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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1997
Commission File Number 1-7850
SOUTHWEST GAS CORPORATION
(Exact name of registrant as specified in its charter)
California 88-0085720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5241 Spring Mountain Road
Post Office Box 98510
Las Vegas, Nevada 89193-8510
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (702) 876-7237
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, $1 Par Value, 27,128,030 shares as of August 4, 1997
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1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except par value)
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
ASSETS (Unaudited)
Utility plant
Gas plant $ 1,813,974 $ 1,732,405
Less: accumulated depreciation (531,640) (505,984)
Acquisition adjustments 4,458 5,866
Construction work in progress 32,985 46,170
------------ ------------
Net utility plant 1,319,777 1,278,457
------------ ------------
Other property and investments 71,039 71,245
------------ ------------
Current assets
Cash and cash equivalents 6,142 8,280
Accounts receivable, net of allowances 48,561 69,000
Accrued utility revenue 20,541 46,500
Income tax benefit 23,350 --
Deferred tax benefit -- 8,009
Deferred purchased gas costs 57,476 --
Prepaids and other current assets 27,592 28,029
------------ ------------
Total current assets 183,662 159,818
------------ ------------
Deferred charges and other assets 50,484 50,749
------------ ------------
Total assets $ 1,624,962 $ 1,560,269
============ ============
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock, $1 par (authorized - 45,000,000 shares; issued
and outstanding - 27,089,363 and 26,732,688 shares) $ 28,719 $ 28,363
Additional paid-in capital 354,942 349,132
Retained earnings (accumulated deficit) (152) 2,121
------------ ------------
Total common equity 383,509 379,616
Redeemable preferred securities of Southwest Gas Capital I 60,000 60,000
Long-term debt, less current maturities 754,442 665,221
------------ ------------
Total capitalization 1,197,951 1,104,837
------------ ------------
Current liabilities
Current maturities of long-term debt 6,347 6,675
Short-term debt 88,420 121,000
Accounts payable 29,538 49,951
Customer deposits 21,693 21,133
Accrued taxes 18,932 9,977
Accrued interest 10,308 9,800
Deferred taxes 15,362 --
Deferred purchased gas costs -- 9,432
Other current liabilities 37,143 33,369
------------ ------------
Total current liabilities 227,743 261,337
------------ ------------
Deferred income taxes and other credits
Deferred income taxes and investment tax credits 156,013 152,063
Other deferred credits 43,255 42,032
------------ ------------
Total deferred income taxes and other credits 199,268 194,095
------------ ------------
Total capitalization and liabilities $ 1,624,962 $ 1,560,269
============ ============
The accompanying notes are an integral part of these statements.
2
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
---------------------- ---------------------- ----------------------
1997 1996 1997 1996 1997 1996
---------- ---------- ---------- ---------- ---------- ----------
Operating revenues:
Gas operating revenues $ 107,740 $ 102,713 $ 319,304 $ 291,065 $ 574,600 $ 528,857
Construction revenues 29,198 20,898 52,865 20,898 129,667 20,898
---------- ---------- ---------- ---------- ---------- ----------
Total operating revenues 136,938 123,611 372,169 311,963 704,267 549,755
---------- ---------- ----------- ---------- ---------- ----------
Operating expenses:
Net cost of gas sold 36,723 36,688 121,322 115,157 193,745 188,947
Operations and maintenance 49,407 48,260 97,855 95,471 200,748 189,718
Depreciation and amortization 20,296 18,052 40,927 34,591 80,035 66,205
Taxes other than income taxes 7,457 7,269 15,111 14,863 28,404 28,548
Construction expenses 27,037 18,089 49,421 18,089 116,021 18,089
---------- ---------- ---------- ---------- --------- ----------
Total operating expenses 140,920 128,358 324,636 278,171 618,953 491,507
---------- ---------- ---------- ---------- --------- ----------
Operating income (loss) (3,982) (4,747) 47,533 33,792 85,314 58,248
---------- ---------- ---------- ---------- --------- ----------
