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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, 1998
Commission File Number 1-7850
SOUTHWEST GAS CORPORATION
(Exact name of registrant as specified in its charter)
California 88-0085720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5241 Spring Mountain Road
Post Office Box 98510
Las Vegas, Nevada 89193-8510
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (702) 876-7237
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------ -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, $1 Par Value, 30,316,387 shares as of November 3, 1998.
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1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except par value)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
ASSETS (Unaudited)
Utility plant:
Gas plant $ 1,983,373 $ 1,867,824
Less: accumulated depreciation (599,751) (551,083)
Acquisition adjustments 3,976 4,259
Construction work in progress 37,833 39,294
------------ ------------
Net utility plant 1,425,431 1,360,294
------------ ------------
Other property and investments 75,204 64,928
Current assets: ------------ ------------
Cash and cash equivalents 7,018 17,567
Accounts receivable, net of allowances 52,724 78,016
Accrued utility revenue 22,500 54,373
Income tax benefit -- 19,425
Deferred purchased gas costs 59,740 86,952
Prepaids and other current assets 41,669 32,211
------------ ------------
Total current assets 183,651 288,544
------------ ------------
Deferred charges and other assets 51,355 55,293
------------ ------------
Total assets $ 1,735,641 $ 1,769,059
============ ============
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $1 par (authorized - 45,000,000 shares; issued
and outstanding - 30,285,129 and 27,387,016 shares) $ 31,915 $ 29,017
Additional paid-in capital 421,631 360,683
Retained earnings (accumulated deficit) 720 (3,721)
------------ ------------
Total common equity 454,266 385,979
Redeemable preferred securities of Southwest Gas Capital I 60,000 60,000
Long-term debt, less current maturities 808,807 778,693
------------ ------------
Total capitalization 1,323,073 1,224,672
Current liabilities: ------------ ------------
Current maturities of long-term debt 5,128 5,621
Short-term debt 33,325 142,000
Accounts payable 36,878 62,324
Customer deposits 22,918 21,945
Accrued taxes 23,923 21,125
Accrued interest 13,494 13,007
Deferred taxes 10,626 24,163
Other current liabilities 41,621 34,222
------------ ------------
Total current liabilities 187,913 324,407
Deferred income taxes and other credits: ------------ ------------
Deferred income taxes and investment tax credits 172,275 168,282
Other deferred credits 52,380 51,698
------------ ------------
Total deferred income taxes and other credits 224,655 219,980
------------ ------------
Total capitalization and liabilities $ 1,735,641 $ 1,769,059
============ ============
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 NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------ -----------------------
1998 1997 1998 1997 1998 1997
--------- --------- --------- --------- --------- ---------
Operating revenues:
Gas operating revenues $ 128,229 $ 95,009 $ 567,609 $ 414,313 $ 767,961 $ 584,075
Construction revenues 34,279 33,689 80,397 86,554 111,188 123,635
--------- --------- --------- --------- --------- ---------
Total operating revenues 162,508 128,698 648,006 500,867 879,149 707,710
--------- --------- --------- --------- --------- ---------
Operating expenses:
Net cost of gas sold 51,499 28,508 246,254 149,830 305,762 198,226
Operations and maintenance 50,765 50,310 153,796 148,165 206,790 201,972
Depreciation and amortization 22,780 21,636 65,822 62,563 87,920 82,216
Taxes other than income taxes 7,699 7,371 23,516 22,482 30,427 28,410
Construction expenses 30,294 28,121 70,694 77,542 98,350 110,416
--------- --------- --------- --------- --------- ---------
Total operating expenses 163,037 135,946 560,082 460,582 729,249 621,240
--------- --------- --------- --------- --------- ---------
Operating income (loss) (529) (7,248) 87,924 40,285 149,900 86,470
--------- --------- --------- --------- --------- ---------
Other income and (expenses):
Net interest deductions (15,760) (16,115) (47,579) (46,362) (64,435) (60,830)
Preferred securities distributions (1,368) (1,368) (4,106) (4,106) (5,475) (5,475)
Other income (deductions), net (304) (467) 234 (609) (11,397) (1,132)
--------- --------- --------- --------- --------- ---------
Total other income and (expenses) (17,432) (17,950) (51,451) (51,077) (81,307) (67,437)
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes (17,961) (25,198) 36,473 (10,792) 68,593 19,033
Income tax expense (benefit) (7,016) (9,512) 13,979 (3,926) 22,764 7,603
Net income (loss) $ (10,945) $ (15,686) $ 22,494 $ (6,866) $ 45,829 $ 11,430
--------- --------- --------- --------- --------- ---------
Basic earnings (loss) per share $ (0.38) $ (0.58) $ 0.80 $ (0.25) $ 1.65 $ 0.42
========= ========= ========= ========= ========= =========
Diluted earnings (loss) per share $ (0.38) $ (0.58) $ 0.80 $ (0.25) $ 1.64 $ 0.42
========= ========= ========= ========= ========= =========
Dividends paid per share $ 0.205 $ 0.205 $ 0.615 $ 0.615 $ 0.82 $ 0.82
========= ========= ========= ========= ========= =========
Average number of common shares outstanding 29,050 27,149 28,028 26,990 27,846 26,902
Average shares outstanding (assuming dilution) -- -- 28,216 -- 28,022 27,021
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)
NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 22,494 $ (6,866) $ 45,829 $ 11,430
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 65,822 62,563 87,920 82,216
Deferred income taxes (9,544) 28,984 8,948 45,155
Changes in current assets and liabilities:
Accounts receivable, net of allowances 25,292 23,199 (5,820) (3,140)
Accrued utility revenue 31,873 24,775 (775) (1,438)
Deferred purchased gas costs 27,212 (74,237) 5,065 (104,357)
Accounts payable (25,446) (16,519) 3,446 4,431
Accrued taxes 22,223 (19,814) 33,760 (31,300)
Other current assets and liabilities (3,503) 13,742 (15,241) 15,760
Other 1,136 530 14,495 9,595
--------- --------- --------- ---------
Net cash provided by operating activities 157,559 36,357 177,627 28,352
--------- --------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Construction expenditures and property additions (136,647) (120,449) (185,812) (197,336)
Other 902 (4,974) 4,568 2,077
--------- --------- --------- ---------
Net cash used in investing activities (135,745) (125,423) (181,244) (195,259)
--------- --------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock, net 63,846 8,762 67,289 12,507
Dividends paid (17,460) (16,583) (23,054) (22,042)
Issuance of long-term debt, net 34,572 118,992 35,901 124,382
Retirement of long-term debt, net (4,646) (5,475) (6,736) (6,986)
Issuance (repayment) of short-term debt (108,675) (12,000) (75,675) 67,575
--------- --------- --------- ---------
Net cash provided by (used in) financing activities (32,363) 93,696 (2,275) 175,436
--------- --------- --------- ---------
Change in cash and temporary cash investments (10,549) 4,630 (5,892) 8,529
Cash at beginning of period 17,567 8,280 12,910 4,381
--------- --------- --------- ---------
Cash at end of period $ 7,018 $ 12,910 $ 7,018 $ 12,910
========= ========= ========= =========
Supplemental information:
Interest paid, net of amounts capitalized $ 46,108 $ 44,126 $ 60,753 $ 56,416
========= ========= ========= =========
Income taxes paid (received), net $ 6,666 $ (2,694) $ (24,594) $ (2,623)
========= ========= ========= =========
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. Southwest's public utility rates, practices,
facilities, and service territories are subject to regulatory oversight. The
timing and amount of rate relief can materially impact results of operations.
Natural gas sales are seasonal, peaking during the winter months. Variability
in weather from normal temperatures can materially impact results of
operations. Northern Pipeline Construction Co. (Northern or the construction
services segment), a wholly owned subsidiary, is a full-service underground
piping contractor which provides utility companies with trenching and
installation, replacement, and maintenance services for energy distribution
systems.
BASIS OF PRESENTATION. The consolidated financial statements included
herein have been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The preparation
of the consolidated financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. In the
opinion of management, all adjustments, consisting of normal recurring items
and estimates necessary for a fair presentation of the results for the interim
periods, have been made. It is suggested that these consolidated financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Company's 1997 Annual Report to Shareholders, which is
incorporated by reference into the Form 10-K, and 1998 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 $4.2 million at September 30, 1998 and
$3.6 million at December 31, 1997. The accounts receivable balance, revenues,
and associated profits are included in the consolidated financial statements
of the Company and were not eliminated during consolidation. Statement of
Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation," provides that intercompany profits on sales to
regulated affiliates should not be eliminated in consolidation if the sales
price is reasonable and if future revenues approximately equal to the sales
price will result from the rate-making process. Management believes these two
criteria are being met.
NOTE 2 - SEGMENT INFORMATION
The following tables list revenues from external customers, intersegment
revenues, and segment income/loss (thousands of dollars):
NATURAL GAS CONSTRUCTION
OPERATIONS SERVICES TOTAL
----------- ------------ ----------
NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues from external customers $ 567,609 $ 53,946 $ 621,555
Intersegment revenues -- 26,451 26,451
----------- ------------ ---------
Total $ 567,609 $ 80,397 $ 648,006
=========== ============ =========
Segment income $ 20,637 $ 1,857 $ 22,494
=========== ============ =========
NINE MONTHS ENDED SEPTEMBER 30, 1997
Revenues from external customers $ 414,313 $ 60,165 $ 474,478
Intersegment revenues -- 26,389 26,389
----------- ------------ ---------
Total $ 414,313 $ 86,554 $ 500,867
=========== ============ =========
Segment income (loss) $ (6,982) $ 116 $ (6,866)
=========== ============ =========
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 the high desert and mountain areas in San Bernardino County.
Southwest purchases, transports, and distributes natural gas to approximately
1,182,000 residential, commercial, industrial and other customers, of which
57 percent are located in Arizona, 33 percent are in Nevada, and 10 percent
are in California. During the twelve months ended September 30, 1998,
Southwest earned 57 percent of operating margin in Arizona, 33 percent in
Nevada, and 10 percent in California. During this same period, Southwest
earned 84 percent of operating margin from residential and small commercial
customers, 5 percent from other sales customers, and 11 percent from
transportation customers. These patterns are consistent with 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, 1998, natural gas construction expenditures totaled $173
million. Approximately 78 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
$144 million, or 83 percent, of the required capital resources pertaining to
these construction expenditures. The remainder was provided from net external
financing activities. The improvement in operating cash flows from expected
levels was due to higher earnings, and income tax refunds related to timing
differences principally associated with gas purchases and recoveries.
Southwest estimates construction expenditures during the three-year period
ending December 31, 2000 will be approximately $510 million. During the three-
year period, cash flow from operating activities (net of dividends) is
estimated to fund approximately one-half of the gas operations total
construction expenditures. A portion of the construction expenditure funding
will be provided by $26 million of funds held in trust, at December 31, 1997,
from the issuance of industrial development revenue bonds (IDRB). The
remaining cash requirements are expected to be provided by other 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.
In August 1998, the Company completed an offering of 2.5 million primary
shares of common stock. The net proceeds from this offering were $56 million
after deducting underwriting discounts and expenses. In September 1998, the
Company issued $25 million in medium-term notes, due 2008, bearing interest at
6
6.27 percent. The proceeds from these issuances will be used 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,
--------------------------------
(Thousands of dollars)
1998 1997
--------- ---------
Natural gas operations $ (11,794) $ (16,771)
Construction services 849 1,085
--------- ---------
Net income (loss) $ (10,945) $ (15,686)
========= =========
Loss per share for the quarter ended September 30, 1998 was $0.38, compared to
a $0.58 loss per share recorded during the corresponding quarter of the prior
year. Natural gas operations results improved $0.21 per share. See separate
discussion at RESULTS OF NATURAL GAS OPERATIONS for changes as they relate to
gas operations. Construction services contributed per share earnings of $0.03
during the current quarter, a $0.01 per share decrease from the corresponding
quarter of the prior year. Average shares outstanding increased 1.9 million
shares between periods primarily due to a 2.5 million issuance of primary
shares in August 1998, and continuing issuances under the Dividend
Reinvestment and Stock Purchase Plan.
Nine-Month Analysis
- -------------------
Contribution to Net Income (Loss)
Nine Months Ended September 30,
--------------------------------
(Thousands of dollars)
1998 1997
---------- ----------
Natural gas operations $ 20,637 $ (6,982)
Construction services 1,857 116
---------- ----------
Net income (loss) $ 22,494 $ (6,866)
========== ==========
Earnings per share for the nine months ended September 30, 1998 were $0.80, a
$1.05 improvement from a per share loss of $0.25 recorded during the
corresponding nine months of the previous year. Natural gas operations
results improved $1.00 per share. See separate discussion at RESULTS OF
NATURAL GAS OPERATIONS for changes as they relate to gas operations.
