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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
Commission File Number 1-7850
SOUTHWEST GAS CORPORATION
(Exact name of registrant as specified in its charter)
California 88-0085720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5241 Spring Mountain Road
Post Office Box 98510
Las Vegas, Nevada 89193-8510
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 876-7237
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, $1 Par Value, 31,386,420 shares as of August 7, 2000.
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except par value)
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Utility plant:
Gas plant $ 2,280,139 $ 2,203,223
Less: accumulated depreciation (690,622) (662,510)
Acquisition adjustments 3,313 3,503
Construction work in progress 33,293 36,886
------------ ------------
Net utility plant 1,626,123 1,581,102
------------ ------------
Other property and investments 92,559 84,850
------------ ------------
Current assets:
Cash and cash equivalents 9,270 17,126
Accounts receivable, net of allowances 64,174 88,476
Accrued utility revenue 23,373 56,373
Deferred income taxes 9,041 6,141
Deferred purchased gas costs 1,278 9,051
Prepaids and other current assets 26,518 31,971
------------ ------------
Total current assets 133,654 209,138
------------ ------------
Deferred charges and other assets 46,880 48,352
------------ ------------
Total assets $ 1,899,216 $ 1,923,442
============ ============
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $1 par (authorized - 45,000,000 shares; issued
and outstanding - 31,357,894 and 30,985,120 shares) $ 32,988 $ 32,615
Additional paid-in capital 446,613 439,262
Retained earnings 36,144 33,548
------------ ------------
Total common equity 515,745 505,425
Redeemable preferred securities of Southwest Gas Capital I 60,000 60,000
Long-term debt, less current maturities 860,399 859,291
------------ ------------
Total capitalization 1,436,144 1,424,716
------------ ------------
Current liabilities:
Current maturities of long-term debt 6,802 7,931
Short-term debt 39,075 61,000
Accounts payable 41,926 64,247
Customer deposits 28,257 27,408
Accrued taxes 45,957 40,611
Accrued interest 14,321 14,270
Other current liabilities 50,509 49,423
------------ ------------
Total current liabilities 226,847 264,890
------------ ------------
Deferred income taxes and other credits:
Deferred income taxes and investment tax credits 180,760 178,438
Other deferred credits 55,465 55,398
------------ ------------
Total deferred income taxes and other credits 236,225 233,836
------------ ------------
Total capitalization and liabilities $ 1,899,216 $ 1,923,442
============ ============
The accompanying notes are an integral part of these statements.
</TABLE>
2
<PAGE>
<TABLE>
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
----------------------- ----------------------- -----------------------
2000 1999 2000 1999 2000 1999
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues:
Gas operating revenues $ 157,885 $ 166,679 $ 424,964 $ 445,789 $ 770,330 $ 806,006
Construction revenues 39,749 33,613 69,485 62,528 152,668 134,122
----------- ----------- ----------- ----------- ----------- -----------
Total operating revenues 197,634 200,292 494,449 508,317 922,998 940,128
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Net cost of gas sold 70,190 71,839 193,694 207,725 316,000 342,819
Operations and maintenance 56,340 55,378 113,667 108,944 225,981 215,085
Depreciation and amortization 26,296 24,134 52,434 48,301 102,658 94,063
Taxes other than income taxes 7,439 7,299 15,112 14,511 28,211 30,340
Construction expenses 34,786 30,112 60,340 54,581 133,989 117,849
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses 195,051 188,762 435,247 434,062 806,839 800,156
----------- ----------- ----------- ----------- ----------- -----------
Operating income 2,583 11,530 59,202 74,255 116,159 139,972
----------- ----------- ----------- ----------- ----------- -----------
Other income and (expenses):
Net interest deductions (16,951) (14,800) (33,737) (29,670) (67,269) (61,205)
Preferred securities distributions (1,369) (1,369) (2,738) (2,738) (5,475) (5,475)
Other income (deductions) (1,241) (42) (456) 235 (2,271) (1,693)
----------- ----------- ----------- ----------- ----------- -----------
