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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, 1999
Commission File Number 1-7850
SOUTHWEST GAS CORPORATION
(Exact name of registrant as specified in its charter)
California 88-0085720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5241 Spring Mountain Road
Post Office Box 98510
Las Vegas, Nevada 89193-8510
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 876-7237
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, $1 Par Value, 30,587,896 shares as of May 4, 1999.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except par value)
MARCH 31, DECEMBER 31,
1999 1998
-------------- --------------
ASSETS (Unaudited)
Utility plant:
Gas plant $ 2,061,817 $ 2,020,139
Less: accumulated depreciation (627,650) (612,138)
Acquisition adjustments 3,786 3,881
Construction work in progress 44,527 47,480
-------------- --------------
Net utility plant 1,482,480 1,459,362
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Other property and investments 72,695 73,926
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Current assets:
Cash and cash equivalents 14,183 18,535
Accounts receivable, net of allowances 83,424 88,037
Accrued utility revenue 33,000 56,873
Deferred purchased gas costs 23,068 57,595
Prepaids and other current assets 28,270 26,346
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Total current assets 181,945 247,386
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Deferred charges and other assets 49,199 50,020
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Total assets $ 1,786,319 $ 1,830,694
============== ==============
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock, $1 par (authorized - 45,000,000 shares; issued
and outstanding - 30,554,952 and 30,409,616 shares) $ 32,185 $ 32,040
Additional paid-in capital 427,541 424,840
Retained earnings 41,505 19,520
-------------- --------------
Total common equity 501,231 476,400
Redeemable preferred securities of Southwest Gas Capital I 60,000 60,000
Long-term debt, less current maturities 779,599 812,906
-------------- --------------
Total capitalization 1,340,830 1,349,306
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Current liabilities:
Current maturities of long-term debt 5,049 5,270
Short-term debt 720 52,000
Accounts payable 55,591 64,295
Customer deposits 24,981 24,333
Accrued taxes 66,774 33,480
Accrued interest 14,034 13,872
Deferred taxes 5,414 12,627
Other current liabilities 44,177 44,917
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Total current liabilities 216,740 250,794
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Deferred income taxes and other credits:
Deferred income taxes and investment tax credits 176,503 179,666
Other deferred credits 52,246 50,928
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Total deferred income taxes and other credits 228,749 230,594
-------------- --------------
Total capitalization and liabilities $ 1,786,319 $ 1,830,694
============== ==============
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,
----------------------- ------------------------
1999 1998 1999 1998
----------- ----------- ------------ -----------
Operating revenues:
Gas operating revenues $ 279,110 $ 274,363 $ 804,344 $ 677,464
Construction revenues 28,915 18,238 128,389 111,916
----------- ----------- ------------ -----------
Total operating revenues 308,025 292,601 932,733 789,380
----------- ----------- ------------ -----------
Operating expenses:
Net cost of gas sold 135,886 120,987 344,748 245,726
Operations and maintenance 53,566 50,850 211,888 203,561
Depreciation and amortization 24,167 21,384 91,587 85,414
Taxes other than income taxes 7,212 7,972 30,886 29,711
Construction expenses 24,469 15,906 112,231 98,720
----------- ----------- ------------ -----------
Total operating expenses 245,300 217,099 791,340 663,132
----------- ----------- ------------ -----------
Operating income 62,725 75,502 141,393 126,248
----------- ----------- ------------ -----------
Other income and (expenses):
Net interest deductions (14,870) (16,280) (61,944) (64,866)
Preferred securities distributions (1,369) (1,369) (5,475) (5,475)
Other income (deductions) 277 602 (1,715) (11,267)
----------- ----------- ------------ -----------
Total other income and (expenses) (15,962) (17,047) (69,134) (81,608)
----------- ----------- ------------ -----------
Income before income taxes 46,763 58,455 72,259 44,640
Income tax expense 18,497 22,502 32,409 13,786
----------- ----------- ------------ -----------
Net income $ 28,266 $ 35,953 $ 39,850 $ 30,854
=========== =========== ============ ===========
Basic earnings per share $ 0.93 $ 1.31 $ 1.36 $ 1.13
=========== =========== ============ ===========
Diluted earnings per share $ 0.92 $ 1.30 $ 1.35 $ 1.13
=========== =========== ============ ===========
Dividends paid per share $ 0.205 $ 0.205 $ 0.82 $ 0.82
=========== =========== ============ ===========
