UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008March 31, 2009
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. 0; & #160; Yes X No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer X | Accelerated filer __ | Non-accelerated filer __ | Smaller reporting company __ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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, 43,914,40744,708,482 shares as of October 31, 2008.May 1, 2009.
SOUTHWEST GAS CORPORATION | Form 10-Q |
September 30, 2008March 31, 2009
| |
PART I - FINANCIAL INFORMATION | |
| | | | | | |
ITEM 1. FINANCIAL STATEMENTS | | | | | | |
| | | | | | |
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES |
CONDENSED CONSOLIDATED BALANCE SHEETS |
(Thousands of dollars, except par value) |
(Unaudited) |
| | MARCH 31, | | | DECEMBER 31, | |
| | 2009 | | | 2008 | |
ASSETS | | | | | | |
Utility plant: | | | | | | |
Gas plant | | $ | 4,309,835 | | | $ | 4,258,727 | |
Less: accumulated depreciation | | | (1,374,261 | ) | | | (1,347,093 | ) |
Acquisition adjustments, net | | | 1,587 | | | | 1,632 | |
Construction work in progress | | | 61,504 | | | | 70,041 | |
Net utility plant | | | 2,998,665 | | | | 2,983,307 | |
Other property and investments | | | 117,970 | | | | 124,781 | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | | 23,782 | | | | 26,399 | |
Accounts receivable, net of allowances | | | 173,568 | | | | 168,829 | |
Accrued utility revenue | | | 44,500 | | | | 72,600 | |
Income taxes receivable, net | | | 11,173 | | | | 32,069 | |
Deferred income taxes | | | - | | | | 14,902 | |
Deferred purchased gas costs | | | 5,780 | | | | - | |
Prepaids and other current assets | | | 70,697 | | | | 123,277 | |
Total current assets | | | 329,500 | | | | 438,076 | |
Deferred charges and other assets | | | 277,800 | | | | 274,220 | |
Total assets | | $ | 3,723,935 | | | $ | 3,820,384 | |
| | | | | | | | |
CAPITALIZATION AND LIABILITIES | | | | | | | | |
Capitalization: | | | | | | | | |
Common stock, $1 par (authorized - 60,000,000 shares; issued | | | | | | | | |
and outstanding - 44,655,347 and 44,191,535 shares) | | $ | 46,285 | | | $ | 45,822 | |
Additional paid-in capital | | | 780,471 | | | | 770,463 | |
Accumulated other comprehensive income (loss), net | | | (19,219 | ) | | | (19,426 | ) |
Retained earnings | | | 280,198 | | | | 240,982 | |
Total equity | | | 1,087,735 | | | | 1,037,841 | |
Subordinated debentures due to Southwest Gas Capital II | | | 100,000 | | | | 100,000 | |
Long-term debt, less current maturities | | | 1,147,109 | | | | 1,185,474 | |
Total capitalization | | | 2,334,844 | | | | 2,323,315 | |
Current liabilities: | | | | | | | | |
Current maturities of long-term debt | | | 5,049 | | | | 7,833 | |
Short-term debt | | | - | | | | 55,000 | |
Accounts payable | | | 116,118 | | | | 191,434 | |
Customer deposits | | | 84,697 | | | | 83,468 | |
Accrued general taxes | | | 60,806 | | | | 41,490 | |
Accrued interest | | | 18,353 | | | | 19,699 | |
Deferred income taxes | | | 3,512 | | | | - | |
Deferred purchased gas costs | | | 25,495 | | | | 33,073 | |
Other current liabilities | | | 86,441 | | | | 77,898 | |
Total current liabilities | | | 400,471 | | | | 509,895 | |
Deferred income taxes and other credits: | | | | | | | | |
Deferred income taxes and investment tax credits | | | 378,728 | | | | 387,539 | |
Taxes payable | | | 3,480 | | | | 3,480 | |
Accumulated removal costs | | | 174,000 | | | | 169,000 | |
Other deferred credits | | | 432,412 | | | | 427,155 | |
Total deferred income taxes and other credits | | | 988,620 | | | | 987,174 | |
Total capitalization and liabilities | | $ | 3,723,935 | | | $ | 3,820,384 | |
| | | | | | | | |
The accompanying notes are an integral part of these statements. | |
PART I - FINANCIAL INFORMATION | |
| | | | | | |
ITEM 1. FINANCIAL STATEMENTS | | | | | | |
| | | | | | |
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES | |
CONDENSED CONSOLIDATED BALANCE SHEETS | |
(Thousands of dollars, except par value) | |
(Unaudited) | |
| | SEPTEMBER 30, | | | DECEMBER 31, | |
| | 2008 | | | 2007 | |
ASSETS | | | | | | |
Utility plant: | | | | | | |
Gas plant | | $ | 4,230,427 | | | $ | 4,043,936 | |
Less: accumulated depreciation | | | (1,334,915 | ) | | | (1,261,867 | ) |
Acquisition adjustments, net | | | 1,677 | | | | 1,812 | |
Construction work in progress | | | 43,720 | | | | 61,419 | |
Net utility plant | | | 2,940,909 | | | | 2,845,300 | |
Other property and investments | | | 137,155 | | | | 143,097 | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | | 13,165 | | | | 31,991 | |
Accounts receivable, net of allowances | | | 119,224 | | | | 203,660 | |
Accrued utility revenue | | | 32,600 | | | | 74,900 | |
Income taxes receivable, net | | | 18,424 | | | | 14,286 | |
Deferred income taxes | | | 7,952 | | | | 6,965 | |
Deferred purchased gas costs | | | - | | | | 33,946 | |
Prepaids and other current assets | | | 79,069 | | | | 136,711 | |
Total current assets | | | 270,434 | | | | 502,459 | |
Deferred charges and other assets | | | 161,378 | | | | 179,332 | |
Total assets | | $ | 3,509,876 | | | $ | 3,670,188 | |
| | | | | | | | |
CAPITALIZATION AND LIABILITIES | | | | | | | | |
Capitalization: | | | | | | | | |
Common stock, $1 par (authorized - 60,000,000 shares; issued | | | | | | | | |
and outstanding - 43,712,159 and 42,805,706 shares) | | $ | 45,342 | | | $ | 44,436 | |
Additional paid-in capital | | | 757,779 | | | | 732,319 | |
Accumulated other comprehensive income (loss), net | | | (12,242 | ) | | | (12,850 | ) |
Retained earnings | | | 220,072 | | | | 219,768 | |
Total equity | | | 1,010,951 | | | | 983,673 | |
Subordinated debentures due to Southwest Gas Capital II | | | 100,000 | | | | 100,000 | |
Long-term debt, less current maturities | | | 1,213,149 | | | | 1,266,067 | |
Total capitalization | | | 2,324,100 | | | | 2,349,740 | |
Current liabilities: | | | | | | | | |
Current maturities of long-term debt | | | 12,455 | | | | 38,079 | |
Short-term debt | | | - | | | | 9,000 | |
Accounts payable | | | 79,689 | | | | 220,731 | |
Customer deposits | | | 80,297 | | | | 75,019 | |
Accrued general taxes | | | 41,994 | | | | 44,637 | |
Accrued interest | | | 19,757 | | | | 21,290 | |
Deferred purchased gas costs | | | 33,744 | | | | 46,088 | |
Other current liabilities | | | 91,084 | | | | 73,088 | |
Total current liabilities | | | 359,020 | | | | 527,932 | |
Deferred income taxes and other credits: | | | | | | | | |
Deferred income taxes and investment tax credits | | | 366,711 | | | | 347,497 | |
Taxes payable | | | 3,993 | | | | 4,387 | |
Accumulated removal costs | | | 163,000 | | | | 146,000 | |
Other deferred credits | | | 293,052 | | | | 294,632 | |
Total deferred income taxes and other credits | | | 826,756 | | | | 792,516 | |
Total capitalization and liabilities | | $ | 3,509,876 | | | $ | 3,670,188 | |
| | | | | | | | |
The accompanying notes are an integral part of these statements. | |
SOUTHWEST GAS CORPORATION | Form 10-Q |
September 30, 2008March 31, 2009
| |
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES | SOUTHWEST GAS CORPORATION AND SUBSIDIARIES | | SOUTHWEST GAS CORPORATION AND SUBSIDIARIES | |
CONDENSED CONSOLIDATED STATEMENTS OF INCOME | CONDENSED CONSOLIDATED STATEMENTS OF INCOME | | CONDENSED CONSOLIDATED STATEMENTS OF INCOME | |
(In thousands, except per share amounts) | (In thousands, except per share amounts) | | (In thousands, except per share amounts) | |
(Unaudited) | (Unaudited) | | (Unaudited) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | THREE MONTHS ENDED | | | NINE MONTHS ENDED | | | TWELVE MONTHS ENDED | | | THREE MONTHS ENDED | | | TWELVE MONTHS ENDED | |
| | SEPTEMBER 30, | | | SEPTEMBER 30, | | | SEPTEMBER 30, | | | MARCH 31, | | | MARCH 31, | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | | | 2008 | | | 2007 | | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
Operating revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gas operating revenues | | $ | 268,450 | | | $ | 274,748 | | | $ | 1,362,753 | | | $ | 1,345,996 | | | $ | 1,831,523 | | | $ | 1,838,039 | | | $ | 635,106 | | | $ | 741,300 | | | $ | 1,685,201 | | | $ | 1,829,051 | |
Construction revenues | | | 105,972 | | | | 96,776 | | | | 272,580 | | | | 245,781 | | | | 364,121 | | | | 318,853 | | | | 54,756 | | | | 72,307 | | | | 335,797 | | | | 342,928 | |
Total operating revenues | | | 374,422 | | | | 371,524 | | | | 1,635,333 | | | | 1,591,777 | | | | 2,195,644 | | | | 2,156,892 | | | | 689,862 | | | | 813,607 | | | | 2,020,998 | | | | 2,171,979 | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net cost of gas sold | | | 134,030 | | | | 141,825 | | | | 839,309 | | | | 834,453 | | | | 1,091,050 | | | | 1,107,594 | | | | 395,810 | | | | 500,699 | | | | 951,088 | | | | 1,092,682 | |
Operations and maintenance | | | 87,489 | | | | 83,222 | | | | 256,298 | | | | 250,847 | | | | 336,659 | | | | 336,934 | | | | 84,662 | | | | 85,206 | | | | 338,116 | | | | 331,879 | |
Depreciation and amortization | | | 48,650 | | | | 46,271 | | | | 144,128 | | | | 136,348 | | | | 190,294 | | | | 179,967 | | | | 48,522 | | | | 47,270 | | | | 194,971 | | | | 185,162 | |
Taxes other than income taxes | | | 8,103 | | | | 7,848 | | | | 27,913 | | | | 28,253 | | | | 37,213 | | | | 37,495 | | | | 10,111 | | | | 10,194 | | | | 36,697 | | | | 37,280 | |
Construction expenses | | | 93,679 | | | | 83,902 | | | | 243,946 | | | | 214,887 | | | | 323,091 | | | | 276,489 | | | | 48,028 | | | | 65,553 | | | | 294,220 | | | | 299,316 | |
Total operating expenses | | | 371,951 | | | | 363,068 | | | | 1,511,594 | | | | 1,464,788 | | | | 1,978,307 | | | | 1,938,479 | | | | 587,133 | | | | 708,922 | | | | 1,815,092 | | | | 1,946,319 | |
Operating income | | | 2,471 | | | | 8,456 | | | | 123,739 | | | | 126,989 | | | | 217,337 | | | | 218,413 | | | | 102,729 | | | | 104,685 | | | | 205,906 | | | | 225,660 | |
Other income and (expenses): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest deductions | | | (21,012 | ) | | | (22,619 | ) | | | (64,270 | ) | | | (65,888 | ) | | | (86,854 | ) | | | (87,967 | ) | | | (18,590 | ) | | | (21,868 | ) | | | (81,641 | ) | | | (88,837 | ) |
Net interest deductions on subordinated debentures | | | (1,933 | ) | | | (1,932 | ) | | | (5,797 | ) | | | (5,795 | ) | | | (7,729 | ) | | | (7,726 | ) | | | (1,933 | ) | | | (1,932 | ) | | | (7,730 | ) | | | (7,728 | ) |
Other income (deductions) | | | (4,163 | ) | | | 597 | | | | (4,572 | ) | | | 6,870 | | | | (4,806 | ) | | | 11,351 | | | | (1,704 | ) | | | (1,467 | ) | | | (13,643 | ) | | | 2,036 | |
Total other income and (expenses) | | | (27,108 | ) | | | (23,954 | ) | | | (74,639 | ) | | | (64,813 | ) | | | (99,389 | ) | | | (84,342 | ) | | | (22,227 | ) | | | (25,267 | ) | | | (103,014 | ) | | | (94,529 | ) |
Income (loss) before income taxes | | | (24,637 | ) | | | (15,498 | ) | | | 49,100 | | | | 62,176 | | | | 117,948 | | | | 134,071 | | |
Income tax expense (benefit) | | | (7,951 | ) | | | (6,180 | ) | | | 19,359 | | | | 22,067 | | | | 45,070 | | | | 47,255 | | |
Net income (loss) | | $ | (16,686 | ) | | $ | (9,318 | ) | | $ | 29,741 | | | $ | 40,109 | | | $ | 72,878 | | | $ | 86,816 | | |
Income before income taxes | | | | 80,502 | | | | 79,418 | | | | 102,892 | | | | 131,131 | |
Income tax expense | | | | 30,521 | | | | 30,266 | | | | 41,090 | | | | 48,497 | |
Net income | | | $ | 49,981 | | | $ | 49,152 | | | $ | 61,802 | | | $ | 82,634 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic earnings (loss) per share | | $ | (0.38 | ) | | $ | (0.22 | ) | | $ | 0.69 | | | $ | 0.95 | | | $ | 1.69 | | | $ | 2.06 | | |
