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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1998
Commission File Number 1-7850
SOUTHWEST GAS CORPORATION
(Exact name of registrant as specified in its charter)
California 88-0085720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5241 Spring Mountain Road
Post Office Box 98510
Las Vegas, Nevada 89193-8510
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (702) 876-7237
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, $1 Par Value, 27,542,320 shares as of April 16, 1998
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1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except par value)
MARCH 31, DECEMBER 31,
1998 1997
ASSETS ------------- -------------
(Unaudited)
Utility plant:
Gas plant $ 1,903,485 $ 1,867,824
Less: accumulated depreciation (567,607) (551,083)
Acquisition adjustments 4,165 4,259
Construction work in progress 37,325 39,294
------------- -------------
Net utility plant 1,377,368 1,360,294
------------- -------------
Other property and investments 67,585 64,928
------------- -------------
Current assets:
Cash and cash equivalents 17,850 17,567
Accounts receivable, net of allowances 78,873 78,016
Accrued utility revenue 33,500 54,373
Income tax benefit -- 19,425
Deferred purchased gas costs 86,351 86,952
Prepaids and other current assets 28,968 32,211
------------- -------------
Total current assets 245,542 288,544
------------- -------------
Deferred charges and other assets 54,842 55,293
------------- -------------
Total assets $ 1,745,337 $ 1,769,059
============= =============
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $1 par (authorized - 45,000,000 shares; issued
and outstanding - 27,521,170 and 27,387,016 shares) $ 29,151 $ 29,017
Additional paid-in capital 362,891 360,683
Retained earnings (accumulated deficit) 26,581 (3,721)
------------- -------------
Total common equity 418,623 385,979
Redeemable preferred securities of Southwest Gas Capital I 60,000 60,000
Long-term debt, less current maturities 778,485 778,693
------------- -------------
Total capitalization 1,257,108 1,224,672
------------- -------------
Current liabilities:
Current maturities of long-term debt 5,215 5,621
Short-term debt 78,000 142,000
Accounts payable 57,503 62,324
Customer deposits 22,496 21,945
Accrued taxes 31,233 21,125
Accrued interest 13,676 13,007
Deferred taxes 25,715 24,163
Other current liabilities 31,809 34,222
------------- -------------
Total current liabilities 265,647 324,407
Deferred income taxes and other credits: ------------- -------------
Deferred income taxes and investment tax credits 170,156 168,282
Other deferred credits 52,426 51,698
------------- -------------
Total deferred income taxes and other credits 222,582 219,980
------------- -------------
Total capitalization and liabilities $ 1,745,337 $ 1,769,059
============= =============
The accompanying notes are an integral part of these statements.
2
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Operating revenues:
Gas operating revenues $ 274,363 $ 211,564 $ 677,464 $ 569,573
Construction revenues 18,238 23,667 111,916 121,367
---------- ---------- ---------- ----------
Total operating revenues 292,601 235,231 789,380 690,940
---------- ---------- ---------- ----------
Operating expenses:
Net cost of gas sold 120,987 84,599 245,726 193,710
Operations and maintenance 50,850 48,448 203,561 199,601
Depreciation and amortization 21,384 20,631 85,414 77,791
Taxes other than income taxes 7,972 7,654 29,711 28,216
Construction expenses 15,906 22,384 98,720 107,073
---------- ---------- ---------- ----------
Total operating expenses 217,099 183,716 663,132 606,391
---------- ---------- ---------- ----------
Operating income 75,502 51,515 126,248 84,549
---------- ---------- ---------- ----------
Other income and (expenses):
Net interest deductions (16,280) (14,632) (64,866) (56,592)
Preferred securities distributions (1,369) (1,369) (5,475) (5,475)
Other income (deductions), net 602 (371) (11,267) (1,187)
---------- ---------- ---------- ----------
Total other income and (expenses) (17,047) (16,372) (81,608) (63,254)
---------- ---------- ---------- ----------
Income before income taxes 58,455 35,143 44,640 21,295
Income tax expense 22,502 13,575 13,786 8,012
---------- ---------- ---------- ----------
Net income $ 35,953 $ 21,568 $ 30,854 $ 13,283
========== ========== ========== ==========
Basic earnings per share $ 1.31 $ 0.80 $ 1.13 $ 0.50
========== ========== ========== ==========
Diluted earnings per share $ 1.30 $ 0.80 $ 1.13 $ 0.50
========== ========== ========== ==========
Dividends paid per share $ 0.205 $ 0.205 $ 0.82 $ 0.82
========== ========== ========== ==========
Average number of common shares outstanding 27,447 26,816 27,225 26,437
Average shares outstanding (assuming dilution) 27,605 26,939 27,358 26,527
The accompanying notes are an integral part of these statements.
