
duly authorized assigns, subject to the provisions of Section 14.
(f) Notwithstanding any provision of this Agreement to the
contrary, upon the occurrence of any of the events described in any of clauses
(A), (B), (C) or (D) of Section 11(a)(ii), the adjustment provided for under
Section 11(a)(ii) shall not apply with respect to any Rights that are at the
time of the occurrence of such event Beneficially Owned by (i) an Acquiring
Person or by any Associate or Affiliate of such Acquiring Person (which
Acquiring Person or Affiliate or Associate engages in, or realizes the benefit
of, one or more of the transactions described in clause (A) or clause (B) of
Section 11(a)(ii), realizes the benefits set forth in clause (C) of Section
11(a)(ii) or, alone or together, become the Beneficial Owner(s) of a number of
shares of Voting Stock which equals or exceeds the percentage of the general
voting power as provided in clause (D) of Section 11(a)(ii), as the case may
be), or (ii) a transferee of an Acquiring Person or of any Associate or
Affiliate of such Acquiring Person (which Acquiring Person or Associate or
Affiliate engages in, or realizes the benefit of, one or more of the
transactions described in clause (A) or clause (B) of Section 11(a)(ii),
realizes the benefits set forth in clause (C) of Section 11(a)(ii) or, alone or
together with such Acquiring Person or any such Associate or Affiliate, become
the Beneficial Owner(s) of a number of shares of Voting Stock which equals or
exceeds the percentage of the general voting power as provided in clause (D) of
Section 11(a)(ii), as the case may be) (A) who becomes a transferee after the
Acquiring Person becomes such, or (B) who becomes a transferee prior to or
concurrently with the Acquiring Person becoming such and receives such Rights
pursuant to either (1) a transfer (whether or not for consideration) from the
Acquiring Person to holders of equity interests in such Acquiring Person or to
any Person with whom such Acquiring Person has any continuing agreement,
arrangement or understanding regarding the transferred Rights or (2) a transfer
which the Board of Directors of the Company has determined is part of a plan,
arrangement or understanding which has as a primary purpose or effect the
avoidance of this Section 7(f). Upon the exercise of such Rights, the holders
thereof shall be entitled to receive, upon payment of the Purchase Price, the
number of Units issuable upon exercise of such Rights without giving effect to
the adjustment provided for under Section 11(a)(ii). The Company shall use all
reasonable efforts to insure that the provisions of this Section 7(f) and
Section 4(b) are complied with, but shall have no liability to any holder of
Right Certificates or other Person as a result of its making or failing to make
any determinations with respect to an Acquiring Person or its Affiliates,
Associates or transferees hereunder.
(g) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder upon the occurrence of any purported
exercise as set forth in this Section 7 unless such registered holder shall have
(i) completed and signed the certificate contained in the
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<PAGE> 13
form of election to purchase set forth on the reverse side of the Right
Certificate surrendered for such exercise, and (ii) provided such additional
evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or
Affiliates or Associates thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Right Certificates.
All Right Certificates surrendered for the purpose of exercise, transfer, split
up, combination or exchange shall, if surrendered to the Company or to any of
its agents, be delivered to the Rights Agent for cancellation or in cancelled
form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no
Right Certificates shall be issued in lieu thereof except as expressly permitted
by this Agreement. The Company shall deliver to the Rights Agent for
cancellation and retirement, and the Rights Agent shall so cancel and retire,
any other Right Certificate purchased or acquired by the Company otherwise than
upon the exercise thereof. The Rights Agent shall deliver all cancelled Right
Certificates to the Company, or shall, at the written request of the Company,
destroy such can-celled Right Certificates, and in such case shall deliver a
certificate of destruction thereof to the Company.
Section 9. Reservation and Availability of Shares; Registration.
(a) The Company covenants and agrees that it shall (i) on or
prior to the Rights Record Date, take all such action as shall be necessary to
cause to be reserved and kept available out of its authorized and unissued
capital stock, the number, class and series of shares that will be sufficient to
permit the exercise in full of all Rights to be outstanding as of the Rights
Record Date, (ii) no later than promptly following the Distribution Date, take
all such action as shall be necessary to cause to be reserved and kept available
out of its authorized and unissued capital stock, the number of additional
shares that will, from time to time, be sufficient to permit the exercise in
full of all Rights from time to time outstanding, (iii) take all such action as
may be necessary to insure that all shares delivered upon exercise of Rights
shall, at the time of delivery of the certificates for such shares (subject to
payment of the Purchase Price), be duly and validly authorized and issued and
fully paid and nonassessable, and (iv) pay when due and payable any and all
federal and state transfer taxes and charges which may be payable in respect of
the issuance or delivery of the Right Certificates or of any shares upon the
exercise of Rights (except as otherwise provided in Section 7(d)).
(b) The Company agrees to take all such action, from and after
the Distribution Date, as may be necessary or appropriate to permit the issuance
of shares in connection with the exercise of the Rights, including any required
registration under (i) the Securities Act of 1933, as amended from time to time
(the "Securities Act"), and (ii) the securities or "blue sky" laws of the
various states and obtaining any necessary approvals of the California Public
Utilities Commission and any other governmental agency as shall be required by
law. The Company may temporarily suspend, for a period of time not to exceed 120
days, the exercisability of the Rights in order to prepare and file a
registration statement or statements for the purpose of effecting any such
registration and permit such statement(s) to become effective and to prepare and
file any application or applications for the purpose of obtaining any such
approvals and permit such approvals to be obtained. At the commencement and
termination of any such suspension, the Company shall issue a public
announcement and shall provide written
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notice to the Rights Agent, stating that the exercisability of the Rights has
been temporarily suspended, or that such suspension has terminated, as the case
may be.
(c) If and so long as the stock issuable upon the exercise of
Rights is listed on any national securities exchange, the Company shall use its
reasonable efforts to cause all shares reserved for issuance upon exercise of
Rights to be listed on such exchange upon official notice of issuance upon such
exercise.
Section 10. Record Date. Each Person in whose name any stock
certificate is issued upon the exercise of Rights shall for all purposes be
deemed to have become the holder of record of the shares represented thereby on,
and such certificate shall be dated, the date upon which the Right Certificate
evidencing such Rights was duly surrendered and payment of the Purchase Price
(and any applicable transfer taxes) was made. Prior to the exercise of the
Rights evidenced thereby, the holder of a Right Certificate shall not be
entitled to any rights of a shareholder of the Company with respect to shares
for which the Rights shall be exercisable, including without limitation the
right to vote or to receive dividends or other distributions, and such holder
shall not be entitled to receive any notice of any proceedings of the Company,
except as provided herein.
Section 11. Adjustment of Purchase Price, Number of Shares or
Number of Rights. The Purchase Price, the number and kind of shares or other
securities covered by each Right and the number of Rights outstanding are
subject to adjustment from time to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date
of this Agreement (A) declare and pay a dividend on the shares which are
subject to the Rights ("Subject Shares") payable in shares of stock of
the Company, (B) subdivide or split the Subject Shares, (C) combine or
consolidate the Subject Shares into a smaller number of shares or effect
a reverse stock split of the Subject Shares or (D) issue any shares of
its capital stock in a reclassification of the Subject Shares (including
any such reclassification in connection with a consolidation or merger
in which the Company is the continuing or surviving corporation), then,
and in each such event, except as otherwise provided in this Section
11(a), the Purchase Price in effect at the time of the record date for
such dividend or of the effective date of such subdivision, split,
reverse split, combination, consolidation or reclassification, and the
number and kind of shares of capital stock issuable on such date, shall
be proportionately adjusted so that the holder of any Right exercised
after such time shall be entitled to receive the aggregate number and
kind of shares of capital stock which, if such Right had been exercised
immediately prior to such date and at a time when the transfer books of
the Company were open, he would have received upon such exercise and
been entitled to receive by virtue of such dividend, subdivision, split,
reverse split, combination, consolidation or reclassification. If an
event occurs which would require an adjustment under both this Section
11(a)(i) and Section 11(a)(ii), the adjustment provided for in this
Section 11(a)(i) shall be in addition to, and shall be made prior to,
any adjustment required pursuant to Section 11(a)(ii).
(ii) In the event that at any time after the date of
this Agreement
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(A) any Acquiring Person, or any Associate or
Affiliate of any Acquiring Person, directly or indirectly (1)
shall merge into the Company or any of its Subsidiaries or
otherwise combine with the Company or any of its Subsidiaries and
the Company or such Subsidiary shall be the continuing or
surviving corporation of such merger or combination and the
Common Stock shall remain outstanding and the outstanding shares
thereof shall not be changed into or exchanged for stock or other
securities of the Company or of any other Person or cash or any
other property, or (2) shall sell or otherwise transfer in one or
more transactions, assets to the Company or any of its
Subsidiaries in exchange for 25 percent or more of the shares of
any class of capital stock of the Company or any of its
Subsidiaries, and the Common Stock shall remain outstanding and
unchanged, or
(B) directly or indirectly, any Acquiring Person,
or any Associate or Affiliate of any Acquiring Person, shall (1)
in one or more transactions, transfer any assets to the Company
or any of its Subsidiaries in exchange (in whole or in part) for
shares of any class of capital stock of the Company or any of its
Subsidiaries or for securities exercisable for or convertible
into shares of any class of capital stock of the Company or any
of its Subsidiaries or otherwise obtain from the Company or any
of its Subsidiaries, with or without consideration, any
additional shares of any class of capital stock of the Company or
any of its Subsidiaries or other securities exercisable for or
convertible into shares of any class of capital stock of the
Company or any of its Subsidiaries (other than as part of a pro
rata distribution by the Company or such Subsidiary to all
holders of Common Stock), (2) sell, purchase, lease, exchange,
mortgage, pledge, transfer or otherwise dispose (in one or more
transactions), to, from or with, as the case may be, the Company
or any of its Subsidiaries, assets on terms and conditions less
favorable to the Company or such Subsidiary than the Company or
such Subsidiary would be able to obtain in arm's-length
negotiation with an unaffiliated third party, (3) receive any
compensation from the Company or any of the Company's
Subsidiaries other than compensation for full-time employment as
a regular employee, or fees for serving as director, at rates in
accordance with the Company's (or its Subsidiaries') past
practices, or (4) receive the benefit, directly or indirectly
(except proportionately as a shareholder), of any loans,
advances, guarantees, pledges or other financial assistance
provided by the Company or any of its Subsidiaries, on terms and
conditions less favorable to the Company or such Subsidiary than
the Company or such Subsidiary would be able to obtain in
arm's-length negotiation with an unaffiliated third party, or
(C) during any such time as there is an Acquiring
Person, there shall be any reclassification of securities
(including any reverse stock split), or recapitalization of the
Company, or any merger or consolidation of the Company with any
of its Subsidiaries or any other similar transaction or series of
transactions involving the Company or any of its Subsidiaries
(whether or not with or into or otherwise involving an Acquiring
Person or any Affiliate or Associate of such Acquiring Person)
which has the effect, directly or indirectly, of increasing by
more than one percent the proportionate share of the outstanding
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<PAGE> 16
shares of any class of equity securities, or of securities
exercisable for or convertible into equity securities, of the
Company or any of its Subsidiaries which is directly or
indirectly owned by any Acquiring Person or any Associate or
Affiliate of any Acquiring Person, or
(D) any Person shall become an Acquiring Person
otherwise than pursuant to a Qualified Offer,
then, and in each such case, but subject to the provisions of Section 27, proper
provision shall be made so that each holder of a Right, except as provided below
and in Section 7(f), shall, on and after the later of (I) the date of the
occurrence of an event described in clause (A), (B), (C) or (D) of this Section
11(a)(ii), or (II) the date of the expiration of the period within which the
Rights may be redeemed pursuant to Section 23 (as the same may have been amended
as provided in Section 26), have the right to receive, upon exercise thereof at
the then current Purchase Price, such number of shares of Common Stock as shall
equal the result obtained by (x) multiplying the then current Purchase Price by
the then number of Units for which a Right is then exercisable and dividing that
product by (y) 50 percent of the current market price per share of Common Stock
(determined in accordance with Section 11(d)) on the date of the occurrence of
the relevant event listed above in clause (A), (B), (C) or (D) of this
subparagraph (ii); provided, however, that if the transaction that would
otherwise give rise to the foregoing adjustment is also subject to the
provisions of Section 13, then only the provisions of Section 13 shall apply and
no adjustment shall be made pursuant to this Section 11(a)(ii). The Company
shall not consummate any such merger, combination, transfer or transaction
referred to in any of such clauses (A), (B) and (C) unless prior thereto there
shall be sufficient authorized but unissued Common Stock to permit the exercise
in full of the Rights in accordance with the foregoing sentence, unless the
Board of Directors has determined to issue Equivalent Stock in accordance with
Section 7(a); provided, however, that in no case may the Company consummate any
such merger, combination, transfer or transaction if at the time of or
immediately after such transaction there are any rights, warrants or other
instruments or securities outstanding or agreements in effect which would
substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights.
In the event that the Company issues Equivalent Stock upon the
exercise of any Rights pursuant to the immediately preceding paragraph, then,
upon any such exercise, proper provision shall be made so that the holder of a
Right (except as provided in Section 7(f)) shall have the right to receive, upon
such exercise at the then current Purchase Price, such number of shares or other
units of Equivalent Stock of the Company as shall equal the result obtained by
(x) multiplying the then current Purchase Price by the number of Units for which
a Right is then exercisable and dividing that product by (y) 50 percent of the
current market price per share or other unit of the Equivalent Stock of the
Company (determined on substantially the same basis as is prescribed by Section
11(d) with respect to the valuation of Common Stock) on the date of occurrence
of the relevant event listed above in clause (A), (B), (C) or (D) of this
subparagraph (ii). In the event that at any time the Company should be
prohibited by law, by any provision of its Articles of Incorporation, or by any
instrument or agreement to which the Company is a party or by which it is bound,
from issuing, or should be unable under its Articles of Incorporation to issue,
sufficient Equivalent Stock to permit the exercise of all outstanding Rights in
accordance
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<PAGE> 17
with the foregoing sentence, then, in lieu of issuing such Equivalent
Stock upon such exercise, the Company shall pay to each holder of a Right
(except as provided in Section 7(f)) upon surrender of the Right as provided
herein but without payment of the Purchase Price, an amount in cash for each
Right equal to the Purchase Price.
(b) In case the Company shall at any time after the Rights Record
Date fix a record date for the issuance of rights or warrants to all holders of
Common Stock or Subject Shares entitling them (for a period expiring within 45
calendar days after such record date) to subscribe for or purchase Common Stock
or Subject Shares or securities convertible into Common Stock or Subject Shares
at a price per share (or having a conversion price per share, if a security
convertible into Common Stock) less than the current market price per share
(determined in accordance with Section 11(d)) on such record date, the Purchase
Price to be in effect after such record date shall be determined by multiplying
the Purchase Price in effect immediately prior to such record date by a
fraction, of which the numerator shall be the total number of shares of Common
Stock and Subject Shares outstanding on such record date plus the number of
shares of Common Stock which the aggregate offering price of the total number of
shares so to be offered (and/or the aggregate initial conversion price of the
convertible securities so to be offered) would purchase at such current market
price and of which the denominator shall be the total number of shares of Common
Stock and Subject Shares outstanding on such record date plus the number of
additional shares to be offered for subscription or purchase (or into which the
convertible securities to be offered are initially convertible). In case such
subscription or purchase price may be paid, in whole or in part, in a form other
than cash, the value of such consideration shall be as determined in good faith
by the Board of Directors of the Company, whose determination shall be described
in a statement filed with the Rights Agent. Shares owned by or held for the
account of the Company shall not be deemed outstanding for the purpose of any
such computation. Such adjustment shall be made successively whenever such a
record date is fixed, and in the event that such rights or warrants are not so
issued, the Purchase Price shall be adjusted to be the Purchase Price which
would then be in effect if such record date had not been fixed.
(c) In case the Company shall at any time after the Rights Record
Date fix a record date for the making of a distribution on the shares of Common
Stock or the Subject Shares, whether by way of a dividend, distribution,
reclassification of stock, recapitalization, reorganization or partial
liquidation of the Company or otherwise (and including any such distribution
made in connection with a consolidation or merger in which the Company is the
continuing corporation), of subscription rights or warrants (excluding those
referred to in Section 11(b)), evidences of indebtedness or other assets (other
than (i) regular periodic cash dividends, (ii) a dividend payable in Common
Stock or (iii) a distribution which is part of or is made in connection with a
transaction to which Section 11(a)(ii) or Section 13 applies), the Purchase
Price to be in effect after such record date shall be determined by multiplying
the Purchase Price in effect immediately prior to such record date by a
fraction, of which the numerator shall be the current market price per share of
Common Stock (determined in accordance with Section 11(d)) on such record date,
less the fair market value applicable to one share of Common Stock (as
determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent) of
such assets or evidences of indebtedness or of such subscription rights or
warrants so to be distributed, and of which the denominator shall be such
current market price per share of Common Stock. Such adjustments
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<PAGE> 18
shall be made successively whenever such a record date is fixed; and in the
event that such distribution is not so made, the Purchase Price shall again be
adjusted to be the Purchase Price which would then be in effect if such record
date had not been fixed.
(d) For the purpose of any computation hereunder, the "current
market price" per share of Common Stock on any date shall be deemed to be the
average of the daily closing prices per share of such Common Stock for the 30
consecutive Trading Days immediately prior to such date; provided, however, that
in the event that the current market price per share of Common Stock is
determined during a period following the announcement by the issuer of such
Common Stock of a dividend or distribution on such Common Stock payable in
shares of such Common Stock or securities convertible into shares of Common
Stock (other than the Rights), and prior to the expiration of 30 Trading Days
after the ex-dividend date for such dividend or distribution, then, and in each
such case, the current market price shall be appropriately adjusted to reflect
the current market price per share of Common Stock in connection with
ex-dividend trading. The closing price for each day shall be the last sale
price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the shares of Common Stock are not listed or admitted to trading on the New
York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the shares of Common Stock are listed or admitted
to trading or, if the shares of Common Stock are not listed or admitted to
trading on any national securities exchange, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc., Automated Quotation System ("NASDAQ").
If on any such date the shares of Common Stock are not quoted by any such
organization, the fair market value of such shares on such date as determined in
good faith by the Board of Directors of the issuer of such Common Stock shall be
used. Any such determination of current market price shall be described in a
statement filed with the Rights Agent.
For the purpose of any computation hereunder, the "current market
price" of a Unit shall be deemed to be equal to the current market price per
share of Common Stock, and the "current market price" of a Subject Share shall
be deemed to be equal to the current market price per share of Common Stock
divided by the number of Subject Shares which comprise a Unit.
For purposes of this Agreement, the term "Trading Day" shall mean
a day on which the principal national securities exchange on which the shares of
Common Stock are listed or admitted to trading is open for the transaction of
business or, if the shares of Common Stock are not listed or admitted to trading
on any national securities exchange, a Business Day.
(e) No adjustment in the Purchase Price shall be required unless
such adjustment would require an increase or decrease of at least one percent in
such Price; provided, however, that any adjustments which by reason of this
Section 11(e) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Section
11 shall be made to the nearest cent or to the nearest one-hundredth of a share,
as the case may be. Notwithstanding the proviso to the first sentence of this
Section 11(e), any adjustment required by this Section 11 shall be made no later
than the earlier of (i) three years
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<PAGE> 19
from the date of the transaction which gives rise to such adjustment or (ii) the
date of the expiration of the right to exercise any Rights.
(f) In the event that at any time, as a result of an adjustment
made pursuant to Section 11(a), the holder of any Right thereafter exercised
shall become entitled to receive any shares of capital stock of the Company
other than shares of Common Stock, thereafter the number of such other shares so
receivable upon exercise of any Right shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to the
provisions, with respect to such shares, contained in Sections 11(a) through
(c), inclusive, and the provisions of Sections 7, 9, 10, 13 and 14 with respect
to the shares of Common Stock shall apply on like terms to any such other
shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall represent the right to
purchase, at the adjusted Purchase Price, the number of shares purchasable from
time to time hereunder upon exercise of the Rights, all subject to further
adjustment as provided herein.
(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Sections 11(b) and (c), each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that number of
shares (calculated to the nearest one-hundredth) obtained by (i) multiplying (x)
the number of shares covered by a Right immediately prior to such adjustment by
(y) the Purchase Price in effect immediately prior to such adjustment of the
Purchase Price and (ii) dividing the product so obtained by the Purchase Price
in effect immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment
of the Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of shares purchasable upon the exercise of each Right.
