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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, 2001
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, 32,172,566 shares as of August 1, 2001.
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PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except par value)
JUNE 30, DECEMBER 31,
2001 2000
---------------- ----------------
ASSETS (Unaudited)
Utility plant:
Gas plant $ 2,463,102 $ 2,369,697
Less: accumulated depreciation (763,892) (728,466)
Acquisition adjustments 2,985 3,124
Construction work in progress 43,434 41,727
---------------- ----------------
Net utility plant 1,745,629 1,686,082
---------------- ----------------
Other property and investments 95,991 91,685
---------------- ----------------
Current assets:
Cash and cash equivalents 6,866 19,955
Accounts receivable, net of allowances 114,771 135,609
Accrued utility revenue 24,973 57,873
Tax receivable, net - 13,394
Deferred purchased gas costs 133,069 92,064
Prepaids and other current assets 30,692 84,334
---------------- ----------------
Total current assets 310,371 403,229
---------------- ----------------
Deferred charges and other assets 50,294 51,341
---------------- ----------------
Total assets $ 2,202,285 $ 2,232,337
================ ================
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $1 par (authorized - 45,000,000 shares; issued
and outstanding - 32,134,290 and 31,710,004 shares) $ 33,764 $ 33,340
Additional paid-in capital 462,383 454,132
Retained earnings 55,506 45,995
---------------- ----------------
Total common equity 551,653 533,467
Redeemable preferred securities of Southwest Gas Capital I 60,000 60,000
Long-term debt, less current maturities 797,461 896,417
---------------- ----------------
Total capitalization 1,409,114 1,489,884
---------------- ----------------
Current liabilities:
Current maturities of long-term debt 288,556 8,139
Short-term debt 2,165 131,000
Accounts payable 79,600 194,679
Customer deposits 29,107 29,039
Accrued taxes 8,864 -
Accrued interest 20,559 15,702
Deferred income taxes 41,567 48,965
Other current liabilities 36,846 54,006
---------------- ----------------
Total current liabilities 507,264 481,530
---------------- ----------------
Deferred income taxes and other credits:
Deferred income taxes and investment tax credits 206,391 204,168
Other deferred credits 79,516 56,755
---------------- ----------------
Total deferred income taxes and other credits 285,907 260,923
---------------- ----------------
Total capitalization and liabilities $ 2,202,285 $ 2,232,337
================ ================
The accompanying notes are an integral part of these statements.
2
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
------------------------- -------------------------- --------------------------
2001 2000 2001 2000 2001 2000
------------ ------------ ------------- ------------ ------------ ------------
Operating revenues:
Gas operating revenues $ 226,296 $ 157,885 $ 673,516 $ 424,964 $1,119,263 $ 770,330
Construction revenues 52,664 39,749 92,942 69,485 186,833 152,668
------------ ------------ ------------ ------------ ------------ ------------
Total operating revenues 278,960 197,634 766,458 494,449 1,306,096 922,998
------------ ------------ ------------ ------------ ------------ ------------
Operating expenses:
Net cost of gas sold 129,462 70,190 409,169 193,694 610,186 316,000
Operations and maintenance 64,051 56,340 124,261 113,667 241,769 225,981
Depreciation and amortization 29,187 26,296 58,085 52,434 112,291 102,658
Taxes other than income taxes 8,220 7,439 16,939 15,112 31,646 28,211
Construction expenses 46,929 34,786 82,787 60,340 165,559 133,989
------------ ------------ ------------ ------------ ------------ ------------
Total operating expenses 277,849 195,051 691,241 435,247 1,161,451 806,839
------------ ------------ ------------ ------------ ------------ ------------
Operating income 1,111 2,583 75,217 59,202 144,645 116,159
------------ ------------ ------------ ------------ ------------ ------------
Other income and (expenses):
Net interest deductions (20,288) (16,951) (40,527) (33,737) (77,461) (67,269)
Preferred securities distributions (1,369) (1,369) (2,738) (2,738) (5,475) (5,475)
Other income (deductions) 2,443 (1,241) 4,666 (456) 4,577 (2,271)
------------ ------------ ------------ ------------ ------------ ------------
Total other income and (expenses) (19,214) (19,561) (38,599) (36,931) (78,359) (75,015)
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes (18,103) (16,978) 36,618 22,271 66,286 41,144
Income tax expense (benefit) (6,963) (7,249) 13,949 6,802 20,775 11,035
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) $ (11,140) $ (9,729) $ 22,669 $ 15,469 $ 45,511 $ 30,109
============ ============ ============ ============ ============ ============
Basic earnings (loss) per share $ (0.35) $ (0.31) $ 0.71 $ 0.50 $ 1.43 $ 0.97
============ ============ ============ ============ ============ ============
Diluted earnings (loss) per share $ (0.35) $ (0.31) $ 0.70 $ 0.49 $ 1.42 $ 0.96
============ ============ ============ ============ ============ ============
Dividends paid per share $ 0.205 $ 0.205 $ 0.41 $ 0.41 $ 0.82 $ 0.82
============ ============ ============ ============ ============ ============
Average number of common shares outstanding 32,000 31,289 31,911 31,215 31,717 31,100
Average shares outstanding (assuming dilution) - - 32,172 31,384 31,967 31,325
The accompanying notes are an integral part of these statements.
