1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-7850
SOUTHWEST GAS CORPORATION
(Exact name of registrant as specified in its charter)
California 88-0085720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5241 Spring Mountain Road
Post Office Box 98510
Las Vegas, Nevada 89193-8510
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 876-7237
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ( X ) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, $1 Par Value 21,052,989 shares as of August 8, 1994
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2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein have been
prepared by Southwest Gas Corporation (the Company), without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. In
the opinion of management, all adjustments, consisting of normal recurring
items necessary for a fair presentation of the results for the interim
periods, have been made. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's 1993 Annual Report
on Form 10-K, and 1994 first quarter report on Form 10-Q.
3
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Thousands of dollars)
(Unaudited)
JUNE 30, DECEMBER 31,
1994 1993
----------- -----------
ASSETS
Cash and cash equivalents $ 112,241 $ 121,342
Debt securities available for sale (at fair value) 536,852 595,726
Debt securities held to maturity (fair value of $67,720 and
$68,738) 69,169 69,660
Loans receivable, net of allowance for estimated losses of
$16,443 and $16,251 885,788 817,279
Loans receivable held for sale (fair value of $3,839 and
$22,019) 3,839 20,051
Receivables, less reserves for uncollectibles 43,775 98,265
Gas utility property, net of accumulated depreciation 985,559 954,488
Real estate held for sale or development, net of allowance
for estimated losses of $485 and $935 1,353 4,088
Real estate acquired through foreclosure 8,001 9,707
Other property, net of accumulated depreciation 36,299 36,495
Excess of cost over net assets acquired 67,570 69,501
Other assets 132,640 147,347
----------- -----------
$ 2,883,086 $ 2,943,949
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Deposits $ 1,227,234 $ 1,207,852
Securities sold under agreements to repurchase 233,951 259,041
Deferred income taxes and tax credits, net 142,014 151,558
Accounts payable and other accrued liabilities 167,687 194,697
Notes payable 56,000 86,000
Long-term debt, including current maturities 708,199 692,865
----------- -----------
2,535,085 2,592,013
----------- -----------
Preferred and preference stocks, including current maturities 8,058 8,058
----------- -----------
Common stock 22,658 22,627
Additional paid-in capital 274,890 274,410
Capital stock expense (5,685) (5,685)
Unrealized gain, net of tax, on debt securities available for sale 80 8,761
Retained earnings 48,000 43,765
----------- -----------
339,943 343,878
----------- -----------
$ 2,883,086 $ 2,943,949
=========== ===========
The accompanying notes are an integral part of these statements.
4
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
-------------------- -------------------- --------------------
1994 1993 1994 1993 1994 1993
--------- --------- --------- --------- --------- ---------
Operating revenues:
Gas operating revenues $ 108,407 $ 100,306 $ 315,776 $ 282,755 $ 572,126 $ 533,013
Financial services interest income 29,124 34,976 57,169 70,973 118,521 144,189
Other 2,646 2,689 6,387 4,804 19,994 14,876
--------- --------- --------- --------- --------- ---------
140,177 137,971 379,332 358,532 710,641 692,078
--------- --------- --------- --------- --------- ---------
Operating expenses:
Net cost of gas purchased 48,439 39,697 145,435 126,437 231,288 212,542
Financial services interest expense, net 14,200 20,906 28,249 43,146 60,179 91,089
Operating expense 41,751 41,101 82,982 81,857 166,274 161,678
Maintenance expense 7,324 7,380 14,063 14,008 28,393 27,923
Provision for estimated credit losses 1,908 1,397 3,756 2,758 8,220 12,294
Depreciation, depletion and amortization 16,340 15,994 32,402 31,743 64,241 62,854
Taxes other than income taxes 6,246 5,964 12,741 12,424 25,078 23,681
Other 4,296 10,933 8,577 15,623 18,799 25,393
--------- --------- --------- --------- --------- ---------
140,504 143,372 328,205 327,996 602,472 617,454
--------- --------- --------- --------- --------- ---------
Operating income (loss) (327) (5,401) 51,127 30,536 108,169 74,624
--------- --------- --------- --------- --------- ---------
Other income and (expenses):
Net interest deductions (13,795) (12,124) (27,410) (24,219) (52,897) (47,517)
Other income (deductions), net (1,162) 3 (1,380) 103 (15,735) (1,146)
--------- --------- --------- --------- --------- ---------
(14,957) (12,121) (28,790) (24,116) (68,632) (48,663)
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes (15,284) (17,522) 22,337 6,420 39,537 25,961
Income tax expense (benefit) (5,503) (4,450) 9,408 5,411 15,257 11,651
--------- --------- --------- --------- --------- ---------
Net income (loss) before cumulative effect of accounting change (9,781) (13,072) 12,929 1,009 24,280 14,310
Cumulative effect of change in method of accounting -- -- -- 3,045 -- 3,045
--------- --------- --------- --------- --------- ---------
Net income (loss) (9,781) (13,072) 12,929 4,054 24,280 17,355
Preferred/preference stock dividend requirements 138 203 277 409 608 917
--------- --------- --------- --------- --------- ---------
Net income (loss) applicable to common stock $ (9,919) $ (13,275) $ 12,652 $ 3,645 $ 23,672 $ 16,438
========= ========= ========= ========= ========= =========
Earnings (loss) per share before cumulative effect of
accounting change $ (0.47) $ (0.64) $ 0.60 $ 0.03 $ 1.13 $ 0.65
Earnings per share from cumulative effect of change in method
of accounting -- -- -- 0.15 -- 0.15
--------- --------- --------- --------- --------- ---------
Earnings (loss) per share of common stock $ (0.47) $ (0.64) $ 0.60 $ 0.18 $ 1.13 $ 0.80
========= ========= ========= ========= ========= =========
Dividends paid per share of common stock $ 0.195 $ 0.175 $ 0.390 $ 0.350 $ 0.780 $ 0.700
========= ========= ========= ========= ========= =========
Average number of common shares outstanding 21,028 20,630 21,026 20,614 20,933 20,606
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these statements.