Total other income and (expenses) (19,561) (16,211) (36,931) (32,173) (75,015) (68,373)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes (16,978) (4,681) 22,271 42,082 41,144 71,599
Income tax expense (benefit) (7,249) (1,085) 6,802 17,412 11,035 32,831
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ (9,729) $ (3,596) $ 15,469 $ 24,670 $ 30,109 $ 38,768
=========== =========== =========== =========== =========== ===========
Basic earnings (loss) per share $ (0.31) $ (0.12) $ 0.50 $ 0.81 $ 0.97 $ 1.29
=========== =========== =========== =========== =========== ===========
Diluted earnings (loss) per share $ (0.31) $ (0.12) $ 0.49 $ 0.80 $ 0.96 $ 1.28
=========== =========== =========== =========== =========== ===========
Dividends paid per share $ 0.205 $ 0.205 $ 0.41 $ 0.41 $ 0.82 $ 0.82
=========== =========== =========== =========== =========== ===========
Average number of common shares outstanding 31,289 30,621 31,215 30,559 31,100 30,123
Average shares outstanding (assuming dilution) - - 31,384 30,830 31,325 30,372
The accompanying notes are an integral part of these statements.
</TABLE>
3
<PAGE>
<TABLE>
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
<CAPTION>
SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income $ 15,469 $ 24,670 $ 30,109 $ 38,768
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 52,434 48,301 102,658 94,063
Deferred income taxes (578) (17,103) (3,471) (12,336)
Changes in current assets and liabilities:
Accounts receivable, net of allowances 24,302 30,051 (6,188) (1,330)
Accrued utility revenue 33,000 33,873 (373) (1,500)
Deferred purchased gas costs 7,773 60,601 (4,284) 66,308
Accounts payable (21,824) (24,938) 3,066 4,126
Accrued taxes 5,346 15,049 (2,572) 23,238
Other current assets and liabilities 7,617 (2,610) 12,964 6,556
Other (682) (517) 2,131 (601)
------------ ------------ ------------ ------------
Net cash provided by operating activities 122,857 167,377 134,040 217,292
------------ ------------ ------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Construction expenditures and property additions (103,278) (111,626) (221,155) (218,704)
Other (321) 2,833 367 14,329
------------ ------------ ------------ ------------
Net cash used in investing activities (103,599) (108,793) (220,788) (204,375)
------------ ------------ ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock, net 7,724 6,447 16,274 68,995
Dividends paid (12,796) (12,529) (25,431) (24,931)
Issuance of long-term debt, net 3,914 12,002 45,260 49,565
Retirement of long-term debt, net (4,031) (2,850) (7,349) (5,897)
Temporary changes in long-term debt - (27,000) 27,000 (27,000)
Change in short-term debt (21,925) (43,630) 30,705 (69,680)
------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities (27,114) (67,560) 86,459 (8,948)
------------ ------------ ------------ ------------
Change in cash and temporary cash investments (7,856) (8,976) (289) 3,969
Cash at beginning of period 17,126 18,535 9,559 5,590
------------ ------------ ------------ ------------
Cash at end of period $ 9,270 $ 9,559 $ 9,270 $ 9,559
============ ============ ============ ============
Supplemental information:
Interest paid, net of amounts capitalized $ 32,740 $ 29,512 $ 64,078 $ 59,965
Income taxes paid (received), net 240 16,851 13,374 20,345
The accompanying notes are an integral part of these statements.
</TABLE>
4
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations. Southwest Gas Corporation (the Company) is comprised of
two segments: natural gas operations (Southwest or the natural gas operations
segment) and construction services. Southwest purchases, transports, and
distributes natural gas to customers in portions of Arizona, Nevada, and
California. Southwest's public utility rates, practices, facilities, and service
territories are subject to regulatory oversight. The timing and amount of rate
relief can materially impact results of operations. Natural gas sales are
seasonal, peaking during the winter months. Variability in weather from normal
temperatures can materially impact results of operations. Northern Pipeline
Construction Co. (Northern or the construction services segment), a wholly owned
subsidiary, is a full-service underground piping contractor which provides
utility companies with trenching and installation, replacement, and maintenance
services for energy distribution systems.