Each of the Rights outstanding after such adjustment of the number of Rights
shall be exercisable for the number of Units for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one-hundredth) obtained by dividing the Purchase
Price in effect immediately prior to adjustment of the Purchase Price by the
Purchase Price in effect immediately after adjustment of the Purchase Price. The
Company shall make a public announcement of its election to adjust the number of
Rights, indicating the record date for the adjustment, and, if known at the
time, the amount of the adjustment to be made. This record date may be the date
on which the Purchase Price is adjusted or any day thereafter, but, if the Right
Certificates have been issued, shall be at least 10 days later than the date of
the public announcement. If Right Certificates have been issued, upon each
adjustment of the number of Rights pursuant to this Section 11(i) the Company
shall, as promptly as practicable, cause to be distributed to holders of record
of Right Certificates on such record date Right Certificates evidencing, subject
to Section 14, the additional Rights to which such holders shall be entitled as
a result of such adjustment, or, at the option of the Company, shall cause to be
distributed to such holders of record in substitution and replacement for the
Right Certificates held by such holders prior to the date of adjustment, and
upon surrender thereof, if required by the Company, new Right Certificates
evidencing all the Rights
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<PAGE> 20
to which such holders shall be entitled after such adjustment. Right
Certificates so to be distributed shall be issued, executed and countersigned in
the manner provided for herein (and may bear, at the option of the Company, the
adjusted Purchase Price) and shall be registered in the names of the holders of
record of Right Certificates on the record date specified in the public
announcement.
(j) Irrespective of any adjustment or change in the Purchase
Price or the number of shares issuable upon the exercise of the Rights, the
Right Certificates theretofore and thereafter issued may continue to express the
Purchase Price per share and the number of shares which were expressed in the
initial Right Certificates issued hereunder.
(k) In any case in which this Section 11 requires that an
adjustment in the Purchase Price be made effective as of the record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
the additional shares or securities of the Company, if any, issuable as a
consequence of such adjustment; provided, however, that the Company shall
deliver to such holder a due bill or other appropriate instrument evidencing
such holder's right to receive such additional shares or securities upon the
occurrence of such event.
(l) Anything in this Section 11 to the contrary notwithstanding,
the Company shall be entitled to make such adjustments in the number of shares
which may be acquired upon exercise of the Rights, and such adjustments in the
Purchase Price, in addition to those adjustments expressly required by the other
subsections of this Section 11, as and to the extent that the Company, in its
sole discretion, shall determine to be advisable, in order that, in the event of
(i) any reclassification, consolidation or subdivision of the Common Stock, (ii)
any reorganization or partial liquidation of the Company or similar transaction,
(iii) any issuance wholly for cash of any Common Stock at less than the current
market price, (iv) any issuance wholly for cash of Common Stock or securities
which by their terms are convertible into or exchangeable for Common Stock, (v)
any stock dividends or (vi) any issuance of rights, options or warrants,
hereafter made by the Company to holders of its Common Stock as provided herein
above in this Section 11, (x) the holders of the Rights in any such event shall
be treated equitably and in accordance with the purpose and intent of this
Agreement, and (y) to the extent reasonably possible, such event shall not, in
the opinion of counsel for the Company, result in the shareholders of the
Company being subject to any United States federal income tax liability by
reason thereof.
Section 12. Certification of Adjusted Purchase Price or Number of
Shares. Whenever an adjustment is made as provided in Section 11 or 13, the
Company shall (i) promptly prepare a certificate setting forth such adjustment,
and a brief statement of the facts accounting for such adjustment, (ii) promptly
file with the Rights Agent and with each transfer agent for the Common Stock a
copy of such certificate, and (iii) mail a brief summary thereof to each holder
of a Right Certificate in accordance with Section 25. Notwithstanding the
foregoing sentence, the failure of the Company to give such notice shall not
affect the validity of, or the force or effect of, the requirement for such
adjustment.
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<PAGE> 21
Section 13. Consolidation, Merger or Sale or Transfer of Assets
or Earning Power.
(a) In the event that, at any time after an Acquiring Person has
become such,
(i) the Company shall consolidate with, or merge with and
into, any other Person and the Company shall not be the continuing or
surviving corporation of such consolidation or merger,
(ii) any other Person(s) shall consolidate or merge with
and into the Company, the Company shall be the continuing or surviving
corporation of such merger and, in connection with such consolidation or
merger, all or part of the Common Stock shall be changed into or
exchanged for stock or other securities of the Company or of any other
Person or cash or any other property, or
(iii) the Company shall sell or otherwise transfer (or one
or more of its Subsidiaries shall sell or otherwise transfer), in one or
more transactions, assets or earning power aggregating more than 50
percent of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person, (other than a pro
rata distribution by the Company of assets (including securities) of the
Company or any of its Subsidiaries to all holders of the Company's
Common Stock),
then, on and after the later of (I) the date of the occurrence of an event
described in clause (i), (ii) or (iii) of this Section 13(a), or (II) the date
of the expiration of the period within which the Rights may be redeemed pursuant
to Section 23 (as the same may have been amended as provided in Section 26):
(A) proper provision shall be made so that each
holder of a Right shall thereafter have the right to receive,
upon the exercise thereof at the then current Purchase Price,
such number of shares of common stock of the Principal Party as
shall be equal to the result obtained by (x) multiplying the then
current Purchase Price by the number of Units for which a Right
is then exercisable and dividing that product by (y) 50 percent
of the current market price per share of the common stock of the
Principal Party (determined in the same manner as the current
market price of Common Stock is determined under Section 11(d))
on the date of consummation of such consolidation, merger, sale
or transfer;
(B) the Principal Party shall thereafter be liable
for, and shall assume, by virtue of such consolidation, merger,
sale or transfer, all the obligations and duties of the Company
pursuant to this Agreement, and proper provision shall be made
for the foregoing, provided that the Principal Party shall, prior
to the first occurrence of an event described in clause (i), (ii)
or (iii) of this Section 13(a), have caused to be reserved out of
its authorized and unissued shares of common stock (or its
authorized and issued shares of common stock held in its
treasury), for issuance pursuant to this Agreement, the number of
shares of common stock that will be sufficient to permit the
exercise in full of the Rights after the occurrence of such
event;
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<PAGE> 22
(C) the term "Company" wherever used in this
Agreement shall thereafter be deemed to refer to such Principal
Party; and
(D) the Principal Party shall, in addition to the
reservation of shares of its common stock as provided in the
proviso to clause (B) above, take such steps (including without
limitation compliance with the Company's other obligations as set
forth in Section 9) in connection with such consummation as may
be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably may be, in
relation to the shares of its Common Stock thereafter deliverable
upon the exercise of the Rights; provided, however, that, upon
the subsequent occurrence of any merger, consolidation, sale of
all or substantially all assets, recapitalization,
reclassification of shares, reorganization or other extraordinary
transaction in respect of such Principal Party, each holder of a
Right shall thereupon be entitled to receive, upon exercise of a
Right and payment of the Purchase Price, such cash, shares,
rights, warrants and other property which such holder would have
been entitled to receive had such holder, at the time of such
transaction, owned the shares of common stock of the Principal
Party purchasable upon the exercise of a Right, and such
Principal Party shall take such steps (including, but not limited
to, reservation of shares of stock) as may be necessary to permit
the subsequent exercise of the Rights in accordance with the
terms hereof for such cash, shares, rights, warrants and other
property.
(b) For purposes of this Agreement, "Principal Party" shall mean
(i) in the case of any transaction described in clause (i)
or (ii) of Section 13(a), (A) the Person that is the issuer of the
securities into which shares of Common Stock are converted in such
merger or consolidation, or, if there is more than one such issuer, the
issuer the common stock of which has the greatest market value, or (B)
if no securities are so issued, (x) the Person that is the other party
to the merger or consolidation and that survives said merger or
consolidation, or, if there is more than one such Person, the Person the
common stock of which has the greatest market value or (y) if the Person
that is the other party to the merger or consolidation does not survive
the merger or consolidation, the Person that does so survive (including
the Company if it survives); and
(ii) in the case of any transaction described in clause
(iii) of Section 13(a), the Person that is the party receiving the
greatest portion of the assets or earning power transferred pursuant to
such transaction or transactions, or, if each Person that is a party to
such transaction or transactions receives the same portion of the assets
or earning power so transferred or if the Person receiving the greatest
portion of the assets or earning power cannot be determined, whichever
of such Persons is the issuer of common stock having the greatest market
value of shares outstanding;
provided, however, that in any such case, (1) if the common stock of such Person
is not at such time and has not been continuously over the preceding 12-month
period registered under Section
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<PAGE> 23
12 of the Exchange Act, and such Person is a direct or indirect Subsidiary of
another corporation the common stock of which is and has been so registered,
"Principal Party" shall refer to such other corporation; (2) if the common stock
of such Person is not and has not been so registered and such Person is not a
direct or indirect Subsidiary of another corporation the common stock of which
is and has been so registered, "Principal Party" shall refer to the corporation
which ultimately controls such Person; (3) in case such Person is a Subsidiary,
directly or indirectly, of more than one corporation, the common stocks of all
of which are and have been so registered, "Principal Party" shall refer to
whichever of such corporations is the issuer of common stock having the greatest
market value of shares held by the public; and (4) if the common stock of such
Person is not and has not been so registered and such Person is owned, directly
or indirectly, by a joint venture formed by two or more Persons that are not
owned, directly or indirectly, by the same Person, the rules set forth in
clauses (1), (2) and (3) above shall apply to each of the chains of ownership
having an interest in such joint venture as if such Person were a "Subsidiary"
of both or all of such joint ventures and the Principal Party in each such chain
shall bear the obligations set forth in this Section 13 in the same ratio as its
direct or indirect interests in such Person bear to the total of such interests.
(c) The Company shall not consummate any such consolidation,
merger, sale or transfer unless prior thereto the Company and the Principal
Party shall have executed and delivered to the Rights Agent a supplemental
agreement making valid provision for the results described in clause (A) of
Section 13(a) and confirming that the Principal Party will perform its
obligations under this Section 13(a); provided, however, that in no case may the
Company consummate any such consolidation, merger, sale or transfer if (i) at
the time of or immediately after such transaction there are any rights, warrants
or other instruments or securities outstanding or agreements in effect which
would substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights or (ii) prior to, simultaneously with or immediately
after such transaction, the shareholders of the Person which constitutes, or
would constitute, the Principal Party for purposes of this Section 13 shall have
received a distribution of Rights previously owned by such Person or any of its
Affiliates and Associates.
(d) The provisions of this Section 13 shall similarly apply to
successive mergers or consolidations or sales or other transfers. This Section
13 shall not be applicable to a transaction described in Subparagraphs (i), (ii)
or (iii) of Subsection (a) of this Section if (i) such transaction is
consummated with a Person or Persons who acquired Common Stock pursuant to a
Qualified Offer (or a wholly owned subsidiary of any such Person or Persons),
(ii) the price per share of Common Stock offered in such transaction or
distributable to shareholders upon conclusion of such transaction is not less
than the price per share of Common Stock paid to all holders of Common Stock
whose shares were purchased pursuant to such Qualified Offer and (iii) the form
of consideration being offered to the remaining holders of Common Stock pursuant
to such transaction or distributable to shareholders upon conclusion of such
transaction is the same as the form of consideration paid pursuant to such
Qualified Offer. Upon conclusion of any transaction described in the foregoing
sentence, all Rights shall expire.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of
Rights or to distribute Right Certificates which evidence fractional Rights. If
the Company shall elect not to
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<PAGE> 24
issue such fractional Rights, in lieu of such fractional Rights, there shall be
paid to the registered holders of the Right Certificates with regard to which
such Fractional Rights would otherwise be issuable an amount in cash equal to
the same fraction of the current market value of a whole Right. For the purposes
of this Section 14(a), the current market value of a whole Right shall be the
closing price of the Rights for the Trading Day immediately prior to the date on
which such fractional Rights would have been otherwise issuable. The closing
price for any day shall be the last sale price, regular way, or, in case no such
sale takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the Rights are not listed or
admitted to trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Rights are listed or
admitted to trading or, if the Rights are not listed or admitted to trading on
any national securities exchange, the average of the high bid and low asked
prices in the over-the-counter market, as reported by NASDAQ. If on any such
date the Rights are not quoted by any such organization, the fair value of the
Rights on such date as determined in good faith by the Board of Directors of the
Company shall be used. Any such determination of current market value shall be
described in a statement filed with the Rights Agent.
(b) The Company shall not be required to issue fractions of
shares upon exercise of a Right or to distribute certificates which evidence
fractional shares. In lieu of fractional shares, the Company shall pay to the
registered holders of Right Certificates at the time such Right Certificates are
exercised as herein provided an amount in cash equal to the same fraction of the
current market value of a share of Common Stock. For purposes of this Section
14, the current market value of a share of Common Stock shall be the closing
price of a share of Common Stock (as determined pursuant to the second sentence
of Section 11(d)) for the Trading Day immediately prior to the date of such
exercise.
(c) The holder of a Right by the acceptance thereof expressly
waives his right to receive any fractional Rights or any fractional shares upon
exercise of a Right.
Section 15. Rights of Action. All rights of action in respect of
this Agreement are vested in the respective registered holders of the Right
Certificates (and prior to the Distribution Date, the registered holders of the
Common Stock), and any registered holder of any Right Certificate (or, prior to
the Distribution Date, any registered holder of the Common Stock), without the
consent of the Rights Agent or of the holder of any other Right Certificate (or,
prior to the Distribution Date, any other registered holder of the Common
Stock), may, on his own behalf and for his own benefit, enforce, and may
institute and maintain, any suit, action or proceeding against the Company to
enforce, or otherwise act in respect of, his right to exercise the Rights
evidenced by such Right Certificate in the manner provided in such Right
Certificate and in this Agreement. Without limiting the foregoing or any
remedies available to the holders of Rights, it is specifically acknowledged
that the holders of Rights would not have an adequate remedy at law for any
breach of this Agreement and will be entitled to specific performance of the
obligations under, and injunctive relief against actual or threatened violations
of the obligations of any Person subject to, this Agreement.
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<PAGE> 25
Section 16. Agreement of Right Holders. Every holder of a Right
by accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of Common Stock;
(b) on and after the Distribution Date, the Right Certificates
will be transferable only on the registry books of the Rights Agent and then if
surrendered at the stock transfer office of the Rights Agent, duly endorsed or
accompanied by a proper instrument of transfer; and
(c) the Company and the Rights Agent may deem and treat the
person in whose name the Right Certificate (or, prior to the Distribution Date,
the associated Common Stock certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Right Certificates or the associated Common Stock
certificate made by anyone other than the Company or the Rights Agent) for all
purposes whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary.
Section 17. Right Certificate Holder Not Deemed a Shareholder. No
holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise of
the Rights represented thereby, nor shall anything contained herein or in any
Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a shareholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
shareholders (except as provided in Section 24), or to receive dividends or
subscription rights, or otherwise, until the Right or Rights evidenced by such
Right Certificate shall have been exercised in accordance with the provisions
hereof.
Section 18. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
other disbursements incurred in the administration and execution of this
Agreement and the exercise and performance of its duties hereunder. The Company
also agrees to indemnify the Rights Agent for, and to hold it harmless against,
any loss, liability, or expense incurred, without negligence, bad faith or
willful misconduct on the part of the Rights Agent, for anything done or omitted
by the Rights Agent in connection with the acceptance and administration of this
Agreement, including the costs and expenses of defending against any claim of
liability in the premises.
(b) The Rights Agent shall be protected and shall incur no
liability for or in respect of any action taken, suffered or omitted by it in
connection with its administration of this Agreement in reliance upon any Right
Certificate or Certificate for Common Stock or for other
22
<PAGE> 26
securities of the Company, instrument of assignment or transfer, power of
attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement, or other paper or document believed by it, acting with
reasonable care, to be genuine and to be signed, executed and, where necessary,
verified or acknowledged, by the proper person or persons.
If and for so long as the Rights are listed on the New York Stock
Exchange or the American Stock Exchange, the Rights Agent, if its principal
offices are located outside New York City, shall maintain in the New York City
area facilities for the servicing of the Rights in the area of Manhattan located
south of Chambers Street. Such facilities may consist of either an office or
agency where transactions in the Rights are serviced directly or a "drop" where
Common Stock certificates, Right Certificates, and other instruments relating to
transactions in Rights may be received for redelivery to an office or agency
outside New York City, all in accordance with the applicable rules of the stock
exchange on which the Rights are listed.
Section 19. Merger or Consolidation or Change of Name of Rights
Agent.
(a) Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights Agent
or any successor Rights Agent shall be a party, or any corporation succeeding to
the stock transfer business of the Rights Agent or any successor Rights Agent,
shall be the successor to the Rights Agent under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, provided that such corporation would be eligible for appointment
as a successor Rights Agent under the provisions of Section 21. In case at the
time such successor Rights Agent shall succeed to the agency created by this
Agreement any of the Right Certificates shall have been countersigned but not
delivered, any such successor Rights Agent may adopt the countersignature of the
predecessor Rights Agent and deliver such Right Certificates so countersigned,
and in case at that time any of the Right Certificates shall not have been
countersigned, any successor Rights Agent may countersign such Right
Certificates either in the name of the predecessor Rights Agent or in the name
of the successor Rights Agent and in all such cases such Right Certificates
shall have the full force provided in the Right Certificates and in this
Agreement.
(b) In case at any time the name of the Rights Agent shall be
changed and at such time any of the Right Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the countersignature
under its prior name and deliver Right Certificates so countersigned, and in
case at that time any of the Right Certificates shall not have been
countersigned, the Rights Agent may countersign such Right Certificates either
in its prior name or in its changed name, and in all such cases such Right
Certificates shall have the full force provided in the Right Certificates and in
this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes
the duties and obligations imposed by this Agreement upon the following terms
and conditions, by all of which the Company and the holders of Right
Certificates, by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be
legal counsel for the Company), and the opinion of such counsel shall be full
and complete
23
<PAGE> 27
authorization and protection to the Rights Agent as to any action taken or
omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact or
matter be proved or established by the Company prior to taking or suffering any
action hereunder, such fact or matter (unless other evidence in respect thereof
be herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by the President, any Vice President, or the
Secretary of the Company and delivered to the Rights Agent, and such certificate
shall be full authorization to the Rights Agent for any action taken or suffered
in good faith by it under the provisions of this Agreement in reliance upon such
certificate.
(c) The Rights Agent shall be liable hereunder only for its own
negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any
of the statements of fact or recitals contained in this Agreement or in the
Right Certificates (except its countersignature thereof) or be required to
verify the same, but all such statements and recitals are and shall be deemed to
have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Right Certificate (except its countersignature
thereof), nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Right Certificate,
nor shall it be responsible for any adjustment required under the provisions of
Section 11 or 13 or responsible for the manner, method or amount of any such
adjustment or the ascertaining of the existence of facts that would require any
such adjustment (except with respect to the exercise of Rights evidenced by
Right Certificates after actual notice of any such adjustment), nor shall it by
any act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of stock to be issued pursuant to
this Agreement or any Right Certificate or as to whether any shares of stock
will, when issued, be validly authorized and issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge
and deliver or cause to be performed, executed, acknowledged and delivered all
such further and other acts, instruments and assurances as may reasonably be
required by the Rights Agent for the carrying out or performance by the Rights
Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
President, any Vice President or the Secretary of the Company, and to apply to
such officers for advice or instructions in connection with its duties, and it
shall not be liable for any action taken or suffered to be taken by it in good
faith in accordance with instructions of any such officer.
(h) The Rights Agent and any shareholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or
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<PAGE> 28
become pecuniarily interested in any transaction in which the Company may be
interested, or contract with or lend money to the Company or otherwise act as
fully and freely as though it were not Rights Agent under this Agreement.
Nothing herein shall preclude the Rights Agent from acting in any other capacity
for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights
or powers hereby vested in it or perform any duty hereunder either itself or by
or through its attorneys or agents, and the Rights Agent shall not be answerable
or accountable for any act, default, neglect or misconduct of any such attorneys
or agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct, provided reasonable care was exercised in the selection
and continued employment thereof.
(j) If, with respect to any Right Certificate surrendered to the
Rights Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to such
requested exercise or transfer without first obtaining the Company's approval.
Section 21. Change of Rights Agent. Unless the Company and the
Rights Agent agree to a shorter time period, the Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 15 days' notice in writing mailed to the Company and to each transfer agent
of Common Stock by registered or certified mail, and to the holders of the Right
Certificates by first-class mail. Unless the Company and the Rights Agent agree
to a shorter time period, the Company may remove the Rights Agent or any
successor Rights Agent upon 15 days' notice in writing, mailed to the Rights
Agent or successor Rights Agent, as the case may be, and to each transfer agent
of Common Stock by registered or certified mail, and to the holders of the Right
Certificates by first-class mail. If the Rights Agent shall resign or be removed
or shall otherwise become incapable of acting, the Company shall appoint a
successor to the Rights Agent. If the Company shall fail to make such
appointment within a period of 15 days after such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Right Certificate (who shall,
with such notice, submit his Right Certificate for inspection by the Company),
then the registered holder of any Right Certificate may apply to any court of
competent jurisdiction for the appointment of a new Rights Agent. Any successor
Rights Agent, whether appointed by the Company or by such a court, shall be a
corporation organized and doing business under the laws of the United States or
of any state of the United States in good standing, which is authorized under
such laws to exercise stock transfer powers and is subject to supervision or
examination by federal or state authority and which has at the time of its
appointment as Rights Agent a combined capital and surplus of at least
$100,000,000. After appointment, the successor Rights Agent shall be vested with
the same powers, rights, duties and responsibilities as if it had been
originally named as Rights Agent without further act or deed, but the
predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Not later
than the effective date of any such appointment, the Company shall file notice
thereof in writing with the predecessor Rights Agent and each transfer agent of
Common Stock and mail a notice thereof in writing to the registered holders of
the Right Certificates. Failure to give any notice provided for in this Section
21, however, or any defect therein, shall
25
<PAGE> 29
not affect the legality or validity of the resignation or removal of the Rights
Agent or the appointment of the successor Rights Agent, as the case may be.
