SOUTHWEST
GAS CORPORATION Form
10-Q
September 30,
2007
Note
3 – Segment Information
The
following tables list revenues from external customers, intersegment revenues,
and segment net income (thousands of dollars):
|
|
Natural
Gas
|
|
|
Construction
|
|
|
|
|
|
|
Operations
|
|
|
Services
|
|
|
Total
|
|
Three
months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
$ |
274,748
|
|
|
$ |
77,445
|
|
|
$ |
352,193
|
|
Intersegment
revenues
|
|
|
--
|
|
|
|
19,331
|
|
|
|
19,331
|
|
Total
|
|
$ |
274,748
|
|
|
$ |
96,776
|
|
|
$ |
371,524
|
|
Segment
net income (loss)
|
|
$ |
(12,863 |
) |
|
$ |
3,545
|
|
|
$ |
(9,318 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
$ |
273,041
|
|
|
$ |
59,626
|
|
|
$ |
332,667
|
|
Intersegment
revenues
|
|
|
--
|
|
|
|
19,133
|
|
|
|
19,133
|
|
Total
|
|
$ |
273,041
|
|
|
$ |
78,759
|
|
|
$ |
351,800
|
|
Segment
net income (loss)
|
|
$ |
(13,780 |
) |
|
$ |
3,044
|
|
|
$ |
(10,736 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
$ |
1,345,996
|
|
|
$ |
192,602
|
|
|
$ |
1,538,598
|
|
Intersegment
revenues
|
|
|
--
|
|
|
|
53,179
|
|
|
|
53,179
|
|
Total
|
|
$ |
1,345,996
|
|
|
$ |
245,781
|
|
|
$ |
1,591,777
|
|
Segment
net income
|
|
$ |
32,910
|
|
|
$ |
7,199
|
|
|
$ |
40,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
$ |
1,235,351
|
|
|
$ |
166,399
|
|
|
$ |
1,401,750
|
|
Intersegment
revenues
|
|
|
--
|
|
|
|
57,893
|
|
|
|
57,893
|
|
Total
|
|
$ |
1,235,351
|
|
|
$ |
224,292
|
|
|
$ |
1,459,643
|
|
Segment
net income
|
|
$ |
28,306
|
|
|
$ |
8,847
|
|
|
$ |
37,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
$ |
1,838,039
|
|
|
$ |
242,956
|
|
|
$ |
2,080,995
|
|
Intersegment
revenues
|
|
|
--
|
|
|
|
75,897
|
|
|
|
75,897
|
|
Total
|
|
$ |
1,838,039
|
|
|
$ |
318,853
|
|
|
$ |
2,156,892
|
|
Segment
net income
|
|
$ |
76,077
|
|
|
$ |
10,739
|
|
|
$ |
86,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
months ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
$ |
1,658,259
|
|
|
$ |
220,624
|
|
|
$ |
1,878,883
|
|
Intersegment
revenues
|
|
|
--
|
|
|
|
77,755
|
|
|
|
77,755
|
|
Total
|
|
$ |
1,658,259
|
|
|
$ |
298,379
|
|
|
$ |
1,956,638
|
|
Segment
net income
|
|
$ |
54,975
|
|
|
$ |
12,433
|
|
|
$ |
67,408
|
|
SOUTHWEST
GAS CORPORATION Form
10-Q
September 30,
2007
Note
4 – Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
Twelve
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Thousands
of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(9,318 |
) |
|
$ |
(10,736 |
) |
|
$ |
40,109
|
|
|
$ |
37,153
|
|
|
$ |
86,816
|
|
|
$ |
67,408
|
|
Additional
minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment, net of $20.3 million tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and $19 million tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33,047
|
|
|
|
(30,753 |
) |
Amortization
of unamortized benefit plan cost,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of $150,000, $450,000, and $450,000 tax expense
|
|
|
246
|
|
|
|
-
|
|
|
|
735
|
|
|
|
-
|
|
|
|
735
|
|
|
|
-
|
|
Comprehensive
income (loss)
|
|
$ |
(9,072 |
) |
|
$ |
(10,736 |
) |
|
$ |
40,844
|
|
|
$ |
37,153
|
|
|
$ |
120,598
|
|
|
$ |
36,655
|
|
The
additional minimum pension liability adjustments noted above resulted from
the
measurement of pension obligations at December 31, 2006 and
2005. Under the provisions of SFAS No. 158, “Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans”, which were adopted
on December 31, 2006, the Company no longer records an adjustment to the
additional minimum pension liability in comprehensive income
(loss). Total accumulated other comprehensive loss as of September
30, 2007 was $12.9 million, net of $7.9 million of tax, and was
composed entirely of unamortized benefit plan costs.
Note
5 – Common Stock
During
the nine months ended September 30, 2007, the Company issued approximately
784,000 shares of common stock through the Dividend Reinvestment and Stock
Purchase Plan (“DRSPP”), Employee Investment Plan, Management Incentive Plan,
and Stock Incentive Plan. No shares have been issued through the
Equity Shelf Program in 2007.