Diluted earnings (loss) per share | | $ | (0.38 | ) | | $ | (0.22 | ) | | $ | 0.68 | | | $ | 0.94 | | | $ | 1.68 | | | $ | 2.04 | | |
Basic earnings per share | | | $ | 1.13 | | | $ | 1.14 | | | $ | 1.41 | | | $ | 1.94 | |
Diluted earnings per share | | | $ | 1.12 | | | $ | 1.14 | | | $ | 1.40 | | | $ | 1.92 | |
Dividends declared per share | | $ | 0.225 | | | $ | 0.215 | | | $ | 0.675 | | | $ | 0.645 | | | $ | 0.89 | | | $ | 0.85 | | | $ | 0.2375 | | | $ | 0.225 | | | $ | 0.9125 | | | $ | 0.87 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Average number of common shares outstanding | | | 43,581 | | | | 42,448 | | | | 43,307 | | | | 42,219 | | | | 43,150 | | | | 42,060 | | | | 44,424 | | | | 43,012 | | | | 43,825 | | | | 42,592 | |
Average shares outstanding (assuming dilution) | | | - | | | | - | | | | 43,610 | | | | 42,607 | | | | 43,464 | | | | 42,469 | | | | 44,680 | | | | 43,290 | | | | 44,118 | | | | 42,940 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these statements. | The accompanying notes are an integral part of these statements. | | The accompanying notes are an integral part of these statements. | |
SOUTHWEST GAS CORPORATION | Form 10-Q |
September 30, 2008March 31, 2009
| |
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES | SOUTHWEST GAS CORPORATION AND SUBSIDIARIES | | SOUTHWEST GAS CORPORATION AND SUBSIDIARIES | |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |
(Thousands of dollars) | (Thousands of dollars) | | (Thousands of dollars) | |
(Unaudited) | (Unaudited) | | (Unaudited) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | NINE MONTHS ENDED | | | TWELVE MONTHS ENDED | | | THREE MONTHS ENDED | | | TWELVE MONTHS ENDED | |
| | SEPTEMBER 30, | | | SEPTEMBER 30, | | | MARCH 31, | | | MARCH 31, | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
CASH FLOW FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 29,741 | | | $ | 40,109 | | | $ | 72,878 | | | $ | 86,816 | | | $ | 49,981 | | | $ | 49,152 | | | $ | 61,802 | | | $ | 82,634 | |
Adjustments to reconcile net income to net | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 144,128 | | | | 136,348 | | | | 190,294 | | | | 179,967 | | | | 48,522 | | | | 47,270 | | | | 194,971 | | | | 185,162 | |
Deferred income taxes | | | 17,855 | | | | (17,456 | ) | | | 51,379 | | | | (3,383 | ) | | | 9,477 | | | | 4,811 | | | | 40,801 | | | | 25,501 | |
Changes in current assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Accounts receivable, net of allowances | | | 84,436 | | | | 97,711 | | | | 8,993 | | | | (5,828 | ) | | | (4,739 | ) | | | (18,662 | ) | | | 48,754 | | | | 11,106 | |
Accrued utility revenue | | | 42,300 | | | | 40,800 | | | | (100 | ) | | | 500 | | | | 28,100 | | | | 30,000 | | | | 400 | | | | (2,900 | ) |
Deferred purchased gas costs | | | 21,602 | | | | 93,152 | | | | 17,599 | | | | 79,825 | | | | (13,358 | ) | | | 3,994 | | | | 3,579 | | | | 78,187 | |
Accounts payable | | | (141,042 | ) | | | (173,942 | ) | | | (12,108 | ) | | | (10,615 | ) | | | (75,316 | ) | | | (70,060 | ) | | | (34,553 | ) | | | (40,459 | ) |
Accrued taxes | | | (7,175 | ) | | | 6,236 | | | | (29,948 | ) | | | 2,804 | | | | 40,212 | | | | 41,724 | | | | (23,349 | ) | | | (28,917 | ) |
Other current assets and liabilities | | | 50,708 | | | | 63,935 | | | | 11,745 | | | | 9,185 | | | | 60,373 | | | | 62,441 | | | | (5,704 | ) | | | 8,525 | |
Other | | | 4,787 | | | | (5,844 | ) | | | 3,370 | | | | (7,486 | ) | |
Gains on sale | | | | (1,065 | ) | | | (705 | ) | | | (2,428 | ) | | | (2,798 | ) |
Changes in undistributed stock compensation | | | | 2,215 | | | | 2,077 | | | | 3,963 | | | | 4,773 | |
AFUDC and property-related changes | | | | (470 | ) | | | (325 | ) | | | (706 | ) | | | (735 | ) |
Changes in other assets and deferred charges | | | | (550 | ) | | | 341 | | | | (896 | ) | | | (3,150 | ) |
Changes in other liabilities and deferred credits | | | | 5,155 | | | | 2,622 | | | | 6,971 | | | | 1,862 | |
Net cash provided by operating activities | | | 247,340 | | | | 281,049 | | | | 314,102 | | | | 331,785 | | | | 148,537 | | | | 154,680 | | | | 293,605 | | | | 318,791 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CASH FLOW FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction expenditures and property additions | | | (221,862 | ) | | | (255,001 | ) | | | (307,736 | ) | | | (366,036 | ) | | | (52,445 | ) | | | (61,100 | ) | | | (291,562 | ) | | | (318,206 | ) |
Change in restricted cash | | - | | | - | | | - | | | | 19,332 | | |
Change in customer advances | | | 4,822 | | | | 21,341 | | | | 7,889 | | | | 27,088 | | |
Changes in customer advances | | | | (1,768 | ) | | | 4,737 | | | | (2,461 | ) | | | 21,202 | |
Return of exchange fund deposit | | | | - | | | | - | | | | 28,000 | | | | - | |
Miscellaneous inflows | | | 44,194 | | | | 4,700 | | | | 44,803 | | | | 7,153 | | | | 2,423 | | | | 1,343 | | | | 18,736 | | | | 5,076 | |
Miscellaneous outflows | | | (2,762 | ) | | | (2,053 | ) | | | (21,486 | ) | | | (5,862 | ) | | | (1,172 | ) | | | (15 | ) | | | (3,850 | ) | | | (18,739 | ) |
Net cash used in investing activities | | | (175,608 | ) | | | (231,013 | ) | | | (276,530 | ) | | | (318,325 | ) | | | (52,962 | ) | | | (55,035 | ) | | | (251,137 | ) | | | (310,667 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CASH FLOW FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock, net | | | 26,366 | | | | 26,735 | | | | 34,728 | | | | 39,033 | | | | 8,152 | | | | 7,413 | | | | 36,130 | | | | 29,870 | |
Dividends paid | | | (28,804 | ) | | | (26,814 | ) | | | (38,261 | ) | | | (35,612 | ) | | | (9,998 | ) | | | (9,254 | ) | | | (39,449 | ) | | | (36,638 | ) |
Issuance of long-term debt | | | 102,460 | | | | 101,956 | | | | 129,098 | | | | 94,633 | | | | - | | | | 78 | | | | 103,797 | | | | 123,199 | |
Retirement of long-term debt | | | (132,504 | ) | | | (105,869 | ) | | | (168,726 | ) | | | (108,271 | ) | | | (5,346 | ) | | | (3,464 | ) | | | (200,573 | ) | | | (143,144 | ) |
Change in long-term portion of credit facility | | | (49,076 | ) | | | (46,000 | ) | | | (76 | ) | | | (16,000 | ) | | | (36,000 | ) | | | (100,000 | ) | | | 64,000 | | | | (18,011 | ) |
Change in short-term debt | | | (9,000 | ) | | | - | | | | - | | | | - | | | | (55,000 | ) | | | (9,000 | ) | | | - | | | | - | |
Net cash used in financing activities | | | (90,558 | ) | | | (49,992 | ) | | | (43,237 | ) | | | (26,217 | ) | | | (98,192 | ) | | | (114,227 | ) | | | (36,095 | ) | | | (44,724 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Change in cash and cash equivalents | | | (18,826 | ) | | | 44 | | | | (5,665 | ) | | | (12,757 | ) | | | (2,617 | ) | | | (14,582 | ) | | | 6,373 | | | | (36,600 | ) |
Cash at beginning of period | | | 31,991 | | | | 18,786 | | | | 18,830 | | | | 31,587 | | | | 26,399 | | | | 31,991 | | | | 17,409 | | | | 54,009 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash at end of period | | $ | 13,165 | | | $ | 18,830 | | | $ | 13,165 | | | $ | 18,830 | | | $ | 23,782 | | | $ | 17,409 | | | $ | 23,782 | | | $ | 17,409 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Supplemental information: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest paid, net of amounts capitalized | | $ | 69,309 | | | $ | 68,139 | | | $ | 94,505 | | | $ | 91,244 | | | $ | 21,325 | | | $ | 23,785 | | | $ | 88,751 | | | $ | 96,438 | |
Income taxes paid | | | 5,278 | | | | 19,233 | | | | 31,070 | | | | 34,116 | | | | 93 | | | | 5,521 | | | | 17,044 | | | | 50,445 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these statements. | The accompanying notes are an integral part of these statements. | | The accompanying notes are an integral part of these statements. | |
SOUTHWEST GAS CORPORATION | Form 10-Q |
September 30, 2008March 31, 2009
| |
Note 1 – Nature of Operations and Basis of Presentation
Nature of Operations. Southwest Gas Corporation and its subsidiaries (the “Company”) are composed of two segments: natural gas operations (“Southwest” or the “natural gas operations” segment) and construction services (Northern Pipeline Construction Co. “NPL” or the “construction services” segment).services. Southwest is engaged in the business of purchasing, distributing, and transporting natural gas to customers in portions of Arizona, Nevada, and California. The public utility rates, practices, facilities, and service territories of Southwest are subject to regulatory oversight. The timing and amount of rate relief can materially impact results of operations. Natural gas sales are seasonal, peaking during the winter months; therefore, results of operations for interim periods are not necessarily indicative of the results for a full year. Variability in weather from normal temperatures can materially impact results of operations. Natural gas purchases and the timing of related recoveries can materially impact liquidity. NPL Construction Co. (“NPL” or the “construction services” segment), a wholly owned subsidiary, is a full-service underground piping contractor that provides utility companies with trenching and installation, replacement, and maintenance services for energy distribution systems.
Basis of Presentation. The condensed 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 (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The preparation of the condensed 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 condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the 20072008 Annual Report to Shareholders, which is incorporated by reference into the 20072008 Form 10-K, and the first and second quarter 2008 reports on Form 10-Q.10-K.
Intercompany Transactions. NPL recognizes revenues generated from contracts with Southwest (see Note 3 below). Accounts receivable for these services were $6.9$5.1 million at September 30, 2008March 31, 2009 and $6.1$6.6 million at December 31, 2007.2008. The accounts receivable balance, revenues, and associated profits are included in the condensed consolidated financial statements of the Company and were not eliminated during consolidation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 71, “Accounting for the Effects of Certain Types of Regulation.”
Other Income (Deductions). The following table provides the composition of significant items included in Other income (deductions) on the consolidated statements of income (thousands of dollars):
| | Three Months Ended | | | Twelve Months Ended | |
| | March 31, | | | March 31, | |
| | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| | | | | | | | | | | | |
Gain/(loss) on company-owned life insurance policies | | $ | (1,594 | ) | | $ | (2,100 | ) | | $ | (11,535 | ) | | $ | (945 | ) |
Interest income | | | 144 | | | | 800 | | | | 1,556 | | | | 3,665 | |
Miscellaneous income and (expense) | | | (254 | ) | | | (167 | ) | | | (3,664 | ) | | | (684 | ) |
| | | | | | | | | | | | | | | | |
Total other income (deductions) | | $ | (1,704 | ) | | $ | (1,467 | ) | | $ | (13,643 | ) | | $ | 2,036 | |
Included in the table above is the gain/(loss) on company-owned life insurance policies (“COLI”). These life insurance policies on members of management and other key employees are used by Southwest to indemnify itself against the loss of talent, expertise, and knowledge, as well as to provide indirect funding for certain nonqualified benefit plans. Current tax regulations provide for tax-free treatment of life insurance (death benefit) proceeds. Therefore, the gain/(loss) in the cash surrender value components of COLI policies as they progress toward the ultimate death benefits are also recorded without tax consequences.