Basis of Presentation. The consolidated financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The preparation of the
consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. In the opinion of
management, all adjustments, consisting of normal recurring items and estimates
necessary for a fair presentation of the results for the interim periods, have
been made. It is suggested that these consolidated financial statements be read
in conjunction with the financial statements and the notes thereto included in
the 1999 Annual Report to Shareholders, which is incorporated by reference into
the Form 10-K, and the 2000 First Quarter Report on Form 10-Q.
Intercompany Transactions. The construction services segment recognizes revenues
generated from contracts with Southwest (see Note 2 below). Accounts receivable
for these services were $4.7 million at June 30, 2000 and $4.4 million at
December 31, 1999. The accounts receivable balance, revenues, and associated
profits are included in the consolidated financial statements of the Company and
were not eliminated during consolidation. Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation," provides that intercompany profits on sales to regulated affiliates
should not be eliminated in consolidation if the sales price is reasonable and
if future revenues approximately equal to the sales price will result from the
rate-making process. Management believes these two criteria are being met.
NOTE 2 - SEGMENT INFORMATION
The following tables list revenues from external customers, intersegment
revenues, and segment net income (thousands of dollars):
<TABLE>
<CAPTION>
Natural Gas Construction
Operations Services Total
--------------- ---------------- -------------
<S> <C> <C> <C>
Six months ended June 30, 2000
Revenues from external customers $ 424,964 $ 44,890 $ 469,854
Intersegment revenues -- 24,595 24,595
--------------- ---------------- -------------
Total $ 424,964 $ 69,485 $ 494,449
=============== ================ =============
Segment net income $ 13,415 $ 2,054 $ 15,469
=============== ================ =============
Six months ended June 30, 1999
Revenues from external customers $ 445,789 $ 40,184 $ 485,973
Intersegment revenues -- 22,344 22,344
--------------- ---------------- -------------
Total $ 445,789 $ 62,528 $ 508,317
=============== ================ =============
Segment net income $ 22,689 $ 1,981 $ 24,670
=============== ================ =============
</TABLE>
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company is principally engaged in the business of purchasing, transporting,
and distributing natural gas. Southwest is the largest distributor in Arizona,
selling and transporting natural gas in most of southern, central, and
northwestern Arizona, including the Phoenix and Tucson metropolitan areas.
Southwest is also the largest distributor and transporter of natural gas in
Nevada, and serves the Las Vegas metropolitan area and northern Nevada. In
addition, Southwest distributes and transports natural gas in portions of
California, including the Lake Tahoe area in northern California and the high
desert and mountain areas in San Bernardino County.
Southwest purchases, transports, and distributes natural gas to approximately
1,298,000 residential, commercial, industrial and other customers, of which 57
percent are located in Arizona, 34 percent are in Nevada, and 9 percent are in
California. During the twelve months ended June 30, 2000, Southwest earned 56
percent of operating margin in Arizona, 35 percent in Nevada, and 9 percent in
California. During this same period, Southwest earned 83 percent of operating
margin from residential and small commercial customers, 4 percent from other
sales customers, and 13 percent from transportation customers. These patterns
are similar to prior years and are expected to continue.
Northern is a full-service underground piping contractor, which provides utility
companies with trenching and installation, replacement, and maintenance services
for energy distribution systems.
CAPITAL RESOURCES AND LIQUIDITY
The capital requirements and resources of the Company generally are determined
independently for the natural gas operations and construction services segments.
Each business activity is generally responsible for securing its own financing
sources. The capital requirements and resources of the construction services
segment are not material to the overall capital requirements and resources of
the Company.