In
May
2007, shareholders of the Company approved an increase in the number of
authorized shares of common stock from 45,000,000 shares to 60,000,000
shares. The increase had no effect on the par value of common
stock.
Note
6 – Income Taxes
The
Company adopted the provisions of FASB Interpretation (“FIN”) No. 48,
“Accounting for Uncertainty in Income Taxes”, on January 1, 2007. The
adoption of the standard had no impact on the Company's financial position
or
results of operations. In connection with the adoption, the Company
identified $1.4 million in liabilities related to unrecognized tax
benefits, which, if recognized, would favorably impact the effective tax
rate.
The Company also identified $1.3 million of accrued interest related to
uncertain tax positions. Both the liabilities related to the unrecognized
tax
benefits and interest were recorded as of December 31, 2006. In the
second quarter of 2007, the Company made income tax payments to the IRS for
tax
and accrued interest related to the uncertain tax
positions. There was no change to the balance of unrecognized tax benefits
during the third quarter of 2007 and the Company does not expect a material
change in the next twelve months. The Company recognizes interest and
penalties related to income tax matters in income tax expense.
The
Company and its subsidiaries file income tax returns in the U.S. federal
jurisdiction, and various states. The Company is no longer subject to
U.S. federal examinations by tax authorities for years before 2001, and is
no
longer subject to state examinations for years before 2002. In the
fourth quarter of 2006, the Internal Revenue Service (“IRS”) completed its
examination of the Company's U.S. income tax returns for 2001 through
2004. As of September 30, 2007, the IRS had proposed certain
timing-related adjustments to the Company's tax returns as
filed. Management has appealed the proposed assessment but has not
resolved the issues as of September 30, 2007. The Company does not
anticipate the adjustments would result in a material change to its financial
position or results of operations.
SOUTHWEST
GAS CORPORATION Form
10-Q
September 30,
2007
Note
7 – Credit Facility
In
April
2007, the Company amended its $300 million credit facility. The
facility was previously scheduled to expire in April 2011 and was extended
to
April 2012. The Company will continue to use $150 million of the
facility as long-term debt and the remaining $150 million for working
capital purposes. Interest rates for the facility are calculated at
the London Interbank Offering Rate plus an applicable margin, or the greater
of
the prime rate or one-half of one percent plus the Federal Funds
rate.
SOUTHWEST
GAS CORPORATION Form
10-Q
September 30,
2007
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion of Southwest Gas Corporation and subsidiaries (the
“Company”) includes information related to the Company’s two business segments:
natural gas operations (“Southwest” or the “natural gas operations” segment) and
construction services. Southwest is engaged in the business of
purchasing, distributing, and transporting natural gas in portions of Arizona,
Nevada, and California. Southwest is the largest distributor in
Arizona, selling and transporting natural gas in most of central and southern
Arizona, including the Phoenix and Tucson metropolitan
areas. Southwest is also the largest distributor of natural gas in
Nevada, serving the Las Vegas metropolitan area and northern
Nevada. In addition, Southwest distributes and transports natural gas
in portions of California, including the Lake Tahoe area and the high desert
and
mountain areas in San Bernardino County.
Northern
Pipeline Construction Co. (“NPL” or the “construction services” segment), a
wholly owned subsidiary, is a full-service underground piping contractor
that
provides utility companies with trenching and installation, replacement,
and
maintenance services for energy distribution systems.
This
Management’s Discussion and Analysis (“MD&A”) of Financial Condition and
Results of Operations should be read in conjunction with the consolidated
financial statements and the notes thereto, as well as the MD&A, included in
the 2006 Annual Report to Shareholders, which is incorporated by reference
into
the 2006 Form 10-K, and the first and second quarter 2007 Form
10-Qs.
Executive
Summary
The
items discussed in this Executive Summary are intended to provide an overview
of
the results of the Company’s operations.
As needed, certain
items are covered in greater detail in later sections of
management’s discussion and analysis. As reflected in the
table below, the natural gas operations segment accounted for an average
of
85 percent of twelve-month-to-date consolidated net income over the past
two years. As such, management’s discussion and analysis is primarily
focused on that segment. Natural gas sales are seasonal, peaking
during the winter months; therefore, results of operations for interim periods
are not necessarily indicative of the results for a full year.