SOUTHWEST GAS CORPORATION | Form 10-Q |
March 31, 2009 | |
Reclassifications. Certain reclassifications have been made to the prior year’s financial information to present it on a basis comparable with the current year’s presentation. None of the reclassifications affected previously reported net income.
Recently Issued Accounting Pronouncements. In December 2007,2008, the Financial Accounting Standards BoardFASB issued FASB Staff Position (“FASB”FSP”) issued SFAS No. 141 (revised 2007), “Business Combinations.132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.” FSP SFAS No. 141 (revised 2007) provides guidelines132(R)-1 requires companies to enhance disclosures about the plan assets of a defined benefit pension or other postretirement plan. Companies will be required to disclose how investment decisions are made, the major plan asset categories, the inputs and valuation techniques used to measure the fair value of plan assets, the level within the fair value hierarchy in which the fair value measurements in their entirety fall, the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the presentationperiod, and measurementsignificant concentrations of assets and liabilities acquired in a business combination and requires the disclosure of information necessary to evaluate the nature and financial effect of a business combination.risk within plan assets. The provisions of FSP SFAS No. 141 (revised 2007) are effective for the Company for acquisitions that occur on or after January 1, 2009. The Company is evaluating what impact, if any, this standard might have on its financial position or results of operations.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.” SFAS No. 160 requires all entities to report minority interests in subsidiaries as equity in the consolidated financial statements. The provisions of SFAS No. 160132(R)-1 are effective for the Company beginning January 1, 2009. The Company is evaluating what impact, if any, this standard might have on itswith 2009 year-end financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - An Amendment of FASB Statement No. 133.” SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities. The provisions of SFAS No. 161 are effective for the Company beginning January 1, 2009.statement reports. The Company is evaluating what impact this standard might have on its disclosures.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” to require disclosures about the fair value of financial disclosures.instruments for interim reporting periods. Starting in the second quarter of 2009, companies will be required to disclose the fair value of financial instruments for interim periods in addition to the currently required annual period disclosure. Upon adoption of the FSP, the Company will disclose the fair value of applicable financial instruments (including its long-term debt) for interim periods beginning in the second quarter of 2009.
SOUTHWEST GAS CORPORATION | Form 10-Q |
September 30, 2008March 31, 2009
| |
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies (in accounting literature instead of auditing literature) the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States (the GAAP hierarchy). The provisions of SFAS No. 162 are effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The adoption of the standard is not expected to have a material impact on the financial position or results of operations of the Company.
Note 2 – Components of Net Periodic Benefit Cost
Southwest has a noncontributory qualified retirement plan with defined benefits covering substantially all employees and a separate unfunded supplemental retirement plan (“SERP”) which is limited to officers. Southwest also provides postretirement benefits other than pensions (“PBOP”) to its qualified retirees for health care, dental, and life insurance benefits.
| | | | | | | | | | | | | |
| | Qualified Retirement Plan | | | Qualified Retirement Plan | |
| | Period Ended September 30, | | | Period Ended March 31, | |
| | Three Months | | | Nine Months | | | Twelve Months | | | Three Months | | | Twelve Months | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | | | 2008 | | | 2007 | | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
(Thousands of dollars) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Service cost | | $ | 4,027 | | | $ | 4,123 | | | $ | 12,081 | | | $ | 12,368 | | | $ | 16,204 | | | $ | 16,439 | | | $ | 3,848 | | | $ | 4,027 | | | $ | 15,929 | | | $ | 16,395 | |
Interest cost | | | 8,123 | | | | 7,311 | | | | 24,368 | | | | 21,933 | | | | 31,679 | | | | 28,635 | | | | 8,631 | | | | 8,122 | | | | 33,000 | | | | 30,055 | |
Expected return on plan assets | | | (8,679 | ) | | | (8,257 | ) | | | (26,035 | ) | | | (24,773 | ) | | | (34,292 | ) | | | (32,425 | ) | | | (8,805 | ) | | | (8,678 | ) | | | (34,841 | ) | | | (33,450 | ) |
Amortization of prior service costs (credits) | | | (3 | ) | | | (3 | ) | | | (8 | ) | | | (8 | ) | | | (11 | ) | | | (10 | ) | | | (1 | ) | | | (2 | ) | | | (10 | ) | | | (11 | ) |
Amortization of net loss | | | 776 | | | | 1,252 | | | | 2,328 | | | | 3,755 | | | | 3,580 | | | | 5,093 | | | | 1,063 | | | | 776 | | | | 3,391 | | | | 4,532 | |
Net periodic benefit cost | | $ | 4,244 | | | $ | 4,426 | | | $ | 12,734 | | | $ | 13,275 | | | $ | 17,160 | | | $ | 17,732 | | | $ | 4,736 | | | $ | 4,245 | | | $ | 17,469 | | | $ | 17,521 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | SERP | |
| | | Period Ended March 31, | |
| | | Three Months | | | Twelve Months | |
| | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
(Thousands of dollars) | | | | | | | | | | | | | | | | | |
Service cost | | | $ | 49 | | | $ | 25 | | | $ | 121 | | | $ | 139 | |
Interest cost | | | | 516 | | | | 510 | | | | 2,047 | | | | 1,971 | |
Amortization of net loss | | | | 227 | | | | 249 | | | | 975 | | | | 1,098 | |
Net periodic benefit cost | | | $ | 792 | | | $ | 784 | | | $ | 3,143 | | | $ | 3,208 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | PBOP | |
| | | Period Ended March 31, | |
| | | Three Months | | | Twelve Months | |
| | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
(Thousands of dollars) | | | | | | | | | | | | | | | | | |
Service cost | | | $ | 182 | | | $ | 183 | | | $ | 729 | | | $ | 792 | |
Interest cost | | | | 593 | | | | 581 | | | | 2,336 | | | | 2,309 | |
Expected return on plan assets | | | | (401 | ) | | | (535 | ) | | | (2,004 | ) | | | (2,143 | ) |
Amortization of transition obligation | | | | 217 | | | | 217 | | | | 867 | | | | 867 | |
Amortization of net loss | | | | 108 | | | | - | | | | 108 | | | | 42 | |
Net periodic benefit cost | | | $ | 699 | | | $ | 446 | | | $ | 2,036 | | | $ | 1,867 | |
| | SERP | |
| | Period Ended September 30, | |
| | Three Months | | | Nine Months | | | Twelve Months | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
(Thousands of dollars) | | | | | | | | | | | | | | | | | | |
Service cost | | $ | 24 | | | $ | 38 | | | $ | 73 | | | $ | 115 | | | $ | 111 | | | $ | 168 | |
Interest cost | | | 510 | | | | 487 | | | | 1,531 | | | | 1,461 | | | | 2,018 | | | | 1,934 | |
Expected return on plan assets | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2 | |
Amortization of net loss | | | 250 | | | | 283 | | | | 748 | | | | 848 | | | | 1,031 | | | | 1,159 | |
Net periodic benefit cost | | $ | 784 | | | $ | 808 | | | $ | 2,352 | | | $ | 2,424 | | | $ | 3,160 | | | $ | 3,263 | |
| | PBOP | |
| | Period Ended September 30, | |
| | Three Months | | | Nine Months | | | Twelve Months | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
(Thousands of dollars) | | | | | | | | | | | | | | | | | | |
Service cost | | $ | 182 | | | $ | 203 | | | $ | 548 | | | $ | 608 | | | $ | 751 | | | $ | 821 | |
Interest cost | | | 581 | | | | 576 | | | | 1,743 | | | | 1,728 | | | | 2,319 | | | | 2,257 | |
Expected return on plan assets | | | (534 | ) | | | (536 | ) | | | (1,604 | ) | | | (1,608 | ) | | | (2,140 | ) | | | (2,063 | ) |
Amortization of transition obligation | | | 216 | | | | 216 | | | | 650 | | | | 650 | | | | 867 | | | | 867 | |
Amortization of net loss | | | - | | | | 14 | | | | - | | | | 43 | | | | 14 | | | | 85 | |
Net periodic benefit cost | | $ | 445 | | | $ | 473 | | | $ | 1,337 | | | $ | 1,421 | | | $ | 1,811 | | | $ | 1,967 | |
SOUTHWEST GAS CORPORATION | Form 10-Q |
September 30, 2008March 31, 2009
| |
Note 3 – Segment Information
The following tables list revenues from external customers, intersegment revenues, and segment net income (thousands of dollars):
| | Natural Gas | | | Construction | | | | | | Natural Gas | | | Construction | | | | |
| | Operations | | | Services | | | Total | | | Operations | | | Services | | | Total | |
Three months ended September 30, 2008 | | | | | | | | | | |
Three months ended March 31, 2009 | | | | | | | | | | |
Revenues from external customers | | | $ | 635,106 | | | $ | 41,595 | | | $ | 676,701 | |
Intersegment revenues | | | | - | | | | 13,161 | | | | 13,161 | |
Total | | | $ | 635,106 | | | $ | 54,756 | | | $ | 689,862 | |
Segment net income | | | $ | 49,852 | | | $ | 129 | | | $ | 49,981 | |
| | | | | | | | | | | | | |
Three months ended March 31, 2008 | | | | | | | | | | | | | |
Revenues from external customers | | $ | 268,450 | | | $ | 88,034 | | | $ | 356,484 | | | $ | 741,300 | | | $ | 59,330 | | | $ | 800,630 | |
Intersegment revenues | | | - | | | | 17,938 | | | | 17,938 | | | | - | | | | 12,977 | | | | 12,977 | |
Total | | $ | 268,450 | | | $ | 105,972 | | | $ | 374,422 | | | $ | 741,300 | | | $ | 72,307 | | | $ | 813,607 | |
Segment net income (loss) | | $ | (19,678 | ) | | $ | 2,992 | | | $ | (16,686 | ) | | $ | 49,333 | | | $ | (181 | ) | | $ | 49,152 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2007 | | | | | | | | | | | | | |
Revenues from external customers | | $ | 274,748 | | | $ | 77,445 | | | $ | 352,193 | | |
Intersegment revenues | | | - | | | | 19,331 | | | | 19,331 | | |
Total | | $ | 274,748 | | | $ | 96,776 | | | $ | 371,524 | | |
Segment net income (loss) | | $ | (12,863 | ) | | $ | 3,545 | | | $ | (9,318 | ) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Nine months ended September 30, 2008 | | | | | | | | | | | | | |
Twelve months ended March 31, 2009 | | | | | | | | | | | | | |
Revenues from external customers | | $ | 1,362,753 | | | $ | 225,558 | | | $ | 1,588,311 | | | $ | 1,685,201 | | | $ | 272,483 | | | $ | 1,957,684 | |
Intersegment revenues | | | - | | | | 47,022 | | | | 47,022 | | | | - | | | | 63,314 | | | | 63,314 | |
Total | | $ | 1,362,753 | | | $ | 272,580 | | | $ | 1,635,333 | | | $ | 1,685,201 | | | $ | 335,797 | | | $ | 2,020,998 | |
Segment net income | | $ | 24,748 | | | $ | 4,993 | | | $ | 29,741 | | | $ | 54,266 | | | $ | 7,536 | | | $ | 61,802 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Nine months ended September 30, 2007 | | | | | | | | | | | | | |
Twelve months ended March 31, 2008 | | | | | | | | | | | | | |
Revenues from external customers | | $ | 1,345,996 | | | $ | 192,602 | | | $ | 1,538,598 | | | $ | 1,829,051 | | | $ | 276,057 | | | $ | 2,105,108 | |
Intersegment revenues | | | - | | | | 53,179 | | | | 53,179 | | | | - | | | | 66,871 | | | | 66,871 | |
Total | | $ | 1,345,996 | | | $ | 245,781 | | | $ | 1,591,777 | | | $ | 1,829,051 | | | $ | 342,928 | | | $ | 2,171,979 | |
Segment net income | | $ | 32,910 | | | $ | 7,199 | | | $ | 40,109 | | | $ | 73,199 | | | $ | 9,435 | | | $ | 82,634 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Twelve months ended September 30, 2008 | | | | | | | | | | | | | |
Revenues from external customers | | $ | 1,831,523 | | | $ | 298,893 | | | $ | 2,130,416 | | |
Intersegment revenues | | | - | | | | 65,228 | | | | 65,228 | | |
Total | | $ | 1,831,523 | | | $ | 364,121 | | | $ | 2,195,644 | | |
Segment net income | | $ | 64,332 | | | $ | 8,546 | | | $ | 72,878 | | |
| | | | | | | | | | | | | |
Twelve months ended September 30, 2007 | | | | | | | | | | | | | |
Revenues from external customers | | $ | 1,838,039 | | | $ | 242,956 | | | $ | 2,080,995 | | |
Intersegment revenues | | | - | | | | 75,897 | | | | 75,897 | | |
Total | | $ | 1,838,039 | | | $ | 318,853 | | | $ | 2,156,892 | | |
Segment net income | | $ | 76,077 | | | $ | 10,739 | | | $ | 86,816 | | |
SOUTHWEST GAS CORPORATION | Form 10-Q |
September 30, 2008March 31, 2009
| |
Note 4 – Comprehensive Income
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | | | Twelve Months Ended | |
| | September 30, | | | September 30, | | | September 30, | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | | | | (Thousands of dollars) | | | | |
| | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (16,686 | ) | | $ | (9,318 | ) | | $ | 29,741 | | | $ | 40,109 | | | $ | 72,878 | | | $ | 86,816 | |
Additional minimum pension liability | | | | | | | | | | | | | | | | | | | | | | | | |
adjustment, net of $20.3 million tax expense | | | | | | | - | | | | | | | | - | | | | | | | | 33,047 | |
Net actuarial gain arising during period, less | | | | | | | | | | | | | | | | | | | | | | | | |
amortization of unamortized benefit plan cost, | | | | | | | | | | | | | | | | | | | | | |
net of tax | | | 203 | | | | 246 | | | | 608 | | | | 735 | | | | 689 | | | | 735 | |
Comprehensive income (loss) | | $ | (16,483 | ) | | $ | (9,072 | ) | | $ | 30,349 | | | $ | 40,844 | | | $ | 73,567 | | | $ | 120,598 | |
| | | | | | | | | | | | |
| | Three Months Ended | | | Twelve Months Ended | |
| | March 31, | | | March 31, | |
| | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| | (Thousands of dollars) | |
| | | | | | | | | | | | |
Net income | | $ | 49,981 | | | $ | 49,152 | | | $ | 61,802 | | | $ | 82,634 | |
Net actuarial gain (loss) arising during period, | | | | | | | | | | | | | | | | |
less amortization of unamortized benefit plan | | | | | | | | | | | | | | | | |
cost, net of tax | | | 207 | | | | 202 | | | | (6,571 | ) | | | 774 | |
Comprehensive income | | $ | 50,188 | | | $ | 49,354 | | | $ | 55,231 | | | $ | 83,408 | |
Tax expense related to the net actuarial gain (loss) arising during the period, less amortization of unamortized benefit plan cost, for the three months nine months, and twelve months ended September 30, 2008March 31, 2009 was $124,000, $372,000,$126,000 and $422,000,$4 million, respectively. Tax expense related to the net actuarial gain arising during the period, less amortization of unamortized benefit plan cost for the three months nine months, and twelve months ended September 30, 2007March 31, 2008 was $150,000, $450,000,$124,000 and $450,000,$474,000, respectively. Total accumulated other comprehensive loss as of September 30, 2008March 31, 2009 was $12.2$19.2 million, net of $7.6$11.8 million of tax, and was composed entirely of unamortized benefit plan costs.