Other income and (expenses):
Net interest deductions (15,615) (13,476) (30,247) (26,429) (58,731) (53,423)
Preferred securities distributions (1,369) (1,369) (2,738) (2,738) (5,475) (3,651)
Other income (deductions), net 229 (282) (142) (203) (676) (864)
---------- ---------- ---------- ---------- --------- ----------
Total other income and (expenses) (16,755) (15,127) (33,127) (29,370) (64,882) (57,938)
---------- ---------- ---------- ---------- --------- ----------
Income (loss) from continuing operations before income taxes (20,737) (19,874) 14,406 4,422 20,432 310
Income tax expense (benefit) (7,989) (7,931) 5,586 1,506 7,954 (762)
---------- ---------- ---------- ---------- --------- ----------
Income (loss) from continuing operations (12,748) (11,943) 8,820 2,916 12,478 1,072
Net loss from discontinued operations -- -- -- -- -- (18,342)
---------- ---------- ---------- ---------- --------- ----------
Net income (loss) (12,748) (11,943) 8,820 2,916 12,478 (17,270)
---------- ---------- ---------- ---------- --------- ----------
Preferred stock dividend requirements -- -- -- -- -- 117
---------- ---------- ---------- ---------- --------- ----------
Net income (loss) applicable to common stock $ (12,748) $ (11,943) $ 8,820 $ 2,916 $ 12,478 $ (17,387)
========== ========== ========== ========== ========== ==========
Earnings (loss) per share from continuing operations $ (0.47) $ (0.46) $ 0.33 $ 0.12 $ 0.47 $ 0.04
Loss per share from discontinued operations -- -- -- -- -- (0.74)
---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) per share of common stock $ (0.47) $ (0.46) $ 0.33 $ 0.12 $ 0.47 $ (0.70)
========== ========== ========== ========== ========== ==========
Dividends paid per share of common stock $ 0 .205 $ 0.205 $ 0.41 $ 0.41 $ 0.82 $ 0.82
========== ========== ========== ========== ========== ==========
Average number of common shares outstanding 27,002 25,817 26,910 25,211 26,733 24,773
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
3
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,
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 8,820 $ 2,916 $ 12,478 $ (17,270)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 40,927 34,591 80,035 66,205
Deferred income taxes 27,321 (1,850) 46,624 (26,834)
Changes in current assets and liabilities:
Accounts receivable, net of allowances 20,439 10,847 (8,294) (778)
Accrued utility revenue 25,959 23,936 (577) (1,340)
Deferred purchased gas costs (66,908) 13,622 (103,874) 16,253
Accounts payable (20,413) (12,286) (3,163) 5,651
Accrued taxes (14,395) 3,045 (36,579) 14,142
Other current assets and liabilities 7,832 (2,238) 12,568 (5,138)
Other 1,069 2,543 8,502 1,163
Undistributed loss from discontinued operations -- -- -- 15,356
---------- ---------- ---------- ----------
Net cash provided by operating activities 30,651 75,126 7,720 67,410
---------- ---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Construction expenditures and property additions (81,033) (87,178) (212,690) (179,316)
Proceeds from bank sale -- -- 191,662 --
Other (3,503) (2,802) (22,813) 1,960
---------- ---------- ---------- ----------
Net cash used in investing activities (84,536) (89,980) (43,841) (177,356)
---------- ---------- ---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 6,166 11,412 12,864 20,576
Issuance of trust originated preferred securities, net -- -- -- 57,713
Reacquisition of preferred stock -- -- -- (4,000)
Dividends paid (11,020) (10,427) (21,904) (20,029)
Issuance of long-term debt, net 92,871 9,286 248,461 33,893
Retirement of long-term debt, net (3,690) (1,519) (250,702) (1,549)
Issuance (repayment) of short-term debt (32,580) 5,234 43,244 26,234
Other -- 1,270 (1,270) 684
---------- ---------- ---------- ----------
Net cash provided by financing activities 51,747 15,256 30,693 113,522
Change in cash and temporary cash investments (2,138) 402 (5,428) 3,576
Cash at beginning of period 8,280 11,168 11,570 7,994
---------- ---------- ---------- ----------
Cash at end of period $ 6,142 $ 11,570 $ 6,142 $ 11,570
========== ========== ========== ==========
Supplemental information:
Interest paid, net of amounts capitalized $ 29,104 $ 30,142 $ 58,970 $ 61,500
========== ========== ========== ==========