Summary
Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
Ended September 30,
|
|
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
Twelve
Months
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Thousands
of dollars, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution
to net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas operations
|
|
$ |
(12,863 |
) |
|
$ |
(13,780 |
) |
|
$ |
32,910
|
|
|
$ |
28,306
|
|
|
$ |
76,077
|
|
|
$ |
54,975
|
|
Construction
services
|
|
|
3,545
|
|
|
|
3,044
|
|
|
|
7,199
|
|
|
|
8,847
|
|
|
|
10,739
|
|
|
|
12,433
|
|
Net
income (loss)
|
|
$ |
(9,318 |
) |
|
$ |
(10,736 |
) |
|
$ |
40,109
|
|
|
$ |
37,153
|
|
|
$ |
86,816
|
|
|
$ |
67,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas operations
|
|
$ |
(0.30 |
) |
|
$ |
(0.34 |
) |
|
$ |
0.78
|
|
|
$ |
0.70
|
|
|
$ |
1.81
|
|
|
$ |
1.38
|
|
Construction
services
|
|
|
0.08
|
|
|
|
0.08
|
|
|
|
0.17
|
|
|
|
0.22
|
|
|
|
0.25
|
|
|
|
0.31
|
|
Consolidated
|
|
$ |
(0.22 |
) |
|
$ |
(0.26 |
) |
|
$ |
0.95
|
|
|
$ |
0.92
|
|
|
$ |
2.06
|
|
|
$ |
1.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
margin
|
|
$ |
132,923
|
|
|
$ |
124,514
|
|
|
$ |
511,543
|
|
|
$ |
474,504
|
|
|
$ |
730,445
|
|
|
$ |
668,978
|
|
SOUTHWEST
GAS CORPORATION Form
10-Q
September 30,
2007
The
comparative improvement in gas segment results of operations during the third
quarter of 2007 was due primarily to an $8.4 million increase in operating
margin, partially offset by increases in gas segment operating expenses due
to
general cost increases and incremental costs associated with
growth. Absent a change in the California margin tracker mechanism
(see General Rate Relief below), gas segment operating results would
have declined between quarters. NPL’s improvement resulted primarily
from additional work in new areas.
Principal
Factors Affecting Operating Margin
Southwest’s
operating revenues are recognized from the distribution and transportation
of
natural gas (and related services) to customers. Operating margin is
the measure of gas operating revenues less the net cost of gas
sold. Management uses operating margin as a main benchmark in
comparing operating results from period to period. The three
principal factors affecting operating margin are general rate relief, weather,
and customer growth.
General
Rate Relief. In the fourth quarter of 2006, the
California Public Utilities Commission (“CPUC”) approved the Company’s 2007
attrition year filing, granting annualized rate relief of $2.7 million,
effective January 2007. In connection with this filing, the Company
also received approval to recognize margin equally throughout the year under
its
margin tracker mechanism, rather than on a seasonally adjusted
basis. This change does not impact the total amount of margin
recognized annually; however it does affect the comparability of 2007 versus
2006 quarterly amounts. During the third quarter of 2007, rate
changes in California provided a $7 million increase in operating margin,
of which $6 million was due to the effect of the equalized margin tracker
mechanism. Southwest is currently preparing its 2008 attrition and
2009 general rate case filings in California, which are expected to be filed
in
the fourth quarter of 2007.
In
August
2007, Southwest filed a general rate application with the Arizona Corporation
Commission (“ACC”) to increase its authorized operating revenues by $50.2
million. Southwest has also proposed a rate structure that, if
approved, would encourage energy efficiency and also shield the Company and
its
customers from weather-related volatility.
Weather. Weather
is a significant driver of natural gas volumes used by residential and small
commercial customers and is the main reason for volatility in
margin. Space heating-related volumes are the primary component of
billings for these customer classes and are concentrated in the months of
November to April for the majority of the Company’s
customers. Variances in temperatures from normal levels, especially
in Arizona where rates remain leveraged, have a significant impact on the
margin
and associated net income of the Company.
Customer
Growth. As of September 30, 2007, Southwest had
1,800,000 residential, commercial, industrial, and other natural gas customers,
of which 54 percent were located in Arizona, 36 percent in Nevada, and 10
percent in California. Residential and commercial customers
represented over 99 percent of the total customer base. During the
twelve months ended September 30, 2007, Southwest earned 55 percent of
operating margin in Arizona, 35 percent in Nevada, and 10 percent in
California. During this same period, Southwest earned 86 percent
of operating margin from residential and small commercial customers,
5 percent from other sales customers, and 9 percent from transportation
customers. These general patterns are expected to
continue.
The
record customer growth levels experienced in recent years have moderated
due to
the overall slow down in the new housing market. During the twelve
months ended September 30, 2007, Southwest added 48,000 customers, a three
percent increase, attributable mainly to population growth in its service
areas. Management expects this more moderate growth level will
continue in the near term.
Incremental
margin has accompanied customer growth, but the costs associated with creating
and maintaining the infrastructure needed to accommodate new customers have
also
been significant. The timing of including these costs in rates is
often delayed (regulatory lag) and can result in a reduction of current-period
earnings.
Management
has attempted to mitigate the regulatory lag associated with growth by
collecting contributions and advances from home builders and by effectively
utilizing technology to minimize incremental staffing levels. During
the quarter,
SOUTHWEST
GAS CORPORATION Form
10-Q
September 30,
2007
nine
months, and twelve months ended September 30, 2007, Southwest partially offset
capital outlays by collecting approximately $9 million, $35 million,
and $44 million, respectively, in net advances and contributions from
customers and third-party contractors.
In
recent
years, Southwest initiated a project to expand its use of electronic meter
reading technology. Use of this technology has reduced the time
associated with obtaining monthly meter readings, while improving their
accuracy. At September 30, 2007, approximately 1.3 million, or
71 percent, of Southwest customers’ meters were being read
electronically. The project is expected to be completed in 2009 with
no adverse impact to existing employees, although some experienced employees
have been redeployed to expand service and construction
capabilities.