Note 5 – Common Stock
During the ninethree months ended September 30, 2008,March 31, 2009, the Company issued approximately 906,000463,000 shares of common stock through the Dividend Reinvestment and Stock Purchase Plan (“DRSPP”), Employee Investment Plan, Restricted Stock/Unit Plan, and Management Incentive Plan, and Stock Incentive Plan. No shares have been issued throughThe remaining capacity under the Equity Shelf Program (“ESP”)of $16.7 million expired unused in 2008.March 2009.
Note 6 -– Derivatives and Fair Value Measurements
In managing its natural gas supply portfolios, Southwest has historically entered into fixed and variable-price contracts, which qualify as derivatives under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities,”Activities”, as amended (“SFAS No. 133”). In 2008, Southwest also began utilizing fixed-for-floating swap contracts (“Swaps”) to supplement its fixed-price contracts. The fixed-price contracts, firm commitments to purchase a fixed amount of gas in the future at a fixed price, qualify for the normal purchases and normal sales exception that is allowed for contracts that are probable of delivery in the normal course of business under SFAS No. 133 and are exempt from its fair value provisions. The variable-price contracts have no significant market value and are likewise not affected by SFAS No. 133’s fair value provisions. Swaps are subject to the fair value provisions and must be recorded at fair value.
The fixed-price contracts and Swaps are utilized by Southwest under its volatility mitigation programs to effectively fix the price on approximately 50 percent of its natural gas portfolios. The maturities of the Swaps highly correlate to actual purchases of natural gas, during timeframes ranging from November 2008April 2009 through October 2009.2010. Under such contracts, Southwest pays the counterparty at a fixed rate and receives from the counterparty a floating rate per MMBtu (“dekatherm”) of natural gas. Only the net differential is actually paid or received. The differential is calculated based on the notional amounts under the contracts (approximately 3.59.5 million dekatherms at September 30,March 31, 2009 and 6.5 million dekatherms at December 31, 2008). Southwest does not utilize derivative financial instruments for speculative purposes, nor does it have trading operations.
SOUTHWEST GAS CORPORATION | Form 10-Q |
September 30, 2008March 31, 2009
| |
The following table sets forth the gains and (losses) recognized on the Company's Swaps (derivatives) for the three months ended March 31, 2009 and their location in the income statement (thousands of dollars).
Derivatives not designated as hedging instruments under SFAS 133: | | | | |
| | | | | |
| Location of Gain or (Loss) Recognized in Income on Derivative | | Amount of Gain or (Loss) Recognized in Income on Derivative | | |
| | | | | |
| | | | | |
Swaps | Net cost of gas sold | | $ | (8,968 | ) | |
Swaps | Net cost of gas sold | | | 8,968 | * | |
Total | | | $ | - | | |
* Represents the impact of regulatory deferral accounting treatment under SFAS No. 71.
The estimated fair values of the derivatives were determined using future natural gas index prices (as more fully described below). The Company has master netting arrangements with each counterparty that provide for the net settlement of all contracts through a single payment. As applicable, the Company has elected to reflect the net amounts in its balance sheets.
The following table sets forth the fair values of the Company's Swaps (derivatives) and their location in the balance sheets (thousands of dollars).
Derivatives not designated as hedging instruments under SFAS 133: | | | | | | | |
| | | | | | | | | | |
March 31, 2009 | | | Asset | | | Liability | | | | |
| Balance Sheet Location | | Derivatives | | | Derivatives | | | Net Total | |
Swaps | Deferred charges and other assets | | $ | 303 | | | $ | (21 | ) | | $ | 282 | |
Swaps | Other current liabilities | | | - | | | | (10,889 | ) | | | (10,889 | ) |
Swaps | Other deferred credits | | | - | | | | (901 | ) | | | (901 | ) |
Total | | | $ | 303 | | | $ | (11,811 | ) | | $ | (11,508 | ) |
| | | | | | | | | | | | | |
December 31, 2008 | | | Asset | | | Liability | | | | | |
| Balance Sheet Location | | Derivatives | | | Derivatives | | | Net Total | |
Swaps | Deferred charges and other assets | | $ | 380 | | | $ | (88 | ) | | $ | 292 | |
Swaps | Other current liabilities | | | - | | | | (14,440 | ) | | | (14,440 | ) |
Total | | | $ | 380 | | | $ | (14,528 | ) | | $ | (14,148 | ) |
Pursuant to regulatory deferral accounting treatment under SFAS No. 71, Southwest records the unrealized gains and losses in fair value of the Swaps as a regulatory asset and/or liability. When the Swaps settle, Southwest reverses any prior positions held and records the settled position as an increase or decrease of purchased gas under the related purchased gas adjustment (“PGA”) mechanism in determining its deferred PGA balances. In accordance with this described treatment, at September 30, 2008,During the first quarter of 2009, Southwest recorded the fair valuespaid counterparties $11.6 million in settlements of the Swaps in Other current liabilities ($10.9 million) and in Other deferred credits ($204,000). Corresponding offsetting amounts were recorded in Prepaids and other current assets ($10.9 million) and Deferred charges and other assets ($204,000).matured Swap contracts. Due to the provisions of SFAS No. 71, neither changes in the fair value of the contracts nor settled amounts have a direct effect on earnings or other comprehensive income. The estimated fair values ofAt March 31, 2009, regulatory assets/liabilities offsetting the derivativesamounts in the above table were determined using future natural gas index prices (as more fully described below)recorded in Prepaids and other current assets ($10.9 million), Deferred charges and other assets ($901,000), and Other deferred credits ($282,000). At December 31, 2008, regulatory assets/liabilities offsetting the amounts in the above table were recorded in Prepaids and other current assets ($14.4 million) and Other deferred credits ($292,000).
In January 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 states that a fair value measurement should be based on the assumptions that market participants would use in pricing the asset or liability and establishes a three-level fair value hierarchy that ranks the inputs used to measure fair value by their reliability. The three levels of the fair value hierarchy defined by SFAS No. 157 are as follows:
SOUTHWEST GAS CORPORATION | Form 10-Q |
March 31, 2009 | |
Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities that a company has the ability to access at the measurement date.
Level 2 – inputs other than quoted prices included within Level 1 that are observable for similar assets or liabilities, either directly or indirectly.
Level 3 - unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
The estimated fair values of Southwest’s Swaps were determined at September 30, 2008March 31, 2009 using NYMEX futures settlement prices for delivery of natural gas at Henry Hub adjusted by the price of NYMEX ClearPort basis Swaps, which reflect the difference between the price of natural gas at a given delivery basin and the Henry Hub pricing points. These Level 2 inputs are observable in the marketplace throughout the full term of the Swaps.Swaps, but have been credit-risk adjusted with no significant impact to the overall fair value measure.
The following table sets forth, by level within the fair value hierarchy, the Company's financial assets and liabilities that were accounted for at fair value as of September 30, 2008.March 31, 2009.
| | | | Fair Value Measurements Using: | |
| | | | | Quoted Prices in Active Markets for Identical Financial Assets and Liabilities | | | Significant Other Observable Inputs | | | Significant Unobservable Inputs | |
(Thousands of dollars) | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Assets at fair value: | | | | | | | | | | | | |
Prepaids and other current assets - swaps | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Deferred charges and other assets - swaps | | | 282 | | | | - | | | | 282 | | | | - | |
| | | | | | | | | | | | | | | | |
Liabilities at fair value: | | | | | | | | | | | | | | | | |
Other current liabilities - swaps | | | (10,889 | ) | | | - | | | | (10,889 | ) | | | - | |
Other deferred credits - swaps | | | (901 | ) | | | - | | | | (901 | ) | | | - | |
| | | | | | | | | | | | | | | | |
Net Assets (Liabilities) | | $ | (11,508 | ) | | $ | - | | | $ | (11,508 | ) | | $ | - | |
| | | | | | |
| | | | | Fair Value Measurements Using: | |
| | | | | Quoted Prices in Active Markets for Identical Financial Assets and Liabilities | | | Significant Other Observable Inputs | | | Significant Unobservable Inputs | |
(Thousands of dollars) | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Assets at fair value: | | | | | | | | | | | | |
Prepaids and other current assets - swaps | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Deferred charges and other assets - swaps | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Liabilities at fair value: | | | | | | | | | | | | | | | | |
Other current liabilities - swaps | | | (10,935 | ) | | | - | | | | (10,935 | ) | | | - | |
Other deferred credits - swaps | | | (204 | ) | | | - | | | | (204 | ) | | | - | |
| | | | | | | | | | | | | | | | |
Net Assets (Liabilities) | | $ | (11,139 | ) | | $ | - | | | $ | (11,139 | ) | | $ | - | |
SOUTHWEST GAS CORPORATION | Form 10-Q |
September 30, 2008
| |
Note 7 – Long-Term Debt
In September 2008, the Company issued $50 million in Clark County, Nevada variable-rate 2008 Series A Industrial Development Revenue Bonds (“IDRBs”), due 2038. The 2008 Series A IDRBs are supported by a letter of credit with JPMorgan Chase Bank. The proceeds from the 2008 Series A IDRBs were used by the Company to redeem the $50 million 2003 Series B variable-rate IDRBs. The 2003 Series B IDRBs were redeemed at par, plus accrued interest, in September 2008.
Note 8 – Other Income (Deductions)
Southwest has company-owned life insurance (“COLI”) policies on members of management and other key employees to indemnify itself against the loss of talent, expertise, and knowledge, as well as to provide indirect funding for certain nonqualified benefit plans. Other income (deductions) on the Company’s income statements includes expenses related to declines in the cash surrender value of these life insurance policies in the three, nine, and twelve months ended September 30, 2008, of $3.7 million, $6.3 million, and $7.3 million, respectively. In contrast, Other income (deductions) on the Company’s income statements includes income related to increases in the cash surrender value of these life insurance policies in the three, nine, and twelve months ended September 30, 2007, of $355,000, $2.2 million, and $3.5 million, respectively. Current tax regulations provide for tax-free treatment of life insurance (death benefit) proceeds. Therefore, the changes in the cash surrender value components of COLI policies as they progress towards the ultimate death benefits are also recorded without tax consequences. Additionally, Other income (deductions) includes interest income in the three, nine, and twelve months ended September 30, 2008, of $216,000, $2 million and $2.7 million, respectively. Other income (deductions) includes interest income in the three, nine, and twelve months ended September 30, 2007, of $869,000, $3.8 million and $5.1 million, respectively.
SOUTHWEST GAS CORPORATION
| Form 10-Q |
September 30, 2008March 31, 2009
| |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Southwest Gas Corporation and its subsidiaries (the “Company”) consist of two business segments: natural gas operations (“Southwest” or the “natural gas operations” segment) and construction services.