Southwest continues to experience significant population growth throughout its
service territories. This growth has required large amounts of capital to
finance the investment in infrastructure, in the form of new transmission and
distribution plant, to satisfy consumer demand. For the twelve months ended June
30, 2000, natural gas construction expenditures totaled $204 million.
Approximately 74 percent of these current-period expenditures represented new
construction and the balance represented costs associated with routine
replacement of existing transmission, distribution, and general plant. Cash
flows from operating activities of Southwest (net of dividends) were $94 million
for the twelve months ended June 30, 2000. Operating cash flows were below prior
year levels because previously deferred purchased gas costs are now fully
recovered.
Southwest estimates construction expenditures during the three-year period
ending December 31, 2002 will be approximately $630 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. 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
and growth factors in Southwest service areas. These external financings may
include the issuance of both debt and equity securities, bank and other
short-term borrowings, and other forms of financing.
During the second quarter of 2000, the Company began to experience significant
increases in natural gas prices. Higher natural gas prices are expected through
the upcoming winter heating season. The recent increase is primarily
attributable to high demand for natural gas in generating electricity, a
changing industry structure as the electric utility industry continues to
deregulate, lower deliverability of natural gas due to a slowdown in natural gas
drilling (now reversing) and lower natural gas storage levels. If natural gas
prices remain near current levels or continue to rise, the Company will be
required to increase short-term borrowings to finance gas supply requirements.
The Company has adequate short-term borrowing capacity to meet this anticipated
need. The Company ultimately recovers all prudently incurred gas costs, with
interest, through its purchased gas adjustment (PGA) mechanisms. In Arizona,
the Company adjusts gas cost recovery rates monthly. In Nevada, a request is
6
<PAGE>
pending before the Public Utilities Commission of Nevada (PUCN) to increase
rates for the recovery of higher gas costs and to adjust gas cost recovery rates
monthly rather than annually. The monthly adjustments are designed to provide a
more timely recovery of gas costs. PGA changes impact cash flows but have no
direct impact on profit margin. See separate discussion at Rates and Regulatory
Proceedings Nevada PGA Filing.
In July 2000, the Company converted $14.3 million of taxable variable-rate
industrial development revenue bonds, Series B, due 2038, to tax-exempt bonds
bearing interest at 5.95 percent. These bonds are described in "Note 6 -
Long-Term Debt" in the Notes to Consolidated Financial Statements of the 1999
Annual Report to Shareholders.
RESULTS OF CONSOLIDATED OPERATIONS
Quarterly Analysis
------------------
Contribution to Net Income (Loss)
Three Months Ended June 30,
------------------------------------------
2000 1999
----------- -----------
(Thousands of dollars)
Natural gas operations $ (10,949) $ (4,376)
Construction services 1,220 780
----------- -----------
Net income (loss) $ (9,729) $ (3,596)
=========== ===========
Loss per share for the quarter ended June 30, 2000 was $0.31, compared to a loss
of $0.12 per share recorded during the corresponding quarter of the prior year.
Earnings from natural gas operations decreased $0.21 per share. See separate
discussion at Results of Natural Gas Operations. The contribution from
construction services for the current quarter increased $0.02 per share compared
to the corresponding quarter of the prior year.
Six-Month Analysis
------------------
Contribution to Net Income
Six Months Ended June 30,
-----------------------------------------
2000 1999
----------- -----------
(Thousands of dollars)
Natural gas operations $ 13,415 $ 22,689
Construction services 2,054 1,981
----------- -----------
Net income $ 15,469 $ 24,670
=========== ===========
Earnings per share for the six months ended June 30, 2000 were $0.50, compared
to $0.81 per share recorded during the corresponding period of the prior year.
Earnings contributed from natural gas operations decreased $0.31 per share. See
separate discussion at Results of Natural Gas Operations. Construction services
contributed per share earnings of $0.07, the same as the corresponding period of
the prior year.
