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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------- -------
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, 26,594,038 shares as of November 4, 1996
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1
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein have been
prepared by Southwest Gas Corporation (the Company), without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. 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. 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. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's 1995 Annual Report
on Form 10-K, and 1996 quarterly reports on Form 10-Q.
2
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
ASSETS
Utility plant
Gas plant $ 1,673,780 $ 1,579,665
Less: accumulated depreciation (492,322) (474,891)
Acquisition adjustments 5,974 6,298
Construction work in progress 39,077 26,678
------------ -----------
Net utility plant 1,226,509 1,137,750
------------ -----------
Other property and investments 72,606 35,128
------------ -----------
Current assets
Cash and cash equivalents 4,381 11,168
Accounts receivable, net of allowances 42,661 38,186
Accrued utility revenue 20,287 43,900
Deferred tax benefit 20,936 17,089
Prepaids and other current assets 29,585 31,386
Net assets of discontinued operations -- 175,493
------------ -----------
Total current assets 117,850 317,222
------------ -----------
Deferred charges and other assets 60,912 42,427
------------ -----------
Total assets $ 1,477,877 $ 1,532,527
============ ===========
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock, $1 par (authorized - 45,000,000 shares; issued
and outstanding - 26,566,472 and 24,467,499 shares) $ 28,196 $ 26,097
Additional paid-in capital 345,554 312,631
Retained earnings (accumulated deficit) (10,683) 17,322
------------ -----------
Total common equity 363,067 356,050
Redeemable preferred securities of Southwest Gas Capital I 60,000 60,000
Long-term debt, less current maturities 662,502 607,945
------------ -----------
Total capitalization 1,085,569 1,023,995
------------ -----------
Current liabilities
Current maturities of long-term debt 5,748 120,000
Short-term debt 41,425 37,000
Accounts payable 29,001 41,864
Accrued taxes 21,463 29,116
Deferred purchased gas costs 39,552 32,776
Other current liabilities 63,577 69,455
------------ -----------
Total current liabilities 200,766 330,211
------------ -----------
Deferred income taxes and other credits
Deferred income taxes and investment tax credits 148,819 138,893
Other deferred credits 42,723 39,428
------------ -----------
Total deferred income taxes and other credits 191,542 178,321
------------ -----------
Total capitalization and liabilities $ 1,477,877 $ 1,532,527
============ ===========
The accompanying notes are an integral part of these statements.
3
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED 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,
--------------------- --------------------- ---------------------
1996 1995 1996 1995 1996 1995
--------- --------- --------- --------- --------- ---------
Operating revenues:
Gas operating revenues $ 85,534 $ 91,433 $ 376,599 $ 417,143 $ 522,958 $ 608,604
Construction revenues 39,721 -- 60,619 -- 60,619 --
--------- --------- --------- --------- --------- ---------
Total operating revenues 125,255 91,433 437,218 417,143 583,577 608,604
--------- --------- --------- --------- --------- ---------
Operating expenses:
Net cost of gas 24,027 30,973 139,184 184,639 182,001 254,716
Operations and maintenance 49,086 46,565 144,557 140,287 192,239 186,808
Depreciation and amortization 19,455 16,326 54,046 47,204 69,334 61,755
Taxes other than income taxes 7,365 6,784 22,228 20,272 29,129 26,861
Construction expenses 33,726 -- 51,815 -- 51,815 --
--------- --------- --------- --------- --------- ---------
Total operating expenses 133,659 100,648 411,830 392,402 524,518 530,140
--------- --------- --------- --------- --------- ---------
Operating income (loss) (8,404) (9,215) 25,388 24,741 59,059 78,464
--------- --------- --------- --------- --------- ---------
Other income and (expenses):
Net interest deductions (14,016) (13,296) (40,445) (39,656) (54,143) (52,935)
Preferred securities distributions (1,368) -- (4,106) -- (5,019) --
Other income (deductions), net (11) (194) (214) (185) (681) (504)
--------- --------- --------- --------- --------- ---------
Total other income and (expenses) (15,395) (13,490) (44,765) (39,841) (59,843) (53,439)
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations before income taxes (23,799) (22,705) (19,377) (15,100) (784) 25,025
Income tax expense (benefit) (9,161) (9,352) (7,655) (6,245) (571) 9,444
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations (14,638) (13,353) (11,722) (8,855) (213) 15,581
Net income (loss) from discontinued operations -- 522 -- 1,328 (18,864) 1,429
--------- --------- --------- --------- --------- ---------
Net income (loss) (14,638) (12,831) (11,722) (7,527) (19,077) 17,010
Preferred/preference stock dividend requirements -- 95 -- 285 22 380
--------- --------- --------- --------- --------- ---------
Net income (loss) applicable to common stock $ (14,638) $ (12,926) $ (11,722) $ (7,812) $ (19,099) $ 16,630
========= ========= ========= ========= ========= =========
Earnings (loss) per share from continuing operations $ (0.55) $ (0.56) $ (0.46) $ (0.40) $ (0.01) $ 0.68
Earnings (loss) per share from discontinued operations -- 0.02 -- 0.06 (0.74) 0.06
--------- --------- --------- --------- --------- ---------
Earnings (loss) per share of common stock $ (0.55) $ (0.54) $ (0.46) $ (0.34) $ (0.75) $ 0.74
========= ========= ========= ========= ========= =========
Dividends paid per share of common stock $ 0.205 $ 0.205 $ 0.615 $ 0.615 $ 0.82 $ 0.82
========= ========= ========= ========= ========= =========
Average number of common shares outstanding 26,477 24,062 25,636 22,768 25,382 22,370
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these statements.
4
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ (11,722) $ (7,527) $ (19,077) $ 17,010
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 54,046 47,204 69,334 61,755
Deferred income taxes 1,282 (16,839) 2,807 (17,883)
Changes in current assets and liabilities
Accounts receivable 8,453 38,089 (9,917) 1,189
Accrued utility revenue 23,613 28,489 (1,243) (1,117)
Deferred purchased gas costs 6,776 50,971 3,800 48,985
Accounts payable (15,986) (28,210) 5,122 1,667
Accrued taxes (7,653) (11,448) (10,025) (5,066)
Other current assets and liabilities 480 2,993 1,148 2,611
Other 911 1,756 (1,049) (1,286)
Undistributed (income) loss from discontinued operations -- (5,795) 17,371 (7,126)
----------- ----------- ----------- -----------
Net cash provided by operating activities 60,200 99,683 58,271 100,739
----------- ----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Construction expenditures (141,948) (116,612) (191,517) (159,883)
Proceeds from bank sale 191,662 -- 191,662 --
Other (29,163) (1,871) (24,828) 2,170
----------- ----------- ----------- -----------
Net cash provided by (used in) investing activities 20,551 (118,483) (24,683) (157,713)
----------- ----------- ----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 14,365 40,584 18,625 43,058
Issuance of trust originated preferred securities -- -- 57,713 --
Reacquisition of preferred/preference stocks -- -- (4,000) (4,058)
Dividends paid (15,852) (14,468) (20,960) (18,946)
Issuance of long-term debt 159,486 32,107 176,786 38,107
Retirement of long-term debt (247,020) (2,280) (247,025) (2,417)
Issuance (repayment) of short-term debt 1,483 (36,000) (17,517) 4,000
Other -- -- (48) 524
----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities (87,538) 19,943 (36,426) 60,268
----------- ----------- ----------- -----------
Change in cash and temporary cash investments (6,787) 1,143 (2,838) 3,294
Cash at beginning of period 11,168 6,076 7,219 3,925
----------- ----------- ----------- -----------
Cash at end of period $ 4,381 $ 7,219 $ 4,381 $ 7,219
=========== =========== =========== ===========
Supplemental information:
Interest paid, net of amounts capitalized $ 47,718 $ 48,375 $ 61,720 $ 61,073
=========== =========== =========== ===========
Income taxes paid, net of refunds $ 18,610 $ 26,143 $ 12,880 $ 27,291
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
5
NOTE 1 -- DISPOSITION OF PRIMERIT BANK
In January 1996, the Company and its wholly owned subsidiaries: The Southwest
Companies and PriMerit Bank, Federal Savings Bank (PriMerit), entered into a
definitive agreement with Norwest Corporation (Norwest) to sell PriMerit to
Norwest for $175 million. In April 1996, Norwest elected, pursuant to an
option in the original agreement, to structure the acquisition as a purchase
of substantially all of the assets and liabilities of PriMerit in exchange for
consideration of $191 million. The Company will pay an additional $16 million
in income taxes by virtue of consummating the sale as a purchase of assets and
assumption of liabilities. The consideration of $191 million, therefore,
provides the economic equivalent to the Company of a sale of stock of PriMerit
for $175 million.
Shareholders of the Company voted on and approved the principal terms of the
sale at the annual shareholder meeting held in July 1996. Various preclosing
regulatory approvals were obtained and other customary closing conditions were
satisfied. The sale closed in July 1996. Net proceeds of approximately
$163 million were initially used to pay down short-term debt and a portion of
the term-loan facilities. In August, the Company retired debt incurred in
connection with its investment in PriMerit.
NOTE 2 -- LONG-TERM DEBT
In August 1996, the Company completed the sale of $75 million of 7-1/2 percent
debentures due 2006 and $75 million of 8 percent debentures due 2026. Net
proceeds of $148 million as well as a portion of the $163 million net proceeds
from the PriMerit sale were used to refund or retire outstanding callable
debentures and pay down short-term debt with the remaining amount being used
for general corporate purposes, including the acquisition of property for the
construction, completion, extension, and improvement of the Company's pipeline
systems and facilities located in and around the communities it serves. The
debt refunded or retired during the third quarter was as follows (thousands of
dollars):
9% Series A, due 2011 $ 26,838
9% Series B, due 2011 31,158
8.75% Series C, due 2011 18,323
9.375% Series D, due 2017 120,000
10% Series E, due 2013 23,069
----------
Debt refunded or retired 219,388
Call premiums 8,873
----------
$ 228,261
==========
Long-term debt outstanding at September 30, 1996 was as follows (thousands of
dollars):
Term loan facility $ 184,000
Debentures:
9.75% Series F, due 2002 100,000
7.50% Series, due 2006 75,000
8.00% Series, due 2026 75,000
Industrial development revenue bonds--
net of funds held in trust 225,057
Other 10,320
Unamortized discount on long-term debt (6,875)
----------
Total long-term debt $ 662,502
==========
6
NOTE 3 -- ACQUISITION OF NORTHERN PIPELINE CONSTRUCTION CO.
On April 29, 1996, the Company acquired all of the outstanding stock of
Northern Pipeline Construction Co. (the construction services segment)
pursuant to a definitive agreement dated November 1995. The Company issued
approximately 1,439,000 shares of common stock valued at $24 million in
connection with the acquisition. The acquisition was accounted for as a
purchase. Goodwill in the amount of approximately $12 million was recorded by
the construction services segment and is being amortized over a period of
approximately 25 years. The construction services segment provides local gas
distribution companies with installation, replacement, and maintenance
services for underground natural gas distribution systems.
During the period from the acquisition date through September 30, 1996, the
construction services segment recognized revenues generated from contracts
with the Company of $37 million. These revenues and associated profits are
included in the condensed 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
will be met.
The assets acquired and the liabilities assumed at the acquisition date were
as follows (thousands of dollars):
Other property and investments $ 26,490
Receivables, net 12,928
Prepaids and other current assets 2,545
Deferred charges and other assets 11,340
---------
Total assets acquired 53,303
---------
Long-term debt and capital leases, including current maturities 14,867
Short-term debt 2,766
Accounts payable 3,123
Other current liabilities 6,759
Deferred income taxes 4,737
Other deferred credits 394
---------
Total liabilities assumed 32,646
---------
Net noncash assets acquired 20,657
Cash acquired in acquisition and included in cash flow statement 3,343
---------
Total common equity issued in acquisition $ 24,000
=========
7
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 to residential, commercial, and
industrial customers in geographically diverse portions of Arizona, Nevada,
and California (natural gas operations segment). The construction services
segment provides local gas distribution companies with installation,
replacement, and maintenance services for underground natural gas distribution
systems.
The Company previously engaged in financial services activities through
PriMerit, a wholly owned subsidiary. In January 1996, the Company signed a
definitive agreement to sell PriMerit to Norwest. The sale closed in
July 1996, following receipt of shareholder and various governmental approvals
and satisfaction of other customary closing conditions. For consolidated
financial reporting purposes, the financial services activities are disclosed
as discontinued operations.
For the twelve months ended September 30, 1996, loss from continuing
operations was $213,000, loss from discontinued operations was $18.9 million,
and total net loss was $19.1 million.
CAPITAL RESOURCES AND LIQUIDITY
Because the Company's business is highly seasonal, short-term debt is used to
meet seasonal working capital requirements. The Company borrows under its
credit lines to finance portions of its capital expenditures, pending
refinancing through the issuance of equity or long-term indebtedness at a
later date depending upon prevailing market conditions.
The Company estimates that construction expenditures for its natural gas
operations for the three-year period ending December 31, 1998 will be
approximately $470 million. It is estimated that cash flow from operating
activities (net of dividends) will fund approximately one-half of the gas
operations' total construction expenditures during the three-year period
ending December 31, 1998. A portion of the construction expenditure funding
will be provided by $36 million of funds held in trust from the issuance of
industrial development revenue bonds at December 31, 1995. The remaining cash
requirements are expected to be provided by external financing sources. The
timing, types, and amounts of these additional external financings will be
dependent on a number of factors, including conditions in the capital markets,
timing and amounts of rate relief, and growth factors in the Company's 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.
Included in the stockholders' equity section of the balance sheet is a
$10.7 million accumulated deficit. This negative retained earnings balance is
primarily attributable to the disposition of PriMerit Bank. Management
anticipates a positive retained earnings balance at year end.
In August 1996, the Company completed the sale of $75 million of 7-1/2 percent
debentures due 2006 and $75 million of 8 percent debentures due 2026. Net
proceeds of $148 million as well as a portion of the $163 million net proceeds
from the PriMerit sale were used to refund or retire $219 million of
outstanding callable debentures and pay down short-term debt with the
remaining amount being used for general corporate purposes, including the
acquisition of property for the construction, completion, extension, and
improvement of the Company's pipeline systems. The refinancing achieved a
126 basis point reduction in the related average interest rate. The financial
impacts of the restructuring will be realized beginning with fourth quarter
results.
In October 1996, the Company filed a $250 million shelf registration
statement. Under this new registration statement, the Company may offer, up
to the registered amount, any combination of debt securities, preferred stock,
depositary shares, and common stock. This registration statement includes a
carryforward of $60 million remaining from a prior shelf registration
statement declared effective by the Securities and Exchange Commission in
October 1995.
8
Securities ratings issued by nationally recognized ratings agencies provide a
method for determining the creditworthiness of an issuer. The Company's debt
ratings are influential since long-term debt constitutes a significant portion
of the Company's capitalization. These debt ratings are a factor considered
by lenders when determining the cost of debt for the Company (i.e., the better
the rating, the lower the cost to borrow funds).
In July 1996, Moody's upgraded the Company's unsecured long-term debt rating
from Baa3 to Baa2. Moody's debt ratings range from Aaa (best quality) to C
(lowest quality). Moody's applies a Baa2 rating to obligations which are
considered medium grade obligations, i.e., they are neither highly protected
nor poorly secured.
Also in July 1996, Duff & Phelps Credit Rating Co. upgraded the Company's
unsecured long-term debt rating to BBB from BBB-. Duff & Phelps debt ratings
range from AAA (highest rating possible) to DD (defaulted debt obligation).