Southwest is engaged in the business of purchasing, distributing, and transporting natural gas in portions of Arizona, Nevada, and California. Southwest is the largest distributor in Arizona, selling and transporting natural gas in most of central and southern Arizona, including the Phoenix and Tucson metropolitan areas. Southwest is also the largest distributor of natural gas in Nevada, serving 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 and the high desert and mountain areas in San Bernardino County.
As of September 30, 2008,March 31, 2009, Southwest had 1,819,0001,821,000 residential, commercial, industrial, and other natural gas customers, of which 984,000 customers were located in Arizona, 657,000 in Nevada, and 178,000180,000 in California. Residential and commercial customers represented over 99 percent of the total customer base. During the twelve months ended September 30, 2008, 55March 31, 2009, 53 percent of operating margin was earned in Arizona, 35 percent in Nevada, and 1012 percent in California. During this same period, Southwest earned 86 percent of operating margin from residential and small commercial customers, 5 percent from other sales customers, and 9 percent from transportation customers. These general patterns are expected to continue.
Southwest recognizes operating revenues from the distribution and transportation of natural gas (and related services) to customers. Operating margin is the measure of gas operating revenues less the net cost of gas sold. Management uses operating margin as a main benchmark in comparing operating results from period to period. The three principal factors affecting operating margin are general rate relief, weather, conservation and efficiencies, and customer growth. Of these, three, weather is the primary reason for volatility in margin. Variances in temperatures from normal levels, especially in Arizona where rates remainare highly leveraged, have a significant impact on the margin and associated net income of the Company.
Northern PipelineNPL Construction Co. (“NPL” or the “construction services” segment), a wholly owned subsidiary, is a full-service underground piping contractor that provides utility companies with trenching and installation, replacement, and maintenance services for energy distribution systems. NPL currently operates in 20 major markets nationwide. Construction activity is cyclical and can be significantly impacted by changes in general and local economic conditions, including the housing market, interest rates, employment levels, job growth, the equipment resale market, and local and federal tax rates. Generally, revenues and profits are lowest during the first quarter of the year due to less favorable winter weather conditions. Operating results typically improve as more favorable weather conditions occur during the summer and fall months.
This Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and the notes thereto, as well as the MD&A, included in the 20072008 Annual Report to Shareholders, which is incorporated by reference into the 20072008 Form 10-K, and the first and second quarter 2008 reports on Form 10-Q.10-K.
SOUTHWEST GAS CORPORATION | Form 10-Q |
September 30, 2008March 31, 2009
| |
Executive Summary
The items discussed in this Executive Summary are intended to provide an overview of the results of the Company’s operations. As needed, certain items are covered in greater detail in later sections of management’s discussion and analysis. As reflected in the table below, the natural gas operations segment accounted for an average of 88 percent of twelve-month-to-date consolidated net income over the past two years. As such, management’s discussion and analysis is primarily focused on that segment. Natural gas sales are seasonal, peaking during the winter months; therefore, results of operations for interim periods are not necessarily indicative of the results for a full year.
| | | | | | | | | | | | | |
Summary Operating Results | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Period Ended September 30, | | | Period Ended March 31, | |
| | Three Months | | | Nine Months | | | Twelve Months | | | Three Months | | | Twelve Months | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | | | 2008 | | | 2007 | | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| | (In thousands, except per share amounts) | | | (In thousands, except per share amounts) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Contribution to net income (loss) | | | | | | | | | | | | | | | | | | | |
Contribution to net income | | | | | | | | | | | | | |
Natural gas operations | | $ | (19,678 | ) | | $ | (12,863 | ) | | $ | 24,748 | | | $ | 32,910 | | | $ | 64,332 | | | $ | 76,077 | | | $ | 49,852 | | | $ | 49,333 | | | $ | 54,266 | | | $ | 73,199 | |
Construction services | | | 2,992 | | | | 3,545 | | | | 4,993 | | | | 7,199 | | | | 8,546 | | | | 10,739 | | | | 129 | | | | (181 | ) | | | 7,536 | | | | 9,435 | |
Net income (loss) | | $ | (16,686 | ) | | $ | (9,318 | ) | | $ | 29,741 | | | $ | 40,109 | | | $ | 72,878 | | | $ | 86,816 | | |
Net income | | | $ | 49,981 | | | $ | 49,152 | | | $ | 61,802 | | | $ | 82,634 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Average number of common | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
shares outstanding | | | 43,581 | | | | 42,448 | | | | 43,307 | | | | 42,219 | | | | 43,150 | | | | 42,060 | | | | 44,424 | | | | 43,012 | | | | 43,825 | | | | 42,592 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic earnings (loss) per share | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic earnings per share | | | | | | | | | | | | | | | | | |
Consolidated | | $ | (0.38 | ) | | $ | (0.22 | ) | | $ | 0.69 | | | $ | 0.95 | | | $ | 1.69 | | | $ | 2.06 | | | $ | 1.13 | | | $ | 1.14 | | | $ | 1.41 | | | $ | 1.94 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Natural Gas Operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating margin | | $ | 134,420 | | | $ | 132,923 | | | $ | 523,444 | | | $ | 511,543 | | | $ | 740,473 | | | $ | 730,445 | | | $ | 239,296 | | | $ | 240,601 | | | $ | 734,113 | | | $ | 736,369 | |
TheContribution to consolidated net income from natural gas segment recorded a loss of $19.7 million duringoperations increased $519,000 in the thirdfirst quarter of 20082009 compared to same period in 2008. The improvement in contribution primarily resulted from lower financing costs partially offset by a $12.9 million lossdecrease in operating margin and increased operating costs. The first quarter of 2009 contribution to consolidated net income from construction services improved $310,000 from the same period of 2007. Other income decreased and operating expenses increasedin 2008. The improvement between the two periods. Other income (principally interest income, long-term investment returns, and non-utility expenses) declinedperiods was primarily as a result of negative returns on long-term investments (company-owned life insurance) in the current quarter versus positive returns in the prior-year quarter. NPL’s decline resulted primarily from less profitable work due to the general slow down in the housing industrylower costs and increased costs for fuel, fuel-related products, and subcontractors.gains on the sale of equipment.
3rd1st Quarter 20082009 Overview
Consolidated results for the third quarter of 2008 decreased compared to the third quarter of 2007,Despite a small increase in net income, basic earnings per share declined between quarters due to declines in both the gas and construction services segments. Basic loss per share was $0.38an increase in the third quarternumber of 2008 compared to a per share loss of $0.22 in the same period of 2007.common shares outstanding.
Gas operations highlights include the following:
Gas operations highlights include the following: |
· | Operating margin increased $1.5decreased approximately $1 million, or 1 percent, fromcompared to the prior periodprior-year’s quarter as customer growth levels continue to moderatenegative impacts of weather variations ($17 million) and conservation/energy efficiencies ($6 million) were substantially offset by rate relief ($10 million) and seasonal operating margin recognition changes ($12 million) |
· | Operating expenses increased just one percent between quarters |
· | Net financing costs decreased $1.5$3.2 million between quarterly periods |
· | Nevada general rate case filed requesting $30.5 million and a decoupled rate structure |
· | Other income declined $5 million between periods primarily due to negative returns on long-term investments (COLI) |
| · | Southwest’s project to expand its use of electronic meter reading technology is substantially complete |
| · | Uncontested settlement reached in California rate cases (pending California Public Utilities Commission (“CPUC”) approval) |
| · | Southwest’s liquidityLiquidity position remains strong |
· | In April 2009, S&P upgraded the Company’s debt rating from BBB- to BBB |
SOUTHWEST GAS CORPORATION | Form 10-Q |
September 30, 2008March 31, 2009
| |
ModeratingReduction in Customer Growth. During the twelve months ended September 30, 2008,March 31, 2009, Southwest completed 39,00029,000 first-time meter sets. These meter sets led to 19,000just 2,000 net additional active meters during the same time frame (11,000 in Arizona, 7,000 in Nevada, and 1,000 in California).frame. The difference between first-time meter sets and incremental active meters indicates a significant inventory of unoccupied homes. The risks/costs of having non-performing assets associated with new homes, are mitigated by Southwest’s practice of taking construction advances from builders on most new construction. These advances are not returned until new homes are occupied.continuing a trend first experienced during 2007. Southwest is projecting continued sluggish net growth (1% or less) for 2009 as high foreclosure rates and recessionary conditions persist throughout its service territories. Once housing supply and demand come back into balance, Southwest expects to experience a correction in which customer additions exceed first-time meter sets. Although management cannot predict the timing of thea turn around, it is not likely to occur in the near term.
Weather. The rate structures in each of Southwest’s three states provide varying levels of protection from risks that drive operating margin volatility, particularly weather risk. During the first quarter of 2009, weather was extremely warm in its service territories, especially in Arizona, which experienced one of its warmest winters in 100 years. On a total Company basis, Southwest estimates that the weather impact on operating margin was a reduction of $13 million. Conversely, during the first quarter of 2008, colder-than-normal temperatures resulted in a favorable margin impact of $4 million.
In Southwest’s California service territories, weather impacts were completely offset by the margin tracking mechanism allowing margin to grow as authorized in its most recent general rate case. In Nevada, the negative impacts were mitigated by a declining block rate structure. Most of the reduction occurred in Arizona, where rates are highly leveraged and a single block rate structure is in effect. In addition, the heating season is fairly condensed in Arizona, therefore variations from “normal” temperatures can cause material volatility in operating margin as over 50 percent of Southwest’s annual operating margin is normally earned in Arizona.
Conservation, Energy Efficiencies, and Economic Impacts on Consumption. A significant portion of Southwest’s operating margin (primarily in Arizona and partially in Nevada) is recognized based on the volumetric usage of its customers. Historically the impacts of this rate design methodology have been most pronounced when temperatures varied from normal levels. Over the longer-term, average usage has also declined due to new home construction practices and energy efficient appliances. Recently, the continued downturn in the economy and associated pro-active conservation efforts have resulted in an extended (multi-year) time horizon.unprecedented drop in per-customer usage. For the quarter ended March 31, 2009, the estimated impact of these non-weather-related volumetric declines was a reduction to operating margin of $6 million. The decoupling methodology requested in the recent Nevada rate case, if approved as proposed, would mitigate this impact in Nevada. Management continues to work with regulators in Arizona to establish a decoupling methodology that would allow the Company to support and encourage conservation efforts without jeopardizing the recognition of authorized operating margin.
Company-Owned Life Insurance (“COLI”). Southwest has life insurance policies on members of management and other key employees to indemnify itself against the loss of talent, expertise, and knowledge, as well as to provide indirect funding for certain nonqualified benefit plans. The COLI policies have a combined net death benefit value of approximately $138$137 million at September 30, 2008.March 31, 2009. The net cash surrender value of these policies (which is the cash amount the Companythat would receivebe received if itSouthwest voluntarily terminated the policies) is approximately $52$45 million at September 30, 2008March 31, 2009 and is included in the caption “Other property and investments” on the balance sheet. InCash surrender values are directly influenced by the three, nine,investment portfolio underlying the insurance policies. This portfolio includes both equity and twelve months ended September 30, 2008,fixed income (mutual fund) investments. As a result, generally the Companycash surrender value (but not the net death benefit) moves up and down consistent with the movements in the broader stock and bond markets. During the first quarter of 2009, Southwest recognized declinesa net decline in the cash surrender values of theits COLI policies as comparedof $1.6 million (compared to a net decline of $2.1 million in the same periodsperiod of 2007,2008). During the twelve months ended March 31, 2009, Southwest recognized a net decline in the cash surrender values of $4.1its COLI policies of $11.5 million $8.5 million, and $10.8 million, respectively, which was reflected(compared to a net decline of $945,000 in Other income (deductions)the same period of 2008). Current tax regulations provide for tax-free treatment of life insurance (death benefit) proceeds. Therefore, the changes in the cash surrender value components of COLI policies as they progress towardstoward the ultimate death benefits are also recorded without tax consequences. Currently, the Company intends to hold the COLI policies for their duration and purchase additional policies as necessary.
SOUTHWEST GAS CORPORATION | Form 10-Q |
March 31, 2009 | |
Meter Reading Project. In 2006, Southwest initiated a project to expand its use of electronic meter reading technology. The efficiencies to be gained from this project more than offset the investment in infrastructure. This technology eliminates the need to gain physical access to meters in order to obtain monthly meter readings, thereby reducing the time associated with each meter read while improving their accuracy. At September 30, 2008, the electronic meter reading project was substantially complete as over 99 percent of Southwest customers’ meters were being read electronically.
Liquidity. During 2008, significant attention was paid to companies’ liquidity and credit risks. Focus on these risks will likely continue given the current national economic environment. The Company has experienced no significant impacts to its liquidity position from the current credit crisis. Southwest believes its liquidity position remains strong for several reasons. First, Southwest has a $300 million credit facility maturing in May 2012, $150 million of which supports ongoingis designated for working capital needs. The facility is composed of eight major banking institutions. Historically, usage of the facility has been low and concentrated in the first half of the winter heating period when gas purchases require temporary financing. In addition,Second, natural gas prices have remained low and beneficial rate mechanisms have resulted in steady gas-cost related operating cash flows. Third, Southwest has no significant debt maturities prior to February 2011. Because of Southwest’s strong liquidity position, in December 2008, Southwest was able to take advantage of the current credit market by repurchasing $75 million of IDRBs at a net deferred gain of $14 million.
