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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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, 31,602,594 shares as of November 1, 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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Utility plant:
Gas plant $ 2,316,695 $ 2,203,223
Less: accumulated depreciation (710,219) (662,510)
Acquisition adjustments 3,219 3,503
Construction work in progress 47,196 36,886
------------- -------------
Net utility plant 1,656,891 1,581,102
------------- -------------
Other property and investments 94,210 84,850
------------- -------------
Current assets:
Cash and cash equivalents 12,605 17,126
Accounts receivable, net of allowances 69,301 88,476
Accrued utility revenue 24,373 56,373
Deferred income taxes 2,841 6,141
Deferred purchased gas costs 17,677 9,051
Prepaids and other current assets 29,080 31,971
------------- -------------
Total current assets 155,877 209,138
------------- -------------
Deferred charges and other assets 47,311 48,352
------------- -------------
Total assets $ 1,954,289 $ 1,923,442
============= =============
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $1 par (authorized - 45,000,000 shares; issued
and outstanding - 31,529,907 and 30,985,120 shares) $ 33,158 $ 32,615
Additional paid-in capital 449,735 439,262
Retained earnings 19,992 33,548
------------- -------------
Total common equity 502,885 505,425
Redeemable preferred securities of Southwest Gas Capital I 60,000 60,000
Long-term debt, less current maturities 860,515 859,291
------------- -------------
Total capitalization 1,423,400 1,424,716
------------- -------------
Current liabilities:
Current maturities of long-term debt 6,135 7,931
Short-term debt 100,500 61,000
Accounts payable 54,708 64,247
Customer deposits 28,427 27,408
Accrued taxes 28,495 40,611
Accrued interest 14,872 14,270
Other current liabilities 55,284 49,423
------------- -------------
Total current liabilities 288,421 264,890
------------- -------------
Deferred income taxes and other credits:
Deferred income taxes and investment tax credits 185,633 178,438
Other deferred credits 56,835 55,398
------------- -------------
Total deferred income taxes and other credits 242,468 233,836
------------- -------------
Total capitalization and liabilities $ 1,954,289 $ 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 NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------- -------------------------
2000 1999 2000 1999 2000 1999
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues:
Gas operating revenues $ 150,178 $ 125,190 $ 575,142 $ 570,979 $ 795,318 $ 802,967
Construction revenues 48,784 41,099 118,269 103,627 160,353 140,942
----------- ----------- ----------- ----------- ----------- -----------
Total operating revenues 198,962 166,289 693,411 674,606 955,671 943,909
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Net cost of gas sold 70,142 46,711 263,836 254,436 339,431 338,031
Operations and maintenance 56,839 54,621 170,506 163,565 228,199 218,941
Depreciation and amortization 26,649 24,697 79,083 72,998 104,610 95,980
Taxes other than income taxes 7,576 7,075 22,688 21,586 28,712 29,716
Construction expenses 41,953 36,089 102,293 90,670 139,853 123,644
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses 203,159 169,193 638,406 603,255 840,805 806,312
----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss) (4,197) (2,904) 55,005 71,351 114,866 137,597
----------- ----------- ----------- ----------- ----------- -----------
Other income and (expenses):
Net interest deductions (17,678) (16,145) (51,415) (45,815) (68,802) (61,590)
Preferred securities distributions (1,368) (1,368) (4,106) (4,106) (5,475) (5,475)
Other income (deductions) 12 (1,674) (444) (1,439) (585) (3,063)
----------- ----------- ----------- ----------- ----------- -----------
Total other income and (expenses) (19,034) (19,187) (55,965) (51,360) (74,862) (70,128)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes (23,231) (22,091) (960) 19,991 40,004 67,469
Income tax expense (benefit) (13,551) (7,903) (6,749) 9,509 5,387 31,944
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ (9,680) $ (14,188) $ 5,789 $ 10,482 $ 34,617 $ 35,525
=========== =========== =========== =========== =========== ===========
Basic earnings (loss) per share $ (0.31) $ (0.46) $ 0.19 $ 0.34 $ 1.11 $ 1.16
=========== =========== =========== =========== =========== ===========
Diluted earnings (loss) per share $ (0.31) $ (0.46) $ 0.18 $ 0.34 $ 1.10 $ 1.15
=========== =========== =========== =========== =========== ===========
Dividends paid per share $ 0.205 $ 0.205 $ 0.615 $ 0.615 $ 0.82 $ 0.82
=========== =========== =========== =========== =========== ===========
Average number of common shares outstanding 31,424 30,742 31,285 30,621 31,272 30,550
Average shares outstanding (assuming dilution) - - 31,465 30,902 31,471 30,824
The accompanying notes are an integral part of
these statements.