Income taxes, net of refunds $ (2,682) $ 4,428 $ 11,572 $ 7,422
========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
4
Note 1 - Summary of Significant Accounting Policies
Nature of Operations. Southwest Gas Corporation (the Company) is
comprised of two segments: Natural gas operations (Southwest or the natural
gas operations segment) and construction services. Southwest purchases,
transports, and distributes natural gas to customers in portions of Arizona,
Nevada, and California. Natural gas sales are seasonal, peaking during the
winter months. Variability in weather from normal temperatures can materially
impact results of operations. Northern Pipeline Construction Co. (Northern or
the construction services segment), a wholly owned subsidiary, is a full-service
underground piping contractor which provides utility companies with
trenching and installation, replacement, and maintenance services for energy
distribution systems.
Discontinued Operations. In July 1996, the Company completed the
sale of the assets and liabilities of PriMerit Bank (the Bank) to Norwest
Corporation. The results of operations of the Bank are shown as discontinued
operations in the accompanying financial statements.
Basis of Presentation. The consolidated financial statements
included herein have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The preparation
of the consolidated financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. In the
opinion of management, all adjustments, consisting of normal recurring items
and estimates necessary for a fair presentation of the results for the interim
periods, have been made. It is suggested that these consolidated financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Company's 1996 Annual Report to Shareholders, which is
incorporated by reference into the Form 10-K, and the 1997 First Quarter
Report on Form 10-Q.
Intercompany Transactions. During the six months ended June 30,
1997, the construction services segment recognized $18 million of revenues
generated from contracts with Southwest. At June 30, 1997, accounts
receivable for these services was $3.2 million. The accounts receivable
balance, revenues, and associated profits are included in the consolidated
financial statements of the Company and were not eliminated during
consolidation. Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation," provides that
intercompany profits on sales to regulated affiliates should not be eliminated
in consolidation if the sales price is reasonable and if future revenues
approximately equal to the sales price will result from the rate-making
process. Management believes these two criteria will be met.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company is principally engaged in the business of purchasing,
transporting, and distributing natural gas. Southwest is the largest
distributor in Arizona, selling and transporting natural gas in most of
southern, central, and northwestern Arizona, including the Phoenix and Tucson
metropolitan areas. Southwest is also the largest distributor and transporter
of natural gas in Nevada, and serves the Las Vegas metropolitan area and
northern Nevada. In addition, Southwest distributes and transports natural
gas in portions of California, including the Lake Tahoe area in northern
California and high desert and mountain areas in San Bernardino County.
Southwest purchases, transports, and distributes natural gas to approximately
1,113,000 residential, commercial, industrial and other customers, of which
58 percent are located in Arizona, 32 percent are in Nevada, and 10 percent
are in California. During the twelve months ended June 30, 1997, Southwest
earned 54 percent of operating margin in Arizona, 37 percent in Nevada, and
9 percent in California. During this same period, Southwest earned 62 percent
of operating margin from residential customers, 23 percent from commercial
customers, and 15 percent from industrial and other customers. These patterns
are consistent with prior years and are expected to continue.
Northern is a full-service underground piping contractor which provides
utility companies with trenching and installation, replacement, and
maintenance services for energy distribution systems.
