===============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 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, 27,274,352 shares as of November 4, 1997
===============================================================================
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except par value)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
ASSETS (Unaudited)
Utility plant
Gas plant $ 1,845,875 $ 1,732,405
Less: accumulated depreciation (545,807) (505,984)
Acquisition adjustments 4,354 5,866
Construction work in progress 34,686 46,170
------------- -------------
Net utility plant 1,339,108 1,278,457
------------- -------------
Other property and investments 70,764 71,245
------------- -------------
Current assets
Cash and cash equivalents 12,910 8,280
Accounts receivable, net of allowances 45,801 69,000
Accrued utility revenue 21,725 46,500
Income tax benefit 35,557 --
Deferred tax benefit -- 8,009
Deferred purchased gas costs 64,805 --
Prepaids and other current assets 34,119 28,029
------------- -------------
Total current assets 214,917 159,818
------------- -------------
Deferred charges and other assets 54,299 50,749
------------- -------------
Total assets $ 1,679,088 $ 1,560,269
============= =============
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock, $1 par (authorized - 45,000,000 shares; issued
and outstanding - 27,222,856 and 26,732,688 shares) $ 28,853 $ 28,363
Additional paid-in capital 357,404 349,132
Retained earnings (accumulated deficit) (21,429) 2,121
------------- -------------
Total common equity 364,828 379,616
Redeemable preferred securities of Southwest Gas Capital I 60,000 60,000
Long-term debt, less current maturities 778,942 665,221
------------- -------------
Total capitalization 1,203,770 1,104,837
------------- -------------
Current liabilities
Current maturities of long-term debt 6,123 6,675
Short-term debt 109,000 121,000
Accounts payable 33,432 49,951
Customer deposits 21,536 21,133
Accrued taxes 25,720 9,977
Accrued interest 11,110 9,800
Deferred taxes 15,071 --
Deferred purchased gas costs -- 9,432
Other current liabilities 48,486 33,369
------------- -------------
Total current liabilities 270,478 261,337
------------- -------------
Deferred income taxes and other credits
Deferred income taxes and investment tax credits 157,967 152,063
------------- -------------
Other deferred credits 46,873 42,032
------------- -------------
Total deferred income taxes and other credits 204,840 194,095
------------- -------------
Total capitalization and liabilities $ 1,679,088 $ 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 NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
---------------------- --------------------- -----------------------
1997 1996 1997 1996 1997 1996
---------- ---------- ---------- ---------- ---------- ----------
Operating revenues:
Gas operating revenues $ 95,009 $ 85,534 $ 414,313 $ 376,599 $ 584,075 $ 522,958
Construction revenues 33,689 39,721 86,554 60,619 123,635 60,619
---------- ---------- ---------- ---------- ---------- ----------
Total operating revenues 128,698 125,255 500,867 437,218 707,710 583,577
---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Net cost of gas sold 28,508 24,027 149,830 139,184 198,226 182,001
Operations and maintenance 50,310 49,086 148,165 144,557 201,972 192,239
Depreciation and amortization 21,636 19,455 62,563 54,046 82,216 69,334
Taxes other than income taxes 7,371 7,365 22,482 22,228 28,410 29,129
Construction expenses 28,121 33,726 77,542 51,815 110,416 51,815
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses 135,946 133,659 460,582 411,830 621,240 524,518
---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) (7,248) (8,404) 40,285 25,388 86,470 59,059
---------- ---------- ---------- ---------- ---------- ----------
Other income and (expenses):
Net interest deductions (16,115) (14,016) (46,362) (40,445) (60,830) (54,143)
Preferred securities distributions (1,368) (1,368) (4,106) (4,106) (5,475) (5,019)
Other income (deductions), net (467) (11) (609) (214) (1,132) (681)
---------- ---------- ---------- ---------- ---------- ----------
Total other income and (expenses) (17,950) (15,395) (51,077) (44,765) (67,437) (59,843)
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations before income taxes (25,198) (23,799) (10,792) (19,377) 19,033 (784)
Income tax expense (benefit) (9,512) (9,161) (3,926) (7,655) 7,603 (571)
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations (15,686) (14,638) (6,866) (11,722) 11,430 (213)
Net loss from discontinued operations -- -- -- -- -- (18,864)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) (15,686) (14,638) (6,866) (11,722) 11,430 (19,077)
Preferred stock dividend requirements -- -- -- -- -- 22
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) applicable to common stock $ (15,686) $ (14,638) $ (6,866) $ (11,722) $ 11,430 $ (19,099)