3
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 22,669 $ 15,469 $ 45,511 $ 30,109
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 58,085 52,434 112,291 102,658
Deferred income taxes (5,176) (578) 76,238 (3,471)
Changes in current assets and liabilities:
Accounts receivable, net of allowances 20,838 24,302 (50,597) (6,188)
Accrued utility revenue 32,900 33,000 (1,600) (373)
Deferred purchased gas costs (41,005) 7,773 (131,791) (4,284)
Accounts payable (115,079) (21,824) 37,177 3,066
Accrued taxes 22,258 5,346 (37,093) (2,572)
Other current assets and liabilities 39,883 7,617 (12,651) 12,964
Other 24,710 (682) 25,048 2,131
------------ ------------ ------------ ------------
Net cash provided by operating activities 60,083 122,857 62,533 134,040
------------ ------------ ------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Construction expenditures and property additions (119,380) (103,278) (239,342) (221,155)
Other (1,551) (321) 2,693 367
------------ ------------ ------------ ------------
Net cash used in investing activities (120,931) (103,599) (236,649) (220,788)
------------ ------------ ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock, net 8,675 7,724 16,546 16,274
Dividends paid (13,071) (12,796) (25,990) (25,431)
Issuance of long-term debt, net 206,187 3,914 247,374 45,260
Retirement of long-term debt, net (4,197) (4,031) (8,308) (7,349)
Temporary changes in long-term debt (21,000) - (21,000) 27,000
Change in short-term debt (128,835) (21,925) (36,910) 30,705
------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities 47,759 (27,114) 171,712 86,459
------------ ------------ ------------ ------------
Change in cash and cash equivalents (13,089) (7,856) (2,404) (289)
Cash at beginning of period 19,955 17,126 9,270 9,559
------------ ------------ ------------ ------------
Cash at end of period $ 6,866 $ 9,270 $ 6,866 $ 9,270
============ ============ ============ =============
Supplemental information:
Interest paid, net of amounts capitalized $ 34,713 $ 32,740 $ 69,611 $ 64,078
Income taxes paid (received), net (4,138) 240 (16,731) 13,374
The accompanying notes are an integral part of these statements.
4
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. The public utility rates, practices, facilities, and service
territories of Southwest 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. Natural
gas purchases and the timing of related recoveries can materially impact
liquidity. 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 (SEC). 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 consolidated financial statements and the notes thereto
included in the 2000 Annual Report to Shareholders, which is incorporated by
reference into the 2000 Form 10-K, and the 2001 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 $6.6 million at June 30, 2001 and $5.2 million at
December 31, 2000. The accounts receivable balance, revenues, and associated
profits are included in the consolidated financial statements of the Company and
were not eliminated during consolidation in accordance with Statement of
Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation."