Construction services activities contributed per share earnings of $0.06
during the current period, a $0.05 per share improvement over the
corresponding period of the prior year. The improvement resulted from
obtaining new work, eliminating less profitable contracts, implementing cost
containment measures, and better-than-expected weather conditions in several
cold-climate operating areas which allowed construction activities to begin
earlier than anticipated during the first quarter of 1998. Average shares
outstanding increased 1 million shares between periods primarily due to a 2.5
million issuance of primary shares in August 1998, and continuing issuances
under the Dividend Reinvestment and Stock Purchase Plan.
7
Twelve-Month Analysis
- ---------------------
Contribution to Net Income
Twelve Months Ended September 30,
--------------------------------
(Thousands of dollars)
1998 1997
---------- ----------
Natural gas operations $ 43,444 $ 10,723
Construction services 2,385 707
---------- ----------
Net income $ 45,829 $ 11,430
========== ==========
Earnings per share for the twelve months ended September 30, 1998 were $1.65,
a $1.23 increase from per share earnings of $0.42 recorded during the prior
twelve-month period. Earnings contributed from natural gas operations
increased $1.16 per share. See separate discussion at RESULTS OF NATURAL GAS
OPERATIONS for changes as they relate to gas operations. Construction
services activities contributed per share earnings of $0.09, a $0.07 per share
improvement over the prior twelve-month period. The improvement is attributed
to obtaining new work, eliminating less profitable contracts, implementing
cost containment measures, and better-than-expected weather conditions in
several cold-climate operating areas which allowed construction activities to
begin earlier than normal during the first quarter of 1998. Average shares
outstanding increased 944,000 shares between periods primarily due to a 2.5
million issuance of primary shares in August 1998, and continuing issuances
under the Dividend Reinvestment and Stock Purchase Plan.
The following table sets forth the ratios of earnings to fixed charges for the
Company:
For the Twelve Months Ended
------------------------------
September 30, December 31,
1998 1997
------------ ------------
Ratios of earnings to fixed charges 1.88 1.28
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.
8
RESULTS OF NATURAL GAS OPERATIONS
Quarterly Analysis
- ------------------
Three Months Ended
September 30,
----------------------------
(Thousands of dollars)
1998 1997
---------- ----------
Gas operating revenues $ 128,229 $ 95,009
Net cost of gas sold 51,499 28,508
---------- ----------
Operating margin 76,730 66,501
Operations and maintenance expense 50,765 50,310
Depreciation and amortization 20,563 18,873
Taxes other than income taxes 7,699 7,371
---------- ----------
Operating loss (2,297) (10,053)
Other income (expense), net (341) (2)
---------- ----------
Loss before interest and income taxes (2,638) (10,055)
Net interest deductions 15,467 15,736
Preferred securities distributions 1,368 1,368
Income tax expense (benefit) (7,679) (10,388)
---------- ----------
Contribution to consolidated net loss $ (11,794) $ (16,771)
========== ==========
Contribution from natural gas operations improved approximately $5 million
compared to the third quarter of 1997. The improvement was primarily due to
growth in operating margin, offset somewhat by higher operating expenses.
Operating margin increased $10.2 million, or 15 percent, in the third quarter
of 1998 when compared to the same period a year ago. Approximately $6 million
was due to rate relief. The remainder was due to customer growth as Southwest
served 58,000, or five percent, more customers than a year ago.
Operations and maintenance expenses increased $455,000, or one percent,
although increases in labor costs between periods were six percent.
Operations and maintenance expenses overall are expected to trend higher for
the calendar year, consistent with the year-to-date results.
Depreciation expense and general taxes increased $2 million, or eight percent,
as a result of construction activities. Average gas plant in service increased
$134 million, or seven percent, as compared to the third quarter of 1997. The
increase reflects ongoing capital expenditures for the upgrade of existing
operating facilities and the expansion of the system to accommodate continued
customer growth.
Net interest deductions decreased $269,000, or two percent. Strong cash flows
coupled with a common stock offering reduced the net amount of debt
outstanding and interest rates on variable-rate facilities were lower than
during the prior period.
9
Nine-Month Analysis
- -------------------
Nine Months Ended
September 30,
--------------------------
(Thousands of dollars)
1998 1997
---------- ----------
Gas operating revenues $ 567,609 $ 414,313
Net cost of gas sold 246,254 149,830
---------- ----------
Operating margin 321,355 264,483
Operations and maintenance expense 153,796 148,165
Depreciation and amortization 59,539 55,188
Taxes other than income taxes 23,516 22,482
---------- ----------
Operating income 84,504 38,648
Other income (expense), net (432) (650)
---------- ----------
Income before interest and income taxes 84,072 37,998
Net interest deductions 46,806 45,192
Preferred securities distributions 4,106 4,106
Income tax expense (benefit) 12,523 (4,318)
---------- ----------
Contribution to consolidated net income (loss) $ 20,637 $ (6,982)
========== ==========
Contribution to consolidated net income improved $27.6 million compared to the
nine months ended September 1997. The improvement was the result of increases
in operating margin, offset somewhat by higher operating and financing
expenses.
Operating margin increased $56.9 million, or 22 percent, due to improved
weather conditions, rate relief, and continued customer growth. Differences
in heating demand caused by weather variances between periods resulted in an
increase of $24 million. Approximately $17 million was attributable to colder-
than-normal temperatures in the current nine-month period, and the remainder
resulted from the corresponding prior period being warmer than normal. Rate
relief, primarily resulting from a September 1997 $32 million annualized
general rate case settlement in Arizona, contributed $23 million in additional
operating margin to the current period. Customer growth accounted for the
remaining $9.9 million.
Operations and maintenance expenses increased $5.6 million, or four percent,
reflecting increases in labor costs along with incremental operating expenses
associated with providing service to the growing Southwest customer base.
Depreciation expense and general taxes increased $5.4 million, or seven
percent, resulting from an increase in average gas plant in service of
$153 million, or nine percent. This increase reflects capital expenditures
for 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 $1.6 million, or four percent, during the
nine months ended September 1998 over the comparative prior period. The
change is attributed primarily to an increase in average total debt
outstanding during the period to finance construction expenditures and to
finance the deferred purchased gas cost balance. Average interest rates on
variable-rate facilities were lower than during the prior period, partially
offsetting the volume variance.
10
Twelve-Month Analysis
- ---------------------
Twelve Months Ended
September 30,
--------------------------
(Thousands of dollars)
1998 1997
---------- ----------
Gas operating revenues $ 767,961 $ 584,075
Net cost of gas sold 305,762 198,226
---------- ----------
Operating margin 462,199 385,849
Operations and maintenance expense 206,790 201,972
Depreciation and amortization 78,879 72,628
Taxes other than income taxes 30,427 28,410
---------- ----------
Operating income 146,103 82,839
Other income (expense), net (12,761) (1,112)
---------- ----------
Income before interest and income taxes 133,342 81,727
Net interest deductions 63,365 58,871
Preferred securities distributions 5,475 5,475
Income tax expense 21,058 6,658
---------- ----------
Contribution to consolidated net income $ 43,444 $ 10,723
========== ==========
Contribution to consolidated net income increased $32.7 million compared to
the corresponding twelve-month period ended September 1997. The increase was
the result of improvements in operating margin, partially offset by higher
operating and financing expenses.
Operating margin increased $76.4 million, or 20 percent, due to improved
weather conditions, rate relief, and continued customer growth. Differences
in heating demand caused by weather variations between periods resulted in an
increase of $33 million. Approximately $22 million was attributable to colder-
than-normal temperatures in the current period, and the remainder was
attributed to the prior period being warmer than normal. Rate relief,
primarily resulting from a September 1997 general rate case settlement in
Arizona, contributed $32 million in additional operating margin to the current
period. Customer growth accounted for the remaining $11.4 million.
Operations and maintenance expenses increased $4.8 million, or two percent,
primarily reflecting increases in labor costs between periods.
Depreciation expense and general taxes increased $8.3 million, or eight
percent, as a result of additional plant in service. Average gas plant in
service for the current twelve-month period increased $140 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 $4.5 million, or eight percent, during the
twelve months ended September 1998 over the comparative prior period. The
change is attributed primarily to an increase in average total debt
outstanding during the period to finance construction expenditures and to
finance the deferred purchased gas cost balance.
During the fourth quarter of 1997, Southwest recognized nonrecurring charges
to income related to cost overruns on two separate construction projects.
These charges are reflected in Other income (deductions), net. An $8 million
pretax charge resulted from cost overruns experienced during expansion of the
northern California service territory. See RATES AND REGULATORY PROCEEDINGS
herein. A second pretax charge, for $5 million, related to cost overruns on a
nonutility construction project. See Note 11 of the Notes to Consolidated
Financial Statements in the 1997 Annual Report to Shareholders for additional
disclosures related to this charge. Partially offsetting these charges was
the recognition of a $3.4 million income tax benefit related to the successful
settlement in November 1997 of open tax issues dating back as far as 1988.
The combined impact of these three events was a $4.1 million, or $0.15 per
share, after-tax reduction to earnings.
11
RATES AND REGULATORY PROCEEDINGS
CALIFORNIA
NORTHERN CALIFORNIA EXPANSION PROJECT. In December 1993, Southwest filed an
application with the California Public Utilities Commission (CPUC) to expand
its northern California service territory and extend service into Truckee,
California. The application included a proposed regulatory mechanism for
recovering the cost of the expansion. In May 1994, rate and cost recovery
issues related to the expansion application were combined by the CPUC with a
January 1994 general rate application Southwest had filed with the CPUC. In
September 1994, a Joint Motion and Stipulation and Settlement Agreement
(Settlement) was presented to the CPUC which resolved the general rate case
and addressed the expansion related cost recovery issues. In December 1994,
the Settlement was approved. In April 1995, Southwest received CPUC approval
for the certificate of public convenience and necessity to serve the expansion
areas.
In its filing, Southwest had indicated that expansion into Truckee would occur
in three phases and result in the conversion of an estimated 9,200 customers
to natural gas service from their existing fuel, primarily propane. The CPUC
established a cost cap of $29.1 million for the project.
In 1995, Southwest completed Phase I of the expansion project, which involved
transmission system reinforcement and distribution system expansion to
accommodate approximately 940 customers. Construction costs of $7.1 million
were on target with the cost estimate approved by the CPUC.
Phase II of the project involved extending the transmission system to Truckee
and distribution system expansion to accommodate an estimated 4,200 customers.
The cost cap apportioned to Phase II was approximately $13.8 million. The
incurred cost of Phase II was $28.6 million. An estimated $9.2 million of the
Phase II cost overrun was due to changes in project scope, such as adjustments
for design changes required by governmental bodies, changes in facilities
necessitated by requirements beyond Southwest's control and costs incurred to
accommodate customer service requests.
Examples of adjustments for changes in project scope included the requirement
to haul excavated soil offsite to be screened whereas normal and anticipated
practice is to screen on site, asphalt repairs which were greater than
expected as a result of increased paving requirements imposed after
construction started, and the installation of more facilities under asphalt
than anticipated. Other unanticipated or externally imposed costs pertained
to extended yard lines, underground boring, environmental studies, right-of-
way acquisitions, and engineering design work.
Due to the Phase II cost overruns and difficult construction environment
experienced, construction of Phase III was postponed to reevaluate the
economics of completing the project.
In July 1997, Southwest filed an application requesting authorization from the
CPUC to modify the terms and conditions of the certificate of public
convenience and necessity granted in 1995. In this application, Southwest
requested that the originally approved cost cap of $29.1 million be increased
to $46.8 million; that the scope of Phase III construction be revised to
include only an estimated 2,900 of the initially estimated 4,200 customers;
and that customer applicants desiring service in the expansion area who were
not identified to receive service during the expansion phases as modified
within the new application be subject to the existing main and service
extension rules. Southwest proposed to recover the incremental costs above
the original cost cap through a surcharge mechanism. Concurrently, the Truckee
town manager, on behalf of the Truckee Town Council, wrote a letter to the
CPUC in support of the application.
In August 1997, the Office of Ratepayer Advocates (ORA) for the CPUC filed a
protest to the Southwest application indicating that the terms of the original
agreement should be adhered to. Southwest responded with written comments in
support of its application. In September 1997, a prehearing conference was
held to discuss the filing, the ORA protest, and Southwest comments. The
administrative law judge (ALJ) made a preliminary ruling in favor of the ORA
protest, but allowed the parties an additional 20 days to supplement their
comments. During this time, Southwest and the ORA, pursuant to direction from
the Commission, began to negotiate a settlement agreement, and the procedural
schedule was adjusted to allow the negotiations to continue beyond the 20 day
period. In January 1998, a settlement involving all parties to the proceeding
was executed and filed with the CPUC which redefined the terms and conditions
for completing the project and recovering the additional project costs.