Credit Ratings. In April 2009, Standard & Poor’s Ratings Services (“S&P”) upgraded the Company’s unsecured long-term debt ratings from BBB- (with a positive outlook) to BBB (with a stable outlook). S&P cited the Company’s stronger financial performance due to reduced debt leverage and the recent general rate increase in the Company’s Arizona service territory as reasons for the upgrade. The change in credit rating will result in an annualized estimated decrease of $200,000 to $300,000 in interest expense and fees on existing variable-rate debt.
SOUTHWEST GAS CORPORATION | Form 10-Q |
September 30, 2008March 31, 2009
| |
Results of Natural Gas Operations
Quarterly Analysis | | | | | | | | | | | | |
| | Three Months Ended | | | Three Months Ended | |
| | September 30, | | | March 31, | |
| | 2008 | | | 2007 | | | 2009 | | | 2008 | |
| | (Thousands of dollars) | | | (Thousands of dollars) | |
Gas operating revenues | | $ | 268,450 | | | $ | 274,748 | | | $ | 635,106 | | | $ | 741,300 | |
Net cost of gas sold | | | 134,030 | | | | 141,825 | | | | 395,810 | | | | 500,699 | |
Operating margin | | | 134,420 | | | | 132,923 | | | | 239,296 | | | | 240,601 | |
Operations and maintenance expense | | | 87,489 | | | | 83,222 | | | | 84,662 | | | | 85,206 | |
Depreciation and amortization | | | 41,623 | | | | 39,774 | | | | 42,339 | | | | 40,645 | |
Taxes other than income taxes | | | 8,103 | | | | 7,848 | | | | 10,111 | | | | 10,194 | |
Operating income (loss) | | | (2,795 | ) | | | 2,079 | | |
Operating income | | | | 102,184 | | | | 104,556 | |
Other income (expense) | | | (4,548 | ) | | | 478 | | | | (1,786 | ) | | | (1,526 | ) |
Net interest deductions | | | 20,521 | | | | 22,003 | | | | 18,182 | | | | 21,352 | |
Net interest deductions on subordinated debentures | | | 1,933 | | | | 1,932 | | | | 1,933 | | | | 1,932 | |
Income (loss) before income taxes | | | (29,797 | ) | | | (21,378 | ) | |
Income tax expense (benefit) | | | (10,119 | ) | | | (8,515 | ) | |
Contribution to consolidated net income (loss) | | $ | (19,678 | ) | | $ | (12,863 | ) | |
Income before income taxes | | | | 80,283 | | | | 79,746 | |
Income tax expense | | | | 30,431 | | | | 30,413 | |
Contribution to consolidated net income | | | $ | 49,852 | | | $ | 49,333 | |
Natural gas operations recorded a loss of $19.7 million in the third quarter of 2008 compared to a loss of $12.9 million in the same period of 2007. Other income declined and operating expenses increased between the periods, partially offset by a modest increase in operating margin and lower net financing costs.
Operating margin increased $1.5 million, or one percent, in the third quarter of 2008 compared to the third quarter of 2007. Customer growth contributed $1 million toward the operating margin increase as the Company added 19,000 customers during the last twelve months, an increase of one percent. Rate changes accounted for the remainder of the increase.
Operations and maintenance expense increased $4.3 million, or five percent, primarily due to general cost increases.
Depreciation expense increased $1.8 million, or five percent, as a result of construction activities. Average gas plant in service for the current period increased $238 million, or six percent, compared to the corresponding period a year ago. The increase reflects ongoing capital expenditures for the upgrade of existing operating facilities and the expansion of the system to accommodate customer growth.
Other income (expense), which principally includes interest income, long-term investment returns, and non-utility expenses, decreased $5 million between periods. This was primarily due to negative returns on long-term investments (COLI) in the current quarter ($3.7 million) compared to positive returns in the prior year’s quarter ($355,000).
Net financing costs decreased $1.5 million between periods primarily due to a reduction in outstanding debt.
SOUTHWEST GAS CORPORATION
| Form 10-Q |
September 30, 2008
| |
Nine-Month Analysis | | | | | | |
| | Nine Months Ended | |
| | September 30, | |
| | 2008 | | | 2007 | |
| | (Thousands of dollars) | |
Gas operating revenues | | $ | 1,362,753 | | | $ | 1,345,996 | |
Net cost of gas sold | | | 839,309 | | | | 834,453 | |
Operating margin | | | 523,444 | | | | 511,543 | |
Operations and maintenance expense | | | 256,298 | | | | 250,847 | |
Depreciation and amortization | | | 123,565 | | | | 117,380 | |
Taxes other than income taxes | | | 27,913 | | | | 28,253 | |
Operating income | | | 115,668 | | | | 115,063 | |
Other income (expense) | | | (6,710 | ) | | | 5,502 | |
Net interest deductions | | | 62,811 | | | | 64,466 | |
Net interest deductions on subordinated debentures | | | 5,797 | | | | 5,795 | |
Income before income taxes | | | 40,350 | | | | 50,304 | |
Income tax expense | | | 15,602 | | | | 17,394 | |
Contribution to consolidated net income | | $ | 24,748 | | | $ | 32,910 | |
Contribution from natural gas operations decreased $8.2 million during the nine-month period of 2008 compared to the same period a year ago. The decrease in contribution was primarily caused by a decline in other income, which offset a slight improvement in operating income and lower financing costs.
Operating margin increased approximately $12 million, or two percent, during the nine-month period of 2008 compared to the same period in 2007. New customers contributed an incremental $5 million in operating margin during the current period. Rate relief in California resulted in a net $2 million increase in operating margin. Differences in heating demand primarily caused by weather variations between periods resulted in a $5 million margin increase as the current period experienced somewhat cooler temperatures while the prior period was slightly warmer-than-normal.
Operations and maintenance expense increased $5.5 million, or two percent, principally due to the impact of general cost increases. Labor efficiencies, primarily from the conversion to electronic meter reading, mitigated the increase in operations and maintenance expense.
Depreciation expense increased $6.2 million, or five percent, as a result of construction activities. Average gas plant in service increased $247 million, or six percent, as compared to the same period of 2007. The increase reflects ongoing capital expenditures for the upgrade of existing operating facilities and the expansion of the system to accommodate customer growth.
Other income (expense), which principally includes interest income, long-term investment returns, and non-utility expenses, declined $12.2 million during the nine-month period of 2008 compared to the same period in 2007. This was primarily due to negative returns on long-term investments (COLI) in the current period ($6.3 million) compared to positive returns in the prior year’s period ($2.2 million) and a $1.8 million reduction in interest income primarily due to the full recovery of previously deferred purchased gas cost receivables.
Net financing costs decreased $1.7 million between periods primarily due to a reduction in outstanding debt.
SOUTHWEST GAS CORPORATION
| Form 10-Q |
September 30, 2008
| |
Twelve-Month Analysis | | | | | | |
| | Twelve Months Ended | |
| | September 30, | |
| | 2008 | | | 2007 | |
| | (Thousands of dollars) | |
Gas operating revenues | | $ | 1,831,523 | | | $ | 1,838,039 | |
Net cost of gas sold | | | 1,091,050 | | | | 1,107,594 | |
Operating margin | | | 740,473 | | | | 730,445 | |
Operations and maintenance expense | | | 336,659 | | | | 336,934 | |
Depreciation and amortization | | | 163,275 | | | | 155,022 | |
Taxes other than income taxes | | | 37,213 | | | | 37,495 | |
Operating income | | | 203,326 | | | | 200,994 | |
Other income (expense) | | | (7,362 | ) | | | 8,984 | |
Net interest deductions | | | 84,781 | | | | 86,018 | |
Net interest deductions on subordinated debentures | | | 7,729 | | | | 7,726 | |
Income before income taxes | | | 103,454 | | | | 116,234 | |
Income tax expense | | | 39,122 | | | | 40,157 | |
Contribution to consolidated net income | | $ | 64,332 | | | $ | 76,077 | |
Contribution to consolidated net income from natural gas operations decreased $11.7 millionincreased $519,000 in the current twelve-month periodfirst quarter of 2009 compared to the same period a year ago.2008. The declineimprovement in contribution was primarily causedreflects the benefit of lower financing costs partially offset by lower other income.a slight reduction in operating margin.
Operating margin increased $10decreased a net $1 million or one percent, between periods.in the first quarter of 2009 compared to the first quarter of 2008. The positive impacts to margin of rate relief and rate changes were approximately $22 million, consisting of $9 million in Arizona, $1 million of rate relief in California and nearly $12 million related to the return to a seasonal margin methodology in California. As a result of weather-related usage variations in Arizona, new margin from rate relief during the first quarter was approximately $3 million to $4 million less than expected. Differences in heating demand, caused primarily by weather variations, negatively impacted operating margin by approximately $17 million as overall temperatures in the current quarter were significantly warmer than normal ($13 million), while temperatures were somewhat colder than normal ($4 million) in the first quarter of 2008. Energy efficiency and conservation resulting from the sluggish economy negatively impacted operating margin by an estimated $6 million. Customer growth contributed $8 million while rate changes accounted for $2 million ofhad a negligible positive impact as only 2,000 net new customers were added during the increase. Warmer-than-normal temperatures were experienced during both twelve-month periods (each with estimated negative impacts to operating margin of approximately $7 million), resulting in no incremental impact between the periods.last twelve months.
Operations and maintenance expense was essentially unchanged between periods. Labordecreased $544,000, or one percent, principally due to labor efficiencies primarily from the conversion to electronic meter reading, mitigated generalassociated with cost increases.containment efforts.
Depreciation expense increased $8.3$1.7 million, or fivefour percent, as a result of additional plant in service. Average gas plant in service for the current twelve-month period increased $257$215 million, or sevenfive 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 customer growth.
Other income decreased $16.3 million between periods. This was primarily due to negative returns on long-term investments (COLI) in the current twelve-month period ($7.3 million) compared to positive returns in the prior year’s twelve-month period ($3.5 million) and lower interest income ($2.4 million) primarily due to the full recovery of previously deferred purchased gas cost receivables.
Net financing costs decreased $1.2$3.2 million between periodsthe first quarters of 2009 and 2008 primarily due to lower average debt outstanding.
outstanding, including the redemption of $75 million of long-term debt in December 2008, and reduced interest rates associated with Southwest’s commercial credit and other variable-rate facilities.
SOUTHWEST GAS CORPORATION | Form 10-Q |
September 30,March 31, 2009
| |
Twelve-Month Analysis | | | | | | |
| | Twelve Months Ended | |
| | March 31, | |
| | 2009 | | | 2008 | |
| | (Thousands of dollars) | |
Gas operating revenues | | $ | 1,685,201 | | | $ | 1,829,051 | |
Net cost of gas sold | | | 951,088 | | | | 1,092,682 | |
Operating margin | | | 734,113 | | | | 736,369 | |
Operations and maintenance expense | | | 338,116 | | | | 331,879 | |
Depreciation and amortization | | | 168,031 | | | | 159,205 | |
Taxes other than income taxes | | | 36,697 | | | | 37,280 | |
Operating income | | | 191,269 | | | | 208,005 | |
Other income (expense) | | | (13,729 | ) | | | 1,948 | |
Net interest deductions | | | 79,926 | | | | 86,640 | |
Net interest deductions on subordinated debentures | | | 7,730 | | | | 7,728 | |
Income before income taxes | | | 89,884 | | | | 115,585 | |
Income tax expense | | | 35,618 | | | | 42,386 | |
Contribution to consolidated net income | | $ | 54,266 | | | $ | 73,199 | |
Contribution to consolidated net income from natural gas operations decreased $18.9 million in the current twelve-month period compared to the same period a year ago. The decline in contribution was primarily caused by lower other income, higher operating expenses, and lower operating margin, partially offset by reduced financing costs.
Operating margin decreased a net $2 million between periods. Rate relief and rate changes provided approximately $25 million of operating margin, consisting of $11 million in Arizona, $2 million of rate relief in California and nearly $12 million related to the return to a seasonal margin methodology in California. Modest customer growth contributed $4 million. Differences in heating demand caused primarily by weather variations between periods resulted in an estimated $21 million operating margin decrease as warmer-than-normal temperatures were experienced during both periods (during the twelve-month period of 2009, operating margin was negatively impacted by $28 million, while the negative impact in the twelve-month period of 2008 was $7 million). Energy efficiency and conservation resulting from current economic conditions negatively impacted operating margin by an estimated $10 million.
Operations and maintenance expense increased $6.2 million, or two percent, principally due to the impact of general cost increases. Labor efficiencies, primarily from the conversion to electronic meter reading and other cost containment efforts, mitigated the increase in operations and maintenance expense.
Depreciation expense increased $8.8 million, or six percent, as a result of additional plant in service. Average gas plant in service for the twelve-month period of 2009 increased $232 million, or six percent, compared to the twelve-month period of 2008. This was attributable to the upgrade of existing operating facilities and the expansion of the system to accommodate customer growth.