Average number of common shares outstanding 30,497 27,447 29,363 27,225
Average shares outstanding (assuming dilution) 30,753 27,605 29,591 27,358
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,
------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 28,266 $ 35,953 $ 39,850 $ 30,854
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 24,167 21,384 91,587 85,414
Deferred income taxes (10,376) 3,426 (13,954) 23,983
Changes in current assets and liabilities:
Accounts receivable, net of allowances 4,613 (857) (4,551) (6,194)
Accrued utility revenue 23,873 20,873 500 (5,230)
Deferred purchased gas costs 34,527 601 63,283 (26,235)
Accounts payable (8,704) (4,821) (1,912) 13,974
Accrued taxes 33,294 29,533 35,541 19,396
Other current assets and liabilities (2,231) 2,438 11,094 2,919
Other 287 32 1,233 13,542
------------ ------------ ------------ ------------
Net cash provided by operating activities 127,716 108,562 222,671 152,423
------------ ------------ ------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Construction expenditures and property additions (45,682) (37,212) (203,091) (167,080)
Other 1,766 (3,310) 9,403 (3,304)
------------ ------------ ------------ ------------
Net cash used in investing activities (43,916) (40,522) (193,688) (170,384)
------------ ------------ ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock, net 2,846 2,342 67,684 11,397
Dividends paid (6,252) (5,623) (24,305) (22,309)
Issuance of long-term debt, net 1,000 1,300 40,564 54,562
Retirement of long-term debt, net (34,466) (1,776) (39,313) (7,426)
Repayment of short-term debt (51,280) (64,000) (77,280) (8,000)
------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities (88,152) (67,757) (32,650) 28,224
------------ ------------ ------------ ------------
Change in cash and temporary cash investments (4,352) 283 (3,667) 10,263
Cash at beginning of period 18,535 17,567 17,850 7,587
------------ ------------ ------------ ------------
Cash at end of period $ 14,183 $ 17,850 $ 14,183 $ 17,850
============ ============ ============ ============
Supplemental information:
Interest paid, net of amounts capitalized $ 14,218 $ 15,291 $ 60,091 $ 58,596
============ ============ ============ ============
Income taxes paid (received), net $ 4,209 $ (599) $ 9,776 $ (34,640)
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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 1998 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 $6.2 million at March 31, 1999 and $5 million at
December 31, 1998. 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 (thousands of dollars):
Natural Gas Construction
Operations Services Total
--------------- ---------------- -------------
THREE MONTHS ENDED MARCH 31, 1999
Revenues from external customers $ 279,110 $ 17,219 $ 296,329
Intersegment revenues -- 11,696 11,696
--------------- ---------------- -------------
Total $ 279,110 $ 28,915 $ 308,025
=============== ================ =============
Segment income $ 27,065 $ 1,201 $ 28,266
=============== ================ =============
THREE MONTHS 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
=============== ================ =============
5
NOTE 3 - MERGER AGREEMENT WITH ONEOK, INC.
In December 1998, the Boards of Directors of the Company and ONEOK, Inc.
(ONEOK), headquartered in Tulsa, Oklahoma, announced an agreement for the
Company to be merged into ONEOK. The agreement called for ONEOK to pay $28.50 in
cash for each share of Company common stock outstanding. In April 1999, the
agreement was amended to reflect, among other things, a revised cash purchase
price of $30 per share. The transaction is subject to customary conditions,
including approvals from shareholders of the Company and state regulators in
Arizona, California, and Nevada.
In February 1999, the Company announced that it had received an unsolicited
proposal from Southern Union Company (Southern Union), headquartered in Austin,
Texas, offering to acquire the Company for $32.00 per share in cash. Under the
terms of the original agreement with ONEOK, and as a result of certain
preliminary determinations made by the Board of Directors of the Company, the
Board of Directors authorized management to commence substantive discussions
with Southern Union regarding its proposal. In April 1999, the Board of
Directors approved the amendment to the agreement with ONEOK and rejected the
unsolicited bid by Southern Union. Southern Union revised its offer to $33.50
per share in late April 1999. In May 1999, the Board of Directors rejected the
revised bid.
The merger agreement, as amended, with ONEOK remains in full force and effect.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company is principally engaged in the business of purchasing, transporting,
and distributing natural gas. Southwest is the largest distributor in Arizona,
selling and transporting natural gas in most of southern, central, and
northwestern Arizona, including the Phoenix and Tucson metropolitan areas.