</TABLE>
3
<PAGE>
<TABLE>
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
<CAPTION>
NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 5,789 $ 10,482 $ 34,617 $ 35,525
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 79,083 72,998 104,610 95,980
Deferred income taxes 10,495 (18,311) 8,810 (8,919)
Changes in current assets and liabilities:
Accounts receivable, net of allowances 19,175 31,594 (12,858) (3,719)
Accrued utility revenue 32,000 32,873 (373) (1,500)
Deferred purchased gas costs (8,626) 60,828 (20,910) 62,973
Accounts payable (9,022) (25,350) 16,280 2,067
Accrued taxes (12,116) 2,540 (7,525) 12,097
Other current assets and liabilities 8,779 2,117 9,399 21,383
Other 1,374 (645) 4,315 (803)
----------- ----------- ----------- -----------
Net cash provided by operating activities 126,931 169,126 136,365 215,084
----------- ----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Construction expenditures and property additions (161,965) (150,336) (241,132) (208,310)
Other (75) (16,443) 19,889 (13,018)
----------- ----------- ----------- -----------
Net cash used in investing activities (162,040) (166,779) (221,243) (221,328)
----------- ----------- ----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock, net 11,016 9,745 16,268 13,079
Dividends paid (19,234) (18,830) (25,568) (25,046)
Issuance of long-term debt, net 5,415 13,502 45,261 19,794
Retirement of long-term debt, net (6,109) (4,301) (7,976) (6,278)
Change in short-term debt 39,500 (15,165) 63,665 3,510
----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities 30,588 (15,049) 91,650 5,059
----------- ----------- ----------- -----------
Change in cash and temporary cash investments (4,521) (12,702) 6,772 (1,185)
Cash at beginning of period 17,126 18,535 5,833 7,018
----------- ----------- ----------- -----------
Cash at end of period $ 12,605 $ 5,833 $ 12,605 $ 5,833
=========== =========== =========== ===========
Supplemental information:
Interest paid, net of amounts capitalized $ 49,456 $ 45,459 $ 65,318 $ 60,515
Income taxes paid (received), net 396 27,928 2,558 26,230
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 1999 Form 10-K, and the 2000 Quarterly Reports on Form 10-Q.
Intercompany Transactions. The construction services segment recognizes revenues
generated from contracts with Southwest (see Note 2 below). Accounts receivable
for these services were $6.2 million at September 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>
Nine months ended September 30, 2000
Revenues from external customers $ 575,142 $ 77,501 $ 652,643
Intersegment revenues -- 40,768 40,768
--------------- ---------------- -------------
Total $ 575,142 $ 118,269 $ 693,411
=============== ================ =============
Segment net income $ 1,797 $ 3,992 $ 5,789
=============== ================ =============
Nine months ended September 30, 1999
Revenues from external customers $ 570,979 $ 71,108 $ 642,087
Intersegment revenues -- 32,519 32,519
--------------- ---------------- -------------
Total $ 570,979 $ 103,627 $ 674,606
=============== ================ =============
Segment net income $ 7,385 $ 3,097 $ 10,482
=============== ================ =============
</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
1,310,000 residential, commercial, industrial and other customers, of which 57
percent are located in Arizona, 34 percent are in Nevada, and 9 percent are in
California. During the twelve months ended September 30, 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, 3 percent from other
sales customers, and 14 percent from transportation customers. These patterns
are similar to prior years and are expected to continue.
Northern is a full-service underground piping contractor, which provides utility
companies with trenching and installation, replacement, and maintenance services
for energy distribution systems.
CAPITAL RESOURCES AND LIQUIDITY
The capital requirements and resources of the Company generally are determined
independently for the natural gas operations and construction services segments.
Each business activity is generally responsible for securing its own financing
sources. The capital requirements and resources of the construction services
segment are not material to the overall capital requirements and resources of
the Company.
Southwest continues to experience significant population growth throughout its
service territories. This growth has required large amounts of capital to
finance the investment in infrastructure, in the form of new transmission and
distribution plant, to satisfy consumer demand. For the twelve months ended
September 30, 2000, natural gas construction expenditures totaled $203 million.