The
results of the natural gas operations segment and the overall results of
the
Company are heavily dependent upon the three components noted previously
(general rate relief, weather, and customer growth). Significant
changes in these components (primarily weather) have contributed to somewhat
volatile earnings historically. Management continues to work with its
regulatory commissions in designing rate structures that strive to provide
affordable and reliable service to its customers while mitigating the volatility
in prices to customers and stabilizing returns to investors. Such a
rate structure is in place in California and progress has been made in
Nevada. The general rate case filed in Arizona includes a proposed
rate structure that, if approved, would encourage energy efficiency and also
shield the Company and its customers from weather-related
volatility.
Cash
Flows
Southwest’s
operating cash flows for the nine and twelve months ended September 30,
2007 improved over the corresponding periods of 2006. Primary drivers
of the improvement include earnings growth and collections of previously
deferred PGA balances. Cash flows from operating activities of
Southwest (net of dividends paid) provided $267 million (representing 80
percent) of the required capital resources pertaining to gas segment capital
expenditures for the twelve months ended September 30, 2007. The
remainder was provided from refundable construction advances, external financing
activities, and existing credit facilities. During the three-year
period ending December 31, 2009, cash flows from gas segment operating
activities (net of dividends) are expected to fund approximately 90 percent
of the gas operations construction expenditures, assuming continued timely
recovery of current and future deferred PGA balances.
Results
of Construction Services Operations
NPL’s
contribution to consolidated net income increased by $501,000 in the third
quarter of 2007 when compared to the third quarter results of the prior
year. The increase was primarily due to the combination of three new
operating areas and replacement bid work that offset the impact of the overall
slow down in the new housing market.
SOUTHWEST
GAS CORPORATION Form
10-Q
September 30,
2007
Results
of Natural Gas Operations
Quarterly
Analysis
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Thousands
of dollars)
|
|
Gas
operating revenues
|
|
$ |
274,748
|
|
|
$ |
273,041
|
|
Net
cost of gas sold
|
|
|
141,825
|
|
|
|
148,527
|
|
Operating margin
|
|
|
132,923
|
|
|
|
124,514
|
|
Operations
and maintenance expense
|
|
|
83,222
|
|
|
|
79,446
|
|
Depreciation
and amortization
|
|
|
39,774
|
|
|
|
36,896
|
|
Taxes
other than income taxes
|
|
|
7,848
|
|
|
|
9,515
|
|
Operating income (loss)
|
|
|
2,079
|
|
|
|
(1,343 |
) |
Other
income (expense)
|
|
|
478
|
|
|
|
1,686
|
|
Net
interest deductions
|
|
|
22,003
|
|
|
|
20,808
|
|
Net
interest deductions on subordinated debentures
|
|
|
1,932
|
|
|
|
1,931
|
|
Income (loss) before income taxes
|
|
|
(21,378 |
) |
|
|
(22,396 |
) |
Income
tax expense (benefit)
|
|
|
(8,515 |
) |
|
|
(8,616 |
) |
Contribution to consolidated net income (loss)
|
|
$ |
(12,863 |
) |
|
$ |
(13,780 |
) |
Contribution
from natural gas operations improved by $917,000 in the third quarter of
2007
compared to the same period a year ago. The improvement in
contribution was principally due to increased operating margin, partially
offset
by higher operating expenses.
Operating
margin increased $8 million, or seven percent, in the third quarter of
2007 compared to the third quarter of 2006. Rate changes accounted
for $7 million of the increase in operating margin compared to the prior
year, of which $6 million was due to the effect of the equalized margin
tracker mechanism. New customers accounted for the remaining
incremental operating margin during the quarter as the Company added
48,000 customers during the last twelve months, an increase of
three percent.
Operations
and maintenance expense increased $3.8 million, or five percent,
primarily due to general cost increases and incremental costs associated
with
customer growth. Higher uncollectible costs also contributed to the
increase.
Depreciation
expense increased $2.9 million, or eight percent, as a result of
construction activities. Average gas plant in service for the current
period increased $307 million, or eight percent, compared to the
corresponding period a year ago. The increase reflects ongoing capital
expenditures for the upgrade of existing operating facilities and the expansion
of the system to accommodate continued customer growth.
General
taxes decreased $1.7 million largely as a result of a change in property
tax rates received and recognized in the third quarter of 2007, retroactive
to
January 2007.
Other
income (expense) declined $1.2 million during the third quarter of 2007
compared to the same period in 2006, primarily due to lower interest income
and
reduced returns on long-term investments.
Net
financing costs rose $1.2 million between periods primarily due to higher
rates on variable-rate debt and interest expense associated with deferred
PGA
balances.