Although CPUC approval of the settlement was still required, management
anticipated approval of the all-party settlement. In February 1998, a
prehearing conference was held before the ALJ and the assigned Commissioner
12
for the purpose of taking public comment on the settlement agreement. There
was no opposition to the settlement agreement from the Truckee Town Council at
the conference, or in a letter written by the Truckee town manager to the CPUC
subsequent to the conference.
Under the proposed settlement, Southwest agreed, among other things, to absorb
$8 million in cost overruns experienced in Phase II of the project. Southwest
also agreed to an $11 million cost cap (with a maximum of $3,800 per customer)
for Phase III of the project. The Phase III project scope would be modified
as requested in the July 1997 application. In addition, Southwest agreed not
to file its next general rate case until Phase III is complete. Based on the
proposed settlement agreement, Southwest recognized an $8 million pretax
charge in the fourth quarter of 1997.
In May 1998, the ALJ issued an unexpected Proposed Decision (PD) rejecting the
all-party settlement and directing Southwest to complete the project under the
terms and conditions of the 1995 certificate. A PD which ignores an all-party
settlement is rare and inconsistent with CPUC policies and procedures
established in 1992. Subsequent to the PD, the Truckee Town Council took a
formal position in opposition to the settlement, although they were not a
party to the proceeding, and had not previously opposed the settlement.
In July 1998, the CPUC voted to adopt the PD and reject the all-party
settlement and ordered Southwest to proceed with all deliberate speed to
complete the project under the terms and scope of the 1995 certificate.
Southwest filed a Motion for Stay (Motion) of order and petitioned the CPUC
for rehearing (Petition) in August 1998. The CPUC in its order stated that
Southwest was required to show extraordinary circumstances to readjudicate the
original settlement. Management did not have the opportunity to demonstrate
that such extraordinary circumstances exist; however, it believes that such
extraordinary circumstances do exist. In September 1998, the CPUC denied the
Motion. However, no action has been taken on the Petition. As a result,
Southwest has the right to petition the Supreme Court of the State of
California for review. Such a petition is discretionary with the Supreme
Court, and if accepted, could take up to two years to be heard. The Supreme
Court filing has not been made pending action by the CPUC on the Petition and
pending the outcome of other contemplated and active proceedings.
Southwest will pursue several alternative regulatory and legal avenues while
seeking the Petition from the CPUC regarding the July 1998 decision. First,
Southwest will petition the CPUC to hold hearings to modify the original
Settlement approved in December 1994. Second, Southwest will seek to reopen
the prior California general rate case and certificate proceeding to
readdress, among other items, the scope and costs of the Truckee project.
Because approval of the settlement agreement was expected, no evidentiary
hearings were conducted. Management strongly believes Southwest is entitled
to an evidentiary hearing before the CPUC, because the recent proceedings
effectively denied Southwest its fundamental due process rights. Third,
Southwest may seek to partially abandon its certificate to serve certain Phase
III geographic locales. Finally, Southwest will undertake civil litigation
against other parties whose actions materially contributed to unanticipated
changes in project cost and scope. The first such action occurred in
September 1998, when Southwest filed a civil lawsuit in U.S. Federal District
Court naming the town of Truckee as a defendant for an indeterminate amount of
damages.
In the January 1998 all-party settlement agreement, Southwest proposed to
modify Phase III of the project to exclude certain areas from the original
certificate application. The excluded areas are the most distant points from
existing mains and present some of the most challenging geographic conditions
in the expansion area. Extension of mains to serve the estimated 1,300
customers in the excluded areas would be considerably more expensive than the
service areas in Phases I and II. Furthermore, these areas have significantly
lower customer density than the remainder of the expansion project; therefore,
expected revenues would be insufficient to justify the anticipated
construction costs.
13
Because of the proposed settlement, and ongoing proceedings, new studies to
extend service into the excluded areas have not been performed. However,
preliminary estimates indicate that it could cost an additional $12 million to
$14 million to extend service to these 1,300 potential customers. The cost to
extend service to the remaining 2,900 potential Phase III customers is
estimated at $11 million.
Based on these forecasts, an additional pretax writeoff of up to $24 million
could be recorded if Southwest is ultimately required to complete the project
under the terms of the 1995 certificate without modification. This estimate
is comprised of approximately $7 million related to costs incurred through
Phase II, and up to $17 million for the forecasted construction costs.
However, Southwest will vigorously prosecute the described regulatory and
legal proceedings with the intent of reversing or mitigating the effects of
the July 1998 CPUC action. Management believes that a reasonable possibility
of modifying the existing CPUC orders pertaining to the expansion project
exists through pursuit of the legal and regulatory remedies which have been
outlined, although there can be no assurance of a favorable outcome.
Management also believes civil litigation offers a reasonable possibility of
recovering certain amounts spent to deal with changes in scope necessitated by
unanticipated third party actions. As a result, Southwest has not recorded any
additional writeoffs beyond the $8 million recognized in the fourth quarter of
1997.
PGA FILINGS
ARIZONA PGA FILING. In March 1998, the Arizona Corporation Commission
approved a purchased gas adjustment (PGA) filing submitted by Southwest in
January 1998 to recover deferred purchased gas costs in Arizona. This filing,
which became effective in April 1998, resulted in an annual revenue increase
of $46.9 million, or 14 percent. The increase in rates was designed to
recover the accumulated PGA balance related to Arizona customers, and to
eliminate the refunds previously built into the rate structure. PGA changes
impact cash flows but have no direct impact on profit margin.
NEVADA PGA FILING. In January 1997, Southwest submitted an out-of-period PGA
filing in Nevada, in response to a substantial run-up in the commodity cost of
natural gas during November and December of 1996. In September 1997, the
Public Utilities Commission of Nevada (PUCN) approved the filing providing
annual revenue increases of $10.1 million, or 9 percent, in the southern
Nevada rate jurisdiction, and $6 million, or 14 percent, in the northern
Nevada rate jurisdiction.
In June 1997, Southwest submitted its annual PGA filing in compliance with the
Nevada Gas Tariff. The filing covered the period from April 1996 through
March 1997. Southwest requested annual revenue increases of $23.1 million, or
18 percent, in the southern Nevada rate jurisdiction, and $8.4 million, or
17 percent, in the northern Nevada rate jurisdiction.
In an order issued in December 1997, the PUCN found that "Southwest failed to
mitigate the risk inherent in a portfolio of all indexed-priced contracts and
failed to reasonably quantify the costs of any risk mitigation." As a result,
gas costs of $3.8 million in southern Nevada and $1.8 million in northern
Nevada were disallowed. The approved annualized revenue increase, after
consideration of the amounts disallowed, was $17.3 million, or 14 percent in
southern Nevada, and $5.2 million, or 11 percent in northern Nevada.
In December 1997, Southwest filed a Petition for Reconsideration (Petition) of
the decision with the PUCN on the grounds that the findings of fact and
conclusions of law are contrary to binding legislative enactments and judicial
decisions. Specifically, the Petition asserted, among other things, that the
PUCN violated its settled obligation in the previous PGA docket, which
included the same winter period, in finding Southwest to be imprudent.
Effectively, the PUCN allowed a previously settled claim to be relitigated.
In addition, management also believes that the PUCN failed to follow its
previous rules and practices surrounding a PGA proceeding, or changed those
rules effective with the disallowance order and sought to retroactively apply
them, which would have required compliance with formal rulemaking procedures
mandated by Nevada Statutes. In February 1998, the PUCN reaffirmed the
original order.
In March 1998, Southwest filed a petition for judicial review (appeal) of the
final order of the PUCN with the Nevada District Court (NDC). The appeal
alleges the same procedural irregularities as were included in the Petition.
In July 1998, the NDC rejected a PUCN motion to dismiss, which was also filed
in March 1998, and established a procedural schedule related to the appeal.
14
An initial hearing is scheduled for the fourth quarter of 1998. Management
estimates the NDC appeal process could take up to six months before a decision
is rendered. Subsequent appeals by either party to the Nevada Supreme Court,
if necessary, could take an additional year.
Management believes it is probable that the action taken to dispute the
findings of fact and conclusions of law in the order will result in the
successful outcome desired, specifically, that the order to exclude
$5.6 million in gas costs from the PGA balance will be reversed. As a result,
the financial statements do not reflect any charges to effect the
disallowance.
In June 1998, Southwest submitted its annual PGA filing in compliance with the
Nevada Gas Tariff. Effective November 1998, new rates were approved by the
PUCN. No gas cost disallowances were ordered and no prudency issues were
raised. The new rates, reflecting a lower cost of gas, resulted in annualized
revenue decreases of $3 million, or two percent in the southern Nevada rate
jurisdiction, and $782,000, or one percent in the northern Nevada rate
jurisdiction. These PGA changes impact cash flows but have no direct impact on
profit margin.
YEAR 2000 RELATED ISSUES
Most companies have computer systems that use two digits to identify a year in
the date field (e.g. "98" for 1998). These systems must be modified to handle
turn-of-the-century calculations. If not corrected, system failures or
miscalculations could occur, potentially causing disruptions of operations,
including, among other things the inability to process transactions, send
invoices, or engage in other normal business activities. The Year 2000 issue
also threatens disruptions in government services, telecommunications, and
other essential industries. This creates potential risk for all companies,
even if their own computer systems are Year 2000 compliant.
In 1994, the Company initiated a comprehensive review of its computer systems
to identify processes that could be adversely affected by Year 2000 issues. By
early 1995, the Company identified computer application systems that required
modification or replacement. Since that time, the Company has focused on
converting all business-critical systems to be Year 2000 compliant.
In addition to the evaluation and remediation of computer application systems
and components, the Company has also developed a comprehensive Year 2000
compliance plan. As part of this plan, the Company has formed a Year 2000
project team with the mission of ensuring that all critical systems,
facilities, and processes are identified and analyzed for Year 2000
compliance. The project team consists of representatives from several
strategic departments of the Company.
The Year 2000 plan includes specific timetables for categories of tasks for
each department as follows:
(1) Assess Year 2000 issues - complete;
(2) Analyze, prioritize, and catalog Year 2000 issues - substantially
complete;
(3) Create action plans - in process and due by the first quarter of 1999;
(4) Implement plans and validate compliance - in process and due by the third
quarter of 1999.
15
The Company's top priority is to ensure that natural gas can be received from
suppliers and delivered to customers. To accomplish this, the Company has
sent inquiries to its five major providers of interstate natural gas
transportation service. All of these providers have responded to the inquiries
indicating that they intend to be Year 2000 compliant before the end of 1999.
The Company has also evaluated its gas pipeline delivery systems, which are
the systems used to distribute natural gas from the interstate pipelines to
the customer. These systems utilize nearly 1,000 hardware and software
components that schedule, regulate, measure, or otherwise facilitate the flow
of natural gas. Of these components, approximately 75 percent are Year 2000
compliant, 5 percent of the components are not compliant and will be remedied,
and 20 percent of the components are being evaluated for compliance. The
Company plans to complete this evaluation by the end of 1998, and intends to
remedy those components determined to be noncompliant during the first quarter
of 1999.
Many of the Company's business-critical computer systems are Year 2000
compliant. For example, the customer service system which supports customer
billing, accounts receivable, and other customer service functions is Year
2000 compliant. The general ledger accounting system of the Company is also
Year 2000 compliant. Year 2000 compliance work on other systems, such as
accounts payable, purchasing, human resources, and payroll, is in process. In
total, over 70 percent (including work-in-progress) of the Company's computer
applications are currently Year 2000 compliant. The Company has also assessed
its other computer components, such as computer equipment and software, and
determined that nearly 90 percent of these components are Year 2000 compliant.
The Company projects that both the computer application systems and the other
computer components will be Year 2000 compliant by the third quarter of 1999.
The Company has initiated communications with suppliers and vendors to
determine the extent to which those companies are addressing Year 2000
compliance issues. The Company is requiring business-critical suppliers and
vendors to certify compliance in order to continue doing business with the
Company. In addition, the Company is identifying and contacting alternate
suppliers and vendors as part of a Year 2000 contingency plan. The majority
of the companies contacted have responded and indicated in their responses
that efforts are underway to become compliant.
The Company is also assessing and remediating Year 2000 issues related to
embedded system devices (such as microcontrollers used in equipment and
machinery), data exchange functions, networks, telecommunications, security
access and building control systems, forms, reports, and other business
processes and activities. The Company expects these areas to be Year 2000
compliant by the third quarter of 1999.
The Company is establishing Year 2000 contingency plans. These plans include
such steps as identifying alternative vendors and suppliers (as noted above),
establishing alternative power supplies, and determining personnel and
staffing requirements to react to potential Year 2000 problems. As part of
this process, the Company will assess and prepare for the most reasonably
likely worst case Year 2000 scenario, which will consider potential power
interruptions, telecommunications disruptions, and upstream pipeline delivery
issues. The timeframe for completing and documenting contingency plans has
not been finalized.