Section 22. Issuance of New Right Certificates. Notwithstanding
any of the provisions of this Agreement or of the Rights to the contrary, the
Company may, at its option, issue new Right Certificates evidencing Rights in
such form as may be approved by its Board of Directors to reflect any adjustment
or change in the Expiration Date, the Purchase Price per share or the number or
kind or class of shares of stock or other securities or property purchasable
under the Right Certificates made in accordance with the provisions of this
Agreement.
Section 23. Redemption.
(a) The Board of Directors of the Company may, at its option and
as provided herein, and notwithstanding the provisions of Sections 11 and 13 of
this Agreement, elect to redeem all but not less than all of the then
outstanding Rights at a redemption price of $.01 per Right, appropriately
adjusted to reflect any stock split, stock dividend, reclassification or similar
transaction occurring after the date hereof (such redemption price being herein
referred to as the "Redemption Price") at any time up to the Close of Business
on a Stock Acquisition Date.
(b) Immediately upon the action of the Board of Directors of the
Company electing to redeem the Rights, the Company shall make a public
announcement thereof, and from and after the date of such announcement, without
any further action and without any further notice, the right to exercise the
Rights will terminate and the only right thereafter of the holders of Rights
shall be to receive the Redemption Price. As soon as practicable after the
election of the Board of Directors to redeem the Rights, the Company shall give
notice of such redemption to the holders of the then outstanding Rights by
mailing such notice to all such holders at their last addresses as they appear
upon the registry books of the Rights Agent. Any notice which is mailed in the
manner herein provided shall be deemed given, whether or not the holder receives
the notice. Each such notice of redemption will state the method by which the
payment of the Redemption Price will be made.
Section 24. Notice of Proposed Actions. In case the Company,
after the Rights become exercisable, shall propose (i) to pay any dividend
payable in stock of any class to the holders of its Common Stock or the Subject
Shares or to make any other distribution to the holders of its Common Stock or
Subject Shares (other than a regular periodic cash dividend), or (ii) to offer
to the holders of its Common Stock or Subject Shares rights or warrants to
subscribe for or to purchase any additional shares of Common Stock or shares of
stock of any class or any other securities, rights or options, or (iii) to
effect any reclassification of its Common Stock or Subject Shares (other than a
reclassification involving only the subdivision of outstanding shares of Common
Stock) or any recapitalization or reorganization of the Company, or (iv) to
effect any consolidation or merger into or with, or to effect any sale or other
transfer (or to permit one or more of its Subsidiaries to effect any sale or
other transfer), in one or more transactions, of more than 50 percent of the
assets or earning power of the Company and its Subsidiaries (taken as a whole)
to, any other Person, or (v) to effect the liquidation, dissolution or winding
up of the Company, then, in each such case, the Company shall give to each
holder of a Right, in accordance with Section 25, a notice of such proposed
action, which shall specify the record date for the purposes of such dividend,
distribution of rights or warrants, or the date on which such
26
<PAGE> 30
reclassification, recapitalization, reorganization, consolidation, merger, sale,
transfer, liquidation, dissolution or winding up is to take place and the date
of participation therein by the holders of Common Stock and/or Subject Shares,
if any such date is to be fixed, and such notice shall be so given in the case
of any action covered by clause (i) or (ii) above at least twenty days prior to
the record date for determining holders of the Common Stock and/or Subject
Shares for purposes of such action, and in the case of any such other action, at
least twenty days prior to the date of the taking of such proposed action or the
date of participation therein by the holders of Common Stock and/or Subject
Shares, whichever shall be the earlier. The failure to give notice required by
this Section 24 or any defect thereon shall not affect the legality or validity
of the action taken by the Company or the vote upon any such action.
Section 25. Notices. Notices or demands authorized by this
Agreement to be given or made by the Rights Agent or by the holder of any Right
Certificate to or on the Company shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
Harris Trust Company of California
601 South Figueroa Street, 49th Floor
Los Angeles, California 90017
Subject to the provisions of Section 21, any notice or demand
authorized by this Agreement to be given or made by the Company or by the holder
of any Right Certificate to or on the Rights Agent shall be sufficiently given
or made if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing with the Company) as follows:
Southwest Gas Corporation
5241 Spring Mountain Road
P.O. Box 98510
Las Vegas, Nevada 89193-8510
Attention: Chief Financial Officer
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to or on the holder of any Right Certificate shall
be sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 26. Supplements and Amendments. Prior to the Distribution
Date and subject to the penultimate sentence of this Section 26, the Company and
the Rights Agent shall, if the Company so directs, supplement or amend any
provision of this Agreement without the approval of any holders of certificates
representing shares of Common Stock. From and after the Distribution Date and
subject to the penultimate sentence of this Section 26, the Company and the
Rights Agent shall, if the Company so directs, supplement or amend this
Agreement without the approval of any holders of Right Certificates in order (i)
to cure any ambiguity, (ii) to correct or supplement any provision contained
herein which may be defective or inconsistent with any other provisions herein,
(iii) to shorten or lengthen any time period hereunder or (iv) to change or
supplement the provisions hereof in any manner which the Company may deem
necessary or
27
<PAGE> 31
desirable and which shall not adversely affect the interests of the holders
of Right Certificates; provided, however, this Agreement may not be supplemented
or amended to lengthen, pursuant to clause (iii) of this sentence, (A) a time
period relating to when the Rights may be redeemed at such time as the Rights
are not then redeemable, or (B) any other time period, unless such lengthening
is for the purpose of protecting, enhancing or clarifying the rights of, and/or
the benefits to, the holders of Rights. Upon the delivery of a certificate from
an appropriate officer of the Company which states that the proposed supplement
or amendment is in compliance with the terms of this Section 26, the Rights
Agent shall execute such supplement or amendment. Notwithstanding anything
contained in this Agreement to the contrary: (1) no supplement or amendment
shall be made which changes the Redemption Price, the Purchase Price or the
number of shares or Units for which a Right is exercisable; and (2) the duration
of the Rights may not be shortened without the written consent of the registered
holders thereof (other than by a redemption of the Rights pursuant to Section
23). Prior to the Distribution Date, the interests of the holders of Rights
shall be deemed coincident with the interests of the holders of Common Stock.
Section 27. Exchange.
(a) The Board of Directors of the Company may, at its option, at
any time after any Person becomes an Acquiring Person, exchange all or part of
the then outstanding and exercisable Rights (which shall not include Rights that
have become subject to the provisions of Section 7(f) hereof) for Common Stock
at an exchange ratio of one share of Common Stock per Right, appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date hereof (such exchange ratio being hereinafter referred
to as the "Exchange Ratio").
(b) Immediately upon the action of the Board of Directors of the
Company ordering the exchange of any Rights pursuant to subsection (a) of this
Section and without any further action and without any notice, the right to
exercise such Rights shall terminate and the only right thereafter of a holder
of such Rights shall be to receive that number of shares of Common Stock equal
to the number of such Rights held by such holder multiplied by the Exchange
Ratio. The Company shall promptly give public notice of any such exchange;
provided, however, that the failure to give, or any defect in, such notice shall
not affect the validity of such exchange. The Company promptly shall mail a
notice of any such exchange to all of the holders of such Rights at their last
addresses as they appear upon the registry books of the Rights Agent. Any notice
which is mailed in the manner herein provided shall be deemed given, whether or
not the holder receives the notice. Each such notice of exchange will state the
method by which the exchange of the Common Stock for Rights will be effected
and, in the event of any partial exchange, the number of Rights which will be
exchanged. Any partial exchange shall be effected pro rata based on the number
of Rights (other than Rights which have become subject to the provisions of
Section 7(f) hereof) held by each holder of Rights.
(c) In the event that there shall not be sufficient authorized
Common Stock to permit an exchange of Rights as contemplated in accordance with
this Section, the Company shall take all such action as may be necessary to
authorize additional Common Stock or Equivalent Stock for issuance upon exchange
of the Rights.
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Section 28. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Determination and Actions Taken by the Board of
Directors. For all purposes of this Agreement, any calculation of the number of
shares of Common Stock (or other applicable securities hereunder) outstanding at
any particular time, including for purposes of determining the particular
percentage of such outstanding shares of Common Stock (or other securities) of
which any Person is the Beneficial Owner, shall be made in accordance with the
last sentence of Rule 13d-3(d)(1)(i) (as in effect on the date of this
Agreement) of the General Rules and Regulations under the Exchange Act. The
Board of Directors of the Company shall have the exclusive power and authority
to administer this Agreement and to exercise all rights and powers specifically
granted to such Board or to the Company, or as may be necessary or advisable in
the administration of this Agreement, including without limitation the right and
power to (i) interpret the provisions of this Agreement, and (ii) make all
determinations deemed necessary or advisable for the administration of this
Agreement (including a determination to redeem or not redeem the Rights or to
amend the Agreement). All such actions, calculations, interpretations and
determinations (including, for purposes of clause (B) below, all omissions with
respect to the foregoing) which are done or made by the Board in good faith,
shall (A) be final, conclusive and binding on the Company, the Rights Agent, the
holders of the Rights and all other parties, and (B) not subject the Board to
any liability to the holders of the Rights.
Section 30. Conditions to the Agreement. The effectiveness of
this Agreement and each and every right and obligation obtained or incurred
pursuant hereto, including, but not limited to, the exercisability of the
Rights, is conditioned upon (a) the Company having received all necessary
approvals and consents from all local, state and federal regulatory authorities
having jurisdiction over the Company and the transactions contemplated by this
Agreement and (b) the absence of any statute, rule, regulation, injunction or
other order (whether temporary, preliminary or permanent) enacted, issued,
promulgated, enforced or entered into by any United States, state or local
legislative body, governmental agency or commission or court of competent
jurisdiction which is in effect and has the effect of making the distribution or
exercise of the Rights illegal or otherwise prohibiting the consummation of the
transactions contemplated by this Agreement.
Section 31. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any Person other than the Company, the Rights
Agent and the registered holders of the Right Certificates (and, prior to the
Distribution Date, the holders of Common Stock) any legal or equitable right,
remedy or claim under this Agreement. This Agreement shall be for the sole and
exclusive benefit of the Company, the Rights Agent and the registered holders of
the Right Certificates (and, prior to the Distribution Date, the holders of
Common Stock).
Section 32. Governing Law. This Agreement and each Right
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of California and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts to
be made and performed entirely within such State. The rights and obligations of
the Rights Agent under this Agreement shall be governed by and construed in
accordance with the laws in effect in the State of California.
29
<PAGE> 33
Section 33. Counterparts. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 34. Section Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
Section 35. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, illegal, or unenforceable, (i) such invalid,
illegal or unenforceable term, provision, covenant or restriction shall
nevertheless be valid, legal and enforceable to the extent, if any, provided by
such court or authority, and (ii) the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
30
<PAGE> 34
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the day and year first above written.
SOUTHWEST GAS CORPORATION:
By: /s/ Jeffrey W. Shaw
-------------------
Title: Vice President/Treasurer
HARRIS TRUST COMPANY OF CALIFORNIA:
By: /s/ John A. Castellanos
-----------------------
Title: Assistant Vice President
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<PAGE> 35
Exhibit A
---------
[Form of Right Certificate]
Certificate No. R- _____ Rights
NOT EXERCISABLE AFTER PUBLIC ANNOUNCEMENT OF
REDEMPTION IS MADE. THE RIGHTS ARE SUBJECT TO
REDEMPTION, AT THE OPTION OF THE COMPANY, AT
$.01 PER RIGHT ON THE TERMS SET FORTH IN THE
AGREEMENT. IN THE EVENT THAT THE RIGHTS
REPRESENTED BY THIS CERTIFICATE ARE ISSUED TO
A PERSON WHO IS AN ACQUIRING PERSON OR AN ASSOCIATE
OR AFFILIATE THEREOF (AS SUCH TERMS ARE DEFINED
IN THE RIGHTS AGREEMENT) OR CERTAIN TRANSFEREES
THEREOF, THIS RIGHT CERTIFICATE AND THE RIGHTS
REPRESENTED HEREBY MAY BE SUBJECT TO CERTAIN
LIMITATIONS IN THE CIRCUMSTANCES SPECIFIED IN
SECTION 7 OF THE RIGHTS AGREEMENT.
RIGHT CERTIFICATE
This certifies that _______________, or registered assigns, is
the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Amended And Restated Rights Agreement, dated as of ______________, 1998 (the
"Rights Agreement"), between Southwest Gas Corporation, (the "Company"), and
Harris Trust Company of California (the "Rights Agent"), to purchase from the
Company, unless the Rights have been previously redeemed, at any time after the
Distribution Date (as such term is defined in the Rights Agreement) and prior to
the Expiration Date (as such term is defined in the Rights Agreement), or the
date, if any, on which the Rights evidenced by this Certificate may be redeemed,
at the stock transfer office of the Rights Agent, or its successors as Rights
Agent, one one-hundredth of a fully paid and nonassessable share of Junior
Participating Preference Stock ("Preference Shares"), at a purchase price of
$45.00 (the "Purchase Price"), upon presentation and surrender of this Right
Certificate with the Form of Election to Purchase duly completed and executed.
The number of Rights evidenced by this Right Certificate as set forth above (and
the number of shares which may be purchased upon exercise thereof), and the
Purchase Price set forth above, are the number and Purchase Price as of the date
of the Rights Agreement based on the Preference Shares as constituted on such
date.
A-1
<PAGE> 36
Upon the occurrence of an event described in clause (A), (B), (C)
or (D) of Section 11(a)(ii) of the Rights Agreement, the holder of any Rights
that are, or were, beneficially owned by an Acquiring Person or an Associate or
Affiliate thereof (as such terms are defined in the Rights Agreement) or certain
transferees thereof which engaged in, or realized the benefit of, an event or
transaction or transactions described in clause (A), (B), (C) or (D) of such
Section 11(a)(ii), shall not be entitled to the benefit of the adjustment
described in such Section 11(a)(ii).
As provided in the Rights Agreement, the Purchase Price and the
number and class of shares which may be purchased upon the exercise of the
Rights evidenced by this Right Certificate are subject to modification and
adjustment upon the happening of certain events.
This Right Certificate is subject to all of the terms, provisions
and conditions of the Rights Agreement, which terms, provisions and conditions
are hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the above-mentioned office of the
Rights Agent and at the principal office of the Company.
This Right Certificate, with or without other Right Certificates,
upon surrender at the stock transfer office of the Rights Agent set forth above,
may be exchanged for another Right Certificate or Right Certificates of like
tenor and date evidencing Rights entitling the holder to purchase such number of
shares as the Rights evidenced by the Right Certificate or Right Certificates
surrendered shall have entitled such holder to purchase. If this Right
Certificate shall be exercised in part, the holder shall be entitled to receive
upon surrender hereof another Right Certificate or Right Certificates for the
number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate may be redeemed by the Company at its option at a
redemption price of $.01 per Right.
No fractional shares will be issued upon the exercise of any
Rights evidenced hereby, but in lieu thereof a cash payment may be made, as
provided in the Rights Agreement.
No holder of this Right Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of shares or of any
other securities of the Company which may at any time be issuable on the
exercise hereof, nor shall anything contained in the Rights Agreement or herein
be construed to confer upon the holder hereof, as such, any of the rights of a
shareholder of the Company or any right to vote for the election of directors or
upon any matter submitted to shareholders at any meeting thereof, or to give or
withhold consent to any corporate action, or to receive notice of meetings or
other actions affecting shareholders (except as provided in the Rights
Agreement), or to receive dividends or subscription rights, or otherwise, until
the Right or Rights evidenced by this Right Certificate shall have been
exercised as provided in the Rights Agreement.
A-2
<PAGE> 37
This Right Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signatures of the proper officers of the
Company.
Dated as of ____________, ____.
SOUTHWEST GAS CORPORATION
By: _________________________
Title:
Countersigned:
HARRIS TRUST COMPANY OF
CALIFORNIA By: _________________________
By: _______________________
Authorized Signature
A-3
<PAGE> 38
[Form of Reverse Side of Right Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer the Right Certificate.)
FOR VALUE RECEIVED ______________________________ hereby sells,
assigns and transfers unto __________________
- ------------------------------------------------------------
(Please print name and address of transferee)
this Right Certificate, together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint ____________________ Attorney to
transfer the within Right Certificate on the books of the within-named
Corporation, with full power of substitution.
Dated: ____________, ____ ______________________________
Signature
Signature Guaranteed:
CERTIFICATE
The undersigned hereby certifies (after due inquiry and to the
best knowledge of the undersigned) by checking the appropriate boxes that:
(1) this Right Certificate [ ] is [ ] is not being sold, assigned
and transferred by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of an Acquiring Person (as such terms are defined in
the Rights Agreement);
(2) the undersigned [ ] did [ ] did not acquire the Rights
evidenced by this Right Certificate from any Person who is, was or subsequently
became an Acquiring Person or an Affiliate or Associate of an Acquiring Person.
Date: ______________, ____ ______________________________
Signature
Signature Guaranteed:
NOTICE
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Right Certificate in
every particular, without alteration or enlargement or any change whatsoever.
A-4
<PAGE> 39
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to
exercise the Right Certificate.)
To Southwest Gas Corporation and [Rights Agent]:
The undersigned hereby irrevocably elects to exercise
_________________ Rights represented by this Right Certificate and to purchase
the shares issuable upon the exercise of such Rights and requests that
certificates for such shares be issued in the name of:
Please insert social security
or other identifying number: _____________________________
___________________________________________________________
(Please print name and address)
____________________________________________________________ If such number of
Rights shall not be all the Rights evidenced by this Right Certificate, a new
Right Certificate for the balance remaining of such Rights shall be registered
in the name of and delivered to:
Please insert social security
or other identifying number: _____________________________
___________________________________________________________________
(Please print name and address)
___________________________________________________________________
Dated: ______________, ____
Signature: __________________
(Signature must conform in all
respects to name of holder as
specified on the face of this Right
Certificate)
Signature Guaranteed:
A-5
<PAGE> 40
CERTIFICATE
The undersigned hereby certifies (after due inquiry and to the
best knowledge of the undersigned) by checking the appropriate boxes that:
(1) the Rights evidenced by this Right Certificate [ ] are [ ]
are not being exercised by or on behalf of a Person who is or was an Acquiring
Person or an Affiliate or Associate of an Acquiring Person (as such terms are
defined in the Rights Agreement);
(2) the undersigned [ ] did [ ] did not acquire the Rights
evidenced by this Right Certificate from any person who is, was or subsequently
became an Acquiring Person or an Affiliate or Associate of an Acquiring Person.
Date: ______________, ____ ______________________________
Signature
Signature Guaranteed:
NOTICE
The signature to the foregoing Election to Purchase and
Certificate must correspond to the name as written upon the face of this Right
Certificate in every particular, without alteration or enlargement or any change
whatsoever.
A-6
<PAGE> 41
EXHIBIT B
[Form of Summary of Rights]
On March 5, 1996, the Board of Directors of Southwest Gas
Corporation (the "Company") declared a distribution of one Right for each
outstanding share of common stock (the "Common Stock") of the Company. The
distribution is to be made as of April 15, 1996 (the "Record Date") to the
shareholders of record on that date. Each Right entitles the registered holder
to purchase from the Company, initially, one one-hundredth of a share of Junior
Participating Preference Stock ("Preference Stock") at a price of $45.00 (the
"Purchase Price"), subject to adjustment. The description and terms of the
Rights are set forth in a Rights Agreement between the Company and Harris Trust
Company of California, as Rights Agent.
Shares of Preference Stock purchasable upon exercise of the
Rights will be entitled to dividends of 100 times the dividends, per share,
declared on shares of the Common Stock and in the event of liquidation will be
entitled to a minimum preferential liquidating distribution of $100 per share
and an aggregate liquidating distribution, per share, of 100 times the
distribution made per share of Common Stock. In the event no dividends are
declared on shares of Common Stock, holders of Preference Stock will be entitled
to receive at least $1.00 per share of Common Stock for each quarter that a
dividend is not declared on shares of Common Stock. The holders of Preference
Stock will vote together with holders of Common Stock and in the event of any
merger, consolidation or other transaction in which shares of Common Stock are
exchanged, each share of Preference Stock will be entitled to receive 100 times
the amount received per each share of Common Stock.