3
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 35,953 $ 21,568 $ 30,854 $ 13,283
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 21,384 20,631 85,414 77,791
Deferred income taxes 3,426 26,919 23,983 43,154
Changes in current assets and liabilities:
Accounts receivable, net of allowances (857) (2,576) (6,194) (15,202)
Accrued utility revenue 20,873 18,230 (5,230) (199)
Deferred purchased gas costs 601 (69,548) (26,235) (95,016)
Accounts payable (4,821) (6,422) 13,974 (8,888)
Accrued taxes 29,533 1,860 19,396 (34,029)
Other current assets and liabilities 2,438 1,523 2,919 11,144
Other 32 379 13,542 7,609
---------- ---------- ---------- ----------
Net cash provided by (used in) operating activities 108,562 12,564 152,423 (353)
---------- ---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Construction expenditures and property additions (37,212) (39,746) (167,080) (219,807)
Proceeds from bank sale -- -- -- 191,662
Other (3,310) (1,314) (3,304) (23,321)
---------- ---------- ---------- ----------
Net cash used in investing activities (40,522) (41,060) (170,384) (51,466)
---------- ---------- ---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 2,342 3,150 11,397 16,906
Dividends paid (5,623) (5,491) (22,309) (21,758)
Issuance of long-term debt, net 1,300 67,059 54,562 226,949
Retirement of long-term debt, net (1,776) (1,915) (7,426) (250,319)
Issuance (repayment) of short-term debt (64,000) (35,000) (8,000) 83,058
Other -- -- -- (1,362)
---------- ---------- ---------- ----------
Net cash provided by (used in) financing activities (67,757) 27,803 28,224 53,474
---------- ---------- ---------- ----------
Change in cash and temporary cash investments 283 (693) 10,263 1,655
Cash at beginning of period 17,567 8,280 7,587 5,932
---------- ---------- ---------- ----------
Cash at end of period $ 17,850 $ 7,587 $ 17,850 $ 7,587
========== ========== ========== ==========
Supplemental information:
Interest paid, net of amounts capitalized $ 15,291 $ 15,466 $ 58,596 $ 59,185
Income taxes, net of refunds $ (599) $ 86 $ (34,640) $ 18,768
The accompanying notes are an integral part of these statements.
4
Note 1 - Summary of Significant Accounting Policies
Nature of Operations. Southwest Gas Corporation (the Company) is comprised
of two segments: natural gas operations (Southwest or the natural gas
operations segment) and construction services. Southwest purchases, transports,
and distributes natural gas to customers in portions of Arizona, Nevada, and
California. Southwest's public utility rates, practices, facilities, and
service territories are subject to regulatory oversight. The timing and amount
of rate relief can materially impact results of operations. Natural gas sales
are seasonal, peaking during the winter months. Variability in weather from
normal temperatures can materially impact results of operations. Northern
Pipeline Construction Co. (Northern or the construction services segment), a
wholly owned subsidiary, is a full-service underground piping contractor which
provides utility companies with trenching and installation, replacement, and
maintenance services for energy distribution systems.
Basis of Presentation. The consolidated financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The preparation of the
consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. In the opinion of
management, all adjustments, consisting of normal recurring items and estimates
necessary for a fair presentation of the results for the interim periods, have
been made. It is suggested that these consolidated financial statements be read
in conjunction with the financial statements and the notes thereto included in
the Company's 1997 Annual Report to Shareholders, which is incorporated by
reference into the Form 10-K.