Other income decreased $15.7 million between the twelve-month periods of 2009 and 2008. This was primarily due to negative returns on COLI policies in the current period ($11.5 million) compared to negative returns in the prior period ($945,000) and a $2.1 million reduction in interest income between the twelve-month periods primarily due to the recovery of previously deferred purchased gas cost receivables.
Net financing costs decreased $6.7 million between the twelve-month periods of 2009 and 2008 primarily due to lower average debt outstanding and reduced interest rates associated with Southwest’s commercial credit and other variable-rate facilities.
SOUTHWEST GAS CORPORATION | Form 10-Q |
March 31, 2009 | |
Results of Construction Services
Contribution to consolidated net income from construction services for the three, nine, and twelve months ended September 30, 2008 decreased $553,000, $2.2 million, and $2.2 million, respectively, compared to the corresponding periods in 2007. Quarterly results declined primarily due to lower profit margins on new construction work in the majorityfirst quarter of NPL’s operating areas and2009 increased costs for fuel, fuel-related products and services, and subcontractors. While revenues increased as a result of several large replacement projects, operating results decreased in the nine-month period of 2008 as$310,000 compared to the same period in 2007of 2008. The improvement was primarily due to lower profit marginscosts and increased gains on new construction work, unfavorable weather conditionsequipment sales between periods. Gains on sales of equipment were $1.1 million in the first quarter of 2008, increased costs2009 and $705,000 in the first quarter of 2008.
Revenues decreased $17.6 million due primarily to a reduction in new construction work. The reduced workload resulted in a corresponding decrease in construction expenses ($17.5 million). Interest expense also decreased between periods due to a reduction in long-term borrowings.
Contribution to consolidated net income from construction services for fuel and fuel-related products and services, andthe twelve-month period of 2009 decreased $1.9 million compared to the same period of 2008. This decrease was due primarily to a reduction in the volume of work with existing customers. Thenew construction work. Higher fuel cost and fuel-related expenses in the second and third quarters of 2008 also contributed to the decrease in net income. Gains on sales of equipment were $2.4 million in the current twelve-month period when compared to the same periodof 2009 and $2 million in the prior year wastwelve-month period of 2008.
Revenues decreased $7.1 million due primarily to unfavorable weather conditions during the first quarter of 2008 and a reduction in the volume of higher-margin new construction work resulting from the general slow down in the new housing market. Increased costs forNew construction work has been largely replaced by infrastructure maintenance and improvement work, which generally yields lower profit margins. There was also a decrease in the amount of work from existing blanket contracts. Construction expenses decreased $5.1 million due primarily to the reduction in construction work, partially offset by the higher fuel and fuel-related productsexpenses noted above.
NPL’s revenues and services also contributedoperating profits are influenced by weather, customer requirements, mix of work, local economic conditions, bidding results, and the equipment resale market. Generally, revenues and profits are lowest during the first quarter of the year due to unfavorable winter weather conditions. Operating results typically improve as more favorable weather conditions occur during the decrease.summer and fall months.
Rates and Regulatory Proceedings
ArizonaCalifornia General Rate Cases. Effective January 2009 Southwest received general rate relief in California. The California Public Utilities Commission (“CPUC”) decision authorized an overall increase of $2.8 million in 2009 with an additional $400,000 deferred to 2010. In addition, attrition increases were approved to be effective for the years 2010-2013 of 2.95% in southern and northern California and $100,000 per year for the South Lake Tahoe rate jurisdiction. The CPUC also authorized a return to a seasonal margin methodology which will result in significant quarterly swings in reported operating margin (2009 versus 2008). In addition to the comparative operating margin increase of $12.8 million recognized in the first quarter of 2009, a decrease of $2 million in the second quarter, a decrease of $9 million in the third quarter, and an increase of $1 million for the fourth quarter of 2009 are expected. The CPUC also authorized lower depreciation rates which will reduce annualized depreciation expense by $3 million.
Nevada General Rate Case. Southwest filed a general rate application with the Arizona CorporationPublic Utilities Commission of Nevada (“ACC”PUCN”) in the third quarter of 2007April 2009 requesting an increase in authorized operating revenues of $50.2 million.$28.8 million, or 5.9 percent in the Company’s southern Nevada rate jurisdiction and $1.7 million, or 1.4 percent in the northern Nevada rate jurisdiction, with an expected effective date of November 2009. The requestCompany is duealso seeking to increases in Southwest’s operating costs (including inflationary increases to labor and benefits), investments in infrastructure, and increased costs of capital. Southwest is requestingimplement a return on rate base of 9.45 percent and a return on equity of 11.25 percent.
In addition, declining average residential usage has hindered Southwest’s ability to earn the returns previously authorized by the ACC. Adecoupled rate structure based on recently established PUCN regulations that would encouragewill help stabilize operating margin and allow the Company to more aggressively pursue customer conservation opportunities through implementation of substantive conservation and energy efficiency and also shield Southwest and its customers from weather-related volatility has also been proposed. Included in the new rate design proposal are a revenue decoupling mechanism that would separate the recovery of fixed costs from volumetric usage and a weather normalization mechanism that would protect customers from higher bills in extreme cold weather and protect Southwest from cost under-recoveries in unseasonably warm weather. Southwest requested an increase of $3.10 in the monthly residential basic service charge.
In April 2008, the two primary intervening parties in the case, the ACC Staff and the Residential Utility Consumer Office, filed testimony in the case. Both parties have separately advocated revenue increases which approximate 60 percent of the filed for amount, primarily through increases in basic service charges, although their positions on a number of matters differ. In addition, neither party supports all ofprograms. Southwest's proposed rate design changes or the revenue decoupling/weather normalization mechanisms, both of which Southwest deems important components of its rate filing if greater margin stability (for both Southwest and its customers) is to be achieved. Hearings concluded in June 2008, with a decision expected in the fourth quarter of 2008. Management cannot predict the amount or timing of rate relief ultimately granted, or whether the ACC will adopt any of the new rate design proposals. The last general rate increase receivedoccurred in Arizona was effective in March 2006.2004.
California Attrition Filing. FERC General Rate CaseIn October 2007, Southwest made its 2008 annual attrition filing. Paiute Pipeline Company, a subsidiary of the Company, filed a general rate case with the CPUC requesting a $2 millionFederal Energy Regulatory Commission (“FERC”) in February 2009. The filing fulfills an obligation from the settlement agreement reached in the 2005 Paiute general rate case. The application requests an increase in operating margin. The increase in customer rates was approved and became effective January 2008.
California General Rate Cases. Southwest filed general rate applications with the CPUC in December 2007 requesting an increase in authorized operating revenues of $9.1 million in its southern California, northern California, and South Lake Tahoe rate jurisdictions with a proposed effective dateapproximately $3.9 million. New rates are anticipated to go into effect subject to refund within 180 days of January 2009. The request was made due to increases in Southwest’s operating costs, investments in infrastructure, and the increased costs of capital. As part of the filing, Southwest also requested that the authorized levels of margin revert to being recognized on a seasonally adjusted basis rather than in equal monthly amounts throughout the year to better reflect the seasonal nature of Southwest’s revenue stream. In addition to the margin balancing mechanism that has been in place since the last general rate case, this filing proposed a Post Test Year (“PTY”) ratemaking mechanism for the period 2010 through 2013. The PTY mechanism was designed to recognize the effects of inflation and certain capital expenditures between general rate cases.filing.
SOUTHWEST GAS CORPORATION | Form 10-Q |
September 30, 2008March 31, 2009
| |
In October 2008, after resolving all issues in the proceeding with intervening parties, Southwest filed an uncontested settlement with the CPUC. If approved by the CPUC, the Company will realize an increase in operating margin of $2.8 million for 2009, with an additional $9.7 million in PTY increases for the period 2010 through 2013. In addition, lower approved depreciation rates will result in depreciation expense reductions of approximately $3 million in 2009 as compared to current depreciation levels. Under the settlement, the return on common equity would be 10.5 percent. Southwest expects a final decision during the fourth quarter of 2008, with new rates effective January 2009.
PGA Filings
AllThe rate schedules in all of Southwest's state regulatory commissions have regulationsSouthwest’s service territories contain provisions that permit Southwestadjustments to track and recover its actual costsrates as the cost of purchased gas. Deferredgas changes. These deferred energy provisions and purchased gas adjustment clauses are collectively referred to as “PGA” clauses. Timing differencesDifferences between changes in PGA ratesgas costs recovered from customers and the recovery/payment of PGA balancesamounts paid for gas by Southwest result in over- and under-collections. At September 30, 2008,March 31, 2009, over-collections in Arizona,California and Southern Nevada and California resulted in a liability of $33.7$25.5 million and under-collections in Arizona and Northern Nevada resulted in an asset of $5.8 million on the Company’s balance sheet. In May 2008, a temporary surcharge that had beensheets. Filings to change rates in place in Arizona since February 2006 to help accelerate the recovery of an under-collected balance was removed.accordance with PGA filingsclauses are subject to audit by state regulatory commissions.commission staffs. PGA rate changes impact cash flows but have no direct impact on profit margin. However, gas cost deferrals and recoveries can impact comparisons between periods of individual income statement components. These include Gas operating revenues, Net cost of gas sold, Net interest deductions, and Other income (deductions).
As of September 30, 2008,March 31, 2009, December 31, 2007,2008, and September 30, 2007,March 31, 2008, Southwest had the following outstanding PGA balances receivable/(payable) (millions of dollars):
| | September 30, 2008 | | | December 31, 2007 | | | September 30, 2007 | | | March 31, 2009 | | | December 31, 2008 | | | March 31, 2008 | |
Arizona | | $ | (6.9 | ) | | $ | 33.9 | | | $ | 31.2 | | | $ | 4.3 | | | $ | (9.6 | ) | | $ | 12.6 | |
Northern Nevada | | | (5.4 | ) | | | (9.2 | ) | | | (10.1 | ) | | | 1.5 | | | | (1.5 | ) | | | (8.4 | ) |
Southern Nevada | | | (17.0 | ) | | | (36.7 | ) | | | (31.9 | ) | | | (20.5 | ) | | | (19.9 | ) | | | (15.9 | ) |
California | | | (4.4 | ) | | | (0.1 | ) | | | (5.3 | ) | | | (5.0 | ) | | | (2.1 | ) | | | (4.4 | ) |
| | $ | (33.7 | ) | | $ | (12.1 | ) | | $ | (16.1 | ) | | $ | (19.7 | ) | | $ | (33.1 | ) | | $ | (16.1 | ) |
Capital Resources and Liquidity
Cash on hand and cash flows from operations have generally been sufficient over the past two years to provide for net investing activities (primarily construction expenditures and property additions). During the past two years, the Company has been able to reduce the net amount of debt outstanding (including short-term borrowings). The Company’s capitalization strategy is to maintain an appropriate balance of equity and debt (including subordinated debentures and short-term borrowings).
To facilitate future financings, the Company has a universal shelf registration statement providing for the issuance and sale of registered securities from time to time, which may consist of secured debt, unsecured debt, preferred stock, or common stock. The number and dollar amount of securities issued under the universal shelf registration statement, which was filed with the SEC and automatically declared effective in December 2008, will be determined at the time of the offerings and presented in the applicable prospectuses.
Cash Flows
Operating Cash Flows. Cash flows provided by consolidated operating activities decreased $6.1 million in the first quarter of 2009 as compared to the same period in 2008. The primary driver of the change was temporary fluctuations in working capital components. Operating cash flows were also impacted by an increase in net income and depreciation and amortization between quarters.
In February 2009, the American Recovery and Reinvestment Act of 2009 (“Act”) was signed into law. This Act provides a 50 percent bonus tax depreciation deduction for qualified property acquired or constructed and placed in service in 2009. Southwest estimates that the bonus depreciation deduction will defer the payment of approximately $22 million of federal income taxes during 2009 to future periods.
SOUTHWEST GAS CORPORATION | Form 10-Q |
March 31, 2009 | |
Investing Cash Flows. Cash used in consolidated investing activities decreased $2.1 million in the first quarter of 2009 as compared to the same period in 2008 primarily due to reductions in construction expenditures and equipment purchases, a result of the new housing market slowdown, partially offset by changes in customer advances.
Financing Cash Flows. Cash used in consolidated financing activities decreased $16 million during the first quarter of 2009 as compared to the same period in 2008 primarily due to fluctuations in borrowings under Southwest’s commercial credit facility. Dividends paid increased in the first quarter of 2009 as compared to 2008 as a result of a quarterly dividend increase and an increase in the number of shares outstanding.
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 NPLthe construction services segment are not material to the overall capital requirements and resources of the Company.
Gas Segment Construction Expenditures and Financing
Southwest continues to experience customer growth, albeit at a much slower pace than in the recent past. This growth has required significant capital outlays primarilyThe Company is also in the process of constructing two new operations centers for its Southern Nevada Division (with total estimated costs of $52 million), which are expected to extend and reinforce its distribution systems.be completed by the third quarter of 2009. During the twelve-month period ended September 30, 2008,March 31, 2009, construction expenditures for the natural gas operations segment were $282$275 million. Approximately 7063 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. During the twelve months ended September 30, 2008, cashCash flows from operating activities of Southwest were $273$250 million and provided approximately 8579 percent of construction expenditures and dividend requirements. Other necessary funding was provided by external financing activities and existing credit facilities, and refundable construction advances. During the three, nine, and twelve months ended September 30, 2008, Southwest partially offset capital outlays by collecting approximately $6 million, $20 million, and $27 million, respectively, in net advances and contributions from customers and third-party contractors. At September 30, 2008, the balance of refundable construction advances was $91 million.