The Duff & Phelps rating of BBB indicates that the Company's credit quality is
considered prudent for investment.
A securities rating is not a recommendation to buy, sell, or hold a security
and is subject to change or withdrawal at any time by the rating agency.
RESULTS OF CONSOLIDATED OPERATIONS
Quarterly Analysis
- ------------------
Contribution to Net Loss
Three Months Ended September 30,
-------------------------------
(Thousands of dollars)
1996 1995
---------- ----------
Continuing operations:
Natural gas operations $ (16,256) $ (13,353)
Construction services 1,618 --
Discontinued operations--financial services -- 522
---------- ----------
Net loss $ (14,638) $ (12,831)
========== ==========
Loss per share for the quarter ended September 30, 1996 was $0.55, compared to
$0.54 recorded during the corresponding quarter of the prior year. See
separate discussion at NATURAL GAS OPERATIONS SEGMENT of the changes as they
relate to the natural gas operations segment. Construction services earnings
per share were $0.06 for the current period. Prior year loss per share
included per share earnings of $0.02 contributed from discontinued operations.
Average shares outstanding increased 2.4 million shares between years
primarily resulting from a 1.4 million share issuance in April 1996, and
issuances under the Company's Dividend Reinvestment and Stock Purchase Plan.
9
Nine-Month Analysis
- -------------------
Contribution to Net Loss
Nine Months Ended September 30,
------------------------------
(Thousands of dollars)
1996 1995
---------- ----------
Continuing operations:
Natural gas operations $ (13,786) $ (8,855)
Construction services 2,064 --
Discontinued operations--financial services -- 1,328
---------- ----------
Net loss $ (11,722) $ (7,527)
========== ==========
Loss per share for the nine months ended September 30, 1996 was $0.46, a $0.12
decline from a per share loss of $0.34 recorded during the nine months ended
September 30, 1995. Loss from continuing operations during the current
nine-month period was $0.46, a decline from the loss recorded during the
corresponding prior period of $0.40 per share. See separate discussion at
NATURAL GAS OPERATIONS SEGMENT of the changes as they relate to the natural
gas operations segment. Construction services earnings per share were $0.08
for the five-month period since acquisition. Prior year loss per share
included per share earnings of $0.06 contributed from discontinued operations.
Average shares outstanding increased 2.9 million shares between years
primarily resulting from a 2.1 million share public offering in May 1995, a
1.4 million share issuance in April 1996, and issuances under the Company's
Dividend Reinvestment and Stock Purchase Plan.
Twelve-Month Analysis
- ---------------------
Contribution to Net Income (Loss)
Twelve Months Ended September 30,
--------------------------------
(Thousands of dollars)
1996 1995
----------- -----------
Continuing operations:
Natural gas operations $ (2,277) $ 15,581
Construction services 2,064 --
Discontinued operations--financial services (18,864) 1,429
----------- -----------
Net income (loss) $ (19,077) $ 17,010
=========== ===========
Loss per share for the twelve months ended September 30, 1996 was $0.75, a
$1.49 decline from per share earnings of $0.74 recorded during the prior
twelve-month period. Loss from continuing operations during the current
twelve-month period was $0.01, a decline from earnings recorded during the
corresponding prior period of $0.68 per share. See separate discussion at
NATURAL GAS OPERATIONS SEGMENT of the changes as they relate to the natural
gas operations segment. Construction services earnings per share were $0.08
for the five-month period since acquisition. Prior year earnings per share
included per share earnings of $0.06 contributed from discontinued operations.
Average shares outstanding increased 3 million shares between years.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board (FASB) issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. This statement is effective for transactions
occurring after December 31, 1996. The Company does not anticipate any
material effect on its financial position or results of operations upon
implementation of this statement.
10
NATURAL GAS OPERATIONS SEGMENT
The Company is engaged in the business of purchasing, transporting, and
distributing natural gas in portions of Arizona, Nevada, and California. Its
service areas are geographically as well as economically diverse. The Company
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. The Company is also the largest distributor and
transporter of natural gas in Nevada, and serves the Las Vegas metropolitan
area and northern Nevada. In addition, the Company distributes and transports
gas in portions of California, including the Lake Tahoe area in northern
California and high desert and mountain areas in San Bernardino County.
The Company purchases, transports, and distributes natural gas to
approximately 1,064,000 residential, commercial, and industrial customers
within its three-state service territory, of which 58 percent are in Arizona,
32 percent are in Nevada, and 10 percent are in California. During the twelve
months ended September 30, 1996, 57 percent of operating margin was earned in
Arizona, 33 percent in Nevada, and 10 percent in California. During this same
period, the Company earned 59 percent of its operating margin from residential
customers, 24 percent from commercial customers, and 17 percent from
industrial and other customers. These patterns are consistent with prior
periods and are expected to continue.
For the twelve months ended September 30, 1996, the Company's natural gas
construction expenditures totaled $191 million, a 19 percent increase when
compared to $160 million of additions for the same period ended a year ago.
The increase is attributed to the investment in new transmission and
distribution plant in Arizona, Nevada, and California to meet the demand from
the Company's growing customer base. Approximately 80 percent of these
current-period expenditures represents new construction and the balance
represents costs associated with routine replacement of existing transmission,
distribution and general plant.
11
RESULTS OF NATURAL GAS OPERATIONS
Quarterly Analysis
- ------------------
Three Months Ended
September 30,
--------------------
(Thousands of dollars)
1996 1995
--------- ---------
Gas operating revenues $ 85,534 $ 91,433
Net cost of gas 24,027 30,973
--------- ---------
Operating margin 61,507 60,460
Operations and maintenance expense 49,086 46,565
Depreciation and amortization 17,012 16,326
Taxes other than income taxes 7,365 6,784
--------- ---------
Operating loss (11,956) (9,215)
Other income (expense), net (23) (194)
--------- ---------
Loss before interest and income taxes (11,979) (9,409)
Net interest deductions 13,645 13,296
Preferred securities distribution 1,368 --
Income tax expense (benefit) (10,540) (9,352)
--------- ---------
Net loss before allocations (16,452) (13,353)
Allocation of carrying costs, net of tax 196 --
--------- ---------
Contribution to consolidated net loss $ (16,256) $ (13,353)
========= =========
Contribution to consolidated net loss decreased $2.9 million compared to the
third quarter of 1995. The decrease was principally the result of higher
operating costs and financing expenses incurred as a result of the expansion
and upgrading of the gas system to accommodate customer growth.
Operating margin increased two percent in the third quarter of 1996 when
compared to the third quarter of 1995. The increase is attributed to rate
relief granted in the Nevada rate jurisdictions effective July 1996.
Operations and maintenance expenses increased $2.5 million, or five percent,
reflecting increases in labor and maintenance costs, including the incremental
expenses associated with meeting the needs of the Company's growing customer
base.
Depreciation expense and general taxes increased $1.3 million, or five percent,
primarily due to an increase in average gas plant in service of $132 million,
or nine percent, compared to the third quarter of 1995. This increase
reflects ongoing capital expenditures for the upgrade of existing operating
facilities and the expansion of the system to accommodate continued customer
growth.
Preferred securities distributions during the third quarter of 1996 were
$1.4 million. These distributions were generated from the original issuance
of preferred securities in October 1995.
12
Nine-Month Analysis
- -------------------
Nine Months Ended
September 30,
--------------------
(Thousands of dollars)
1996 1995
--------- ---------
Gas operating revenues $ 376,599 $ 417,143
Net cost of gas 139,184 184,639
--------- ---------
Operating margin 237,415 232,504
Operations and maintenance expense 144,557 140,287
Depreciation and amortization 50,003 47,204
Taxes other than income taxes 22,228 20,272
--------- ---------
Operating income 20,627 24,741
Other income (expense), net (298) (185)
--------- ---------
Income before interest and income taxes 20,329 24,556
Net interest deductions 39,869 39,656
Preferred securities distribution 4,106 --
Income tax expense (benefit) (9,533) (6,245)
--------- ---------
Net loss before allocations (14,113) (8,855)
Allocation of carrying costs, net of tax 327 --
--------- ---------
Contribution to consolidated net loss $ (13,786) $ (8,855)
========= =========
Contribution to consolidated net loss decreased $4.9 million compared to the
nine months ended September 1995. This was the result of increased operating
costs and financing expenses incurred as a result of the continued expansion
and upgrading of the gas system to accommodate the Company's growth.
Operating margin increased two percent during the nine months ended
September 1996, compared to the same period in 1995 due primarily to customer
growth throughout the service territories and rate relief in the Nevada rate
jurisdictions. However, the impact of record warm temperatures in the
Southwest region of the country during the first quarters of 1996 and 1995
reduced operating margin in both periods from expected levels.
Operations and maintenance expenses increased $4.3 million, or three percent,
reflecting increases in labor and maintenance costs along with incremental
operating expenses associated with meeting the needs of the Company's growing
customer base.
Depreciation expense and general taxes increased $4.8 million, or
seven percent, primarily due to an increase in average gas plant in service of
$140 million, or nine percent. This increase reflects capital expenditures
for the upgrade of existing operating facilities and the expansion of the
system to accommodate continued customer growth within the Company's service
area.
Preferred securities distributions during the current period were
$4.1 million. These distributions were generated from the original issuance
of preferred securities in October 1995.
13
Twelve-Month Analysis
- ---------------------
Twelve Months Ended
September 30,
--------------------
(Thousands of dollars)
1996 1995
--------- ---------
Gas operating revenues $ 522,958 $ 608,604
Net cost of gas 182,001 254,716
--------- ---------
Operating margin 340,957 353,888
Operations and maintenance expense 192,239 186,808
Depreciation and amortization 65,291 61,755
Taxes other than income taxes 29,129 26,861
--------- ---------
Operating income 54,298 78,464
Other income (expense), net (765) (504)
--------- ---------
Income before interest and income taxes 53,533 77,960
Net interest deductions 53,567 52,935
Preferred securities distribution 5,019 --
Income tax expense (benefit) (2,449) 9,444
--------- ---------
Net income (loss) before allocations (2,604) 15,581
Allocation of carrying costs, net of tax 327 --
--------- ---------
Contribution to consolidated net income (loss) $ (2,277) $ 15,581
========= =========
Contribution to consolidated net income decreased $17.9 million compared to
the twelve months ended September 1995. Operating margin decreased while
operations and maintenance expense, depreciation, general taxes, and financing
expenses increased.
Despite a five percent increase in the number of customers billed between the
two periods, operating margin decreased $12.9 million due to record warm
weather experienced during the 1995/1996 winter heating season. Unseasonably
warm weather experienced during much of the fourth quarter of 1995 and the
first quarter of 1996 caused operating margin to be approximately $32 million
less than expected and $26 million lower than the prior twelve-month period.
The addition of 66,000 new customers over the twelve-month period partially
mitigated the impact of weather, contributing approximately $13 million to
operating margin.
Operations and maintenance expenses increased $5.4 million, or three percent,
primarily as a result of general cost increases in labor and materials over
the same period a year ago.
Depreciation expense and general taxes increased $5.8 million, or
seven percent, as a result of additional plant in service. Average gas plant
in service for the current twelve-month period increased $141 million, or
ten 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 continued customer growth.
Preferred securities distributions during the current period were $5 million.
These distributions were generated from the original issuance of preferred
securities in October 1995.
14
RATES AND REGULATORY PROCEEDINGS
NEVADA
In December 1995, the Company filed general rate cases with the Public Service
Commission of Nevada (PSCN) seeking approval to increase revenues by
$15.8 million, or 12 percent, annually for its southern Nevada rate
jurisdiction and $5 million, or 10 percent, annually for its northern Nevada
rate jurisdiction. The Company was seeking recovery of increased operating
and maintenance costs, construction-related financing, tax, insurance, and
depreciation expenses associated with its expanding customer base. In
April 1996, the PSCN approved a settlement of the general rate cases providing
the Company with a $10.6 million general rate increase in southern Nevada and
a $3.2 million increase in northern Nevada. The settlement achieved a number
of rate design and tariff restructuring changes resulting in rates that are
more cost-based. Over 86 percent of annual margin will now be recoverable
from core customer classes, those most responsible for the increased operating
costs. The settlement also adjusts rate design by equalizing margins earned
from sales and transportation customers, resulting in consistent margin
regardless of the type of service elected by a customer. The settlement also
specifies a moratorium on future general rate increase requests until
April 1999. The new rates became effective July 1, 1996.
FERC
In July 1996, Paiute Pipeline Company, a wholly owned subsidiary of the
Company, filed a general rate case with the Federal Energy Regulatory
Commission (FERC) seeking approval to increase revenues by $6.9 million
annually. Paiute is seeking recovery of cost increases associated with plant
and related items, depreciation rates, operational costs including labor, and
an increase in the allowed rate of return. Interim rates reflecting the
increased revenues are expected to become effective in January 1997, subject
to refund. The exact amount of rate relief that will ultimately be authorized
is not known.
ARIZONA
In November 1996, the Company filed a general rate application with the
Arizona Corporation Commission (ACC) seeking approval to increase revenues by
$49.3 million, or 16 percent, annually for both of its Arizona rate
jurisdictions. The Company is seeking rate relief for increased operating
costs, changes in financing costs, and improvements and additions to the
distribution system. The rate application also proposes a number of rate
design improvements including consolidation of the southern and central
Arizona operating divisions and better matching of rates with the costs of
servicing various customer classes.
15
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 - Amended and Restated Lease Agreement between
Spring Mountain Road Associates and Southwest
Gas Corporation dated as of July 1, 1996.
Exhibit 27 - Financial Data Schedule (filed electronically
only)
Exhibit 99 - Financial Analyst Report - Third Quarter 1996
(b) Reports on Form 8-K
None
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 12, 1996 /s/ Edward A. Janov
--------------------------------------------------
Edward A. Janov
Vice President/Controller/Chief Accounting Officer
16
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------
10 Amended and Restated Lease Agreement between Spring Mountain
Road Associates and Southwest Gas Corporation dated as of
July 1, 1996.