The Company estimates that the cost of remediation will be less than $2
million. Expenditures of $900,000 have already been incurred in connection
with systems that have been converted. The remediation costs include internal
labor costs, as well as fees and expenses paid to outside contractors
specifically associated with reprogramming or replacing noncompliant
components. At the present time, the Company does not expect that such
expenditures will have a material impact on results of operations or financial
condition.
The Company's Year 2000 plans, including costs and completion schedules, are
based on management's best estimates. These estimates were derived using
numerous assumptions of future events including, but not limited to third
party modification plans, availability of qualified personnel, support of
software vendors, and other factors. The Company is also relying on the
representations made by significant third party suppliers and vendors.
16
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, the effects of regulation,
the outcome of Southwest's challenges to regulatory actions in California and
Nevada, changes in capital requirements and funding, Year 2000 remediation
efforts, and acquisitions.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 132 "Employers'
Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132
standardizes the disclosure requirements for pensions and other postretirement
benefits, requires additional information to facilitate financial analysis,
and eliminates certain previously required disclosures. It does not change
measurement or recognition of amounts related to those plans. This statement
is effective for 1998 reporting. The disclosure requirements of this
statement are not expected to significantly change current reporting practices
of the Company.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for fiscal years
beginning after June 15, 1999. The disclosure and accounting requirements of
this statement are currently being analyzed by the Company.
In August 1998, the Securities and Exchange Commission (SEC) issued Release
No. 33-7558 "Statement of the Commission Regarding Disclosure of Year 2000
Issues and Consequences by Public Companies, Investment Advisers, Investment
Companies, and Municipal Securities Issuers," (the Release). The Release
provides guidance regarding specific matters for companies to address in SEC
filings. Required disclosures must cover four areas: state of readiness,
costs to address Year 2000 issues, risks of Year 2000 issues, and contingency
plans. Companies are required to apply the interpretive guidance contained in
the Release for reporting periods ending after August 4, 1998. The Company
applied the interpretive guidance provided by the Release to prepare the Year
2000 Related Issues disclosure shown on pages 15 and 16.
17
PART II - OTHER INFORMATION
ITEMS 1-5. None
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 - Form of Employment Agreement with Company
Officers.
Exhibit 10.2 - 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
The Company filed a Form 8-K, dated September 14, 1998,
containing amended bylaws disclosing the adoption of notice
procedures for shareholder proposals intended for
consideration at an annual meeting.
The Company filed a Form 8-K, dated October 29, 1998,
reporting summary financial information for the quarter ended
September 30, 1998.
18
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: November 13, 1998
/s/ Edward A. Janov
------------------------------------------------------
Edward A. Janov
Vice President/Controller and Chief Accounting Officer
19
EXHIBIT 10.1
FORM OF EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "AGREEMENT") entered into as
of the 1st day of July, 1998 between SOUTHWEST GAS CORPORATION, a
California corporation (the "COMPANY"), and ____________________
(the "EMPLOYEE").
1. DEFINITIONS
For the purposes of this Agreement:
(a) The term "COMPANY" shall include any corporate
successor to the business presently conducted by the
Company.
(b) The term "SUBSIDIARY" shall mean any corporation,
partnership, joint venture or other entity in which the
Company has a 50% or greater equity interest.
(c) "PERMANENT DISABILITY" shall mean that because of
physical or mental illness or disability, the Employee
shall have been continuously unable to perform the
essential functions of his job (as those functions are
described herein) with or without reasonable
accommodation for a consecutive period of at least six
months.
(d) The Employee shall be deemed to engage in a "COMPETING
BUSINESS" if, in any capacity, including but not
limited to proprietor, joint venturer, partner,
officer, director or employee, he engages or
participates, directly or indirectly, in the operation,
ownership or management of any proprietorship, joint
venture, partnership, corporation, limited liability
company, or other business entity which is in the
natural gas distribution business. Indirect
participation in the operation or ownership of any such
entity shall include any investment by the Employee in
any such entity, by way of loan, guarantee or stock or
equity ownership (other than ownership of 1% or less of
any class of the entity or other securities of a
company which is listed and regularly traded on any
national securities exchange or which is regularly
traded over-the-counter).
2. EMPLOYMENT: TERM OF AGREEMENT
(a) The Employee shall perform the duties of [Officer's
Title] of the Company and, as such, shall supervise and
direct the [affairs/operations] of the Company and, to
the extent practicable, any corporation, partnership,
joint venture or other entity in which the Company has
a 20% or greater equity interest. The Employee shall
also perform such duties related to the business and
affairs of the Company as may be delegated to him from
time to time by the Board of Directors of the Company
(the "BOARD") [or the President and CEO of the
Company].
(b) The Company agrees to employ the Employee and the
Employee agrees to serve the Company, in accordance
with the terms of this Agreement, for an initial term
of [24 or 36] months, commencing July 1, 1998. If a
Change in Control (as hereinafter defined) occurs, the
term of this Agreement shall be extended for a period
of 24 months from the date of the Change in Control.
Unless within 60 days prior to any anniversary date of
this Agreement (or, if a Change in Control has
occurred, the second anniversary of such Change in
Control and any succeeding anniversary thereof), the
Company (or the Employee) gives written notice to the
Employee (or the Company) of the termination of this
Agreement as of the then applicable expiration date,
then the term of this Agreement shall automatically be
extended for an additional 12 months.
3. COMPENSATION
The Employee shall receive the following compensation for
services during the term of his employment hereunder:
(a) The Employee's minimum base salary shall be $________
per annum, payable in installments in accordance with
the Company's regular payroll procedures, subject to
adjustment (but not below the minimum base salary
provided above) in accordance with the regular
procedures established by the Company for salary
adjustments;
(b) The Employee shall participate in: (i) any incentive
compensation plan, pension or profit sharing plans,
stock purchase plan or executive retirement plan
maintained by the Company for its employees in
accordance with the terms and conditions thereof; and
(ii) any annuity or group insurance benefit plan,
medical plan and other welfare/employee benefit plans
maintained by the Company for its executive employees,
in accordance with the terms and conditions thereof;
(c) The Company will provide the Employee with an active
membership, which shall include initiation fee and
dues, in a suitable country club of the Employee's
choice, said membership shall remain the Employee's
following the term of this Agreement but the Company
shall have no continuing obligation (unless otherwise
expressly provided herein) to pay dues or other fees or
expenses with respect thereto after the Employee's
termination; and
(d) The Company will provide a suitable automobile valued
at retail at approximately $_______, with the Company
assuming the expenses for insurance, repairs and
maintenance of the automobile.
The Company reserves the right to modify, suspend, or
discontinue any or all of its benefit programs referred to in
Section 3(b) at any time without recourse by the Employee
(subject to Section 9(b)(ii)(C)) so long as such action is taken
generally with respect to other similarly situated employees and
does not single out the Employee.
2
4. DUTIES
The Employee agrees that at all times during the term
hereof, he will:
(a) Faithfully, industriously and to the best of his
ability, experience and talents, perform all of the
duties that may be required of and from him, and he
will fulfill all of his responsibilities hereunder
pursuant to the express and explicit terms hereof, to
the reasonable satisfaction of the Board;
(b) Devote all of his undivided time, attention, knowledge
and skills, during customary business hours, to the
business and interests of the Company, subject to such
holidays, personal holidays, reasonable vacations and
sick leave as are provided under the general policies
of the Company as they may exist from time to time;
(c) Comply with all the general rules and regulations of
the Company;
(d) Not engage in a Competing Business;
(e) Maintain his residence at a location within the city or
in or near a suburban community of the city in which
the executive offices of the Company are located, [or
the executive offices of a Company division if the
Employee is so assigned]; and
(f) Shall keep complete and accurate records of all
business or reimbursable expenditures such that the
Employee may fully account to the Board, if requested,
or as then may be required by the Internal Revenue
Service.
5. CONFIDENTIALITY
The Employee acknowledges that during his employment by, and
as a result of his relationship with, the Company he will obtain
knowledge of and gain access to information regarding the
Company's business, operations, products, proposed products,
production methods, processes, customer lists, advertising,
marketing and promotional plans and materials, price lists,
pricing policies, financial information and other trade secrets,
confidential information and material proprietary to the Company
or designated as being confidential by the Company which is not
generally known to non-Company personnel, including information
and material originated, discovered or developed in whole or in
part by the Employee (collectively referred to herein as
"CONFIDENTIAL INFORMATION"). The Employee agrees that during the
term of this Agreement and, to the fullest extent permitted by
law thereafter, he will, in a fiduciary capacity for the benefit
of the Company, hold all Confidential Information strictly in
confidence and will not directly or indirectly reveal, report,
disclose, publish or transfer any of such Confidential
Information to any person, firm or other entity, or utilize any
of the Confidential Information for any purpose, except in
furtherance of his employment by the Company.
3
The Employee agrees that upon the expiration of this
Agreement or any earlier termination of his employment, he will
immediately surrender and return to the Company all lists, books,
records and other Confidential Information of the Company, or
obtained in connection with the Company's business, it being
expressly acknowledged by the Employee that all such items are
the exclusive property of the Company, and all other property
belonging to the Company then in the possession of the Employee,
and the Employee shall not make or retain any copies thereof.
6. TERMINATION DUE TO DEATH OR DISABILITY
The Employee's employment with the Company shall terminate:
(i) upon the Employee's death, or (ii) in the event of the
Permanent Disability of the Employee upon written notice given by
the Company to the Employee to that effect. In either case, the
Employee's salary shall immediately cease and the Employee (and
his beneficiaries or personal representatives) shall be entitled
to no other payment or benefits pursuant to this Agreement,
except for any vested rights the Employee (or his beneficiaries
or personal representatives) may have in items under Section
3(b).
7. OTHER TERMINATION
The Company may at any time terminate its employment of the
Employee for Cause (as hereinafter defined) upon written notice
to the Employee. In the event of such termination by the Company
for Cause, the Employee's salary shall immediately cease and the
Employee shall be entitled to no other payments or benefits
pursuant to this Agreement, except for any vested rights the
Employee may have in items under Section 3(b).
For purposes of this Agreement, "CAUSE" shall mean (i) any
material breach of any material provision of this Agreement by
the Employee which is not cured within 60 days after written
notice of such breach by the Company to the Employee,
(ii) conviction of the Employee of a felony or crime involving
moral turpitude (meaning a crime that necessarily includes the
commission of an act of gross depravity, dishonesty or bad
morals), or (iii) any acts or wilful malfeasance or gross
negligence in a matter of material importance to the Company.
The Company may at any time terminate its employment of the
Employee for any other reason, provided any such purported
termination must be on 60 days advance written notice to the
Employee (the date such notice is purported to be given is
referred to herein as the "COMPANY'S NOTICE DATE"). In such
event, the Employee's employment shall continue during the notice
period and shall terminate on the 60th day following the
Company's Notice Date (the "COMPANY'S TERMINATION DATE");
provided that during the 60-day notice period the Company may
place the Employee on a paid administrative leave.
The Employee may terminate his employment by giving written
notice to the Company of his intent to terminate (the date such
notice is purported to be given is referred to herein as the
"EMPLOYEE'S NOTICE DATE"). In such event, the Employee's
employment shall continue during the notice period and shall
terminate on the 60th day following the Employee's Notice Date or
such earlier date that the Company may consent to in writing (the
"EMPLOYEE'S TERMINATION DATE"). In the event that the Employee
4
terminates without Good Reason (as hereinafter defined), the
Employee's salary shall cease as of the Employee's Termination
Date and, as of such date, the Employee shall be entitled to no
other benefits or payments pursuant to this Agreement, except for
any vested rights the Employee may have in items under
Section 3(b). Any termination by the Employee for Good Reason
shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for such termination.
