form10q3rdqtr2009.htm






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, 2009


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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
     
Yes          No       

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer    Accelerated filer                                                                                           Non-accelerated filer                                                Smaller reporting company     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
     
Yes          No   X 
 
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, 44,955,318 shares as of November 2, 2009.
 
 
 
 


 
 

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



PART I - FINANCIAL INFORMATION
 
             
ITEM 1. FINANCIAL STATEMENTS
           
             
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Thousands of dollars, except par value)
 
(Unaudited)
 
   
SEPTEMBER 30,
   
DECEMBER 31,
 
   
2009
   
2008
 
ASSETS
           
Utility plant:
           
Gas plant
  $ 4,409,570     $ 4,258,727  
Less: accumulated depreciation
    (1,417,020 )     (1,347,093 )
Acquisition adjustments, net
    1,496       1,632  
Construction work in progress
    45,479       70,041  
Net utility plant
    3,039,525       2,983,307  
Other property and investments
    119,680       124,781  
Current assets:
               
Cash and cash equivalents
    32,828       26,399  
Accounts receivable, net of allowances
    85,778       168,829  
Accrued utility revenue
    32,200       72,600  
Income taxes receivable, net
    45,173       32,069  
Deferred income taxes
    8,541       14,902  
Prepaids and other current assets
    74,684       123,277  
Total current assets
    279,204       438,076  
Deferred charges and other assets
    274,859       274,220  
Total assets
  $ 3,713,268     $ 3,820,384  
                 
CAPITALIZATION AND LIABILITIES
               
Capitalization:
               
Common stock, $1 par (authorized - 60,000,000 shares; issued
               
and outstanding - 44,920,316 and 44,191,535 shares)
  $ 46,550     $ 45,822  
Additional paid-in capital
    787,495       770,463  
Accumulated other comprehensive income (loss), net
    (18,806 )     (19,426 )
Retained earnings
    249,754       240,982  
Total equity
    1,064,993       1,037,841  
Subordinated debentures due to Southwest Gas Capital II
    100,000       100,000  
Long-term debt, less current maturities
    1,126,575       1,185,474  
Total capitalization
    2,291,568       2,323,315  
Current liabilities:
               
Current maturities of long-term debt
    1,307       7,833  
Short-term debt
    -       55,000  
Accounts payable
    66,840       191,434  
Customer deposits
    86,052       83,468  
Accrued general taxes
    39,670       41,490  
Accrued interest
    18,064       19,699  
Deferred purchased gas costs
    102,867       33,073  
Other current liabilities
    73,001       77,898  
Total current liabilities
    387,801       509,895  
Deferred income taxes and other credits:
               
Deferred income taxes and investment tax credits
    418,813       387,539  
Taxes payable
    3,172       3,480  
Accumulated removal costs
    184,000       169,000  
Other deferred credits
    427,914       427,155  
Total deferred income taxes and other credits
    1,033,899       987,174  
Total capitalization and liabilities
  $ 3,713,268     $ 3,820,384  
                 
The accompanying notes are an integral part of these statements.
 

 
 2

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 


SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
(In thousands, except per share amounts)
 
(Unaudited)
 
                                     
   
THREE MONTHS ENDED
   
NINE MONTHS ENDED
   
TWELVE MONTHS ENDED
 
   
SEPTEMBER 30,
   
SEPTEMBER 30,
   
SEPTEMBER 30,
 
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
 
Operating revenues:
                                   
Gas operating revenues
  $ 235,020     $ 268,450     $ 1,186,870     $ 1,362,753     $ 1,615,512     $ 1,831,523  
Construction revenues
    82,489       105,972       208,149       272,580       288,917       364,121  
Total operating revenues
    317,509       374,422       1,395,019       1,635,333       1,904,429       2,195,644  
Operating expenses:
                                               