SOUTHWEST GAS CORPORATION
| Form 10-Q |
September 30, 2008
| |
facilities.
At December 31, 2007, Southwest initially estimated thatestimates natural gas segment construction expenditures during the three-year period ending December 31, 2010 would2011 will be approximately $850$720 million. Based on current economic and growth indicators, the actualOf this amount, will likelyapproximately $260 million is expected to be five to eight percent less than originally estimated.incurred in 2009. During the three-year period, ended December 31, 2010, cash flows from operating activities of Southwest are still estimated to fund over 8085 percent of the gas operations total construction expenditures and dividend requirements. Southwest also had $25has $200 million in long-term debt maturities overdue in 2011. During the three-year period, (related to debt that matured in September 2008 and was redeemed as planned). During this time frame, the Company initially expectedexpects to raise $70$40 million to $80$50 million from its various common stock programs; however, these issuances will also likely decline based on the expected reduction in construction expenditures.programs. Any remaining cash requirements not met by operating activities are expected to be provided by existing credit facilities and/or other external financing sources. The timing, types, and amounts of these additional external financings will be dependent on a number of factors, including conditions in the capital markets, timing and amounts of rate relief, growth levels in Southwest service areas, and earnings. These external sourcesfinancings may include the issuance of both debt and equity securities, bank and other short-term borrowings, customer contributions and advances, and other forms of financing.
During the nine months ended September 30, 2008,first quarter of 2009, the Company issued approximately 906,000 additional shares of common stock through the DRSPP,Dividend Reinvestment and Stock Purchase Plan (“DRSPP”) and Employee Investment Plan, Management Incentive Plan, and Stock Incentive Plan, raising approximately $26$8 million. No shares have been issued throughother financing activities were necessary during the ESP in 2008 and the Company does not anticipate issuing additional shares under this plan. The $16.7 million of remaining capacity under the ESP is expected to expire unused in March 2009.
In February 2008, the Economic Stimulus Act of 2008 (“Act”) was signed into law. This Act provides a 50 percent bonus tax depreciation deduction for qualified property acquired or constructed and placed in service in 2008. Based on forecasted qualifying construction expenditures, Southwest estimates the bonus depreciation deduction will defer the payment of approximately $30 million of federal income taxes during 2008.period.
Dividend Policy
The Company has a common stock dividend policy which states that common stock dividends will be paid at a prudent level that is within the normal dividend payout range for its respective businesses, and that the dividend will be established at a level considered sustainable in order to minimize business risk and maintain a strong capital structure throughout all economic cycles. In February 2008,2009, the Board of Directors increased the quarterly dividend payout from 21.522.5 cents to 22.523.75 cents per share, effective with the June 20082009 payment.
SOUTHWEST GAS CORPORATION | Form 10-Q |
March 31, 2009 | |
Liquidity
Liquidity refers to the ability of an enterprise to generate adequatesufficient amounts of cash through its operating activities and external financing to meet its cash requirements. Several general factors (some of which are out of the control of the Company) that could significantly affect liquidity in future years include inflation, growth in Southwest’s service territories,variability of natural gas prices, changes in the ratemaking policies of regulatory commissions, interest rates, variability ofregulatory lag, customer growth in the natural gas prices,segment’s service territories, Southwest’s ability to access theand obtain capital markets,from external sources, interest rates, changes in income tax laws, pension funding requirements, inflation, and the level of Company earnings. Of these factors naturalNatural gas prices and related gas cost recovery rates have historically had the most significant impact on Company liquidity.
The rate schedules in Southwest's service territories contain PGA clauses which permit adjustments to rates as the cost of purchased gas changes. The PGA mechanism allows Southwest to request to change the gas cost component of the rates charged to its customers to reflect increases or decreases in the price expected to be paid to its suppliers and companies providing interstate pipeline transportation service.
SOUTHWEST GAS CORPORATION
| Form 10-Q |
September 30, 2008
| |
On an interim basis, Southwest generally defers over- or under-collections of gas costs to PGA balancing accounts. In addition, Southwest uses this mechanism to either refund amounts over-collected or recoup amounts under-collected as compared to the price paid for natural gas during the period since the last PGA rate change went into effect. At September 30, 2008,March 31, 2009, the balancescombined balance in the PGA accounts totaled ana net over-collection of $33.7 million versus an over-collection of $16.1 million at September 30, 2007. Southwest anticipates remaining in an over-collected position$20 million. See PGA Filings for more information on a total Company basis through year end.recent regulatory filings.
To balance daily workingIn the current challenging capital needs, includingmarket environment, the Company has not to date experienced significant impacts on its financing activities. Limited availability of commercial paper and temporarily financing natural gas purchases, Southwesthigher interest rates in 2008 are the most significant impacts the Company has the ability to draw on itsexperienced. The Company has a $300 million credit facility.facility that expires in May 2012. Southwest has designated $150 million of the $300 million facility as long-term debt and the remaining $150 million for working capital purposes. Southwest currently believes the $150 million designated for working capital purposes is adequate to meet liquidity needs. At September 30, 2008, $101March 31, 2009, $114 million was outstanding on the long-term portion and no borrowings were outstanding on the short-term portion of the credit facility. The credit facility can be used as necessary to meet liquidity requirements, including temporarily financing under-collected PGA balances. This credit facility has been, and is supported by eight major banking institutionsexpected to continue to be, adequate for Southwest’s working capital needs outside of funds raised through operations and matures in May 2012.other types of external financing. Management believes the Company currently has a solid liquidity position.
The following table sets forth the ratios of earnings to fixed charges for the Company. Due to the seasonal nature of the Company’s business, these ratios are computed on a twelve-month basis:
| | For the Twelve Months Ended | |
| | September 30, | | December 31, | |
| | 2008 | | 2007 | |
| | | | | |
| Ratio of earnings to fixed charges | 2.14 | | 2.25 | |
| | For the Twelve Months Ended | |
| | March 31, | | | December 31, | |
| | 2009 | | | 2008 | |
| | | | | | |
Ratio of earnings to fixed charges | | | 2.06 | | | | 2.01 | |
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), and net amortized debt costs.
IDRB Supporting Credit Arrangements
In September 2008, the Company issued $50 million in Clark County, Nevada variable-rate 2008 Series A Industrial Development Revenue Bonds (“IDRBs”), due 2038. The 2008 Series A IDRBs are supported by a letter of credit with JPMorgan Chase Bank. The proceeds from the 2008 Series A IDRBs were used by the Company to redeem its $50 million 2003 Series B variable-rate IDRBs. From 2003 through September 2008, the Company had utilized an insurance policy from Ambac Assurance Corporation (“Ambac”) to support its $50 million 2003 Series B variable-rate IDRBs. The 2003 Series B were designed to be repriced weekly in an auction market. Since mid-February 2008, the 2003 Series B weekly auctions had failed amid the uncertainty surrounding bond insurers. In June 2008, Standard & Poor’s and Moody’s Investors Service, the two largest ratings companies, downgraded Ambac and assigned a “negative” outlook to the new rating. This resulted in the Company’s 2003 Series B being downgraded from a AAA rating to a AA rating. As a result of the failed auctions and the ratings downgrade, the Company had been required to price the 2003 Series B at a predetermined maximum auction-rate (200 percent of the one-month LIBOR rate at the time of redemption).
Forward-Looking Statements
This quarterly report contains statements which constitute “forward-looking statements”statements��� within the meaning of the Private Securities Litigation Reform Act of 1995 (“Reform Act”). All statements other than statements of historical fact included or incorporated by reference in this quarterly report are forward-looking statements, including, without limitation, statements regarding the Company’s plans, objectives, goals, projections, strategies, future events or performance, and underlying assumptions. The words “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “continue,” and similar words and expressions are generally used and intended to identify forward-looking statements. For example, statements regarding operating margin earned, customer growth, the composition of our customer base, the anticipated efficiencies from the use of electronic meter reading technology,price volatility, risks and costs associated with having non-performing assets associated with new homes, timing of improvements in the housing market, amount and timing for completion of estimated future construction expenditures, forecasted operating cash flows, funding sources of cash requirements, sufficiency of working capital, bank lending practices, the Company’s views regarding its liquidity position, ability to raise funds and receive external
SOUTHWEST GAS CORPORATION | Form 10-Q |
September 30, 2008March 31, 2009
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cash requirements, sufficiency of working capital, ability to raise funds and receive external financing, the amount and form of any such financing, liquidity, and statements regarding estimated bonus depreciation deductions, equity issuances related to our ESP and construction expenditures, the recovery of under recoveredunder-collected PGA balances, the impact of the application of certain accounting standards, certain tax benefits from the Economic StimulusAmerican Recovery and Reinvestment Act of 2008,2009, statements regarding future gas prices, gas purchase contracts and derivative financial interests, the impact of certain legal proceedings, and the timing and results of future rate hearings and approvals are forward-looking statements. All forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act.
A number of important factors affecting the business and financial results of the Company could cause actual results to differ materially from those stated in the forward-looking statements. These factors include, but are not limited to, the impact of weather variations on customer usage, customer growth rates, conditions in the housing market, the effects of a possible U.S. economic recession, interest rates, our ability to recover costs through our PGA mechanisms, the effects of regulation/deregulation, the timing and amount of rate relief, changes in rate design, changes in gas procurement practices, changes in capital requirements and funding, the impact of conditions in the capital markets on the availability of financing and financing costs, the impact of stock market volatility, rating agency actions, changes in construction expenditures and financing, renewal of franchises, easements and rights-of-way, changes in operations and maintenance expenses, effects of pension expense forecasts, accounting changes, future liability claims, changes in pipeline capacity for the transportation of gas and related costs, acquisitions and management’s plans related thereto, competition, and our ability to raise capital in external financings. In addition, the Company can provide no assurance that its discussions regarding certain trends relating to its financing and operations and maintenance expenses will continue in future periods. For additional information on the risks associated with the Company’s business, see Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.2008.
All forward-looking statements in this quarterly report are made as of the date hereof, based on information available to the Company as of the date hereof, and the Company assumes no obligation to update or revise any of its forward-looking statements even if experience or future changes show that the indicated results or events will not be realized. We caution you not to unduly rely on any forward-looking statement(s).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7A. Quantitative and Qualitative Disclosures about Market Risk in the Company’s 20072008 Annual Report on Form 10-K filed with the SEC. No material changes have occurred related to the Company’s disclosures about market risk.
SOUTHWEST GAS CORPORATION | Form 10-Q |
March 31, 2009 | |
ITEM 4. CONTROLS AND PROCEDURES
The Company has established disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and benefits of controls must be considered relative to their costs. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or management override of the control. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
Based on the most recent evaluation, as of September 30, 2008,March 31, 2009, management of the Company, including the Chief Executive Officer and Chief Financial Officer, believe the Company’s disclosure controls and procedures are effective at attaining the level of reasonable assurance noted above.
SOUTHWEST GAS CORPORATION
| Form 10-Q |
September 30, 2008
| |
There have been no changes in the Company’s internal controls over financial reporting during the thirdfirst quarter of 20082009 that have materially affected, or are likely to materially affect, the Company’s internal controls over financial reporting. Southwest implemented a new asset management accounting system related to its property, plant, and equipment records during the fourth quarter of 2008. Testing of the internal controls surrounding the system implementation process has been conducted by management. Operating effectiveness of related key controls will be evaluated in the fourth quarter of 2008.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is named as a defendant in various legal proceedings. The ultimate dispositions of these proceedings are not presently determinable; however, it is the opinion of management that none of this litigation individually or in the aggregate will have a material adverse impact on the Company’s financial position or results of operations.
ITEMS 1A. through 5. None.
ITEM 6. EXHIBITS
| The following documents are filed as part of this report on Form 10-Q: |
| | | |
| Exhibit 3(ii).01 | - | Amended Bylaws of Southwest Gas Corporation. |
| Exhibit 3(ii).02 | - | Amended Bylaws of Southwest Gas Corporation. |
| Exhibit 10.01 | - | IDRB Series 2003 Clark County Indenture. |
| Exhibit 10.02 | - | IDRB Series 2008 Clark County Indenture. |
| Exhibit 10.03 | - | IDRB Series 2008 Clark County Financing Agreement. |
| Exhibit 12.01 | - | Computation of Ratios of Earnings to Fixed Charges. |
| Exhibit 31.01 | - | Section 302 Certifications. |
| Exhibit 32.01 | - | Section 906 Certifications. |
SOUTHWEST GAS CORPORATION | Form 10-Q |
September 30, 2008March 31, 2009
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SIGNATURES
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) |
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Date: November 6, 2008May 8, 2009 | |
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| /s/ Roy R. Centrella |
| Roy R. Centrella |
| Vice President/Controller and Chief Accounting Officer |