==============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------- -------
COMMISSION FILE NUMBER 1-7850
SOUTHWEST GAS CORPORATION
(Exact name of registrant as specified in its charter)
California 88-0085720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5241 Spring Mountain Road
Post Office Box 98510
Las Vegas, Nevada 89193-8510
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (702) 876-7237
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, $1 Par Value, 26,594,038 shares as of November 4, 1996
==============================================================================
1
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein have been
prepared by Southwest Gas Corporation (the Company), without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. In
the opinion of management, all adjustments, consisting of normal recurring
items and estimates necessary for a fair presentation of the results for the
interim periods, have been made. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's 1995 Annual Report
on Form 10-K, and 1996 quarterly reports on Form 10-Q.
2
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
<CAPTION
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ -----------
ASSETS
Utility plant
Gas plant $ 1,673,780 $ 1,579,665
Less: accumulated depreciation (492,322) (474,891)
Acquisition adjustments 5,974 6,298
Construction work in progress 39,077 26,678
------------ -----------
Net utility plant 1,226,509 1,137,750
------------ -----------
Other property and investments 72,606 35,128
------------ -----------
Current assets
Cash and cash equivalents 4,381 11,168
Accounts receivable, net of allowances 42,661 38,186
Accrued utility revenue 20,287 43,900
Deferred tax benefit 20,936 17,089
Prepaids and other current assets 29,585 31,386
Net assets of discontinued operations -- 175,493
------------ -----------
Total current assets 117,850 317,222
------------ -----------
Deferred charges and other assets 60,912 42,427
------------ -----------
Total assets $ 1,477,877 $ 1,532,527
============ ===========
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock, $1 par (authorized - 45,000,000 shares; issued
and outstanding - 26,566,472 and 24,467,499 shares) $ 28,196 $ 26,097
Additional paid-in capital 345,554 312,631
Retained earnings (accumulated deficit) (10,683) 17,322
------------ -----------
Total common equity 363,067 356,050
Redeemable preferred securities of Southwest Gas Capital I 60,000 60,000
Long-term debt, less current maturities 662,502 607,945
------------ -----------
Total capitalization 1,085,569 1,023,995
------------ -----------
Current liabilities
Current maturities of long-term debt 5,748 120,000
Short-term debt 41,425 37,000
Accounts payable 29,001 41,864
Accrued taxes 21,463 29,116
Deferred purchased gas costs 39,552 32,776
Other current liabilities 63,577 69,455
------------ -----------
Total current liabilities 200,766 330,211
------------ -----------
Deferred income taxes and other credits
Deferred income taxes and investment tax credits 148,819 138,893
Other deferred credits 42,723 39,428
------------ -----------
Total deferred income taxes and other credits 191,542 178,321
------------ -----------
Total capitalization and liabilities $ 1,477,877 $ 1,532,527
============ ===========
The accompanying notes are an integral part of these statements.