========== ========== ========== ========== ========== ==========
Earnings (loss) per share from continuing operations $ (0.58) $ (0.55) $ (0.25) $ (0.46) $ 0.42 $ (0.01)
Loss per share from discontinued operations -- -- -- -- -- (0.74)
---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) per share of common stock $ (0.58) $ (0.55) $ (0.25) $ (0.46) $ 0.42 $ (0.75)
========== ========== ========== ========== ========== ==========
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 27,149 26,477 26,990 25,636 26,902 25,382
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
3
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ (6,866) $ (11,722) $ 11,430 $ (19,077)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 62,563 54,046 82,216 69,334
Deferred income taxes 28,984 1,282 45,155 2,807
Changes in current assets and liabilities:
Accounts receivable, net of allowances 23,199 8,453 (3,140) (9,917)
Accrued utility revenue 24,775 23,613 (1,438) (1,243)
Deferred purchased gas costs (74,237) 6,776 (104,357) 3,800
Accounts payable (16,519) (15,986) 4,431 5,122
Accrued taxes (19,814) (7,653) (31,300) (10,025)
Other current assets and liabilities 13,742 480 15,760 1,148
Other 530 911 9,595 (1,049)
Undistributed loss from
discontinued operations -- -- -- 17,371
----------- ----------- ----------- -----------
Net cash provided by operating activities 36,357 60,200 28,352 58,271
----------- ----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Construction expenditures and property additions (120,449) (141,948) (197,336) (191,517)
Proceeds from bank sale -- 191,662 -- 191,662
Other (4,974) (29,163) 2,077 (24,828)
----------- ----------- ----------- -----------
Net cash provided by (used in) investing activities (125,423) 20,551 (195,259) (24,683)
----------- ----------- ----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 8,762 14,365 12,507 18,625
Issuance of trust originated preferred securities, net -- -- -- 57,713
Reacquisition of preferred stock -- -- -- (4,000)
Dividends paid (16,583) (15,852) (22,042) (20,960)
Issuance of long-term debt, net 118,992 159,486 124,382 176,786
Retirement of long-term debt, net (5,475) (247,020) (6,986) (247,025)
Issuance (repayment) of short-term debt (12,000) 1,483 67,575 (17,517)
Other -- -- -- (48)
----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities 93,696 (87,538) 175,436 (36,426)
----------- ----------- ----------- -----------
Change in cash and temporary cash investments 4,630 (6,787) 8,529 (2,838)
Cash at beginning of period 8,280 11,168 4,381 7,219
----------- ----------- ----------- -----------
Cash at end of period $ 12,910 $ 4,381 $ 12,910 $ 4,381
=========== =========== =========== ===========
Supplemental information:
Interest paid, net of amounts capitalized $ 44,126 $ 47,718 $ 56,416 $ 61,720
=========== =========== =========== ===========
Income taxes, net of refunds $ (2,694) $ 18,610 $ (2,623) $ 12,880
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
</END TABLE>
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 1997 quarterly reports on
Form 10-Q.
INTERCOMPANY TRANSACTIONS. During the nine months ended September 30,
1997, the construction services segment recognized $26 million of revenues
generated from contracts with Southwest. At September 30, 1997, accounts
receivable for these services was $3.1 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 are being 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
1,124,000 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 September 30, 1997,
Southwest earned 55 percent of operating margin in Arizona, 35 percent in
Nevada, and 10 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 September 30, 1997, natural gas construction
expenditures totaled $184 million. Approximately 78 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, June and September 1997 totaling $100 million and
a $16 million issuance of commercial paper in February 1997.
6
Cash flows from operating activities during the nine and twelve months ended
September 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 $39.6 million payable, at
September 30, 1996, to a $64.8 million receivable, at September 30, 1997, a
$104 million change. Southwest must first obtain 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 Utilities
Commission of Nevada (PUCN). In April 1997, the filing was amended. In
September 1997, annual increases of $10.1 million, or 9 percent, in the
southern Nevada rate jurisdiction and $6 million, or 14 percent, in the
northern Nevada rate jurisdiction were granted effective September 1997. In
approving the increase, the PUCN indicated the PGA mechanism may need to be
replaced with one that includes a price incentive mechanism. The Company had
recommended during the hearing process that the PUCN adopt such a mechanism.