NOTE 2 - SEGMENT INFORMAITON
The following tables list revenues from external customers, intersegment
revenues, and segment net income (thousands of dollars):
NATURAL GAS CONSTRUCTION
OPERATIONS SERVICES TOTAL
--------------- ---------------- -------------
SIX MONTHS ENDED JUNE 30, 2001
Revenues from external customers $ 673,516 $ 61,506 $ 735,022
Intersegment revenues -- 31,436 31,436
--------------- ---------------- -------------
Total $ 673,516 $ 92,942 $ 766,458
=============== ================ =============
Segment net income $ 20,964 $ 1,705 $ 22,669
=============== ================ =============
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
=============== ================ =============
5
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 high desert
and mountain areas in San Bernardino County.
Southwest purchases, transports, and distributes natural gas to approximately
1,361,000 residential, commercial, industrial and other customers, of which 56
percent are located in Arizona, 35 percent are in Nevada, and 9 percent are in
California. During the twelve months ended June 30, 2001, Southwest earned 57
percent of operating margin in Arizona, 34 percent in Nevada, and 9 percent in
California. During this same period, Southwest earned 84 percent of operating
margin from residential and small commercial customers, 4 percent from other
sales customers, and 12 percent from transportation customers. These patterns
are similar to prior years and are expected to continue.
Northern is a full-service underground piping contractor which provides utility
companies with trenching and installation, replacement, and maintenance services
for energy distribution systems.
CAPITAL RESOURCES AND LIQUIDITY
The capital requirements and resources of the Company generally are determined
independently for the natural gas operations and construction services segments.
Each business activity is generally responsible for securing its own financing
sources. The capital requirements and resources of the construction services
segment are not material to the overall capital requirements and resources of
the Company.
Southwest continues to experience significant population growth throughout its
service territories. This growth has required large amounts of capital to
finance the investment in infrastructure, in the form of new transmission and
distribution plant, to satisfy consumer demand. For the twelve months ended June
30, 2001, natural gas construction expenditures totaled $224 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 $24
million for the twelve months ended June 30, 2001. Such cash flows were
unfavorably impacted by unusually high working capital requirements resulting
from gas costs that exceeded the amounts recovered from customers.
Southwest estimates construction expenditures during the three-year period
ending December 31, 2003 will be approximately $694 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 customer growth levels. These external financings may include the issuance
of both debt and equity securities, bank and other short-term borrowings, and
other forms of financing.
Long-term debt, less current maturities decreased $99 million between
December 2000 and June 2001. The decrease primarily resulted from the
reclassification of $281 million of long-term debt to current maturities of
long-term debt in June 2001, offset by the issuance of $200 million in notes
during the first quarter. Net proceeds from the issuance of the notes were
used to pay down short-term debt. Current maturities of long-term debt were
$289 million at June 30, 2001. In June 2002, the $350 million revolving credit
facility, of which $200 million is designated as long-term debt with
$179 million outstanding at June 30, 2001, and the $100 million Series F
debentures will mature. The Company intends to refinance the long-term portion
of the revolving credit agreement and the Series F debentures on a long-term
basis but no firm agreements are in place at this time. The
6
timing, types, and amounts of these external financings will be
dependent on conditions in the capital markets. Once the debt has been
refinanced, or long-term agreements have been entered into, the current
maturities line item will return to normal levels. The Company also
intends to maintain short-term borrowing capacity at a level sufficient to cover
working capital needs.
In February 2001, the Company issued $200 million in notes, due 2011, bearing
interest at 8.375%. The net proceeds from the sale of the notes are being used
to finance the construction, completion, extension and improvement of the
pipeline systems and facilities located in and around the communities served by
Southwest. These capital expenditures were originally funded, in part, with
short-term debt, which was repaid with the net proceeds of the notes.
During the first half of 2001, Southwest continued to experience high gas
purchase prices relative to amounts recovered in rates for gas purchases.
Natural gas prices have moderated somewhat but remain relatively high.
Southwest generally defers over or under collections of gas costs to purchased
gas adjustment (PGA) accounts. At June 30, 2001, the combined balances in these
PGA accounts were $133 million. The balances will remain high until recovery
rates are adjusted and amounts are recovered from customers, or prices paid for
gas purchases decline below levels embedded in sales rates. See RATES AND
REGULATORY PROCEEDINGS for the status of current PGA filings. Southwest
utilizes short-term borrowings to temporarily finance PGA balances. Southwest
currently has short-term borrowing capacity of $225 million, which is
considered adequate to meet anticipated needs.