5
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1994 1993 1994 1993
--------- --------- --------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 12,929 $ 4,054 $ 24,280 $ 17,355
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 32,402 31,743 64,241 62,854
Change in unrecovered purchased gas costs 8,085 (4,963) (20,523) (11,083)
Change in deferred income taxes (9,547) 18,755 (1,101) 17,657
Change in deferred charges and credits (5,408) (4,736) (3,226) (16,226)
Change in provision for estimated losses 3,756 2,758 8,220 12,294
Change in noncash working capital 45,022 34,185 14,338 25,530
Loss on sale of Arizona assets and services -- 6,160 102 6,160
Cumulative effect of change in method of
accounting for income taxes -- (3,045) -- (3,045)
Other 2,611 (270) 8,369 (4,517)
--------- --------- --------- ---------
Net cash provided by operating activities 89,850 84,641 94,700 106,979
--------- --------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Construction expenditures (63,780) (50,756) (128,448) (117,701)
Purchases of debt securities (75,929) (67,190) (121,817) (431,899)
Proceeds from sale of debt securities 3,559 19,837 344,575 61,838
Maturities and repayment of debt securities 120,512 127,863 286,437 281,799
Loan originations, net of repayments (87,274) (90,538) (183,345) (189,158)
Sales of loans and loan servicing rights 31,308 37,371 72,290 161,785
Proceeds from sales of real estate held for development 2,860 1,345 3,441 7,272
Proceeds from sales of real estate acquired through foreclosure 2,048 5,246 19,718 15,828
Acquisition of real estate held for development (172) (351) (3,032) (2,194)
Proceeds from sale of Arizona assets and services -- -- 6,718 --
Other (3,228) 1,632 (7,270) (2,661)
--------- --------- --------- ---------
Net cash provided by (used in) investing activities (70,096) (15,541) 289,267 (215,091)
--------- --------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) repurchase
agreements and other borrowings (25,090) (77,226) (65,682) 130,810
Change in deposit accounts 19,382 (30,591) (42,842) (121,016)
Issuance of long-term debt 17,000 5,000 98,909 117,422
Retirement of long-term debt (1,666) (18,467) (31,765) (131,712)
Issuance (repayment) of notes payable (30,000) (5,000) 41,000 15,000
Dividends paid (8,444) (7,623) (16,960) (15,364)
Sale and assumption of Arizona deposit liabilities -- -- (320,902) --
Issuance of common stock 511 1,850 5,451 1,850
Other (548) (1,116) (7,503) (7,181)
--------- --------- --------- ---------
Net cash used in financing activities (28,855) (133,173) (340,294) (10,191)
--------- --------- --------- ---------
Net change in cash and cash equivalents (9,101) (64,073) 43,673 (118,303)
Balance at beginning of period 121,342 132,641 68,568 186,871
--------- --------- --------- ---------
Balance at end of period $ 112,241 $ 68,568 $ 112,241 $ 68,568
========= ========= ========= =========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest, net of amounts capitalized $ 34,672 $ 34,287 $ 67,270 $ 61,749
Income taxes, net of refunds 2,425 16,121 (2,713) 5,032
The accompanying notes are an integral part of these statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summarized Consolidated Financial Statement Data
Summarized consolidated financial statement data for PriMerit Bank is presented
below:
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Thousands of dollars)
(Unaudited)
JUNE 30, DECEMBER 31,
1994 1993
---------- ----------
ASSETS
Cash and cash equivalents $ 109,928 $ 119,215
Debt securities available for sale (at fair value) 536,852 595,726
Debt securities held to maturity (fair value of $67,720 and
$68,738) 69,169 69,660
Loans receivable, net of allowance for estimated credit losses
of $16,443 and $16,251 885,788 817,279
Loans receivable held for sale (fair value of $3,839 and $22,019) 3,839 20,051
Real estate held for sale or development, net of allowance for
estimated losses of $485 and $935 1,353 4,088
Real estate acquired through foreclosure 8,001 9,707
Excess of cost over net assets acquired 67,570 69,501
FHLB stock, at cost 16,821 16,501
Other assets 33,284 29,691
---------- ----------
$1,732,605 $1,751,419
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits $1,227,234 $1,207,852
Securities sold under agreements to repurchase 233,951 259,041
Advances from FHLB 71,000 71,000
Notes payable 8,200 8,265
Other liabilities 19,593 28,318
---------- ----------
1,559,978 1,574,476
Stockholder's equity 172,627 176,943
---------- ----------
$1,732,605 $1,751,419
========== ==========
/TABLE
7
Note 1 - Summarized Consolidated Financial Statement Data (Continued)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands of dollars)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
------------------ ------------------ ------------------
1994 1993 1994 1993 1994 1993
-------- -------- -------- -------- -------- --------
Interest income $ 29,124 $ 34,976 $ 57,169 $ 70,973 $118,521 $144,189
Interest expense 14,200 20,906 28,249 43,146 60,179 91,089
-------- -------- -------- -------- -------- --------
Net interest income 14,924 14,070 28,920 27,827 58,342 53,100
Provision for estimated credit losses (2,275) (1,180) (3,709) (2,303) (7,618) (5,600)
-------- -------- -------- -------- -------- --------
Net interest income after provision for credit losses 12,649 12,890 25,211 25,524 50,724 47,500
-------- -------- -------- -------- -------- --------
Income from real estate operations 228 11 157 86 171 581
Decrease (increase) in provision for estimated real estate losses 367 (217) (47) (455) (602) (6,694)
-------- -------- -------- -------- -------- --------
Net income (loss) from real estate operations 595 (206) 110 (369) (431) (6,113)
Gain on sale of loans 116 428 364 983 1,216 4,509
Loss on sale of loans (113) (18) (269) (45) (308) (1,088)
Net gain on sale of debt securities -- 196 33 372 7,634 2,452
Gain on sale of mortgage loan servicing -- -- -- -- -- 1,930
Gain (loss) on secondary marketing hedging activity 191 (163) 322 (754) 108 (754)
Loss on interest rate swaps -- -- -- -- -- (1,652)
Loan related fees 429 351 666 635 1,056 1,579
Deposit related fees 1,736 1,602 3,231 3,014 6,614 5,716
Gain on sale of credit cards -- -- 1,690 -- 1,690 --
Loss on sale - Arizona branches -- (6,160) -- (6,160) (102) (6,160)
Other income 59 282 193 513 1,813 1,603
-------- -------- -------- -------- -------- --------
15,662 9,202 31,551 23,713 70,014 49,522
General and administrative expenses 10,773 12,186 21,761 24,175 45,882 48,139
Amortization of cost in excess of net assets acquired 965 1,014 1,931 2,053 3,862 4,131
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes 3,924 (3,998) 7,859 (2,515) 20,270 (2,748)
Income tax expense 1,748 719 3,494 1,593 8,246 2,391
-------- -------- -------- -------- -------- --------
Net income (loss) before cumulative effect of accounting change 2,176 (4,717) 4,365 (4,108) 12,024 (5,139)
Cumulative effect of change in method of accounting -- -- -- 3,045 -- 3,045
-------- -------- -------- -------- -------- --------
Net income (loss) $ 2,176 $ (4,717) $ 4,365 $ (1,063) $ 12,024 $ (2,094)
======== ======== ======== ======== ======== ========
Contribution to consolidated net income (loss) (a) $ 954 $ (5,966) $ 1,930 $ (3,532) $ 7,117 $ (7,073)
======== ======== ======== ======== ======== ========
(a) Includes after-tax allocation of costs from parent.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company is comprised of two business segments; natural gas operations and
financial services. The gas segment purchases, transports and distributes
natural gas to residential, commercial and industrial customers in
geographically diverse portions of Arizona, Nevada and California. The
financial services segment consists of PriMerit Bank (the Bank), a wholly
owned subsidiary, which is engaged in retail and commercial banking. The
Bank's principal business is to attract deposits from the general public and
make consumer and commercial loans secured by real estate and other
collateral. For the twelve months ended June 30, 1994, the natural gas
operations segment contributed $17.2 million and the financial services
segment contributed $7.1 million, resulting in consolidated net income of
$24.3 million.
CONSOLIDATED CAPITAL RESOURCES AND LIQUIDITY
The capital requirements and resources of the Company generally are
determined independently for the natural gas operations and financial
services segments. Each segment is generally responsible for securing its
own financing sources.
In May 1994, the Board of Directors declared a quarterly common stock
dividend of 20.5 cents per share payable September 1, 1994, a five percent
increase from the previous level. The increase was established in accordance
with the Company's dividend policy which states that the Company will pay
common stock dividends 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.