Capital Resources and Liquidity
The capital requirements and resources of the Company generally are determined
independently for the natural gas operations and construction services
segments. Each business activity is generally responsible for securing its
own financing sources. The capital requirements and resources of the
construction services segment are not material to the overall capital
requirements and resources of the Company.
Southwest continues to experience significant population growth throughout its
service territories. This growth has required large amounts of capital to
finance the investment in infrastructure, in the form of new transmission and
distribution plant, to satisfy consumer demand. Southwest estimates
construction expenditures during the three-year period ending
December 31, 1999 will be approximately $468 million. During the three-year
period, cash flow from operating activities (net of dividends) is estimated to
fund approximately one-half of the gas operations total construction
expenditures. A portion of the construction expenditure funding will be
provided by $30 million of funds held in trust, at December 31, 1996, from the
issuance of industrial development revenue bonds (IDRB). The remaining cash
requirements are expected to be provided by external financing sources. The
timing, types, and amounts of these additional external financings will be
dependent on a number of factors, including conditions in the capital markets,
timing and amounts of rate relief, and growth levels in Southwest service
areas. These external financings may include the issuance of both debt and
equity securities, bank and other short-term borrowings, and other forms of
financing. Due to the significant size of the current construction program,
differences between estimated and actual results are expected to occur.
Actual events, and the timing of those events, frequently do not occur as
expected, and can impact, favorably or unfavorably, anticipated cash flows.
For the twelve months ended June 30, 1997, natural gas construction
expenditures totaled $201 million. Approximately 80 percent of these
expenditures represents new construction and the balance represents costs
associated with routine replacement of existing transmission, distribution and
general plant. Financing for recent construction expenditures and for other
corporate purposes was provided primarily by the issuances of medium-term
notes in January, February and June 1997 totaling $75 million and a
$16 million issuance of commercial paper in February 1997.
Cash flows from operating activities during the six and twelve months ended
June 30, 1997 were negatively affected by increases in the cost of gas during
the fourth quarter of 1996 and first quarter of 1997. Higher gas costs
coupled with refunds to customers of previously overcollected amounts shifted
the deferred purchased gas cost balance from a $46.4 million payable, at
6
June 30, 1996, to a $57.5 million receivable, at June 30, 1997, a $104 million
change. Southwest must first seek regulatory approval before changing the
rates it charges for recovery of gas costs.
The increase in the cost of gas resulted from several factors including
reduced natural gas storage supplies nationwide following colder-than-normal
temperatures in the East and Midwest during the winter heating season of
1995/1996. Domestic storage supplies were not fully replenished during the
summer months of 1996 because natural gas prices did not fall as much as
expected, and companies were shifting to "just-in-time" delivery practices in
lieu of storage. Reduced availability coupled with increased weather-related
demand for supplies during the winter heating season of 1996/1997 were the
primary reasons for the increased cost of natural gas. These increases not
only impacted Southwest, but local gas distribution companies throughout the
country.
Southwest intends to file for recovery of the accumulated balances in all
applicable rate jurisdictions. In January 1997, Southwest submitted a
purchased gas cost adjustment (PGA) filing with the Public Service Commission
of Nevada (PSCN). In April 1997 the filing was amended. If approved as
amended, the filing would result in annual increases of $12.4 million, or
11 percent, in the southern Nevada rate jurisdiction and $6 million, or
14 percent, in the northern Nevada rate jurisdiction. Hearings on this filing
were held in July 1997 and a final decision from the PSCN is expected during
the third quarter of 1997.
In June 1997, Southwest submitted an additional PGA filing with the PSCN to
increase annual rates by $24 million, or 19 percent, in southern Nevada and
$8.6 million, or 17 percent, in northern Nevada. This annual PGA filing
addresses the increased costs of natural gas since the beginning of 1997 as
well as an increase to recover costs previously deferred.