SOUTHWEST
GAS CORPORATION Form
10-Q
September 30,
2007
Nine-Month
Analysis
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Thousands
of dollars)
|
|
Gas
operating revenues
|
|
$ |
1,345,996
|
|
|
$ |
1,235,351
|
|
Net
cost of gas sold
|
|
|
834,453
|
|
|
|
760,847
|
|
Operating margin
|
|
|
511,543
|
|
|
|
474,504
|
|
Operations
and maintenance expense
|
|
|
250,847
|
|
|
|
234,716
|
|
Depreciation
and amortization
|
|
|
117,380
|
|
|
|
109,012
|
|
Taxes
other than income taxes
|
|
|
28,253
|
|
|
|
25,752
|
|
Operating income
|
|
|
115,063
|
|
|
|
105,024
|
|
Other
income (expense)
|
|
|
5,502
|
|
|
|
6,567
|
|
Net
interest deductions
|
|
|
64,466
|
|
|
|
64,015
|
|
Net
interest deductions on subordinated debentures
|
|
|
5,795
|
|
|
|
5,793
|
|
Income before income taxes
|
|
|
50,304
|
|
|
|
41,783
|
|
Income
tax expense
|
|
|
17,394
|
|
|
|
13,477
|
|
Contribution to consolidated net income
|
|
$ |
32,910
|
|
|
$ |
28,306
|
|
Contribution
from natural gas operations increased $4.6 million in the nine-month period
of 2007 compared to the same period a year ago. The increase was
principally attributed to improved operating margin, partially offset by
higher
operating expenses.
Operating
margin increased approximately $37 million, or eight percent, in the
nine-month period of 2007 compared to the nine-month period of
2006. New customers contributed an incremental $11 million in
operating margin during the current period. Rate relief resulted in
an $18 million increase in operating margin (including $15 million in
Arizona general rate relief). Differences in heating demand primarily
caused by weather variations between periods resulted in an $8 million
margin increase as the current period experienced near normal temperatures
while
the prior period was warmer than normal.
Operations
and maintenance expense increased $16.1 million, or seven percent,
principally due to the impact of general cost increases and incremental costs
associated with providing service to a growing customer base. Factors
contributing to the increase included higher uncollectible expenses and
employee-related costs.
Depreciation
expense increased $8.4 million, or eight percent, as a result of
construction activities. Average gas plant in service increased
$285 million, or eight percent, as compared to the nine-month period
of 2006. The increase reflects ongoing capital expenditures for the
upgrade of existing operating facilities and the expansion of the system
to
accommodate continued customer growth.
General
taxes increased $2.5 million primarily as a result of a favorable
nonrecurring property tax settlement recognized in April 2006.
Other
income (expense) decreased $1.1 million during the nine-month period of
2007 compared to the same period in 2006, primarily due to lower interest
income
on declining PGA balances, partially offset by increased returns on long-term
investments and gains on dispositions of miscellaneous
properties. The nine-month period of 2006 included $1 million in
interest income related to the nonrecurring property tax
settlement.
Income
tax expense for the nine months ended September 30, 2006 included a nonrecurring
$1.7 million state income tax benefit.
SOUTHWEST
GAS CORPORATION Form
10-Q
September 30,
2007
Twelve-Month
Analysis
|
|
|
|
|
|
|
|
|
Twelve
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Thousands
of dollars)
|
|
Gas
operating revenues
|
|
$ |
1,838,039
|
|
|
$ |
1,658,259
|
|
Net
cost of gas sold
|
|
|
1,107,594
|
|
|
|
989,281
|
|
Operating margin
|
|
|
730,445
|
|
|
|
668,978
|
|
Operations
and maintenance expense
|
|
|
336,934
|
|
|
|
322,475
|
|
Depreciation
and amortization
|
|
|
155,022
|
|
|
|
143,925
|
|
Taxes
other than income taxes
|
|
|
37,495
|
|
|
|
34,515
|
|
Operating income
|
|
|
200,994
|
|
|
|
168,063
|
|
Other
income (expense)
|
|
|
8,984
|
|
|
|
8,801
|
|
Net
interest deductions
|
|
|
86,018
|
|
|
|
85,366
|
|
Net
interest deductions on subordinated debentures
|
|
|
7,726
|
|
|
|
7,724
|
|
Income before income taxes
|
|
|
116,234
|
|
|
|
83,774
|
|
Income
tax expense
|
|
|
40,157
|
|
|
|
28,799
|
|
Contribution to consolidated net income
|
|
$ |
76,077
|
|
|
$ |
54,975
|
|
Contribution
to consolidated net income from natural gas operations increased
$21.1 million in the current twelve-month period compared to the same
period a year ago. The improvement in contribution resulted from higher
operating margin, partially offset by increased operating expenses.
Operating
margin increased $61 million between periods. Rate relief in
Arizona and California added $31 million. Customer growth
contributed an incremental $16 million. Differences in heating
demand, caused primarily by weather variations, accounted for a $14 million
increase in operating margin as warmer-than-normal temperatures were experienced
during both periods (during the current twelve-month period the negative
impact
was $7 million, while the negative impact during the prior twelve-month
period was $21 million).
Operations
and maintenance expense increased $14.5 million, or four percent,
between periods reflecting general cost increases and incremental operating
costs associated with serving additional customers. Additional
factors included increases in uncollectible expenses and employee-related
expenses. The prior period includes a $10 million nonrecurring
provision made in December 2005 for an injuries and damages case.