8. TERMINATION BY THE COMPANY WITHOUT CAUSE OR BY THE EMPLOYEE
FOR GOOD REASON
Termination of employment by the Employee for Good Reason or
by the Company for any reason other than (i) death,
(ii) Permanent Disability, (iii) Cause, or (iv) upon expiration
of the term of this Agreement as provided in Section 2, shall
have the following effect:
(a) Any restricted stock awards, stock options or stock
appreciation rights to purchase or relating to Common
Stock of the Company held by the Employee on the
Company's Notice Date or Employee's Notice Date,
whichever first occurs, which are not then currently
vested or exercisable shall on such date automatically
become vested or exercisable and shall remain
exercisable for 90 days thereafter (subject to any
fixed term of such award, option or right set forth in
the document evidencing such award, option or right);
(b) The Company shall continue to pay the Employee his base
salary being paid at the time of notification, plus 20%
of his base salary in lieu of employee benefits for the
balance of the term of this Agreement [(not to exceed
18 months)];
(c) The Company shall pay the Employee his incentive
compensation, which shall be calculated as [60% or 90%]
of the Employee's base salary for the balance of the
term of this Agreement (such term calculated as though
such termination has not occurred and assuming no
additional automatic extensions) [(not to exceed 18
months)];
(d) The Company shall pay the Employee's expenses incurred
in finding new employment and costs of moving the
Employee and his family and possessions to a new
location or, in lieu of such moving expenses, a cash
payment of $75,000, with the choice to be the
Employee's;
(e) The Company shall pay the Employee's normal business
expenses incurred through the Company's Termination
Date or the Employee's Termination Date, whichever
first occurs (except with respect to seminars or travel
as provided below), including automobile, dues of the
club referred to in Section 3(c), plus any conventions,
seminars or travel either incurred prior to the
applicable termination date or scheduled at the time of
notification of termination;
5
(f) The Company shall pay the Employee any benefits under
the Company's Deferred Compensation Plan (the "DCP")
and Supplemental Executive Retirement Plan (the
"SERP"), which are fully vested at the Company's
Termination Date or the Employee's Termination Date,
whichever first occurs, in accordance with applicable
payment schedules and any applicable elections;
provided, however that the Employee shall receive
additional benefits under the SERP such that the
Employee will be permitted to add to the formula for
purposes of eligibility for benefits, vesting and
calculation of benefits, [10 or 15] points which, at
the election of the Employee, may be applied either to
an age assumption or continuous length of service
assumption (e.g., if an officer is 50 and has 20 years
of service, he could allocate the points so that for
purposes of eligibility, vesting and calculation of
benefits, he is age 55 and has [25 or 30] years of
service);
(g) The Company will provide the Employee with suitable
office space (equivalent to that occupied by the
Employee on such notice date) and private secretarial
services away from the Company's offices in an office
complex of the Employee's choice in Las Vegas, Nevada
[or the division headquarters city where the Employee
was last assigned] for a period ending on the later of:
(i) the expiration of the term of this Agreement; or
(ii) the first anniversary of the Company's Termination
Date or the Employee's Termination Date, whichever
first occurs.
9. CHANGE IN CONTROL OF THE COMPANY
The Board recognizes that the continuing possibility of a
change in control of the Company is unsettling to the Employee
and other officers of the Company. Therefore, the arrangements
set forth below are being made to help assure a continuing
dedication by the Employee to his duties to the Company,
notwithstanding the occurrence or potential occurrence of a
change in control. In particular, the Board believes it
important, should the Company receive proposals from third
parties with respect to its future, to enable the Employee,
without being influenced by the uncertainties of his own
situation, to assess and advise the Board whether such proposals
would be in the best interests of the Company and its
shareholders and to take such other action regarding such
proposals as the Board might determine to be appropriate. The
Board also wishes to demonstrate to officers of the Company that
the Company is concerned with the welfare of its officers and
intends to see that loyal officers are treated fairly.
In view of the foregoing and in further consideration of the
Employee's continued employment with the Company, the Company
agrees as follows:
(a) Limited Right to Receive a Severance Benefit. The
Employee shall be entitled to the severance benefits
provided in Section 9(c), in lieu of the benefits
provided under Section 8 if, within 24 months after a
Change in Control: (i) the Employee terminates his
employment with the Company for Good Reason, provided
he terminates his employment within 120 days following
the occurrence of any of the events specified in
Section 9(b)(ii); or (ii) the Employee's employment is
terminated by the Company for any reason other than (A)
6
the Employee's death, (B) the Employee's Permanent
Disability, (C) Cause, or (D) the expiration of the
term of this Agreement following the Change in Control
as provided in Section 2.
(b) Certain Additional Definitions. For purposes of this
Agreement:
(i) Change in Control. The term "CHANGE IN CONTROL"
shall mean any of the following:
(A) Approval by the shareholders of the Company
of the dissolution or liquidation of the
Company;
(B) Approval by the shareholders of the Company
of an agreement to merge or consolidate, or
otherwise reorganize, with or into one or
more entities that are not Subsidiaries, as a
result of which less than 50% of the
outstanding voting securities of the
surviving or resulting entity immediately
after the reorganization are, or will be,
owned, directly or indirectly, by
shareholders of the Company immediately
before such reorganization (assuming for
purposes of such determination that there is
no change in the record ownership of the
Company's securities from the record date for
such approval until such reorganization and
that such record owners hold no securities of
the other parties to such reorganization, but
including in such determination any
securities of the other parties to such
reorganization held by affiliates of the
Company);
(C) Approval by the shareholders of the Company
of the sale of substantially all of the
Company's business and/or assets to a person
or entity which is not a Subsidiary;
(D) Any "person" (as such term is used in
Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended (the
"EXCHANGE ACT"), but excluding any person
described in and satisfying the conditions of
Rule 13d-1(b)(1) thereunder), becomes the
beneficial owner (as defined in Rule 13d-3
under the Exchange Act), directly or
indirectly, of securities of the Company
representing more than 20% of the combined
voting power of the Company's then
outstanding securities entitled to then vote
generally in the election of directors of the
Company; or
(E) During any period not longer than two
consecutive years, individuals who at the
beginning of such period constituted the
Board cease to constitute at least a majority
thereof, unless the election, or the
nomination for election by the Company's
shareholders, of each new Board member was
approved by a vote of at least three-fourths
of the Board members then still in office who
were Board members at the beginning of such
7
period (including for these purposes, new
members whose election was so approved).
(ii) Good Reason. For purposes of this Agreement,
"GOOD REASON" shall mean:
(A) Following a Change in Control: (1) without
the Employee's express written consent, the
assignment to him of any duties inconsistent
with his positions, duties, authority,
responsibilities and status with the Company
immediately prior to the Change in Control;
(2) a demotion or a change in the Employee's
titles or offices as in effect immediately
prior to the Change in Control; (3) any
removal of the Employee from or any failure
to re-elect him to any of such positions;
except in connection with the termination of
the Employee's employment for Cause,
Permanent Disability or retirement or as a
result of his death or by him other than for
Good Reason;
(B) A reduction by the Company in the Employee's
base salary as in effect on the date hereof
(or, if a Change in Control has occurred, a
reduction by the Company in the Employee's
base salary as in effect on the date of the
Change in Control);
(C) Following a Change in Control: (1) the
failure by the Company to continue at levels
in existence immediately prior to the Change
in Control any thrift, incentive or
compensation plan, or any pension, life
insurance, health and accident or disability
plan in which the Employee participated
immediately prior to the Change in Control,
provided that the Company may adopt
substantially similar plans that provide
benefits at levels no less than those in
existence immediately prior to the Change in
Control; (2) the taking of any action by the
Company which would adversely affect the
Employee's participation in or materially
reduce his aggregate benefits under all of
such plans, when taken together, or deprive
him of any material fringe benefit enjoyed by
him at the time of the Change in Control
(except for the acceleration of the
termination dates of options, awards and
rights as contemplated by this Agreement).
(D) Following a Change in Control, the assignment
of the Employee without his consent to a new
work location which would require a round-
trip commute to work from the Employee's
residence immediately prior to the Change in
Control of more than 40 miles per day.
8
(E) Any material breach of any material provision
of this Agreement by the Company which is not
cured within 60 days after written notice of
such breach by the Employee to the Company.
(c) Effect of Termination. If the Employee is entitled to
receive a severance benefit pursuant to Section 9(a),
the Company will provide the Employee with only the
following severance benefits:
(i) The benefits specified in Section 8(a);
(ii) A lump sum severance payment equal to: (A) [24, 30
or 36] months of the Employee's yearly base salary
in effect as of the Employee's Notice Date or the
Company's Notice Date, whichever first occurs (or,
if greater, in effect on the date of the Change in
Control); (B) [24, 30, or 36] months incentive
compensation calculated as [60% or 90%] of the
amount payable pursuant to clause (A); and (C)
[24, 30 or 36] months fringe benefits calculated
as 20% of the amount payable pursuant to clause
(A);
(iii) The benefits specified in Section 8(d);
(iv) The benefits specified in Section 8(e);
(v) Any benefits under the DCP and the SERP which are
fully vested at the Company's Termination Date or
the Employee's Termination Date, whichever first
occurs, in accordance with applicable payment
schedules and any applicable elections; provided,
however that the Employee shall receive additional
benefits under the SERP such that the Employee
will be permitted to add to the formula for
purposes of eligibility for benefits, vesting and
calculation of benefits, [10 or 15] points which,
at the election of the Employee, may be applied
either to an age assumption or continuous length
of service assumption (See Section 8(f) for
illustration); such amounts having been deposited
with a trustee under an appropriate Trust
Agreement providing for a so-called Rabbi Trust
Arrangement pursuant to I.R.S. Rev. Proc. 92-64,
as described in Section 19; and
(vi) Suitable office space (equivalent to that occupied
by the Employee on the Employee's Notice Date or
the Company's Notice Date, whichever first occurs)
and private secretarial services away from the
Company's offices in an office complex of the
Employee's choice in Las Vegas, Nevada [or the
division headquarters city where the Employee was
last assigned] for a period ending on the earlier
of (A) the second anniversary of the Employee's
Notice Date, or (B) the date the Employee secures
suitable other employment.
9
10. RESTRICTIVE COVENANT
In consideration of the Company's agreements contained
herein and the payments to be made by it to the Employee pursuant
hereto, the Employee agrees that, during the period of his
employment hereunder and for a further period expiring 12 months
following the end of the term of this Agreement or any extensions
or renewal thereof, the Employee will not, without the written
consent of the Board of Directors of the Company, engage in a
Competing Business within the geographical limits of any state
(or such lesser geographical area as may be set by a court of
competent jurisdiction) in which any of the businesses of the
Company are being conducted on the date of any such termination.
The Employee acknowledges and agrees that a breach by the
Employee of the provisions of this Section 10 will constitute
such damage as will be irreparable and the exact amount of which
will be impossible to ascertain and, for that reason, agrees that
the Company will be entitled to an injunction to be issued by any
court of competent jurisdiction restraining and enjoining the
Employee from violating the provisions of this Section 10. The
right of an injunction shall be in addition to and not in lieu of
any other remedy available to the Company for such breach or
threatened breach, including the recovery of damages from the
Employee.
Termination of this Agreement, whether by passage of time or
any other cause, shall not constitute a waiver of the Company's
rights under this Section 10, nor a release of the Employee from
his obligations hereunder.
11. ARBITRATION AND LITIGATION
In the event the Company terminates the Employee by reason
of his Permanent Disability or for Cause and the Employee
disputes the accuracy of the assertion of Permanent Disability or
Cause, or in the event the Employee terminates his employment for
Good Reason and the Company disputes the accuracy of such
assertion of Good Reason, or in the event either party disputes
the occurrence of a Change in Control, such dispute shall be
resolved through final and binding arbitration in Clark County,
Nevada in accordance with the then current commercial arbitration
rules of the American Arbitration Association ("ASSOCIATION") or
its successor, provided the Employee or the Company files a
written demand for arbitration at a regional office of the
Association within 30 calendar days following the date the
Employee notifies the Company that he disputes the accuracy of
the assertion of Permanent Disability or Cause or Change in
Control, or the Company notifies the Employee that it disputes
the accuracy of the assertion of Good Reason or Change in
Control. In no event shall a demand for arbitration be made
after the date when institution of legal or equitable proceedings
based on the dispute in question would be barred by any
applicable statute of limitations. In the event the Arbitrator
finds that the termination by the Company was not for Permanent
Disability or not for Cause or that the termination by the
Employee was for Good Reason, or that a Change in Control has
occurred and such issue was challenged by the Company, the
Employee shall not be entitled to reinstatement, but shall be
entitled to the appropriate benefits under Section 8 or Section
9, as applicable, and payment of his reasonable legal expenses in
such arbitration. Any reasonableness of costs and expenses shall
be determined by the arbitrator.
10
Should the Employee at any time bring suit against the
Company for breach of this Agreement (not including any matter
required to be submitted to arbitration pursuant to the foregoing
provisions of this Section 11) and obtain judgment in his favor,
the Company shall pay his reasonable legal expenses and costs of
suit. The provisions of this Section 11 shall in no way limit
the right of any party to exercise self-help remedies or to
obtain provisional or ancillary relief from a court of competent
jurisdiction before, after, or during the pendency of any
arbitration proceeding. The exercise of such remedy shall not
waive the right of any party to resort to arbitration. The
parties each acknowledge and agree that to any extent any legal
proceeding other than arbitration is permitted in this Section
11, the Superior Court of the State of Nevada in and for Clark
County, and the associated federal and appellate courts, shall
have exclusive jurisdiction over such legal proceedings.