Results of Consolidated Operations
Quarterly Analysis
Contribution to Net Loss
Three Months Ended June 30,
---------------------------
(Thousands of dollars)
1997 1996
--------- ---------
Natural gas operations $ (12,747) $ (12,389)
Construction services (1) 446
--------- ---------
Net loss $ (12,748) $ (11,943)
========= =========
Loss per share for the quarter ended June 30, 1997 was $0.47, compared to a
$0.46 loss per share recorded during the corresponding quarter of the prior
year. Loss from natural gas operations improved $0.01 per share. See
separate discussion at RESULTS OF NATURAL GAS OPERATIONS for changes as they
relate to gas operations. Construction services results declined $0.02 per
share from the previous period primarily resulting from inclement weather in
some construction areas. In addition, the 1996 income does not include April
Northern results which are typically losses due to the seasonal nature of the
construction services business. Average shares outstanding increased
1.2 million shares between years primarily resulting from continuing issuances
under the Company Dividend Reinvestment and Stock Purchase Plan.
7
Six-Month Analysis
Contribution to Net Income
Six Months Ended June 30,
---------------------------
(Thousands of dollars)
1997 1996
--------- ---------
Natural gas operations $ 9,789 $ 2,470
Construction services (969) 446
--------- ---------
Net income $ 8,820 $ 2,916
========= =========
Earnings per share for the six months ended June 30, 1997 were $0.33 a $0.21
increase from per share earnings of $0.12 recorded during the corresponding
six months of the previous year. Earnings contributed from natural gas
operations during the current six-month period were $0.36 per share, an
increase of $0.26 per share. See separate discussion at RESULTS OF NATURAL GAS
OPERATIONS for changes as they relate to gas operations. Construction
services activities incurred a loss per share of $0.03 during the current
period reflecting the seasonal nature of construction activity in colder
climate areas. In the prior period, construction services contributed $0.02
per share, however, those results excluded the months of January through April
1996 which are typically loss months. Average shares outstanding increased
1.7 million shares between years primarily resulting from a 1.4 million share
issuance in April 1996 to acquire Northern.
Twelve-Month Analysis
Contribution to Net Income (Loss)
Twelve Months Ended June 30,
----------------------------
(Thousands of dollars)
1997 1996
--------- ---------
Continuing operations
Natural gas operations $ 11,238 $ 626
Construction services 1,240 446
--------- ---------
12,478 1,072
Discontinued operations-financial services -- (18,342)
--------- ---------
Net income (loss) $ 12,478 $ (17,270)
========= =========
Earnings per share for the twelve months ended June 30, 1997 were $0.47, a
$0.43 increase from the $0.04 per share earnings from continuing operations
recorded during the prior twelve-month period. Earnings contributed from
natural gas operations increased $0.40 per share. See separate discussion
at RESULTS OF NATURAL GAS OPERATIONS for changes as they relate to gas
operations. Construction services activities contributed per share
earnings of $0.05 reflecting a full year of operations. Discontinued
operations posted a $0.74 per share loss during the prior year. Average
shares outstanding increased 2 million shares between periods due to a 1.4
million share issuance in April 1996 to acquire Northern and issuances
under the Company Dividend Reinvestment and Stock Purchase Plan.
The following table sets forth the ratios of earnings to fixed charges for
the Company:
For the Twelve Months Ended
------------------------------
June 30, December 31,
1997 1996
------------ ------------
Ratios of earnings to fixed charges 1.28 1.15
For the purposes of computing the ratios of earnings to fixed charges,
earnings are defined as the sum of pretax income from continuing operations
plus fixed charges. Fixed charges consist of all interest expense
including capitalized interest, one-third of rent expense (which
approximates the interest component of such expense), preferred securities
distributions and amortized debt costs.