Twelve-Month Analysis
---------------------
Contribution to Net Income
Twelve Months Ended June 30,
-----------------------------------------
2000 1999
----------- -----------
(Thousands of dollars)
Natural gas operations $ 26,199 $ 35,088
Construction services 3,910 3,680
----------- -----------
Net income $ 30,109 $ 38,768
=========== ===========
Earnings per share for the twelve months ended June 30, 2000 were $0.97, a $0.32
decrease from per share earnings of $1.29 recorded during the prior twelve-month
period. Earnings contributed from natural gas operations decreased $0.33 per
share. See separate discussion at Results of Natural Gas Operations.
Construction services activities contributed per share earnings of $0.13, a
$0.01 per share improvement over the prior twelve-month period.
7
<PAGE>
The following table sets forth the ratios of earnings to fixed charges for the
Company:
For the Twelve Months Ended
--------------------------------------
June 30, December 31,
2000 1999
-------------- --------------
Ratio of earnings to fixed charges 1.50 1.78
Earnings are defined as the sum of pretax income plus fixed charges. Fixed
charges consist of all interest expense including capitalized interest,
one-third of rent expense (which approximates the interest component of such
expense), preferred securities distributions, and amortized debt costs.
Results of Natural Gas Operations
Quarterly Analysis
------------------
Three Months Ended
June 30,
---------------------------
2000 1999
----------- -----------
(Thousands of dollars)
Gas operating revenues $ 157,885 $ 166,679
Net cost of gas sold 70,190 71,839
----------- -----------
Operating margin 87,695 94,840
Operations and maintenance expense 56,340 55,378
Depreciation and amortization 23,420 21,652
Taxes other than income taxes 7,439 7,299
----------- -----------
Operating income 496 10,511
Other income (expense) (1,735) (799)
----------- -----------
Income (loss) before interest and income taxes (1,239) 9,712
Net interest deductions 16,498 14,431
Preferred securities distributions 1,369 1,369
Income tax expense (benefit) (8,157) (1,712)
----------- -----------
Contribution to consolidated net income (loss) $ (10,949) $ (4,376)
=========== ===========
Contribution from natural gas operations declined approximately $6.6 million in
the second quarter of 2000 compared to the same period a year ago. The decline
was principally the result of lower operating margin, and higher operating
expenses and financing costs incurred as a result of the expansion and upgrading
of the gas system to accommodate continued customer growth.
Operating margin decreased $7.1 million, or eight percent. Differences in
heating demand between periods was the primary reason for the decrease.
Temperatures were 25 percent above normal during the current period, whereas, in
the prior period, temperatures were 34 percent colder-than-normal. Southwest
served 64,000, or five percent, more customers than a year ago, which partially
offset the impact of weather on operating margin.
Operations and maintenance expenses increased $1 million, or two percent,
reflecting general increases in labor and maintenance costs. Depreciation
expense and general taxes increased $1.9 million, or seven percent, as a result
of construction activities. Average gas plant in service increased $176 million,
or eight percent, as compared to the second quarter of 1999. The increase
reflects ongoing capital expenditures for the upgrade of existing operating
facilities and the expansion of the system to accommodate continued customer
growth.
Net interest deductions increased $2.1 million, or 14 percent, due to higher
average short-term debt outstanding, long-term debt issuances to finance
construction and increased interest rates on variable-rate debt instruments.
8
<PAGE>
Other income (expense) in the current period included a $1.9 million pretax
charge to reflect a June 2000 settlement with the PUCN related to disallowed gas
costs from the 1996/1997 winter heating season.