27 Financial Data Schedule (filed electronically only)
99 Financial Analyst Report - Third Quarter 1996
EXHIBIT 10
AMENDED AND RESTATED LEASE AND AGREEMENT
Between
SPRING MOUNTAIN ROAD ASSOCIATES,
as Lessor
And
SOUTHWEST
GAS CORPORATION,
as Lessee
Dated as of July 1, 1996
TABLE OF CONTENTS
Paragraph Page
- --------- ----
1. Lease of Premises; Title and Condition................ 1
2. Use................................................... 2
3. Terms................................................. 2
4. Rent.................................................. 2
5. Net Lease; Non-Terminability.......................... 3
6. Taxes and Assessments; Compliance with Law............ 4
7. Liens................................................. 11
8. Indemnification....................................... 11
9. Maintenance and Repair................................ 13
10. Alterations; Reimbursement for Additions.............. 14
11. Condemnation and Casualty............................. 14
12. Insurance............................................. 17
13. Uneconomic Use........................................ 19
14. Mandatory Offer to Purchase........................... 20
15. Procedure Upon Purchase............................... 20
16. Assignment and Subletting............................. 20
17. Permitted Contests.................................... 21
18. Conditional Limitations; Default Provision............ 22
19. Additional Rights of Lessor........................... 26
20. Notices, Demands and Other Instruments................ 27
21. Estoppel Certificates................................. 27
22. No Merger............................................. 28
23. Surrender............................................. 28
24. Merger, Consolidation or Sale of Assets............... 28
25. Separability; Binding Effect; Miscellany.............. 29
26. Lessee's Right of First Refusal....................... 29
27. Purchase Option....................................... 30
28. Appraisal Procedure................................... 31
29. Governing Law......................................... 31
30. Schedules............................................. 31
Schedule A - Description of Premises
Schedule B - Terms and Basic Rent Payments
Schedule C - Purchase Prices Pursuant to paragraph 11(b)
Schedule D - Purchase Prices Pursuant to paragraphs 13 or 27
Location of Definitions:
- -----------------------
Basic Rent - paragraph 4 & Schedule B
Business Day - paragraph 11
Event of default - paragraph 18(a)
Exercise Date - paragraph 13
Existing Lease - preliminary statement paragraph A
Extended Term - paragraph 3 & Schedule B
Improvements - paragraph 1
Legal Requirements - paragraph 6(b)
Mortgage - paragraph 12(b)
Mortgagee - paragraph 12(b)
Net Proceeds - paragraph 11(a)
Noteholder - paragraph 5
Payment Dates - paragraph 4 & Schedule 3
Premises - paragraph 1
Primary Term - paragraph 3 & Schedule B
Termination Date - paragraph 11(b)
Third Party Offer - paragraph 26
AMENDED AND RESTATED LEASE and AGREEMENT, dated as of July 1, 1996 (as
amended or supplemented from time to time as permitted hereby, this "Lease"),
between SPRING MOUNTAIN ROAD ASSOCIATES, a Nevada limited partnership
(herein, together with its successors and assigns as lessor hereunder,
referred to as "Lessor"), having an address c/o PaineWebber Incorporated,
1285 Avenue of the Americas, New York, New York 10019, and SOUTHWEST GAS
CORPORATION, a California corporation (herein, together with any corporation
succeeding thereto by consolidation, merger or acquisition of its assets
substantially as an entirety, referred to as "Lessee"), having an address at
5241 Spring Mountain Road, P. 0. Box 98510, Las Vegas, Nevada 89193-8510.
PRELIMINARY STATEMENT
A. Lessor and Lessee have executed and delivered that certain Lease
and Agreement dated as of June 15, 1982, pursuant to which Lessor has leased
to Lessee all right, title and interest of Lessor in and to a certain parcel
of land, together with the improvements located thereon, in Clark County,
Las Vegas, Nevada and more particularly described in said lease (the foregoing
lease, together with all amendments and supplements thereto, herein called the
"Existing Lease").
B. Lessor and Lessee have agreed to amend and restate the terms,
provisions and conditions of the Existing Lease as hereinafter provided.
1. Lease of Premises; Title and Condition. (a) In consideration
of the rents and covenants herein stipulated to be paid and performed by
Lessee and upon the terms and conditions herein specified, Lessor hereby leases
to Lessee, and Lessee hereby leases from Lessor, the premises (the "Premises")
consisting of the land described in Schedule A, all buildings and other
improvements now or hereafter located thereon (the "Improvements"), and all
easements, rights and appurtenances relating thereto. The Premises are leased
to Lessee in their present condition without representation or warranty by
Lessor and subject to the rights of parties in possession, to the existing
state of title, and to all applicable Legal Requirements (as hereinafter
defined) now or hereafter in effect. Lessee has examined the Premises and
title thereto and has found the same satisfactory for all purposes.
(b) IRRESPECTIVE OF ANY INSPECTION LESSOR MAY HAVE MADE, LESSOR MAKES
NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED OR OTHERWISE, WITH RESPECT
1
TO THE PREMISES OR THE LOCATION, USE, DESCRIPTION, DESIGN, MERCHANTABILITY,
FITNESS FOR USE FOR ANY PARTICULAR PURPOSE, CONDITION, OR DURABILITY THEREOF,
OR AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, OR AS TO LESSOR'S
TITLE THERETO OR OWNERSHIP THEREOF OR OTHERWISE, IT BEING AGREED THAT ALL
RISKS INCIDENT THERETO ARE TO BE BORNE BY LESSEE. IN THE EVENT OF ANY DEFECT
OR DEFICIENCY OF ANY NATURE IN THE PREMISES OR ANY FIXTURE OR OTHER ITEM
CONSTITUTING A PORTION THEREOF, WHETHER PATENT OR LATENT, LESSOR SHALL HAVE NO
RESPONSIBILITY OR LIABILITY WITH RESPECT THERETO. THE PROVISIONS OF THIS
PARAGRAPH 1(b) HAVE BEEN NEGOTIATED AND ARE INTENDED TO BE A COMPLETE
EXCLUSION AND NEGATION OF ANY WARRANTIES BY LESSOR, EXPRESS OR IMPLIED, WITH
RESPECT TO THE PREMISES OR ANY FIXTURE OR OTHER ITEM CONSTITUTING A PORTION
THEREOF, WHETHER ARISING PURSUANT TO THE UNIFORM COMMERCIAL CODE OR ANOTHER
LAW NOW OR HEREAFTER IN EFFECT OR OTHERWISE.
2. Use. Lessee may use the Premises as corporate headquarters or
office space.
3. Terms. The Premises are leased for a primary term of twenty-
one (21) years (the "Primary Term") and, at Lessee's irrevocable option, so
long as no event of default has occurred and is continuing, for one additional
term of five years (the "Extended Term"), unless and until the term of this
Lease shall expire or be terminated pursuant to any provision hereof. The
Primary Term and the Extended Term shall commence and expire as set forth in
Schedule B hereto. The lease extension option shall be exercisable by the
Lessee giving notice to Lessor not less than 360 days prior to the expiration
of the Primary Term. Except as otherwise provided in this Lease, this Lease
shall not be subject to termination by Lessor unless as a specified remedy
while Lessee is in default hereunder and such default shall be continuing, nor
by Lessee for any reason whatsoever.
4. Rent. (a) Lessee shall pay to Lessor in lawful money of the
United States, as fixed rent for the Premises, the amounts set forth in
Schedule B (Basic Rent) on the dates set forth therein (Payment Dates), at
Lessor's address set forth above, or at such other address or to such other
2
person as Lessor from time to time may designate by wire transfer of
immediately available funds not later than noon Minnesota time.
(b) All amounts which Lessee is required to pay pursuant to this
Lease (other than Basic Rent, amounts payable upon purchase of the Premises and
amounts payable as liquidated damages pursuant to paragraph 18), together with
every fine, penalty, interest and cost which may be added for non-payment or
late payment thereof, shall constitute additional rental obligations. If
Lessee shall fail to pay any additional rental obligations, Lessor shall have
the right to pay the same and shall have all rights, powers and remedies with
respect thereto as are provided herein or by law in the case of non-payment of
Basic Rent. Lessee shall pay to Lessor interest at the rate of 10.45% per
annum on all overdue Basic Rent from the due date thereof until paid, and on
all overdue additional rental obligations paid by Lessor on behalf of Lessee
from the date of payment by Lessor until repaid by Lessee. Lessee shall
perform all its obligations under this Lease at its sole cost and expense, and
shall pay all Basic Rent and additional rental obligations when due, without
notice or demand.
5. Net Lease; Non-Terminability. (a) This Lease is a net lease
and, except as otherwise expressly provided herein, any present or future law
to the contrary notwithstanding, shall not terminate, nor shall Lessee be
entitled to any abatement, reduction, set-off, counterclaim, defense or
deduction with respect to any Basic Rent, additional rental obligations or
other sum payable hereunder, nor shall the obligations of Lessee hereunder be
affected by reason of any damage to or destruction of or any defects in the
Premises; any taking of the Premises or any part thereof by condemnation or
otherwise; any prohibition, limitation, restriction or prevention of Lessee's
use, occupancy or enjoyment of the Premises, or any interference with such
use, occupancy or enjoyment by any person; any eviction by paramount title or
otherwise; any default by Lessor hereunder or under any other agreement; the
impossibility or illegality of performance by Lessor, Lessee or both; any
action of any governmental authority; the failure to make any demand or give
notice with respect to the payment of any sum hereunder; the existence of any
claims against the Lessor, the Mortgagee (as hereinafter defined), or any of
the noteholders from time to time (the "Noteholders") under the Mortgage (as
hereinafter defined); or any other cause whether similar or dissimilar to the
foregoing. The parties intend that the obligations of Lessee hereunder shall
be separate and independent covenants and agreements and shall continue
unaffected unless such obligations shall have been modified or terminated
pursuant to an express provision of this Lease. Lessee acknowledge and agrees
that it is intended that this Lease shall be completely carefree and at no
3
cost to Lessor, except as expressly set out in the Lease; that Lessor is not
responsible during the term of this Lease (including the Extended Term) for
any costs, charges, expenses, or outlays of any nature whatsoever arising from
or relating to the Premises, or the use and occupancy thereof, or the contents
thereof, or the business carried on therein; and Lessee shall pay all charges,
expenses, costs, and outlays of every nature and kind relating to the Premises
except as expressly set out in this Lease.
(b) Lessee shall remain obligated under this Lease in accordance with
its terms and shall not take any action to terminate, rescind or avoid this
Lease, notwithstanding any bankruptcy, insolvency, reorganization, liquidation,
dissolution or other proceeding affecting Lessor or any assignee of Lessor or
any action with respect to this Lease which may be taken by any trustee,
receiver or liquidator or by any court. Lessee waives all rights to terminate
or surrender this Lease, or to any abatement or deferment of Basic Rent,
additional rental obligations or other sums payable hereunder.
(c) Lessee waives all rights which may now or hereafter be conferred
by law (i) to quit, terminate or surrender this Lease or the Premises or any
part thereof, or (ii) to any abatement, suspension, deferment or reduction of
the Basic Rent, additional rental obligations or any other sums payable under
this Lease, except as otherwise expressly provided herein.
6. Taxes and Assessments; Compliance with Law. (a) Lessee shall
pay: (i) all taxes, assessments, levies, fees, water and sewer rents and
charges, and all other governmental charges, general and special, ordinary and
extraordinary, foreseen and unforeseen, which are, at any time prior to or
during the term hereof, imposed or levied upon or assessed against (A) the
Premises, (B) any Basic Rent, additional rental obligations or other sum
payable hereunder or (C) this Lease or the leasehold estate hereby created, or
which arise in respect of the operation, possession or use of the Premises;
(ii) all gross receipts or similar taxes imposed or levied upon, assessed
against or measured by any Basic Rent, additional rental obligations or other
sums payable hereunder but not taxes measured by net income; (iii) all sales,
use and similar taxes at any time levied, assessed or payable on account of
the acquisition, leasing or use of the Premises; and (iv) all charges for
utilities serving the Premises. Lessee shall not be required to pay any
franchise, estate, inheritance, transfer, income or similar tax of Lessor
(other than any tax which is required to be paid by Lessee pursuant to clause
(ii) above) unless such tax is imposed, levied or assessed insubstitution for
4
any other tax, assessment charge or levy which Lessee is required to pay
pursuant to clause (i), (iii) or (iv) above or is in substitution for a gross
receipts tax imposed or levied upon, assessed against or measured by any Basic
Rent, additional rental obligations or other sums payable hereunder but not
taxes measured by net income. Lessee will furnish to Lessor, promptly after
demand therefor, proof of payment of all items referred to above which are
payable by Lessee If any such assessment may legally be paid in
installments, Lessee may pay such assessment in installments; in such event,
Lessee shall be liable only for installments which become due and payable
prior to or during the term hereof.
(b) Except as otherwise provided in paragraph 17 of this Lease,
Lessee shall comply with and cause the Premises to comply with (i) all laws,
statutes, codes, ordinances, regulations, judgments, decrees, injunctions,
rules, permits, licenses, authorizations, directions and requirements of, and
agreements with, all governments, departments, commissions, boards, courts,
authorities, agencies, officials and officers, foreseen or unforeseen,
ordinary or extraordinary, general or special or arising from any restriction
or agreements of record or otherwise (including, without limitation, any and
all laws, statutes, codes, ordinances, regulations, judgments, decrees,
injunctions, rules, permits, licenses, authorizations, directions and
requirements in respect of environmental matters), which now or at any time
hereafter may be applicable to the Lessee, the Premises or any part thereof,
or any of the adjoining sidewalks, vaults and vault space, if any, streets or
ways, or the occupancy or any use or condition of the Premises or any part
thereof and any other governmental rules, orders and determinations now or
hereafter enacted, made or issued, and applicable to the Lessee, the Premises
or the occupancy or use thereof, whether or not presently contemplated
(collectively referred to herein as the "Legal Requirements"); and (ii) all
contracts (including insurance policies), agreements, covenants, conditions
and restrictions applicable to the Premises or the ownership, occupancy or use
thereof, including but not limited to all such Legal Requirements, contracts,
agreements, covenants, conditions and restrictions which require structural,
unforeseen or extraordinary changes in the Improvements.
(c) Lessee will obtain and keep in full force and effect, or cause
to be obtained and kept in full force and effect, all governmental or
regulatory approvals, consents, authorizations and/or licenses, if any, with
respect to the ownership, occupation or use of the Premises, required of
Lessee, Lessor or any other party having any interest in the Premises or the
occupancy or use thereof; provided that as to items notice of which is sent to
Lessor but not Lessee, Lessee shall have received reasonable notice from
5
Lessor, provided that Lessee shall have taken all reasonable steps necessary
to insure that Lessee shall receive all such notices from parties other than
Lessor in a timely manner. Lessee will not do or permit to be done any act or
thing which materially impairs the usefulness to Lessee or the value of the
Premises, or which constitutes a public or private nuisance.
(d) Without limiting the generality of clauses (a), (b) and (c)
above, Lessee agrees that it will comply with all relevant federal, state and
local laws, including, but not limited to, the Americans with Disabilities Act
of 1990 (hereinafter the "ADA"), as such laws in any way relate to Lessee's
use or occupancy of the Improvements. Lessee specifically agrees to assume
sole responsibility for any and all obligations Lessee may incur as a "public
accommodation," as that term is defined by Title III of the ADA (e.g.,
engaging in readily achievable barrier removal; the provision of auxiliary
aids; modification of policy, practice or procedure). In the event that
Lessee makes, or shall be permitted to make any alteration, modification, or
improvement of, or engages in new construction relating in or to the
Improvements during the term of this Lease, and such alteration, modification,
improvement or new construction triggers an obligation for alteration of the
exterior of the Improvements, Lessee assumes responsibility for compliance
with any and all applicable state and federal law relating to all such
alterations, modifications, improvements and new construction, including, but
not limited to the Americans with Disabilities Act Architectural Guidelines.