8
Results of Natural Gas Operations
Quarterly Analysis
Three Months Ended
June 30,
-------------------------
(Thousands of dollars)
1997 1996
---------- ---------
Gas operating revenues $ 107,740 $ 102,713
Net cost of gas sold 36,723 36,688
---------- ---------
Operating margin 71,017 66,025
Operations and maintenance expense 49,407 48,260
Depreciation and amortization 18,357 16,452
Taxes other than income taxes 7,457 7,269
---------- ---------
Operating income (loss) (4,204) (5,956)
Other income (expense), net (43) (354)
---------- ---------
Income (loss) before interest and income taxes (4,247) (6,310)
Net interest deductions 15,195 13,053
Preferred securities distributions 1,369 1,369
Income tax expense (benefit) (8,064) (8,343)
---------- ---------
Contribution to consolidated net income $ (12,747) $ (12,389)
========== =========
Contribution to consolidated net income declined $358,000 compared to the
second quarter of 1996. Higher operating and financing expenses incurred
as a result of the expansion and upgrading of the gas system to accommodate
continued customer growth were nearly offset by improvements in operating
margin.
Operating margin increased $5 million, or eight percent, in the second
quarter of 1997 when compared to the second quarter of 1996. The operating
margin improvement was primarily the result of general rate relief granted
in Nevada jurisdictions effective July 1996 and customer growth. Southwest
added approximately 62,000 customers during the past twelve months, a six
percent increase.
Operations and maintenance expenses increased $1.1 million, or two percent,
reflecting general increases in labor, purchased goods and services.
Depreciation expense and general taxes increased $2.1 million, or
nine percent, as a result of construction activities. Average gas plant in
service increased $169 million, or ten percent, as compared to the second
quarter of 1996. The increase reflects ongoing capital expenditures for
the upgrade of existing operating facilities and the expansion of the
system to accommodate continued customer growth.
Financing costs increased $2.1 million, or 15 percent, over the prior
period. This increase is primarily attributed to higher short-term
borrowings outstanding during the current quarter and an increase in
long-term debt reflecting $75 million of medium-term note issuances during
1997. The increase in short-term debt reflects the need for short-term
financing to cover higher gas costs experienced during the fourth quarter of
1996 and first quarter of 1997.
9
Six-Month Analysis
Six Months Ended
June 30,
------------------------
(Thousands of dollars)
1997 1996
---------- ----------
Gas operating revenues $ 319,304 $ 291,065
Net cost of gas sold 121,322 115,157
---------- ----------
Operating margin 197,982 175,908
Operations and maintenance expense 97,855 95,471
Depreciation and amortization 36,315 32,991
Taxes other than income taxes 15,111 14,863
---------- ----------
Operating income 48,701 32,583
Other income (expense), net (648) (275)
---------- ----------
Income before interest and income taxes 48,053 32,308
Net interest deductions 29,456 26,006
Preferred securities distributions 2,738 2,738
Income tax expense 6,070 1,094
---------- ----------
Contribution to consolidated net income $ 9,789 $ 2,470
========== ==========
Contribution to consolidated net income increased $7.3 million compared to
the six months ended June 1996. The increase was the result of improvement
in operating margin, offset somewhat by higher operating and financing
expenses.
Operating margin increased $22.1 million, or 13 percent, during the six
months ended June 1997 compared to the same period in 1996 due primarily to
continued customer growth throughout the Southwest service areas, general
rate relief granted in Nevada jurisdictions effective July 1996, and more
favorable weather conditions during the first quarter of 1997 relative to
the first quarter of 1996.
Operations and maintenance expenses increased $2.4 million, or two percent,
reflecting increases in labor and maintenance costs along with incremental
operating expenses associated with providing service to the growing
Southwest customer base.
Depreciation expense and general taxes increased $3.6 million, or seven
percent, resulting from an increase in average gas plant in service of $162
million, or ten percent. This increase reflects capital expenditures for
the upgrade of existing operating facilities and the expansion of the
system to accommodate new customers being added to the system.
Financing costs increased $3.5 million, or 12 percent, during the six
months ended June 1997 over the comparative prior period. Average total
debt outstanding during the period increased due to the financing of
construction expenditures and working capital needs and included higher
short-term debt, the issuance of medium-term notes during 1997, and the
drawdown of IDRB funds held in trust.