3
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------- ---------------------
1996 1995 1996 1995 1996 1995
--------- --------- --------- --------- --------- ---------
Operating revenues:
Gas operating revenues $ 85,534 $ 91,433 $ 376,599 $ 417,143 $ 522,958 $ 608,604
Construction revenues 39,721 -- 60,619 -- 60,619 --
--------- --------- --------- --------- --------- ---------
Total operating revenues 125,255 91,433 437,218 417,143 583,577 608,604
--------- --------- --------- --------- --------- ---------
Operating expenses:
Net cost of gas 24,027 30,973 139,184 184,639 182,001 254,716
Operations and maintenance 49,086 46,565 144,557 140,287 192,239 186,808
Depreciation and amortization 19,455 16,326 54,046 47,204 69,334 61,755
Taxes other than income taxes 7,365 6,784 22,228 20,272 29,129 26,861
Construction expenses 33,726 -- 51,815 -- 51,815 --
--------- --------- --------- --------- --------- ---------
Total operating expenses 133,659 100,648 411,830 392,402 524,518 530,140
--------- --------- --------- --------- --------- ---------
Operating income (loss) (8,404) (9,215) 25,388 24,741 59,059 78,464
--------- --------- --------- --------- --------- ---------
Other income and (expenses):
Net interest deductions (14,016) (13,296) (40,445) (39,656) (54,143) (52,935)
Preferred securities distributions (1,368) -- (4,106) -- (5,019) --
Other income (deductions), net (11) (194) (214) (185) (681) (504)
--------- --------- --------- --------- --------- ---------
Total other income and (expenses) (15,395) (13,490) (44,765) (39,841) (59,843) (53,439)
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations before income taxes (23,799) (22,705) (19,377) (15,100) (784) 25,025
Income tax expense (benefit) (9,161) (9,352) (7,655) (6,245) (571) 9,444
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations (14,638) (13,353) (11,722) (8,855) (213) 15,581
Net income (loss) from discontinued operations -- 522 -- 1,328 (18,864) 1,429
--------- --------- --------- --------- --------- ---------
Net income (loss) (14,638) (12,831) (11,722) (7,527) (19,077) 17,010
Preferred/preference stock dividend requirements -- 95 -- 285 22 380
--------- --------- --------- --------- --------- ---------
Net income (loss) applicable to common stock $ (14,638) $ (12,926) $ (11,722) $ (7,812) $ (19,099) $ 16,630
========= ========= ========= ========= ========= =========
Earnings (loss) per share from continuing operations $ (0.55) $ (0.56) $ (0.46) $ (0.40) $ (0.01) $ 0.68
Earnings (loss) per share from discontinued operations -- 0.02 -- 0.06 (0.74) 0.06
--------- --------- --------- --------- --------- ---------
Earnings (loss) per share of common stock $ (0.55) $ (0.54) $ (0.46) $ (0.34) $ (0.75) $ 0.74
========= ========= ========= ========= ========= =========
Dividends paid per share of common stock $ 0.205 $ 0.205 $ 0.615 $ 0.615 $ 0.82 $ 0.82
========= ========= ========= ========= ========= =========
Average number of common shares outstanding 26,477 24,062 25,636 22,768 25,382 22,370
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these statements.
4
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ (11,722) $ (7,527) $ (19,077) $ 17,010
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 54,046 47,204 69,334 61,755
Deferred income taxes 1,282 (16,839) 2,807 (17,883)
Changes in current assets and liabilities
Accounts receivable 8,453 38,089 (9,917) 1,189
Accrued utility revenue 23,613 28,489 (1,243) (1,117)
Deferred purchased gas costs 6,776 50,971 3,800 48,985
Accounts payable (15,986) (28,210) 5,122 1,667
Accrued taxes (7,653) (11,448) (10,025) (5,066)
Other current assets and liabilities 480 2,993 1,148 2,611
Other 911 1,756 (1,049) (1,286)
Undistributed (income) loss from discontinued operations -- (5,795) 17,371 (7,126)
----------- ----------- ----------- -----------
Net cash provided by operating activities 60,200 99,683 58,271 100,739
----------- ----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Construction expenditures (141,948) (116,612) (191,517) (159,883)
Proceeds from bank sale 191,662 -- 191,662 --
Other (29,163) (1,871) (24,828) 2,170
----------- ----------- ----------- -----------
Net cash provided by (used in) investing activities 20,551 (118,483) (24,683) (157,713)
----------- ----------- ----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 14,365 40,584 18,625 43,058
Issuance of trust originated preferred securities -- -- 57,713 --
Reacquisition of preferred/preference stocks -- -- (4,000) (4,058)