Southwest is also the largest distributor and transporter of natural gas in
Nevada, and serves the Las Vegas metropolitan area and northern Nevada. In
addition, Southwest distributes and transports natural gas in portions of
California, including the Lake Tahoe area in northern California and the high
desert and mountain areas in San Bernardino County.
Southwest purchases, transports, and distributes natural gas to approximately
1,225,000 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, 1999, Southwest earned
57 percent of operating margin in Arizona, 33 percent in Nevada, and 10 percent
in California. During this same period, Southwest earned 83 percent of operating
margin from residential and small commercial customers, 5 percent from other
sales customers, and 12 percent from transportation customers. These patterns
are similar to prior years and are expected to continue.
Northern is a full-service underground piping contractor, which provides utility
companies with trenching and installation, replacement, and maintenance services
for energy distribution systems.
CAPITAL RESOURCES AND LIQUIDITY
The capital requirements and resources of the Company generally are determined
independently for the natural gas operations and construction services segments.
Each business activity is generally responsible for securing its own financing
sources. The capital requirements and resources of the construction services
segment are not material to the overall capital requirements and resources of
the Company.
Southwest continues to experience significant population growth throughout its
service territories. This growth has required large amounts of capital to
finance the investment in infrastructure, in the form of new transmission and
distribution plant, to satisfy consumer demand. For the twelve months ended
March 31, 1999, natural gas construction expenditures totaled $186 million.
Approximately 75 percent of these current-period expenditures represented new
construction and the balance represented costs associated with routine
replacement of existing transmission, distribution, and general plant. Cash
flows from operating activities of Southwest (net of dividends) were $188
million for the twelve months ended March 31, 1999. Operating cash flows
exceeded expected levels due to higher earnings and deferred purchased gas cost
recoveries.
Southwest estimates construction expenditures during the three-year period
ending December 31, 2001 will be approximately $580 million. During the
three-year period, cash flow from operating activities (net of dividends) is
estimated to fund approximately 60 percent of the gas operations total
construction expenditures. A portion of the construction expenditure funding
will be provided by $20 million of funds held in trust, at December 31, 1998,
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, growth factors in Southwest service areas,
and merger-related developments (see Note 3). These external financings may
include the issuance of both debt and equity securities, bank and other
short-term borrowings, and other forms of financing. Under the agreement with
ONEOK, common stock issuances are currently limited to those necessary under
employee benefit and dividend reinvestment plans.
7
RESULTS OF CONSOLIDATED OPERATIONS
Quarterly Analysis
- ------------------
Contribution to Net Income
Three Months Ended March 31,
------------------------------------------
(Thousands of dollars)
1999 1998
----------- -----------
Natural gas operations $ 27,065 $ 35,657
Construction services 1,201 296
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Net income $ 28,266 $ 35,953
=========== ===========
Net income for the quarter ended March 31, 1999 was $0.93 per share, compared to
$1.31 per share recorded during the corresponding quarter of the prior year.
Earnings from natural gas operations decreased $0.41 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 $0.04
during the current quarter, a $0.03 per share increase from the corresponding
quarter of the prior year. The improvement is attributed to the continuance of a
high volume of work that carried over from the prior quarter resulting from
unseasonably warm, dry weather conditions in several cold-climate operating
areas. Average shares outstanding increased 3.1 million shares between periods
primarily due to a 2.5 million share issuance of common stock in August 1998 and
continuing issuances under the Dividend Reinvestment and Stock Purchase Plan.
Twelve-Month Analysis
- ---------------------
Contribution to Net Income
Twelve Months Ended March 31,
--------------------------------------------
(Thousands of dollars)
1999 1998
-------------- -------------
Natural gas operations $ 36,238 $ 28,946
Construction services 3,612 1,908
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Net income $ 39,850 $ 30,854
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Earnings per share for the twelve months ended March 31, 1999 were $1.36, a
$0.23 increase from per share earnings of $1.13 recorded during the prior
twelve-month period. Earnings contributed from natural gas operations increased
$0.18 per share. Prior-period results included the impact of several
nonrecurring events recorded during the fourth quarter of 1997, which reduced
earnings per share by $0.15. 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 $0.12, a $0.05 per share
improvement over the prior twelve-month period. The improvement is attributed to
obtaining new work, eliminating less profitable contracts, implementing cost
containment measures, and better-than-expected weather conditions in several
cold-climate operating areas which prevented the normal slow down in work during
the fourth quarter of 1998 and the first quarter of 1999. Average shares
outstanding increased 2.1 million shares between periods primarily due to a 2.5
million share issuance of common stock in August 1998 and continuing issuances
under the Dividend Reinvestment and Stock Purchase Plan.