Except as may be necessary to enter judgment upon the award
or to the extent required by applicable law, all claims, defenses
and proceedings (including, without limiting the generality of
the foregoing, the existence of the controversy and the fact that
there is an arbitration proceeding) shall be treated in a
confidential manner by the arbitrator, the parties and their
counsel, and each of their agents and employees, and all others
acting on behalf or in concert with them. Without limiting the
generality of the foregoing, no one shall divulge to any third
party or person not directly involved in the arbitration, the
contents of the pleadings, papers, orders, hearings, trials, or
awards in the arbitration, except as may be necessary to enter
judgment upon an award as required by applicable law. Any court
proceedings relating to the arbitration hereunder, including,
without limiting the generality of the foregoing, to prevent or
compel arbitration to perform, correct, vacate or otherwise
enforce an arbitration award, shall be filed under seal with the
court, to the extent permitted by law.
12. BENEFIT AND BINDING EFFECT
This Agreement shall inure to the benefit of and be binding
upon the Company, its successors and assigns, including but not
limited to any corporation, person or other entity which may
acquire all or substantially all of the assets and business of
the Company or any corporation with or into which the Company may
be consolidated or merged and the Employee, his heirs, executors,
administrators and legal representatives, provided that the
obligations of the Employee hereunder may not be delegated.
13. OTHER AGREEMENTS
The Employee represents that the execution and performance
of this Agreement will not result in a breach of any of the terms
and conditions of any employment or other agreement between the
Employee and any third party.
In the event the Company shall elect to insure all or part
of its liability for providing health and long-term disability
benefits under this Agreement, the Employee shall submit to such
reasonable physical examination as the Company may request.
11
Provided that the Company duly performs all of its
obligations (if any) arising by virtue of a termination of or by
the Employee, the Employee will not publicly disparage the
Company or its officers, directors, employees or agents and will
refrain from any action which would reasonably be expected to
cause material adverse public relations or embarrassment to the
Company or to any of such persons. Similarly, the Company
(including its officers, directors, employees and agents) will
not disparage the Employee and will refrain from any action which
would reasonably be expected to result in embarrassment to the
Employee or to materially and adversely affect his opportunities
for employment. The preceding two sentences shall not apply to
disclosures required by applicable law, regulation or order of a
court or governmental agency.
The Company may withhold from any amounts payable under this
Agreement all federal, state, local and foreign taxes as may be
required to be withheld pursuant to any applicable law or
regulation.
14. NOTICES
All notices or other communications relating to this
Agreement shall be in writing and delivered personally or sent by
registered or certified mail, postage prepaid and return receipt
requested, to the party concerned at the address set forth below:
If to the Company, to: Southwest Gas Corporation
5241 Spring Mountain Road
Las Vegas, Nevada 89101
Attn: General Counsel
If to the Employee, to: [Employee's Name]
Either party may change the address to which notices are to
be sent to it by giving 10 days written notice of such change of
address to the other party in the manner provided above for
giving notice. Notices will be considered delivered on the date
of personal delivery or on the date of deposit in the United
States mail in the manner provided for giving notice by mail.
12
15. PARACHUTE PAYMENTS
(a) In the event that any payment or distribution by the
Company to or for the benefit of the Employee (whether
paid or payable or distributed or distributable
pursuant to the terms of this Agreement or otherwise,
but determined without regard to any additional
payments under this Section 15(a)) (a "PAYMENT") is
determined to be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as
amended (the "CODE"), or any interest or penalties are
incurred by the Employee with respect to such excise
tax (such excise tax, together with any such interest
and penalties, are hereinafter collectively referred to
as the "EXCISE TAX"), then the Company shall pay to the
Employee an additional payment (a "GROSS-UP PAYMENT")
in an amount such that after payment by the Employee of
all taxes (including any interest or penalties imposed
with respect to such taxes), including, without
limitation, any income taxes (and any interest and
penalties imposed with respect thereto) and Excise Tax
imposed upon the Gross-Up Payment, the Employee retains
an amount of the Gross-Up Payment equal to the Excise
Tax imposed upon the Payments.
(b) Subject to the provisions of Section 15(c), all
determinations required to be made under this Section
15, including whether and when a Gross-Up Payment is
required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such
determination, shall be made by a nationally recognized
certified public accounting firm which is satisfactory
to the Company (the "Accounting Firm"), which shall
provide detailed supporting calculations both to the
Company and the Employee within 15 business days after
such determinations are requested by the Employee or
the Company. All fees and expenses of the Accounting
Firm shall be borne solely by the Company. Any
Gross-Up Payment, as determined pursuant to this
Section 15(b), shall be paid by the Company to the
Employee within five days after the Company's receipt
of the Accounting Firm's determination. As a result of
the uncertainty in the application of Section 4999 of
the Code at the time of the initial determination by
the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by the
Company should have been made ("UNDERPAYMENT"),
consistent with the calculations required to be made
hereunder. In the event that the Company exhausts its
remedies pursuant to Section 15(c) and the Employee
thereafter is required to make a payment of any Excise
Tax, the Accounting Firm shall determine the amount of
the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to
or for the benefit of the Employee.
(c) The Employee shall notify the Company in writing of any
claim by the Internal Revenue Service that, if
successful, would require the payment by the Company of
a Gross-Up Payment. Such notification shall be given
as soon as practicable but no later than ten business
days after the Employee is informed in writing of such
claim and shall apprise the Company of the nature of
13
such claim, and the date on which such claim is
requested to be paid. The Employee shall not pay such
claim prior to the expiration of the 30-day period
following the date on which it gives such notice to the
Company (or such shorter period ending on the date that
any payment of taxes with respect to such claim is
due). If the Company notifies the Employee in writing
prior to the expiration of such period that it desires
to contest such claim, the Employee shall:
(i) give the Company any information reasonably
requested by the Company relating to such claim,
(ii) take such action in connection with contesting
such claim as the Company shall reasonably request
in writing from time to time, including, without
limitation, accepting legal representation with
respect to such claim by an attorney reasonably
selected by the Company,
(iii) cooperate with the Company in good faith in
order to contest such claim effectively, and
(iv) permit the Company to participate in any
proceedings relating to such claim;
provided, however, that the Company shall bear and pay
directly all costs and expenses (including additional
interest and penalties) incurred in connection with
such contest and shall indemnify and hold the Employee
harmless, on an after-tax basis, for any Excise Tax or
income tax (including interest and penalties with
respect thereto) imposed as a result of such
representation and payment of costs and expenses.
Without limitation on the foregoing provisions of this
Section 15(c), the Company shall control all
proceedings taken in connection with such contest and,
at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of
such claim and may, at its sole option, either direct
the Employee to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner,
and the Employee agrees to prosecute such contest to a
determination before any administrative tribunal, in a
court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine;
provided, however, that if the Company directs the
Employee to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the
Employee, on an interest-free basis and shall indemnify
and hold the Employee harmless, on an after-tax basis,
from any Excise Tax or income tax (including interest
or penalties with respect thereto) imposed with respect
to such advance or with respect to any imputed income
with respect to such advance; and further provided that
any extension of the statute of limitations relating to
payment of taxes for the taxable year of the Employee
with respect to which such contested amount is claimed
to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall
be limited to issues with respect to which a Gross-Up
14
Payment would be payable hereunder and the Employee
shall be entitled to settle or contest, as the case may
be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(d) If, after the receipt by the Employee of an amount
advanced by the Company pursuant to Section 15(c) the
Employee becomes entitled to receive any refund with
respect to such claim, or if the actual amount of the
Excise Tax is less than the amount of the Gross-Up
Payment, the Employee shall (subject to the Company's
complying with the requirements of Section 15(c))
promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon
after taxes applicable thereto) or the amount of such
difference. If, after the receipt by the Employee of
an amount advanced by the Company pursuant to Section
15(c), a determination is made that the Employee shall
not be entitled to any refund with respect to such
claim and the Company does not notify the Employee in
writing of its intent to contest such denial of refund
prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and
shall not be required to be repaid and the amount of
such advance shall offset, to the extent thereof, the
amount of Gross-Up Payment required to be paid.
16. ENTIRE AGREEMENT
The entire understanding and agreement between the parties
has been incorporated into this Agreement, and this Agreement
supersedes all other agreements, negotiations, and understandings
between the Employee and the Company with respect to the
employment of the Employee by the Company (including any prior
employment agreements or change in control agreements between the
Employee and the Company). This Agreement may not be amended
orally, but only by an agreement in writing signed by both
parties.
17. GOVERNING LAW
This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Nevada. It is intended
by the parties that this Agreement be interpreted in accordance
with its fair and simple meaning, not for or against either
party, and neither party shall be deemed to be the drafter of
this Agreement.
18. CAPTIONS; COUNTERPARTS
The section headings and captions included herein are for
convenience and shall not constitute a part of this Agreement.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all
of which shall together constitute one and the same Agreement.
15
19. FUNDING OF CERTAIN SEVERANCE BENEFITS
The method of providing funding for the amounts payable
under Section 9(c)(v) shall be by way of a Rabbi Trust. Such
trust shall be established by the Company upon a Change in
Control with either (i) a major bank located in a major city of
the United States or (ii) any other party located in a major city
of the United States that may be granted corporate trustee powers
under state law, in favor of the Employee. Such trust shall not
be revocable and shall continue until such trust is terminated in
accordance with the termination provisions set forth in the Trust
Agreement described in Section 9(c)(v).
20. SEVERABILITY
If any portion or provision of this Agreement is determined
by arbitration or by a court of competent jurisdiction to be
invalid, illegal or unenforceable, the remaining portions or
provisions hereof shall not be affected.
IN WITNESS WHEREOF, this Employment Agreement has been
executed by the parties hereto as of the date first written
above.
SOUTHWEST GAS CORPORATION
By:
Print Name:
Its:
THE EMPLOYEE
[Employee]
Significant terms of employment and change in control agreements by
individual officer.
Minimum Incentive Additional Severance Change in control
annual compensation SERP benefits lump-sum
base salary percentage points maximum months salary benefit
----------- ------------ ------------ -------------- -----------------
Michael O. Maffie $ 475,000 90% 15 points 36 months 36 months
George C. Biehl $ 220,000 60% 15 points 18 months 30 months
James P. Kane $ 150,000 60% 10 points 18 months 30 months
James F. Lowman $ 165,000 60% 10 points 18 months 24 months
Dudley J. Sondeno $ 164,000 60% 10 points 18 months 24 months
Edward S. Zub $ 172,000 60% 10 points 18 months 30 months
Thomas J Armtrong $ 143,000 60% 10 points 18 months 24 months
16
EXHIBIT 10.2
FORM OF CHANGE IN CONTROL AGREEMENT
THIS AGREEMENT (this "AGREEMENT") entered into as of the 1st day of July,
1998 between SOUTHWEST GAS CORPORATION, a California corporation (the
"COMPANY"), and ___________________ (the "EMPLOYEE").
1. DEFINITIONS
For the purposes of this Agreement:
(a) The term "COMPANY" shall include any corporate successor to the
business presently conducted by the Company.
(b) The term "SUBSIDIARY" shall mean any corporation, partnership, joint
venture or other entity in which the Company has a 50% or greater
equity interest.
(c) "PERMANENT DISABILITY" shall mean that because of physical or mental
illness or disability, the Employee shall have been continuously
unable to perform the essential functions of his job (as those
functions are described herein) with or without reasonable
accommodation for a consecutive period of at least six months.
(d) "CAUSE" shall mean (i) any material breach by the Employee of his
material duties and obligations as an employee of the Company (as
such duties and obligations may be assigned by the Board or by the
President and CEO of the Company) which is not cured within 60 days
after written notice of such breach by the Company to the Employee,
(ii) conviction of the Employee of a felony or crime involving moral
turpitude (meaning a crime that necessarily includes the commission
of an act of gross depravity, dishonesty or bad morals), or (iii)
any acts or wilful malfeasance or gross negligence in a matter of
material importance to the Company.
(e) "BOARD" shall mean the Board of Directors of the Company.
2. TERM OF AGREEMENT
The initial term of this Agreement shall be 24 months, commencing on the
date first written above. If a Change in Control (as hereinafter defined)
occurs, the term of this Agreement shall be extended for a period of 24 months
from the date of the Change in Control. Unless within 60 days prior to any
anniversary date of this Agreement (or, if a Change in Control has occurred,
the second anniversary of such Change in Control and any succeeding
anniversary thereof), the Company (or the Employee) gives written notice to
the Employee (or the Company) of the termination of this Agreement as of the
then applicable expiration date, then the term of this Agreement shall
automatically be extended for an additional 12 months.