Dividends paid (15,852) (14,468) (20,960) (18,946)
Issuance of long-term debt 159,486 32,107 176,786 38,107
Retirement of long-term debt (247,020) (2,280) (247,025) (2,417)
Issuance (repayment) of short-term debt 1,483 (36,000) (17,517) 4,000
Other -- -- (48) 524
----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities (87,538) 19,943 (36,426) 60,268
----------- ----------- ----------- -----------
Change in cash and temporary cash investments (6,787) 1,143 (2,838) 3,294
Cash at beginning of period 11,168 6,076 7,219 3,925
----------- ----------- ----------- -----------
Cash at end of period $ 4,381 $ 7,219 $ 4,381 $ 7,219
=========== =========== =========== ===========
Supplemental information:
Interest paid, net of amounts capitalized $ 47,718 $ 48,375 $ 61,720 $ 61,073
=========== =========== =========== ===========
Income taxes paid, net of refunds $ 18,610 $ 26,143 $ 12,880 $ 27,291
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
5
NOTE 1 -- DISPOSITION OF PRIMERIT BANK
In January 1996, the Company and its wholly owned subsidiaries: The Southwest
Companies and PriMerit Bank, Federal Savings Bank (PriMerit), entered into a
definitive agreement with Norwest Corporation (Norwest) to sell PriMerit to
Norwest for $175 million. In April 1996, Norwest elected, pursuant to an
option in the original agreement, to structure the acquisition as a purchase
of substantially all of the assets and liabilities of PriMerit in exchange for
consideration of $191 million. The Company will pay an additional $16 million
in income taxes by virtue of consummating the sale as a purchase of assets and
assumption of liabilities. The consideration of $191 million, therefore,
provides the economic equivalent to the Company of a sale of stock of PriMerit
for $175 million.
Shareholders of the Company voted on and approved the principal terms of the
sale at the annual shareholder meeting held in July 1996. Various preclosing
regulatory approvals were obtained and other customary closing conditions were
satisfied. The sale closed in July 1996. Net proceeds of approximately
$163 million were initially used to pay down short-term debt and a portion of
the term-loan facilities. In August, the Company retired debt incurred in
connection with its investment in PriMerit.
NOTE 2 -- LONG-TERM DEBT
In August 1996, the Company completed the sale of $75 million of 7-1/2 percent
debentures due 2006 and $75 million of 8 percent debentures due 2026. Net
proceeds of $148 million as well as a portion of the $163 million net proceeds
from the PriMerit sale were used to refund or retire outstanding callable
debentures and pay down short-term debt with the remaining amount being used
for general corporate purposes, including the acquisition of property for the
construction, completion, extension, and improvement of the Company's pipeline
systems and facilities located in and around the communities it serves. The
debt refunded or retired during the third quarter was as follows (thousands of
dollars):
9% Series A, due 2011 $ 26,838
9% Series B, due 2011 31,158
8.75% Series C, due 2011 18,323
9.375% Series D, due 2017 120,000
10% Series E, due 2013 23,069
----------
Debt refunded or retired 219,388
Call premiums 8,873
----------
$ 228,261
==========
Long-term debt outstanding at September 30, 1996 was as follows (thousands of
dollars):
Term loan facility $ 184,000
Debentures:
9.75% Series F, due 2002 100,000
7.50% Series, due 2006 75,000
8.00% Series, due 2026 75,000
Industrial development revenue bonds--
net of funds held in trust 225,057
Other 10,320
Unamortized discount on long-term debt (6,875)
----------
Total long-term debt $ 662,502
==========
6
NOTE 3 -- ACQUISITION OF NORTHERN PIPELINE CONSTRUCTION CO.
On April 29, 1996, the Company acquired all of the outstanding stock of
Northern Pipeline Construction Co. (the construction services segment)
pursuant to a definitive agreement dated November 1995. The Company issued
approximately 1,439,000 shares of common stock valued at $24 million in
connection with the acquisition. The acquisition was accounted for as a
purchase. Goodwill in the amount of approximately $12 million was recorded by
the construction services segment and is being amortized over a period of
approximately 25 years. The construction services segment provides local gas
distribution companies with installation, replacement, and maintenance
services for underground natural gas distribution systems.