(e) Lessee represents, covenants and warrants to Lessor and Mortgagee
and the Noteholders that:
(i) at all times during the term of this Lease, the Premises
shall comply in all respects with all applicable Environmental Laws (as
hereinafter defined); Lessee has obtained or will obtain, as and when
required, all permits, licenses, and any other authorization to conduct
operations at the Premises that are required under all applicable
Environmental Laws; Lessee is in compliance with all terms and
conditions of all permits, licenses, and any other authorizations
required under all applicable Environmental Laws;
(ii) no notices, complaints or orders of violations or non-
compliance of any nature whatsoever have been issued to Lessee or, to
the best of its knowledge, to any person regarding the Premises, and no
federal, state or local environmental investigation or legal action by a
private party is pending or threatened, in each case with regard to the
Premises or any use thereof or any alleged violation of, or strict
6
liability arising under, Environmental Laws with regard to the Premises;
no liens have been placed upon the Premises in connection with any
actual or alleged liability under any Environmental Laws;
(iii) the Premises (a) has not been used by Lessee or by any
other Person to generate, manufacture, refine, produce or process any
Hazardous Substance (as hereinafter defined) or to store, handle,
transfer or transport any Hazardous Substance other than normal and
lawful uses of such Hazardous Substances, taking into account Lessee's
use of the Premises, in lawful quantities and in compliance with
Environmental Laws, and (b) will not be used by Lessee or any other
Person at any time during the term of this Lease to generate,
manufacture, refine, produce or process any Hazardous Substance or
to store, handle, transfer or transport any Hazardous Substance,
other than normal and lawful uses of such Hazardous Substance,
taking into account Lessee's intended use of the Premises, in
lawful quantities and in compliance with Environmental Laws where
such uses will have no material adverse effect upon the Premises;
(iv) no surface impoundments are constructed, operated or
maintained in or on the Premises in violation of applicable
Environmental Laws and no underground storage tanks are constructed,
operated or maintained in or on the Premises; there is no asbestos nor
asbestos-containing material located in, on, at or under the Premises
nor is there any polychlorinated biphenyl-containing equipment,
including transformers (except for transformers located on the Premises
and owned by Nevada Power Company) located in, on, at or under the
Premises; and
(v) except as otherwise permitted in subparagraph (iii) above,
the Premises is and at all times during the term of this Lease will
be maintained (a) free of Hazardous Substances, to which Persons
working on or visiting the Premises could be exposed, the removal,
remediation of which is required or the maintenance or the removal
of which is prohibited or penalized by any applicable Environmental
Laws or which would have a material adverse effect upon the
Premises and (b) free of asbestos and asbestos-containing material
and free of polychlorinated biphenyl-containing equipment,
including transformers (except for transformers located on the
Premises and owned by Nevada Power Company).
7
Lessee shall (i) fully comply with all Environmental Laws with regard to
the Premises, (ii) prohibit the use of the Premises for the generation,
manufacturer, refinement, production or processing of any Hazardous Substance
or for the storage, handling, transfer or transportation of any Hazardous
Substances (other than normal and lawful uses of such products in lawful
quantities in compliance with Environmental Laws where such uses will have no
material adverse effect upon the Premises), (iii) not install or permit the
installation on the Premises of any underground storage tanks or asbestos-
containing materials or, except in accordance with applicable Environmental
Laws, surface impoundments, (iv) cause any alterations of, or construction
on, the Premises to be done in accordance with applicable Environmental Laws,
and in connection with any such alterations or construction, shall remove and
dispose of, in compliance with applicable Environmental Laws, or otherwise
bring into compliance with applicable Environmental Laws, any Hazardous
Substances present upon the Premises not in compliance with Environmental Laws
and (v) as soon as reasonably practicable after the date hereof, install leak
detection equipment or cause leak detection equipment to be installed, of a
type and in a manner reasonably satisfactory to the Lessor, on the underground
storage tank on the property adjacent to the Premises and referred to in
Item 2 of that certain letter dated July 17, 1996 from RAL Consulting to the
Lessor.
Promptly upon obtaining knowledge thereof, Lessee shall give to Lessor
notice of the occurrence of any of the following events: (i) the failure of
the Premises or Lessee to comply with any Environmental Law in any manner
whatsoever; (ii) the issuance to Lessee of any notice, complaint or order of
violation or non-compliance of any nature whatsoever with regard to the
Premises or the use thereof with respect to Environmental Laws; or (iii) any
notice of a pending or threatened investigation to determine whether Lessee's
operations on the Premises are in violation of any Environmental Law.
At any time if Lessor receives notice that an adverse change in the
environmental condition of the Premises has occurred or that an adverse
environmental condition with respect to the Premises has been discovered,
Lessor shall give notice thereof to Lessee, and if Lessee shall not
(i) diligently commence to cure such condition, to the extent required
hereunder and as necessary to meet legal requirements or comply fully with
applicable Environmental Laws or to prevent a material diminution in the fair
market value of the Premises, within 30 days after receipt of such notice (or
such shorter period as may be required by law or in the event of an emergency)
and (ii) thereafter diligently prosecute to completion such cure, then Lessor
may cause to be performed an environmental audit or risk assessment of the
8
Premises and the then uses thereof, and may take such actions as it may deem
necessary to cure such condition. Such environmental audit or assessment
shall be performed by an environmental consultant satisfactory to Lessor and
may, at Lessor's option, include a review of the uses of the Premises and
compliance of the same with all Environmental Laws. Lessee grants to Lessor
and its agents the right of access to the Premises for Lessor to take such
actions. All costs and expenses incurred by Lessor in connection with such
environmental audit or assessment and any remediations required shall be paid
by Lessee upon demand.
Lessee agrees to indemnify, defend and hold harmless each Indemnified
Party (as defined in paragraph 8) from and against any and all losses,
liabilities (including, without limitation, damages, judgments, penalties,
claims, charges, costs and expenses (including, without limitation, fees and
disbursements of counsel and consultants for such Indemnified Party)) which
may be suffered or incurred by, or asserted against such Indemnified Party to
the extent arising directly or indirectly out of, from, on, over, under or in
the Premises, the presence, use, storage, transportation, disposal, release,
threatened release, discharge, emission or generation of any Hazardous
Substances at the Premises in violation of this paragraph 6, provided, that no
Indemnified Party will be indemnified by Lessee hereunder for environmental
contamination solely to the extent caused by the willful misconduct or
grossly negligent acts of such Indemnified Party, its employees, agents or
assigns, other than at the direction of Lessee or resulting from Lessee's
failure to comply with this paragraph 6. Lessee assumes liability for and
agrees to pay each Indemnified Party, on demand, an additional amount equal to
any tax liability incurred by such Indemnified Party solely on account of such
losses, liabilities, damages, costs, expenses, causes of action, suits,
claims, demands or judgments indemnified by Lessee pursuant to this
paragraph 6.
The warranties and obligations of Lessee, and the rights and remedies
of each Indemnified Party under this paragraph 6 are in addition to and not in
limitation of any other warranties, obligations, rights and remedies provided
in this Lease or otherwise at law or in equity.
In the event of the expiration or termination of this Lease as herein
provided or Lessee's abandonment of the Premises, the obligations and
liabilities of Lessee with respect to each Indemnified Party, actual or
contingent, under this paragraph 6, shall survive such expiration, termination
or abandonment.
9
The term "Environmental Laws" means and includes but shall not be
limited to the Resource Conservation and Recovery Act (42 U.S.C. Sec. 6901)
et. seq.), as amended by the Hazardous and Solid Waste Amendments of 1984, the
Comprehensive Environmental Response, Compensation and Liability Act
(42 U.S.C. Sec. 9601 et. seq.), as amended by the Superfund Amendments and
Reauthorization Act of 1986, the Hazardous Materials Transportation Act
(49 U.S.C. Sec. 1801 et. seq.), the Toxic Substances Control Act (15 U.S.C.
Sec. 2601 et. seq.), Clean Air Act (42 U.S.C. Sec. 9402 et. seq.), the Clean
Water Act (33 U.S.C. Sec. 1251 et. seq.), the Federal Insecticide, Fungicide
and Rodenticide Act (7 U.S.C. Sec. 136 et. seq.), the Occupation Safety and
Health Act (29 U.S.C. Sec. 651 et. seq.) and all applicable federal, state and
local environmental laws, including obligations under the common law,
ordinances, rules, regulations, private agreements (such as covenants,
conditions and restrictions) and publications, as any of the foregoing may
have been or may be from time to time amended, supplemental or supplanted, and
any other federal, state or local laws, including obligations under the common
law, ordinances, rules, regulations, private agreements (such as covenants,
conditions and restrictions) and publications, now or hereafter existing
relating to regulation or control of Hazardous Substances or environmental
health and safety.
The term "Hazardous Substances" means (i) those substances included
within the definition of or identified as "hazardous substances", "hazardous
materials", or "toxic substances" in or pursuant to, without limitation, the
Comprehensive Environmental Response Compensation and Liability Act of 1980
(42 U.S.C. Sec. 9601 et. seq.) (CERCLA), as amended by Superfund Amendments
and Reauthorization Act of 1986 (Pub. L. 99-499, 100 Stat. 1613) (SARA), the
Resource Conservation and Recovery Act of 1976 (42 U.S.C. Sec. 6901 et. seq.)
(RCRA), the Occupational Safety and Health Act of 1970 (29 U.S.C. Sec. 651 et
seq.) (OSHA), and the Hazardous Materials Transportation Act, 49 U.S.C.
Sec. 1801 et. seq. and in the regulations promulgated pursuant to said laws,
all as amended; (ii) those substances listed in the United States Department
of Transportation Table (40 CFR 172.101 and amendments thereto) or by the
Environmental Protection Agency (or any successor agency) as hazardous
substances (40 CFR Part 302 and amendments thereto); (iii) any material, waste
or substance which is or contains (A) petroleum, including crude oil or any
fraction thereof, natural gas, or synthetic gas usable for fuel or any mixture
thereof, (B) asbestos, (C) polychlorinated biphenyls, (D) designated as
"hazardous substance" pursuant to Section 311 of the Clean Water Act,
33 U.S.C. Sec. 1251 et. seq., (33 U.S.C. Sec. 1321) or listed pursuant to
Section 307 of the Clean Water Act (33 U.S.C. Sec. 1317); (E) flammable
10
explosives; (F) radioactive materials; and (iv) such other substances,
materials and wastes which are or become regulated as hazardous, toxic or
"special wastes" under applicable local, state or federal law, or the United
States government, or which are classified as hazardous, toxic or as "special
wastes" under federal, state or local laws or regulation.
7. Liens. Lessee will not directly or indirectly create or permit to
be created or to remain, and will promptly remove and discharge any charge,
lien, security interest or encumbrance upon the Premises or any Basic Rent,
additional rental obligations or other sum payable hereunder which arise for
any reason, including all liens which arise out of the use, occupancy,
construction, repair or rebuilding of the Premises or by reason of labor or
materials furnished or claimed to have been furnished to Lessee or for the
Premises, but not including the liens and encumbrances set forth in Part II of
Schedule A hereto, any mortgage, charge, lien, security interest or
encumbrance created by Lessor and consented to by the Mortgagee (as
hereinafter defined), but without the consent of Lessee, or any mortgage,
charge, lien, security interest or encumbrance which is being contested in
compliance with the provisions of paragraph 17 hereof. Nothing contained in
this Lease shall be construed as constituting the consent or request of
Lessor, express or implied, to or for the performance by any contractor,
laborer, materialman, or vendor of any labor or services or for the furnishing
of any materials for any construction, alteration, addition, repair or
demolition of or to the Premises or any part thereof. NOTICE IS HEREBY GIVEN
THAT LESSOR IS NOT AND SHALL NOT BE LIABLE FOR ANY LABOR, SERVICES OR
MATERIALS FURNISHED OR TO BE FURNISHED TO LESSEE, OR TO ANYONE HOLDING THE
PREMISES OR ANY PART THEREOF THROUGH OR UNDER LESSEE, AND THAT NO MECHANIC'S
OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR
AFFECT THE INTEREST OF LESSOR IN AND TO THE PREMISES.
8. Indemnification. Lessee shall pay, and shall protect, indemnify
and save harmless Lessor, any partner, officer, director or shareholder of
Lessor, any partner, officer, director or shareholder of any partner of
Lessor, the Mortgagee or any Noteholder or any partner, officer, director, or
shareholder of the Mortgagee or any Noteholder (collectively, the "Indemnified
Parties") from and against all liabilities, losses, damages, costs, expenses
(including reasonable attorneys' fees and expenses), causes of action, suits,
claims, demands or judgments of any nature arising from (i) injury to or death
of any person, or damage to or loss of property, on or immediately adjacent to
the Premises or on adjoining sidewalks, streets or ways, or connected with the
11
use, condition or occupancy of any thereof, (ii) any failure on the part of
Lessee to perform or comply with any of the terms of this Lease, (iii) any
contest referred to in paragraph 17 hereof, (iv) violation by Lessee of any
contract or agreement to which Lessee is a party or violation of any Legal
Requirement, contract or agreement to which Lessee is a party or violation of
any Legal Requirement, contract or agreement, covenant, condition or
restriction, in each case affecting the Premises or any part thereof or the
ownership, occupancy or use thereof, and (v) any act of negligence of Lessee
or its agents, contractors, licensees, sublessees or invitees or any person
for whose conduct Lessee is legally responsible. Lessee assumes liability for
and agrees to pay to each Indemnified Party, on demand, an additional amount
equal to any tax liability incurred by such Indemnified Party solely on
account of such liabilities, losses, damages, costs, expenses, causes of
action, suits, claims, demands or judgments indemnified by Lessee pursuant to
this paragraph 8.
Lessee agrees to pay, protect and indemnify and save harmless any
Indemnified Party from and against, and shall defend all actions against any
such person with respect to, any and all liabilities, losses, damages, costs,
expenses (including reasonable attorneys' fees and expenses), penalties,
causes of action, suits, claims, demands or judgments of any nature whatsoever
arising by reason of, on account of, or in connection with, any violation or
any alleged violation of, Lessee's obligations under the ADA.
The obligations of Lessee under this paragraph 8 shall survive any
termination of this Lease for all events described in this paragraph 8 which
occur prior to the termination of this Lease. In case any action shall be
brought against any of the Indemnified Parties in respect of which indemnity
may be sought against Lessee, such Indemnified Parties shall promptly notify
the Lessee in writing and Lessee may elect to assume the defense thereof,
including the employment of counsel reasonably satisfactory to Lessor and the
payment of all expenses. Lessor shall have the right to employ separate
counsel in any such action and participate in the defense thereof, and the
fees and expenses of such counsel shall be paid by Lessee if Lessee shall have
failed to employ counsel reasonably satisfactory to Lessor. If Lessee shall
elect not to assume the defense thereof, Lessor may assume the defense
thereof, including the employment of counsel, and Lessee shall pay all of the
reasonable expenses of Lessor incurred in respect of such defense. Lessee
shall not be liable for any settlement of any action without its consent;
provided, however, that if any such action is settled with the consent of
Lessee or if there be final judgment for the plaintiff in any such action (and
all appeals thereof shall have expired), Lessee agrees to indemnify and hold
12
harmless such Indemnified Parties from and against any loss or liability by
reason of such settlement or judgment.
9. Maintenance and Repair. Lessee will maintain the Premises in good
repair and condition, except for ordinary wear and tear, and will make all
structural and non-structural, foreseen and unforeseen and ordinary and
extraordinary changes and repairs which may be required to keep the Premises
in good repair and condition and in compliance with all Legal Requirements.
On or prior to July 31, 2001, Lessee shall complete updating the heating,
ventilation and air-conditioning systems for the Improvements in compliance
with all Legal Requirements and in a manner reasonably acceptable to Lessor.
Prior to commencing such work, Lessee shall provide Lessor with such
information as Lessor may require to assure that such work is performed in
compliance with the requirements of the immediately preceding sentence.
Lessor shall not be required to maintain, repair or rebuild the Improvements
or to maintain the Premises, and Lessee waives the right to make repairs at
the expense of Lessor pursuant to any law at any time in effect. Lessee
covenants to perform or observe all terms, covenants or conditions of any
reciprocal easement or maintenance agreement to which it may at any time be a
party or to which the Premises are subject. Lessee shall, at its expense, use
its best efforts to enforce compliance with any reciprocal easement or
maintenance agreement benefiting the Premises by any other Person subject to
such agreement.