3. CONFIDENTIALITY
The Employee acknowledges that during his employment by, and as a result
of his relationship with, the Company he will obtain knowledge of and gain
access to information regarding the Company's business, operations, products,
proposed products, production methods, processes, customer lists, advertising,
marketing and promotional plans and materials, price lists, pricing policies,
financial information and other trade secrets, confidential information and
material proprietary to the Company or designated as being confidential by the
Company which is not generally known to non-Company personnel, including
information and material originated, discovered or developed in whole or in
part by the Employee (collectively referred to herein as "CONFIDENTIAL
INFORMATION"). The Employee agrees that during the term of this Agreement and,
to the fullest extent permitted by law thereafter, he will, in a fiduciary
capacity for the benefit of the Company, hold all Confidential Information
strictly in confidence and will not directly or indirectly reveal, report,
disclose, publish or transfer any of such Confidential Information to any
person, firm or other entity, or utilize any of the Confidential Information
for any purpose, except in furtherance of his employment by the Company.
The Employee agrees that upon the expiration of this Agreement or any
earlier termination of his employment, he will immediately surrender and
return to the Company all lists, books, records and other Confidential
Information of the Company, or obtained in connection with the Company's
business, it being expressly acknowledged by the Employee that all such items
are the exclusive property of the Company, and all other property belonging to
the Company then in the possession of the Employee, and the Employee shall not
make or retain any copies thereof.
4. CHANGE IN CONTROL OF THE COMPANY
The Board recognizes that the continuing possibility of a change in
control of the Company is unsettling to the Employee and other officers of the
Company. Therefore, the arrangements set forth below are being made to help
assure a continuing dedication by the Employee to his duties to the Company,
notwithstanding the occurrence or potential occurrence of a change in control.
In particular, the Board believes it important, should the Company receive
proposals from third parties with respect to its future, to enable the
Employee, without being influenced by the uncertainties of his own situation,
to assess and advise the Board whether such proposals would be in the best
interests of the Company and its shareholders and to take such other action
regarding such proposals as the Board might determine to be appropriate. The
Board also wishes to demonstrate to officers of the Company that the Company
is concerned with the welfare of its officers and intends to see that loyal
officers are treated fairly.
In view of the foregoing and in further consideration of the Employee's
continued employment with the Company, the Company agrees as follows:
(a) Limited Right to Receive a Severance Benefit. The Employee shall be
entitled to the severance benefits provided in Section 4(c) if,
within 24 months after a Change in Control: (i) the Employee
terminates his employment with the Company for Good Reason, provided
he terminates his employment within 120 days following the
2
occurrence of any of the events specified in Section 4(b)(ii); or
(ii) the Employee's employment is terminated by the Company for any
reason other than (A) the Employee's death, (B) the Employee's
Permanent Disability, or (C) Cause.
Following a Change in Control, any termination by the Employee for
Good Reason or any termination by the Company for Permanent
Disability or for Cause shall be accompanied or preceded by a notice
to the other party hereto which shall set forth in reasonable detail
the facts and circumstances claimed as a basis for such termination.
(b) Certain Additional Definitions. For purposes of this Agreement:
(i) Change in Control. The term "CHANGE IN CONTROL" shall mean any
of the following:
(A) Approval by the shareholders of the Company of the
dissolution or liquidation of the Company;
(B) Approval by the shareholders of the Company of an
agreement to merge or consolidate, or otherwise
reorganize, with or into one or more entities that are not
Subsidiaries, as a result of which less than 50% of the
outstanding voting securities of the surviving or
resulting entity immediately after the reorganization are,
or will be, owned, directly or indirectly, by shareholders
of the Company immediately before such reorganization
(assuming for purposes of such determination that there is
no change in the record ownership of the Company's
securities from the record date for such approval until
such reorganization and that such record owners hold no
securities of the other parties to such reorganization,
but including in such determination any securities of the
other parties to such reorganization held by affiliates of
the Company);
(C) Approval by the shareholders of the Company of the sale of
substantially all of the Company's business and/or assets
to a person or entity which is not a Subsidiary;
(D) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT"), but excluding any person described
in and satisfying the conditions of Rule 13d-1(b)(1)
thereunder), becomes the beneficial owner (as defined in
Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing more
than 20% of the combined voting power of the Company's
then outstanding securities entitled to then vote
generally in the election of directors of the Company; or
3
(E) During any period not longer than two consecutive years,
individuals who at the beginning of such period
constituted the Board cease to constitute at least a
majority thereof, unless the election, or the nomination
for election by the Company's shareholders, of each new
Board member was approved by a vote of at least three-
fourths of the Board members then still in office who were
Board members at the beginning of such period (including
for these purposes, new members whose election was so
approved).
(ii) Good Reason. For purposes of this Agreement, "GOOD REASON"
shall mean:
(A) Without the Employee's express written consent, the
assignment to him of any duties inconsistent with his
positions, duties, authority, responsibilities and status
with the Company immediately prior to the Change in
Control; or a demotion or a change in the Employee's
titles or offices as in effect immediately prior to the
Change in Control; or any removal of the Employee from or
any failure to re-elect him to any of such positions;
except in connection with the termination of the
Employee's employment for Cause, Permanent Disability or
retirement or as a result of his death or by him other
than for Good Reason;
(B) A reduction by the Company in the Employee's base salary
as in effect on the date of the Change in Control;
(C) The failure by the Company to continue at levels in
existence immediately prior to the Change in Control any
thrift, incentive or compensation plan, or any pension,
life insurance, health and accident or disability plan in
which the Employee participated immediately prior to the
Change in Control, provided that the Company may adopt
substantially similar plans that provide benefits at
levels no less than those in existence immediately prior
to the Change in Control; or the taking of any action by
the Company which would adversely affect the Employee's
participation in or materially reduce his aggregate
benefits under all of such plans, when taken together, or
deprive him of any material fringe benefit enjoyed by him
at the time of the Change in Control (except for the
acceleration of the termination dates of options, awards
and rights as contemplated by this Agreement).
(D) The assignment of the Employee without his consent to a
new work location which would require a round-trip commute
4
to work from the Employee's residence immediately prior to
the Change in Control of more than 40 miles per day.
(c) Effect of Termination. If the Employee is entitled to receive a
severance benefit pursuant to Section 4(a), the Company will provide
the Employee with only the following severance benefits:
(i) Any restricted stock awards, stock options or stock
appreciation rights to purchase or relating to Common Stock of
the Company held by the Employee on the date the Company or the
Employee terminates the Employee's employment or gives notice
of such termination, whichever first occurs (the "TERMINATION
DATE"), which are not then currently vested or exercisable
shall on such date automatically become vested or exercisable
and shall remain exercisable for 90 days thereafter (subject to
any fixed term of such award, option or right set forth in the
document evidencing such award, option or right);
(ii) A lump sum severance payment equal to: (A) 24 months of the
Employee's base salary in effect as of the Termination Date
(or, if greater, in effect on the date of the Change in
Control); (B) 24 months incentive compensation calculated as
40% of the amount payable pursuant to clause (A); and (C) 24
months fringe benefits calculated as 20% of the amount payable
pursuant to clause (A);
(iii) The Company shall pay the Employee's normal business
expenses incurred through the date the Employee's employment
terminates (except with respect to seminars or travel as
provided below), including automobile, plus any conventions,
seminars or travel either incurred prior to the applicable date
of termination or scheduled at the time of notification of
termination; and
(iv) Any benefits under the DCP and the SERP which are fully vested
on the date the Employee's employment terminates, in accordance
with applicable payment schedules and any applicable elections;
provided, however that the Employee shall receive additional
benefits under the SERP such that the Employee will be
permitted to add to the formula for purposes of eligibility for
benefits, vesting and calculation of benefits, 10 points which,
at the election of the Employee, may be applied either to an
age assumption or continuous length of service assumption
(e.g., if an officer is 50 and has 20 years of service, he
could allocate the points so that for purposes of eligibility,
vesting and calculation of benefits, he is age 55 and has 25
years of service); such amounts having been deposited with a
trustee under an appropriate Trust Agreement providing for a so-
called Rabbi Trust Arrangement pursuant to I.R.S. Rev. Proc. 92-
64, as described in Section 19.
5
The Company reserves the right to modify, suspend, or discontinue any or
all of its benefit programs at any time without recourse by the Employee
(subject to Section 4(b)(ii)(C)).
5. ARBITRATION AND LITIGATION
In the event that, following a Change in Control, the Company terminates
the Employee by reason of his Permanent Disability or for Cause and the
Employee disputes the accuracy of the assertion of Permanent Disability or
Cause, or in the event that, following a Change in Control, the Employee
terminates his employment for Good Reason and the Company disputes the
accuracy of such assertion of Good Reason, or in the event either party
disputes the occurrence of a Change in Control, such dispute shall be resolved
through final and binding arbitration in Clark County, Nevada in accordance
with the then current commercial arbitration rules of the American Arbitration
Association ("ASSOCIATION") or its successor, provided the Employee or the
Company files a written demand for arbitration at a regional office of the
Association within 30 calendar days following the date the Employee notifies
the Company that he disputes the accuracy of the assertion of Permanent
Disability or Cause or Change in Control, or the Company notifies the Employee
that it disputes the accuracy of the assertion of Good Reason or Change in
Control. In no event shall a demand for arbitration be made after the date
when institution of legal or equitable proceedings based on the dispute in
question would be barred by any applicable statute of limitations. In the
event the Arbitrator finds that a Change in Control has occurred and the
termination by the Company was not for Permanent Disability or not for Cause
or that the termination by the Employee was for Good Reason, the Employee
shall not be entitled to reinstatement, but shall be entitled to the
appropriate benefits under Section 4 and payment of his reasonable legal
expenses in such arbitration. Any reasonableness of costs and expenses shall
be determined by the arbitrator.
Should the Employee at any time bring suit against the Company for breach
of this Agreement (not including any matter required to be submitted to
arbitration pursuant to the foregoing provisions of this Section 5) and obtain
judgment in his favor, the Company shall pay his reasonable legal expenses and
costs of suit. The provisions of this Section 5 shall in no way limit the
right of any party to exercise self-help remedies or to obtain provisional or
ancillary relief from a court of competent jurisdiction before, after, or
during the pendency of any arbitration proceeding. The exercise of such
remedy shall not waive the right of any party to resort to arbitration. The
parties each acknowledge and agree that to any extent any legal proceeding
other than arbitration is permitted in this Section 5, the Superior Court of
the State of Nevada in and for Clark County, and the associated federal and
appellate courts, shall have exclusive jurisdiction over such legal
proceedings.
Except as may be necessary to enter judgment upon the award or to the
extent required by applicable law, all claims, defenses and proceedings
(including, without limiting the generality of the foregoing, the existence of
the controversy and the fact that there is an arbitration proceeding) shall be
treated in a confidential manner by the arbitrator, the parties and their
counsel, and each of their agents and employees, and all others acting on
behalf or in concert with them. Without limiting the generality of the
6
foregoing, no one shall divulge to any third party or person not directly
involved in the arbitration, the contents of the pleadings, papers, orders,
hearings, trials, or awards in the arbitration, except as may be necessary to
enter judgment upon an award as required by applicable law. Any court
proceedings relating to the arbitration hereunder, including, without limiting
the generality of the foregoing, to prevent or compel arbitration to perform,
correct, vacate or otherwise enforce an arbitration award, shall be filed
under seal with the court, to the extent permitted by law.
6. BENEFIT AND BINDING EFFECT
This Agreement shall inure to the benefit of and be binding upon the
Company, its successors and assigns, including but not limited to any
corporation, person or other entity which may acquire all or substantially all
of the assets and business of the Company or any corporation with or into
which the Company may be consolidated or merged and the Employee, his heirs,
executors, administrators and legal representatives, provided that the
obligations of the Employee hereunder may not be delegated.
7. OTHER AGREEMENTS
In the event the Company shall elect to insure all or part of its health
and long-term disability benefits, the Employee shall submit to such
reasonable physical examination as the Company may request.
Provided that the Company duly performs all of its obligations (if any)
arising by virtue of this Agreement, the Employee will not publicly disparage
the Company or its officers, directors, employees or agents and will refrain
from any action which would reasonably be expected to cause material adverse
public relations or embarrassment to the Company or to any of such persons.
The preceding sentence shall not apply to disclosures required by applicable
law, regulation or order of a court or governmental agency.
The Company may withhold from any amounts payable under this Agreement
all federal, state, local and foreign taxes as may be required to be withheld
pursuant to any applicable law or regulation.
8. NOTICES
All notices or other communications relating to this Agreement shall be
in writing and delivered personally or sent by registered or certified mail,
postage prepaid and return receipt requested, to the party concerned at the
address set forth below:
If to the Company, to: Southwest Gas Corporation
5241 Spring Mountain Road
Las Vegas, Nevada 89101
Attn: General Counsel
7
If to the Employee, to: [Employee's Name]
Either party may change the address to which notices are to be sent to it
by giving 10 days written notice of such change of address to the other party
in the manner provided above for giving notice. Notices will be considered
delivered on the date of personal delivery or on the date of deposit in the
United States mail in the manner provided for giving notice by mail.