The Company's unsecured debt is rated Ba1 by Moody's Investors Service, BBB-
by Standard and Poor's Ratings Group and BB+ by Duff and Phelps Credit Rating
Company.
See separate discussions of the capital resources and liquidity for each
segment.
RESULTS OF CONSOLIDATED OPERATIONS
Quarterly Analysis
- ------------------
Contribution to Consolidated Net Loss
Three Months Ended June 30,
-------------------------------------
1994 1993
--------- ---------
(Thousands of dollars)
Natural gas operations segment $ (10,735) $ (7,106)
Financial services segment 954 (5,966)
--------- ---------
Consolidated net loss $ (9,781) $ (13,072)
========= =========
See separate discussions of each business segment for an analysis of these
changes.
9
Six Month Analysis
- ------------------
Contribution to Consolidated Net Income
Six Months Ended June 30,
---------------------------------------
1994 1993
-------- --------
(Thousands of dollars)
Natural gas operations segment $ 10,999 $ 7,586
Financial services segment 1,930 (6,577)
Financial services segment cumulative
effect of accounting change -- 3,045
-------- --------
Consolidated net income $ 12,929 $ 4,054
======== ========
See separate discussions of each business segment for an analysis of these
changes.
Twelve Month Analysis
- ---------------------
Contribution to Consolidated Net Income
Twelve Months Ended June 30,
---------------------------------------
1994 1993
-------- --------
(Thousands of dollars)
Natural gas operations segment $ 17,163 $ 24,428
Financial services segment 7,117 (10,118)
Financial services segment cumulative
effect of accounting change -- 3,045
-------- --------
Consolidated net income $ 24,280 $ 17,355
======== ========
See separate discussions of each business segment for an analysis of these
changes.
NATURAL GAS OPERATIONS SEGMENT
The Company is engaged in the business of purchasing, transporting, and
distributing natural gas in portions of Arizona, Nevada and California. Its
several service areas are geographically as well as economically diverse.
The Company is the largest distributor in Arizona, selling and transporting
gas in most of southern, central, and northwestern Arizona. The Company is
also the largest distributor and transporter of natural gas in Nevada. The
Company also distributes and transports gas in portions of California,
including the Lake Tahoe area and high desert and mountain areas in San
Bernardino County.
For the twelve months ended June 30, 1994, 56 percent of operating margin was
earned in Arizona, 33 percent in Nevada and 11 percent in California. This
pattern is consistent with prior years and is expected to continue.
For the twelve months ended June 30, 1994, the Company's natural gas
construction expenditures totaled $126 million, a 10 percent increase when
compared to $115 million of additions for the same period ended a year ago. The
increase is attributed to the investment in new distribution plant in Arizona
and southern Nevada to meet the demand from the Company's growing customer
base.
CAPITAL RESOURCES AND LIQUIDITY
The Company currently estimates that construction expenditures for the gas
segment during 1994 through 1996 will be approximately $410 million, and debt
maturities and repayments, and other cash requirements are expected to
10
approximate $190 million. Often times there are differences between
estimated and actual results, because actual events and circumstances
frequently do not occur as expected, and those differences may be
significant.
It is currently estimated that cash flow from operating activities (net of
dividends) will generate approximately 45 percent of the gas segment's total
cash requirements during 1994 through 1996. A portion of the remaining
funding requirements will be provided by $102 million of IDRB funds held in
trust from the 1993 Series A issues. The remaining cash requirements,
including debt refinancings, are expected to be provided by external
financing sources. The timing, types, and amounts of these additional
external financings will be dependent on a number of factors, including
conditions in the capital markets, timing and amounts of rate relief, and
growth factors in the Company's service areas. These external financings may
include the issuance of both debt and equity securities, bank and other
short-term borrowings, and other forms of financing.
RESULTS OF NATURAL GAS OPERATIONS
Quarterly Analysis
- ------------------
Three Months Ended
June 30,
----------------------
(Thousands of dollars)
1994 1993
--------- ---------
Gas operating revenues $ 108,407 $ 100,306
Net cost of gas 48,439 39,697
--------- ---------
Operating margin 59,968 60,609
Operations and maintenance expense 43,673 42,416
Depreciation and amortization 14,381 13,789
General taxes 6,165 5,808
--------- ---------
Operating loss (4,251) (1,404)
Other income (expense), net (1,162) 3
--------- ---------
Loss before interest and income taxes (5,413) (1,401)
Net interest deductions 13,795 12,124
Income tax expense (benefit) (7,251) (5,170)
--------- ---------
Net loss before allocation to the Bank (11,957) (8,355)
Costs allocated to the Bank, net of tax 1,222 1,249
--------- ---------
Contribution to consolidated net loss $ (10,735) $ (7,106)
========= =========
Contribution to consolidated net loss increased $3.6 million, or 51 percent,
compared to the second quarter of 1993. This was the result of increased
operations and maintenance expense, depreciation expense and net interest
deductions.
Operating margin decreased $641,000, or one percent, when compared to the
same period ended a year ago. Differences in heating demand between periods
accounted for the decrease.
Operations and maintenance expenses increased $1.3 million, or three percent,
reflecting general increases in labor and maintenance costs associated with
meeting the needs of the Company's increasing customer base.
Depreciation expense increased $591,000, or four percent, resulting from an
increase in average gas plant in service of $76 million, or six percent,
during the second quarter of 1994. This increase reflects ongoing capital
expenditures for the upgrade of existing operating facilities and the
expansion of the system to accommodate continued customer growth.
Net interest deductions increased $1.7 million, or 14 percent, over the prior
period. The increase is the result of a $37 million increase in average
long-term debt and a $36 million increase in average short-term debt
11
outstanding during the period. The increase in debt is attributed primarily
to borrowings for construction expenditures, including the draw down of a
portion of IDRB funds previously held in trust.
Six Month Analysis
- ------------------
Six Months Ended
June 30,
----------------------
(Thousands of dollars)
1994 1993
--------- ---------
Gas operating revenues $ 315,776 $ 282,755
Net cost of gas 145,435 126,437
--------- ---------
Operating margin 170,341 156,318
Operations and maintenance expense 86,108 83,856
Depreciation and amortization 28,429 27,313
General taxes 12,536 12,099
--------- ---------
Operating income 43,268 33,050
Other income (expense), net (1,380) 103
--------- ---------
Income before interest and income taxes 41,888 33,153
Net interest deductions 27,410 24,219
Income tax expense 5,914 3,817
--------- ---------
Net income before allocation to the Bank 8,564 5,117
Costs allocated to the Bank, net of tax 2,435 2,469
--------- ---------
Contribution to consolidated net income $ 10,999 $ 7,586
========= =========
Contribution to consolidated net income increased $3.4 million, or 45 percent,
as compared to the six months ended June 1993. This was the result of increased
operating margin partially offset by increased operations and maintenance
expense, depreciation expense and net interest deductions.
Operating margin increased $14 million, or nine percent, during the six
months ended June 1994. The increase in operating margin is attributed to
rate relief, strong customer growth, particularly in Arizona and southern
Nevada, and differences in heating demand between periods.
Operations and maintenance expenses increased $2.3 million, or three percent,
reflecting general increases in labor and maintenance costs associated with
meeting the needs of the Company's increasing customer base.