In June 1997, Southwest submitted an additional PGA filing with the PUCN.
This annual PGA filing addressed the increased costs of natural gas since the
beginning of 1997 as well as the recovery of costs previously deferred. In
September 1997, the filing was amended to reflect changes necessary as a
result of the September 1997 order on the previous PGA filing. If approved as
amended, the filing would result in annual increases, above the revenue levels
approved in the previous PGA order, of $23.1 million, or 18 percent, in the
southern Nevada rate jurisdiction and $8.4 million, or 17 percent, in the
northern Nevada rate jurisdiction. Hearings on this filing commenced in
October 1997 and are ongoing. A final decision is expected from the PUCN
prior to year-end.
In September 1997, Southwest submitted a PGA filing with the California Public
Utilities Commission (CPUC) to increase rates annually by $10 million, or 19
percent, in the southern California rate jurisdiction. The rates are expected
to become effective by December 1997.
7
RESULTS OF CONSOLIDATED OPERATIONS
Quarterly Analysis
- ------------------
Contribution to Net Loss
Three Months Ended September 30,
--------------------------------
(Thousands of dollars)
1997 1996
---------- ----------
Natural gas operations $ (16,771) $ (16,256)
Construction services 1,085 1,618
---------- ----------
Net loss $ (15,686) $ (14,638)
========== ==========
Loss per share for the quarter ended September 30, 1997 was $0.58, compared to
a $0.55 loss per share recorded during the corresponding quarter of the prior
year. Natural gas operations results declined $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 lower-than-anticipated revenues.
Revenues declined 15 percent due to project cancellations and curtailments in
portions of California, Washington, Missouri, and Kansas. Northern has
reorganized and closed offices in some of these areas and is pursuing new
contracts in other areas to improve profitability. Average shares
outstanding increased 672,000 shares between years primarily resulting from
continuing issuances under the Company Dividend Reinvestment and Stock
Purchase Plan.
Nine-Month Analysis
- -------------------
Contribution to Net Loss
Nine Months Ended September 30,
-------------------------------
(Thousands of dollars)
1997 1996
---------- ----------
Natural gas operations $ (6,982) $ (13,786)
Construction services 116 2,064
---------- ----------
Net loss $ (6,866) $ (11,722)
========== ==========
Loss per share for the nine months ended September 30, 1997 was $0.25, a $0.21
improvement from a per share loss of $0.46 recorded during the corresponding
nine months of the previous year. Loss from natural gas operations improved
$0.28 per share. See separate discussion at RESULTS OF NATURAL GAS OPERATIONS
for changes as they relate to gas operations. Construction services earnings
per share were $0.01 during the current period. In the prior period,
construction services contributed $0.08 per share, however, those results
excluded the months of January through April 1996 which are typically loss
months. In addition, the decline was a result of various project
cancellations and curtailments. To improve profitability, Northern is
pursuing new contracts and has reorganized and closed some offices. Average
shares outstanding increased 1.4 million shares between years primarily 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.
8
Twelve-Month Analysis
- ---------------------
Contribution to Net Income (Loss)
Twelve Months Ended September 30,
---------------------------------
(Thousands of dollars)
1997 1996
---------- ----------
Continuing operations
Natural gas operations $ 10,723 $ (2,277)
Construction services 707 2,064
---------- ----------
11,430 (213)
Discontinued operations--financial services -- (18,864)
---------- ----------
Net income (loss) $ 11,430 $ (19,077)
========== ==========
Earnings per share for the twelve months ended September 30, 1997 were $0.42,
a $0.43 increase from the $0.01 per share loss from continuing operations
recorded during the prior twelve-month period. Earnings contributed from
natural gas operations increased $0.49 per share. See separate discussion at
RESULTS OF NATURAL GAS OPERATIONS for changes as they relate to gas
operations. Construction services results declined $0.06 per share from the
previous period. The decline was primarily the result of project
cancellations and curtailments. Northern has closed some offices and is
pursuing new contracts to improve profitability. Discontinued operations
posted a $0.74 per share loss during the prior year. Average shares
outstanding increased 1.5 million shares between periods primarily 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
--------------------------------
September 30, December 31,
1997 1996
------------- ------------
Ratios of earnings to fixed charges 1.25 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.