Depreciation
expense increased $11.1 million, or eight percent, as a result of
additional plant in service. Average gas plant in service for the current
twelve-month period increased $275 million, or eight percent, compared
to the corresponding period a year ago. This was attributable to the upgrade
of
existing operating facilities and the expansion of the system to accommodate
customer growth.
General
taxes increased $3 million primarily as a result of the favorable
nonrecurring property tax settlement recognized in April 2006.
Net
financing costs increased slightly between periods primarily due to higher
rates
on variable-rate debt.
Income
tax expense for the twelve months ended September 30, 2006 included a
nonrecurring $1.7 million state income tax benefit.
SOUTHWEST
GAS CORPORATION Form
10-Q
September 30,
2007
Results
of Construction Services
Contribution
to consolidated net income for the three months ended September 30, 2007
increased $501,000, when compared to the corresponding period in
2006. The increase was primarily due to the addition of three new
operating areas. Also, additional replacement bid work reduced the
impact of the overall slow down in the new housing market. However,
results for the nine and twelve-month periods decreased $1.6 million, and
$1.7 million, respectively, compared to the corresponding periods in
2006. These decreases reflect the general slow down in the housing
market, which adversely affected profits on blanket contracts in the majority
of
NPL’s operating areas, and lower gains on sales of
equipment. Unfavorable working conditions due to poor weather earlier
in the current year also contributed to the decreases. The amount of
work received under existing blanket contracts, the amount of bid work, and
the
equipment resale market vary from period to period.
Rates
and Regulatory Proceedings
California
Attrition Filing. In the fourth quarter of 2006, the CPUC
approved a $2.7 million increase in operating margin related to the Company’s
2007 annual California attrition filing. The increase in customer
rates was approved to be made effective January 2007. In connection
with this filing, the Company also received approval to change the way operating
margin is recognized under the Company’s margin tracker
mechanism. The change provides for authorized levels of margin to be
recognized in equal monthly amounts throughout the year, rather than on a
seasonally adjusted basis. This change did not impact the total
amount of margin recognized annually; however, it has affected the comparability
of 2007 versus 2006 quarterly amounts, particularly the first through third
quarters. Attrition rate relief during the nine-month period of 2007
provided approximately $3 million in operating margin including the
cumulative effect of the method change. Southwest is currently
preparing its 2008 attrition and 2009 general rate case filings in California,
which are expected to be filed in the fourth quarter of 2007.
Arizona
General Rate Case. Southwest filed a general rate application
with the ACC in the third quarter of 2007 requesting an increase in authorized
operating revenues of $50.2 million. The request is due to
increases in Southwest’s operating costs (including inflationary increases to
labor and benefits), investments in infrastructure to serve new customers,
and
the increased costs of capital to fund those investments. The Company
is requesting a return on rate base of 9.45 percent and a return on equity
of 11.25 percent.
In
addition, declining average residential usage has hindered the Company’s ability
to earn the returns previously authorized by the ACC. A rate
structure that would encourage energy efficiency and also shield the Company
and
its customers from weather-related volatility was also
proposed. Included in the new rate design proposal were a revenue
decoupling mechanism that would separate the recovery of fixed costs from
volumetric usage and a weather normalization mechanism that would protect
customers from higher bills in extreme cold weather and protect the Company
from
cost under-recoveries in unseasonably warmer weather. The Company
also requested an increase of $3.10 in the monthly residential basic service
charge. Southwest requested the new rates be effective October
2008. Management cannot predict the amount or timing of rate relief
ultimately granted. The last general rate increase received in
Arizona was effective March 2006.
PGA
Filings
All
of
Southwest's state regulatory commissions have regulations that permit the
Company to track and recover its actual costs of purchased
gas. Deferred energy provisions and purchased gas adjustment clauses
are collectively referred to as “PGA” clauses. Timing differences
between changes in PGA rates and the recovery/payment of PGA balances result
in
over and under-collections. At September 30, 2007, over-collections
in Nevada and California resulted in a liability of $47.3 million and
under-collections in Arizona resulted in an asset of $31.2 million on the
Company’s balance sheet. PGA filings are subject to audit by state
regulatory commissions. PGA rate changes impact cash flows but have
no direct impact on profit margin.
SOUTHWEST
GAS CORPORATION Form
10-Q
September 30,
2007
As
of
September 30, 2007 and December 31, 2006, Southwest had the
following outstanding PGA balances receivable/(payable) (millions of
dollars):
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
Arizona
|
|
$ |
31.2
|
|
|
$ |
68.4
|
|
Northern
Nevada
|
|
|
(10.1 |
) |
|
|
1.1
|
|
Southern
Nevada
|
|
|
(31.9 |
) |
|
|
4.1
|
|
California
|
|
|
(5.3 |
) |
|
|
3.4
|
|
|
|
$ |
(16.1 |
) |
|
$ |
77.0
|
|
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 NPL are not material to
the
overall capital requirements and resources of the Company.