Depreciation expense and general taxes increased $1.6 million, or four percent,
resulting from an increase in average gas plant in service of $78 million, or
six percent. This increase reflects capital expenditures for the upgrade of
existing operating facilities and the expansion of the system to accommodate
continued customer growth within the Company's service area.
Net interest deductions increased $3.2 million, or 13 percent, over the prior
period. The increase is attributable to a $34 million increase in average
long-term debt and a $50 million increase in average short-term debt
outstanding during the period. The increase in debt is attributed primarily
to borrowings for construction expenditures, including the draw down of a
portion of IDRB funds previously held in trust.
12
Twelve Month Analysis
- ---------------------
Twelve Months Ended
June 30,
----------------------
(Thousands of dollars)
1994 1993
--------- ---------
Gas operating revenues $ 572,126 $ 533,013
Net cost of gas 231,288 212,542
--------- ---------
Operating margin 340,838 320,471
Operations and maintenance expense 172,174 166,194
Depreciation and amortization 56,203 53,865
General taxes 24,562 23,041
--------- ---------
Operating income 87,899 77,371
Other income (expense), net (15,735) (1,146)
--------- ---------
Income before interest and income taxes 72,164 76,225
Net interest deductions 52,897 47,517
Income tax expense 7,011 9,259
--------- ---------
Net income before allocation to the Bank 12,256 19,449
Costs allocated to the Bank, net of tax 4,907 4,979
--------- ---------
Contribution to consolidated net income $ 17,163 $ 24,428
========= =========
Contribution to consolidated net income decreased $7.3 million, or 30 percent,
as compared to the twelve months ended June 1993. Increased operating margin
was offset by increased operations and maintenance expense, depreciation
expense, and net interest deductions. The recognition of the Arizona pipe
replacement program disallowances contributed significantly to the decline in
net income.
Operating margin increased $20 million, or six percent, during the twelve months
ended June 1994. This increase was due to continued customer growth in the
Company's service areas, combined with rate relief in the Company's central
Arizona, California and federal rate jurisdictions.
Operations and maintenance expenses increased $6 million, or four percent,
resulting primarily from general cost increases in labor and materials over
the same period ended a year ago. These increases are the direct result of
increased costs to provide service to the Company's steadily growing customer
base.
Depreciation expense and general taxes increased $3.9 million, or five percent.
In the last twelve months, average gas plant in service increased $94 million,
or eight percent. This was attributable to the upgrade of existing operating
facilities and the expansion of the system to accommodate the number of new
customers being added to the system.
Other income (expense) increased $14.6 million during the twelve months ended
June 1994, principally the result of regulatory mandates to write off gross
plant related to the central and southern Arizona pipe replacement programs.
In December 1993, the Company wrote off $15.9 million of gross plant related
to the pipe replacement programs. The impact of these disallowances, net of
accumulated depreciation, tax benefits and other related items, was a noncash
reduction to net income of $9.3 million. See Note 17 of the Notes to
Consolidated Financial Statements of the 1993 Form 10-K for further
discussion. In June 1994, the Company recorded an additional write-off
relating to the southern Arizona settlement as discussed in Rates and
Regulatory Proceedings--Arizona.
Net interest deductions increased $5.4 million, or 11 percent, the result of
a $30 million increase in average long-term debt and a $46 million increase
in average short-term debt outstanding during the period. This increase is
primarily attributed to borrowings for construction expenditures, including
the draw down of a portion of IDRB funds previously held in trust.
13
RATES AND REGULATORY PROCEEDINGS
CALIFORNIA
Effective January 1, 1994, the Company received approval of an attrition
allowance to increase annual margin by $1.5 million in its southern and
northern California rate jurisdictions. Pursuant to the California Public
Utilities Commission rate case processing plan, the Company filed a general
rate application in January 1994 to increase annual margin by $1.1 million
effective January 1995 for its southern and northern California rate
jurisdictions.
NEVADA
In March 1993, the Company filed general rate cases with the Public Service
Commission of Nevada (PSCN) seeking approval to increase revenues for its
southern and northern Nevada rate jurisdictions. The PSCN issued its rate
order in October 1993 and ordered the Company to reduce general rates by
$648,000 in southern Nevada and authorized a $799,000 increase in northern
Nevada. The Company filed a motion for reconsideration and rehearing on
several issues following the issuance of the rate order. In January 1994,
the PSCN granted the rehearing of certain rate case issues. Hearings
commenced in July 1994. The resolution of these issues is not expected to
have a material effect on the Company's results of operations. A final order
is expected in the fourth quarter of 1994.
ARIZONA
In October 1993, the Company filed a rate application with the Arizona
Corporation Commission (ACC) seeking approval to increase annual revenues by
$10 million, or 9.3 percent, for its southern Arizona jurisdiction. In
July 1994, the ACC approved a settlement agreement of the southern Arizona
general rate case. The agreement was reached through negotiations between the
Company, the ACC staff, and the Residential Utility Consumer Office. The
agreement calls for a $4.3 million, or 3.9 percent, rate increase which
became effective July 1994. The Company also agreed not to file another
general rate request for its southern Arizona jurisdiction before November 1996.
The settlement established a disallowance formula to be used in future rate
cases for expenditures related to defective materials and/or installation. As
part of the settlement, the Company agreed to write off $3.2 million of gross
plant in service related to southern Arizona pipe replacement programs in
addition to the $1.3 million disallowance previously written off in
December 1993. Cumulatively, the Company has written off $19.1 million in gross
plant related to both central and southern Arizona pipe replacement programs.
See Note 17 of the Notes to Consolidated Financial Statements of the 1993
Form 10-K for further discussion of Arizona pipe replacement program
disallowances. The impact of these disallowances, net of accumulated
depreciation, tax benefits and other related items, was a noncash reduction to
net income of $9.6 million, or $0.45 per share, $9.3 million of which was
recognized in December 1993. The Company believes this settlement effectively
resolves all financial issues associated with currently challenged Arizona pipe
replacement programs, that it has adequately provided for future disallowances
and does not anticipate further material effects on results of operations as a
result of gross plant disallowances related to these pipe replacement programs.
FERC
In October 1992, Paiute filed a general rate case with the Federal Energy
Regulatory Commission (FERC) requesting approval to increase revenues by
$6.8 million annually. Paiute is seeking recovery of increased costs
associated with its capacity expansion project that was placed into service
in February 1993. Interim rates reflecting the increased revenues became
effective in April 1993 and are subject to refund until a final order is
issued. A final decision from the FERC is expected in late 1994.
14
FINANCIAL SERVICES SEGMENT
PriMerit Bank (the Bank) is a federally chartered stock savings bank conducting
business through branch offices in Nevada. The Bank's deposit accounts are
insured to the maximum extent permitted by law by the Federal Deposit Insurance
Corporation (FDIC) through the Savings Association Insurance Fund (SAIF). The
Bank is regulated by the Office of Thrift Supervision (OTS) and the FDIC, and is
a member of the Federal Home Loan Bank (FHLB) system.
The Bank's principal business is to attract deposits from the general public
and make loans secured by real estate and other collateral to enable borrowers
to purchase, refinance, construct or improve such property. Revenues are
derived from interest on real estate loans and debt securities and, to a lesser
extent, from interest on nonmortgage loans, gains on sales of loans and debt
securities, and fees received in connection with loans and deposits. The Bank's
major expense is the interest paid on savings deposits and borrowings.