9
RESULTS OF NATURAL GAS OPERATIONS
Quarterly Analysis
- ------------------
Three Months Ended
September 30,
-------------------------
(Thousands of dollars)
1997 1996
---------- ----------
Gas operating revenues $ 95,009 $ 85,534
Net cost of gas sold 28,508 24,027
---------- ----------
Operating margin 66,501 61,507
Operations and maintenance expense 50,310 49,086
Depreciation and amortization 18,873 17,012
Taxes other than income taxes 7,371 7,365
---------- ----------
Operating loss (10,053) (11,956)
Other income (expense), net (2) (23)
---------- ----------
Loss before interest and income taxes (10,055) (11,979)
Net interest deductions 15,736 13,318
Preferred securities distributions 1,368 1,368
Income tax expense (benefit) (10,388) (10,409)
---------- ----------
Contribution to consolidated net loss $ (16,771) $ (16,256)
========== ==========
Contribution from natural gas operations declined $515,000 compared to the
third quarter of 1996. The decline was principally the result of higher
operating and financing expenses incurred as a result of the expansion and
upgrading of the gas system to accommodate continued customer growth,
partially offset by an improvement in margin.
Operating margin increased $5 million, or eight percent, in the third quarter
of 1997 when compared to the third quarter of 1996. The operating margin
improvement was primarily the result of customer growth and general rate
relief granted in Arizona jurisdictions effective September 1997. Southwest
added approximately 60,000 customers during the past twelve months, a six
percent increase.
Operations and maintenance expenses increased $1.2 million, or two percent,
reflecting general increases in labor, purchased goods and services.
Depreciation expense and general taxes increased $1.9 million, or eight
percent, as a result of construction activities. Average gas plant in service
increased $178 million, or 11 percent, as compared to the third 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 $2.4 million, or 16 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 $100 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.
10
Nine-Month Analysis
- -------------------
Nine Months Ended
September 30,
-------------------------
(Thousands of dollars)
1997 1996
---------- ----------
Gas operating revenues $ 414,313 $ 376,599
Net cost of gas sold 149,830 139,184
---------- ----------
Operating margin 264,483 237,415
Operations and maintenance expense 148,165 144,557
Depreciation and amortization 55,188 50,003
Taxes other than income taxes 22,482 22,228
---------- ----------
Operating income 38,648 20,627
Other income (expense), net (650) (298)
---------- ----------
Income before interest and income taxes 37,998 20,329
Net interest deductions 45,192 39,324
Preferred securities distributions 4,106 4,106
Income tax expense (benefit) (4,318) (9,315)
---------- ----------
Contribution to consolidated net loss $ (6,982) $ (13,786)
========== ==========
Contribution to consolidated net loss improved $6.8 million compared to the
nine months ended September 1996. The improvement was the result of an
increase in operating margin, offset somewhat by higher operating and
financing expenses.
Operating margin increased $27.1 million, or 11 percent, during the nine
months ended September 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 $3.6 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 $5.4 million, or eight
percent, resulting from an increase in average gas plant in service of $167
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 $5.9 million, or 14 percent, during the nine months
ended September 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.
11
Twelve-Month Analysis
- ---------------------
Twelve Months Ended
September 30,
------------------------
(Thousands of dollars)
1997 1996
---------- ----------
Gas operating revenues $ 584,075 $ 522,958
Net cost of gas sold 198,226 182,001
---------- ----------
Operating margin 385,849 340,957
Operations and maintenance expense 201,972 192,239
Depreciation and amortization 72,628 65,291
Taxes other than income taxes 28,410 29,129
---------- ----------
Operating income 82,839 54,298
Other income (expense), net (1,112) (765)
---------- ----------
Income before interest and income taxes 81,727 53,533
Net interest deductions 58,871 53,022
Preferred securities distributions 5,475 5,019
Income tax expense (benefit) 6,658 (2,231)
---------- ----------
Contribution to consolidated net income (loss) $ 10,723 $ (2,277)
========== ==========
Contribution to consolidated net income increased $13 million compared
to the corresponding twelve-month period ended September 1996. The
increase was the result of an improvement in operating margin, offset
somewhat by higher operating and financing expenses.