During the period from the acquisition date through September 30, 1996, the
construction services segment recognized revenues generated from contracts
with the Company of $37 million. These revenues and associated profits are
included in the condensed consolidated financial statements of the Company and
were not eliminated during consolidation. Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation," provides that intercompany profits on sales to regulated
affiliates should not be eliminated in consolidation if the sales price is
reasonable and if future revenues approximately equal to the sales price will
result from the rate-making process. Management believes these two criteria
will be met.
The assets acquired and the liabilities assumed at the acquisition date were
as follows (thousands of dollars):
Other property and investments $ 26,490
Receivables, net 12,928
Prepaids and other current assets 2,545
Deferred charges and other assets 11,340
---------
Total assets acquired 53,303
---------
Long-term debt and capital leases, including current maturities 14,867
Short-term debt 2,766
Accounts payable 3,123
Other current liabilities 6,759
Deferred income taxes 4,737
Other deferred credits 394
---------
Total liabilities assumed 32,646
---------
Net noncash assets acquired 20,657
Cash acquired in acquisition and included in cash flow statement 3,343
---------
Total common equity issued in acquisition $ 24,000
=========
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company is principally engaged in the business of purchasing,
transporting, and distributing natural gas to residential, commercial, and
industrial customers in geographically diverse portions of Arizona, Nevada,
and California (natural gas operations segment). The construction services
segment provides local gas distribution companies with installation,
replacement, and maintenance services for underground natural gas distribution
systems.
The Company previously engaged in financial services activities through
PriMerit, a wholly owned subsidiary. In January 1996, the Company signed a
definitive agreement to sell PriMerit to Norwest. The sale closed in
July 1996, following receipt of shareholder and various governmental approvals
and satisfaction of other customary closing conditions. For consolidated
financial reporting purposes, the financial services activities are disclosed
as discontinued operations.
For the twelve months ended September 30, 1996, loss from continuing
operations was $213,000, loss from discontinued operations was $18.9 million,
and total net loss was $19.1 million.
CAPITAL RESOURCES AND LIQUIDITY
Because the Company's business is highly seasonal, short-term debt is used to
meet seasonal working capital requirements. The Company borrows under its
credit lines to finance portions of its capital expenditures, pending
refinancing through the issuance of equity or long-term indebtedness at a
later date depending upon prevailing market conditions.
The Company estimates that construction expenditures for its natural gas
operations for the three-year period ending December 31, 1998 will be
approximately $470 million. It is estimated that cash flow from operating
activities (net of dividends) will fund approximately one-half of the gas
operations' total construction expenditures during the three-year period
ending December 31, 1998. A portion of the construction expenditure funding
will be provided by $36 million of funds held in trust from the issuance of
industrial development revenue bonds at December 31, 1995. The remaining cash
requirements are expected to be provided by external financing sources. The
timing, types, and amounts of these additional external financings will be
dependent on a number of factors, including conditions in the capital markets,
timing and amounts of rate relief, and growth factors in the Company's service
areas. These external financings may include the issuance of both debt and
equity securities, bank and other short-term borrowings, and other forms of
financing.
Included in the stockholders' equity section of the balance sheet is a
$10.7 million accumulated deficit. This negative retained earnings balance is
primarily attributable to the disposition of PriMerit Bank. Management
anticipates a positive retained earnings balance at year end.
In August 1996, the Company completed the sale of $75 million of 7-1/2 percent
debentures due 2006 and $75 million of 8 percent debentures due 2026. Net
proceeds of $148 million as well as a portion of the $163 million net proceeds
from the PriMerit sale were used to refund or retire $219 million of
outstanding callable debentures and pay down short-term debt with the
remaining amount being used for general corporate purposes, including the
acquisition of property for the construction, completion, extension, and
improvement of the Company's pipeline systems. The refinancing achieved a
126 basis point reduction in the related average interest rate. The financial
impacts of the restructuring will be realized beginning with fourth quarter
results.
In October 1996, the Company filed a $250 million shelf registration
statement. Under this new registration statement, the Company may offer, up
to the registered amount, any combination of debt securities, preferred stock,
depositary shares, and common stock. This registration statement includes a
carryforward of $60 million remaining from a prior shelf registration
statement declared effective by the Securities and Exchange Commission in
October 1995.