The following table sets forth the ratios of earnings to fixed charges for the
Company:
For the Twelve Months Ended
------------------------------------------
March 31, December 31,
1999 1998
------------ ------------
Ratios of earnings to fixed charges 1.94 2.08
8
Earnings are defined as the sum of pretax income plus fixed charges. Fixed
charges consist of all interest expense including capitalized interest,
one-third of rent expense (which approximates the interest component of such
expense), preferred securities distributions, and amortized debt costs.
RESULTS OF NATURAL GAS OPERATIONS
Quarterly Analysis
- ------------------
Three Months Ended
March 31,
------------------------------
(Thousands of dollars)
1999 1998
----------- -----------
Gas operating revenues $ 279,110 $ 274,363
Net cost of gas sold 135,886 120,987
----------- -----------
Operating margin 143,224 153,376
Operations and maintenance expense 53,566 50,850
Depreciation and amortization 21,911 19,302
Taxes other than income taxes 7,212 7,972
----------- -----------
Operating income 60,535 75,252
Other income 117 11
----------- -----------
Income before interest and income taxes 60,652 75,263
Net interest deductions 14,632 16,025
Preferred securities distributions 1,369 1,369
Income tax expense 17,586 22,212
----------- -----------
Contribution to consolidated net income $ 27,065 $ 35,657
=========== ===========
Contribution from natural gas operations declined approximately $8.6 million
compared to the first quarter of 1998. The decline was principally the result of
lower operating margin and higher operating expenses incurred as a result of the
expansion and upgrading of the gas system to accommodate continued customer
growth, partially offset by reduced financing costs.
Operating margin decreased $10.2 million, or seven percent, in the first quarter
of 1999 compared to the same period a year ago. Differences in heating demand
caused by weather variations between periods resulted in a $13 million decrease,
much of which was attributed to colder-than-normal temperatures during the prior
period. Partially offsetting the weather-related impacts was an increase of
approximately $3 million in operating margin due to customer growth, as
Southwest served 60,000, or five percent, more customers than a year ago.
Operations and maintenance expenses increased $2.7 million, or five percent,
reflecting general increases in labor and maintenance costs along with
incremental operating expenses associated with providing service to a steadily
growing customer base.
Depreciation expense and general taxes increased a net $1.8 million, or seven
percent, as a result of construction activities. Average gas plant in service
increased $156 million, or eight percent, as compared to the first quarter of
1998. The increase reflects ongoing capital expenditures for the upgrade of
existing operating facilities and the expansion of the system to accommodate
continued customer growth.
Net interest deductions decreased $1.4 million, or nine percent, resulting
primarily from lower average short-term debt balances. Strong cash flows coupled
with a 2.5 million share common stock offering during the third quarter of 1998
were the primary reasons for the reduction.
9
Twelve-Month Analysis
- ---------------------
Twelve Months Ended
March 31,
------------------------------
(Thousands of dollars)
1999 1998
----------- -----------
Gas operating revenues $ 804,344 $ 677,464
Net cost of gas sold 344,748 245,726
----------- -----------
Operating margin 459,596 431,738
Operations and maintenance expense 211,888 203,561
Depreciation and amortization 82,840 75,872
Taxes other than income taxes 30,886 29,711
----------- -----------
Operating income 133,982 122,594
Other income (expense) (2,009) (12,363)
----------- -----------
Income before interest and income taxes 131,973 110,231
Net interest deductions 60,891 63,515
Preferred securities distributions 5,475 5,475
Income tax expense 29,369 12,295
----------- -----------
Contribution to consolidated net income $ 36,238 $ 28,946
=========== ===========
Contribution to consolidated net income increased $7.3 million compared to the
corresponding twelve-month period ended March 1998. The increase was the result
of improvements in operating margin, partially offset by higher operating
expenses. Prior-period results included the effects of several nonrecurring
events recorded during the fourth quarter of 1997.
Operating margin increased $27.9 million, or six percent, due to rate relief and
customer growth. Rate relief received effective September 1997 contributed
$15 million towards the increase and customer growth accounted for the
remainder. Both periods experienced weather that was moderately
colder than normal. Consequently, there was not a significant weather-related
operating margin variance between periods.
Operations and maintenance expenses increased $8.3 million, or four percent,
reflecting general increases in labor and maintenance costs along with
incremental operating expenses associated with providing service to a steadily
growing customer base.