9. PARACHUTE PAYMENTS
(a) In the event that any payment or distribution by the Company to or
for the benefit of the Employee (whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement
or otherwise, but determined without regard to any additional
payments under this Section 9(a)) (a "PAYMENT") is determined to be
subject to the excise tax imposed by Section 4999 of the Internal
Revenue Code of 1986, as amended (the "CODE"), or any interest or
penalties are incurred by the Employee with respect to such excise
tax (such excise tax, together with any such interest and penalties,
are hereinafter collectively referred to as the "EXCISE TAX"), then
the Company shall pay to the Employee an additional payment (a
"GROSS-UP PAYMENT") in an amount such that after payment by the
Employee of all taxes (including any interest or penalties imposed
with respect to such taxes), including, without limitation, any
income taxes (and any interest and penalties imposed with respect
thereto) and Excise Tax imposed upon the Gross-Up Payment, the
Employee retains an amount of the Gross-Up Payment equal to the
Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 9(c), all determinations
required to be made under this Section 9, including whether and when
a Gross-Up Payment is required and the amount of such Gross-Up
Payment and the assumptions to be utilized in arriving at such
determination, shall be made by a nationally recognized certified
public accounting firm which is satisfactory to the Company (the
"ACCOUNTING FIRM"), which shall provide detailed supporting
calculations both to the Company and the Employee within 15 business
days after such determinations are requested by the Employee or the
Company. All fees and expenses of the Accounting Firm shall be
borne solely by the Company. Any Gross-Up Payment, as determined
pursuant to this Section 9(b), shall be paid by the Company to the
Employee within five days after the Company's receipt of the
Accounting Firm's determination. As a result of the uncertainty in
the application of Section 4999 of the Code at the time of the
initial determination by the Accounting Firm hereunder, it is
possible that Gross-Up Payments which will not have been made by the
Company should have been made ("UNDERPAYMENT"), consistent with the
calculations required to be made hereunder. In the event that the
Company exhausts its remedies pursuant to Section 9(c) and the
Employee thereafter is required to make a payment of any Excise Tax,
the Accounting Firm shall determine the amount of the Underpayment
8
that has occurred and any such Underpayment shall be promptly paid
by the Company to or for the benefit of the Employee.
(c) The Employee shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the
payment by the Company of a Gross-Up Payment. Such notification
shall be given as soon as practicable but no later than ten business
days after the Employee is informed in writing of such claim and
shall apprise the Company of the nature of such claim, and the date
on which such claim is requested to be paid. The Employee shall not
pay such claim prior to the expiration of the 30-day period
following the date on which it gives such notice to the Company (or
such shorter period ending on the date that any payment of taxes
with respect to such claim is due). If the Company notifies the
Employee in writing prior to the expiration of such period that it
desires to contest such claim, the Employee shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to
time, including, without limitation, accepting legal
representation with respect to such claim by an attorney
reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order to
contest such claim effectively, and
(iv) permit the Company to participate in any proceedings relating
to such claim;
provided, however, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and
hold the Employee harmless, on an after-tax basis, for any Excise
Tax or income tax (including interest and penalties with respect
thereto) imposed as a result of such representation and payment of
costs and expenses. Without limitation on the foregoing provisions
of this Section 9(c), the Company shall control all proceedings
taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of
such claim and may, at its sole option, either direct the Employee
to pay the tax claimed and sue for a refund or contest the claim in
any permissible manner, and the Employee agrees to prosecute such
contest to a determination before any administrative tribunal, in a
court of initial jurisdiction and in one or more appellate courts,
as the Company shall determine; provided, however, that if the
Company directs the Employee to pay such claim and sue for a refund,
the Company shall advance the amount of such payment to the
9
Employee, on an interest-free basis and shall indemnify and hold the
Employee harmless, on an after-tax basis, from any Excise Tax or
income tax (including interest or penalties with respect thereto)
imposed with respect to such advance or with respect to any imputed
income with respect to such advance; and further provided that any
extension of the statute of limitations relating to payment of taxes
for the taxable year of the Employee with respect to which such
contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of the contest
shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and the Employee shall be entitled to
settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by the Employee of an amount advanced by the
Company pursuant to Section 9(c) the Employee becomes entitled to
receive any refund with respect to such claim, or if the actual
amount of the Excise Tax is less than the amount of the Gross-Up
Payment, the Employee shall (subject to the Company's complying with
the requirements of Section 9(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto) or the amount of such
difference. If, after the receipt by the Employee of an amount
advanced by the Company pursuant to Section 9(c), a determination is
made that the Employee shall not be entitled to any refund with
respect to such claim and the Company does not notify the Employee
in writing of its intent to contest such denial of refund prior to
the expiration of 30 days after such determination, then such
advance shall be forgiven and shall not be required to be repaid and
the amount of such advance shall offset, to the extent thereof, the
amount of Gross-Up Payment required to be paid.
10. ENTIRE AGREEMENT
The entire understanding and agreement between the parties has been
incorporated into this Agreement, and this Agreement supersedes all other
agreements, negotiations, and understandings between the Employee and the
Company with respect to the Employee's rights in the event of a change in
control of the Company (including any prior change in control agreements
between the Employee and the Company). This Agreement may not be amended
orally, but only by an agreement in writing signed by both parties.
11. GOVERNING LAW
This Agreement shall be governed by and interpreted in accordance with
the laws of the State of Nevada. It is intended by the parties that this
Agreement be interpreted in accordance with its fair and simple meaning, not
for or against either party, and neither party shall be deemed to be the
drafter of this Agreement.
Prior to a Change in Control, nothing in this Agreement shall confer upon
the Employee any right to continue in the employ or other service of the
10
Company or constitute any contract or agreement of employment or service, nor
shall interfere in any way with the right of the Company to change Employee's
compensation or other benefits or to terminate the employment of the Employee,
with or without cause; and, following a Change in Control, the Employee's only
rights under this Agreement shall be to receive those benefits provided for in
Section 4(c) following a termination described in Section 4(a).
12. CAPTIONS; COUNTERPARTS
The section headings and captions included herein are for convenience and
shall not constitute a part of this Agreement.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
shall together constitute one and the same Agreement.
13. FUNDING OF CERTAIN SEVERANCE BENEFITS
The method of providing funding for the amounts payable under Section
4(c)(v) shall be by way of a Rabbi Trust. Such trust shall be established by
the Company upon a Change in Control with either (i) a major bank located in a
major city of the United States or (ii) any other party located in a major
city of the United States that may be granted corporate trustee powers under
state law, in favor of the Employee. Such trust shall not be revocable and
shall continue until such trust is terminated in accordance with the
termination provisions set forth in the Trust Agreement described in Section
4(c)(v).
14. SEVERABILITY
If any portion or provision of this Agreement is determined by
arbitration or by a court of competent jurisdiction to be invalid, illegal or
unenforceable, the remaining portions or provisions hereof shall not be
affected.
11
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto as of the date first written above.
SOUTHWEST GAS CORPORATION
By:
Michael O. Maffie
Its: President and Chief Executive Officer
THE EMPLOYEE
[Employee]
12
EXHIBIT 12.1
SOUTHWEST GAS CORPORATION
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Thousands of dollars)
For the Twelve Months Ended
----------------------------------------------------------------------------------
September 30, December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- --------- ----------
Continuing operations
1. Fixed charges:
A) Interest expense $ 64,490 $ 63,247 $ 54,674 $ 52,844 $ 48,688 $ 40,883
B) Amortization 1,215 1,164 1,494 1,569 1,426 1,330
C) Interest portion of rentals 7,058 6,973 6,629 4,435 4,743 4,556
D) Preferred securities distributions 5,475 5,475 5,475 913 - -
---------- ---------- ---------- ---------- --------- ----------
Total fixed charges $ 78,238 $ 76,859 $ 68,272 $ 59,761 $ 54,857 $ 46,769
========== ========== ========== ========== ========= ==========
2. Earnings (as defined):
E) Pretax income from
continuing operations $ 68,593 $ 21,328 $ 10,448 $ 3,493 $ 38,119 $ 21,959
Fixed Charges (1. above) 78,238 76,859 68,272 59,761 54,857 46,769
---------- ---------- ---------- ---------- --------- ----------
Total earnings as defined $ 146,831 $ 98,187 $ 78,720 $ 63,254 $ 92,976 $ 68,728
========== ========== ========== ========== ========= ==========
3. Ratio of earnings to fixed charges 1.88 1.28 1.15 1.06 1.69 1.47
========== ========== ========== ========== ========= ==========
For the Twelve Months Ended
----------------------------------------------------------------------------------
September 30, December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- --------- ----------
Adjusted for interest allocated to
discontinued operations
1. Fixed charges:
A) Interest expense $ 64,490 $ 63,247 $ 54,674 $ 52,844 $ 48,688 $ 40,883
B) Amortization 1,215 1,164 1,494 1,569 1,426 1,330
C) Interest portion of rentals 7,058 6,973 6,629 4,435 4,743 4,556
D) Preferred securities distributions 5,475 5,475 5,475 913 - -
E) Allocated interest [1] - - - 9,636 7,874 7,874
---------- ---------- ---------- ---------- --------- ----------
Total fixed charges $ 78,238 $ 76,859 $ 68,272 $ 69,397 $ 62,731 $ 54,643
========== ========== ========== ========== ========= ==========
2. Earnings (as defined):
F) Pretax income from
continuing operations $ 68,593 $ 21,328 $ 10,448 $ 3,493 $ 38,119 $ 21,959
Fixed Charges (1. above) 78,238 76,859 68,272 69,397 62,731 54,643
---------- ---------- ---------- ---------- --------- ----------
Total earnings as defined $ 146,831 $ 98,187 $ 78,720 $ 72,890 $ 100,850 $ 76,602
========== ========== ========== ========== ========= ==========
3. Ratio of earnings to fixed charges 1.88 1.28 1.15 1.05 1.61 1.40
========== ========== ========== ========== ========= ==========
[1] Represents allocated interest through the period ended December 31, 1995. Carrying costs for the
period subsequent to year end through the disposition of the discontinued operations were accrued and
recorded as disposal costs.
/TABLE
EXHIBIT 12.1
SOUTHWEST GAS CORPORATION
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
(Thousands of dollars)
For the Twelve Months Ended
----------------------------------------------------------------------------------
September 30, December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
---------- --------- ---------- --------- --------- ----------
Continuing operations
1. Combined fixed charges:
A) Total fixed charges $ 78,238 $ 76,859 $ 68,272 $ 59,761 $ 54,857 $ 46,769
B) Preferred dividends [1] - - - 404 826 1,183
---------- --------- ---------- ---------- --------- ----------
Total fixed charges and
preferred dividends $ 78,238 $ 76,859 $ 68,272 $ 60,165 $ 55,683 $ 47,952
========== ========= ========== ========== ========= ==========
2. Earnings $ 146,831 $ 98,187 $ 78,720 $ 63,254 $ 92,976 $ 68,728
========== ========= ========== ========== ========= ==========
3. Ratio of earnings to fixed charges
and preferred dividends 1.88 1.28 1.15 1.05 1.67 1.43
========== ========= ========== ========== ========= ==========
For the Twelve Months Ended
---------------------------------------------------------------------------------
September 30, December 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- ----------
Adjusted for interest allocated to
discontinued operations
1. Combined fixed charges:
A) Total fixed charges $ 78,238 $ 76,859 $ 68,272 $ 69,397 $ 62,731 $ 54,643
B) Preferred dividends [1] - - - 404 826 1,183
---------- --------- ---------- ---------- --------- ----------
Total fixed charges and
preferred dividends $ 78,238 $ 76,859 $ 68,272 $ 69,801 $ 63,557 $ 55,826
========== ========= ========== ========== ========= ==========
2. Earnings $ 146,831 $ 98,187 $ 78,720 $ 72,890 $ 100,850 $ 76,602
========== ========= ========== ========== ========= ==========
3. Ratio of earnings to fixed charges
and preferred dividends 1.88 1.28 1.15 1.04 1.59 1.37
========== ========= ========== ========== ========= ==========
[1] Preferred and preference dividends have been adjusted to represent the pretax earnings necessary
to cover such dividend requirements.
/TABLE
UT
1,000
9-MOS
DEC-31-1998
SEP-30-1998
PER-BOOK
1,425,431
75,204
183,651
51,355
0
1,735,641
31,915
421,631
720
454,266
0
0
808,807
33,325
0
0
5,128
0
0
0
434,115
1,735,641
648,006
13,979
560,082
560,082
87,924
(3,872)
84,052
47,579
22,494
0
22,494
17,460
0
157,559
0.80
0.80
Includes: trust originated preferred securities of $60,000, current
liabilities, net of current long-term debt maturities and short-term debt, of
$149,460, and deferred income taxes and other credits of $224,655.
Includes distributions related to trust originated preferred securities of $4,106.