Net cost of gas sold
    104,518       134,030       668,013       839,309       884,681       1,091,050  
Operations and maintenance
    85,773       87,489       257,281       256,298       339,643       336,659  
Depreciation and amortization
    46,903       48,650       143,152       144,128       192,743       190,294  
Taxes other than income taxes
    8,265       8,103       27,880       27,913       36,747       37,213  
Construction expenses
    71,528       93,250       180,757       241,844       250,658       320,586  
Total operating expenses
    316,987       371,522       1,277,083       1,509,492       1,704,472       1,975,802  
Operating income
    522       2,900       117,936       125,841       199,957       219,842  
Other income and (expenses):
                                               
Net interest deductions
    (19,296 )     (21,012 )     (56,670 )     (64,270 )     (77,319 )     (86,854 )
Net interest deductions on subordinated debentures
    (1,933 )     (1,933 )     (5,798 )     (5,797 )     (7,730 )     (7,729 )
Other income (deductions)
    3,971       (4,592 )     4,719       (6,674 )     (2,013 )     (7,311 )
Total other income and (expenses)
    (17,258 )     (27,537 )     (57,749 )     (76,741 )     (87,062 )     (101,894 )
Income (loss) before income taxes
    (16,736 )     (24,637 )     60,187       49,100       112,895       117,948  
Income tax expense (benefit)
    (8,439 )     (7,951 )     19,097       19,359       40,573       45,070  
Net income (loss)
  $ (8,297 )   $ (16,686 )   $ 41,090     $ 29,741     $ 72,322     $ 72,878  
                                                 
Basic earnings (loss) per share
  $ (0.18 )   $ (0.38 )   $ 0.92     $ 0.69     $ 1.63     $ 1.69  
Diluted earnings (loss) per share
  $ (0.18 )   $ (0.38 )   $ 0.91     $ 0.68     $ 1.61     $ 1.68  
Dividends declared per share
  $ 0.2375     $ 0.225     $ 0.7125     $ 0.675     $ 0.9375     $ 0.89  
                                                 
Average number of common shares outstanding
    44,855       43,581       44,671       43,307       44,497       43,150  
Average shares outstanding (assuming dilution)
    -       -       44,960       43,610       44,785       43,464  
                                                 
The accompanying notes are an integral part of these statements.
 

 
 3

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Thousands of dollars)
 
(Unaudited)
 
                         
   
NINE MONTHS ENDED
   
TWELVE MONTHS ENDED
 
   
SEPTEMBER 30,
   
SEPTEMBER 30,
 
   
2009
   
2008
   
2009
   
2008
 
CASH FLOW FROM OPERATING ACTIVITIES:
                       
Net income
  $ 41,090     $ 29,741     $ 72,322     $ 72,878  
Adjustments to reconcile net income to net
                               
cash provided by operating activities:
                               
Depreciation and amortization
    143,152       144,128       192,743       190,294  
Deferred income taxes
    37,255       17,855       55,535       51,379  
Changes in current assets and liabilities:
                               
Accounts receivable, net of allowances
    83,051       84,436       33,446       8,993  
Accrued utility revenue
    40,400       42,300       400       (100 )
Deferred purchased gas costs
    69,794       21,602       69,123       17,599  
Accounts payable
    (124,594 )     (141,042 )     (12,849 )     (12,108 )
Accrued taxes
    (15,232 )     (7,175 )     (29,894 )     (29,948 )
Other current assets and liabilities
    43,890       50,708       (10,454 )     11,745  
Gains on sale
    (2,219 )     (2,102 )     (2,185 )     (2,510 )
Changes in undistributed stock compensation
    3,416       3,161       4,080       3,888  
AFUDC and property-related changes
    (951 )     (286 )     (1,226 )     (1,253 )
Changes in other assets and deferred charges
    (11,126 )     1,514       (12,645 )     570  
Changes in other liabilities and deferred credits
    11,109       5,378       10,169       6,280  
Net cash provided by operating activities
    319,035       250,218       368,565       317,707  
                                 
CASH FLOW FROM INVESTING ACTIVITIES:
                               