Depreciation expense and general taxes increased $8.1 million, or eight percent,
as a result of additional plant in service. Average gas plant in service for the
current twelve-month period increased $141 million, or eight percent, compared
to the corresponding period a year ago. This was attributable to the upgrade of
existing operating facilities and the expansion of the system to accommodate new
customers being added to the system.
Net interest deductions decreased $2.6 million, or four percent, during the
twelve months ended March 1999 compared to the corresponding prior twelve-month
period. Strong cash flows, coupled with a 2.5 million share common stock
offering during the third quarter of 1998, reduced the need for new borrowings
and also reduced the average amount of short-term debt outstanding.
Other income (expense) improved $10.4 million. 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 (expense). An $8 million pretax charge resulted from cost overruns
experienced during expansion of the northern California service territory. See
Rates and Regulatory Proceedings herein. A second pretax charge, for $5 million,
related to cost overruns on a nonutility construction project. See Note 11 of
the Notes to Consolidated Financial Statements in the 1998 Annual Report to
Shareholders for additional disclosures related to this charge. Partially
offsetting these charges was the recognition of a $3.4 million income tax
benefit related to the successful settlement in November 1997 of open tax issues
dating back as far as 1988. The combined impact of these three events was a
10
$4.1 million, or $0.15 per share, after-tax reduction to earnings. In connection
with the proposed merger into ONEOK, Southwest incurred approximately
$1.5 million (pretax) of financial advisor, legal, and other costs, which are
included in Other income (expense) for the twelve-month period ended
March 31, 1999.
RATES AND REGULATORY PROCEEDINGS
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. The California
Public Utilities Commission (CPUC) established a $29.1 million cost cap for the
project. Cost overruns experienced during the construction of Phase II of the
project have led Southwest to pursue regulatory and legal avenues aimed at
minimizing its regulatory disallowance exposure. See Note 11 of the Notes to
Consolidated Financial Statements in the 1998 Annual Report to Shareholders for
additional background information.
Beginning in November 1998, Southwest, together with representatives from the
town of Truckee, met before a federal mediator to reconcile disputes and claims
against each other related to the expansion project cost overruns. In April
1999, as a result of the mediation, Southwest and the Truckee Town Council
negotiated a Settlement Agreement and Mutual Release (Agreement). The Agreement
addresses the civil suit against the town of Truckee, the remaining project
scope, recovery of project costs, and the timing of the next California general
rate case, among other items.
In May 1999, Southwest will include the Agreement as part of a new application
it plans to file with the CPUC to modify the certificate of public convenience
and necessity granted in 1995.
Management believes there is a reasonable possibility the CPUC will approve the
planned new application and Agreement. If approved, Southwest would reduce its
regulatory disallowance exposure from approximately $24 million to approximately
$2 million, pretax, based on current estimates to complete the project. If not
approved, Southwest will continue to pursue regulatory and legal proceedings
with the intent of reversing or mitigating the effects of the July 1998 CPUC
order to complete the project under its original terms and scope. As a result,
Southwest has not recorded any additional write-offs for this project beyond an
$8 million charge recognized in the fourth quarter of 1997.
YEAR 2000 READINESS DISCLOSURE
Most companies have computer systems that use two digits to identify a year in
the date field (e.g. "98" for 1998). These systems must be modified to handle
turn-of-the-century calculations. If not corrected, system failures or
miscalculations could occur, potentially causing disruptions of operations,
including, among other things the inability to process transactions, send
invoices, or engage in other normal business activities. The Year 2000 issue
also threatens disruptions in government services, telecommunications, and other
essential industries. This creates potential risk for all companies, even if
their own computer systems are Year 2000 compliant.
In 1994, the Company initiated a comprehensive review of its computer systems to
identify processes that could be adversely affected by Year 2000 issues. By
early 1995, the Company identified computer application systems that required
modification or replacement. Since that time, the Company has focused on
converting all business-critical systems to be Year 2000 compliant.
In addition to the evaluation and remediation of computer application systems
and components, the Company has also developed a comprehensive Year 2000
compliance plan. As part of this plan, the Company has formed a Year 2000
project team with the mission of ensuring that all critical systems, facilities,
and processes are identified and analyzed for Year 2000 compliance. The project
team consists of representatives from several strategic departments of the
Company.
11
The Year 2000 plan includes specific timetables for categories of tasks for each
department as follows:
(1) Assess Year 2000 issues - complete;
(2) Analyze, prioritize, and catalog Year 2000 issues - complete;
(3) Create action plans - complete;
(4) Implement plans and validate compliance - in process and due by the third
quarter of 1999.