10
Twelve-Month Analysis
Twelve Months Ended
June 30,
------------------------
(Thousands of dollars)
1997 1996
---------- ----------
Gas operating revenues $ 574,600 $ 528,857
Net cost of gas sold 193,745 188,947
---------- ----------
Operating margin 380,855 339,910
Operations and maintenance expense 200,748 189,718
Depreciation and amortization 70,767 64,605
Taxes other than income taxes 28,404 28,548
---------- ----------
Operating income 80,936 57,039
Other income (expense), net (1,133) (936)
---------- ----------
Income before interest and income taxes 79,803 56,103
Net interest deductions 56,453 53,000
Preferred securities distributions 5,475 3,651
Income tax expense (benefit) 6,637 (1,174)
---------- ----------
Contribution to consolidated net income $ 11,238 $ 626
========== ==========
Contribution to consolidated net income increased $10.6 million compared to
the corresponding twelve-month period ended June 1996. The increase was
the result of an improvement in operating margin, offset somewhat by higher
operating and financing expenses.
Operating margin increased $40.9 million due to customer growth, rate
relief, and improved, but warmer-than-normal, weather conditions.
Southwest billed an average of 63,000 more customers per month than during
the previous twelve-month period which contributed approximately $11
million of additional margin. General rate relief granted in Nevada
jurisdictions effective July 1996 contributed $14 million. Weather-related
variances between periods resulted in a $16 million increase in operating
margin from weather-sensitive customers. On a weather-normalized basis,
operating margin would have been approximately $14 million greater than
actually reported for the twelve months ended June 30, 1997 and $30 million
higher in the previous period.
Operations and maintenance expenses increased $11 million, or six percent,
reflecting increases in labor and maintenance costs along with incremental
operating expenses associated with providing service to the steadily
growing Southwest customer base.
Depreciation expense and general taxes increased $6 million, or six
percent, as a result of construction activities. Average gas plant in
service for the current twelve-month period increased $151 million, or
ten percent, compared to the corresponding period a year ago. This was
attributed to the upgrade of existing operating facilities and the
expansion of the system to accommodate customer growth.
Financing costs increased $5.3 million, or nine percent, during the twelve
months ended June 30, 1997 over the comparative prior period. Average
total debt outstanding during the period increased due to the financing of
construction expenditures and working capital needs and included higher
short-term debt, the issuance of medium-term notes during 1997, and the
drawdown of IDRB funds held in trust. Additionally, the current year
reflects the full annual cost of the $60 million issuance of preferred
securities in October 1995.
11
Rates and Regulatory Proceedings
Arizona
In November 1996, Southwest filed a general rate application with the
Arizona Corporation Commission (ACC) seeking approval to increase revenues
by $49.3 million annually for both of its Arizona rate jurisdictions.
Southwest 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 rate
jurisdictions and better matching of rates with the costs of serving
various customer classes. In June 1997 a settlement agreement was filed
with the ACC representing agreement among the principal parties to resolve
the rate case without a lengthy hearing process. If approved as filed, the
settlement agreement would authorize an annual revenue increase of $32
million effective September 1997. The ACC is expected to address the
settlement agreement filing at a hearing in late August 1997.
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 rate relief for increased costs associated with
transmission system additions and improvements, higher depreciation rates,
operating cost increases including labor, and an increase in the allowed
rate of return. Interim rates reflecting the increased revenues became
effective in January 1997, subject to refund until a final order is issued.
In June 1997 a settlement agreement was filed with the FERC which calls for
a $3.2 million general rate increase. A final order could be received by
the end of 1997. The Company has been accruing a liability to customers
for the difference between the rates collected since January 1, 1997 and
the estimated amount of relief to ultimately be granted.
California
Northern California Expansion Project. In 1995, Southwest initiated a
multi-year, three-phase construction project to expand its northern
California service territory and extend service into Truckee, California.