(b) If any Improvements situated on the Premises at any time during
the term of this Lease shall encroach upon any property, street or right-of-
way adjoining or adjacent to the Premises, or shall violate the agreements or
conditions contained in any restrictive covenant affecting the Premises or any
part thereof, or shall impair the rights of others under or hinder or obstruct
any easement or right-of-way to which the Premises are subject, then, promptly
after the written request of Lessor or any Person affected by any such
encroachment, violation, impairment, hindrance or obstruction, Lessee shall,
at its expenses, either (i) obtain effective waivers or settlements of all
claims, liabilities and damages resulting from each such encroachment,
violation, impairment, hindrance or obstruction whether the same shall affect
Lessor, Lessee or both, or (ii) make such changes in the Improvements on the
Premises and take such other action as shall be necessary to remove such
encroachments, hindrances or obstructions and to end such violations or
impairments, including, if necessary, the alternation or removal of any
improvement on the Premises. Any such alteration or removal shall be made in
conformity with the requirements of paragraph 11(a) to the same extent as if
13
such alteration or removal were an alteration under the provisions of
paragraph 11(a).
10. Alterations; Reimbursement for Additions. Lessee may, at its
expense, make additions to and alterations of the Improvements, construct
additional Improvements and make substitutions and replacements for the
Improvements, provided that (i) the market value of the Premises shall not be
lessened thereby, (ii) such work shall be expeditiously completed in a good
and workmanlike manner and in compliance with all applicable Legal
Requirements and the requirements of any insurance policy required to be
maintained hereunder, (iii) no Improvements shall be demolished unless Lessee
shall have first furnished Lessor with such surety bonds or other security
acceptable to Lessor as shall be necessary to assure rebuilding of such
Improvements, and (iv) the Improvements will not be changed from a building
suitable for the uses for which the Improvements were originally designed
without the prior approval of Lessor. Prior to commencing any such work
having a projected cost of $500,000 or more, Lessee shall notify Lessor
thereof and shall furnish to Lessor such surety bonds, construction
contracts, architect's plans and specifications and other materials as may be
required by Lessor to assure that such work will be performed in compliance
with the requirements of the preceding sentence, in accordance with the plans
and specifications of a licensed architect or engineer, and will be paid for.
All such additions, alterations, additional Improvements, substitutions and
replacements shall be and remain part of the realty and the property of Lessor
and shall be subject to this Lease but the rental obligations hereunder of
Lessee shall not increase. Lessee may place upon the Premises any inventory,
trade fixtures, machinery or equipment belonging to Lessee or third parties
and may remove the same at any time during the term of this Lease. Lessee
shall repair any damage to the Premises caused by such removal.
11. Condemnation and Casualty. (a) Lessee hereby irrevocably assigns
to Lessor any award, compensation or insurance payment to which Lessee may
become entitled by reason of its interest in the Premises (i) if the Premises
are damaged or destroyed by fire or other casualty or (ii) if the use,
occupancy or title of the Premises or any part thereof is taken, requisitioned
or sold in, by or on account of any actual or threatened eminent domain
proceeding, other action by any person having the power of eminent domain or
any claim of or eviction by paramount title. Lessee shall promptly notify
Lessor of the occurrence of any such event; Lessor shall have the right to
require Lessee (and, if no directions are given Lessee by Lessor within
10 Business Days of the receipt of such notice, Lessee shall have the right
and is hereby authorized and empowered in the name and on behalf of Lessor) to
14
appear in any such proceeding or action, to negotiate, prosecute and adjust
any claim for any award, compensation or insurance payment on account of any
such damage, destruction, taking, requisition, sale, or claim of or eviction
by paramount title, and to collect for Lessor any such award, compensation or
insurance payment. "Business Day" means any day which is not a Saturday,
Sunday or legal holiday in Illinois, Minnesota or Nevada. Both Lessor and
Lessee shall be entitled and do not forfeit their respective rights to
participate in any such proceeding, action, negotiation, prosecution or
adjustment by the exercise of the rights set forth in the preceding sentence.
All amounts paid in connection with any such damage, destruction, taking,
requisition, sale or claim of or eviction by paramount title shall be applied
pursuant to this paragraph 11, and all such amounts (minus the expense of
collecting such amounts and minus awards made specifically to Lessee as
relocation expense or compensation for business interruption or awards or
damages to additions not reimbursed by Lessor, which awards shall be the
property of Lessee) are herein called the Net Proceeds. Lessee, at the
request of Lessor, shall take all appropriate action in connection with each
such proceeding, action, negotiation, prosecution and adjustment. Lessor and
Lessee shall each cooperate with the other in connection with the foregoing.
(b) If an occurrence of the character referred to in paragraph 11(a)
hereof shall affect all or a substantial portion of the Premises, such that
the continued use and occupancy of the Premises in Lessee's business is no
longer economic (without regard to interest rates) as certified by the
Lessee's Board of Directors, Lessee shall have the option to either (i) not
later than 75 days after such occurrence, deliver to Lessor notice of its
intention to terminate this Lease on the next Payment Date (the "Termination
Date") which occurs not less than 90 days after the delivery of such notice or
(ii) repair any damage to the Premises caused by such event as specified in
paragraph 11(c) hereof. If the Termination Date occurs during the Primary
Term, such notice shall be accompanied by an irrevocable offer by Lessee to
purchase the remaining portion of the Premises and the Net Proceeds, if any,
payable in connection with such occurrence (or the right to receive the same
when made, if payment thereof has not yet been made) on the Termination Date,
at a price determined in accordance with Schedule C attached hereto. If
either (1) Lessor shall reject such offer by notice given to Lessee not later
than the 30th day prior to the Termination Date or (2) the Termination Date
occurs during an Extended Term, this Lease shall terminate on the Termination
Date except with respect to obligations and liabilities of Lessee hereunder,
actual or contingent, which have arisen on or prior to the Termination Date,
upon payment by Lessee of all Basic Rent, additional rent and other sums then
15
due and payable hereunder to and including the Termination Date, and the Net
Proceeds shall belong to Lessor. Unless Lessor shall have rejected such offer
in accordance with this paragraph, Lessor shall be conclusively presumed to
have accepted such offer, and, on the Termination Date, shall convey the
remaining portion of the Premises, if any, to Lessee or its designee and shall
assign to Lessee or its designee all its interest in the Net Proceeds,
pursuant to and upon compliance with paragraph 15 hereof.
(c) If, after an occurrence of the character referred to in
paragraph 11(a) hereof, Lessee does not exercise its option to terminate this
Lease, then this Lease shall continue in full effect, and Lessee shall repair
any damage to the Premises caused by such event in conformity with the
requirements of paragraph 10 hereof so as to restore the Premises (as nearly
as practicable) to the condition and market value thereof immediately prior to
such occurrence. Lessee shall be entitled to receive the Net Proceeds payable
in connection with such occurrence (and interest, if any, earned thereon), but
only against certificates of Lessee delivered to Lessor from time to time as
such work of repair progresses, each such certificate describing the work of
repair for which Lessee is requesting payment and the cost incurred by Lessee
in connection therewith and stating that Lessee has not theretofore received
payment for such work. Any Net Proceeds (and interest, if any, earned
thereon) remaining after final payment has been made for such work shall, if
less than $100,000, be paid to Lessee, but if equal to or more than $100,000,
such Net Proceeds shall, at Lessor's option, be retained by Lessor and
thereafter (i) the purchase prices set forth in Schedules C and D attached
hereto (as such purchase prices may have been previously reduced from time to
time in accordance with the terms of this paragraph 11(c)) shall be reduced
for each remaining period set forth thereon by an amount equal to the product
of (A) the amount of such purchase price immediately prior to such occurrence,
multiplied by (B) a fraction, the numerator of which is the amount of such Net
Proceeds (and interest, if any, earned thereon) so retained by Lessor, and the
denominator of which is an amount equal to (1) $19,167,500 minus (2) the
amount of all Net Proceeds (and interest, if any earned thereon) previously
retained by the Lessor pursuant to this paragraph 11(c), and (ii) each
installment of Basic Rent payable on or after the first Payment Date occurring
one month or more after the final payment to Lessee for such work shall be
reduced by an amount equal to the product of (A) the amount of such
installment, multiplied by (B) the fraction calculated pursuant to clause (B)
above. In the event of any temporary requisition, this Lease shall remain in
full effect for the remainder of the term hereof and Lessee shall be entitled
to receive the entire Net Proceeds payable during the remainder of the term
16
hereof by reason of such requisition. If the cost of any repairs required to
be made by Lessee pursuant to this paragraph 11(c) shall exceed the amount of
such Net Proceeds, the deficiency shall be paid by Lessee. No payment shall
be made to Lessee pursuant to this paragraph 11(c) if at the time any default
or event of default shall have occurred and be continuing.
12. Insurance. (a) Lessee will maintain, or cause to be maintained,
insurance covering the Premises of the following character:
(i) Property Insurance. Lessee will provide property insurance on an
all-risk, replacement-value basis for the Premises, including,
without limitation, flood insurance if the Premises is located in
a flood hazard zone. Minimum limits will exceed the current
replacement value of the Premises, including contents of Lessee as
adjusted annually by the Lessee and reported on its books and
accounts (or, solely in the case of flood insurance, to the full
amount insurable under the National Flood Insurance Program
administered by the Federal Emergency Management Agency). Lessee
agrees to provide course of construction or builder's risk
coverage with limits exceeding the replacement value of the
additions, modifications, or improvements to the Premises. This
coverage may be included in the property policy or provided
separately. The property policy will be a manuscript form
provided by the Lessee.
(ii) General Liability Insurance. Lessee agrees to maintain operations
liability (Excess General Liability) coverage against claims for
bodily injury, death or property damage occurring on, in or about
the Premises and adjoining streets and sidewalks on a claims-made,
claims-first-made, or occurrence basis with minimum limits of
$10 million. Coverage will attach in excess of a self-insured
retention not to exceed $5 million with one-half of any amount
over $1 million to be reinsured. Lessee may, at its option,
insure, self-insure, or reinsure any portion of the self-insured
retention not required to be reinsured pursuant to the immediately
preceding sentence. Coverage will meet or exceed the protection
afforded by a standard-form ISO CGL policy.
(iii) Worker's Compensation. Lessee agrees to maintain workers'
compensation coverage as it may be applicable to this Lease and
the Premises. Coverage will include employer's liability
protection of not less than $1 million and will include excess
workers' compensation coverage with limits not less than
17
$10 million. All coverage will be subject to statutory requirements
of the state where the Premises is located. Coverage may be provided
by a program of conventional insurance, self-insurance or any
combination thereof, or coverage may be provided by the State Fund.
(iv) Other Insurance. Such other insurance, in such amounts, against
such risks, and with such other provisions as is customarily and
generally maintained by operators of similar properties of a
financial standing similar to Lessee.
Such insurance shall be written by companies of nationally recognized
financial standing with a claims paying rating ability of at least equivalent
to an NAIC 1 (or such other rating required from time to time by NAIC
regulations or guidelines) and authorized to do an insurance business in the
state in which the Premises are located, and shall name as insured parties
Lessor, Mortgagee and Lessee as their interests may appear.
(b) Property, general liability and builder's risk policies shall bear
a first mortgagee endorsement in favor of the trustees or their successors
(the "Mortgagee") under a trust indenture or any subsequent instrument
creating a first lien on the Premises (the "Mortgage"); and any loss under any
such policy shall be payable to the Mortgagee to be held and applied pursuant
to paragraph 11(c) hereof. Every policy referred to in paragraph 12(a) hereof
shall provide that it will not be cancelled except after 30 days' written
notice to Lessor, the Mortgagee and each Noteholder and that it shall not be
invalidated by any act or neglect of Lessor or Lessee, nor by occupancy of the
Premises for purposes more hazardous than permitted by such policy, nor by any
foreclosure or other proceedings relating to the Premises, nor by change in
title to the Premises. Every policy of insurance shall provide that the
insurer waives all rights of subrogation against Lessor, any successor to
Lessor's interests in the Premises and Mortgagee.
(c) Lessee shall deliver to the Mortgagee original or duplicate
policies or certificates of insurers, satisfactory to the Mortgagee,
evidencing the existence of all insurance which is required to be maintained
by Lessee hereunder, such delivery to be made (i) promptly after the execution
and delivery hereof and (ii) within 30 days prior to the expiration of any
such insurance. Lessee shall also deliver to the Lessor, Mortgagee, and each
Noteholder on July 1, in each year a certificate of an independent insurance
broker as to the sufficiency of the insurance carried by the Lessee with
respect to the provisions hereof. Lessee shall not obtain or carry separate
18
insurance concurrent in form or contributing in the event of loss with that
required by this paragraph 12 unless Lessor is a named insured therein, with
first mortgagee endorsement and loss payable as provided herein. Lessee shall
immediately notify Lessor whenever any such separate insurance is obtained and
shall deliver to the Mortgagee the policies or certificates evidencing the
same. Any insurance required hereunder may be provided under blanket policies
which comply with the provisions hereof and specify the coverage and amounts
thereof with respect to the Premises.
13. Uneconomic Use. If the Premises shall have become uneconomic or
unsuitable for continued use in Lessee's business and Lessee has discontinued
use thereof or decided to discontinue use thereof, then Lessee may give notice
to Lessor of its intention to terminate this Lease on any Payment Date which
occurs after December 1, 2008 (the "Exercise Date") as specified in such
notice and which occurs not less than 360 days after the giving of such notice
and its intention, upon such termination, to sell the Premises to a third
party on an arm's-length basis. Such notice shall include an irrevocable
offer by Lessee to purchase the Premises on the Exercise Date at a price
determined in accordance with Schedule D attached hereto, together with a
certificate of Lessee that its Board of Directors has determined that the
Premises are uneconomic or unsuitable (without regard to interest rates) for
continued use in Lessee's business and that Lessee has discontinued, or will
within 180 days of the Exercise Date discontinue, use thereof and shall not
(nor shall any affiliate) occupy the Premises for any purpose whatsoever for a
period of eight years after the Exercise Date, together with an offer by a
third party to purchase the Premises by a third party on an arm's length basis
on the Exercise Date. If Lessor shall reject such offer by notice given to
Lessee not later than the 20th day prior to the Exercise Date, this Lease
shall terminate on the Exercise Date except with respect to obligations and
liabilities of Lessee hereunder, actual or contingent, which have arisen on or
prior to the Exercise Date, upon payment by Lessee of all Basic Rent,
additional rental obligations and other sums then due and payable hereunder to
and including the Exercise Date. Unless Lessor shall have rejected such offer
in accordance with this paragraph, Lessor shall be conclusively presumed to
have accepted such offer, and then on the Exercise Date, Lessor shall convey
the Premises to Lessee or its designee pursuant to and upon compliance with
paragraph 15 hereof and simultaneously therewith Lessee shall sell the
Premises to such third party as described above.
14. Mandatory Offer to Purchase. Lessee shall be deemed to have made
an irrevocable offer to purchase the Premises on the last day of the Primary
19
Term at a price equal to $5,400,000. If Lessor shall reject such offer by
notice given to Lessee not later than the 45th day prior to the last day of
the Primary Term, this Lease shall continue in accordance with its terms.
Unless Lessor shall have rejected such offer in accordance with this
paragraph, Lessor shall be conclusively presumed to have accepted such offer,
and then on the last day of the Primary Term, Lessor shall convey the Premises
to Lessee or its designee pursuant to and upon compliance with paragraph 15
hereof.
15. Procedure Upon Purchase. (a) If Lessee shall purchase the
Premises pursuant to this Lease, Lessor shall convey to Lessee or its designee
title thereto not inferior to that which existed on the date of the
commencement of the term hereof, and Lessee or its designee shall accept such
title, subject, however, to all charges, liens, security interests and
encumbrances on the Premises and all applicable Legal Requirements, but free
of the lien of the Mortgage and charges, liens, security interests and
encumbrances resulting from acts of Lessor taken without the consent of
Lessee.