Because of the Preference Stock' dividend and liquidation rights,
the value when issued of the one one-hundredth interest in a share of Preference
Stock purchasable upon exercise of each Right should approximate the value of
one share of Common Stock.
Until the earlier to occur of (i) 10 business days following a
public announcement that a person or group of affiliated or associated persons
(an "Acquiring Person") has acquired beneficial ownership of 20% or more of the
Company's general voting power other than pursuant to a Qualified Offer (as
defined below), the date of such public announcement being called the "Stock
Acquisition Date," or (ii) 10 business days (or such later date as may be
determined by action of the Board of Directors) following the commencement of,
or announcement of an intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a person or
group of 20% or more of the Company's general voting power (the date of such
earlier occurrence being called the "Distribution Date"), the Rights will be
evidenced by the certificates representing the Common Stock and will be
transferred with and only with the Common Stock. New Common Stock certificates
issued after the Record Date upon transfer or new issuance of shares of Common
Stock will contain a notation incorporating the Rights Agreement by reference,
and the surrender for transfer of any certificate for shares of Common Stock,
even without such notation or a copy of this Summary of Rights being attached
thereto, will also constitute the transfer of the Rights associated with the
shares of Common Stock represented by such certificate. As soon as
B-1
<PAGE> 42
practicable following the Distribution Date, separate certificates evidencing
the Rights ("Right Certificates") will be mailed to holders of record of the
Common Stock as of the close of business on the Distribution Date and such
separate Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The
Rights will expire on the tenth anniversary of the Record Date (the "Final
Expiration Date"), unless the Final Expiration Date is extended or unless the
Rights are earlier redeemed or exchanged by the Company, as described below.
The Purchase Price payable, the number of shares or other
securities or property issuable upon exercise of the Rights, and the number of
outstanding Rights, are subject to adjustment from time to time to prevent
dilution.
A Qualified Offer is a tender offer or exchange offer for all
outstanding shares of Common Stock which is determined by the non-affiliated
directors to be adequate and otherwise in the best interests of the Company and
its shareholders.
In the event that any person becomes an Acquiring Person other
than by a purchase pursuant to a Qualified Offer, proper provision shall be made
so that each holder of a Right, other than Rights beneficially owned by the
Acquiring Person (which will not be entitled to the benefit of such adjustment)
will thereafter have the right to receive upon exercise that number of shares of
Common Stock or Common Stock equivalents having a market value of two times the
exercise price of the Right.
In the event that, at any time after an Acquiring Person has
become such, the Company is acquired in a merger or other business combination
transaction (other than a merger which follows a Qualified Offer at the same or
a higher price) or 50% or more of its consolidated assets or earning power are
sold, proper provision will be made so that each holder of a Right will
thereafter have the right to receive, upon the exercise thereof at the then
current exercise price of the Right, that number of shares of common stock of
the acquiring company which at the time of such transaction will have a market
value of two times the exercise price of the Right.
At any time after an Acquiring Person has become such, the Board
of Directors of the Company may exchange the Rights (other than Rights owned by
such person or group), in whole or in part, at an exchange ratio of one share of
Common Stock per Right (subject to adjustment).
Up to and including the tenth business day after a Stock
Acquisition Date, the Board of Directors of the Company may redeem the Rights in
whole, but not in part, at a price of $.01 per Right (the "Redemption Price").
Immediately upon any redemption of the Rights, the right to exercise them will
terminate and the only right of the holders will be to receive the Redemption
Price.
The terms of the Rights may be amended by the Board of Directors
without the consent of the holders of the Rights at any time prior to the
Distribution Date. Thereafter the Rights may be amended to make changes which do
not adversely affect the interests of the
B-2
<PAGE> 43
holders of the Rights, or which shorten or lengthen time periods, subject to
certain limitations set forth in the Rights Agreement.
Until a Right is exercised, the holder thereof, as such, will
have no rights as a shareholder of the Company, including, but, not limited to,
the right to vote or to receive dividends. The exercise of the Rights is subject
to compliance with applicable legal and regulatory requirements, including,
approval of the California Public Utilities Commission.
A copy of the Rights Agreement has been filed with the Securities
and Exchange Commission as an Exhibit to a registration statement on Form 8-A. A
copy of the Rights Agreement is available free of charge from the Company. This
summary description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement, which is
incorporated herein by reference.
B-3
<PAGE> 1
EXHIBIT 12.01
SOUTHWEST GAS CORPORATION
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
CONTINUING OPERATIONS 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1. Fixed charges:
A) Interest expense $ 63,416 $ 63,247 $ 54,674 $ 52,844 $ 48,688
B) Amortization 1,243 1,164 1,494 1,569 1,426
C) Interest portion of rentals 7,531 6,973 6,629 4,435 4,743
D) Preferred securities
distributions 5,475 5,475 5,475 913 0
--------- --------- --------- --------- ---------
Total fixed charges $ 77,665 $ 76,859 $ 68,272 $ 59,761 $ 54,857
========= ========= ========= ========= =========
2. Earnings (as defined):
E) Pretax income from
continuing operations $ 83,951 $ 21,328 $ 10,448 $ 3,493 $ 38,119
Fixed Charges (1. above) 77,665 76,859 68,272 59,761 54,857
--------- --------- --------- --------- ---------
Total earnings as defined $ 161,616 $ 98,187 $ 78,720 $ 63,254 $ 92,976
========= ========= ========= ========= =========
3. Ratio of earnings to fixed
charges 2.08 1.28 1.15 1.06 1.69
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
ADJUSTED FOR INTEREST ALLOCATED TO ----------------------------------------------------------
DISCONTINUED OPERATIONS 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1. Fixed charges:
A) Interest expense $ 63,416 $ 63,247 $ 54,674 $ 52,844 $ 48,688
B) Amortization 1,243 1,164 1,494 1,569 1,426
C) Interest portion of rentals 7,531 6,973 6,629 4,435 4,743
D) Preferred securities
distributions 5,475 5,475 5,475 913 --
E) Allocated interest [1] -- -- -- 9,636 7,874
--------- --------- ---------- ---------- ----------
Total fixed charges $ 77,665 $ 76,859 $ 68,272 $ 69,397 $ 62,731
========= ========= ========== ========== ==========
2. Earnings (as defined):
F) Pretax income from
continuing operations $ 83,951 $ 21,328 $ 10,448 $ 3,493 $ 38,119
Fixed Charges (1. above) 77,665 76,859 68,272 69,397 62,731
--------- --------- ---------- ---------- ----------
Total earnings as defined $ 161,616 $ 98,187 $ 78,720 $ 72,890 $ 100,850
========= ========= ========== ========== ==========
3. Ratio of earnings to fixed
charges 2.08 1.28 1.15 1.05 1.61
========== ========= ========== ========== ==========
</TABLE>
[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.
<PAGE> 2
EXHIBIT 12.01
SOUTHWEST GAS CORPORATION
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
CONTINUING OPERATIONS 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1. Combined fixed charges:
A) Total fixed charges $ 77,665 $ 76,859 $ 68,272 $ 59,761 $ 54,857
B) Preferred dividends [1] - - - 404 826
--------- --------- --------- --------- ---------
Total fixed charges and
preferred dividends $ 77,665 $ 76,859 $ 68,272 $ 60,165 $ 55,683
========= ========= ========= ========= =========
2. Earnings $ 161,616 $ 98,187 $ 78,720 $ 63,254 $ 92,976
========= ========= ========= ========= =========
3. Ratio of earnings to fixed
charges and preferred
dividends 2.08 1.28 1.15 1.05 1.67
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
ADJUSTED FOR INTEREST ALLOCATED TO -----------------------------------------------------------
DISCONTINUED OPERATIONS 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1. Combined fixed charges:
A) Total fixed charges $ 77,665 $ 76,859 $ 68,272 $ 69,397 $ 62,731
B) Preferred dividends [1] - - - 404 826
--------- --------- --------- --------- ---------
Total fixed charges and
preferred dividends $ 77,665 $ 76,859 $ 68,272 $ 69,801 $ 63,557
========= ========= ========= ========= =========
2. Earnings $ 161,616 $ 98,187 $ 78,720 $ 72,890 $ 100,850
========= ========= ========= ========= =========
3. Ratio of earnings to fixed
charges and preferred
dividends 2.08 1.28 1.15 1.04 1.59
======== ========= ========= ========= =========
</TABLE>
[1] Preferred and preference dividends have been adjusted to represent the
pretax earnings necessary to cover such dividend requirements.
<PAGE> 1
CONSOLIDATED SELECTED FINANCIAL STATISTICS 21
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
(Thousands of dollars, except per share amounts)
<S> <C> <C> <C> <C> <C>
Operating revenues............... $ 917,309 $ 732,010 $ 644,061 $ 563,502 $ 599,553
Operating expenses............... 763,139 629,749 572,488 505,090 510,863
- -----------------------------------------------------------------------------------------------------
Operating income................. $ 154,170 $ 102,261 $ 71,573 $ 58,412 $ 88,690
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Income from continuing
operations..................... $ 47,537 $ 16,469 $ 6,574 $ 2,654 $ 23,524
Income (loss) from discontinued
operations, net of tax()1...... -- -- -- (17,536) 2,777
- -----------------------------------------------------------------------------------------------------
Net income (loss)................ $ 47,537 $ 16,469 $ 6,574 $ (14,882) $ 26,301
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Net income (loss) applicable to
common stock................... $ 47,537 $ 16,469 $ 6,574 $ (15,189) $ 25,791
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Total assets at year end......... $1,830,694 $1,769,059 $1,560,269 $1,532,527 $1,453,582
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Capitalization at year end
Common equity.................. $ 476,400 $ 385,979 $ 379,616 $ 356,050 $ 348,556
Preferred stocks............... -- -- -- -- 4,000
Trust originated preferred
securities................... 60,000 60,000 60,000 60,000 --
Long-term debt................. 812,906 778,693 665,221 607,945 678,263
- -----------------------------------------------------------------------------------------------------
$1,349,306 $1,224,672 $1,104,837 $1,023,995 $1,030,819
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Common stock data
Return on average common
equity....................... 11.0% 4.3% 1.8% (4.1)% 7.6%
Basic earnings (loss) per share
Continuing operations........ $ 1.66 $ 0.61 $ 0.25 $ 0.10 $ 1.09
Discontinued operations...... -- -- -- (0.76) 0.13
- -----------------------------------------------------------------------------------------------------
Basic earnings (loss) per
share........................ $ 1.66 $ 0.61 $ 0.25 $ (0.66) $ 1.22
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Diluted earnings (loss) per
share........................ $ 1.65 $ 0.61 $ 0.25 $ (0.66) $ 1.22
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Dividends paid per share....... $ 0.82 $ 0.82 $ 0.82 $ 0.82 $ 0.80
Payout ratio................... 49% N/A N/A N/A 66%
Book value per share at year
end.......................... $ 15.67 $ 14.09 $ 14.20 $ 14.55 $ 16.38
Market value per share at year
end.......................... $ 26.63 $ 18.69 $ 19.25 $ 17.63 $ 14.13
Market value per share to book
value per share.............. 170% 133% 136% 121% 86%
Common shares outstanding at
year end (000)............... 30,410 27,387 26,733 24,467 21,282
Number of common shareholders
at year end.................. 24,489 25,833 26,371 25,133 20,765
Ratio of earnings to fixed
charges
Continuing operations.......... 2.08 1.28 1.15 1.06 1.69
Adjusted for interest allocated
to discontinued operations... 2.08 1.28 1.15 1.05 1.61
</TABLE>
1. Contribution from the financial services segment, including the 1995 loss on
sale of the Bank.
<PAGE> 2
22 NATURAL GAS OPERATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
Sales............................ $ 753,338 $ 569,542 $ 506,200 $ 524,914 $ 560,207
Transportation................... 46,259 45,123 40,161 38,588 39,061
Other............................ -- -- -- -- 285
- -----------------------------------------------------------------------------------------------------
Operating revenue................ 799,597 614,665 546,361 563,502 599,553
Net cost of gas sold............. 329,849 209,338 187,580 227,456 249,922
- -----------------------------------------------------------------------------------------------------
Operating margin................. 469,748 405,327 358,781 336,046 349,631
Expenses
Operations and maintenance..... 209,172 201,159 198,364 187,969 178,310
Depreciation and
amortization................. 80,231 74,528 67,443 62,492 57,284
Other.......................... 31,646 29,393 28,156 27,173 25,347
- -----------------------------------------------------------------------------------------------------
Operating income................. $ 148,699 $ 100,247 $ 64,818 $ 58,412 $ 88,690
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Contribution to consolidated net
income (loss).................. $ 44,830 $ 15,825 $ 3,919 $ 2,654 $ 23,524
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Total assets at year end......... $1,772,418 $1,717,025 $1,498,099 $1,357,034 $1,277,727
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Net gas plant at year end........ $1,459,362 $1,360,294 $1,278,457 $1,137,750 $1,035,916
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Construction expenditures and
property additions............. $ 179,361 $ 164,528 $ 210,743 $ 166,183 $ 141,390
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Cash flow, net
From operating activities...... $ 189,465 $ 45,923 $ 47,931 $ 97,754 $ 84,074
From investing activities...... (176,731) (170,455) (41,804) (163,718) (141,547)
From financing activities...... (12,632) 132,349 (11,456) 71,056 61,422
- -----------------------------------------------------------------------------------------------------
Net change in cash............... $ 102 $ 7,817 $ (5,329) $ 5,092 $ 3,949
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Total throughput (thousands of
therms)
Sales.......................... 1,103,264 914,732 818,329 805,884 881,868
Transportation................. 1,001,372 1,030,857 968,208 1,016,011 914,791
- -----------------------------------------------------------------------------------------------------
Total throughput................. 2,104,636 1,945,589 1,786,537 1,821,895 1,796,659
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Weighted average cost of gas
purchased ($/therm)............ $ 0.27 $ 0.35 $ 0.27 $ 0.21 $ 0.30
Customers at year end............ 1,209,000 1,151,000 1,092,000 1,029,000 980,000
Employees at year end............ 2,429 2,447 2,420 2,383 2,359
Degree days -- actual............ 2,321 1,976 1,896 1,781 2,091
Degree days -- ten-year
average........................ 2,043 2,022 2,033 2,021 2,068
</TABLE>
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of Southwest Gas Corporation and subsidiaries (the
Company) includes information related to its regulated natural gas transmission
and distribution activities and nonregulated activities. In 1996, the Company
completed the sale of PriMerit Bank, Federal Savings Bank (the Bank), which was
reported as discontinued operations. The loss on disposition was included in the
1995 results of operations.
The Company is principally engaged in the business of purchasing,
transporting, and distributing natural gas (Southwest or natural gas operations
segment). 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 high desert and mountain areas in San Bernardino
County.
As of December 31, 1998 Southwest had 1,209,000 residential, commercial,
industrial, and other customers, of which 689,000 customers were located in
Arizona, 403,000 in Nevada, and 117,000 in California. Residential and
commercial customers represented over 99 percent of the total customer base.
During 1998, Southwest added 58,000 customers, a five percent increase, of which
28,000 customers were added in Arizona, 28,000 in Nevada, and 2,000 in
California. Customer growth over the past three years averaged over five percent
annually. These additions are largely attributed to population growth in the
service areas. Based on current commitments from builders, customer growth is
expected to approximate five percent in 1999. During 1998, 57 percent of
operating margin was earned in Arizona, 33 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, 5 percent from other
sales customers, and 11 percent from transportation customers. These patterns
are similar to prior years and are expected to continue.
In April 1996, the Company acquired all of the outstanding stock of
Northern Pipeline Construction Co. (Northern or construction services segment)
pursuant to a definitive agreement dated November 1995. The Company issued
approximately 1,439,000 shares of common stock valued at $24 million in
connection with the acquisition. The acquisition was accounted for as a
purchase. Goodwill in the amount of approximately $10 million was recorded by
Northern and is being amortized over 25 years. Northern provides utility
companies with trenching and installation, replacement, and maintenance services
for energy distribution systems.
23
<PAGE> 4
24
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
In December 1998, the Boards of Directors of the Company and ONEOK, Inc.
(ONEOK), headquartered in Tulsa, Oklahoma, announced a definitive agreement for
the Company to be merged into ONEOK. The agreement calls for ONEOK to pay cash
of $28.50 for each share of Company common stock outstanding. The transaction is
subject to customary conditions, including approvals from shareholders of the
Company and state regulators in Arizona, California, and Nevada. ONEOK expects
to account for the merger using the purchase method of accounting. If the merger
is consummated, the Company would operate as a division of ONEOK.
In connection with the proposed merger into ONEOK, the Company incurred
approximately $1.1 million (pretax) of financial advisor and legal costs, which
were included in Other income (deductions), net, during the fourth quarter of
1998. Additional amounts of financial advisor, legal, and accounting-related
expenses will be incurred during the merger process and, depending on the
successful completion of the merger, are estimated at $2 million to $5 million.
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. The
proposal is preliminary in nature and subject to a number of contingencies and
uncertainties. Under the terms of the agreement with ONEOK, as a result of
certain preliminary determinations made by the Board of Directors of the
Company, the Board of Directors has authorized management to commence
substantive discussions with Southern Union regarding its proposal. No
assurances can be given that any agreement will be reached with Southern Union.
The merger agreement with ONEOK remains in full force and effect.
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 example, during the
three-year period ended December 31, 1998, total gas plant increased from $1.6
billion to $2 billion, or at an annual rate of nine percent.
During 1998, capital expenditures were $179 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) provided $166 million of the required
capital resources pertaining to these construction expenditures. The remainder
was provided from net external financing activities. The improvement in
operating cash flows from expected levels was due to higher earnings and timing
differences principally associated with deferred purchased gas cost recoveries
and income taxes.
<PAGE> 5
25
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 levels in Southwest service areas, and
merger-related developments (see Note 13 of the Notes to Consolidated Financial
Statements). 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 definitive agreement with ONEOK, common stock issuances are
currently limited to those necessary under employee benefit and dividend
reinvestment plans.
Liquidity refers to the ability of an enterprise to generate adequate
amounts of cash to meet its cash requirements. General factors that could
significantly affect capital resources and liquidity in future years include
inflation, growth in the economy, changes in income tax laws, changes in the
ratemaking policies of regulatory commissions, interest rates, and the level of
natural gas prices.
The rate schedules in all of the service territories of Southwest contain
purchased gas adjustment (PGA) clauses which permit adjustments to rates as the
cost of purchased gas changes. Southwest must first obtain regulatory approval
before changing the rates it charges for recovery of gas costs. The PGA
mechanism allows Southwest to change the gas cost component of the rates charged
to its customers to reflect increases or decreases in the price expected to be
paid to its suppliers and companies providing interstate pipeline transportation
service. In addition, Southwest uses this mechanism to either refund amounts
over-collected or recoup amounts under-collected as compared to the price paid
for natural gas during the period since the last PGA rate change went into
effect. Generally, tariffs for Southwest provide for annual adjustment dates for
changes in purchased gas costs. In addition, Southwest may request to adjust
rates more often than once each year, if conditions warrant. These changes
impact cash flows but have no direct impact on profit margin. See RATES AND
REGULATORY PROCEEDINGS for details of these filings.
The Company has established a common stock dividend policy which states
that common stock dividends will be paid at a prudent level that is within the
normal dividend payout range for its respective businesses, and that the
dividend will be established at a level considered sustainable in order to
minimize business risk and maintain a strong capital structure throughout all
economic cycles. The quarterly common stock dividend was 20.5 cents per share
throughout 1998.
Securities ratings issued by nationally recognized ratings agencies provide
a method for determining the credit worthiness of an issuer. Company debt
ratings are important because long-term debt constitutes a significant portion
of total capitalization. These debt ratings are a factor considered by lenders
when determining the cost of debt for the Company (i.e., the better the rating,
the lower the cost to borrow funds).
<PAGE> 6
26
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Since January 1997, Moody's Investor Service has rated Company unsecured
long-term debt at Baa2. Moody's debt ratings range from Aaa (best quality) to C
(lowest quality). Moody's applies a Baa2 rating to obligations which are
considered medium grade obligations (i.e., they are neither highly protected nor
poorly secured).
Since September 1997, Duff & Phelps Credit Rating Co. has rated Company
unsecured long-term debt at BBB. Duff & Phelps debt ratings range from AAA
(highest rating possible) to DD (defaulted debt obligation). The Duff & Phelps
rating of BBB indicates a credit quality that is considered prudent for
investment.
The Company's unsecured long-term debt rating from Standard and Poor's
(S&P) is BBB-. S&P debt ratings range from AAA (highest rating possible) to D
(obligation is in default). The S&P rating of BBB- indicates the debt is
regarded as having an adequate capacity to pay interest and repay principal.
A securities rating is not a recommendation to buy, sell, or hold a
security and is subject to change or withdrawal at any time by the rating
agency.