CAPITAL RESOURCES AND LIQUIDITY
In accordance with OTS regulations, the Bank is required to maintain an
average daily balance of liquid assets equal to at least five percent of its
liquidity base (savings deposits and borrowings due in one year or less)
during the preceding calendar month. The liquidity ratio was 12 percent for
the month of June 1994. The Bank's ratio is substantially higher than the
requirement due to an increased level of transaction accounts. Management
considers the Bank's liquidity position to be adequate. At June 30, 1994,
the Bank maintained in excess of $295 million of unencumbered assets which
could be borrowed against or sold to increase liquidity levels.
The Bank's deposits decreased $7.4 million during the quarter while
increasing $19.4 million for the year. The decrease in the second quarter of
1994 is principally due to a $12.6 million decrease in transaction accounts,
partially offset by a $5.2 million increase in longer term certificate of
deposit accounts. The net increase for the first half of 1994 is due
primarily to a $30.3 million increase in money market transaction accounts
and an $8.2 million increase in certificates of deposit partially offset by a
decline of $21.1 million in other transaction accounts.
FINANCIAL AND REGULATORY CAPITAL
The Bank exceeded all three minimum capital requirements--tangible, core and
risk-based--applicable at June 30, 1994 and all three fully phased-in capital
requirements which will be applicable at July 1, 1996 under current
regulations. During the first six months of 1994, all three of the Bank's
regulatory capital ratios declined as a result of the $8.8 million decline in
the unrealized gain, net of tax, on debt securities available for sale offset
partially by the Bank's first half net income of $4.4 million. The Bank's
core and risk-based capital ratios also declined as a result of the deduction
from capital of an additional $5.5 million of supervisory goodwill at
June 30, 1994. The OTS requires the phase-out of supervisory goodwill
includable in capital by January 1, 1995. The includable supervisory goodwill
was 0.375 percent of total assets on January 1, 1994 and will reach zero percent
on January 1, 1995. The Bank continues to be classified as "well capitalized"
under the FDIC Improvement Act of 1991 (FDICIA).
15
A reconciliation of stockholder's equity to the three regulatory capital
standards and the Bank's resulting ratios are set forth in the table below
(thousands of dollars):
June 30, 1994 December 31, 1993
--------------------------------------- ---------------------------------------
Tangible Core Risk-based Tangible Core Risk-based
----------- ----------- ----------- ----------- ----------- -----------
Stockholder's equity $ 172,627 $ 172,627 $ 172,627 $ 176,943 $ 176,943 $ 176,943
Capital adjustments:
Nonsupervisory goodwill (41,420) (41,420) (41,420) (42,464) (42,464) (42,464)
Supervisory goodwill (26,150) (19,905) (19,905) (27,037) (14,422) (14,422)
Real estate investments (49) (49) (186) -- -- (478)
General loan loss reserves -- -- 10,892 -- -- 11,008
----------- ----------- ----------- ----------- ----------- -----------
Regulatory capital 105,008 111,253 122,008 107,442 120,057 130,587
Minimum required capital 24,982 49,964 69,265 25,229 50,459 70,031
----------- ----------- ----------- ----------- ----------- -----------
Excess $ 80,026 $ 61,289 $ 52,743 $ 82,213 $ 69,598 $ 60,556
=========== =========== =========== =========== =========== ===========
Regulatory capital ratio 6.31% 6.68% 14.09% 6.39% 7.14% 14.92%
Minimum required ratio 1.50 3.00 8.00 1.50 3.00 8.00
----------- ----------- ----------- ----------- ----------- -----------
Excess 4.81% 3.68% 6.09% 4.89% 4.14% 6.92%
=========== =========== =========== =========== =========== ===========
Asset base $ 1,665,454 $ 1,665,454 $ 865,818 $ 1,681,952 $ 1,681,952 $ 875,387
=========== =========== =========== =========== =========== ===========
At June 30, 1994 under fully phased-in capital rules applicable at July 1, 1996,
the Bank would have exceeded its fully phased-in tangible, core and risk-based
capital requirements by $79.2 million, $54.2 million and $45.2 million,
respectively.
The OTS issued a regulation which adds a component to an institution's risk-
based capital calculation effective in the third quarter of 1994. The
regulation will require a reduction of an institution's risk-based capital by
50 percent of the decline in the institution's net portfolio value (NPV)
exceeding two percent of assets under a hypothetical 200 basis point increase
or decrease in market interest rates. Based upon OTS measurement of the
Bank's interest rate risk (IRR) exposure at December 31, 1993 and
March 31, 1994, and management's estimate of its IRR exposure at June 30, 1994,
the Bank would not be subjected to a reduction of its risk-based capital as a
result of the implementation of this regulation. The FDIC and the Office of
the Comptroller of the Currency have proposed similar regulations which may
result in a more stringent capital requirement for IRR than the current OTS
regulations. OTS regulations can be no less stringent than those applicable
to national banks. Therefore, the impact of this proposed regulation on the
Bank is unknown at this time.
RESULTS OF FINANCIAL SERVICES OPERATIONS
Quarterly Analysis
- ------------------
The Bank recorded net income of $2.2 million for the three months ended
June 30, 1994 compared to a net loss of $4.7 million for the same period in
1993. After-tax components of the Bank's 1994 second quarter net income were
comprised of $3 million from core banking operations and $391,000 of real
estate income, offset partially by $965,000 of goodwill amortization expense
and a $238,000 loss from credit card charge-offs. After-tax components of
the Bank's 1993 second quarter net loss were comprised of income of
$2.2 million from core banking operations, offset by a $5.8 million loss as
the result of the write-off of goodwill associated with the sale of the
Bank's Arizona-based deposit liabilities, a $117,000 loss from real estate
operations, and $1 million in goodwill amortization.
16
Income from real estate operations was $595,000 for the second quarter of
1994 compared to a net loss of $206,000 for the second quarter of 1993. The
increase was due principally to gains on the sale of a real estate
development project in Nevada and a former branch facility in Arizona.
Net gains on secondary marketing hedging activities result from pair-offs of
forward sale commitments used to hedge secondary marketing activities
occurring during the second quarter of 1994. A net loss from similar
activity was recorded for the same period in 1993.
General and administrative expenses decreased by $1.4 million, or 12 percent,
in the second quarter of 1994 compared to the same period in 1993, due
primarily to the effects of the sale of the Arizona-based deposit liabilities
during the third quarter of 1993 and continued expense control.