Approximately 75 percent of these current-period expenditures represented new
construction and the balance represented costs associated with routine
replacement of existing transmission, distribution, and general plant. Cash
flows from operating activities of Southwest (net of dividends) were $93 million
for the twelve months ended September 30, 2000. Operating cash flows were below
prior year levels because the prior period included net recoveries of $63
million related to previously deferred purchased gas costs, whereas, in the
current period, there were net under recoveries of $21 million related to
purchased gas costs.
Southwest estimates construction expenditures during the three-year period
ending December 31, 2002 will be approximately $630 million. During the
three-year period, cash flows 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 third quarter of 2000, the Company continued 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 higher 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 further increase short-term borrowings to finance gas supply
requirements. The Company believes it 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)
6
<PAGE>
mechanisms. In Arizona, the Company adjusts gas cost recovery rates monthly. In
California, a monthly gas cost adjuster based on forecasted monthly prices will
become effective December 1, 2000. Monthly adjustments are designed to provide a
more timely recovery of gas costs. In Nevada, requests are pending before the
Public Utilities Commission of Nevada (PUCN) to increase rates for the recovery
of higher gas costs. PGA changes impact cash flows but have no direct impact on
profit margin. See separate discussions at Rates and Regulatory Proceedings
Nevada PGA Filings and California PGA Filings.
In October 2000, the Company issued $25 million in medium-term notes, due 2005,
bearing interest at 7.75 percent. The proceeds from this issuance will be used
to pay down short-term debt incurred to finance construction and improvement of
pipeline systems and facilities located in and around the communities served by
Southwest.
RESULTS OF CONSOLIDATED OPERATIONS
Quarterly Analysis
------------------
Contribution to Net Income (Loss)
Three Months Ended September 30,
------------------------------------------
2000 1999
----------- -----------
(Thousands of dollars)
Natural gas operations $ (11,618) $ (15,304)
Construction services 1,938 1,116
----------- -----------
Net income (loss) $ (9,680) $ (14,188)
=========== ===========
Loss per share for the quarter ended September 30, 2000 was $0.31, a $0.15
improvement from the per share loss of $0.46 reported for the quarter ended
September 30, 1999. Natural gas operations experienced a third quarter 2000 per
share loss of $0.37, a $0.13 improvement from the per share loss of $0.50
reported for the third quarter of 1999. See separate discussion at Results of
Natural Gas Operations. Construction services activities contributed third
quarter 2000 per share earnings of $0.06, a $0.02 per share increase from the
$0.04 per share earned in the third quarter of 1999.
Nine-Month Analysis
-------------------
Contribution to Net Income
Nine Months Ended September 30,
------------------------------------------
2000 1999
----------- -----------
(Thousands of dollars)
Natural gas operations $ 1,797 $ 7,385
Construction services 3,992 3,097
----------- -----------
Net income $ 5,789 $ 10,482
=========== ===========
Earnings per share for the nine months ended September 30, 2000 were $0.19, a
$0.15 decrease from per share earnings of $0.34 recorded during the
corresponding period of the prior year. Natural gas operations contributed
year-to-date earnings of $0.06 per share in 2000, an $0.18 decrease from the
$0.24 per share contributed year to date in 1999. See separate discussion at
Results of Natural Gas Operations. Construction services activities contributed
2000 year-to-date per share earnings of $0.13, a $0.03 per share increase from
the $0.10 per share earned in the corresponding period of the prior year.
7
<PAGE>
Twelve-Month Analysis
---------------------
Contribution to Net Income
Twelve Months Ended September 30,
------------------------------------------
2000 1999
----------- -----------
(Thousands of dollars)
Natural gas operations $ 29,885 $ 31,578
Construction services 4,732 3,947
----------- -----------
Net income $ 34,617 $ 35,525
=========== ===========
Earnings per share for the twelve months ended September 30, 2000 were $1.11, a
$0.05 decrease from per share earnings of $1.16 recorded during the prior
twelve-month period. Natural gas operations contributed $0.96 per share in the
current twelve-month period, a $0.07 decrease from $1.03 per share in the prior
twelve-month period. See separate discussion at Results of Natural Gas
Operations. Construction services activities contributed per share earnings of
$0.15 in the current twelve-month period, a $0.02 per share improvement from
$0.13 per share earned in the prior twelve-month period.