The impact of inflation on results of operations has diminished in recent
years. Natural gas, labor, and construction costs are the categories most
significantly impacted by inflation. Changes to Company cost of gas are
generally recovered through PGA mechanisms and do not significantly impact net
earnings when approved as filed. Labor is a component of the cost of service,
and construction costs are the primary component of rate base. In order to
recover increased costs, and earn a fair return on rate base, general rate cases
are filed by Southwest, when deemed necessary, for review and approval by its
regulatory authorities. Regulatory lag, that is, the time between the date
increased costs are incurred and the time such increases are recovered through
the ratemaking process, can impact earnings. See RATES AND REGULATORY
PROCEEDINGS for discussion of recent rate case proceedings.
CONSOLIDATED RESULTS OF OPERATIONS
CONTRIBUTION TO NET INCOME
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C>
Natural gas operations...................................... $44,830 $15,825 $3,919
Construction services....................................... 2,707 644 2,655
- ------------------------------------------------------------------------------------------
Net income.................................................. $47,537 $16,469 $6,574
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
1998 VS. 1997 Earnings per share for the year ended December 31, 1998 were
$1.66, a $1.05 increase from per share earnings of $0.61 recorded for the year
ended December 31, 1997. Current-year earnings were composed of $1.57 per share
from natural gas operations and $0.09 per share from construction services.
Prior-year results included the impact of three nonrecurring events which
reduced earnings by $4.1 million, or $0.15 per share. Average shares outstanding
increased by 1.5 million shares between years, primarily resulting from a 2.5
million share common stock issuance in August 1998.
<PAGE> 7
27
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1997 VS. 1996 Earnings per share for the year ended December 31, 1997 were
$0.61, a $0.36 increase from per share earnings of $0.25 recorded for the year
ended December 31, 1996. The 1997 earnings were composed of $0.59 per share from
natural gas operations and $0.02 per share from construction services. Average
shares outstanding increased by 1.2 million shares between years, primarily
resulting from continuing issuances under the Dividend Reinvestment and Stock
Purchase Plan.
RESULTS OF NATURAL GAS OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C>
Gas operating revenues...................................... $799,597 $614,665 $546,361
Net cost of gas sold........................................ 329,849 209,338 187,580
- ----------------------------------------------------------------------------------------------
Operating margin.......................................... 469,748 405,327 358,781
Operations and maintenance expense.......................... 209,172 201,159 198,364
Depreciation and amortization............................... 80,231 74,528 67,443
Taxes other than income taxes............................... 31,646 29,393 28,156
- ----------------------------------------------------------------------------------------------
Operating income.......................................... 148,699 100,247 64,818
Other income (deductions), net.............................. (2,115) (12,979) (760)
- ----------------------------------------------------------------------------------------------
Income before interest and income taxes................... 146,584 87,268 64,058
Net interest deductions..................................... 62,284 61,751 53,003
Preferred securities distributions.......................... 5,475 5,475 5,475
Income tax expense.......................................... 33,995 4,217 1,661
- ----------------------------------------------------------------------------------------------
Contribution to consolidated net income................... $ 44,830 $ 15,825 $ 3,919
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
1998 VS. 1997 The gas segment contribution to consolidated net income increased
$29 million from 1997. The increase was the result of record first quarter
earnings driven by cooler temperatures, rate relief, and customer growth. The
second and third quarters were substantially better than the prior year,
primarily as a result of customer growth, second quarter weather, and rate
design improvements. Fourth quarter results were about the same as the prior
year.
Operating margin increased $64 million, or 16 percent, in 1998. Arizona
rate relief, effective September 1997, contributed $23 million towards the
increase. Customer growth accounted for $16 million as Southwest added 58,000
customers during the year, a five percent increase. The remaining $25 million
was due to differences in heating demand caused by weather variations between
periods.
Operations and maintenance expenses increased $8 million, or four percent,
reflecting increases in labor and other costs, including the incremental
expenses associated with meeting the needs of a growing customer base.
Depreciation expense and general taxes increased $8 million, or eight
percent, as a result of construction activities. Average gas plant in service
increased $136 million, or eight percent, compared to the prior year. This was
attributed to the upgrade of existing operating facilities and the expansion of
the system to accommodate customer growth.
<PAGE> 8
28
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Net interest deductions increased less than one percent between years.
Stronger-than-expected cash flows from operating activities, coupled with a 2.5
million share common stock offering, reduced the need to issue net new debt
during the year.
Other income (deductions), net improved $10.9 million. Prior year results
included two nonrecurring charges recorded in the fourth quarter (see discussion
below). In connection with the proposed merger into ONEOK, the Company incurred
approximately $1.1 million (pretax) of financial advisor and legal costs, which
were included in other income (deductions), net, during the fourth quarter of
1998. Additional amounts of financial advisor, legal, and accounting-related
costs will be incurred during the merger process. See Note 13 of the Notes to
Consolidated Financial Statements for additional disclosures related to the
proposed merger.
1997 VS. 1996 The gas segment contribution to consolidated net income increased
$11.9 million from 1996. The increase was the result of fundamental improvements
in operating margin coupled with more favorable weather conditions.
Operating margin increased $47 million, or 13 percent, due to customer
growth, rate relief, and the return to more normal winter season temperatures
following consecutive years of record-setting warm weather. Rate relief in
Arizona and Nevada accounted for approximately $20 million of the operating
margin increase. Colder-than-normal weather during the fourth quarter of 1997
partially offset the effects of first quarter warmer-than-normal temperatures
and, overall, weather-related factors resulted in $19 million of additional
operating margin. During 1997, Southwest added 59,000 customers, a five percent
increase, contributing $8 million towards the change in operating margin.
Depreciation expense and general taxes increased $8.3 million, or nine
percent, as a result of construction activities in 1997. Average gas plant in
service increased $162 million, or ten percent, during this same period. This
was attributed to the upgrade of existing operating facilities and the expansion
of the system to accommodate customer growth.
Net interest deductions during 1997 increased $8.7 million, or 17 percent,
from 1996. Average total debt outstanding during this period increased due to
the financing of construction expenditures and working capital needs and
included higher short-term debt, the issuance of medium-term notes during 1997,
and the drawdown of IDRB funds held in trust. The increase in short-term debt
reflected the need for short-term financing to cover higher gas costs
experienced during the 1996/1997 winter heating season.
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 (deductions), net. An $8
million nonrecurring pretax charge resulted from cost overruns experienced
during expansion of the northern California service territory. A second pretax
charge, for $5 million, related to cost overruns on a nonutility construction
project. A subsidiary of the Company was building a liquefied natural gas (LNG)
storage and distribution system to serve several small towns. The project was
completed in 1998. See Note 11 of the Notes to Consolidated Financial Statements
for additional disclosures related to these projects. Partially offsetting these
charges was the recognition of a $3.4 million income tax benefit related to the
successful settlement
<PAGE> 9
29
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- --------------------------------------------------------------------------------
in November 1997 of open tax issues dating back as far as 1988. The combined
impact of these three nonrecurring events was a $4.1 million, or $0.15 per
share, after-tax reduction to earnings.
RATES AND REGULATORY PROCEEDINGS
CALIFORNIA GENERAL RATE CASES. Southwest last filed general rate applications
for its California jurisdictions with the California Public Utilities Commission
(CPUC) in 1994. Increased rates went into effect in January 1995 and continued
through 1998 as part of a settlement agreement. In addition, annual operational
attrition increases have been received in northern California. However,
primarily as a result of the northern California expansion proposal described
below, the Company filed a petition with the CPUC in March 1999 requesting an
extension of the rate case cycle. Approval of this petition would result in a
general rate moratorium through December 2000 at a minimum.
NEVADA GENERAL RATE CASES. In December 1995, Southwest filed general rate cases
for its northern and southern Nevada jurisdictions. Increased rates went into
effect in July 1996 as part of a settlement agreement. The settlement agreement
also specified a moratorium on future general rate increase requests until April
1999.
ARIZONA GENERAL RATE CASE. In November 1996, Southwest filed its most recent
general rate application with the Arizona Corporation Commission (ACC) seeking
approval to increase revenues for both Arizona rate jurisdictions. In August
1997, the ACC approved a settlement of the general rate case providing the
Company with a $32 million annualized general rate increase effective September
1997. There is no rate moratorium in Arizona on future general rate filings.
FERC GENERAL RATE CASE. In July 1996, Paiute Pipeline Company, a wholly owned
subsidiary of the Company, filed a general rate case with the Federal Energy
Regulatory Commission (FERC) seeking approval to increase rates. Effective
January 1997, the FERC authorized a $3.2 million annualized general rate
increase. The settlement prohibits Paiute from filing for a rate increase until
December 1999.
NORTHERN CALIFORNIA EXPANSION PROJECT. In December 1993, Southwest filed an
application with the CPUC to expand its northern California service territory
and extend service into Truckee, California. The application included a proposed
regulatory mechanism for recovering the cost of the expansion. In May 1994, rate
and cost recovery issues related to the expansion application were combined by
the CPUC with a January 1994 general rate application Southwest had filed with
the CPUC. In September 1994, a Joint Motion and Stipulation and Settlement
Agreement (Settlement) was presented to the CPUC which resolved the general rate
case and addressed the expansion related cost recovery issues. In December 1994,
the Settlement was approved. In April 1995, Southwest received CPUC approval for
the certificate of public convenience and necessity to serve the expansion
areas.
<PAGE> 10
30
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In its filing, Southwest had indicated that expansion into Truckee would
occur in three phases and result in the conversion of an estimated 9,200
customers to natural gas service from their existing fuel, primarily propane.
The CPUC established a cost cap of $29.1 million for the project.
In 1995, Southwest completed Phase I of the expansion project, which
involved transmission system reinforcement and distribution system expansion to
accommodate approximately 940 customers. Construction costs of $7.1 million were
on target with the cost estimate approved by the CPUC.
Phase II of the project involved extending the transmission system to
Truckee and expanding the distribution system to accommodate an estimated 4,200
customers. The cost cap apportioned to Phase II was approximately $13.8 million.
The incurred cost of Phase II was $28.8 million. An estimated $9.2 million of
the Phase II cost overrun was due to changes in project scope, such as
adjustments for design changes required by governmental bodies, changes in
facilities necessitated by requirements beyond Southwest's control, and costs
incurred to accommodate customer service requests.
Examples of adjustments for changes in project scope included the
requirement to haul excavated soil off-site to be screened whereas normal and
anticipated practice is to screen on-site, asphalt repairs which were greater
than expected due to increased paving requirements imposed after construction
started, and the installation of more facilities under asphalt than anticipated.
Other unexpected or externally imposed costs pertained to extended yard lines,
underground boring, environmental studies, right-of-way acquisitions, and
engineering design work.
Due to the Phase II cost overruns and difficult construction environment
experienced, construction of Phase III was postponed to reevaluate the economics
of completing the project.
In July 1997, Southwest filed an application requesting authorization from
the CPUC to modify the terms and conditions of the certificate of public
convenience and necessity granted in 1995. In this application, Southwest
requested that the originally approved cost cap of $29.1 million be increased to
$46.8 million; that the scope of Phase III construction be revised to include
only an estimated 2,900 of the initially estimated 4,200 customers; and that
customer applicants desiring service in the expansion area who were not
identified to receive service during the expansion phases as modified within the
new application be subject to the existing main and service extension rules.
Southwest proposed to recover the incremental costs above the original cost cap
through a surcharge mechanism. Concurrently, the Truckee town manager, on behalf
of the Truckee Town Council, wrote a letter to the CPUC in support of the
application.
The areas requested to be excluded from the revised scope of Phase III are
the most distant points from existing mains and present some of the most
challenging geographic conditions in the expansion area. Extension of mains to
serve the estimated 1,300 customers in the excluded areas would be considerably
more expensive than the service areas in Phases I and II. Furthermore, these
areas have significantly lower customer density than the remainder of the
expansion project; therefore, expected revenues would be insufficient to justify
the anticipated construction costs.
In August 1997, the Office of Ratepayer Advocates (ORA) for the CPUC filed
a protest to the Southwest application indicating that the terms of the original
agreement should be adhered to. Southwest responded with written comments in
support of its application. In September 1997, a prehearing conference was held
to discuss the filing, the ORA protest, and Southwest comments.
<PAGE> 11
31
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The administrative law judge (ALJ) made a preliminary ruling in favor of the ORA
protest, but allowed the parties an additional 20 days to supplement their
comments. During this time, Southwest and the ORA, pursuant to direction from
the CPUC, began to negotiate a settlement agreement, and the procedural schedule
was adjusted to allow the negotiations to continue beyond the 20-day period.
In January 1998, a settlement involving all parties to the proceeding was
executed and filed with the CPUC which redefined the terms and conditions for
completing the project and recovering the additional project costs. Although
CPUC approval of the settlement was still required, management anticipated
approval of the all-party settlement. In February 1998, a prehearing conference
was held before the ALJ and the assigned Commissioner for the purpose of taking
public comment on the settlement agreement. There was no opposition to the
settlement agreement from the Truckee Town Council at the conference, or in a
letter written by the Truckee town manager to the CPUC subsequent to the
conference.
Under the January 1998 proposed settlement, Southwest agreed, among other
things, to absorb $8 million in cost overruns experienced in Phase II of the
project. Southwest also agreed to an $11 million cost cap (with a maximum of
$3,800 per customer) for Phase III of the project. The Phase III project scope
would be modified as requested in the July 1997 application. In addition,
Southwest agreed not to file its next general rate case until the completion of
Phase III. Based on the proposed settlement, Southwest recognized an $8 million
pretax charge in the fourth quarter of 1997.
In May 1998, the ALJ issued an unexpected Proposed Decision (PD) rejecting
the January 1998 all-party settlement and directing Southwest to complete the
project under the terms and conditions of the 1995 certificate. A PD that
ignores an all-party settlement is rare and inconsistent with CPUC policies and
procedures established in 1992. Subsequent to the PD, the Truckee Town Council
took a formal position in opposition to the settlement, although they were not a
party to the proceeding, and had not previously opposed the settlement.
In July 1998, the CPUC voted to adopt the PD and reject the all-party
settlement, and ordered Southwest to proceed with all deliberate speed to
complete the project under the terms and scope of the 1995 certificate.
Southwest filed a Motion for Stay (Motion) of order and petitioned the CPUC for
rehearing (Petition) in August 1998. The CPUC stated in its order that Southwest
was required to show extraordinary circumstances to readjudicate the original
settlement. Because no evidentiary hearings were conducted, management did not
have the opportunity to demonstrate that such extraordinary circumstances exist;
however, it believes that such circumstances do exist. In September 1998, the
CPUC denied the Motion and in January 1999, the Petition was denied. As a
result, in February 1999, Southwest petitioned the Supreme Court of the State of
California for review of the July 1998 CPUC decision. Such a petition is
discretionary with the Supreme Court, and if accepted, could take up to two
years to be heard.
In September 1998, Southwest filed a civil lawsuit in the United States
Federal District Court naming the Town of Truckee as a defendant for an
indeterminate amount of damages. Southwest asserts that actions taken by the
Town of Truckee resulted in unanticipated changes in project
<PAGE> 12
32
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- --------------------------------------------------------------------------------
scope, which materially contributed to the cost overruns experienced during the
construction of Phase II of the project.
In November 1998, Southwest, together with representatives from the town of
Truckee, met before a federal mediator to reconcile the disputes and claims
against each other. As a result of the mediation, Southwest and representatives
of the town of Truckee are attempting to negotiate a Settlement Agreement and
Mutual Release (Agreement). If an Agreement is reached, it would need to be
ratified by the Truckee Town Council and approved by the CPUC, and likely would
address the civil suit against the town of Truckee, the remaining project scope,
and recovery of project costs among other items. An Agreement might also require
Southwest to postpone the filing of its next California general rate case. If an
Agreement is reached, it is anticipated that it will be presented to the Truckee
Town Council at a town meeting. If ratified by the Truckee Town Council,
Southwest would include the Agreement as part of a new application it plans to
file with the CPUC to reopen the prior California general rate case and
certificate proceeding in order to modify the original Settlement approved in
December 1994.
Management believes that subsequent events may reduce the remaining scope
and estimated costs of the project; however, preliminary estimates indicate that
it could cost an additional $23 million to $25 million to complete the project
under the terms of the 1995 certificate without modification. An additional
pretax write-off of up to $24 million could be recorded under this scenario.
This estimate is comprised of approximately $7 million related to costs incurred
through Phase II, and up to $17 million for the forecasted construction costs.
However, Southwest will actively pursue the described regulatory and legal
proceedings with the intent of reversing or mitigating the effects of the July
1998 CPUC action. Management believes that a reasonable possibility of modifying
the existing CPUC orders pertaining to the expansion project exists through
pursuit of the legal and regulatory remedies that have been outlined, although
there can be no assurance of a favorable outcome. As a result, Southwest has not
recorded any additional write-offs beyond the $8 million recognized in the
fourth quarter of 1997. Management also believes that civil litigation offers a
reasonable possibility of recovering certain amounts spent to deal with changes
in scope necessitated by unanticipated third party actions.
PGA FILINGS
The following table shows the most recent PGA changes authorized by rate
jurisdiction (thousands of dollars):
<TABLE>
<CAPTION>
Annualized
Revenue Effective
Jurisdiction Adjustment Percentage Date
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Arizona:
Central and Southern $46,900 14% April 1998
California:
Northern 2,600 19 January 1998
Southern 10,000 19 December 1997
Nevada:
Northern (782) (1) November 1998
Southern (3,000) (2) November 1998
</TABLE>
<PAGE> 13
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ARIZONA PGA FILING. In March 1998, the ACC approved a purchased gas adjustment
(PGA) filing submitted by Southwest in January 1998 to recover deferred
purchased gas costs in Arizona. This filing, which became effective in April
1998, resulted in an annual revenue increase of $46.9 million, or 14 percent.
The increase in rates was designed to recover the accumulated PGA balance
related to Arizona customers, and to eliminate the refunds previously built into
the rate structure. PGA changes impact cash flows but have no direct impact on
profit margin.
In October 1998, the ACC approved a proposal by the ACC staff, to modify
the methodology used by Arizona natural gas utilities in calculating and
revising customer rates to reflect changes in the cost of gas. The
modifications, which will become effective in June 1999, will use a twelve-month
rolling average of the commodity cost of gas and related transportation costs.
The updated rates will be reflected in customer bills each month. The changes
are designed to reduce volatility on customer bills and in the PGA balance. The
mechanism also provides for recovery from customers of the existing balance in
the deferred purchased gas cost account.
NEVADA PGA FILING. In January 1997, Southwest submitted an out-of-period PGA
filing in Nevada in response to a substantial run-up in the commodity cost of
natural gas during November and December of 1996. In September 1997, the Public
Utilities Commission of Nevada (PUCN) approved the filing providing annual
increases of $10.1 million, or nine percent, in the southern Nevada rate
jurisdiction, and $6 million, or 14 percent, in the northern Nevada rate
jurisdiction.
In June 1997, Southwest submitted its annual PGA filing in compliance with
the Nevada Gas Tariff. The filing covered the period from April 1996 through
March 1997. Southwest requested annual increases of $23.1 million, or 18
percent, in the southern Nevada rate jurisdiction, and $8.4 million, or 17
percent, in the northern Nevada rate jurisdiction.
In an order issued in December 1997, the PUCN found that "Southwest failed
to mitigate the risk inherent in a portfolio of all indexed-priced contracts and
failed to reasonably quantify the costs of any risk mitigation." As a result,
gas costs of $3.8 million in southern Nevada and $1.8 million in northern Nevada
were disallowed. The approved annualized revenue increase, after consideration
of the amounts disallowed, was $17.3 million, or 14 percent in southern Nevada,
and $5.2 million, or 11 percent in northern Nevada.
In December 1997, Southwest filed a Petition for Reconsideration (Petition)
of the decision with the PUCN on the grounds that the findings of fact and
conclusions of law are contrary to binding legislative enactments and judicial
decisions. Specifically, the Petition asserted, among other things, that the
PUCN violated its settled obligation in the previous PGA docket, which included
the same winter period, in finding Southwest to be imprudent. Effectively, the
PUCN allowed a previously settled claim to be relitigated. In addition,
management also believes that the PUCN failed to follow its previous rules and
practices surrounding a PGA proceeding, or changed those rules effective with
the disallowance order and sought to retroactively apply them, which would have
required compliance with formal rulemaking procedures mandated by Nevada
Statutes. In February 1998, the PUCN reaffirmed the original order.
In March 1998, Southwest filed a petition for judicial review (appeal) of
the final order of the PUCN with the Nevada District Court (NDC). The appeal
alleged the same procedural irregularities as were included in the Petition. In
November 1998, the NDC issued an order in which the December 1997 order
<PAGE> 14
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was determined to be void on procedural grounds. Specifically, the decision
found that the Chairman of the PUCN did not have a majority when proceedings
were reopened to accept additional evidence in support of a cost disallowance.
This decision, if not overturned on appeal, has the effect of allowing Southwest
a full recovery of the gas costs requested in the June 1997 PGA filing.
In December 1998, the PUCN filed a motion with the NDC asking for an
amendment or alteration of the November 1998 NDC decision. Oral arguments were
heard in February 1999. The NDC affirmed its prior order in favor of the
Company. The PUCN filed a notice of appeal to the Nevada Supreme Court in
February 1999. No substantive action is expected to take place during 1999.