Intercompany Transactions. The construction services segment recognizes
revenues generated from contracts with Southwest (see Note 2 below). Accounts
receivable for these services were $4 million at March 31, 1998 and $3.6 million
at December 31, 1997. The accounts receivable balance, revenues, and associated
profits are included in the consolidated financial statements of the Company and
were not eliminated during consolidation. Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation," provides that intercompany profits on sales to regulated affiliates
should not be eliminated in consolidation if the sales price is reasonable and
if future revenues approximately equal to the sales price will result from the
rate-making process. Management believes these two criteria are being met.
Note 2 - Segment Information
The following tables list revenues from external customers, intersegment
revenues, and segment income/loss (thousands of dollars):
Natural Gas Construction
Operations Services Total
----------- ------------ ----------
Quarter ended March 31, 1998
Revenues from external customers $ 274,363 $ 9,131 $ 283,494
Intersegment revenues -- 9,107 9,107
---------- ---------- ----------
Total $ 274,363 $ 18,238 $ 292,601
========== ========== ==========
Segment income $ 35,657 $ 296 $ 35,953
========== ========== ==========
Quarter ended March 31, 1997
Revenues from external customers $ 211,564 $ 14,316 $ 225,880
Intersegment revenues -- 9,351 9,351
---------- ---------- ----------
Total $ 211,564 $ 23,667 $ 235,231
========== ========== ==========
Segment income (loss) $ 22,536 $ (968) $ 21,568
========== ========== ==========
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company is principally engaged in the business of purchasing, transporting,
and distributing natural gas. Southwest is the largest distributor in Arizona,
selling and transporting natural gas in most of southern, central, and
northwestern Arizona, including the Phoenix and Tucson metropolitan areas.
Southwest is also the largest distributor and transporter of natural gas in
Nevada, and serves the Las Vegas metropolitan area and northern Nevada. In
addition, Southwest distributes and transports natural gas in portions of
California, including the Lake Tahoe area in northern California and high desert
and mountain areas in San Bernardino County.
Southwest purchases, transports, and distributes natural gas to approximately
1,165,000 residential, commercial, industrial and other customers, of which
57 percent are located in Arizona, 33 percent are in Nevada, and 10 percent are
in California. During the twelve months ended March 31, 1998, Southwest earned
56 percent of operating margin in Arizona, 34 percent in Nevada, and 10 percent
in California. During this same period, Southwest earned 84 percent of
operating margin from residential and small commercial customers, 4 percent from
other sales customers, and 12 percent from transportation customers. These
patterns are consistent with prior years and are expected to continue.
Northern is a full-service underground piping contractor which provides utility
companies with trenching and installation, replacement, and maintenance services
for energy distribution systems.
Capital Resources and Liquidity
The capital requirements and resources of the Company generally are determined
independently for the natural gas operations and construction services segments.
Each business activity is generally responsible for securing its own financing
sources. The capital requirements and resources of the construction services
segment are not material to the overall capital requirements and resources of
the Company.
Southwest continues to experience significant population growth throughout its
service territories. This growth has required large amounts of capital to
finance the investment in infrastructure, in the form of new transmission and
distribution plant, to satisfy consumer demand. For the twelve months ended
March 31, 1998, natural gas construction expenditures totaled $164 million.
Approximately 77 percent of these current-period expenditures represented new
construction and the balance represented costs associated with routine
replacement of existing transmission, distribution, and general plant. Cash
flows from operating activities (net of dividends) provided $115 million of the
required capital resources pertaining to these construction expenditures. The
remainder was provided from net external financing activities.