The following table sets forth information with respect to interest rate spread
for the periods shown (thousands of dollars):
Three Months Ended June 30,
---------------------------------------------------------------------------------
1994 1993
--------------------------------------- ---------------------------------------
Average Average Average Average
Balance Interest Yield Balance Interest Yield
----------- ----------- ----------- ----------- ----------- -----------
Interest-earning assets:
Cash equivalents $ 50,587 $ 512 4.05% $ 15,099 $ 134 3.55%
Debt securities held
to maturity 66,553 1,061 6.38 362,155 6,890 7.61
Debt securities available
for sale 560,282 8,380 5.98 782,603 9,795 5.01
Loans receivable, net 883,494 18,982 8.59 771,882 17,987 9.32
FHLB stock 16,795 189 4.50 16,346 170 4.16
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets $ 1,577,711 29,124 7.38 $ 1,948,085 34,976 7.18
=========== ----------- ----------- =========== ----------- -----------
Interest-bearing liabilities:
Deposits $ 1,227,626 10,690 3.49 $ 1,604,657 16,491 4.11
Securities sold under
agreements to repurchase 213,925 2,466 4.62 294,886 3,256 4.42
Advances from FHLB 71,000 832 4.70 14,222 315 8.86
Notes payable 8,200 160 7.83 18,510 384 8.30
Unsecured senior notes -- -- -- 25,000 470 7.52
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing
liabilities $ 1,520,751 14,148 3.73 $ 1,957,275 20,916 4.27
=========== ----------- ----------- =========== ----------- -----------
Cost of hedging activities 56 .01 -- --
----------- ----------- ----------- -----------
Cost of funds 14,204 3.74 20,916 4.27
----------- ----------- ----------- -----------
Capitalized and
transferred interest (4) -- (10) --
----------- ----------- ----------- -----------
Net interest income $ 14,924 3.64% $ 14,070 2.91%
=========== =========== =========== ===========
Net yield on interest-
earning assets 3.78% 2.89%
=========== ===========
During the second quarter of 1994, average interest-earning assets declined
by approximately $370 million and average interest-bearing liabilities
declined approximately $437 million compared to 1993. The decreases resulted
primarily from the sale of $321 million of higher costing Arizona-based
deposit liabilities funded by the sale of $334 million of lower yielding MBS
in the third quarter of 1993. Despite a decrease in average interest-earning
assets, net interest income increased $854,000 or six percent and net
interest margin increased from 2.89 percent to 3.78 percent.
17
Six Month Analysis
- ------------------
Net income of $4.4 million was recorded for the first half of 1994 compared
to a net loss of $1.1 million ($4.1 million net loss before cumulative effect
of accounting change) for the six months ended June 30, 1993. After-tax
components of the first half of 1994's net income were comprised of
$5.4 million from core banking operations, a gain of $861,000 from the Bank's
credit card portfolio sale net of credit card charge-offs, and a $72,000 gain
from real estate operations. Income was partially offset by $1.9 million of
goodwill amortization. After-tax components of the Bank's 1993 first half
net loss were comprised of income of $3.9 million from core banking
operations and $3 million from the cumulative effect of the accounting change
for taxes, offset by the write-off of goodwill of $5.8 million as the result
of the Bank's sale of its Arizona-based deposit liabilities in 1993, goodwill
amortization of $2 million and a $224,000 loss on real estate operations.
Income from the Bank's real estate operations increased $479,000 in 1994 as a
result of the sale of a real estate development project in Nevada and the
sale of a former branch facility in Arizona.
General and administrative expenses declined $2.4 million or 10 percent for
the first six months of 1994 versus the same period in 1993 due to declines
in overall operating expenses as a result of the 1993 sale of the Bank's
Arizona-based deposit liabilities.
The following table sets forth information with respect to interest rate spread
for the periods shown (thousands of dollars):
Six Months Ended June 30,
---------------------------------------------------------------------------------
1994 1993
--------------------------------------- ---------------------------------------
Average Average Average Average
Balance Interest Yield Balance Interest Yield
----------- ----------- ----------- ----------- ----------- -----------
Interest-earning assets:
Cash equivalents $ 60,122 $ 1,065 3.54% $ 30,943 $ 527 3.41%
Debt securities held
to maturity 67,165 2,162 6.44 768,532 24,059 6.26
Debt securities available
for sale 574,133 16,804 5.85 391,302 9,795 5.01
Loans receivable, net 869,339 36,797 8.47 762,604 36,338 9.53
FHLB stock 16,708 341 4.08 16,530 254 3.07
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets $ 1,587,467 57,169 7.20 $ 1,969,911 70,973 7.21
=========== ----------- ----------- =========== ----------- -----------
Interest-bearing liabilities:
Deposits $ 1,217,325 21,023 3.48 $ 1,603,352 33,766 4.25
Securities sold under
agreements to repurchase 235,236 5,176 4.44 326,057 7,036 4.35
Advances from FHLB 71,000 1,654 4.70 15,111 664 8.86
Notes payable 8,233 314 7.69 18,575 777 8.44
Unsecured senior notes -- -- -- 25,000 940 7.58
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing
liabilities $ 1,531,794 28,167 3.71 $ 1,988,095 43,183 4.38
=========== ----------- ----------- =========== ----------- -----------
Cost of hedging activities 93 .01 -- --
----------- ----------- ----------- -----------
Cost of funds 28,260 3.72 43,183 4.38
----------- ----------- ----------- -----------
Capitalized and
transferred interest (11) -- (37) --
----------- ----------- ----------- -----------
Net interest income $ 28,920 3.48% $ 27,827 2.83%
=========== =========== =========== ===========
Net yield on interest-
earning assets 3.64% 2.83%
=========== ===========
During the first half of 1994, average interest-earning assets decreased
$382 million and average interest-bearing liabilities decreased $456 million.
The decreases resulted from the sale of the Bank's higher costing Arizona-based
18
deposit liabilities in the third quarter of 1993 and sales and principal
repayments of loans and lower yielding debt securities exceeding originations
and purchases. Despite the decline in average interest earning assets, net
interest income increased $1.1 million.
Twelve Month Analysis
- ---------------------
The Bank recorded net income of $12 million for the twelve months ended
June 30, 1994 compared to a loss of $2.1 million for the twelve months ended
June 30, 1993. After-tax components of the Bank's net income for the twelve
months ended June 30, 1994 were comprised of $9.3 million from core banking
operations, a gain of $4.8 million from the sale of debt securities used to
fund the sale of the Arizona deposit liabilities, a gain of $861,000 from the
sale of the Bank's credit card portfolio net of credit card charge-offs, a
$1.2 million gain from a legal settlement and a change in tax rate, offset
partially by a loss of $281,000 from real estate operations, and $3.9 million
of goodwill amortization expense. After-tax components of the Bank's net
loss for the twelve months ended June 30, 1993 were comprised of income of
$6.9 million from core banking operations, a $3 million gain as the result of
the cumulative effect of a change in method of accounting for income taxes,
and gains of $1.3 million and $544,000 on the sale of servicing rights and
balance sheet restructuring, respectively; offset by a $4 million loss from
real estate operations, a $5.8 million loss on the sale of the Arizona-based
deposit liabilities, and $4.1 million of goodwill amortization expense.
Net interest income increased $5.2 million due to the following factors:
(i) Total interest income decreased $25.7 million, or 18 percent, due to a
decrease in interest income on debt securities of $26.5 million, or
38 percent, caused by a $416 million decrease in the average balance and a
14 basis point decrease in the average yield; and a decrease in interest
income on loans of $277,000 due to a 94 basis point decrease in the average
yield, partially offset by an increase of $78.7 million in the average
portfolio balance. In May 1993, $638 million of mortgage-backed securities
(MBS) were designated as MBS held for sale in connection with the sale of
the Arizona-based deposit liabilities and in anticipation of implementation
of SFAS No. 115, thus causing changes in the average balances of the
available for sale and held to maturity categories. The net decrease in
total MBS was due primarily to $334 million of MBS sold during August of
1993 to fund the transfer of the Arizona-based deposit liabilities. In
addition, interest income from cash equivalents and dividends from FHLB
stock increased $1.1 million, or 74 percent, due to an increase
$23.2 million in the average portfolio balance and an increase of 56 basis
points in the yield.