Six-Month Analysis
------------------
Six Months Ended
June 30,
---------------------------
2000 1999
----------- -----------
(Thousands of dollars)
Gas operating revenues $ 424,964 $ 445,789
Net cost of gas sold 193,694 207,725
----------- -----------
Operating margin 231,270 238,064
Operations and maintenance expense 113,667 108,944
Depreciation and amortization 46,836 43,563
Taxes other than income taxes 15,112 14,511
----------- -----------
Operating income 55,655 71,046
Other income (expense) (1,465) (682)
----------- -----------
Income before interest and income taxes 54,190 70,364
Net interest deductions 32,885 29,063
Preferred securities distributions 2,738 2,738
Income tax expense 5,152 15,874
----------- -----------
Contribution to consolidated net income $ 13,415 $ 22,689
=========== ===========
Contribution to consolidated net income declined approximately $9.3 million in
the first six months of 2000 compared to the same period a year ago. The decline
was principally the result of lower operating margin, and higher operating
expenses and financing costs incurred as a result of the expansion and upgrading
of the gas system to accommodate continued customer growth.
Operating margin decreased $6.8 million, or three percent. Temperatures in the
current period were 12 percent above normal, which reduced operating margin
$16.6 million between periods. Partially offsetting the weather-related impacts
was an increase of approximately $9.8 million in operating margin due to
customer growth.
Operations and maintenance expenses increased $4.7 million, or four percent,
reflecting general increases in labor and maintenance costs along with
incremental operating expenses associated with providing service to a steadily
growing customer base.
Depreciation expense and general taxes increased $3.9 million, or seven percent,
as a result of construction activities. Average gas plant in service increased
$179 million, or nine percent, as compared to the six month period ended June
30, 1999. The increase reflects ongoing capital expenditures for the upgrade of
existing operating facilities and the expansion of the system to accommodate
continued customer growth.
Net interest deductions increased $3.8 million, or 13 percent, due to higher
average short-term debt outstanding, long-term debt issuances to finance
construction and increased interest rates on variable-rate debt instruments.
Other income (expense) in the current period includes a $1.9 million pretax
charge to reflect a June 2000 settlement with the PUCN related to disallowed gas
costs from the 1996/1997 winter heating season. The prior period includes $2.9
million ($2.5 million after tax) of costs related to the now terminated merger
with ONEOK, Inc., partially offset by a $1.6 million litigation-related recovery
by a nonconstruction, nonutility subsidiary.
Utility income tax expense, exclusive of changes in pretax income, decreased
approximately $1.6 million between periods. The decrease was attributed to the
favorable resolution of certain federal and state income tax issues during the
current period.
9
<PAGE>
Twelve-Month Analysis
---------------------
Twelve Months Ended
June 30,
---------------------------
2000 1999
----------- -----------
(Thousands of dollars)
Gas operating revenues $ 770,330 $ 806,006
Net cost of gas sold 316,000 342,819
----------- -----------
Operating margin 454,330 463,187
Operations and maintenance expense 225,981 215,085
Depreciation and amortization 91,527 84,818
Taxes other than income taxes 28,211 30,340
----------- -----------
Operating income 108,611 132,944
Other income (expense) (3,708) (2,706)
----------- -----------
Income before interest and income taxes 104,903 130,238
Net interest deductions 65,419 60,008
Preferred securities distributions 5,475 5,475
Income tax expense 7,810 29,667
----------- -----------
Contribution to consolidated net income $ 26,199 $ 35,088
=========== ===========
Contribution to consolidated net income decreased $8.9 million in the current
twelve-month period compared to the corresponding prior twelve-month period. The
decrease was primarily the result of lower operating margin, and higher
operating expenses and increased financing costs incurred as a result of the
expansion and upgrading of the gas system to accommodate continued customer
growth.
Operating margin decreased $8.9 million, or two percent, between periods.
Customer growth contributed $17 million of incremental margin. However,
differences in heating demand more than offset the impact of customer growth as
temperatures were 14 percent above normal during the current period.
Operations and maintenance expenses increased $10.9 million, or five percent,
reflecting general increases in labor and maintenance costs along with
incremental operating expenses associated with providing service to a steadily
growing customer base.