Southwest estimates construction expenditures during the three-year period
ending December 31, 2000 will be approximately $510 million. During the three-
year period, cash flow from operating activities (net of dividends) is estimated
to fund approximately one-half of the gas operations total construction
expenditures. A portion of the construction expenditure funding will be
provided by $26 million of funds held in trust, at December 31, 1997, from the
issuance of industrial development revenue bonds (IDRB). The remaining cash
requirements are expected to be provided by external financing sources. The
timing, types, and amounts of these additional external financings will be
dependent on a number of factors, including conditions in the capital markets,
timing and amounts of rate relief, and growth factors in Southwest service
areas. These external financings may include the issuance of both debt and
equity securities, bank and other short-term borrowings, and other forms of
financing. Differences between estimated and actual results are expected to
occur. Actual events, and the timing of those events, frequently do not occur as
expected, and can impact, favorably or unfavorably, anticipated cash flows.
6
Forward-Looking Statements
This report contains statements which constitute "forward-looking statements"
within the meaning of the Securities Litigation Reform Act of 1995 (Reform Act).
All such forward-looking statements are intended to be subject to the safe
harbor protection provided by the Reform Act. A number of important factors
affecting the business and financial results of the Company could cause actual
results to differ materially from those stated in the forward-looking
statements. These factors include, but are not limited to, developments in the
legislative, regulatory and competitive environment, gas industry restructuring,
and weather.
Results of Consolidated Operations
Quarterly Analysis
Contribution to Net Income
Three Months Ended March 31,
------------------------------
(Thousands of dollars)
1998 1997
---------- ----------
Natural gas operations $ 35,657 $ 22,536
Construction services 296 (968)
---------- ----------
Net income $ 35,953 $ 21,568
========== ==========
Net income for the first quarter of 1998 was a record $36 million or $1.31 per
share. This was a $0.51 increase from per share earnings of $0.80 recorded
during the corresponding quarter of the prior year. Earnings contributed from
natural gas operations increased $0.46 per share. See separate discussion at
Results of Natural Gas Operations for changes as they relate to gas operations.
Construction services contributed per share earnings of $0.01 during the current
quarter, a $0.05 per share improvement over the corresponding quarter of the
prior year. The increase primarily resulted from better-than-expected weather
conditions in several cold-climate operating areas which allowed construction
activities to begin earlier than anticipated.
7
Twelve-Month Analysis
Contribution to Net Income
Twelve Months Ended March 31,
----------------------------
(Thousands of dollars)
1998 1997
---------- ----------
Natural gas operations $ 28,946 $ 11,596
Construction services 1,908 1,687
---------- ----------
Net income $ 30,854 $ 13,283
========== ==========
Earnings per share for the twelve months ended March 31, 1998 were $1.13, a
$0.63 increase from per share earnings of $0.50 recorded during the prior
twelve-month period. Earnings contributed from natural gas operations increased
$0.62 per share. See separate discussion at Results of Natural Gas Operations
for changes as they relate to gas operations. Construction services activities
contributed per share earnings of $0.07, a $0.01 per share improvement over the
prior twelve-month period. The improvement is attributed to the commencement of
construction activities in several cold-climate operating areas earlier than
expected resulting from favorable winter weather conditions during the first
quarter of 1998. This increase was partially offset by a decline in revenues
resulting from project cancellations and curtailments during the second and
third quarters of 1997.
The following table sets forth the ratios of earnings to fixed charges for the
Company:
For the Twelve Months Ended
---------------------------
March 31, December 31,
1998 1997
--------- -----------
Ratios of earnings to fixed charges 1.57 1.28
For the purposes of computing the ratios of earnings to fixed charges, earnings
are defined as the sum of pretax income from continuing operations plus fixed
charges. Fixed charges consist of all interest expense including capitalized
interest, one-third of rent expense (which approximates the interest component
of such expense), preferred securities distributions, and amortized debt costs.
8
Results of Natural Gas Operations
Quarterly Analysis
Three Months Ended
March 31,
---------------------------
(Thousands of dollars)
1998 1997
---------- ----------
Gas operating revenues $ 274,363 $ 211,564
Net cost of gas sold 120,987 84,599
---------- ----------
Operating margin 153,376 126,965
Operations and maintenance expense 50,850 48,448
Depreciation and amortization 19,302 17,958
Taxes other than income taxes 7,972 7,654
---------- ----------
Operating income 75,252 52,905
Other income (deductions), net 11 (605)
---------- ----------
Income before interest and income taxes 75,263 52,300
Net interest deductions 16,025 14,261
Preferred securities distributions 1,369 1,369
Income tax expense 22,212 14,134
---------- ----------
Contribution to consolidated net income $ 35,657 $ 22,536
========== ==========
Contribution to consolidated net income increased $13.1 million compared to the
first quarter of 1997. The increase was the result of fundamental improvements
in operating margin coupled with favorable weather conditions, offset somewhat
by higher operating and financing expenses incurred as a result of the expansion
and upgrading of the gas system to accommodate continued customer growth.