The Company's top priority is to ensure that natural gas can be received from
suppliers and delivered to customers. To accomplish this, the Company has sent
inquiries to its five major providers of interstate natural gas transportation
service. All of these providers have responded to the inquiries indicating that
they intend to be Year 2000 compliant before the end of 1999. The Company has
also evaluated its gas pipeline delivery systems, which are the systems used to
distribute natural gas from the interstate pipelines to the customer. These
systems utilize an extensive network of hardware and software devices that
schedule, regulate, measure, or otherwise facilitate the flow of natural gas. Of
these devices, approximately 80 percent are Year 2000 compliant, while
approximately 20 percent are in the process of being replaced or remediated.
Remediation or replacement of the noncompliant devices is expected to be
completed by the middle of 1999.
Many of the Company's business-critical computer systems are Year 2000
compliant. For example, the customer service system which supports customer
billing, accounts receivable, and other customer service functions is Year 2000
compliant. The general ledger accounting system of the Company is also Year 2000
compliant. Year 2000 compliance work on other systems, such as accounts payable,
purchasing, human resources, and payroll, is in process. In total, approximately
90 percent (including work-in-progress) of the Company's computer applications
are currently Year 2000 compliant. The Company has also assessed its other
computer components, such as computer equipment and software, and determined
that approximately 90 percent of these components are Year 2000 compliant. The
Company projects that both the computer application systems and the other
computer components will be Year 2000 compliant by the third quarter of 1999.
The Company has initiated communications with suppliers and vendors to determine
the extent to which those companies are addressing Year 2000 compliance issues.
The Company is requiring business-critical suppliers and vendors to certify
compliance in order to continue doing business with the Company. In addition,
the Company is identifying and contacting alternate suppliers and vendors as
part of a Year 2000 contingency plan. All of the companies contacted have
responded that efforts are underway to become compliant.
The Company is also assessing and remediating Year 2000 issues related to
embedded system devices (such as microcontrollers used in equipment and
machinery), data exchange functions, networks, telecommunications, security
access and building control systems, forms, reports, and other business
processes and activities. The Company expects these areas to be Year 2000
compliant by the third quarter of 1999.
The Company is in the process of developing contingency scenarios for each
district and division. These scenarios will consider the systems, operations,
and devices that have been identified as at risk for failure. These scenarios
will attempt to forecast what failures might occur, where the failures might
occur, as well as the impact of the failures on dependent systems, operations,
and devices. As part of this process, the Company will identify the most
reasonably likely worst case Year 2000 scenario. The Company will then prepare
for this scenario by developing contingency plans for all "high risk" systems,
operations, and devices. This process will culminate in the development of a
"Contingency Plan Operations Guide." This guide will document specific items
associated with the Company's Year 2000 contingency plans including
personnel-related items, non-labor resources required by the plan, command and
decision authority roles, and location and function of a contingency command
center. The Contingency Plan Operations Guide is scheduled for completion during
the third quarter of 1999.
The Company estimates that the cost of remediation will be approximately $2
million. Expenditures of approximately $1 million have already been incurred in
connection with systems that have been converted. The remediation costs include
12
internal labor costs, as well as fees and expenses paid to outside contractors
specifically associated with reprogramming or replacing noncompliant components.
At the present time, the Company does not expect that such expenditures will
have a material impact on results of operations or financial condition.
The Company's Year 2000 plans, including costs and completion schedules, are
based on management's best estimates. These estimates were derived using
numerous assumptions of future events including, but not limited to, third party
modification plans, availability of qualified personnel, support of software
vendors, and other factors. The Company is also relying on the representations
made by significant third party suppliers and vendors.
FORWARD-LOOKING STATEMENTS
This report contains statements which constitute "forward-looking statements"
within the meaning of the Securities Litigation Reform Act of 1995 (Reform Act).
All such forward-looking statements are intended to be subject to the safe
harbor protection provided by the Reform Act. A number of important factors
affecting the business and financial results of the Company could cause actual
results to differ materially from those stated in the forward-looking
statements. These factors include, but are not limited to, the impact of weather
variations on customer usage, natural gas prices, the effects of
regulation/deregulation, the timing of rate relief, the outcome of Southwest's
challenges to regulatory actions, changes in capital requirements and funding,
Year 2000 remediation efforts, acquisitions, competition, and merger-related
developments (see Note 3).