The following table sets forth the ratios of earnings to fixed charges for the
Company:
For the Twelve Months Ended
------------------------------------------
September 30, December 31,
2000 1999
------------------ -------------
Ratio of earnings to fixed charges 1.48 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
------------------
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------
2000 1999
----------- -----------
(Thousands of dollars)
<S> <C> <C>
Gas operating revenues $ 150,178 $ 125,190
Net cost of gas sold 70,142 46,711
----------- -----------
Operating margin 80,036 78,479
Operations and maintenance expense 56,839 54,621
Depreciation and amortization 23,535 21,918
Taxes other than income taxes 7,576 7,074
----------- -----------
Operating income (loss) (7,914) (5,134)
Other income (expense) (82) (1,918)
----------- -----------
Income (loss) before interest and income taxes (7,996) (7,052)
Net interest deductions 17,165 15,657
Preferred securities distributions 1,368 1,368
Income tax expense (benefit) (14,911) (8,773)
----------- -----------
Contribution to consolidated net income (loss) $ (11,618) $ (15,304)
=========== ===========
</TABLE>
Contribution from natural gas operations improved $3.7 million in the third
quarter of 2000 compared to the same period a year ago. The increase was
principally due to the recognition of $4.4 million of income tax benefits
resulting from the favorable resolution of certain federal income tax issues and
the statutory closure of open federal tax years.
8
<PAGE>
Operating margin increased $1.6 million, or two percent, as Southwest served
64,000, or five percent, more customers than a year ago.
Operations and maintenance expense increased $2.2 million, or four percent,
reflecting general increases in labor and maintenance costs. Depreciation
expense and general taxes increased $2.1 million, or seven percent, as a result
of construction activities. Average gas plant in service increased $169 million,
or eight percent, as compared to the third 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 $1.5 million, or ten percent, due to
additional borrowings to finance construction, and increased interest rates on
variable-rate debt instruments.
Other income (expense) increased $1.8 million. Prior period results included
$1.7 million, or $0.06 per share, of after-tax costs associated with the now
terminated merger with ONEOK, Inc.
Utility income tax benefit increased $6.1 million between periods. Exclusive of
changes in pretax income, the increase was mainly attributed to the recognition
of $4.4 million of income tax benefits in the current period, resulting from the
favorable resolution of certain federal income tax issues and the statutory
closure of open federal tax years.
Nine-Month Analysis
-------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
2000 1999
----------- -----------
(Thousands of dollars)
<S> <C> <C>
Gas operating revenues $ 575,142 $ 570,979
Net cost of gas sold 263,836 254,436
----------- -----------
Operating margin 311,306 316,543
Operations and maintenance expense 170,506 163,565
Depreciation and amortization 70,371 65,481
Taxes other than income taxes 22,688 21,585
----------- -----------
Operating income 47,741 65,912
Other income (expense) (1,547) (2,600)
----------- -----------
Income before interest and income taxes 46,194 63,312
Net interest deductions 50,050 44,720
Preferred securities distributions 4,106 4,106
Income tax expense (benefit) (9,759) 7,101
----------- -----------
Contribution to consolidated net income $ 1,797 $ 7,385
=========== ===========
</TABLE>
Contribution to consolidated net income declined $5.6 million in the first nine
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 partially offset by lower income tax expense.
Operating margin decreased $5.2 million, or two 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 $11.4 million in operating margin due to
customer growth.
Operations and maintenance expense increased $6.9 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 $6 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 nine-month period ended
9
<PAGE>
September 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 $5.3 million, or 12 percent, due to additional
borrowings 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 $4.4
million ($4.2 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 decreased $16.9 million between periods. Exclusive of
changes in pretax income, the decrease was mainly attributed to the recognition
of $6 million of income tax benefits in the current period, resulting from the
favorable resolution of certain federal income tax issues and the statutory
closure of open federal tax years.
Twelve-Month Analysis
---------------------
<TABLE>
<CAPTION>
Twelve Months Ended
September 30,
------------------------------
2000 1999
----------- -----------
(Thousands of dollars)
<S> <C> <C>
Gas operating revenues $ 795,318 $ 802,967
Net cost of gas sold 339,431 338,031
----------- -----------
Operating margin 455,887 464,936
Operations and maintenance expense 228,199 218,941
Depreciation and amortization 93,144 86,173
Taxes other than income taxes 28,713 29,715
----------- -----------
Operating income 105,831 130,107
Other income (expense) (1,872) (4,283)
----------- -----------
Income before interest and income taxes 103,959 125,824
Net interest deductions 66,927 60,198
Preferred securities distributions 5,475 5,475
Income tax expense 1,672 28,573
----------- -----------
Contribution to consolidated net income $ 29,885 $ 31,578
=========== ===========
</TABLE>
Contribution to consolidated net income decreased $1.7 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 partially offset by lower income tax
expense.