In June 1998, Southwest submitted its annual PGA filing in compliance with
the Nevada Gas Tariff. Effective November 1998, new rates were approved by the
PUCN. No gas cost disallowances were ordered and no prudency issues were raised.
The new rates, reflecting a lower cost of gas, resulted in annualized revenue
decreases of $3 million, or two percent in the southern Nevada rate
jurisdiction, and $782,000, or one percent in the northern Nevada rate
jurisdiction. These PGA changes impact cash flows but have no direct impact on
profit margin.
RESULTS OF CONSTRUCTION SERVICES
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997
- -----------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C>
Construction revenues....................................... $117,712 $117,345
Cost of construction........................................ 108,911 112,194
- -----------------------------------------------------------------------------------------
Gross profit............................................ 8,801 5,151
General and administrative expenses......................... 2,931 2,777
- -----------------------------------------------------------------------------------------
Income from operations.................................. 5,870 2,374
Other income (expense), net................................. 326 379
- -----------------------------------------------------------------------------------------
Income before interest and income taxes................. 6,196 2,753
Interest expense............................................ 1,070 1,467
Income tax expense.......................................... 2,419 642
- -----------------------------------------------------------------------------------------
Contribution to consolidated net income................. $ 2,707 $ 644
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
1998 VS. 1997 The construction services segment contribution to consolidated net
income increased $2.1 million from 1997. The increase was the result of a
fundamental improvement in gross profit margin coupled with favorable weather
conditions.
With comparable revenues of approximately $117 million, gross profit
increased $3.6 million from 1997. The improvement is attributed to obtaining
more profitable new contracts, eliminating less profitable contracts,
implementing cost containment measures, and favorable winter weather conditions
in several of the cold-climate operating areas during the first and fourth
quarters of 1998.
General and administrative expenses remained relatively constant, while
interest expense decreased approximately $397,000. Timely billings to customers
coupled with collections of accounts receivable and the timing of equipment
purchases had a direct impact in reducing interest costs.
1997 VS. 1996 Contribution to consolidated net income from construction services
was $644,000 in 1997. In 1996, construction services contributed $2.7 million,
however, those results excluded the preacquisition months January through April
which are typically loss months. The decline was primarily
<PAGE> 15
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a result of lower-than-anticipated revenues caused by various project
cancellations and curtailments in portions of California, Washington, Missouri,
and Kansas. Northern reorganized and closed offices in some of those areas to
pursue new contracts in other areas to improve profitability. Comparative
information by major income statement caption was not provided for 1996 since
those results were for a partial year.
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. This statement is effective for quarters of fiscal years
beginning after June 15, 1999 (i.e., first quarter of 2000). 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.
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.
<PAGE> 16
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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 -- substantially complete;
(3) Create action plans -- in process and due by the first quarter of 1999;
(4) Implement plans and validate compliance -- in process and due by the third
quarter of 1999.
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 70 percent are Year 2000 compliant,
while approximately 30 percent were determined to be noncompliant or were in the
process of being replaced or remediated. Remediation or replacement of the
noncompliant devices is expected to be completed by the middle of 1999.
Many 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. The general ledger accounting system of the Company is also Year 2000
compliant. Year 2000 compliance work on other systems, such as accounts payable,
purchasing, human resources, and payroll, is in process. In total, approximately
80 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 90 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 the third quarter of 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. The Company expects these areas to be Year 2000
compliant by the third quarter of 1999.
<PAGE> 17
37
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company is in the process of developing contingency scenarios for each
district and division. These scenarios will consider the systems, operations,
and devices that have been identified as at risk for failure. These scenarios
will attempt to forecast what failures might occur, where the failures might
occur, as well as the impact of the failures on dependent systems, operations,
and devices. As part of this process, the Company will identify the most
reasonably likely worst case Year 2000 scenario. The Company will then prepare
for this scenario by developing 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 during
the third quarter of 1999.
The Company estimates that the cost of remediation will be approximately $2
million. Expenditures of approximately $1 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.
At the present time, 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 annual 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 and amount of rate relief, the outcome of
Southwest's challenges to regulatory actions in California and Nevada, changes
in capital requirements and funding, Year 2000 remediation efforts,
acquisitions, competition, and merger-related developments (see Note 13 of the
Notes to Consolidated Financial Statements).
<PAGE> 18
38
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMMON STOCK PRICE AND DIVIDEND INFORMATION
<TABLE>
<CAPTION>
1998 1997 Dividends Paid
---------------- ---------------- ---------------
High Low High Low 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter................................... $21 1/2 $17 5/16 $20 1/4 $17 1/4 $0.205 $0.205
Second Quarter.................................. 25 20 3/8 19 7/8 16 1/8 0.205 0.205
Third Quarter................................... 24 1/2 17 3/8 20 1/8 17 3/4 0.205 0.205
Fourth Quarter.................................. 26 7/8 20 3/16 19 15/1 17 1/8 0.205 0.205
--------------
$0.820 $0.820
--------------
--------------
</TABLE>
The principal markets on which the common stock of the Company is traded
are the New York Stock Exchange and the Pacific Stock Exchange. At March 15,
1999 there were 24,186 holders of record of common stock and the market price of
the common stock was $27.
<PAGE> 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS,
SOUTHWEST GAS CORPORATION:
We have audited the accompanying consolidated balance sheets of Southwest
Gas Corporation (a California corporation, hereinafter referred to as the
Company) and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company and its
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
March 26, 1999
39
<PAGE> 20
40 CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1998 1997
- -------------------------------------------------------------------------------------
(Thousands of dollars, except par value)
<S> <C> <C>
ASSETS
Utility plant:
Gas plant................................................. $2,020,139 $1,867,824
Less: accumulated depreciation............................ (612,138) (551,083)
Acquisition adjustments................................... 3,881 4,259
Construction work in progress............................. 47,480 39,294
- -------------------------------------------------------------------------------------
Net utility plant (Note 2).............................. 1,459,362 1,360,294
- -------------------------------------------------------------------------------------
Other property and investments.............................. 73,926 64,928
- -------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents................................. 18,535 17,567
Accounts receivable, net of allowances (Note 3)........... 88,037 78,016
Accrued utility revenue................................... 56,873 54,373
Income tax benefit........................................ -- 19,425
Deferred purchased gas costs (Note 4)..................... 57,595 86,952
Prepaids and other current assets......................... 26,346 32,211
- -------------------------------------------------------------------------------------
Total current assets.................................... 247,386 288,544
- -------------------------------------------------------------------------------------
Deferred charges and other assets (Note 4).................. 50,020 55,293
- -------------------------------------------------------------------------------------
Total assets................................................ $1,830,694 $1,769,059
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $1 par (authorized -- 45,000,000 shares;
issued and outstanding -- 30,409,616 and 27,387,016
shares)................................................. $ 32,040 $ 29,017
Additional paid-in capital................................ 424,840 360,683
Retained earnings (accumulated deficit)................... 19,520 (3,721)
- -------------------------------------------------------------------------------------
Total common equity..................................... 476,400 385,979
Company-obligated mandatorily redeemable preferred
securities of the Company's subsidiary, Southwest Gas
Capital I, holding solely $61.8 million principal amount
of 9.125% subordinated notes of the Company due 2025
(Note 5)................................................ 60,000 60,000
Long-term debt, less current maturities (Note 6).......... 812,906 778,693
- -------------------------------------------------------------------------------------
Total capitalization.................................... 1,349,306 1,224,672
- -------------------------------------------------------------------------------------
Commitments and contingencies (Note 8)
Current liabilities:
Current maturities of long-term debt (Note 6)............. 5,270 5,621
Short-term debt (Note 7).................................. 52,000 142,000
Accounts payable.......................................... 64,295 62,324
Customer deposits......................................... 24,333 21,945
Accrued taxes............................................. 33,480 21,125
Accrued interest.......................................... 13,872 13,007
Deferred taxes (Note 10).................................. 12,627 24,163
Other current liabilities................................. 44,917 34,222
- -------------------------------------------------------------------------------------
Total current liabilities............................... 250,794 324,407
- -------------------------------------------------------------------------------------
Deferred income taxes and other credits:
Deferred income taxes and investment tax credits (Note
10)..................................................... 179,666 168,282
Other deferred credits (Note 4)........................... 50,928 51,698
- -------------------------------------------------------------------------------------
Total deferred income taxes and other credits........... 230,594 219,980
- -------------------------------------------------------------------------------------
Total capitalization and liabilities........................ $1,830,694 $1,769,059
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 21
CONSOLIDATED STATEMENTS OF INCOME 41
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Operating revenues:
Gas operating revenues.................................... $799,597 $614,665 $546,361
Construction revenues..................................... 117,712 117,345 97,700
- --------------------------------------------------------------------------------------------
Total operating revenues................................ 917,309 732,010 644,061
- --------------------------------------------------------------------------------------------
Operating expenses:
Net cost of gas sold...................................... 329,849 209,338 187,580
Operations and maintenance................................ 209,172 201,159 198,364
Depreciation and amortization............................. 88,804 84,661 73,699
Taxes other than income taxes............................. 31,646 29,393 28,156
Construction expenses..................................... 103,668 105,198 84,689
- --------------------------------------------------------------------------------------------
Total operating expenses................................ 763,139 629,749 572,488
- --------------------------------------------------------------------------------------------
Operating income............................................ 154,170 102,261 71,573
- --------------------------------------------------------------------------------------------
Other income and (expenses):
Net interest deductions................................... (63,354) (63,218) (54,913)
Preferred securities distributions (Note 5)............... (5,475) (5,475) (5,475)
Other income (deductions), net (Note 11).................. (1,390) (12,240) (737)
- --------------------------------------------------------------------------------------------
Total other income and (expenses)....................... (70,219) (80,933) (61,125)
- --------------------------------------------------------------------------------------------
Income before income taxes.................................. 83,951 21,328 10,448
Income tax expense (Note 10)................................ 36,414 4,859 3,874
- --------------------------------------------------------------------------------------------
Net income.................................................. $ 47,537 $ 16,469 $ 6,574
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Basic earnings per share (Note 15).......................... $ 1.66 $ 0.61 $ 0.25
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Diluted earnings per share (Note 15)........................ $ 1.65 $ 0.61 $ 0.25
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Average number of common shares outstanding................. 28,611 27,069 25,888
Average shares outstanding (assuming dilution).............. 28,815 27,193 25,955
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 22
42 CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income................................................ $ 47,537 $ 16,469 $ 6,574
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 88,804 84,661 73,699
Deferred income taxes................................... (152) 47,476 17,453
Changes in current assets and liabilities:
Accounts receivable, net of allowances................ (10,021) (7,913) (17,886)
Accrued utility revenue............................... (2,500) (7,873) (2,600)
Deferred purchased gas costs.......................... 29,357 (96,384) (23,344)
Accounts payable...................................... 1,971 12,373 4,964
Accrued taxes......................................... 31,780 (8,277) (19,139)
Other current assets and liabilities.................. 15,763 2,004 2,498
Other................................................... 978 13,889 9,976
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities............... 203,517 56,425 52,195
- -----------------------------------------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Construction expenditures and property additions.......... (194,621) (169,614) (218,835)
Proceeds from bank sale................................... -- -- 191,662
Other..................................................... 4,327 (1,308) (22,112)
- -----------------------------------------------------------------------------------------------
Net cash used in investing activities................... (190,294) (170,922) (49,285)
- -----------------------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock, net............................. 67,180 12,205 18,110
Dividends paid............................................ (23,676) (22,177) (21,311)
Issuance of long-term debt, net........................... 40,864 120,321 164,876
Retirement of long-term debt, net......................... (6,623) (7,565) (248,531)
Issuance (repayment) of short-term debt................... (90,000) 21,000 81,058
- -----------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities..... (12,255) 123,784 (5,798)
- -----------------------------------------------------------------------------------------------
Change in cash and temporary cash investments............. 968 9,287 (2,888)
Cash at beginning of period............................... 17,567 8,280 11,168
- -----------------------------------------------------------------------------------------------
Cash at end of period..................................... $ 18,535 $ 17,567 $ 8,280
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Supplemental information:
Interest paid, net of amounts capitalized................. $ 61,164 $ 58,771 $ 60,008
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Income taxes paid (received), net......................... $ 4,968 $ (33,954) $ 18,682
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 23
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 43
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
------------------ Paid-in Retained
Shares Amount Capital Earnings Total
- ------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1995............................ 24,467 $ 26,097 $ 312,631 $ 17,322 $ 356,050
Common stock issuances..................... 2,266 2,266 36,501 38,767
Net income................................. 6,574 6,574
Dividends declared
Common: $0.82 per share.................. (21,775) (21,775)
- ------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996............................ 26,733 28,363 349,132 2,121 379,616
Common stock issuances..................... 654 654 11,551 12,205
Net income................................. 16,469 16,469
Dividends declared
Common: $0.82 per share.................. (22,311) (22,311)
- ------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997............................ 27,387 29,017 360,683 (3,721) 385,979
Common stock issuances..................... 3,023 3,023 64,157 67,180
Net income................................. 47,537 47,537
Dividends declared
Common: $0.82 per share.................. (24,296) (24,296)
- ------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998............................ 30,410* $ 32,040 $ 424,840 $ 19,520 $ 476,400
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
* At December 31, 1998 2.1 million common shares were registered and
available for issuance under provisions of the Employee Investment Plan, the
Stock Incentive Plan, and the Dividend Reinvestment and Stock Purchase Plan.
The accompanying notes are an integral part of these statements.
<PAGE> 24
44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 Company follows generally accepted accounting
principles (GAAP) in accounting for all of its businesses. Accounting for the
natural gas utility operations conforms with GAAP as applied to regulated
companies and as prescribed by federal agencies and the commissions of the
various states in which the utility operates. The preparation of financial
statements in conformity with GAAP 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.
CONSOLIDATION. The accompanying financial statements are presented on a
consolidated basis and include the accounts of Southwest Gas Corporation and all
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated with the exception of transactions between
Southwest and Northern. 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.
NET UTILITY PLANT. Net utility plant includes gas plant at original cost, less
the accumulated provision for depreciation and amortization, plus the
unamortized balance of acquisition adjustments. Original cost includes
contracted services, material, payroll and related costs such as taxes and
benefits, general and administrative expenses, and an allowance for funds used
during construction less contributions in aid of construction.
DEFERRED PURCHASED GAS COSTS. The various regulatory commissions have
established procedures to enable Southwest to adjust its billing rates for
changes in the cost of gas purchased. The difference between the current cost of
gas purchased and the cost of gas recovered in billed rates is deferred.
Generally, these deferred amounts are recovered or refunded within one to two
years. Southwest must first obtain regulatory approval before changing the rates
it charges for recovery of gas costs.
INCOME TAXES. The Company uses the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 45
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period that
includes the enactment date.
For regulatory and financial reporting purposes, investment tax credits
(ITC) related to gas utility operations are deferred and amortized over the life
of related fixed assets.
GAS OPERATING REVENUES. Revenues are recorded when customers are billed.
Customer billings are based on monthly meter reads and are calculated in
accordance with applicable tariffs. Southwest also recognizes accrued utility
revenues for the estimated amount of services rendered between the meter-reading
dates in a particular month and the end of such month.
CONSTRUCTION REVENUES. The majority of Northern's contracts are performed under
unit price contracts. These contracts state prices per unit of installation.
Revenues are recorded as installations are completed. Fixed-price contracts use
the percentage of completion method of accounting and, therefore, take into
account the cost, estimated earnings, and revenue to date on contracts not yet
completed. The amount of revenue recognized is based on costs expended to date
relative to anticipated final contract costs. Revisions in estimates of cost and
earnings during the course of the work are reflected in the accounting period in
which the facts requiring revision become known. If a loss on a contract becomes
known or is anticipated, the entire amount of the estimated ultimate loss is
recognized at that time in the financial statements.
DEPRECIATION AND AMORTIZATION. Utility plant depreciation is computed on the
straight-line remaining life method at composite rates considered sufficient to
amortize costs over estimated service lives, including components which adjust
for salvage value and removal costs, as approved by the appropriate regulatory
agency. When plant is retired from service, the original cost of plant,
including costs of removal, less salvage, is charged to the accumulated
provision for depreciation. Acquisition adjustments are amortized, as ordered by
regulators, over periods which approximate the remaining estimated life of the
acquired properties. Costs related to refunding utility debt and debt issuance
expenses are deferred and amortized over the weighted-average lives of the new
issues. Other regulatory assets, when appropriate, are amortized over time
periods authorized by regulators. Nonutility property and equipment are
depreciated on a straight-line method based on the estimated useful lives of the
related assets.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC). AFUDC represents the cost
of both debt and equity funds used to finance utility construction. AFUDC is
capitalized as part of the cost of utility plant. The Company capitalized $2.4
million in 1998, $1.6 million in 1997, and $1.8 million in 1996 of AFUDC related
to natural gas utility operations. The debt portion of AFUDC is reported in the
consolidated statements of income as an offset to net interest deductions and
the equity portion is reported as other income. Utility plant construction
costs, including AFUDC, are recovered in authorized rates through depreciation
when completed projects are placed into operation, and general rate relief is
requested and granted.
EARNINGS PER SHARE. The Company implemented Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share," for 1997 financial reporting
purposes. Basic earnings per share (EPS) are calculated by dividing net income
by the weighted-average number of shares outstanding during the period. Diluted
EPS includes additional weighted-average common stock equivalents (stock options
and performance shares). Unless otherwise noted, the term "Earnings Per Share"
refers to Basic EPS. A
<PAGE> 26
46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
reconciliation of the shares used in the Basic and Diluted EPS calculations is
shown in the following table. Net income was the same for Basic and Diluted EPS
calculations.
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Average basic shares....................................... 28,611 27,069 25,888
Effect of dilutive securities
Stock options.......................................... 108 61 27
Performance shares..................................... 96 63 40
- -----------------------------------------------------------------------------------------------------
Average diluted shares..................................... 28,815 27,193 25,955
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
CASH FLOWS. For purposes of reporting consolidated cash flows, cash and cash
equivalents include cash on hand and financial instruments with a maturity of
three months or less, but exclude funds held in trust from the issuance of
industrial development revenue bonds.
RECLASSIFICATIONS. Certain reclassifications have been made to amounts shown for
prior years to conform to the current-year presentation.
NOTE 2.
UTILITY PLANT
Net utility plant as of December 31, 1998 and 1997 was as follows (thousands of
dollars):
<TABLE>
<CAPTION>
December 31, 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Gas plant:
Storage................................................. $ 3,316 $ 3,233
Transmission............................................ 170,512 169,033
Distribution............................................ 1,598,703 1,458,707
General................................................. 186,468 178,838
Other................................................... 61,140 58,013
- ---------------------------------------------------------------------------------------------
2,020,139 1,867,824
Less: accumulated depreciation.............................. (612,138) (551,083)
Acquisition adjustments, net................................ 3,881 4,259
Construction work in progress............................... 47,480 39,294
- ---------------------------------------------------------------------------------------------
Net utility plant....................................... $1,459,362 $1,360,294
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
Depreciation expense on gas plant was $78.4 million in 1998, $73.5 million
in 1997, and $66.9 million in 1996.
LEASES AND RENTALS. Southwest leases the liquefied natural gas (LNG) facilities
on its northern Nevada system, a portion of its corporate headquarters office
complex in Las Vegas, and its administrative offices in Phoenix. The leases
provide for current terms which expire in 2003, 2017, and 2004, respectively,
with optional renewal terms available at the expiration dates. The rental
payments for the LNG facilities are $6.7 million annually and $30 million in the
aggregate. The rental payments for the corporate headquarters office complex are
$1.8 million for each year 1999 through 2002, $1.9 in 2003 and $28.2 million
cumulatively thereafter. The rental payments for the Phoenix administrative
offices are $1.2 million for 1999 and 2000, $1.3 million for each of the years
2001 through 2003, and $1 million in the final year of the lease. In addition to
the above, the Company leases certain office and construction equipment. The
majority of these leases are short-term. These
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 47
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
leases are accounted for as operating leases, and for the gas segment are
treated as such for regulatory purposes. Rentals included in operating expenses
for all operating leases were $22.6 million in 1998, $20.7 million in 1997, and
$19.9 million in 1996. These amounts include Northern lease expenses of
approximately $7.6 million in 1998, $6.7 million in 1997, and $6 million in 1996
for various short-term leases of equipment and temporary office sites.
The following is a schedule of future minimum lease payments for
noncancellable operating leases (with initial or remaining terms in excess of
one year) as of December 31, 1998 (thousands of dollars):
<TABLE>
<CAPTION>
Year Ending December 31,
- ---------------------------------------------------------------------
<S> <C>
1999........................................................ $10,213
2000........................................................ 10,004
2001........................................................ 10,062
2002........................................................ 9,999
2003........................................................ 6,470
Thereafter.................................................. 29,197
- ---------------------------------------------------------------------
Total minimum lease payments................................ $75,945
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
</TABLE>
NOTE 3.