8
Securities ratings issued by nationally recognized ratings agencies provide a
method for determining the creditworthiness of an issuer. The Company's debt
ratings are influential since long-term debt constitutes a significant portion
of the Company's capitalization. These debt ratings are a factor considered
by lenders when determining the cost of debt for the Company (i.e., the better
the rating, the lower the cost to borrow funds).
In July 1996, Moody's upgraded the Company's unsecured long-term debt rating
from Baa3 to Baa2. Moody's debt ratings range from Aaa (best quality) to C
(lowest quality). Moody's applies a Baa2 rating to obligations which are
considered medium grade obligations, i.e., they are neither highly protected
nor poorly secured.
Also in July 1996, Duff & Phelps Credit Rating Co. upgraded the Company's
unsecured long-term debt rating to BBB from BBB-. Duff & Phelps debt ratings
range from AAA (highest rating possible) to DD (defaulted debt obligation).
The Duff & Phelps rating of BBB indicates that the Company's credit quality is
considered prudent for investment.
A securities rating is not a recommendation to buy, sell, or hold a security
and is subject to change or withdrawal at any time by the rating agency.
RESULTS OF CONSOLIDATED OPERATIONS
Quarterly Analysis
- ------------------
Contribution to Net Loss
Three Months Ended September 30,
-------------------------------
(Thousands of dollars)
1996 1995
---------- ----------
Continuing operations:
Natural gas operations $ (16,256) $ (13,353)
Construction services 1,618 --
Discontinued operations--financial services -- 522
---------- ----------
Net loss $ (14,638) $ (12,831)
========== ==========
Loss per share for the quarter ended September 30, 1996 was $0.55, compared to
$0.54 recorded during the corresponding quarter of the prior year. See
separate discussion at NATURAL GAS OPERATIONS SEGMENT of the changes as they
relate to the natural gas operations segment. Construction services earnings
per share were $0.06 for the current period. Prior year loss per share
included per share earnings of $0.02 contributed from discontinued operations.
Average shares outstanding increased 2.4 million shares between years
primarily resulting from a 1.4 million share issuance in April 1996, and
issuances under the Company's Dividend Reinvestment and Stock Purchase Plan.
9
Nine-Month Analysis
- -------------------
Contribution to Net Loss
Nine Months Ended September 30,
------------------------------
(Thousands of dollars)
1996 1995
---------- ----------
Continuing operations:
Natural gas operations $ (13,786) $ (8,855)
Construction services 2,064 --
Discontinued operations--financial services -- 1,328
---------- ----------
Net loss $ (11,722) $ (7,527)
========== ==========
Loss per share for the nine months ended September 30, 1996 was $0.46, a $0.12
decline from a per share loss of $0.34 recorded during the nine months ended
September 30, 1995. Loss from continuing operations during the current
nine-month period was $0.46, a decline from the loss recorded during the
corresponding prior period of $0.40 per share. See separate discussion at
NATURAL GAS OPERATIONS SEGMENT of the changes as they relate to the natural
gas operations segment. Construction services earnings per share were $0.08
for the five-month period since acquisition. Prior year loss per share
included per share earnings of $0.06 contributed from discontinued operations.
Average shares outstanding increased 2.9 million shares between years
primarily resulting from a 2.1 million share public offering in May 1995, a
1.4 million share issuance in April 1996, and issuances under the Company's
Dividend Reinvestment and Stock Purchase Plan.