Operating margin increased $26.4 million, or 21 percent, in the first quarter of
1998 compared to the same period a year ago. Differences in heating demand
caused by weather variations between periods resulted in a $14 million increase.
Approximately $7 million was attributed to colder-than-normal temperatures
during the current period, and the remainder resulted from the prior period
being warmer than normal. Arizona rate relief, resulting from a $32 million
annualized general rate case settlement effective September 1997, contributed $9
million in additional operating margin to the current period. The rate relief
was significant from both a timing and a rate design perspective. Nearly 70
percent of the annualized increase is nonweather dependent. The remainder of
the improvement in operating margin was due to customer growth as Southwest
served 59,000, or five percent, more customers than a year ago.
Operations and maintenance expenses increased $2.4 million, or five percent,
reflecting general increases in labor and maintenance costs.
Depreciation expense and general taxes increased $1.7 million, or six percent,
as a result of construction activities. Average gas plant in service increased
$136 million, or eight percent, as compared to the first quarter of 1997. The
increase reflects ongoing capital expenditures for the upgrade of existing
operating facilities and the expansion of the system to accommodate continued
customer growth.
Net interest deductions increased $1.8 million, or 12 percent, over the prior
period. This increase is primarily attributed to higher short-term borrowings
outstanding during the current quarter and an increase in long-term debt
reflecting medium-term note issuances during 1997 and the drawdown of IDRB funds
held in trust. The increase in short-term debt reflects the need for short-term
financing to cover increased working capital requirements.
9
Twelve-Month Analysis
Twelve Months Ended
March 31,
---------------------------
(Thousands of dollars)
1998 1997
---------- ----------
Gas operating revenues $ 677,464 $ 569,573
Net cost of gas sold 245,726 193,710
---------- ----------
Operating margin 431,738 375,863
Operations and maintenance expense 203,561 199,601
Depreciation and amortization 75,872 68,862
Taxes other than income taxes 29,711 28,216
---------- ----------
Operating income 122,594 79,184
Other income (deductions), net (12,363) (1,444)
---------- ----------
Income before interest and income taxes 110,231 77,740
Net interest deductions 63,515 54,311
Preferred securities distributions 5,475 5,475
Income tax expense 12,295 6,358
---------- ----------
Contribution to consolidated net income $ 28,946 $ 11,596
========== ==========
Contribution to consolidated net income increased $17.4 million compared to the
corresponding twelve-month period ended March 1997. The increase was the result
of improvements in operating margin, offset somewhat by higher operating and
financing expenses.
Operating margin increased $55.9 million, or 15 percent, due to improved weather
conditions, rate relief, and customer growth. Weather-related variances between
periods resulted in a $22 million increase. Approximately $8 million was
attributed to colder-than-normal temperatures during the current twelve-month
period, and the remainder resulted from the prior period being warmer than
normal. Rate relief contributed $24 million towards the increase, and customer
growth accounted for the remaining $10 million.
Operations and maintenance expenses increased $4 million, or two percent,
reflecting increases in labor and maintenance costs along with incremental
operating expenses associated with providing service to a steadily growing
customer base.
Depreciation expense and general taxes increased $8.5 million, or nine percent,
as a result of additional plant in service. Average gas plant in service for the
current twelve-month period increased $154 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 new
customers being added to the system.
Net interest deductions increased $9.2 million, or 17 percent, during the twelve
months ended March 1998 over the comparative prior period. The increase is
attributed primarily to an increase in average total debt outstanding during the
period due to the financing of construction expenditures and increased working
capital needs.