RESULTS OF CONSOLIDATED OPERATIONS
Period Ended June 30,
-----------------------------------------------------------------------------------
Three Months Six Months Twelve Months
----------------------- ----------------------- -------------------------
2001 2000 2001 2000 2001 2000
---------- ---------- ---------- ---------- ---------- ----------
Contribution to net income
- --------------------------
(Thousands of dollars)
Natural gas operations $ (12,365) $ (10,949) $ 20,964 $ 13,415 $ 41,457 $ 26,199
Construction services 1,225 1,220 1,705 2,054 4,054 3,910
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) $ (11,140) $ (9,729) $ 22,669 $ 15,469 $ 45,511 $ 30,109
========== ========== ========== ========== ========== ==========
Earnings (loss) per share
- -------------------------
Gas operations $ (0.39) $ (0.35) $ 0.66 $ 0.43 $ 1.30 $ 0.84
Construction services 0.04 0.04 0.05 0.07 0.13 0.13
---------- ---------- ---------- ---------- ---------- ----------
Consolidated $ (0.35) $ (0.31) $ 0.71 $ 0.50 $ 1.43 $ 0.97
========== ========== ========== ========== ========== ==========
See separate discussion at RESULTS OF NATURAL GAS OPERATIONS.
Construction services earnings per share for the three and twelve months ended
June 30, 2001 were unchanged when compared to the same periods ended June 30,
2000. Construction services earnings per share for the six months ended June 30,
2001 were $0.02 lower when compared to the same period in 2000. The decrease was
attributable to favorable weather conditions during the first quarter of 2000
that were not experienced in 2001.
The following table sets forth the ratios of earnings to fixed charges for the
Company:
For the Twelve Months Ended
------------------------------------------
June 30, December 31,
2001 2000
----------------- -------------
Ratio of earnings to fixed charges 1.71 1.60
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.
7
RESULTS OF NATURAL GAS OPERATIONS
Quarterly Analysis
- ------------------
Three Months Ended
June 30,
------------------------------
2001 2000
----------- -----------
(Thousands of dollars)
Gas operating revenues $ 226,296 $ 157,885
Net cost of gas sold 129,462 70,190
----------- -----------
Operating margin 96,834 87,695
Operations and maintenance expense 64,051 56,340
Depreciation and amortization 25,798 23,420
Taxes other than income taxes 8,220 7,439
----------- -----------
Operating income (loss) (1,235) 496
Other income (expense) 2,119 (1,735)
----------- -----------
Income (loss) before interest and income taxes 884 (1,239)
Net interest deductions 19,753 16,498
Preferred securities distributions 1,369 1,369
Income tax expense (benefit) (7,873) (8,157)
----------- -----------
Contribution to consolidated net income (loss) $ (12,365) $ (10,949)
=========== ===========
Contribution from natural gas operations decreased $1.4 million in the second
quarter of 2001 compared to the same period a year ago. The decrease was
principally the result of increased operating expenses and financing costs
partially offset by higher operating margin and improved other income (expense).
Operating margin increased $9.1 million, or ten percent compared to the same
period a year ago. Customer growth was the primary reason for the increase as
the Company served 63,000, or five percent, more customers than a year ago. In
addition, operating margin generated from large commercial, industrial and
electric generation customers increased as many of these customers converted, at
least temporarily, from transportation service to sales service, which has
higher margin rates.
Operations and maintenance expense increased $7.7 million, or 14 percent,
reflecting general increases in labor and maintenance costs and continued
expansion and upgrading of the gas system to accommodate customer growth. Other
factors which influenced the change between periods included higher
uncollectible expenses and timing related to outside services. Depreciation
expense and general taxes increased $3.2 million, or ten percent, as a result of
construction activities. Average gas plant in service increased $179 million, or
eight percent, as compared to the second quarter of 2000. The increase reflects
ongoing capital expenditures for the upgrade of existing operating facilities
and the expansion of the system to accommodate continued customer growth.