Twelve-Month Analysis
- ---------------------
Contribution to Net Income (Loss)
Twelve Months Ended September 30,
--------------------------------
(Thousands of dollars)
1996 1995
----------- -----------
Continuing operations:
Natural gas operations $ (2,277) $ 15,581
Construction services 2,064 --
Discontinued operations--financial services (18,864) 1,429
----------- -----------
Net income (loss) $ (19,077) $ 17,010
=========== ===========
Loss per share for the twelve months ended September 30, 1996 was $0.75, a
$1.49 decline from per share earnings of $0.74 recorded during the prior
twelve-month period. Loss from continuing operations during the current
twelve-month period was $0.01, a decline from earnings recorded during the
corresponding prior period of $0.68 per share. See separate discussion at
NATURAL GAS OPERATIONS SEGMENT of the changes as they relate to the natural
gas operations segment. Construction services earnings per share were $0.08
for the five-month period since acquisition. Prior year earnings per share
included per share earnings of $0.06 contributed from discontinued operations.
Average shares outstanding increased 3 million shares between years.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board (FASB) issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. This statement is effective for transactions
occurring after December 31, 1996. The Company does not anticipate any
material effect on its financial position or results of operations upon
implementation of this statement.
10
NATURAL GAS OPERATIONS SEGMENT
The Company is engaged in the business of purchasing, transporting, and
distributing natural gas in portions of Arizona, Nevada, and California. Its
service areas are geographically as well as economically diverse. The Company
is the largest distributor in Arizona, selling and transporting natural gas in
most of southern, central, and northwestern Arizona, including the Phoenix and
Tucson metropolitan areas. The Company is also the largest distributor and
transporter of natural gas in Nevada, and serves the Las Vegas metropolitan
area and northern Nevada. In addition, the Company distributes and transports
gas in portions of California, including the Lake Tahoe area in northern
California and high desert and mountain areas in San Bernardino County.
The Company purchases, transports, and distributes natural gas to
approximately 1,064,000 residential, commercial, and industrial customers
within its three-state service territory, of which 58 percent are in Arizona,
32 percent are in Nevada, and 10 percent are in California. During the twelve
months ended September 30, 1996, 57 percent of operating margin was earned in
Arizona, 33 percent in Nevada, and 10 percent in California. During this same
period, the Company earned 59 percent of its operating margin from residential
customers, 24 percent from commercial customers, and 17 percent from
industrial and other customers. These patterns are consistent with prior
periods and are expected to continue.
For the twelve months ended September 30, 1996, the Company's natural gas
construction expenditures totaled $191 million, a 19 percent increase when
compared to $160 million of additions for the same period ended a year ago.
The increase is attributed to the investment in new transmission and
distribution plant in Arizona, Nevada, and California to meet the demand from
the Company's growing customer base. Approximately 80 percent of these
current-period expenditures represents new construction and the balance
represents costs associated with routine replacement of existing transmission,
distribution and general plant.
11
RESULTS OF NATURAL GAS OPERATIONS
Quarterly Analysis
- ------------------
Three Months Ended
September 30,
--------------------
(Thousands of dollars)
1996 1995
--------- ---------
Gas operating revenues $ 85,534 $ 91,433
Net cost of gas 24,027 30,973
--------- ---------
Operating margin 61,507 60,460
Operations and maintenance expense 49,086 46,565
Depreciation and amortization 17,012 16,326
Taxes other than income taxes 7,365 6,784
--------- ---------
Operating loss (11,956) (9,215)
Other income (expense), net (23) (194)
--------- ---------
Loss before interest and income taxes (11,979) (9,409)
Net interest deductions 13,645 13,296
Preferred securities distribution 1,368 --
Income tax expense (benefit) (10,540) (9,352)
--------- ---------
Net loss before allocations (16,452) (13,353)
Allocation of carrying costs, net of tax 196 --
--------- ---------
Contribution to consolidated net loss $ (16,256) $ (13,353)
========= =========
Contribution to consolidated net loss decreased $2.9 million compared to the
third quarter of 1995. The decrease was principally the result of higher
operating costs and financing expenses incurred as a result of the expansion
and upgrading of the gas system to accommodate customer growth.
Operating margin increased two percent in the third quarter of 1996 when
compared to the third quarter of 1995. The increase is attributed to rate
relief granted in the Nevada rate jurisdictions effective July 1996.
Operations and maintenance expenses increased $2.5 million, or five percent,
reflecting increases in labor and maintenance costs, including the incremental
expenses associated with meeting the needs of the Company's growing customer
base.