(ii) Total interest expense decreased $30.9 million, or 34 percent, due to a
decrease in interest on deposits of $27.7 million, or 38 percent, caused by
a decrease of 87 basis points in the average interest rate, and a decrease
of $377 million in the average balance outstanding as a result of the sale
of the Arizona-based deposit liabilities; and, a decrease in interest on
borrowings of $3.4 million, or 18 percent, due to a 104 basis point
decrease in the average borrowing rate, partially offset by an increase of
$1.6 million in the average balance outstanding. Capitalized and
transferred interest decreased $197,000 due to the decline in the real
estate portfolio.
Net loss from real estate operations was $431,000 for the twelve months ended
June 30, 1994 compared to a net loss of $6.1 million for the same period in
1993. The loss for the twelve-month period ended June 30, 1993 was primarily
attributable to the establishment of $6.5 million in provisions for estimated
losses on the Bank's real estate investments, compared to provisions of
$602,000 for the current twelve-month period. The provisions for the twelve-
month period ended June 30, 1993 were primarily the result of the Bank's
valuation allowances and charge-offs of real estate required as a result of
the slow sales activity and the decline in real estate values in the
California market. Similar levels of provisions and charge-offs did not
occur in the twelve months ended June 30, 1994 due to a substantially lower
portfolio balance.
19
Net gains on the sale of loans decreased $2.5 million for the twelve months
ended June 30, 1994 compared to the same period ended June 30, 1993,
principally due to a greater volume of loan sales during 1993 as part of the
Bank's balance sheet restructuring.
Loss on the sale of the Bank's Arizona-based deposit liabilities was
$6.2 million for the twelve months ended June 30, 1993. Net gains on the
sale of MBS for the twelve months ended June 30, 1994 were $7.6 million. The
MBS were sold primarily to fund the sale of the Arizona-based deposit
liabilities to World Savings and Loan Association. Net gains on the sale of
MBS for the twelve months ended June 30, 1993 were $2.5 million. This gain
was primarily the result of the Bank's balance sheet restructuring.
Loan related fees decreased $523,000 due to a lower level of loans serviced
for others as a result of the sale of mortgage loan servicing rights and
payoffs within the loan servicing portfolio. Deposit related fees and other
income increased by $1.1 million due to a higher deposit fee structure and
the increased level of transaction accounts subject to fee assessment.
General and administrative expenses declined $2.3 million, or five percent,
for the twelve months ended June 30, 1994 compared to the same period in 1993
due to the sale of the Arizona-based deposit liabilities and increased
efficiencies.
ASSET QUALITY
NONPERFORMING ASSETS. Nonperforming assets are comprised of nonaccrual assets,
restructured loans and real estate acquired through foreclosure. Nonaccrual
assets are those on which management believes the timely collection of
interest is doubtful. Loans are transferred to nonaccrual status when
payments of interest or principal are 90 days past due or if, in management's
opinion, the accrual of interest should be ceased sooner. There were no
loans on accrual status which were over 90 days delinquent or past maturity
as of June 30, 1994. Interest income for loans on nonaccrual status is
generally recorded on a cash basis.
The following table summarizes nonperforming assets as of the dates indicated
(thousands of dollars):
June 30, December 31,
1994 1993
-------- --------
Nonaccrual loans past due 90 days or more:
Mortgage loans:
Construction and land $ 1,711 $ 1,233
Permanent single-family residences 7,580 6,636
Other mortgage loans 6,693 6,728
-------- --------
15,984 14,597
Nonmortgage loans 352 184
Restructured loans 16,597 2,842
-------- --------
Total nonperforming loans 32,933 17,623
Real estate acquired through foreclosure 8,001 9,707
-------- --------
Total nonperforming assets $ 40,934 $ 27,330
======== ========
Allowance for estimated credit losses $ 16,443 $ 16,251
======== ========
Allowance for estimated credit losses as a
percentage of nonperforming loans 49.93% 92.21%
======== ========
Allowance for estimated credit losses as a
percentage of nonperforming assets 40.17% 59.46%
======== ========
The increase in restructured loans of $13.8 million is a result of single
family loan modifications made to borrowers with earthquake-related damage in
California. Federal agencies encouraged financial institutions to modify
20
loan terms for certain borrowers who were affected by the earthquake which
occurred in January of this year. The terms of these modifications were
generally three- to six-month payment extensions with no negative credit
reporting regarding the borrower. These loans are on a nonaccrual basis
during the extension period.
The decrease in real estate acquired through foreclosure of $1.7 million is
due primarily to pay-downs of three single-family residential construction
loans in California for $1.1 million and $537,000 of single-family
residential loan payoffs and sales (primarily in Arizona).
CLASSIFIED ASSETS. OTS regulations require the Bank to classify certain assets
and establish prudent valuation allowances. Classified assets are
categorized as "substandard," "doubtful" and "loss." In addition, the Bank
can designate an asset as "special mention."
The following table sets forth the amounts of the Bank's classified assets
and ratio of classified assets to total assets, net of allowances and charge-
offs, as of the dates indicated (thousands of dollars):
June 30, 1994 December 31, 1993
------------------- -------------------
% of Total % of Total
Balance Assets Balance Assets
-------- -------- -------- --------
Substandard assets:
Loans:
Single family residential $ 8,276 0.48% $ 7,339 0.42%
Consumer 352 0.02 134 0.01
Commercial and multi-family mortgage 22,133 1.28 25,522 1.47
Construction and land 4,860 0.28 4,581 0.26
Other 43 -- 310 0.02
Foreclosed real estate (net) 8,001 0.46 9,707 0.55
Real estate held for investment 1,226 0.07 2,166 0.12
Investments 26,004 1.50 29,509 1.68
Doubtful assets -- -- -- --
Loss assets -- -- -- --
-------- -------- -------- --------
Total $ 70,895 4.09% $ 79,268 4.53%
======== ======== ======== ========
Classified assets decreased $8.4 million from December 31, 1993 to June 30, 1994
primarily as a result of the upgrade of a $2.1 million shopping center loan,
repayments of $3.5 million of investments, a decrease of $940,000 in real estate
held for investment due to sales, and a $1.7 million decrease in foreclosed
real estate. The investment security classified as substandard represents a
privately issued MBS collateralized by apartments, office buildings, town homes,
shopping centers and day care centers located in various states along the
southeastern seaboard and is further supported by a credit enhancement feature.
The single A credit rating of this security was withdrawn in the first half of
1993, due to a large number of delinquencies underlying the security. Based on
extensive credit reviews, the Bank determined that only a portion of the
underlying loans met the criteria for substandard classification. However, the
entire security is classified as substandard because the OTS does not have a
policy for the "split rating" of a security. The security may be upgraded once
improvement in the level of delinquencies in the loans underlying the security
occurs.
Substandard loans decreased $2.2 million due primarily to the upgrade of a
$2.1 million shopping center loan in Nevada. The largest substandard loan at
June 30, 1994 was an $8.3 million multi-family real estate loan in Nevada.
The Bank had five additional substandard loans at June 30, 1994 in excess of
$1 million: one multi-family real estate loan in Nevada, two hotel loans in
Nevada, one single-family residential construction loan in California, and
one outstanding single-family residential commitment in California.