RECEIVABLES AND RELATED ALLOWANCES
Business activity with respect to gas utility operations is conducted with
customers located within the three-state region of Arizona, Nevada, and
California. At December 31, 1998, gas utility customer accounts receivable were
$67.3 million. Approximately 57 percent of the gas utility customers were in
Arizona, 33 percent in Nevada, and 10 percent in California. Although the
Company seeks to minimize its credit risk related to utility operations by
requiring security deposits from new customers, imposing late fees, and actively
pursuing collection on certain accounts, some accounts are ultimately not
collected. Provisions for uncollectible accounts are recorded monthly, as
needed, and are included in the ratemaking process as a cost of service.
Activity in the allowance for uncollectibles is summarized as follows (thousands
of dollars):
<TABLE>
<CAPTION>
Allowance
for Uncollectibles
- ----------------------------------------------------------------------------------
<S> <C>
Balance, December 31, 1995.................................. $ 1,227
Additions charged to expense............................ 1,285
Accounts written off, less recoveries................... (1,002)
- ----------------------------------------------------------------------------------
Balance, December 31, 1996.................................. 1,510
Additions charged to expense............................ 1,495
Accounts written off, less recoveries................... (1,427)
- ----------------------------------------------------------------------------------
Balance, December 31, 1997.................................. 1,578
Additions charged to expense............................ 2,057
Accounts written off, less recoveries................... (2,290)
- ----------------------------------------------------------------------------------
Balance, December 31, 1998.................................. $ 1,345
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
<PAGE> 28
48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 4.
REGULATORY ASSETS AND LIABILITIES
Natural gas operations are subject to the regulation of the Arizona
Corporation Commission (ACC), the Public Utilities Commission of Nevada (PUCN),
the California Public Utilities Commission (CPUC), and the Federal Energy
Regulatory Commission (FERC). The Company's accounting policies conform to
generally accepted accounting principles applicable to rate-regulated
enterprises and reflect the effects of the ratemaking process. Such effects
concern mainly the time at which various items enter into the determination of
net income in accordance with the principle of matching costs with related
revenues.
The following table represents existing regulatory assets and liabilities
(thousands of dollars):
<TABLE>
<CAPTION>
December 31, 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Regulatory assets:
Deferred purchased gas costs............................ $ 57,595 $ 86,952
SFAS No. 109 -- Income taxes, net....................... 7,870 9,651
Unamortized premium on reacquired debt.................. 16,107 16,803
Other................................................... 21,478 23,048
- -----------------------------------------------------------------------------------------
103,050 136,454
Regulatory liabilities:
Supplier and other rate refunds due customers........... (2,809) (1,059)
Other................................................... (241) (1,124)
- -----------------------------------------------------------------------------------------
Net regulatory assets....................................... $100,000 $134,271
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
NOTE 5.
PREFERRED SECURITIES
PREFERRED SECURITIES OF SOUTHWEST GAS CAPITAL I. In October 1995, Southwest Gas
Capital I (the Trust), a consolidated wholly owned subsidiary of the Company,
issued $60 million of 9.125% Trust Originated Preferred Securities (the
Preferred Securities). In connection with the Trust's issuance of the Preferred
Securities and the related purchase by the Company of all of the Trust's common
securities (the Common Securities), the Company issued to the Trust $61.8
million principal amount of its 9.125% Subordinated Deferrable Interest Notes,
due 2025 (the Subordinated Notes). The sole assets of the Trust are and will be
the Subordinated Notes. The interest and other payment dates on the Subordinated
Notes correspond to the distribution and other payment dates on the Preferred
Securities and Common Securities. Under certain circumstances, the Subordinated
Notes may be distributed to the holders of the Preferred Securities and holders
of the Common Securities in liquidation of the Trust. The Subordinated Notes are
redeemable at the option of the Company on or after December 31, 2000, at a
redemption price of $25 per Subordinated Note plus accrued and unpaid interest.
In the event that the Subordinated Notes are repaid, the Preferred Securities
and the Common Securities will be redeemed on a pro rata basis at $25 per
Preferred Security and Common Security plus accumulated and unpaid
distributions. The Company's obligations under the Subordinated Notes, the
Declaration of Trust (the agreement under which the Trust was formed), the
guarantee of payment of certain distributions, redemption payments and
liquidation payments with respect to the Preferred Securities to the extent the
Trust has funds available therefor and the indenture governing the Subordinated
Notes, including the Company's agreement pursuant to such indenture to pay all
fees and expenses of the Trust, other than with respect to the Preferred
Securities and Common Securities, taken together, constitute a full and
unconditional guarantee on a subordinated basis by the Company of payments due
on the Preferred Securities. As of December 31, 1998, 2.4 million Preferred
Securities were outstanding.
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 49
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company has the right to defer payments of interest on the Subordinated
Notes by extending the interest payment period at any time for up to 20
consecutive quarters (each, an Extension Period). If interest payments are so
deferred, distributions will also be deferred. During such Extension Period,
distributions will continue to accrue with interest thereon (to the extent
permitted by applicable law) at an annual rate of 9.125% per annum compounded
quarterly. There could be multiple Extension Periods of varying lengths
throughout the term of the Subordinated Notes. If the Company exercises the
right to extend an interest payment period, the Company shall not during such
Extension Period (i) declare or pay dividends on, or make a distribution with
respect to, or redeem, purchase or acquire or make a liquidation payment with
respect to, any of its capital stock, or (ii) make any payment of interest,
principal or premium, if any, on or repay, repurchase, or redeem any debt
securities issued by the Company that rank equal with or junior to the
Subordinated Notes; provided, however, that restriction (i) above does not apply
to any stock dividends paid by the Company where the dividend stock is the same
as that on which the dividend is being paid. The Company has no present
intention of exercising its right to extend the interest payment period.
NOTE 6.
LONG-TERM DEBT
December
31, 1998 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Carrying Market Carrying Market
Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Debentures:
9 3/4% Series F, due 2002............................... $100,000 $111,672 $100,000 $112,120
7 1/2% Series, due 2006................................. 75,000 83,063 75,000 78,116
8% Series, due 2026..................................... 75,000 84,301 75,000 82,028
Medium-term notes, 7.59% series, due 2017............... 25,000 26,817 25,000 26,214
Medium-term notes, 7.78% series, due 2022............... 25,000 27,458 25,000 26,735
Medium-term notes, 7.92% series, due 2027............... 25,000 27,852 25,000 27,121
Medium-term notes, 6.89% series, due 2007............... 17,500 18,242 17,500 17,327
Medium-term notes, 6.76% series, due 2027............... 7,500 7,277 7,500 7,079
Medium-term notes, 6.27% series, due 2008............... 25,000 24,997 -- --
Unamortized discount.................................... (3,452) -- (3,592) --
- -------------------------------------------------------------------------------------------------------
371,548 346,408
- -------------------------------------------------------------------------------------------------------
Revolving credit facility................................... 200,000 200,000 200,000 200,000
- -------------------------------------------------------------------------------------------------------
Industrial development revenue bonds:
Variable-rate bonds
Series A, due 2028................................. 50,000 50,000 50,000 50,000
Less funds held in trust........................... (19,684) -- (25,926) --
- -------------------------------------------------------------------------------------------------------
30,316 24,074
- -------------------------------------------------------------------------------------------------------
Fixed-rate bonds
7.30% 1992 Series A, due 2027...................... 30,000 28,484 30,000 30,288
7.50% 1992 Series B, due 2032...................... 100,000 96,777 100,000 102,883
6.50% 1993 Series A, due 2033...................... 75,000 63,591 75,000 67,661
Unamortized discount............................... (3,448) -- (3,551) --
- -------------------------------------------------------------------------------------------------------
201,552 201,449
- -------------------------------------------------------------------------------------------------------
Other....................................................... 14,760 -- 12,383 --
- -------------------------------------------------------------------------------------------------------
818,176 784,314
Less current maturities..................................... (5,270) (5,621)
- -------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities..................... $812,906 $778,693
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 30
50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
In October 1996, the Company filed a $250 million shelf registration
statement. In connection with this registration statement, the Company may
offer, up to the registered amount, any combination of debt securities,
preferred stock, depositary shares, and common stock. The Company filed a
prospectus supplement in December 1996 identifying $150 million of the shelf as
medium-term notes. During 1997 and 1998, the Company issued a total of $125
million in medium-term notes.
In June 1997, the Company entered into a $350 million revolving credit
agreement which replaced a previous $200 million term-loan facility and a $150
million short-term credit line. Revolving credit loans bear interest at either
the London Interbank Offering Rate (LIBOR) plus or minus a competitive margin or
prime rate plus one half of one percent of the Federal Funds rate. Any amounts
borrowed under the revolving credit agreement become payable in June 2002. The
Company has designated $200 million of the total facility as long-term debt and
uses the remaining $150 million for working capital purposes and has designated
the related outstanding amounts as short-term debt.
The interest rate on the variable-rate industrial development revenue bonds
(IDRB) is established on a weekly basis and averaged 3.74 percent in 1998, 4.18
percent in 1997, and 4.16 percent in 1996. At the option of the Company, the
interest period can be converted from a weekly rate to a daily-term or
variable-term rate.
The fair value of the revolving credit facility approximates carrying
value. Market values for the debentures and fixed-rate IDRB were determined
based on dealer quotes using trading records for December 31, 1998 and 1997, as
applicable, and other secondary sources which are customarily consulted for data
of this kind. The carrying value of the IDRB Series due 2028 was used as the
estimate of fair value based upon the variable interest rate of the bonds.
Estimated maturities of long-term debt for the next five years are expected
to be $5.3 million, $4.9 million, $2.5 million, $302 million, and $95,000,
respectively.
NOTE 7.
SHORT-TERM DEBT
In June 1997, a portion of the $350 million revolving credit facility,
discussed in Note 6, replaced various credit lines which aggregated $150
million. Short-term borrowings were $52 million and $142 million at December 31,
1998 and 1997, respectively. The weighted-average interest rates on these
borrowings were 7.62 percent at December 31, 1998 and 6.54 percent at December
31, 1997.
In October 1997, the Company entered into a $50 million unsecured line of
credit agreement with various banks, for general working capital purposes, which
expired in October 1998. During 1998 and 1997, no amounts were outstanding on
this line of credit.
NOTE 8.
COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS. The Company has been named as defendant in various legal
proceedings. The ultimate dispositions of these proceedings are not presently
determinable; however, it is the opinion of management that no litigation to
which the Company is subject will have a material adverse impact on its
financial position or results of operations.
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 51
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 9.
EMPLOYEE BENEFITS
Southwest has a noncontributory qualified retirement plan with defined
benefits covering substantially all employees. Southwest also provides
postretirement benefits other than pensions (PBOP) to its qualified retirees for
health care, dental, and life insurance benefits.
In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures About
Pensions and Other Postretirement Benefits," which standardized the disclosure
requirements for pensions and other postretirement benefits. SFAS No. 132 did
not change the measurement or recognition of amounts related to those plans.
Prior-year amounts were reclassified to conform to the new standard. The
following tables set forth the qualified retirement plan and PBOP funded status
and amounts recognized on the Consolidated Balance Sheets and Statements of
Income.
<TABLE>
<CAPTION>
Qualified
Retirement Plan PBOP
-------------------- --------------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligation for service rendered to date at
beginning of year (PBO/APBO)....................... $190,389 $187,183 $ 21,698 $ 23,888
Service cost......................................... 9,130 9,630 504 567
Interest cost........................................ 14,092 12,945 1,591 1,638
Actuarial loss (gain)................................ 14,221 (14,870) 1,334 (3,415)
Benefits paid........................................ (5,000) (4,499) (1,150) (980)
- ---------------------------------------------------------------------------------------------------
Benefit obligation at end of year (PBO/APBO)......... 222,832 190,389 23,977 21,698
- ---------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Market value of plan assets at beginning of year..... 232,413 195,994 3,581 2,408
Actual return on plan assets......................... 28,272 35,305 487 479
Employer contributions............................... -- 5,613 2,611 693
Benefits paid........................................ (5,000) (4,499) -- --
- ---------------------------------------------------------------------------------------------------
Market value of plan assets at end of year........... 255,685 232,413 6,679 3,580
- ---------------------------------------------------------------------------------------------------
Funded status -- over (under)........................ 32,853 42,024 (17,298) (18,117)
Unrecognized net actuarial loss (gain)............... (44,467) (48,647) (231) (1,151)
Unrecognized transition obligation (2004/2012)....... 4,142 4,979 12,137 13,004
Unrecognized prior service cost...................... 295 352 -- --
- ---------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost....................... $ (7,177) $ (1,292) $ (5,392) $ (6,264)
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS
AS OF DECEMBER 31,
Discount rate........................................ 7.00% 7.50% 7.00% 7.50%
Expected return on plan assets....................... 9.00% 9.00% 9.00% 9.00%
Rate of compensation increase........................ 4.50% 4.75% 4.50% 4.75%
</TABLE>
For PBOP measurement purposes, a seven percent annual rate of increase in
the per capita cost of covered health care benefits is assumed for 1999. The
rate is assumed to decrease one-half of one percent per
<PAGE> 32
52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
year until 2003, at which time the average annual increase is projected to be
five percent. The Company makes fixed contributions for health care benefits of
employees who retire after 1988, but pays up to 100 percent of covered health
care costs for employees who retired prior to 1989. The assumed annual rate
increase noted above applies to the benefit obligations of pre-1989 retirees
only.
Components of net periodic benefit cost:
<TABLE>
<CAPTION>
Qualified Retirement Plan PBOP
------------------------------ ------------------------
1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Service cost.................................. $ 9,130 $ 9,630 $ 8,762 $ 504 $ 567 $ 521
Interest cost................................. 14,092 12,945 11,992 1,591 1,638 1,638
Expected return on plan assets................ (18,199) (16,270) (14,428) (349) (244) (175)
Amortization of prior service costs........... 57 57 57 -- -- --
Amortization of unrecognized transition
obligation.................................. 837 837 837 867 867 867
Amortization of net (gain) loss............... (32) -- -- -- 12 53
- ---------------------------------------------------------------------------------------------------------
Net periodic benefit cost..................... $ 5,885 $ 7,199 $ 7,220 $2,613 $2,840 $2,904
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
In addition to the qualified retirement plan, Southwest has a separate
unfunded supplemental retirement plan which is limited to officers. The plan is
noncontributory with defined benefits. Plan costs were $2 million in 1998, $2
million in 1997, and $1.8 million in 1996. The accumulated benefit obligation of
the plan was $17.1 million at December 31, 1998.
The Employees' Investment Plan provides for purchases of the Company's
common stock or certain other investments by eligible Southwest employees
through deductions of up to 16 percent of base compensation, subject to IRS
limitations. Southwest matches one-half of amounts deferred up to six percent of
an employee's annual compensation. The cost of the plan was $2.6 million in
1998, $2.5 million in 1997, and $2.6 million in 1996. Northern has a separate
plan, the cost and liability for which are not significant.
Southwest has a deferred compensation plan for all officers and members of
the Board. The plan provides the opportunity to defer up to 100 percent of
annual cash compensation. Southwest matches one-half of amounts deferred up to
six percent of an officer's annual salary. Payments of compensation deferred,
plus interest, are made in equal monthly installments over 5, 10, 15, or 20
years, as elected by the participant. Deferred compensation earns interest at a
rate determined each January. The interest rate represents 150 percent of
Moody's Seasoned Corporate Bond Index.
At December 31, 1998, the Company had two stock-based compensation plans.
These plans are accounted for in accordance with APB Opinion No. 25 "Accounting
for Stock Issued to Employees." In connection with the stock-based compensation
plans, the Company recognized compensation expense of $2.1 million in 1998, $1
million in 1997, and $571,000 in 1996. Had compensation cost been determined
based on the fair value of the awards at the grant dates, net income and
earnings per share would have reflected the pro forma amounts indicated below
(thousands of dollars, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income............................................ As reported $47,537 $16,469 $6,574
Pro forma 47,869 16,318 6,535
Basic earnings per share.............................. As reported 1.66 0.61 0.25
Pro forma 1.67 0.60 0.25
</TABLE>
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 53
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
With respect to the first plan, the Company may grant options to purchase
shares of common stock to key employees and outside directors. Each option has
an exercise price equal to the market price of Company common stock on the date
of grant and a maximum term of 10 years. In 1998, 118,000 options were granted.
The options vest 40 percent at the end of year one and 30 percent at the end of
years two and three. The grant date fair value of the options was estimated
using the extended binomial option pricing model. The following assumptions were
used in the valuation calculation:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield.................................. 3.15% 4.09% 4.65%
Risk-free interest rate range................... 5.36 to 5.63% 5.28 to 5.38% 5.83 to 6.42%
Expected volatility range....................... 22 to 25% 22 to 24% 22 to 25%
Expected life................................... 1 to 3 years 1 to 3 years 1 to 3 years
</TABLE>
The following tables summarize the Company's stock option plan activity and
related information (thousands of options):
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
Weighted- Weighted- Weighted-
average average average
Number exercise Number exercise Number exercise
of options price of options price of options price
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the beginning of
the year..................... 472 $15.96 380 $15.00 -- --
Granted during the year........ 118 23.04 121 18.78 380 $15.00
Exercised during the year...... -- -- -- -- -- --
Forfeited during the year...... (3) 15.80 (29) 15.14 -- --
Expired during the year........ -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------
Outstanding at year end........ 587 $17.38 472 $15.96 380 $15.00
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Exercisable at year end........ 295 $16.19 141 $15.00 -- --
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted-average grant-date fair value of options granted was $2.68 for
1998, $2.26 for 1997, and $1.79 for 1996. The exercise prices for the options
granted range from $15.00 to $23.06. On December 31, 1998, the options
outstanding had a weighted-average remaining contractual life of approximately
8.1 years.
In addition to the option plan, the Company may issue restricted stock in
the form of performance shares to encourage key employees to remain in its
employment to achieve short-term and long-term performance goals. Plan
participants are eligible to receive a cash bonus (i.e., short-term incentive)
and performances shares (i.e., long-term incentive). The performance shares vest
after three years from issuance and are subject
<PAGE> 34
54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
to a final adjustment as determined by the Board of Directors. The following
table summarizes the activity of this plan (thousands of shares):
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonvested performance shares at beginning of year........... 126 93 41
Performance shares granted.................................. 67 59 64
Performance shares forfeited................................ -- -- --
Shares vested and issued.................................... (21) (26) (12)
- ----------------------------------------------------------------------------------------
Nonvested performance shares at end of year................. 172 126 93
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Grant date fair value of award.............................. $18.69 $19.25 $17.63
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
NOTE 10.
INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C>
Current:
Federal................................................... $32,267 $(42,921) $(15,087)
State..................................................... 2,519 (2,227) (1,566)
- ---------------------------------------------------------------------------------------------
34,786 (45,148) (16,653)
- ---------------------------------------------------------------------------------------------
Deferred:
Federal................................................... (268) 47,614 18,832
State..................................................... 1,896 2,393 1,695
- ---------------------------------------------------------------------------------------------
1,628 50,007 20,527
- ---------------------------------------------------------------------------------------------
Total income tax expense................................ $36,414 $ 4,859 $ 3,874
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
Deferred income tax expense (benefit) consists of the following significant
components:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C>
Deferred federal and state:
Property-related items.................................. $ 15,586 $19,006 $11,586
Purchased gas cost adjustments.......................... (10,344) 37,156 8,437
All other deferred...................................... (2,746) (5,287) 1,372
- --------------------------------------------------------------------------------------------
Total deferred federal and state................... 2,496 50,875 21,395
Deferred investment tax credit, net......................... (868) (868) (868)
- --------------------------------------------------------------------------------------------
Total deferred income tax expense.................. $ 1,628 $50,007 $20,527
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 55
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The consolidated effective income tax rate for the period ended December
31, 1998 and the two prior periods differs from the federal statutory income tax
rate. The sources of these differences and the effect of each are summarized as
follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax rate........................... 35.0% 35.0% 35.0%
Net state tax liability................................. 5.5 4.2 5.0
Property-related items.................................. 1.3 3.8 8.8
Effect of Internal Revenue Service Examination.......... -- (16.0) --
Tax credits............................................. (1.0) (4.0) (8.3)
Tax exempt interest..................................... (0.3) (1.7) (3.7)
Corporate owned life insurance.......................... 1.0 (1.0) (4.0)
All other differences................................... 1.9 2.5 4.3
- ---------------------------------------------------------------------------------------
Consolidated effective income tax rate.................. 43.4% 22.8% 37.1%
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, 1998 1997
- -----------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C>
Deferred tax assets:
Deferred income taxes for future amortization of ITC.... $ 11,673 $ 12,201
Employee benefits....................................... 9,779 7,459
Other................................................... 8,996 9,278
Valuation allowance..................................... -- --
- -----------------------------------------------------------------------------------------
30,448 28,938
- -----------------------------------------------------------------------------------------
Deferred tax liabilities:
Property-related items, including accelerated
depreciation.............................................. 149,095 133,539
Regulatory balancing accounts........................... 23,280 33,626
Property-related items previously flowed-through........ 19,543 21,851
Unamortized ITC......................................... 17,271 18,138
Debt-related costs...................................... 6,258 6,458
Other................................................... 7,294 7,771
- -----------------------------------------------------------------------------------------
222,741 221,383
- -----------------------------------------------------------------------------------------
Net deferred tax liabilities................................ $192,293 $192,445
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Current..................................................... $ 12,627 $ 24,163
Noncurrent.................................................. 179,666 168,282
- -----------------------------------------------------------------------------------------
Net deferred tax liabilities................................ $192,293 $192,445
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, the Company has an Arizona net operating loss
carryforward of $35 million which expires in 2002. The Company anticipates
utilizing the net operating loss carryforward prior to expiration. Additionally,
the Company has an alternative minimum tax credit carryforward of approximately
$7.6 million, which can be carried forward indefinitely.