Operating margin increased $44.9 million due to customer growth, rate
relief, and improved, but warmer-than-normal, weather conditions.
Southwest billed an average of 61,000 more customers per month than
during the previous twelve-month period which contributed approximately
$10 million of additional margin. General rate relief, primarily
related to Nevada jurisdictions, contributed $15 million incrementally
to operating margin. Weather-related variances between periods
resulted in a $20 million increase in operating margin from weather-
sensitive customers. On a weather-normalized basis, operating margin
would have been approximately $12 million greater than actually
reported for the twelve months ended September 30, 1997 and $32 million
higher in the previous period.
Operations and maintenance expenses increased $9.7 million, or five
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 $6.6 million, or seven
percent, as a result of construction activities. Average gas plant in
service for the current twelve-month period increased $162 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 $6.3 million, or 11 percent, during the
twelve months ended September 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 preferred securities issued in October 1995.
12
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 was seeking rate relief for increased
operating costs, changes in financing costs, and improvements and
additions to the distribution system. In August 1997, the ACC
approved a settlement of the general rate case providing the Company
with a $32 million general rate increase effective September 1, 1997.
The settlement achieved a number of favorable rate design improvements
and tariff restructuring changes including consolidation of the
southern and central Arizona rate jurisdictions for ratemaking purposes
and better matching of rates with the costs of serving various customer
classes. The timing of the increase is important to the Company because
it provides the benefit of having new rates in place before the start of
the 1997/1998 winter heating season.
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, if approved, would authorize a $3.2 million general
rate increase effectve January 1997. An order approving the settlement
agreement was issued in October 1997 and is expected to become final in
November 1997. Paiute has accrued a liability to customers for the difference
between the rates collected since January 1997 and the estimated amount of rate
relief to ultimately be granted. Refunds for this difference will be made to
customers within 60 days of the effective date.
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. In August 1997, the Office of Ratepayer Advocates filed
a protest to the Southwest application indicating that the terms of
the original agreement should be adhered to. In September, a hearing was
held to discuss the filing and related protest. Southwest has until
December 1997, to file additional comments related to the protest.
Management expects the CPUC to issue a final decision during the first
quarter of 1998.
13
For 1997, construction work on this project has been 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued two
new accounting pronouncements. Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share," establishes standards
for computing and presenting earnings per share (EPS). This statement
replaces the presentation of primary EPS with basic EPS and fully
diluted EPS with diluted EPS. It also requires the presentation of
basic and diluted EPS on the face of the income statement for all
entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation. This
statement becomes effective December 31, 1997. The Company has
reviewed the requirements of SFAS No. 128 and does not anticipate any
material changes in EPS amounts previously reported.
The second pronouncement issued was SFAS No. 129, "Disclosure of
Information about Capital Structure." SFAS No. 129 reaffirms standards
for disclosing information about an entity's capital structure. The
statement becomes effective December 31, 1997. The disclosure
requirements of this standard are not anticipated to significantly
change current reporting practices of the Company.
In June 1997, the Financial Accounting Standards Board issued two new
accounting pronouncements. 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 has reviewed the requirements
of SFAS No. 130 and does not expect any material change to its current
financial statement presentation format.
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 disclosure requirements of this
statement are not expected to significantly change current reporting
practices of the Company.
14
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 3 (ii) Amended Bylaws of Southwest Gas
Corporation.
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)
(b) Reports on Form 8-K
On September 17, 1997, the Company filed a Form 8-K
which announced the retirement of Kenny C. Guinn as
director and chairman of the Southwest Gas Corporation
Board of Directors and the appointment of Thomas Y.
Hartley as chairman.
The Company filed a Form 8-K, dated November 4, 1997,
reporting summary financial information for the
quarter ended September 30, 1997.
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 10, 1997
/s/ Edward A. Janov
------------------------------------------------------
Edward A. Janov
Vice President/Controller and Chief Accounting Officer
15
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
3(ii) Amended Bylaws of Southwest Gas Corporation.
12 Computation of Ratios of Earnings to Fixed Charges and Ratios of
Earnings to Combined Fixed Charges and Preferred Stock Dividends
27 Financial Data Schedule (filed electronically only)