(b) Upon the date fixed for any purchase of the Premises hereunder,
Lessee shall pay to Lessor the purchase price therefor specified herein
together with all Basic Rent, additional rental obligations and other sums
then due and payable hereunder to and including such date of purchase, and
Lessor shall deliver to Lessee or Lessee's designee a deed to the Premises in
recordable form conveying title as specified in paragraph 15(a) hereof,
together with any other instruments necessary to assign any other property
then required to be assigned by Lessor pursuant hereto. Lessee shall pay all
charges incident to such conveyance and assignment, including counsel fees,
escrow fees, recording fees, title insurance premiums and all applicable taxes
(other than any income or franchise taxes of Lessor) which may be imposed by
reason of such conveyance and assignment and the delivery of said deed and
other instruments. Upon the completion of such purchase, but not prior
thereto (whether or not any delay or failure in the completion of such
purchase shall be the fault of Lessor), this Lease shall terminate, except
with respect to obligations and liabilities of Lessee hereunder, actual or
contingent, which have arisen on or prior to such date of purchase. Lessee
shall pay to Lessor, interest at the rate of 20-1/2% per annum on any overdue
payment of the purchase price and other sums payable hereunder.
16. Assignment and Subletting. Lessee may sublet all or any part of
the Premises or assign its interests hereunder, provided that (i) at the time
thereof no default or event of default shall have occurred and be continuing,
(ii) Lessor shall have been given ten Business Days' prior written notice
20
thereof together with copies of all documents related thereto; and (iii) each
sublease shall expressly be made subject to the provisions hereof and shall
expressly state that it shall be subject to termination upon any termination
of this Lease. No such assignment or sublease shall modify or limit any right
or power of Lessor hereunder or affect or reduce any obligation of Lessee
hereunder, and all such obligations shall continue in full effect as
obligations of the Lessee, as a principal and not of a guarantor or surety, as
though no assignment or subletting had been made. Neither this Lease nor the
term hereby demised shall be mortgaged by Lessee, nor shall Lessee mortgage or
pledge its interests in any sublease of the Premises or the rentals payable
thereunder. Any such mortgage or pledge, and any sublease or assignment made
otherwise than as permitted by this paragraph 16, shall be void.
17. Permitted Contests Lessee shall not be required, nor shall
Lessor have the right, to pay, discharge or remove any tax, assessment, levy,
fee, rent, charge, lien or encumbrance, or to comply with any Legal
Requirement (excluding Legal Requirements relating to Environmental Laws)
applicable to the Premises or the use thereof; so long as no default or event
of default shall have occurred and be continuing, and so long as Lessee shall
contest the existence, amount or validity thereof by appropriate proceedings
(i) which shall prevent the collection of or other realization upon the tax,
assessment, levy, fee, rent, charge, lien or encumbrance so contested, and the
sale, forfeiture or loss of the Premises or any Basic Rent or any additional
rental obligations, to satisfy the same, and (ii) which shall not affect the
payment of any Basic Rent or any additional rental obligations; provided that
such contest shall be pursued in good faith and Lessor shall not be subject
to the risk of any civil or criminal liability. Lessee shall give such
reasonable security as may be necessary to prevent any sale or forfeiture of
the Premises by reason of such non-payment.
Lessee shall pay, and save Lessor harmless against, any and all losses,
judgments, decrees and costs (including, without limitation, fees and
disbursements of counsel) in connection with any contest and shall, promptly
after the final settlement, compromise or determination (including any
appeals) of such contest, fully pay and discharge the amounts which shall be
levied, assessed, charged or imposed or be determined to be payable therein or
in connection therewith, together with all penalties, fines, interests, costs
and expenses thereof or in connection therewith, and perform all acts, the
performance of which shall be ordered or decreed as a result thereof.
21
18. Conditional Limitations: Default Provision. (a) Any of the
following occurrences or acts shall constitute an event of default under this
Lease:
(i) if Lessee shall (1) fail to pay any Basic Rent, additional rental
obligations referred to in paragraph 4(b) hereof or other sum required to be
paid by Lessee hereunder and such failure shall continue for 5 days
thereafter, or (2) fail to observe or perform any provision contained in
paragraphs 5, 6, 7, 8, 9, 12, 14, 16 and 24 hereof, or (3) fail to observe or
perform any other provision hereof and such failure shall continue for 30 days
thereafter (provided, that, in the case of any such default which cannot be
cured by the payment of money and cannot with diligence be cured within such
30-day period, if Lessee shall commence promptly to cure the same and
thereafter prosecute the curing thereof with diligence, the time within which
such default may be cured shall be extended for such period as is necessary to
complete the curing thereof with diligence but not more than 90 days after the
occurrence of such event); or
(ii) if Lessee shall file a petition commencing a voluntary case under
any federal bankruptcy or similar law or in bankruptcy or for reorganization
or for an arrangement pursuant to any bankruptcy law, insolvency or any
similar law, federal or state, or shall be adjudicated a debtor or bankrupt
under any bankruptcy, insolvency or any similar law, federal or state, or
become insolvent, or shall make an assignment for the benefit of creditors, or
shall admit in writing its inability to pay its debts generally as they become
due, or shall not pay its debts generally as they become due, or if a petition
commencing an involuntary case against Lessee or answer proposing the
adjudication of Lessee as a debtor or bankrupt or its reorganization pursuant
to any federal or state bankruptcy law or any similar law shall be filed in
any court and Lessee shall consent to or acquiesce in the filing thereof or
such petition or answer shall not be dismissed, discharged or denied within 60
days after the filing thereof; or
(iii) if a custodian, receiver, trustee, United States Trustee or
liquidator of Lessee or of all or substantially all of the assets of Lessee or
of the Premises or Lessee's estate therein shall be appointed in any
proceeding brought by Lessee, or if any such custodian, receiver, trustee,
United States Trustee or liquidator shall be appointed in any proceeding
brought against Lessee and shall not be discharged within 60 days after such
appointment, or if Lessee shall consent to or acquiesce in such appointment;
or
22
(iv) if the Premises shall have been left unoccupied and unattended for
a period of 30 days; or
(v) if any representation or warranty of Lessee contained in this
Lease, any assignment or reassignment of this Lease or consent thereto
executed by Lessee or in any notice, demand, certificate, request or
instrument delivered pursuant to or in connection with this Lease, any such
assignment or reassignment or consent shall prove to be incorrect in any
material respect as of the time when the same shall have been made; or
(vi) if an event of default by the Lessee shall have occurred and be
continuing under any instrument for borrowed money or lease obligation which
shall involve individually or in the aggregate an amount in excess of
$5,000,000 and all applicable grace periods either contained in such
instrument or otherwise expressly granted by the obligee with respect to said
instrument shall have expired with respect thereto, unless Lessee (A) shall
contest in good faith the existence, amount or validity thereof by appropriate
proceedings, and (B) shall have delivered to Lessor an opinion of counsel in
form and substance to the reasonable satisfaction of Lessor stating that
Lessee possesses a meritorious defense to such event of default;
notwithstanding clauses (A) and (B) above, such an event of default shall
constitute an event of default under this Lease if an adverse decision in such
contest would, as reasonably determined by Lessor, in due course lead to the
voluntary or involuntary filing in any court of a petition commencing a case
proposing the adjudication of Lessee as a debtor or bankrupt or its
reorganization pursuant to any federal or state bankruptcy law or any similar
law; or
(vii) if final judgment or judgments for the payment of money
aggregating $100,000 or more shall be rendered against the Lessee and the
Lessee shall not discharge the same or cause it to be discharged within
30 days from the entry thereof, or shall not appeal therefrom or from the
order, decree or process upon which or pursuant to which said judgment was
granted, based or entered, and secure a stay or execution pending such appeal.
The provisions of this subparagraph (vii) shall not apply (A) to judgments
relating to rate refund proceedings which do not have a material adverse
effect on Lessee's ability to perform its obligations hereunder, and (B)
judgments against which the Lessee has adequate insurance where the Lessee has
obtained or is diligently seeking a recovery from the insurer.
(b) If an event of default shall have happened and be continuing,
Lessor shall have the right to give Lessee notice of Lessor's intention to
23
immediately terminate the term of this Lease. Upon the giving of such notice,
the term of this Lease and the estate hereby granted shall expire and
terminate on such date as fully and completely and with the same effect as if
such date were the date herein fixed for the expiration of the term of this
Lease, and all rights of Lessee hereunder shall expire and terminate, but
Lessee shall remain liable as hereinafter provided.
(c) if an event of default shall have happened and be continuing,
Lessor shall have the immediate right, whether or not the term of this Lease
shall have been terminated pursuant to paragraph 18(b) hereof, to re-enter and
repossess the Premises by summary proceedings, ejectment or in any manner
Lessor determines to be necessary or desirable and the right to remove all
persons and property therefrom. Lessor shall be under no liability by reason
of any such re-entry, repossession or removal. No such re-entry or
repossession of the Premises shall be construed as an election by Lessor to
terminate the term of this Lease unless a notice of such intention is given to
Lessee pursuant to paragraph 18(b) hereof, or unless such termination is
decreed by a court of competent jurisdiction.
(d) At any time or from time to time after the re-entry or
repossession of the Premises pursuant to paragraph l8(c) hereof, whether or
not the term of this Lease shall have been terminated pursuant to
paragraph 18(b) hereof, Lessor may (but shall be under no obligation to) relet
the Premises for the account of Lessee, in the name of Lessee or Lessor or
otherwise, without notice to Lessee, for such term or terms and on such
conditions and for such lawful uses as Lessor, in its absolute discretion, may
determine. Lessor may collect and receive any rents payable by reason of such
reletting. Lessor shall not be liable for any failure to relet the Premises
or for any failure to collect (after making reasonable efforts to collect) any
rent due upon any such reletting.
(e) No expiration or termination of the term of this Lease pursuant to
paragraph 18(b) hereof, by operation of law or otherwise, and no reentry or
repossession of the Premises pursuant to paragraph 18(c) hereof or otherwise,
and no reletting of the Premises pursuant to paragraph 18(d) hereof or
otherwise, shall relieve Lessee of its liabilities and obligations hereunder,
all of which shall survive such expiration, termination, re-entry,
repossession or reletting.
(f) In the event of any expiration or termination of the term of this
Lease or re-entry or repossession of the Premises by reason of the occurrence
of an event of default, Lessee will pay to Lessor all Basic Rent, additional
rental obligations and other sums required to be paid by Lessee to and
including the date of such expiration, termination, re-entry or repossession,
24
including any reasonable attorneys' fees and expenses incurred in connection
with such expiration, termination, re-entry or repossession; and thereafter,
Lessee shall, until the end of what would have been the Primary Term (or the
Extended Term, as the case may be) of this Lease in the absence of such
expiration, termination, re-entry, or repossession, and whether or not the
Premises shall have been relet, be liable to Lessor for, and shall pay to
Lessor, as liquidated and agreed current damages: (i) all Basic Rent,
additional rental obligations and other sums which would be payable under this
Lease by Lessee in the absence of such expiration, termination, re-entry, or
repossession, including any reasonable attorneys' fees and expenses incurred
in connection with such expiration, termination, re-entry or repossession,
less (ii) the net proceeds, if any, of any re-letting effected for the account
of Lessee pursuant to paragraph 18(d) hereof, after deducting from such
proceeds all Lessor's expenses in connection with such reletting (including
all repossession costs, brokerage commissions, reasonable attorneys fees and
expenses, reasonable employees' expenses, alteration costs and expenses of
preparation for such reletting). Lessee will pay such current damages on the
days on which Basic Rent would be payable under this Lease in the absence of
such expiration, termination, reentry, or repossession, and Lessor shall be
entitled to recover the same from Lessee on each such day.
(g) At any time after such expiration or termination of the term of
this Lease or re-entry or repossession of the Premises by reason of the
occurrence of an event of default, whether or not Lessor shall have collected
any current damages pursuant to paragraph 18(f) hereof, Lessor shall be
entitled to recover from Lessee, and Lessee will pay to Lessor on demand, as
and for liquidated and agreed final damages for Lessee's default and in lieu
of all current damages beyond the date of such demand (it being agreed that it
would be impracticable or extremely difficult to fix the actual damages), an
amount equal to the excess, if any, of (i) all Basic Rent, additional rental
obligations and other sums which would be payable under this Lease from the
date of such demand (or, if it be earlier, the date to which Lessee shall have
satisfied in full its obligations under paragraph 18(f) hereof to pay current
damages) for what would be the then unexpired term of this Lease in the
absence of such expiration, termination, re-entry or repossession, discounted
at the rate of 7% per annum over (ii) the then fair rental value of the
Premises (determined by applying a discount rate of 7% per annum) for the same
period and, in addition, Lessee shall pay to Lessor all repossession costs,
reasonable attorneys' fees and expenses, employees expenses, alteration costs
and expenses of preparation for such expiration, termination, re-entry or
repossession. If any law shall limit the amount of such liquidated final
25
damages to less than the amount above agreed upon, Lessor shall be entitled to
the maximum amount allowable under such law.
(h) At any time after any such expiration or termination of the term
of this Lease or re-entry or repossession of the Premises by reason of the
occurrence of an event of default, whether or not Lessor shall have collected
any current damages pursuant to paragraph 18(f), Lessor shall be entitled to
recover from Lessee, and Lessee shall pay to Lessor on demand, as and for
liquidated and agreed final damages for Lessee's default and in lieu of all
current damages beyond the date of such demand and in lieu of the amount
referred to in paragraph 18(g) (it being agreed that it would be impracticable
or extremely difficult to fix the actual damages), an amount equal to the
purchase price for the Premises determined under Schedule D of this Lease for
the date immediately following the date on which the last payment of Basic
Rent was made by Lessee, together with all other sums due and payable
hereunder; provided that for so long as any indebtedness secured by the
Mortgage is outstanding, the amount of such damages shall be the greater of
(i) such amount as calculated as set forth in subparagraph (g) above, and (ii)
the aggregate principal amount, accrued interest and other amounts, in each
case, outstanding under or secured by the Mortgage, together with, in the case
of any termination of the Lease pursuant to paragraph 13 or any other
determination of any purchase price under this paragraph 18(h) of the Lease
or otherwise based on Schedule D, any prepayment premium, as calculated in and
payable under the Mortgage. If any law shall limit the amount of such
liquidated final damages to less than the amount above agreed upon, Lessor
shall be entitled to the maximum amount allowable under such law.
19. Additional Rights of Lessor. (a) No right or remedy hereunder
shall be exclusive of any other right or remedy, but shall be cumulative and
in addition to any other right or remedy hereunder or now or hereafter
existing under law or in equity. Failure to insist upon the strict
performance of any provision hereof or to exercise any option, right, power or
remedy contained herein shall not constitute a waiver or relinquishment
thereof for the future. Receipt by Lessor of any Basic Rent, additional
rental obligations or other sums payable hereunder with knowledge of the
breach of any provision hereof shall not constitute a waiver of such breach,
and no waiver by Lessor of any provision hereof shall be deemed to have been
made unless made in writing. Lessor shall be entitled to injunctive relief in
case of the violation, or threatened violation, of any of the provisions
hereof, or to a decree compelling performance of any of the provisions hereof,
or to any other remedy allowed to Lessor by law.
26
(b) Lessee hereby waives and surrenders for itself and all those
claiming under it, including creditors of all kinds, (i) any right and
privilege which it or any of them may have to redeem the Premises or to have a
continuance of this Lease after termination of Lessee's right of occupancy by
order or judgment of any court or by any legal process or writ, or under the
terms of this Lease, or after the termination of the term of this Lease as
herein provided, and (ii) the benefits of any law which exempts property from
liability for debt or for distress for rent.