Gas
Segment Construction Expenditures and Financing
Southwest
continues to experience customer growth above industry averages, albeit at
a
slower pace than in the recent past. This growth has required
significant capital outlays for new transmission and distribution plant,
to keep
up with consumer demand. During the twelve-month period ended
September 30, 2007, construction expenditures for the natural gas
operations segment were $335 million. Approximately
77 percent of these current-period expenditures represented new
construction and the balance represented costs associated with routine
replacement of existing transmission, distribution, and general
plant. Cash flows from operating activities of Southwest (net of
dividends paid) provided $267 million, or 80 percent, of the required
capital resources pertaining to gas segment capital expenditures for the
twelve
months ended September 30, 2007. Operating cash flows during the
current twelve-month period were positively impacted by earnings growth and
recoveries of deferred PGA balances. The remainder was provided from
external financing activities, existing credit facilities, and refundable
construction advances. At September 30, 2007, the balance of
refundable construction advances was $83 million.
In
October 2007, the Company sold its Southern Nevada Division operations facility
for $35 million. The gain on the sale (approximately
$20 million) will be deferred and recorded as a regulatory liability to be
included in a future rate case. The Company plans to build two
separate facilities to better serve the expanding customer base in Las
Vegas. During construction of the new facilities, the Company will
lease back the operations facility. The Company’s corporate
headquarters complex is not affected by these transactions.
Southwest
estimates construction expenditures during the three-year period ending
December 31, 2009 will be approximately
$880 million. During the three-year period, cash flows from
operating activities (net of dividends) are estimated to fund approximately
90 percent of the gas operations’ total construction expenditures, assuming
continued timely recovery of currently deferred PGA
balances. Southwest also has $43 million in long-term debt
maturities over the three-year period. During this time frame, the
Company expects to raise $100 million to $125 million from its various
common stock programs. Any remaining cash requirements are expected to be
provided by existing credit facilities and/or other external financing
sources. The timing, types, and amounts of these additional external
financings will be dependent on a number of factors, including conditions
in the
capital markets, timing and amounts of rate relief, growth levels in Southwest
service areas, and earnings. These external sources may include the
issuance of both debt and equity securities, bank and other short-term
borrowings, customer contributions and advances, and other forms of
financing.
During
the nine months ended September 30, 2007, the Company issued approximately
784,000 additional shares of common stock through the Dividend Reinvestment
and
Stock Purchase Plan (“DRSPP”), Employee Investment Plan,
SOUTHWEST
GAS CORPORATION Form
10-Q
September 30,
2007
Management
Incentive Plan, and Stock Incentive Plan. No shares have been issued
through the Equity Shelf Program (“ESP”) in 2007. The Company has
$16.7 million of remaining capacity under the ESP.
Liquidity
Liquidity
refers to the ability of an enterprise to generate adequate amounts of cash
to
meet its cash requirements. Several general factors that could
significantly affect liquidity in future years include inflation, growth
in
Southwest’s service territories, changes in the ratemaking policies of
regulatory commissions, interest rates, variability of natural gas prices,
changes in income tax laws, and the level of Company earnings. Of
these factors, natural gas prices have had the most significant impact on
Company liquidity.
Over
the
past several years the cost of natural gas has fluctuated
dramatically. Price volatility is expected to continue
indefinitely. Southwest periodically enters into fixed-price term
contracts to mitigate price volatility. About half of Southwest’s
annual normal weather supply needs are secured using short duration contracts
(one year or less). Natural gas purchases not covered by fixed-price
contracts are made under variable-price contracts with firm quantities and
on
the spot market. Prices for these contracts are not known until the
month of purchase. Southwest does not currently utilize other
stand-alone derivative financial instruments for speculative purposes, or
for
hedging. In the future, Southwest intends to supplement its current
volatility mitigation program with stand-alone derivative financial instruments
for hedging purposes. The combination of fixed-price contracts and
derivative financial instruments should increase flexibility for Southwest
and
increase supplier diversification. The costs of such derivative
financial instruments are expected to be recovered from customers.
The
rate
schedules in Southwest's service territories contain PGA clauses which permit
adjustments to rates as the cost of purchased gas changes. The PGA
mechanism allows Southwest to request to change the gas cost component of
the
rates charged to its customers to reflect increases or decreases in the price
expected to be paid to its suppliers and companies providing interstate pipeline
transportation service.
On
an
interim basis, Southwest generally defers over- or under-collections of gas
costs to PGA balancing accounts. In addition, Southwest uses this
mechanism to either refund amounts over-collected or recoup amounts
under-collected as compared to the price paid for natural gas during the
period
since the last PGA rate change went into effect. At September 30,
2007, the combined balances in PGA accounts totaled a net over-collection
of
$16.1 million versus an under-collection of $77 million at
December 31, 2006. Southwest has the ability to draw on its
$300 million credit facility to temporarily finance under-collected PGA
balances. This facility was extended by one year in April 2007 to
expire in April 2012. Southwest has designated $150 million of
the facility as long-term debt and the remaining $150 million for working
capital purposes. Southwest currently believes the $150 million
designated for working capital purposes is adequate to meet liquidity
needs. At September 30, 2007, $101 million was outstanding on
the long-term portion and no borrowings were outstanding on the short-term
portion of the credit facility.