Other income (expense) improved $3.9 million between periods. The current period
includes an incremental $2 million of interest income primarily earned on the
deferred PGA account balances. The prior period includes a $1.9 million
non-recurring charge to settle regulatory issues in Nevada.
Net interest deductions increased $3.3 million, or 20 percent, due to additional
borrowings to finance construction expenditures, and to finance purchased gas
costs in excess of amounts recovered from customers.
8
Six-Month Analysis
- ------------------
Six Months Ended
June 30,
------------------------------
2001 2000
----------- -----------
(Thousands of dollars)
Gas operating revenues $ 673,516 $ 424,964
Net cost of gas sold 409,169 193,694
----------- -----------
Operating margin 264,347 231,270
Operations and maintenance expense 124,261 113,667
Depreciation and amortization 51,442 46,836
Taxes other than income taxes 16,939 15,112
----------- -----------
Operating income 71,705 55,655
Other income (expense) 4,095 (1,465)
----------- -----------
Income before interest and income taxes 75,800 54,190
Net interest deductions 39,528 32,885
Preferred securities distributions 2,738 2,738
Income tax expense 12,570 5,152
----------- -----------
Contribution to consolidated net income $ 20,964 $ 13,415
=========== ===========
Contribution from natural gas operations improved $7.5 million in the first six
months of 2001 compared to the same period a year ago. The increase was
principally the result of higher operating margin and improved other income
(expense) partially offset by increased operating expenses and financing costs.
Operating margin increased $33 million, or 14 percent compared to the same
period a year ago. Differences in heating demand caused by weather variations
between periods resulted in a $19 million margin increase. During the prior
period, Southwest experienced the warmest February in ten years throughout its
service territories. Customer growth contributed $14 million of incremental
operating margin.
Operations and maintenance expense increased $10.6 million, or nine percent,
reflecting general increases in labor and maintenance costs, along with
increased uncollectible expenses and other operating expenses incurred to
provide service to a steadily growing customer base.
Depreciation expense and general taxes increased $6.4 million, or ten percent,
as a result of construction activities. Average gas plant in service increased
$174 million, or eight percent, as compared to the first six months of 2000. The
increase reflects ongoing capital expenditures for the upgrade of existing
operating facilities and the expansion of the system to accommodate continued
customer growth.
Other income (expense) improved $5.6 million between periods. The current period
includes an incremental $3.9 million of interest income primarily earned on the
deferred PGA account balances. The prior period includes a $1.9 million
non-recurring charge to settle regulatory issues in Nevada.
Net interest deductions increased $6.6 million, or 20 percent, due to additional
borrowings to finance construction expenditures and to finance purchased gas
costs in excess of amounts recovered from customers.
9
Twelve-Month Analysis
- ---------------------
Twelve Months Ended
June 30,
------------------------------
2001 2000
----------- -----------
(Thousands of dollars)
Gas operating revenues $ 1,119,263 $ 770,330
Net cost of gas sold 610,186 316,000
----------- -----------
Operating margin 509,077 454,330
Operations and maintenance expense 241,769 225,981
Depreciation and amortization 99,295 91,527
Taxes other than income taxes 31,646 28,211
----------- -----------
Operating income 136,367 108,611
Other income (expense) 3,795 (3,708)
----------- -----------
Income before interest and income taxes 140,162 104,903
Net interest deductions 75,535 65,419
Preferred securities distributions 5,475 5,475
Income tax expense 17,695 7,810
----------- -----------
Contribution to consolidated net income $ 41,457 $ 26,199
=========== ===========
Contribution to consolidated net income improved $15.3 million in the current
twelve-month period compared to the same period a year ago. The increase was the
result of higher operating margin and improved other income (expense), partially
offset by increased operating expenses and financing costs.
Operating margin increased $55 million, or 12 percent, largely due to
differences in heating demand between periods. During the 2000/2001 winter
heating season, the Southwest service territories experienced weather that was
ten percent colder than normal, whereas temperatures were substantially above
normal during the prior heating season. This resulted in a $34 million increase
in weather-sensitive operating margin. Customer growth contributed $21 million
in incremental margin.
Operations and maintenance expense increased $15.8 million, or seven 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 $11.2 million, or nine percent,
as a result of additional plant in service. Average gas plant in service for the
current twelve-month period increased $171 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.