<PAGE> 36
56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 11.
CALIFORNIA EXPANSION AND LNG CONSTRUCTION PROJECTS
NORTHERN CALIFORNIA EXPANSION PROJECT. In December 1993, Southwest filed an
application with the California Public Utilities Commission (CPUC) to expand its
northern California service territory and extend service into Truckee,
California. The application included a proposed regulatory mechanism for
recovering the cost of the expansion. In May 1994, rate and cost recovery issues
related to the expansion application were combined by the CPUC with a January
1994 general rate application Southwest had filed with the CPUC. In September
1994, a Joint Motion and Stipulation and Settlement Agreement (Settlement) was
presented to the CPUC which resolved the general rate case and addressed the
expansion related cost recovery issues. In December 1994, the Settlement was
approved. In April 1995, Southwest received CPUC approval for the certificate of
public convenience and necessity to serve the expansion areas.
In its filing, Southwest had indicated that expansion into Truckee would
occur in three phases and result in the conversion of an estimated 9,200
customers to natural gas service from their existing fuel, primarily propane.
The CPUC established a cost cap of $29.1 million for the project.
In 1995, Southwest completed Phase I of the expansion project, which
involved transmission system reinforcement and distribution system expansion to
accommodate approximately 940 customers. Construction costs of $7.1 million were
on target with the cost estimate approved by the CPUC.
Phase II of the project involved extending the transmission system to
Truckee and expanding the distribution system to accommodate an estimated 4,200
customers. The cost cap apportioned to Phase II was approximately $13.8 million.
The incurred cost of Phase II was $28.8 million. An estimated $9.2 million of
the Phase II cost overrun was due to changes in project scope, such as
adjustments for design changes required by governmental bodies, changes in
facilities necessitated by requirements beyond Southwest's control, and costs
incurred to accommodate customer service requests.
Examples of adjustments for changes in project scope included the
requirement to haul excavated soil off-site to be screened whereas normal and
anticipated practice is to screen on-site, asphalt repairs which were greater
than expected due to increased paving requirements imposed after construction
started, and the installation of more facilities under asphalt than anticipated.
Other unexpected or externally imposed costs pertained to extended yard lines,
underground boring, environmental studies, right-of-way acquisitions, and
engineering design work.
Due to the Phase II cost overruns and difficult construction environment
experienced, construction of Phase III was postponed to reevaluate the economics
of completing the project.
In July 1997, Southwest filed an application requesting authorization from
the CPUC to modify the terms and conditions of the certificate of public
convenience and necessity granted in 1995. In this application, Southwest
requested that the originally approved cost cap of $29.1 million be increased to
$46.8 million; that the scope of Phase III construction be revised to include
only an estimated 2,900 of the initially estimated 4,200 customers; and that
customer applicants desiring service in the expansion area who were not
identified to receive service during the expansion phases as modified within the
new application be subject to the existing main and service extension rules.
Southwest proposed to recover the incremental costs above the original cost cap
through a surcharge mechanism. Concurrently, the Truckee town manager, on behalf
of the Truckee Town Council, wrote a letter to the CPUC in support of the
application.
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 57
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The areas requested to be excluded from the revised scope of Phase III are
the most distant points from existing mains and present some of the most
challenging geographic conditions in the expansion area. Extension of mains to
serve the estimated 1,300 customers in the excluded areas would be considerably
more expensive than the service areas in Phases I and II. Furthermore, these
areas have significantly lower customer density than the remainder of the
expansion project; therefore, expected revenues would be insufficient to justify
the anticipated construction costs.
In August 1997, the Office of Ratepayer Advocates (ORA) for the CPUC filed
a protest to the Southwest application indicating that the terms of the original
agreement should be adhered to. Southwest responded with written comments in
support of its application. In September 1997, a prehearing conference was held
to discuss the filing, the ORA protest, and Southwest comments. The
administrative law judge (ALJ) made a preliminary ruling in favor of the ORA
protest, but allowed the parties an additional 20 days to supplement their
comments. During this time, Southwest and the ORA, pursuant to direction from
the CPUC, began to negotiate a settlement agreement, and the procedural schedule
was adjusted to allow the negotiations to continue beyond the 20-day period.
In January 1998, a settlement involving all parties to the proceeding was
executed and filed with the CPUC which redefined the terms and conditions for
completing the project and recovering the additional project costs. Although
CPUC approval of the settlement was still required, management anticipated
approval of the all-party settlement. In February 1998, a prehearing conference
was held before the ALJ and the assigned Commissioner for the purpose of taking
public comment on the settlement agreement. There was no opposition to the
settlement agreement from the Truckee Town Council at the conference, or in a
letter written by the Truckee town manager to the CPUC subsequent to the
conference.
Under the January 1998 proposed settlement, Southwest agreed, among other
things, to absorb $8 million in cost overruns experienced in Phase II of the
project. Southwest also agreed to an $11 million cost cap (with a maximum of
$3,800 per customer) for Phase III of the project. The Phase III project scope
would be modified as requested in the July 1997 application. In addition,
Southwest agreed not to file its next general rate case until the completion of
Phase III. Based on the proposed settlement, Southwest recognized an $8 million
pretax charge in the fourth quarter of 1997.
In May 1998, the ALJ issued an unexpected Proposed Decision (PD) rejecting
the January 1998 all-party settlement and directing Southwest to complete the
project under the terms and conditions of the 1995 certificate. A PD that
ignores an all-party settlement is rare and inconsistent with CPUC policies and
procedures established in 1992. Subsequent to the PD, the Truckee Town Council
took a formal position in opposition to the settlement, although they were not a
party to the proceeding, and had not previously opposed the settlement.
In July 1998, the CPUC voted to adopt the PD and reject the all-party
settlement, and ordered Southwest to proceed with all deliberate speed to
complete the project under the terms and scope of the 1995 certificate.
Southwest filed a Motion for Stay (Motion) of order and petitioned the CPUC for
rehearing (Petition) in August 1998. The CPUC stated in its order that Southwest
was required to show extraordinary circumstances to readjudicate the original
settlement. Because no evidentiary hearings were conducted, management did not
have the opportunity to demonstrate that such extraordinary circumstances exist;
however, it believes that such circumstances do exist. In September 1998, the
CPUC denied the Motion and in January 1999, the Petition was denied. As a
result, in February 1999, Southwest petitioned the Supreme Court of the State of
California for review of the July 1998 CPUC decision. Such a petition is
discretionary with the Supreme Court, and if accepted, could take up to two
years to be heard.
<PAGE> 38
58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
In September 1998, Southwest filed a civil lawsuit in the United States
Federal District Court naming the Town of Truckee as a defendant for an
indeterminate amount of damages. Southwest asserts that actions taken by the
Town of Truckee resulted in unanticipated changes in project scope, which
materially contributed to the cost overruns experienced during the construction
of Phase II of the project.
In November 1998, Southwest, together with representatives from the town of
Truckee, met before a federal mediator to reconcile the disputes and claims
against each other. As a result of the mediation, Southwest and representatives
of the town of Truckee are attempting to negotiate a Settlement Agreement and
Mutual Release (Agreement). If an Agreement is reached, it would need to be
ratified by the Truckee Town Council and approved by the CPUC, and likely would
address the civil suit against the town of Truckee, the remaining project scope,
and recovery of project costs among other items. An Agreement might also require
Southwest to postpone the filing of its next California general rate case. If an
Agreement is reached, it is anticipated that it will be presented to the Truckee
Town Council at a town meeting. If ratified by the Truckee Town Council,
Southwest would include the Agreement as part of a new application it plans to
file with the CPUC to reopen the prior California general rate case and
certificate proceeding in order to modify the original Settlement approved in
December 1994.
Management believes that subsequent events may reduce the remaining scope
and estimated costs of the project; however, preliminary estimates indicate that
it could cost an additional $23 million to $25 million to complete the project
under the terms of the 1995 certificate without modification. An additional
pretax write-off of up to $24 million could be recorded under this scenario.
This estimate is comprised of approximately $7 million related to costs incurred
through Phase II, and up to $17 million for the forecasted construction costs.
However, Southwest will actively pursue the described regulatory and legal
proceedings with the intent of reversing or mitigating the effects of the July
1998 CPUC action. Management believes that a reasonable possibility of modifying
the existing CPUC orders pertaining to the expansion project exists through
pursuit of the legal and regulatory remedies that have been outlined, although
there can be no assurance of a favorable outcome. As a result, Southwest has not
recorded any additional write-offs beyond the $8 million recognized in the
fourth quarter of 1997. Management also believes that civil litigation offers a
reasonable possibility of recovering certain amounts spent to deal with changes
in scope necessitated by unanticipated third party actions.
LNG STORAGE AND DISTRIBUTION SYSTEM. A subsidiary of the Company entered into an
agreement to build Liquefied Natural Gas (LNG) storage and distribution systems
to serve several small towns. The subsidiary contracted to provide project
management services, materials, two gas distribution systems, and two LNG
storage and vaporization systems. The project was completed in 1998. The total
project cost exceeded the contract price by approximately $5 million. A pretax
charge of $5 million was recorded in 1997 and was included in Other income
(deductions), net on the Consolidated Statements of Income.
NOTE 12.
ACQUISITION OF NORTHERN PIPELINE CONSTRUCTION CO.
In April 1996, the Company acquired all of the outstanding stock of
Northern Pipeline Construction Co. (Northern or the construction services
segment) pursuant to a definitive agreement dated November 1995. The Company
issued approximately 1,439,000 shares of common stock valued at $24 million in
connection with the acquisition. The acquisition was accounted for as a
purchase. Goodwill in the amount of approximately $10
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 59
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
million was recorded by Northern and is being amortized over 25 years. Northern
provides utility companies with trenching and installation, replacement, and
maintenance services for energy distribution systems.
During 1998, Northern recognized $38 million of revenues generated from
contracts with Southwest, and $36 million in 1997. During the period from the
acquisition date through December 31, 1996, the construction services segment
recognized $36 million of revenues generated from contracts with Southwest.
These revenues and associated profits are included in the consolidated financial
statements of the Company and were not eliminated during consolidation. 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. At December 31, 1998 and
1997, consolidated accounts receivable included $5 million and $3.6 million,
respectively, which were not eliminated during consolidation.
NOTE 13.
MERGER AGREEMENT WITH ONEOK, INC.
In December 1998, the Boards of Directors of the Company and ONEOK, Inc.
(ONEOK), headquartered in Tulsa, Oklahoma, announced a definitive agreement for
the Company to be merged into ONEOK. The agreement calls for ONEOK to pay cash
of $28.50 for each share of Company common stock outstanding. The transaction is
subject to customary conditions, including approvals from shareholders of the
Company and state regulators in Arizona, California, and Nevada. ONEOK expects
to account for the merger using the purchase method of accounting. If the merger
is consummated, the Company would operate as a division of ONEOK.
In connection with the proposed merger into ONEOK, the Company incurred
approximately $1.1 million (pretax) of financial advisor and legal costs, which
were included in Other income (deductions), net, during the fourth quarter of
1998. Additional amounts of financial advisor, legal, and accounting-related
expenses will be incurred during the merger process and, depending on the
successful completion of the merger, are estimated at $2 million to $5 million.
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. The
proposal is preliminary in nature and subject to a number of contingencies and
uncertainties. Under the terms of the agreement with ONEOK, as a result of
certain preliminary determinations made by the Board of Directors of the
Company, the Board of Directors has authorized management to commence
substantive discussions with Southern Union regarding its proposal. No
assurances can be given that any agreement will be reached with Southern Union.
The merger agreement with ONEOK remains in full force and effect.
NOTE 14.
SEGMENT INFORMATION
The Company's operating segments are determined based on the nature of
their activities. The natural gas operations segment is engaged in the business
of purchasing, transporting, and distributing natural gas. Revenues are
generated from the sale and transportation of natural gas. The construction
services segment is engaged in the business of providing utility companies with
trenching and installation, replacement, and maintenance services for energy
distribution systems.
<PAGE> 40
60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The accounting policies of the reported segments are the same as those
described within Note 1 -- Summary of Significant Accounting Policies. Northern
accounts for the services provided to Southwest at contractual (market) prices.
The financial information pertaining to the Company's natural gas
operations and construction services segments for each of the three years in the
period ended December 31, 1998, is as follows (thousands of dollars):
<TABLE>
<CAPTION>
1998
----------------------------------------------------------
Gas Construction
Operations Services Adjustments Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers.... $ 799,597 $ 79,736 $ 879,333
Intersegment sales...................... -- 37,976 37,976
- ----------------------------------------------------------------------------------------------------
Total............................... $ 799,597 $117,712 $ 917,309
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Interest expense........................ $ 62,284 $ 1,070 $ 63,354
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Depreciation and amortization........... $ 80,231 $ 8,573 $ 88,804
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Income tax expense...................... $ 33,995 $ 2,419 $ 36,414
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Segment income.......................... $ 44,830 $ 2,707 $ 47,537
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Segment assets.......................... $1,772,418 $ 59,285 $(1,009) $1,830,694
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Capital expenditures.................... $ 179,361 $ 15,260 $ 194,621
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
Gas Construction
Operations Services Adjustments Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers.... $ 614,665 $ 81,421 $ 696,086
Intersegment sales...................... -- 35,924 35,924
- ----------------------------------------------------------------------------------------------------
Total............................... $ 614,665 $117,345 $ 732,010
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Interest expense........................ $ 61,751 $ 1,467 $ 63,218
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Depreciation and amortization........... $ 74,528 $ 10,133 $ 84,661
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Income tax expense...................... $ 4,217 $ 642 $ 4,859
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Segment income.......................... $ 15,825 $ 644 $ 16,469
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Segment assets.......................... $1,717,025 $ 52,919 $(885) $1,769,059
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Capital expenditures.................... $ 164,528 $ 5,086 $ 169,614
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------------------------------
Gas Construction
Operations Services Adjustments Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers.... $ 546,361 $ 61,646 $ 608,007
Intersegment sales...................... -- 36,054 36,054
- ----------------------------------------------------------------------------------------------------
Total............................... $ 546,361 $ 97,700 $ 644,061
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 61
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996
----------------------------------------------------------
Gas Construction
Operations Services Adjustments Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest expense........................ $ 53,003 $ 1,910 $ 54,913
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Depreciation and amortization........... $ 67,443 $ 6,256 $ 73,699
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Income tax expense...................... $ 1,661 $ 2,213 $ 3,874
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Segment income.......................... $ 3,919 $ 2,655 $ 6,574
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Segment assets.......................... $1,498,099 $ 62,315 $(145) $1,560,269
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Capital expenditures.................... $ 210,743 $ 8,092 $ 218,835
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
Construction services segment interest expense and income tax expense, for
the year ended December 31, 1996, include allocations of $968,000 and
$(387,000), respectively, from the gas operations segment. For the years ended
December 31, 1998 and 1997, no allocations from the gas operations segment to
the construction services segment were made.
Construction services segment assets include deferred tax assets of $1
million in 1998, $885,000 in 1997, and $145,000 in 1996, which were netted
against gas operations segment deferred tax liabilities during consolidation.
NOTE 15.
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended March 31 June 30 September 30 December 31
- -------------------------------------------------------------------------------------------------
(Thousands of dollars, except per share amounts)
<S> <C> <C> <C> <C>
1998
Operating revenues....................... $292,601 $192,897 $162,508 $269,303
Operating income (loss).................. 75,502 12,951 (529) 66,246
Net income (loss)........................ 35,953 (2,514) (10,945) 25,043
Basic earnings (loss) per common
share*................................. 1.31 (0.09) (0.38) 0.83
Diluted earnings (loss) per common
share*................................. 1.30 (0.09) (0.38) 0.82
1997
Operating revenues....................... $235,231 $136,938 $128,698 $231,143
Operating income (loss).................. 51,515 (3,982) (7,248) 61,976
Net income (loss)........................ 21,568 (12,748) (15,686) 23,335
Basic earnings (loss) per common
share*................................. 0.80 (0.47) (0.58) 0.85
Diluted earnings (loss) per common
share*................................. 0.80 (0.47) (0.58) 0.85
1996
Operating revenues....................... $188,352 $123,611 $125,255 $206,843
Operating income (loss).................. 38,539 (4,747) (8,404) 46,185
Net income (loss)........................ 14,859 (11,943) (14,638) 18,296
Basic earnings (loss) per common
share*................................. 0.60 (0.46) (0.55) 0.69
Diluted earnings (loss) per common
share*................................. 0.60 (0.46) (0.55) 0.68
</TABLE>
* The sum of quarterly earnings (loss) per average common share may not equal
the annual earnings (loss) per share due to the ongoing change in the weighted
average number of common shares outstanding.
<PAGE> 42
62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The demand for natural gas is seasonal, and it is management's opinion that
comparisons of earnings for the interim periods do not reliably reflect overall
trends and changes in the Company's operations. Also, the timing of general rate
relief can have a significant impact on earnings for interim periods. See
Management's Discussion and Analysis for additional discussion of operating
results.
NOTE 16.
DISCONTINUED OPERATIONS -- FINANCIAL SERVICES ACTIVITIES
In July 1996, the Company completed the sale of the assets and liabilities of
PriMerit Bank (the Bank) to Norwest Corporation for $191 million. Proceeds from
the sale were used by the Company to retire debt incurred in connection with its
investment in the Bank. The loss on disposition was included in the 1995 results
of operations.
<PAGE> 1
EXHIBIT 21.01
SOUTHWEST GAS CORPORATION
LIST OF SUBSIDIARIES OF THE REGISTRANT
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
STATE OF INCORPORATION
SUBSIDIARY NAME OR ORGANIZATION TYPE
- --------------- ----------------------
<S> <C>
LNG Energy, Inc. Nevada
Paiute Pipeline Company Nevada
Northern Pipeline Construction Co. Nevada
Southwest Gas Transmission Company Partnership between
Southwest Gas Corporation
and Utility Financial Corp.
Southwest Gas Capital I Delaware
Utility Financial Corp. Nevada
</TABLE>
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report dated March 26, 1999, incorporated by reference in
this Form 10-K, into Southwest Gas Corporation's previously filed registration
statements on Form S-8 (File No. 33-58135), Form S-3 (File No. 333-14605), Form
S-3 (File No. 333-17667), Form S-8 (File No. 333-31223), and Form S-8 (File No.
333-31267).
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUTHWEST
GAS CORPORATION'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,459,362
<OTHER-PROPERTY-AND-INVEST> 73,926
<TOTAL-CURRENT-ASSETS> 247,386
<TOTAL-DEFERRED-CHARGES> 0
<OTHER-ASSETS> 50,020
<TOTAL-ASSETS> 1,830,694
<COMMON> 32,040
<CAPITAL-SURPLUS-PAID-IN> 424,840
<RETAINED-EARNINGS> 19,520
<TOTAL-COMMON-STOCKHOLDERS-EQ> 476,400
0
0
<LONG-TERM-DEBT-NET> 812,906
<SHORT-TERM-NOTES> 52,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 5,270
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 484,118<F1>
<TOT-CAPITALIZATION-AND-LIAB> 1,830,694
<GROSS-OPERATING-REVENUE> 917,309
<INCOME-TAX-EXPENSE> 36,414
<OTHER-OPERATING-EXPENSES> 763,139
<TOTAL-OPERATING-EXPENSES> 763,139
<OPERATING-INCOME-LOSS> 154,170
<OTHER-INCOME-NET> (6,865)<F2>
<INCOME-BEFORE-INTEREST-EXPEN> 147,305
<TOTAL-INTEREST-EXPENSE> 63,354
<NET-INCOME> 47,537
0
<EARNINGS-AVAILABLE-FOR-COMM> 47,537
<COMMON-STOCK-DIVIDENDS> 23,676
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 203,517
<EPS-PRIMARY> 1.66
<EPS-DILUTED> 1.65
<FN>
<F1>Includes: trust originated preferred securities of $60,000, current
liabilities, net of current long-term debt maturities and short-term debt, of
$193,524 and deferred income taxes and other credits of $230,594.
<F2>Includes distributions related to trust originated preferred securities of
$5,475.
</FN>
</TABLE>