During the fourth quarter of 1997, Southwest recognized nonrecurring charges to
income related to cost overruns on two separate construction projects. These
charges are reflected in Other income (deductions), net. An $8 million
nonrecurring pretax charge resulted from cost overruns experienced during
expansion of the northern California service territory. A second pretax charge,
for $5 million, related to cost overruns on a nonutility construction project.
See Note 11 of the Notes to Consolidated Financial Statements in the 1997 Annual
Report to Shareholders for additional disclosures related to these projects.
Partially offsetting these charges was the recognition of a $3.4 million income
tax benefit related to the successful settlement in November 1997 of open tax
issues dating back as far as 1988. The combined impact of these three
nonrecurring events was a $4.1 million, or $0.15 per share, after-tax reduction
to earnings.
10
Rates and Regulatory Proceedings
California
Northern California Expansion Project. In 1995, Southwest initiated a multi-
year, three-phase construction project to expand its northern California service
territory and extend service into Truckee, California. In July 1997, following
construction of the first two phases of the project, Southwest filed an
application requesting authorization from the California Public Utilities
Commission (CPUC) to modify the terms and conditions of the certificate of
public convenience and necessity granted by the CPUC in 1995. In August 1997,
the Office of Ratepayer Advocates (ORA) filed a protest to the Southwest
application indicating that the terms of the original agreement should be
adhered to.
In January 1998, Southwest and the ORA executed a settlement agreement that, if
approved by the CPUC, will allow Southwest to commence the final phase of the
project. Under the settlement, Southwest agreed, among other things, to absorb
$8 million in cost overruns experienced in Phase II of the project. Southwest
also agreed to an $11 million cost cap for Phase III of the project. A decision
by the CPUC on the settlement agreement is expected during the second quarter of
1998.
Based on the proposed settlement agreement, Southwest recognized an $8 million
nonrecurring pretax charge in the fourth quarter of 1997. See the Rates and
Regulatory Proceedings section of Management's Discussion and Analysis in the
1997 Annual Report to Shareholders for additional background information.
PGA Filings
Arizona PGA Filing. In March 1998, the Arizona Corporation Commission approved
a purchased gas adjustment (PGA) filing submitted by Southwest in January 1998
to recover deferred purchased gas costs in Arizona. This filing, which became
effective in April 1998, will result in an annual increase of $46.9
million, or 14 percent. The increase in rates is designed to recover the
accumulated PGA balance related to Arizona customers, and to eliminate the
refunds currently built into the rate structure. PGA changes impact cash flows
but have no direct impact on profit margin.
Nevada PGA Filing. In January 1997, Southwest submitted an out-of-period PGA
filing in Nevada, in response to a substantial run-up in the commodity cost of
natural gas during November and December of 1996. In September 1997, the Public
Utilities Commission of Nevada (PUCN) approved the filing providing annual
increases of $10.1 million, or 9 percent, in the southern Nevada rate
jurisdiction, and $6 million, or 14 percent, in the northern Nevada rate
jurisdiction.
In June 1997, Southwest submitted its annual PGA filing in compliance with the
Nevada Gas Tariff. The filing covered the period from April 1996 through March
1997. Southwest requested annual increases of $23.1 million, or 18 percent, in
the southern Nevada rate jurisdiction, and $8.4 million, or 17 percent, in the
northern Nevada rate jurisdiction.
In an order issued in December 1997, the PUCN found that "Southwest failed to
mitigate the risk inherent in a portfolio of all indexed-priced contracts and
failed to reasonably quantify the costs of any risk mitigation." As a result,
Southwest was ordered to reduce its cost of gas by $3.8 million in southern
Nevada and $1.8 million in northern Nevada. The approved increase, after
consideration of the amounts disallowed, was $17.3 million, or 14 percent in
southern Nevada, and $5.2 million, or 11 percent in northern Nevada.