(c) Lessee agrees to pay or cause to be paid all expenses incurred by
Lessor (including counsel fees and the fees, expenses and disbursements of an
investment bank or other firm acting as Lessor's financial advisor) following
the occurrence and during the continuance of any default or event of default
or in connection with any potential, actual or proposed workout, restructuring
or similar negotiations relating to Lessee. If Lessor shall be made a party
to any litigation commenced against Lessee and Lessee, at its expense, shall
fail to provide Lessor with counsel approved by Lessor, Lessee shall pay all
costs and reasonable attorneys' fees and expenses incurred by Lessor in
connection with such litigation.
20. Notices, Demands and Other Instruments. All notifications,
notices, demands, requests, consents, approvals and other communications
herein provided for or made pursuant hereto shall be in writing and shall be
sent by (i) reputable overnight delivery service, and the giving of such
communication shall be complete on the immediately succeeding Business Day
after the same is deposited with such delivery service or (ii) legible
confirmed fax with original to follow on the next Business Day by overnight
delivery service as set forth in clause (i) and the giving of such
communication shall be complete when such fax is received: (a) if to Lessee
at such address as set forth above for Lessee, marked for the attention of
William A. Claerhout, Esq., or at such other address as Lessee may furnish
Lessor in writing; (b) if to Lessor, at such address as set forth above for
Lessor marked for the attention of Eileen McLaughlin or at such other address
as Lessor may furnish Lessee in writing, with a copy to Victor J. Paci, Esq.
at Bingham, Dana & Gould LLP, 150 Federal Street, Boston, Massachusetts 02110.
21. Estoppel Certificates. (a) Lessee will, from time to time, upon
20 days prior request by Lessor, execute, acknowledge and deliver to Lessor a
certificate of Lessee stating that this Lease is unmodified and in full effect
(or, if there have been modifications, that this Lease is in full effect as
modified, and setting forth such modifications) and the dates to which Basic
27
Rent, additional rental obligations and other sums payable hereunder have been
paid, and either stating that to the knowledge of the signer of such
certificate no default exists hereunder or specifying each such default of
which the signer has knowledge. Any such certificate may be relied upon by
any prospective mortgagee or purchaser of the Premises.
(b) From time to time during the term of this Lease, Lessor expects to
secure financings of its interest in the Premises by assigning Lessor's
interest in this Lease and the sums payable hereunder to any Mortgagee. In
the event of any such assignment to a Mortgagee, Lessee will, upon not less
than ten Business Days' prior request by Lessor, execute, acknowledge and
deliver to Lessor a consent to such assignment addressed to such Mortgagee in
a form satisfactory to such Mortgagee; and Lessee will produce, at Lessee's
expense, such certificates, opinions of counsel, and other documents as may be
reasonably requested by such Mortgagee.
22. No Merger. There shall be no merger of this Lease or of the
leasehold estate hereby created with the fee estate in the Premises by reason
of the fact that the same person acquires or holds, directly or indirectly,
this Lease or the leasehold estate hereby created or any interest herein or in
such leasehold estate as well as the fee estate in the Premises or any
interest in such fee estate.
23. Surrender. Upon the expiration or termination of the term of this
Lease, Lessee shall surrender the Premises to Lessor in the condition in which
the Premises were originally received from Lessor, except as repaired,
rebuilt, restored, altered or added to as permitted or required hereby, and
except for ordinary wear and tear. Either Lessee shall remove from the
Premises on or prior to such expiration or termination all property situated
thereon which is not owned by Lessor and repair any damage caused by such
removal, or such property not so removed shall become the property of Lessor;
provided, however, if such property not so removed shall materially impair the
economic value of the Premises, Lessor may cause such property to be removed
from the Premises at Lessee's expense.
24. Merger, Consolidation or Sale of Assets. It shall be a condition
precedent to the merger of Lessee with another corporation or to the
consolidation of Lessee with one or more other corporations that: (i) if the
Lessee shall not be the surviving corporation, such corporation shall be
organized under the laws of any State of the United States of America and
shall by agreement become a party to this Lease and expressly assume all
obligations of Lessee hereunder; (ii) the surviving corporation, whether or
28
not it be Lessee, shall have a net worth and credit rating by Standard &
Poor's Corporation or Moody's Investors Service, Inc. after such merger or
consolidation at least equal to that of Lessee prior to such merger or
consolidation, and (iii) no default shall have occurred and be existing
hereunder or would exist after giving effect to such merger or consolidation.
Lessee covenants that it will not sell or otherwise dispose of all or
substantially all of its assets during the term hereof, unless the transferee
thereof shall have satisfied the conditions of (i) and (ii) above and unless
no default shall have occurred and be existing hereunder.
25. Separability; Binding Effect; Miscellany. Each provision hereof
shall be separate and independent and the breach of any such provision by
Lessor shall not discharge or relieve Lessee from its obligations to perform
each and every covenant to be performed by Lessee hereunder. If any provision
hereof or the application thereof to any person or circumstance or at any time
shall to any extent be invalid or unenforceable, the remaining provisions
hereof, or the application of such provision to persons or circumstances at
times other than those as to which it is invalid or unenforceable, shall not
be affected thereby, and each provision hereof shall be valid and shall be
enforced to the extent permitted by law. All provisions contained in this
Lease shall be binding upon, inure to the benefit of and be enforceable by,
the respective successors and assigns of Lessor and Lessee to the same extent
as if each successor and assign were named as a party hereto. This Lease may
not be changed, modified or discharged except by a writing signed by Lessor
and Lessee. This Lease may be executed in any number of counterparts, each of
which shall be an original, and such counterparts shall together constitute
but one and the same Lease. The Table of Contents contained herein and the
headings of the various paragraphs herein have been inserted for reference
only and shall not to any extent have the effect of modifying or amending the
express terms and provisions hereof.
26. Lessee's Right of First Refusal. Lessee shall have a right of
first refusal to purchase Lessor's interest in the Premises on the same terms
and conditions as any third party during the Term of this Lease. Excepting
only a transfer by way of security pursuant to a Mortgage encumbering Lessor's
interest in the Premises, Lessor shall not consummate any proposed sale or
other disposition of Lessor's interest in the Premises other than pursuant to
a bona fide third party final and definitive written offer to purchase (the
"Third Party Offer"), as to which Lessee has failed to exercise and thereafter
consummate its right of first refusal as hereafter set forth. At any time
Lessor receives a Third Party Offer which Lessor in good faith determines it
is willing to accept and consummate, Lessor shall promptly provide Lessee a
29
copy of such Third Party Offer accompanied by Lessor's certification of
intention to accept and consummate the same (failing exercise by Lessee of its
first refusal option), which certification shall constitute an unconditional
and irrevocable offer by Lessor to Lessee to sell Lessor's interest in the
Premises on the terms and conditions set forth in such Third Party Offer.
Lessee shall have a period of 30-days thereafter within which to exercise its
option hereunder to accept such offer by Lessor. If Lessee notifies Lessor of
its acceptance within such 30-day period, the parties shall thereupon proceed
forthwith to effect the purchase and sale of Lessor's interest in the Premises
on the terms and conditions set forth in such Third Party Offer. In the event
Lessee fails to exercise its option hereunder, or, exercising such option,
fails thereafter to consummate the purchase of same (time being of the
essence), Lessor, without waiving any rights arising out of Lessee's failure
to so purchase, shall be free thereafter to consummate the sale of Lessor's
interest in the Premises on the terms and conditions set forth in such Third
Party Offer, provided such sale is duly consummated within 150 days after
Lessee shall have failed to either exercise its option or to timely purchase;
otherwise any such disposition by Lessor shall be void and of no force and
effect If such Third Party Offer shall be other than for cash and/or note(s)
payable in cash, the notice from Lessor shall be further accompanied by a full
and complete description of the property and assets (the "Third Party
Property") proposed to be delivered as all or part of the consideration,
together with the designation by Lessor of the name of a person selected to
act as an appraiser of the Third Party Property. The appraisal of the net
current fair market value of the Third Party Property shall be determined by
Lessee, or its designee, and Lessor or, if they fail to agree, as determined
as set forth in paragraph 28 hereof. Such appraisal shall be deemed final for
purposes of Lessee's right of first refusal and with respect to determination
of the amount, terms and conditions of the Third Party Offer. Failure on the
part of Lessee to exercise its right of first refusal hereunder shall not in
any way affect its purchase options or other rights hereunder. Any purchase
hereunder by the Lessee shall not result in a merger of the leasehold estate
hereunder with the estate acquired by the Lessee as a result of such exercise.
27. Purchase Option. If at the time no event of default hereunder has
occurred and is continuing, Lessee shall have an irrevocable one-time option
to purchase the interests of Lessor in the Premises on June 30, 2007 upon
prior written notice to Lessor given not later than July 1, 2006, at a price
equal to the higher of (i) the fair market value of the Premises on June 30,
2007, such value to be as determined by Lessee and Lessor, or, if they fail to
agree, as determined as set forth in paragraph 28 hereof entitled "Appraisal
Procedure" and (ii) one hundred and fifty percent (150%) of the purchase price
30
calculated by reference to Schedule D attached hereto and applicable to
June 30, 2007 (together with payment of any prepayment premium as set forth in
Schedule D). Lessee may not revoke its decision to exercise its option
hereunder once the written notice hereunder has been given. If Lessee shall
have failed to have given notice of its exercise of the purchase option
contained herein on or before July 1, 2006, such option shall be deemed to
have been terminated.
28. Appraisal Procedure. If Lessee and Lessor fail to agree as to the
fair market value of property in paragraphs 26 or 27 hereof, the value thereof
shall be determined by appraisers selected in the following manner: Lessor and
Lessee, or its designee, shall each appoint an appraiser, and the fair market
value shall be determined by the two appraisers so appointed. If the two
appraisers so appointed are unable to agree upon fair market value, fair
market value shall be the average of the amounts determined by the appraisers
if such amounts are within five percent (5%) of each other.
If the difference between the two (2) amounts exceeds five percent (5%)
a determination shall be made by a third appraiser selected by the two
appraisers appointed by the parties hereto. In such event fair market value
shall be the average of the two (2) closest appraised amounts. All appraisers
shall be members in good standing of the American Institute of Real Estate
Appraisers or any organization succeeding thereto. Lessee agrees that it, or
its designee, shall bear the costs of such appraisals. The options assigned
and created hereby are exercisable only so long as this Lease is in effect.
The options assigned and created hereby shall expire upon the termination or
expiration of this Lease.
29. Governing Law. This lease shall be governed by the law of the
State of Nevada.
30. Schedules. Schedules A, B, C and D referred to in this Lease and
attached hereto are hereby incorporated by reference herein.
31
IN WITNESS WHEREOF, Lessor and Lessee have each caused this Amended and
Restated Lease and Agreement to be duly executed and delivered, and Lessee has
caused its corporate seal to be hereunto affixed and attested, all as of the
date first above written.
SPRING MOUNTAIN ROAD ASSOCIATES,
as Lessor
By PW Spring Mountain
the General Partner
By: /s/ Steven R. Dyer
---------------------------
Steven R. Dyer
Vice President
SOUTHWEST GAS CORPORATION,
as Lessee
By: /s/ Jeffrey W. Shaw
---------------------------
Jeffrey W. Shaw
Vice President/Treasurer
32
SCHEDULE A
Part I: Description of the Premises
------------------------------------
Situated in the County of Clark, State of Nevada:
Parcel Two (2) as shown by map thereof on file in File 37 of Parcel Maps,
page 96 in the Office of the County Recorder of Clark County, Nevada.
Excepting therefrom, that portion of land as conveyed to Clark County by
deed recorded September 12, 1988 in Book 880912 as Document No. 00420 of
Official Records.
Also excepting therefrom, that portion conveyed to Carson Water Company by
deed recorded April 6, 1989 in Book 890406 as Document No. 00780.
Part II: Permitted Liens and Encumbrances
------------------------------------------
Any of the following:
(a) Easements, rights of way, servitudes, zoning laws. use
regulations, other similar reservations, rights and restrictions and
other minor defects and irregularities in the title to the Premises,
none of which materially lessens the value of the Premises or
materially impairs the use thereof for the purposes held by the
Lessor and leased by Lessee under the Lease;
(b) The right reserved to or vested in any municipality or public
authority to condemn, appropriate, recapture or designate a
purchaser of the Premises;
(c) Any liens for taxes, assessments and other governmental charges
and any liens of mechanics, materialmen and laborers for work
or services performed or materials furnished in connection with
the Premises which are not due and payable or the amount or
validity of which is being contested at the time by appropriate
legal proceedings which shall operate to prevent the collection
thereof or other realization thereon and the sale or forfeiture
of the Premises or any interest therein to satisfy the same,
provided that Lessee shall have complied with the provisions of
this Lease dealing with the contest of any tax, assessment,
other governmental charge or lien; and
(d) The easements, rights of way, encroachments, encumbrances or
other irregularities in the title, if any, set forth in the
policy of title insurance (or the commitment therefor)
delivered to the Lessor at the time of the delivery of this
Lease.
2
SCHEDULE B
Terms and Basic Rent Payments
-----------------------------
The Primary Term shall commence on July 1, 1996 and shall end at
midnight on June 30, 2017. The Extended Term shall be 5 years commencing on
the day after the last day of the Primary Term.
1. Installments of Basic Rent shall be payable for the Premises
during the Primary Term semiannually in arrears on the last day of each June
and December during the Primary Term, commencing December 31, 1996, and each
installment shall be an amount equal to the amount set forth below opposite
the payment date for such installment.
Commencement Date of
Semiannual Period Payment Date Semiannual Rent
-------------------- ------------ ---------------
07/01/1996 12/31/1996 $ 1,540,395
01/01/1997 06/30/1997 $ 1,540,395
07/01/1997 12/31/1997 $ 900,000
01/01/1998 06/30/1998 $ 900,000
07/01/1998 12/31/1998 $ 900,000
01/01/1999 06/30/1999 $ 900,000
07/01/1999 12/31/1999 $ 900,000
01/01/2000 06/30/2000 $ 900,000
07/01/2000 12/31/2000 $ 900,000
01/01/2001 06/30/2001 $ 900,000
07/01/2001 12/31/2001 $ 900,000
01/01/2002 06/30/2002 $ 900,000
07/01/2002 12/31/2002 $ 900,000
01/01/2003 06/30/2003 $ 925,000
07/01/2003 12/31/2003 $ 925,000
01/01/2004 06/30/2004 $ 975,000
07/01/2004 12/31/2004 $ 975,000
01/01/2005 06/30/2005 $ 975,000
07/01/2005 12/31/2005 $ 975,000
01/01/2006 06/30/2006 $ 975,000
07/01/2006 12/31/2006 $ 975,000
01/01/2007 06/30/2007 $ 995,000
07/01/2007 12/31/2007 $ 995,000
01/01/2008 06/30/2008 $ 1,010,000
07/01/2008 12/31/2008 $ 1,010,000
01/01/2009 06/30/2009 $ 1,010,000
07/01/2009 12/31/2009 $ 1,010,000
01/01/2010 06/30/2010 $ 1,010,000
07/01/2010 12/31/2010 $ 1,010,000
01/01/2011 06/30/2011 $ 1,030,000
07/01/2011 12/31/2011 $ 1,030,000
01/01/2012 06/30/2012 $ 1,050,000
Commencement Date of
Semiannual Period Payment Date Semiannual Rent
-------------------- ------------ ---------------
07/01/2012 12/31/2012 $ 1,050,000
01/01/2013 06/30/2013 $ 1,070,000
07/01/2013 12/31/2013 $ 1,070,000
01/01/2014 06/30/2014 $ 1,095,000
07/01/2014 12/31/2014 $ 1,095,000
01/01/2015 06/30/2015 $ 1,135,000
07/01/2015 12/31/2015 $ 1,135,000
01/01/2016 06/30/2016 $ 1,150,000
07/01/2016 12/31/2016 $ 1,193,000
01/01/2017 06/30/2017 $ 1,193,770
Total $ 43,027,560
===============
2. Each installment of Basic Rent payable for the Premises during the
Extended Term shall be an amount equal to $1,000,000, and said installments
shall be payable semiannually in arrears on the last day of each June and
December during the Extended Term, commencing December 31, 2017.