Depreciation expense and general taxes increased $1.3 million, or five percent,
primarily due to an increase in average gas plant in service of $132 million,
or nine percent, compared to the third quarter of 1995. This increase
reflects ongoing capital expenditures for the upgrade of existing operating
facilities and the expansion of the system to accommodate continued customer
growth.
Preferred securities distributions during the third quarter of 1996 were
$1.4 million. These distributions were generated from the original issuance
of preferred securities in October 1995.
12
Nine-Month Analysis
- -------------------
Nine Months Ended
September 30,
--------------------
(Thousands of dollars)
1996 1995
--------- ---------
Gas operating revenues $ 376,599 $ 417,143
Net cost of gas 139,184 184,639
--------- ---------
Operating margin 237,415 232,504
Operations and maintenance expense 144,557 140,287
Depreciation and amortization 50,003 47,204
Taxes other than income taxes 22,228 20,272
--------- ---------
Operating income 20,627 24,741
Other income (expense), net (298) (185)
--------- ---------
Income before interest and income taxes 20,329 24,556
Net interest deductions 39,869 39,656
Preferred securities distribution 4,106 --
Income tax expense (benefit) (9,533) (6,245)
--------- ---------
Net loss before allocations (14,113) (8,855)
Allocation of carrying costs, net of tax 327 --
--------- ---------
Contribution to consolidated net loss $ (13,786) $ (8,855)
========= =========
Contribution to consolidated net loss decreased $4.9 million compared to the
nine months ended September 1995. This was the result of increased operating
costs and financing expenses incurred as a result of the continued expansion
and upgrading of the gas system to accommodate the Company's growth.
Operating margin increased two percent during the nine months ended
September 1996, compared to the same period in 1995 due primarily to customer
growth throughout the service territories and rate relief in the Nevada rate
jurisdictions. However, the impact of record warm temperatures in the
Southwest region of the country during the first quarters of 1996 and 1995
reduced operating margin in both periods from expected levels.
Operations and maintenance expenses increased $4.3 million, or three percent,
reflecting increases in labor and maintenance costs along with incremental
operating expenses associated with meeting the needs of the Company's growing
customer base.
Depreciation expense and general taxes increased $4.8 million, or
seven percent, primarily due to an increase in average gas plant in service of
$140 million, or nine percent. This increase reflects capital expenditures
for the upgrade of existing operating facilities and the expansion of the
system to accommodate continued customer growth within the Company's service
area.
Preferred securities distributions during the current period were
$4.1 million. These distributions were generated from the original issuance
of preferred securities in October 1995.
13
Twelve-Month Analysis
- ---------------------
Twelve Months Ended
September 30,
--------------------
(Thousands of dollars)
1996 1995
--------- ---------
Gas operating revenues $ 522,958 $ 608,604
Net cost of gas 182,001 254,716
--------- ---------
Operating margin 340,957 353,888
Operations and maintenance expense 192,239 186,808
Depreciation and amortization 65,291 61,755
Taxes other than income taxes 29,129 26,861
--------- ---------
Operating income 54,298 78,464
Other income (expense), net (765) (504)
--------- ---------
Income before interest and income taxes 53,533 77,960
Net interest deductions 53,567 52,935
Preferred securities distribution 5,019 --
Income tax expense (benefit) (2,449) 9,444
--------- ---------
Net income (loss) before allocations (2,604) 15,581
Allocation of carrying costs, net of tax 327 --
--------- ---------
Contribution to consolidated net income (loss) $ (2,277) $ 15,581
========= =========
Contribution to consolidated net income decreased $17.9 million compared to
the twelve months ended September 1995. Operating margin decreased while
operations and maintenance expense, depreciation, general taxes, and financing
expenses increased.
Despite a five percent increase in the number of customers billed between the
two periods, operating margin decreased $12.9 million due to record warm
weather experienced during the 1995/1996 winter heating season. Unseasonably
warm weather experienced during much of the fourth quarter of 1995 and the
first quarter of 1996 caused operating margin to be approximately $32 million
less than expected and $26 million lower than the prior twelve-month period.