The largest foreclosed real estate asset held by the Bank at June 30, 1994
was a $1.7 million single-family construction real estate parcel in
California. The Bank also owned two parcels of foreclosed real estate at
June 30, 1994 with book values in excess of $1 million: one multi-family
property located in Nevada, and one land parcel located in California.
21
The Bank's largest investment in real estate classified as substandard at
June 30, 1994, was a former bank branch in Arizona with a current book value
of $891,000. The Bank's remaining real estate development projects
classified as substandard have current book values of $195,000 and $140,000.
Special mention assets increased from $27.6 million at December 31, 1993 to
$50.9 million at June 30, 1994, primarily due to the addition of
$13.9 million in California single family residential loans with earthquake
related problems which were modified and a Nevada apartment loan for
$9 million. The geographic concentration of the Bank's classified assets at
June 30, 1994 was 39 percent in Nevada, 21 percent in California, 3 percent
in Arizona, and 37 percent in the southeastern seaboard states.
It is the Bank's practice to charge off all assets or portions thereof which
it considers to be "loss." As a result, none of the Bank's assets, net of
charge-offs, were classified as "loss" at June 30, 1994.
The following tables set forth the Bank's charge-off experience for loans
receivable and real estate acquired through foreclosure by loan type (thousands
of dollars):
Net
Charge-Offs Recoveries Charge-Offs
----------- ----------- -----------
Six Months Ended June 30, 1994:
- -------------------------------
Single-family residential $ 913 $ (368) $ 545
Commercial and multi-family mortgage 602 (99) 503
Construction/land 903 (11) 892
Nonmortgage 1,934 (357) 1,577
----------- ----------- -----------
Total net charge-offs $ 4,352 $ (835) $ 3,517
=========== =========== ===========
Six Months Ended June 30, 1993:
- -------------------------------
Single-family residential $ 686 $ (105) $ 581
Commercial and multi-family mortgage 771 (89) 682
Construction/land 816 (177) 639
Nonmortgage 1,240 (353) 887
----------- ----------- -----------
Total net charge-offs $ 3,513 $ (724) $ 2,789
=========== =========== ===========
PROVISIONS AND ALLOWANCES FOR LOAN AND REAL ESTATE LOSSES. On a regular basis,
management evaluates the adequacy of the allowances for estimated losses on
loans, investments, and real estate and establishes additions to the allowances
through provisions to expense. The Bank utilizes a comprehensive internal
asset review system and general valuation allowance methodology. General
valuation allowances are established for each of the loan, investment, and real
estate portfolios for unforeseen losses. Factors taken into account in
determining the adequacy of allowances include review of existing risks in the
portfolios, prevailing and anticipated economic conditions, actual loss
experience and delinquencies. Regular reviews of the quality of the Bank's
loan, investment, and real estate portfolios by the Risk Management Committee
and examinations by regulatory authorities are performed periodically.
Charge-offs are recorded on particular assets when it is determined that the
fair or net realizable value of an asset is below the carrying value. When a
loan is foreclosed, the asset is written down to fair value based on a current
appraisal of the subject property.
22
Activity in the allowances for losses on loans and investments in real estate
is summarized as follows (thousands of dollars):
Total Investments
Loans and in
Foreclosed Real
Real Estate Estate Total
----------- ----------- -----------
Balance at March 31, 1994 $ 15,563 $ 541 $ 16,104
Provisions for estimated losses 2,275 (367) 1,908
Charge-offs, net of recoveries (1,395) 311 (1,084)
----------- ----------- -----------
Balance at June 30, 1994 $ 16,443 $ 485 $ 16,928
=========== =========== ===========
Balance at December 31, 1993 $ 16,251 $ 935 $ 17,186
Provisions for estimated losses 3,709 47 3,756
Charge-offs, net of recoveries (3,517) (497) (4,014)
----------- ----------- -----------
Balance at June 30, 1994 $ 16,443 $ 485 $ 16,928
=========== =========== ===========
Balance at March 31, 1993 $ 17,022 $ 1,070 $ 18,092
Provisions for estimated losses 1,180 217 1,397
Charge-offs, net of recoveries (1,460) (447) (1,907)
----------- ----------- -----------
Balance at June 30, 1993 $ 16,742 $ 840 $ 17,582
=========== =========== ===========
Balance at December 31, 1992 $ 17,228 $ 1,463 $ 18,691
Provisions for estimated losses 2,303 455 2,758
Charge-offs, net of recoveries (2,789) (1,078) (3,867)
----------- ----------- -----------
Balance at June 30, 1993 $ 16,742 $ 840 $ 17,582
=========== =========== ===========
The Bank recorded net loan charge-offs of $3.5 million and net real estate
write-downs of $497,000 during the first half of 1994 as a result of the
analysis of the adequacy of its allowances for estimated credit and real
estate losses. For the second quarter of 1994, the Bank recorded net loan
charge-offs of $1.4 million and net real estate recoveries of $311,000. The
loan and foreclosed real estate charge-offs were primarily attributable to
the partial charge-off of an apartment complex loan in Nevada, two single-
family residential construction properties located in California and credit
card and other consumer loan charge-offs. The Bank's quarterly analysis
required no significant change in the allowance for estimated credit losses
at June 30, 1994 from December 31, 1993.
Included in net real estate write-downs of $497,000 for 1994 were $519,000
related to the Bank's two previous branches in Arizona which were
subsequently transferred to investment in real estate from premises and
equipment in conjunction with the sale of the Arizona-based deposit
liabilities in the second quarter of 1993. Through a bulk sale, the Bank
recovered $280,000 on a real estate project in Nevada during the second
quarter of 1994, which was previously written down.
23
PART II - OTHER INFORMATION
Items 1-3 None
Item 4 Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on May 12, 1994.
The eleven directors nominated were reelected by shareholders. Other
matters voted upon and the results of the voting were as follows:
(1) The proposed amendment to the Company's Restated Articles of
Incorporation to provide for a classified Board of Directors
having staggered three-year terms was not approved.
Shareholders voted 8,461,232 shares in favor, 5,245,700 opposed,
and 4,079,144 abstentions and broker nonvotes. An amendment to
the Articles of Incorporation requires the affirmative vote of
at least 50 percent of the outstanding shares of the Company's
common stock.
(2) The Management Incentive Plan for key management employees of
the Company was approved. Shareholders voted 14,595,301 shares
in favor, 2,699,536 opposed, and 491,239 abstentions.
(3) The selection of Arthur Andersen & Co. to audit the financial
statements of the Company and its subsidiaries for 1994 was
approved. Shareholders voted 17,122,899 shares in favor,
423,638 opposed, and 239,539 abstentions.
Item 5 None
Item 6 Exhibits and Reports on Form 8-K
(a) The following documents are filed as part of this report on
Form 10-Q:
Exhibit 3.ii - Amended Bylaws of Southwest Gas Corporation
Exhibit 10.01 - Management Incentive Plan, amended and
restated May 10, 1994
Exhibit 10.02 - Executive Deferral Plan, amended and
restated May 10, 1994
Exhibit 10.03 - Supplemental Retirement Plan, amended and
restated effective May 10, 1994
(b) Reports on Form 8-K - None
24
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Southwest Gas Corporation
---------------------------------------
(Registrant)
Date: August 11, 1994
/s/ Edward A. Janov
---------------------------------------
Edward A. Janov
Controller and Chief Accounting Officer