Other income (expense) improved $7.5 million between periods. The current period
includes an incremental $4 million of interest income primarily earned on the
deferred PGA account balances. The prior period includes non-recurring charges
of $3.9 million to settle regulatory issues in Nevada and California.
Net interest deductions increased $10.1 million, or 15 percent, resulting
primarily from additional borrowings to finance construction expenditures and to
finance purchased gas costs in excess of amounts recovered from customers.
10
RATES AND REGULATORY PROCEEDINGS
ARIZONA GENERAL RATE CASE. In May 2000, Southwest filed a general rate
application with the Arizona Corporation Commission (ACC) seeking approval to
increase operating margin by $37.1 million, or nine percent, annually for its
Arizona rate jurisdiction. Southwest sought rate relief for increased operating
costs, changes in financing costs, declining average residential usage, and
improvements and additions to the distribution system.
In February 2001, Southwest entered a negotiated settlement proposal
(Settlement) with the ACC Staff and the Residential Utility Consumer Office. In
April 2001, the ACC indicated that additional information was needed before new
rates could be approved and did not accept the Settlement. As a result, the
application for new rates proceeded to hearing. Southwest supplemented the
record in the case currently on file with additional information requested by
the ACC to further support the initial application for an annual operating
margin increase of $37.1 million. ACC hearings were conducted in late July 2001.
A decision by the ACC is expected during the third quarter of 2001.
NEVADA GENERAL RATE CASES. In July 2001, Southwest filed general rate
applications with the Public Utilities Commission of Nevada (PUCN) seeking
approval to increase revenues by $21.7 million, or eight percent, annually in
the southern Nevada rate jurisdiction and $7.7 million, or eight percent,
annually in the northern Nevada rate jurisdiction. Southwest is seeking to earn
a fair and reasonable rate of return so that it can attract the capital
necessary to support continued growth in Nevada. Southwest also proposes
shifting more day-to-day operating costs from the gas usage charge to the basic
service charge to reduce the impact of weather on customers' monthly bills and
to stabilize revenue. A PUCN decision is not expected until early 2002. Nevada
general rates were last increased in 1996.
NEVADA PGA FILINGS. In June 2001, the PUCN approved an agreement allowing
Southwest to increase rates by $74.6 million annually to recover higher gas
costs. Effective July 2001, rates increased $47.2 million, or 23 percent, in
southern Nevada and $27.4 million, or 36 percent in northern Nevada. The
agreement followed a thorough review by the Bureau of Consumer Protection (BCP)
and PUCN Staff of the gas purchasing practices of Southwest over the last year.
The original out-of-cycle PGA filing was made by Southwest in January 2001 to
recover gas costs incurred through December 2000. PGA changes impact cash flows
but have no direct impact on profit margin.
In October 2000, Southwest submitted an out-of-cycle PGA filing with the PUCN to
recover gas costs incurred through September 2000. This filing was approved
effective January 2001. In a related order issued May 2001, the PUCN directed
that Southwest meet with PUCN staff and the BCP in the third quarter of 2001 to
establish guidelines for Southwest to follow in constructing its Nevada gas
supply portfolio for coming years. The guidelines are expected to include a
requirement to utilize financial options to mitigate future price risks. Several
meetings have been held and more are planned. The parties are required to report
to the PUCN by September 2001.
CALIFORNIA ORDER INSTITUTING INVESTIGATION (OII). In June 2001, the California
Public Utilities Commission (CPUC) ordered an investigation into the
reasonableness of Southwest natural gas procurement practices and costs from
June 1999 through May 2001 and related measures taken to minimize gas costs
beyond May 2001. Southwest filed a detailed report with the CPUC in July 2001 on
the above items for both its northern and southern California service
territories. The OII resulted from complaints by southern California customers
about the size of monthly PGA rate increases that were necessary due to the
unusually high cost of natural gas during the winter of 2000-2001. Hearings, if
necessary, are expected to be held during the third quarter with a final
decision anticipated before the end of 2001. Management fully expects the
prudency of its gas procurement practices to be upheld.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141 "Business Combinations." SFAS
No. 141 will apply to all business combinations initiated after June 30, 2001.