Depreciation expense and general taxes increased a net $4.6 million, or four
percent, as a result of additional plant in service. Average gas plant in
service for the current twelve-month period increased $174 million, or nine
percent, compared to the corresponding period a year ago. This was attributable
to the upgrade of existing operating facilities and the expansion of the system
to accommodate new customers being added to the system.
Net interest deductions increased $5.4 million, or nine percent, resulting
primarily from additional borrowings to finance construction expenditures and
higher interest rates on variable-rate debt.
Other income (expense) in the current period includes a $2 million expense
recorded December 1999 in connection with the California Public Utilities
Commission approval of a settlement agreement with the town of Truckee. Also
included is a $1.9 million pretax charge to reflect a June 2000 settlement with
the PUCN related to disallowed gas costs from the 1996/1997 winter heating
season. The prior period includes $4 million ($3.2 million after tax) of costs
related to the now terminated merger with ONEOK, Inc., partially offset by a
$1.6 million litigation-related recovery by a nonconstruction, nonutility
subsidiary.
Utility income tax expense, exclusive of changes in pretax income, decreased
$4.6 million between periods. The decrease was attributed to the favorable
resolution of certain federal and state income tax issues during the current
period, and the recognition of income tax liabilities for unrelated tax issues
in the prior period.
10
<PAGE>
RATES AND REGULATORY PROCEEDINGS
Arizona General Rate Case
In May 2000, the Company filed a general rate application with the Arizona
Corporation Commission (ACC) seeking approval to increase revenues by $37.1
million, or nine percent, annually for its Arizona rate jurisdiction. The
Company is seeking rate relief for increased operating costs, changes in
financing costs, declining average residential useage, and improvements and
additions to the distribution system. The Company has proposed shifting more
day-to-day operating costs to the basic service charge to ease the impact of
weather on monthly bills. Hearings are scheduled to begin in the first quarter
of 2001. Arizona general rates were last increased in September 1997.
Nevada PGA Filing
In June 2000, the Company submitted an annual purchased gas adjustment (PGA)
filing in compliance with the provisions of its Nevada Gas Tariff. If approved
as filed, residential gas bills would increase by approximately nine percent.
The Company is also requesting a change in the frequency of future PGA filings.
A monthly PGA mechanism, designed to reduce the impact of large price
fluctuations, would replace the current annual mechanism. Customer bills would
reflect monthly price variations as a direct result of the most recent natural
gas prices. A decision from the PUCN is expected in November 2000. PGA changes
impact cash flows but have no direct impact on profit margin.
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." In June 1999, the FASB issued SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." As it applies to the Company, SFAS
No. 137 postpones the effective date of SFAS No. 133 to January 2001. In June
2000, the FASB issued SFAS No. 138 "Accounting for Derivative Instruments and
Hedging Activities - An Amendment of FASB Statement No. 133." Of significance to
the Company is the expansion of the normal purchases and normal sales exclusion
provisions of SFAS No. 133.
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 has fixed-price gas supply contracts, which, absent the expansion of
the normal purchases and normal sales exclusion, may have been considered
derivatives under the requirements of SFAS No. 133. The Company will continue to
review the applicability of SFAS No. 133 accounting requirements to these and
other contracts.
FORWARD-LOOKING STATEMENTS
This report contains statements which constitute "forward-looking statements"
within the meaning of the Securities Litigation Reform Act of 1995 (Reform Act).
All such forward-looking statements are intended to be subject to the safe
harbor protection provided by the Reform Act. A number of important factors
affecting the business and financial results of the Company could cause actual
results to differ materially from those stated in the forward-looking
statements. These factors include, but are not limited to, the impact of weather
variations on customer usage, natural gas prices, the effects of
regulation/deregulation, the timing and amount of rate relief, changes in
capital requirements and funding, resolution of the pending litigation,
acquisitions and competition.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Litigation is pending in the United States District Court for the Southern
District of California (99 cv 1004-L (CGA)), the United States District Court of
Arizona (Civ '99 1294 PHX ROS and Civ '00 0119 PHX VAM) and the United States
District Court for the Northern District of Oklahoma (Case No. 00cv063 KE)
relating to the now terminated acquisition of the Company by ONEOK, Inc. and the
Company's rejection of competing offers from Southern Union Company. This
litigation is described in Item 3, "Legal Proceedings" in the 1999 Form 10-K
filed with the Securities and Exchange Commission. There have been no new
material developments related to these proceedings.