In December 1997, Southwest filed a Petition for Reconsideration (Petition) of
the decision with the PUCN on the grounds that the findings of fact and
conclusions of law are contrary to binding legislative enactments and judicial
decisions. Specifically, the Petition asserted, among other things, that the
PUCN violated its settled obligation in the previous PGA docket, which included
the same winter period, in finding Southwest to be imprudent. Effectively, the
PUCN allowed a previously settled claim to be relitigated. In addition,
management also believes that the PUCN failed to follow its previous rules and
11
practices surrounding a PGA proceeding, or changed those rules effective with
the disallowance order and sought to retroactively apply them, which would have
required compliance with formal rulemaking procedures mandated by Nevada
Statutes. In February 1998, the PUCN reaffirmed the original order.
In March 1998, Southwest filed a petition for judicial review (appeal) of the
final order of the PUCN with the Nevada District Court. The appeal alleges the
same procedural irregularities as were included in the Petition. It is
anticipated that judicial review will take no less than six months from the date
of the filing and could take as long as two years depending on the civil trial
calendar of the Nevada District Court.
See Note 8 of the Notes to Consolidated Financial Statements in the 1997 Annual
Report to Shareholders for additional background information.
Management believes it is probable that the action taken to dispute the findings
of fact and conclusions of law in the order will result in the successful
outcome desired, specifically, that the order to exclude $5.6 million in gas
costs from the PGA balance will be reversed. As a result, the financial
statements do not reflect any charges to effect the disallowance.
Recently Issued Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes the
disclosure requirements for pensions and other postretirement benefits, requires
additional information to facilitate financial analysis, and eliminates certain
previously required disclosures. It does not change measurement or recognition
of amounts related to those plans. This statement is effective for 1998
reporting. The disclosure requirements of this statement are not expected to
significantly change current reporting practices of the Company.
12
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 12 - Computation of Ratios of Earnings to Fixed
Charges and Ratios of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
Exhibit 27 - Financial Data Schedule (filed electronically
only)
(b) Reports on Form 8-K
The Company filed a Form 8-K, dated April 15, 1998, indicating
that earnings for the quarter ended March 31, 1998 would
exceed analysts' estimates.
The Company filed a Form 8-K, dated April 29, 1998, reporting
summary financial information for the quarter ended
March 31, 1998.
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: April 30, 1998
/s/ Edward A. Janov
------------------------------------------------------
Edward A. Janov
Vice President/Controller and Chief Accounting Officer
13
EXHIBIT 12
SOUTHWEST GAS CORPORATION
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Thousands of dollars)
For the Twelve Months Ended
---------------------------------------------------------------------------------
March 31, December 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- --------- ----------
Continuing operations
1. Fixed charges:
A) Interest expense $ 64,789 $ 63,247 $ 54,674 $ 52,844 $ 48,688 $ 40,883
B) Amortization 1,176 1,164 1,494 1,569 1,426 1,330
C) Interest portion of rentals 6,842 6,973 6,629 4,435 4,743 4,556
D) Preferred securities distributions 5,475 5,475 5,475 913 - -
---------- ---------- ---------- ---------- --------- ----------
Total fixed charges $ 78,282 $ 76,859 $ 68,272 $ 59,761 $ 54,857 $ 46,769
========== ========== ========== ========== ========= ==========
2. Earnings (as defined):
E) Pretax income from
continuing operations $ 44,640 $ 21,328 $ 10,448 $ 3,493 $ 38,119 $ 21,959
Fixed Charges (1. above) 78,282 76,859 68,272 59,761 54,857 46,769
---------- ---------- ---------- ---------- --------- ----------
Total earnings as defined $ 122,922 $ 98,187 $ 78,720 $ 63,254 $ 92,976 $ 68,728
========== ========== ========== ========== ========= ==========