Operating margin decreased $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 15 percent above normal during the current period.
Operations and maintenance expense increased $9.3 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 a net $6 million, or five
percent, as a result of additional plant in service. Average gas plant in
service for the current twelve-month period increased $175 million, or eight
percent, compared to the corresponding period a year ago. This was attributable
to the upgrade of existing operating facilities and the expansion of the system
to accommodate new customers being added to the system.
Net interest deductions increased $6.7 million, or 11 percent, resulting
primarily from additional borrowings to finance construction expenditures and
higher interest rates on variable-rate debt.
10
<PAGE>
Other income (expense) in the current period includes a $2 million expense
recorded in December 1999 associated with the California Public Utilities
Commission approval of a settlement agreement with the town of Truckee,
California. 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 $5.5 million ($4.9 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 decreased $26.9 million between periods. Exclusive of
changes in pretax income, the decrease was mainly attributed to the recognition
of $6 million of income tax benefits in the current period, due to the favorable
resolution of certain federal income tax issues and the statutory closure of
open federal tax years. Other tax matters, including the recognition of income
tax liabilities for potential unrelated issues in the prior period, resulted in
a $3 million improvement in earnings between periods.
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 Filings
In June 2000, the Company submitted an annual 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 also requested 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. Hearings were held in
October 2000 related to the June 2000 PGA filing. A decision from the PUCN is
expected in late November 2000.
During the recently held PGA hearings, the PUCN Regulatory Operations Staff and
the Bureau of Consumer Protection indicated their preference for an immediate
out-of-period PGA filing in lieu of considering the monthly PGA mechanism
proposal. In October 2000, the Company made an out-of-period PGA filing
requesting increases of $47.1 million, or 28 percent, in southern Nevada and
$16.6 million, or 29 percent, in northern Nevada. The Company requested
expedited PUCN action on this filing so that new rates could be implemented
during the 2000/2001 winter heating season.
California PGA Filings
The Company filed for PGA increases in September 2000, related to the southern
and northern California rate jurisdictions, in the amount of $6.9 million, or 10
percent, and $4.6 million, or 26 percent, respectively. The Company expects a
decision by the California Public Utilities Commission on the proposed increase
during the fourth quarter of 2000. In a filing separate from the PGA, the
Company requested approval of a monthly gas cost adjuster based on forecasted
monthly prices. The monthly gas cost mechanism was approved and will be
effective December 2000.
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
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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. The Company has fixed-price gas supply contracts which
qualify for the normal purchases and normal sales exclusion. None of the
Company's current long-term financial instruments or other contracts meet the
definition of a derivative under the standard. Upon adoption of SFAS No. 133,
the Company does not expect any significant impact to its financial position or
results of operations.
In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement replaces SFAS No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" and revises the standards
of accounting and disclosures of securitizations and other transfers of
financial assets and collateral and the settling of liabilities. SFAS No. 140 is
effective for transfers and servicing of assets and extinguishments of
liabilities occurring after March 31, 2001, and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. The Company does not anticipate any significant impact to its
financial position or results of operations upon adoption of SFAS No. 140.
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.
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
Litigation is pending in the United States District Court of California (99 cv
1891-L (JAH) and the United States District Court of Arizona (Civ `99 1294 PHX
ROS, Civ `00 0119 PHX VAM, Civ '00 0452 PHX RGS, Civ '00 1775 PHX RLB and Civ
'00 1812 PHX ROS) 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 2-5. None
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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 10.1 - Amendment to Form of Employment Agreement
with Company Officers.
Exhibit 10.2 - Amendment to Form of Change in Control
Agreement with Company Officers.
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
On November 1, 2000, the Company reported summary financial
information for the quarter, year to date and twelve months
ended September 30, 2000 pursuant to Item 9 of Form 8-K.
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
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(Registrant)
Date: November 13, 2000
/s/ Edward A. Janov
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Edward A. Janov
Vice President/Controller and Chief Accounting Officer
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