Other Proceedings
-----------------
The Company has been named as defendant in various other legal proceedings. The
ultimate dispositions of these proceedings are not presently determinable;
however, it is the opinion of management that none of this litigation will have
a material adverse impact on the Company's financial position or results of
operations.
ITEMS 2-3. NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on May 11, 2000. Matters voted upon
and the results of the voting were as follows:
(1) Cumulative voting became effective for all shareholders when
the intent to cumulatively vote shares was announced at the
Annual Meeting of Shareholders. Each shareholder/proxy was
entitled to give one nominee for director a number of votes
equal to the number of directors to be elected (in this
case 11) multiplied by the number of votes to which the
shareholder's shares were normally entitled. A
shareholder/proxy could distribute their votes on the same
principle among as many of the nominees for director as the
shareholder/proxy desired. The 11 nominees that received the
highest allocation of affirmative votes were elected.
Withholding votes or voting against a nominee had no legal
effect. Shares were accumulated and allocated among the
nominees in sufficient number to elect the following as
directors.
George C. Biehl 25,421,438
Manuel J. Cortez 25,334,287
Lloyd T. Dyer 25,387,770
Mark M. Feldman 28,002,246
Thomas Y. Hartley 25,395,455
Michael B. Jager 25,414,562
Leonard R. Judd 25,421,759
James J. Kropid 25,362,949
Michael O. Maffie 25,309,360
Carolyn M. Sparks 25,344,482
Terrance L. Wright 25,410,432
The remaining accumulated shares were allocated to the other
nominees, Robert S. Sundt, Mary McCarthy, and
Michael J. Melarkey.
(2) The proposal to ratify the selection of Arthur Andersen LLP
as independent public accountants for the Company was
approved. Shareholders voted 23,146,802 shares in favor,
588,279 against, and 647,423 abstentions.
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ITEM 5. OTHER INFORMATION
In July 2000, the Company, the National Labor Relations Board (NLRB) and the
International Brotherhood of Electrical Workers (IBEW) entered into an NLRB
Settlement Agreement whereby the Company recognizes the IBEW as the bargaining
agent for certain employees in the Central Arizona division. As part of the
settlement, the union will drop all of its legal actions against the Company and
the Company will withdraw its complaint at the D.C.
Circuit Court of Appeals challenging the legality of the union vote.
In July 2000, David H. Gunning, 58, was elected as a director of the Company,
succeeding Lloyd T. Dyer, who retired after serving as a director for the last
22 years. Mr. Gunning is the principal in Encinitos Ventures, and was president
and chief executive officer of Capitol American Financial Corporation. He serves
as a director of The Lincoln Electric Company, Roulston & Co., and Development
Alternatives, Inc. Mr. Gunning received his undergraduate degree from Cornell
University and his juris doctorate from Harvard University.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report on
Form 10-Q:
Exhibit 12.1 - Computation of Ratios of Earnings to Fixed
Charges and Ratios of Earnings to Combined
Fixed Charges and Preferred Stock Dividends.
Exhibit 27.1 - Financial Data Schedule (filed electronically only).
(b) Reports on Form 8-K
The Company filed a Form 8-K, dated August 3, 2000, reporting
summary financial information for the quarter, year to date and
twelve months ended June 30, 2000.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Southwest Gas Corporation
--------------------------------------------------
(Registrant)
Date: August 11, 2000
/s/ Edward A. Janov
--------------------------------------------------
Edward A. Janov
Vice President/Controller/Chief Accounting Officer
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