3. Ratio of earnings to fixed charges 1.57 1.28 1.15 1.06 1.69 1.47
========== ========== ========== ========== ========= ==========
For the Twelve Months Ended
---------------------------------------------------------------------------------
March 31, December 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- --------- ----------
Adjusted for interest allocated to
discontinued operations
1. Fixed charges:
A) Interest expense $ 64,789 $ 63,247 $ 54,674 $ 52,844 $ 48,688 $ 40,883
B) Amortization 1,176 1,164 1,494 1,569 1,426 1,330
C) Interest portion of rentals 6,842 6,973 6,629 4,435 4,743 4,556
D) Preferred securities distributions 5,475 5,475 5,475 913 - -
E) Allocated interest [1] - - - 9,636 7,874 7,874
---------- ---------- ---------- ---------- -------- ----------
Total fixed charges $ 78,282 $ 76,859 $ 68,272 $ 69,397 $ 62,731 $ 54,643
========== ========== ========== ========== ========= ==========
2. Earnings (as defined):
F) Pretax income from
continuing operations $ 44,640 $ 21,328 $ 10,448 $ 3,493 $ 38,119 $ 21,959
Fixed Charges (1. above) 78,282 76,859 68,272 69,397 62,731 54,643
---------- ---------- ---------- ---------- -------- ----------
Total earnings as defined $ 122,922 $ 98,187 $ 78,720 $ 72,890 $ 100,850 $ 76,602
========== ========== ========== ========== ========= ==========
3. Ratio of earnings to fixed charges 1.57 1.28 1.15 1.05 1.61 1.40
========== ========== ========== ========== ========= ==========
[1] Represents allocated interest through the period ended December 31, 1995. Carrying costs for the
period subsequent to year end through the disposition of the discontinued operations were accrued and
recorded as disposal costs.
/TABLE
EXHIBIT 12
SOUTHWEST GAS CORPORATION
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
(Thousands of dollars)
For the Twelve Months Ended
-------------------------------------------------------------------------------
March 31, December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
Continuing operations
1. Combined fixed charges:
A) Total fixed charges $ 78,282 $ 76,859 $ 68,272 $ 59,761 $ 54,857 $ 46,769
B) Preferred dividends [1] - - - 404 826 1,183
--------- --------- --------- --------- --------- ---------
Total fixed charges and
preferred dividends $ 78,282 $ 76,859 $ 68,272 $ 60,165 $ 55,683 $ 47,952
========= ========= ========= ========= ========= =========
2. Earnings $ 122,922 $ 98,187 $ 78,720 $ 63,254 $ 92,976 $ 68,728
========= ========= ========= ========= ========= =========
3. Ratio of earnings to fixed charges
and preferred dividends 1.57 1.28 1.15 1.05 1.67 1.43
========= ========= ========= ========= ========= =========
For the Twelve Months Ended
-------------------------------------------------------------------------------
March 31, December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
Adjusted for interest allocated to
discontinued operations
1. Combined fixed charges:
A) Total fixed charges $ 78,282 $ 76,859 $ 68,272 $ 69,397 $ 62,731 $ 54,643
B) Preferred dividends [1] - - - 404 826 1,183
--------- --------- --------- --------- --------- ---------
Total fixed charges and
preferred dividends $ 78,282 $ 76,859 $ 68,272 $ 69,801 $ 63,557 $ 55,826
========= ========= ========= ========= ========= =========
2. Earnings $ 122,922 $ 98,187 $ 78,720 $ 72,890 $ 100,850 $ 76,602
========= ========= ========= ========= ========= =========
3. Ratio of earnings to fixed charges
and preferred dividends 1.57 1.28 1.15 1.04 1.59 1.37
========= ========= ========= ========= ========= =========
[1] Preferred and preference dividends have been adjusted to represent the pretax earnings necessary
to cover such dividend requirements.
/TABLE
UT
1,000
3-MOS
DEC-31-1998
MAR-31-1998
PER-BOOK
1,377,368
67,585
245,542
54,842
0
1,745,337
29,151
362,891
26,581
418,623
0
0
778,485
78,000
0
0
5,215
0
0
0
465,014
1,745,337
292,601
22,502
217,099
217,099
75,502
(767)
74,735
16,280
35,953
0
35,953
5,623
0
108,562
1.31
1.30
Includes: trust originated preferred securities of $60,000, current
liabilities, net of current long-term debt maturities and short-term debt, of
$182,432, and deferred income taxes and other credits of $222,582.
Includes distributions related to trust originated preferred securities of
$1,369.
Primary earnings per share is equal to basic earnings per share.