Construction expenditures and property additions
    (171,538 )     (221,862 )     (249,893 )     (307,736 )
Changes in customer advances
    (4,678 )     4,822       (5,456 )     7,889  
Receipt of exchange fund deposit
    -       28,000       -       28,000  
Miscellaneous inflows
    5,449       16,477       6,628       17,086  
Miscellaneous outflows
    (3,567 )     (2,762 )     (3,498 )     (21,486 )
Net cash used in investing activities
    (174,334 )     (175,325 )     (252,219 )     (276,247 )
                                 
CASH FLOW FROM FINANCING ACTIVITIES:
                               
Issuance of common stock, net
    14,022       23,205       26,208       30,562  
Dividends paid
    (31,271 )     (28,804 )     (41,172 )     (37,983 )
Issuance of long-term debt
    -       102,460       1,415       129,098  
Retirement of long-term debt
    (15,323 )     (132,504 )     (81,510 )     (168,726 )
Change in long-term portion of credit facility
    (50,700 )     (49,076 )     (1,624 )     (76 )
Change in short-term debt
    (55,000 )     (9,000 )     -       -  
Net cash used in financing activities
    (138,272 )     (93,719 )     (96,683 )     (47,125 )
                                 
Change in cash and cash equivalents
    6,429       (18,826 )     19,663       (5,665 )
Cash at beginning of period
    26,399       31,991       13,165       18,830  
                                 
Cash at end of period
  $ 32,828     $ 13,165     $ 32,828     $ 13,165  
                                 
Supplemental information:
                               
Interest paid, net of amounts capitalized
  $ 62,457     $ 69,309     $ 84,359     $ 94,505  
Income taxes paid (received)
    (5,128 )     5,278       12,066       31,070  
                                 
The accompanying notes are an integral part of these statements.
 


 
 4

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



Note 1 – Nature of Operations and Basis of Presentation

Nature of Operations.  Southwest Gas Corporation and its subsidiaries (the “Company”) are composed of two 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. The public utility rates, practices, facilities, and service territories of Southwest are subject to regulatory oversight. The timing and amount of rate relief can materially impact results of operations. 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. Variability in weather from normal temperatures can materially impact results of operations. Natural gas purchases and the timing of related recoveries can materially impact liquidity.  NPL 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.

Basis of Presentation.  The condensed 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 (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The preparation of the condensed 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 expense 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 condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the 2008 Annual Report to Shareholders, which is incorporated by reference into the 2008 Form 10-K, and the first and second quarter 2009 reports on Form 10-Q.

Intercompany Transactions.  NPL recognizes revenues generated from contracts with Southwest (see Note 3 below). Accounts receivable for these services were $5.1 million at September 30, 2009 and $6.6 million at December 31, 2008. The accounts receivable balance, revenues, and associated profits are included in the condensed consolidated financial statements of the Company and were not eliminated during consolidation in accordance with accounting treatment for rate-regulated utilities.

Other Income (Deductions).  The following table provides the composition of significant items included in Other income (deductions) on the consolidated statements of income (thousands of dollars):

   
Three Months Ended
   
Nine Months Ended
   
Twelve Months Ended
 
   
September 30,
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
 
                                     
Change in COLI policies
  $ 4,870     $ (3,700 )   $ 6,943     $ (6,300 )   $ 1,202     $ (7,300 )
Interest income
    29       217       244       1,998       458       2,662  
Miscellaneous income and (expense)
    (928 )     (1,109 )     (2,468 )     (2,372 )     (3,673 )     (2,673 )
                                                 
Total other income (deductions)
  $ 3,971     $ (4,592 )   $ 4,719     $ (6,674 )   $ (2,013 )   $ (7,311 )
 
Included in the table above is the change in cash surrender values of company-owned life insurance (“COLI”) policies.  These life insurance policies on members of management and other key employees are used by Southwest to indemnify itself against the loss of talent, expertise, and knowledge, as well as to provide indirect funding for certain nonqualified benefit plans.  Current tax regulations provide for tax-free treatment of life insurance (death benefit) proceeds.  Therefore, the change in the cash surrender value components of COLI policies as they progress toward the ultimate death benefits are also recorded without tax consequences.