In
February 2007, the Board of Directors increased the quarterly dividend payout
from 20.5 cents to 21.5 cents per share, effective with the June 2007
payment.
SOUTHWEST
GAS CORPORATION Form
10-Q
September 30,
2007
The
following table sets forth the ratios of earnings to fixed charges for the
Company. Due to the seasonal nature of the Company’s business, these
ratios are computed on a twelve-month basis:
|
|
For
the Twelve Months Ended
|
|
|
September
30,
|
|
December
31,
|
|
|
2007
|
|
2006
|
|
|
|
|
|
Ratio
of earnings to fixed charges
|
|
2.29
|
|
2.25
|
Earnings
are defined as the sum of pretax income plus fixed charges. Fixed charges
consist of all interest expense including capitalized interest, one-third
of
rent expense (which approximates the interest component of such expense),
and
amortized debt costs.
Forward-Looking
Statements
This
quarterly report contains statements which constitute “forward-looking
statements” within the meaning of the Securities Litigation Reform Act of 1995
(“Reform Act”). All statements other than statements of historical
fact included or incorporated by reference in this quarterly report are
forward-looking statements, including, without limitation, statements regarding
the Company’s plans, objectives, goals, projections, strategies, future events
or performance, and underlying assumptions. The words “may,” “will,”
“should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”
“predict,” “continue,” and similar words and expressions are generally used and
intended to identify forward-looking statements. For example,
statements regarding customer growth, estimated future construction
expenditures, forecasted operating cash flows, sufficiency of working capital,
ability to raise funds and receive external financing, the amount of any
such
financing, and statements regarding future gas prices, gas purchase contracts
and derivative financial instruments, the recovery of under-recovered PGA
balances, and the timing and results of future rate approvals are
forward-looking statements. All forward-looking statements are
intended to be subject to the safe harbor protection provided by the Reform
Act.
A
number
of important factors affecting the business and financial results of the
Company
could cause actual results to differ materially from those stated in the
forward-looking statements. These factors include, but are not
limited to, the impact of weather variations on customer usage, customer
growth
rates, changes in natural gas prices, our ability to recover costs through
our
PGA mechanism, the effects of regulation/deregulation, the timing and amount
of
rate relief, changes in rate design, changes in gas procurement practices,
changes in capital requirements and funding, the impact of conditions in
the
capital markets on financing costs, changes in construction expenditures
and
financing, renewal of franchises, easements and rights-of-way, changes in
operations and maintenance expenses, effects of accounting changes, future
liability claims, changes in pipeline capacity for the transportation of
gas and
related costs, acquisitions and management’s plans related thereto, competition,
and our ability to raise capital in external financings. In addition,
the Company can provide no assurance that its discussions regarding certain
trends relating to its financing, operations and maintenance expenses will
continue in future periods. For additional information on the risks
associated with the Company’s business, see Item 1A. Risk
Factors in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2006.
All
forward-looking statements in this quarterly report are made as of the date
hereof, based on information available to the Company as of the date hereof,
and
the Company assumes no obligation to update or revise any of its forward-looking
statements even if experience or future changes show that the indicated results
or events will not be realized. We caution you not to unduly
rely on any forward-looking statement(s).
SOUTHWEST
GAS CORPORATION Form
10-Q
September 30,
2007
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk in the Company’s 2006 Annual Report on Form 10-K filed with the
SEC. No material changes have occurred related to the Company’s
disclosures about market risk.
ITEM
4. CONTROLS
AND PROCEDURES
The
Company has established disclosure controls and procedures that are designed
to
provide reasonable assurance that information required to be disclosed in
reports filed or submitted under the Securities Exchange Act of 1934 is
recorded, processed, summarized, and reported within the time periods specified
in the SEC’s rules and forms. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are resource
constraints, and benefits of controls must be considered relative to their
costs. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or management override
of the control. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and
not be detected.
Based
on
the most recent evaluation, as of September 30, 2007, management of the Company,
including the Chief Executive Officer and Chief Financial Officer, believe
the
Company’s disclosure controls and procedures are effective at attaining the
level of reasonable assurance noted above.
There
have been no changes in the Company’s internal controls over financial reporting
during the third quarter of 2007 that have materially affected, or are likely
to
materially affect, the Company’s internal controls over financial
reporting.
PART
II - OTHER INFORMATION
ITEM
1.
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LEGAL
PROCEEDINGS
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The
Company is named as a defendant in various legal proceedings. The
ultimate dispositions of these proceedings are not presently determinable;
however, it is the opinion of management that none of this litigation
individually or in the aggregate will have a material adverse impact on the
Company’s financial position or results of operations.
ITEMS
1A. through 5.
|
None.
|
|
The
following documents are filed as part of this report on
Form 10-Q:
|
|
Exhibit
3(i)
|
-
Restated Articles of Incorporation of Southwest Gas
Corporation.
|
|
Exhibit
12.01
|
-
Computation of Ratios of Earnings to Fixed Charges.
|
|
Exhibit
31.01
|
-
Section 302 Certifications.
|
|
Exhibit
32.01
|
-
Section 906 Certifications.
|