This statement also applies to all business combinations accounted for using the
purchase method for which the date of acquisition is July 1, 2001, or later. The
pooling method of accounting for business combinations will no longer be
allowed. All business combinations in the scope of this Statement are to be
accounted for using one method, the purchase method, better reflecting the
investment made in an acquired entity, improving the comparability of reported
11
financial information and providing more complete financial information. Upon
adoption of SFAS No. 141, no significant impact to the financial position or
results of operations of the Company is expected.
In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets." SFAS No. 142 will be effective for fiscal years beginning after
December 15, 2001. In all cases, SFAS No. 142 must be adopted as of the
beginning of a fiscal year. SFAS No. 142 requires that the amortization of
goodwill be eliminated and that existing goodwill be evaluated for impairment.
Goodwill will be tested for impairment at least annually using a two-step
process that begins with an estimation of the fair value of a reporting unit.
The first step is a screen for potential impairment, and the second step
measures the amount of impairment, if any. However, if certain criteria are met,
the requirement to test goodwill for impairment annually can be satisfied
without a remeasurement of the fair value of a reporting unit. The Company has
included goodwill resulting from the purchase of Northern Pipeline Construction
Co. and other properties in its consolidated financial statements. Management
does not anticipate any significant impact to the financial position or results
of operations of the Company as a result of SFAS No. 142.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002 with early adoption encouraged. Due to the timing of the issuance,
management has not yet quantified the effects of the new standard on the
financial position or results of operations of the Company.
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, customer growth rates, natural gas prices, the
effects of regulation/deregulation, the timing and amount of rate relief,
changes in gas procurement practices, changes in capital requirements and
funding, the impact of conditions in the capital markets on financing costs,
resolution of pending litigation, acquisitions and competition.
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 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 ROS and Civ '00 1812 PHX ROS) relating to the now terminated
acquisition of the Company by ONEOK, Inc. (ONEOK) and the rejection of competing
offers from Southern Union Company (Southern Union). This litigation is
described in Item 3, "Legal Proceedings" in the 2000 Form 10-K filed by the
Company with the SEC.
The following claims of Southern Union have been dismissed with
prejudice by United States District Judge Roslyn O. Silver in the Arizona
litigation:
(1) claims against the Company, the Company's Chairman of the Board, Thomas
Hartley, the Company's President and Chief Executive Officer, Michael
Maffie, the Company's Executive Vice President/Consumer Resources and
Energy Services, Edward Zub, ONEOK, Arizona Corporation Commissioner,
Jim Irvin, and others under the Federal Racketeer Influenced and
Corrupt Organizations Act ("RICO") and under the Arizona state RICO
statute;
12
(2) fraudulent inducement claims against the Company's Chairman of the
Board, Thomas Hartley, the Company's Executive Vice President/Consumer
Resources and Energy Services, Edward Zub, ONEOK and Arizona
Corporation Commissioner, Jim Irvin and others; and
(3) tortious interference claims against the Company's President and Chief
Executive Officer, Michael Maffie.
Since all of Southern Union's claims against Mr. Hartley and Mr. Zub have been
dismissed, they are no longer parties to the Arizona lawsuit.
United States District Judge Roslyn O. Silver has also declined to allow
Southern Union to immediately appeal the Court's dismissal of the federal and
state RICO counts. Instead, an appeal, if any, of the Court's dismissal may only
be taken by Southern Union in the ordinary course after conclusion of a trial on
the merits. A trial date is set for November 2001. It is anticipated that the
trial could last two to three months.