13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been named as defendant in various legal proceedings. The
ultimate dispositions of these proceedings are not presently determinable;
however, it is the opinion of management that no litigation to which the Company
is subject will have a material adverse impact on its financial position or
results of operations.
On December 16, 1998, Arthur Klein filed a Complaint in the Superior Court of
the State of California in San Diego County (Case No. 726615) against the
Company and its directors alleging one cause of action for breach of fiduciary
duty. The plaintiff alleged that the consideration for the proposed Merger with
ONEOK is unfair and inadequate because the Company's Board of Directors approved
the Merger Agreement with ONEOK without conducting any auction or using another
"market check" mechanism. Plaintiff is proposing to represent a class of all
shareholders of the Company (excluding defendants and their affiliates and
families). On March 22, 1999, the plaintiff filed an Amended Complaint in which
he alleges causes of action for breach of fiduciary duty, duty of loyalty and
due care and breach of duty of candor. The Complaint was further amended on
May 5, 1999 in which he alleges causes of action for breach of the duties of
loyalty, due care, candor and good faith and fair dealing. By his Amended
Complaint, plaintiff seeks
- - to enjoin the Merger with ONEOK;
- - to rescind the Merger Agreement with ONEOK, or portions thereof;
- - to implement an auction of the Company or similar process;
- - to void the $30 million termination fee in the Merger Agreement with ONEOK;
and
- - unspecified damages.
In addition, plaintiff seeks a declaration that the action is properly
maintainable as a class action on behalf of all shareholders. On March 31, 1999,
the Court allowed John Mauricio to file a complaint in intervention, which is
substantially identical to Arthur Klein's first Amended Complaint.
The Court has set a preliminary injunction schedule, which, if followed, would
result in a ruling on plaintiffs' motion for a preliminary injunction in June
1999.
The Company believes that it has valid defenses to plaintiffs' claims.
On May 4, 1999, Southern Union filed a motion to intervene in the proceedings.
This motion was granted. In addition, Southern Union filed a complaint against
the Company seeking a declaration from the Court that it is entitled to directly
solicit the Company's shareholders to oppose the Merger and to seek approval of
a proposed merger with Southern Union, rescinding portions of the
confidentiality agreement between Southern Union and the Company and a temporary
restraining order and a preliminary injunction to maintain the status quo during
the course of the litigation. In addition, Southern Union is seeking damages and
punitive damages.
On April 30, 1999, the Company filed a complaint in the U.S. District Court,
District of Nevada (Case No. CV-99-0530-JBR-LRL) alleging breach of the
confidentiality agreement between the Company and Southern Union, breach of the
implied covenant of good faith and fair dealing, misappropriation of trade
secrets, intentional interference with contract, intentional interference with
prospective economic advantage and other violations of California and Nevada
law.
ITEMS 2-5. None
14
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 12.1 - Computation of Ratios of Earnings to Fixed
Charges and Ratios of Earnings to Combined Fixed Charges and
Preferred Stock Dividends.
Exhibit 27.1 - Financial Data Schedule (filed electronically
only).
(b) Reports on Form 8-K
The Company filed a Form 8-K, containing Amendment No. 1,
dated as of April 25, 1999, to the Agreement and Plan of
Merger, dated as of December 14, 1998, by and among ONEOK,
Inc., Oasis Acquisition Corporation, and Southwest Gas
Corporation.
The Company filed a Form 8-K, dated May 4, 1999, reporting
summary financial information for the quarter ended
March 31, 1999.