(See Note 8 of the Notes to Consolidated Financial Statements of the 1996
Annual Report to Shareholders, incorporated by reference into the Form 10-K,
for additional background information.) In July 1997, Southwest filed
an application requesting authorization from the California Public
Utilities Commission (CPUC) to modify the terms and conditions of the
certificate of public convenience and necessity granted by the CPUC in
1995.
In the new application, Southwest is requesting that the cost cap of $29.1
million, originally approved by the CPUC, be increased to $46.8 million;
that the scope of Phase III construction be revised to include 2,900 of the
initially proposed 4,200 customers; and that Southwest be permitted to
collect contributions or advances from customer applicants desiring service
in the expansion area who were not identified to receive service during the
expansion phases as modified within the new application. Southwest has
proposed to recover the incremental costs above the original cost cap on a
dollar-for-dollar basis through a surcharge mechanism.
The modified filing, if approved as proposed, places Southwest in an
improved position to recover the costs of the expansion and earn a return
on its investment. Management expects the CPUC to hold hearings on this
filing and issue a final decision by the end of 1997.
For the remainder of 1997, construction work on this project will be
limited to the installation of services and meters off existing mains for
approximately 900 additional customers at a cost of approximately $1
million. Phase III, if approved as modified in the July 1997 application,
would be completed during the 1998 and 1999 construction seasons with
construction expenditures estimated at $11 million.
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Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued two new
accounting pronouncements. Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and displaying comprehensive income and its components in a full
set of general-purpose financial statements. The components are required
to be reported in a financial statement that is displayed with the same
prominence as other financial statements. This statement becomes effective
January 1, 1998. The Company is in the process of reviewing the
requirements of SFAS No. 130 and determining the placement and format of
the required disclosures.
The second pronouncement issued was SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. The
statement becomes effective for 1998 annual financial statements. The
Company is in the process of reviewing the requirements of SFAS No. 131,
and determining the content and format of the additional disclosures.
13
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 8,
1997. Matters voted upon and the results of the voting were as
follows:
(1) The eleven directors nominated were reelected.
(2) The proposal to ratify the selection of Arthur Andersen LLP as
independent public accountants for the Company was approved.
Shareholders voted 21,818,417 shares in favor, 206,078
opposed, and 192,493 abstentions.
ITEM 5 OTHER INFORMATION
In July 1997, the Southwest Gas Corporation Board of Directors
approved the addition of James J. Kropid and Terrance L. Wright
to its board. Mr. Kropid is president of James J. Kropid
Investments. He is a graduate of DePaul University in Chicago and
the executive development program at the University of Illinois.
He joined Centel Corporation in 1961 and became president of its
Nevada/Texas division in 1987. In 1993 and subsequent to his
retirement, Kropid was appointed general manager of the Nevada
State Industrial Insurance System, a position in which he served
for two years.
Mr. Wright is president and chief executive officer
of Nevada Title Insurance Company. He is a graduate of DePaul
University where he received his undergraduate degree in business
administration and a juris doctorate. He joined Chicago Title
Insurance Company while in law school, and after graduation,
remained with the company and moved to its Las Vegas office.
In 1978, he acquired the assets of Western Title to form the
company he now heads.
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 $350 million Revolving Credit Agreement
among the Company, Union Bank of
Switzerland, et al., dated as of
June 12, 1997.
Exhibit 12 Computation of Ratios of Earnings to Fixed
Charges and Ratios of Earnings to Combined
Fixed Charges and Preferred Stock Dividends.
Exhibit 27 Financial Data Schedule (filed
electronically only)
Exhibit 99 Financial Analyst Report-
Second Quarter 1997
(b) Reports on Form 8-K
None
14
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 13, 1997
/s/ Edward A. Janov
------------------------------------------------------
Edward A. Janov
Vice President/Controller and Chief Accounting Officer
15