The Company and certain of its current and former directors have reached a
settlement in principle with the named shareholder plaintiffs in the Arthur
Klein class action pending in U.S. District Court for the Southern District of
California (Case No. 99 cv 1891-L (JAH)). The settlement in principle, which is
subject to final court approval, will include a class of all holders and
purchasers of Southwest stock at any time from December 14, 1998 through January
21, 2000. According to the terms of the settlement, shareholders will support
the Company in its claims against Southern Union and ONEOK in the Arizona
litigation currently pending in federal court. The settlement also provides,
among other things, that Southwest shareholder class members will receive one of
the following payments upon the first occurrence of any of these contingent
events: (i) $22 million if Southwest enters into a business combination with a
third party within 36 months, following execution of the stipulation and
settlement, (ii) 50 percent of the first $54 million of any net recovery from
Southern Union or ONEOK by Southwest, after litigation expenses, within 36
months following execution of the stipulation and settlement, or, (iii) payments
sufficient to bring the total payments to the class to $9.5 million, from
Southwest's insurers, if payments made under the circumstances described in
subsections (i) and (ii), total less than $9.5 million at the end of 36 months
following execution of the stipulation and settlement. The settlement also
includes full mutual releases and the payment of $7.25 million of attorney's
fees for the shareholder class to be paid by Southwest's insurers.
Other Proceedings
- -----------------
The Company has been named as a 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 financial position or results of operations of
the Company.
ITEMS 2-3. None
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on May 10, 2001. 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 26,538,446
Manuel J. Cortez 26,531,316
Mark M. Feldman 32,256,575
David H. Gunning 26,611,079
Thomas Y. Hartley 26,545,882
Michael B. Jager 26,584,169
Leonard R. Judd 26,598,896
James J. Kropid 26,578,200
Michael O. Maffie 22,872,641
Carolyn M. Sparks 26,581,444
Terrance L. Wright 26,610,126
(2) The proposal to ratify the selection of Arthur Andersen LLP as
independent public accountants for the Company was approved.
Shareholders voted 28,047,387 shares in favor, 525,972
against, and 207,225 abstentions.
(3) The shareholder proposal to recommend the elimination of the
shareholder rights plan was approved. Shareholders voted
12,958,798 shares in favor, 8,555,106 against, and 657,014
abstentions.
ITEM 5. None
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following document is filed as part of this report on Form 10-Q:
Exhibit 12 -Computation of Ratios of Earnings to Fixed
Charges.
(b) Reports on Form 8-K
The Company filed a Form 8-K, dated May 21, 2001 reporting that the
December 2000 dismissal of claims against the Company and ONEOK,
asserted by Southern Union under RICO was upheld by
Judge Roslyn O. Silver of the Federal District Court in
Phoenix, Arizona. In addition, Arizona state RICO claims against the
Company and ONEOK were dismissed.
The Company filed a Form 8-K dated July 26, 2001 reporting a settlement
in principle with the named shareholder plaintiffs in the Arthur Klein
class action.
On July 31, 2001, the Company reported summary financial information
for the quarter, year to date and twelve months ended June 30, 2001
pursuant to Item 9 of Form 8-K.
15
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 10, 2001
/s/ Edward A. Janov
-------------------------------------------
Edward A. Janov
Vice President and Chief Accounting Officer
16
SOUTHWEST GAS CORPORATION
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
FOR THE TWELVE MONTHS ENDED
----------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
---------------------------------------------------------------
CONTINUING OPERATIONS 2001 2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
1.Fixed charges:
A) Interest expense $ 77,288 $ 70,659 $ 63,110 $ 63,416 $ 63,247 $ 54,674
B) Amortization 1,702 1,564 1,366 1,243 1,164 1,494
C) Interest portion of rentals 9,029 8,572 8,217 7,531 6,973 6,629
D) Preferred securities distributions 5,475 5,475 5,475 5,475 5,475 5,475
----------- ----------- ----------- ----------- ----------- -----------
Total fixed charges $ 93,494 $ 86,270 $ 78,168 $ 77,665 $ 76,859 $ 68,272
=========== =========== =========== =========== =========== ===========
2.Earnings (as defined):
E) Pretax income from
continuing operations $ 66,286 $ 51,939 $ 60,955 $ 83,951 $ 21,328 $ 10,448
Fixed Charges (1. above) 93,494 86,270 78,168 77,665 76,859 68,272
----------- ----------- ----------- ----------- ----------- -----------
Total earnings as defined $ 159,780 $ 138,209 $ 139,123 $ 161,616 $ 98,187 $ 78,720
=========== =========== =========== =========== =========== ===========
1.71 1.60 1.78 2.08 1.28 1.15
=========== =========== =========== =========== =========== ===========