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: May 12, 1999
/s/ Edward A. Janov
------------------------------------------------------
Edward A. Janov
Vice President/Controller and Chief Accounting Officer
15
EXHIBIT 12.1
SOUTHWEST GAS CORPORATION
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Thousands of dollars)
For the Twelve Months Ended
----------------------------------------------------------------------
March 31, December 31,
----------------------------------------------------------
Continuing operations 1999 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ----------
1. Fixed charges:
A) Interest expense $ 62,030 $ 63,416 $ 63,247 $ 54,674 $ 52,844 $ 48,688
B) Amortization 1,272 1,243 1,164 1,494 1,569 1,426
C) Interest portion of rentals 7,835 7,531 6,973 6,629 4,435 4,743
D) Preferred securities distributions 5,475 5,475 5,475 5,475 913 -
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges $ 76,612 $ 77,665 $ 76,859 $ 68,272 $ 59,761 $ 54,857
========== ========== ========== ========== ========== ==========
2. Earnings (as defined):
E) Pretax income from
continuing operations $ 72,259 $ 83,951 $ 21,328 $ 10,448 $ 3,493 $ 38,119
Fixed Charges (1. above) 76,612 77,665 76,859 68,272 59,761 54,857
---------- ---------- ---------- ---------- ---------- ----------
Total earnings as defined $ 148,871 $ 161,616 $ 98,187 $ 78,720 $ 63,254 $ 92,976
========== ========== ========== ========== ========== ==========
1.94 2.08 1.28 1.15 1.06 1.69
========== ========== ========== ========== ========== ==========
For the Twelve Months Ended
----------------------------------------------------------------------
Adjusted for interest allocated to March 31, December 31,
----------------------------------------------------------
discontinued operations 1999 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ----------
1. Fixed charges:
A) Interest expense $ 62,030 $ 63,416 $ 63,247 $ 54,674 $ 52,844 $ 48,688
B) Amortization 1,272 1,243 1,164 1,494 1,569 1,426
C) Interest portion of rentals 7,835 7,531 6,973 6,629 4,435 4,743
D) Preferred securities distributions 5,475 5,475 5,475 5,475 913 -
E) Allocated interest [1] - - - - 9,636 7,874
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges $ 76,612 $ 77,665 $ 76,859 $ 68,272 $ 69,397 $ 62,731
========== ========== ========== ========== ========== ==========
2. Earnings (as defined):
F) Pretax income from
continuing operations $ 72,259 $ 83,951 $ 21,328 $ 10,448 $ 3,493 $ 38,119
Fixed Charges (1. above) 76,612 77,665 76,859 68,272 69,397 62,731
---------- ---------- ---------- ---------- ---------- ----------
Total earnings as defined $ 148,871 $ 161,616 $ 98,187 $ 78,720 $ 72,890 $ 100,850
========== ========== ========== ========== ========== ==========
3. Ratio of earnings to fixed charges 1.94 2.08 1.28 1.15 1.05 1.61
========== ========== ========== ========== ========== ==========
[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.
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,
----------------------------------------------------------
Continuing operations 1999 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ----------
1. Combined fixed charges:
A) Total fixed charges $ 76,612 $ 77,665 $ 76,859 $ 68,272 $ 59,761 $ 54,857
B) Preferred dividends [1] - - - - 404 826
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges and
preferred dividends $ 76,612 $ 77,665 $ 76,859 $ 68,272 $ 60,165 $ 55,683
========== ========== ========== ========== ========== ==========
2. Earnings $ 148,871 $ 161,616 $ 98,187 $ 78,720 $ 63,254 $ 92,976
========== ========== ========== ========== ========== ==========
3. Ratio of earnings to fixed charges
and preferred dividends 1.94 2.08 1.28 1.15 1.05 1.67
========== ========== ========== ========== ========== ==========
For the Twelve Months Ended
----------------------------------------------------------------------
Adjusted for interest allocated to March 31, December 31,
----------------------------------------------------------
discontinued operations 1999 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ----------
1. Combined fixed charges:
A) Total fixed charges $ 76,612 $ 77,665 $ 76,859 $ 68,272 $ 69,397 $ 62,731
B) Preferred dividends [1] - - - - 404 826
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges and
preferred dividends $ 76,612 $ 77,665 $ 76,859 $ 68,272 $ 69,801 $ 63,557
========== ========== ========== ========== ========== ==========
2. Earnings $ 148,871 $ 161,616 $ 98,187 $ 78,720 $ 72,890 $ 100,850
========== ========== ========== ========== ========== ==========
3. Ratio of earnings to fixed charges
and preferred dividends 1.94 2.08 1.28 1.15 1.04 1.59
========== ========== ========== ========== ========== ==========
[1] Preferred and preference dividends have been adjusted to represent the
pretax earnings necessary to cover such dividend requirements.
UT
1,000
3-MOS
DEC-31-1999
MAR-31-1999
PER-BOOK
1,482,480
72,695
181,945
0
49,199
1,786,319
32,185
427,541
41,505
501,231
0
0
779,599
720
0
0
5,049
0
0
0
499,720
1,786,319
308,025
18,497
245,300
245,300
62,725
(1,092)
61,633
14,870
28,266
0
28,266
6,252
0
127,716
0.93
0.92
Includes: trust originated preferred securities of $60,000, current liabilities, net of current long-term debt
maturities and short-term debt, of $210,971 and deferred income taxes and other credits of $228,749
Includes distributions related to trust originated preferred securities of $1,369