The addition of 66,000 new customers over the twelve-month period partially
mitigated the impact of weather, contributing approximately $13 million to
operating margin.
Operations and maintenance expenses increased $5.4 million, or three percent,
primarily as a result of general cost increases in labor and materials over
the same period a year ago.
Depreciation expense and general taxes increased $5.8 million, or
seven percent, as a result of additional plant in service. Average gas plant
in service for the current twelve-month period increased $141 million, or
ten percent compared to the corresponding period a year ago. This was
attributable to the upgrade of existing operating facilities and the expansion
of the system to accommodate continued customer growth.
Preferred securities distributions during the current period were $5 million.
These distributions were generated from the original issuance of preferred
securities in October 1995.
14
RATES AND REGULATORY PROCEEDINGS
NEVADA
In December 1995, the Company filed general rate cases with the Public Service
Commission of Nevada (PSCN) seeking approval to increase revenues by
$15.8 million, or 12 percent, annually for its southern Nevada rate
jurisdiction and $5 million, or 10 percent, annually for its northern Nevada
rate jurisdiction. The Company was seeking recovery of increased operating
and maintenance costs, construction-related financing, tax, insurance, and
depreciation expenses associated with its expanding customer base. In
April 1996, the PSCN approved a settlement of the general rate cases providing
the Company with a $10.6 million general rate increase in southern Nevada and
a $3.2 million increase in northern Nevada. The settlement achieved a number
of rate design and tariff restructuring changes resulting in rates that are
more cost-based. Over 86 percent of annual margin will now be recoverable
from core customer classes, those most responsible for the increased operating
costs. The settlement also adjusts rate design by equalizing margins earned
from sales and transportation customers, resulting in consistent margin
regardless of the type of service elected by a customer. The settlement also
specifies a moratorium on future general rate increase requests until
April 1999. The new rates became effective July 1, 1996.
FERC
In July 1996, Paiute Pipeline Company, a wholly owned subsidiary of the
Company, filed a general rate case with the Federal Energy Regulatory
Commission (FERC) seeking approval to increase revenues by $6.9 million
annually. Paiute is seeking recovery of cost increases associated with plant
and related items, depreciation rates, operational costs including labor, and
an increase in the allowed rate of return. Interim rates reflecting the
increased revenues are expected to become effective in January 1997, subject
to refund. The exact amount of rate relief that will ultimately be authorized
is not known.
ARIZONA
In November 1996, the Company filed a general rate application with the
Arizona Corporation Commission (ACC) seeking approval to increase revenues by
$49.3 million, or 16 percent, annually for both of its Arizona rate
jurisdictions. The Company is seeking rate relief for increased operating
costs, changes in financing costs, and improvements and additions to the
distribution system. The rate application also proposes a number of rate
design improvements including consolidation of the southern and central
Arizona operating divisions and better matching of rates with the costs of
servicing various customer classes.
15
PART II - OTHER INFORMATION
---------------------------
ITEMS 1-5 NONE
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report
on Form 10-Q:
Exhibit 10 - Amended and Restated Lease Agreement between
Spring Mountain Road Associates and Southwest
Gas Corporation dated as of July 1, 1996.
Exhibit 27 - Financial Data Schedule (filed electronically
only)
Exhibit 99 - Financial Analyst Report - Third Quarter 1996
(b) Reports on Form 8-K
None
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Southwest Gas Corporation
--------------------------------------------------
(Registrant)
Date: November 12, 1996 /s/ Edward A. Janov
--------------------------------------------------
Edward A. Janov
Vice President/Controller/Chief Accounting Officer
16
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------
10 Amended and Restated Lease Agreement between Spring Mountain
Road Associates and Southwest Gas Corporation dated as of
July 1, 1996.
27 Financial Data Schedule (filed electronically only)
99 Financial Analyst Report - Third Quarter 1996