2
SPRING MOUNTAIN ROAD ASSOCIATES
Schedule C of Lease and Agreement
Purchase Prices Pursuant to paragraph 11(b)
-------------------------------------------
Upon the purchase of the Premises pursuant to paragraph 11(b) of this
Lease, the purchase price payable shall be an amount equal to the amount set
forth below opposite the period in which the date of purchase occurs (period 1
commencing on July 1, 1996 and ending on December 31, 1996, and each
succeeding period being each of the following semiannual periods occurring
thereafter).
End Date of Period Period Schedule C Price
------------------ ------ ----------------
12/31/1996 1 $ 18,236,462
06/30/1997 2 $ 17,356,952
12/31/1997 3 $ 17,227,674
06/30/1998 4 $ 17,092,933
12/31/1998 5 $ 16,952,500
06/30/1999 6 $ 16,806,134
12/31/1999 7 $ 16,653,583
06/30/2000 8 $ 16,494,587
12/31/2000 9 $ 16,328,874
06/30/2001 10 $ 16,156,159
12/31/2001 11 $ 15,976,147
06/30/2002 12 $ 15,788,529
12/31/2002 13 $ 15,592,985
06/30/2003 14 $ 15,389,179
12/31/2003 15 $ 15,176,762
06/30/2004 16 $ 14,955,370
12/31/2004 17 $ 14,724,625
06/30/2005 18 $ 14,484,131
12/31/2005 19 $ 14,233,475
06/30/2006 20 $ 13,972,230
12/31/2006 21 $ 13,699,947
06/30/2007 22 $ 13,416,160
12/31/2007 23 $ 13,120,383
06/30/2008 24 $ 12,812,110
12/31/2008 25 $ 12,490,812
06/30/2009 26 $ 12,155,939
12/31/2009 27 $ 11,806,917
06/30/2010 28 $ 11,443,150
12/31/2010 29 $ 11,064,013
06/30/2011 30 $ 10,668,858
12/31/2011 31 $ 10,257,008
06/30/2012 32 $ 9,827,756
12/31/2012 33 $ 9,380,369
06/30/2013 34 $ 8,914,080
12/31/2013 35 $ 8,428,090
06/30/2014 36 $ 7,921,567
End Date of Period Period Schedule C Price
------------------ ------ ----------------
12/31/2014 37 $ 7,393,644
06/30/2015 38 $ 6,843,416
12/31/2015 39 $ 6,269,940
06/30/2016 40 $ 5,672,236
12/31/2016 41 $ 5,049,278
06/30/2017 42 $ 4,400,000
2
SPRING MOUNTAIN ROAD ASSOCIATES
Schedule D of Lease and Agreement
Purchase prices Pursuant to paragraphs 13 or 27
-----------------------------------------------
Upon the purchase of the Premises pursuant to paragraphs 13 or 27 of this
Lease, the purchase price payable shall be an amount equal to the amount set
forth below opposite the period in which the date of purchase occurs (period 1
commencing on July 1, 1996, and ending on December 31, 1996, and each
succeeding period being each of the following semiannual periods occurring
thereafter). In addition, upon any such purchase of the Premises, the Lessee
will pay to the Lessor an amount equal to the amount of any prepayment premium
as calculated in and payable under the Mortgage.
End Date of Period Period Schedule D Price
------------------ ------ -----------------
02/31/1996 1 $ 18,236,462
06/30/1997 2 $ 17,356,952
12/31/1997 3 $ 17,227,674
06/30/1998 4 $ 17,092,933
12/31/1998 5 $ 16,952,500
06/30/1999 6 $ 16,806,134
12/31/1999 7 $ 16,653,583
06/30/2000 8 $ 16,494,587
12/31/2000 9 $ 16,328,874
06/30/2001 10 $ 16,156,159
12/31/2001 11 $ 15,976,147
06/30/2002 12 $ 15,788,529
12/31/2002 13 $ 15,592,985
06/30/2003 14 $ 15,389,179
12/31/2003 15 $ 15,176,762
06/30/2004 16 $ 14,955,370
12/31/2004 17 $ 14,724,625
06/30/2005 18 $ 14,484,131
12/31/2005 19 $ 14,233,475
06/30/2006 20 $ 13,972,230
12/31/2006 21 $ 13,699,947
06/30/2007 22 $ 13,645,667
12/31/2007 23 $ 13,120,383
06/30/2008 24 $ 12,812,110
12/31/2008 25 $ 12,490,812
06/30/2009 26 $ 12,155,939
12/31/2009 27 $ 11,806,917
06/30/2010 28 $ 11,443,150
12/31/2010 29 $ 11,064,013
06/30/2011 30 $ 10,668,858
12/31/2011 31 $ 10,257,008
06/30/2012 32 $ 9,827,756
End Date of Period Period Schedule D Price
------------------ ------ -----------------
12/31/2012 33 $ 9,380,369
06/30/2013 34 $ 8,914,080
12/31/2013 35 $ 8,428,090
06/30/2014 36 $ 7,921,567
12/31/2014 37 $ 7,393,644
06/30/2015 38 $ 6,843,416
12/31/2015 39 $ 6,269,940
06/30/2016 40 $ 5,672,236
12/31/2016 41 $ 5,049,278
06/30/2017 42 $ 4,400,000
2
UT
1,000
9-MOS
DEC-31-1996
SEP-30-1996
PER-BOOK
1,226,509
72,606
117,850
60,912
0
1,477,877
28,196
345,554
(10,683)
363,067
0
0
662,502
41,425
0
0
5,748
0
0
0
405,135
1,477,877
437,218
(7,655)
411,830
411,830
25,388
(4,320)
21,068
40,445
(11,722)
0
(11,722)
15,852
0
60,200
(0.46)
(0.46)
Includes: trust originated preferred of $60,000, current liabilities,
net of current long-term debt maturities and short-term debt, of $153,593 and
deferred income taxes and other credits of $191,542.
Includes distributions related to trust originated preferred securities of
$4,106.
1 EXHIBIT 99
SOUTHWEST GAS CORPORATION
SUMMARY STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------
Gas operating revenues $ 376,599 $ 417,143 $ 522,958 $ 608,604
Net cost of gas purchased 139,184 184,639 182,001 254,716
- ----------------------------------------------------------------------------------------------------------------
Operating margin 237,415 232,504 340,957 353,888
Operations and maintenance expenses 144,557 140,287 192,239 186,808
Depreciation, amortization, and general taxes 72,231 67,476 94,420 88,616
- ----------------------------------------------------------------------------------------------------------------
Operating income 20,627 24,741 54,298 78,464
Net interest deductions 39,328 39,657 53,025 52,936
Preferred securities distribution 4,106 -- 5,019 --
- ----------------------------------------------------------------------------------------------------------------
Pretax utility income (loss) (22,807) (14,916) (3,746) 25,528
Utility income tax expense (benefit) (9,321) (6,451) (2,012) 9,226
- ----------------------------------------------------------------------------------------------------------------
Net utility income (loss) (13,486) (8,465) (1,734) 16,302
Other income (expense), net (300) (390) (543) (721)
- ----------------------------------------------------------------------------------------------------------------
Contribution to net income (loss) - gas operations (13,786) (8,855) (2,277) 15,581
- ----------------------------------------------------------------------------------------------------------------
Equity in earnings of construction services subsidiary 2,391 -- 2,391 --
Acquisition carrying costs, net of tax (327) -- (327) --
- ----------------------------------------------------------------------------------------------------------------
Contribution to net income (loss) - construction services 2,064 -- 2,064 --
- ----------------------------------------------------------------------------------------------------------------
Discontinued operations - PriMerit Bank - NOTE 2 -- 1,328 (18,864) 1,429
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) (11,722) (7,527) (19,077) 17,010
Preferred & preference dividends -- 285 22 380
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ (11,722) $ (7,812) $ (19,099) $ 16,630
================================================================================================================
Earnings (loss) per share from gas operations $ (0.54) $ (0.40) $ (0.09) $ 0.68
Earnings per share from construction services 0.08 -- 0.08 --
Earnings (loss) per share from discontinued operations -- 0.06 (0.74) 0.06
- ----------------------------------------------------------------------------------------------------------------
Earnings (loss) per share of common stock $ (0.46) $ (0.34) $ (0.75) $ 0.74
================================================================================================================
Average outstanding common shares 25,636 22,768 25,382 22,370
================================================================================================================
See Notes to Summary Financial Statements.
2
SOUTHWEST GAS CORPORATION
SUMMARY BALANCE SHEET
AT SEPTEMBER 30, 1996
(In thousands)
(Unaudited)
ASSETS
UTILITY PLANT
Gas plant, net of accumulated depreciation $ 1,187,432
Construction work in progress 39,077
------------
Net utility plant 1,226,509
------------
OTHER PROPERTY AND INVESTMENTS
Investment in discontinued operations - PriMerit Bank - NOTE 2 --
Investment in construction services subsidiary 26,549
Other 41,547
------------
Total other property and investments 68,096
------------
CURRENT AND ACCRUED ASSETS
Cash, working funds and temporary cash investments 3,252
Receivables - less reserve of $1,381 for uncollectibles 18,420
Accrued utility revenue 20,287
Other 48,622
------------
Total current and accrued assets 90,581
------------
DEFERRED DEBITS
Unamortized debt expense 19,756
Other deferred debits 34,382
------------
Total deferred debits 54,138
------------
TOTAL ASSETS $ 1,439,324
============
CAPITALIZATION, LIABILITIES AND DEFERRED CREDITS
CAPITALIZATION
Common stockholders' equity
Common stock equity, $1 par, 26,566 shares outstanding $ 373,750
Retained earnings (accumulated deficit) (10,683)
------------
Total common stockholders' equity 363,067 33.8%
Preferred securities of Southwest Gas Capital I, 9.125% 60,000 5.6
Long-term debt - NOTE 3 652,182 60.6
------------ -----
Total capitalization 1,075,249 100.0%
------------ =====
CURRENT AND ACCRUED LIABILITIES
Notes payable 38,000
Accounts payable 24,319
Customer deposits 20,946
Taxes accrued (including income taxes) 20,971
Deferred purchased gas costs 39,552
Other 33,851
------------
Total current and accrued liabilities 177,639
------------
DEFERRED CREDITS
Deferred investment tax credits 19,223
Deferred income taxes 125,831
Other 41,382
------------
Total deferred credits 186,436
------------
TOTAL CAPITALIZATION, LIABILITIES AND DEFERRED CREDITS $ 1,439,324
============
See Notes to Summary Financial Statements.
3
SOUTHWEST GAS CORPORATION
SUMMARY STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(In thousands)
(Unaudited)
CASH FLOWS FROM OPERATIONS:
Net income (loss) $ (11,722)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 50,003
Change in receivables and payables 21,634
Change in gas cost related balancing items 7,659
Change in accrued taxes (8,130)
Change in deferred taxes 2,802
Allowance for funds used during construction (1,358)
Other (1,237)
----------
Net cash provided by operating activities 59,651
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (141,171)
Investment in construction services subsidiary (24,158)
Proceeds from sale of bank 191,662
Other (24,877)
----------
Net cash provided by investing activities 1,456
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock issuances 11,022
Stock issuance - construction services acquisition 24,000
Dividends paid (15,852)
Change in notes payable 1,000
Long-term debt issuance, net 155,486
Long-term debt retirements (244,398)
----------
Net cash used in financing activities (68,742)
----------
Change in cash and temporary cash investments (7,635)
Cash at beginning of period 10,887
----------
Cash at end of period $ 3,252
==========
SUPPLEMENTAL INFORMATION:
Interest paid, net of amounts capitalized $ 47,141
Income taxes paid, net of refunds $ 18,186
See Notes to Summary Financial Statements.
4
SOUTHWEST GAS CORPORATION
NOTES TO SUMMARY FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The financial statements have been prepared by Southwest Gas Corporation
(the Company) using the equity method of accounting for its construction
services subsidiary. This presentation is not in accordance with generally
accepted accounting principles (GAAP), and certain information and footnote
disclosures normally included in financial statements prepared in accordance
with GAAP have been omitted. The financial statement presentation in this
report produces the same net income as the consolidated financial statements
and, in management's opinion, is a fair representation of the operations and
contributions to net income of the Company's operating segments.
NOTE 2 - DISCONTINUED OPERATIONS:
In January 1996, the Company reached an agreement to sell PriMerit Bank
(PriMerit) to Norwest Corporation. Discontinued operations includes the
net income of PriMerit and its subsidiaries on a stand-alone basis as
adjusted, reduced by allocated carrying costs associated with the Company's
investment in PriMerit (principally interest) net of taxes. Discontinued
operations also includes the estimated loss on the disposition. The sale
of PriMerit to Norwest was completed in July 1996.
NOTE 3 - LONG-TERM DEBT:
Commercial paper facility $ 184,000
Debentures:
Debentures, 9.75% series F, due 2002 100,000
Debentures, 7 1/2% series, due 2006 75,000
Debentures, 8% series, due 2026 75,000
Industrial development revenue bonds - net of funds held in trust 225,057
Unamortized discount on long-term debt (6,875)
---------
TOTAL LONG-TERM DEBT $ 652,182
=========
ESTIMATED CURRENT MATURITIES $ --
=========
5
SOUTHWEST GAS CORPORATION
SELECTED STATISTICAL DATA
SEPTEMBER 30, 1996
FINANCIAL STATISTICS
Market value to book value per share at quarter end 128%
Twelve months to date return on equity -- total company (5.1)%
-- gas segment (0.7)%
Common stock dividend yield at quarter end 4.7%
GAS OPERATIONS SEGMENT
Authorized
Authorized Authorized Return on
Rate Base Rate of Common
Rate Jurisdiction (In thousands) Return Equity
- ----------------------- ------------ ------------ ------------
Central Arizona $ 267,348 9.13% 10.75%
Southern Arizona 157,620 9.12 11.00
Southern Nevada 237,165 9.50 11.55
Northern Nevada 63,986 9.67 11.55
Southern California 69,486 9.94 11.35
Northern California 9,521 10.02 11.35
Paiute Pipeline Company 61,057 10.09 12.50
SYSTEM THROUGHPUT BY CUSTOMER CLASS NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
(In dekatherms) 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------
Residential 32,797,699 33,353,107 41,718,026 46,149,190
Small commercial 17,470,268 17,499,110 22,920,354 23,928,594
Large commercial 5,890,686 6,631,610 7,603,142 8,960,538
Industrial / Other 4,046,550 5,464,247 5,604,019 7,708,746
Transportation 74,153,452 78,567,084 97,187,490 100,930,733
- --------------------------------------------------------------------------------------------------
Total system throughput 134,358,655 141,515,158 175,033,031 187,677,801
==================================================================================================
HEATING DEGREE DAY COMPARISON
- --------------------------------------------------------------------------------------------------
Actual 1,280 1,381 1,680 2,106
Ten year average 1,445 1,432 2,032 2,038
==================================================================================================