 
 5

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



Reclassifications.  Certain reclassifications have been made to the prior year’s financial information to present it on a basis comparable with the current year’s presentation.  None of the reclassifications affected previously reported net income.

Recently Issued Accounting Standards Updates.  In December 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) SFAS No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” which requires companies to enhance disclosures about the plan assets of a defined benefit pension or other postretirement plan.  Companies will be required to disclose how investment decisions are made, the major plan asset categories, the inputs and valuation techniques used to measure the fair value of plan assets, the level within the fair value hierarchy in which the fair value measurements in their entirety fall, the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period, and significant concentrations of risk within plan assets.  The provisions of FSP SFAS No. 132(R)-1 are effective for the Company beginning with 2009 year-end financial statement reports.  The Company is evaluating what impact this standard might have on its disclosures.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets – an amendment of SFAS No. 140” which eliminates the qualifying special purpose entity concept and the related exception from consolidation, limits derecognition of financial assets when control still exists, and requires enhanced disclosures.  For the Company, SFAS No. 166 will be effective prospectively for new transfers of financial assets beginning January 2010.  The Company is evaluating what impact, if any, this standard might have on its financial position or disclosures.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” which changes the methodology for determining the primary beneficiary of a variable interest entity.  This methodology change could cause an entity to consolidate a previously unconsolidated variable interest entity or deconsolidate a previously consolidated variable interest entity if the primary beneficiary has changed under the new guidance.  Entities will have the option to adopt retrospectively or through cumulative effect.  Enhanced disclosures are also required.  The Company currently does not consolidate Southwest Gas Capital II (“Trust II”), a wholly owned subsidiary, which was created as a financing trust for the sole purpose of issuing preferred trust securities for the benefit of the Company.  Although the Company owns 100 percent of the common voting securities of Trust II, under Interpretation No. 46 “Consolidation of Variable Interest Entities (revised December 2003),” the Company is not considered the primary beneficiary and therefore Trust II is not consolidated.  SFAS No. 167 will be effective for the Company in January 2010.  The Company is evaluating the potential impacts of the standard.

Subsequent Events.  Management of the Company monitors significant events occurring after the balance sheet date and prior to the issuance of the financial statements to determine the impacts, if any, of events on the financial statements to be issued.  All subsequent events of which management is aware were evaluated through November 6, 2009, the date these financial statements were issued.

 
 6

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



Note 2 – Components of Net Periodic Benefit Cost

Southwest has a noncontributory qualified retirement plan with defined benefits covering substantially all employees and a separate unfunded supplemental retirement plan (“SERP”) which is limited to officers.  Southwest also provides postretirement benefits other than pensions (“PBOP”) to its qualified retirees for health care, dental, and life insurance benefits.
 
                                     
   
Qualified Retirement Plan
 
   
Period Ended September 30,
 
   
Three Months
   
Nine Months
   
Twelve Months
 
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
 
(Thousands of dollars)
                                   
Service cost
  $ 3,848     $ 4,027     $ 11,543     $ 12,081     $ 15,570     $ 16,204  
Interest cost
    8,632       8,123       25,895       24,368       34,018       31,679  
Expected return on plan assets
    (8,805 )     (8,679 )     (26,416 )     (26,035 )     (35,095 )     (34,292 )
Amortization of prior service costs (credits)
    (1 )     (3 )     (2 )     (8 )     (5 )     (11 )
Amortization of net loss
    1,063       776       3,190       2,328       3,966       3,580  
Net periodic benefit cost
  $ 4,737     $ 4,244     $ 14,210     $ 12,734     $ 18,454     $ 17,160  
                                                 
                                                 
   
SERP
 
   
Period Ended September 30,
 
   
Three Months
   
Nine Months
   
Twelve Months
 
     2009      2008      2009      2008      2009      2008  
(Thousands of dollars)
                                               
Service cost
  $ 49     $ 24     $ 147     $ 73     $ 171     $ 111  
Interest cost
    516       510       1,548       1,531       2,058       2,018  
Amortization of net loss
    227       250       681       748       930       1,031  
Net periodic benefit cost
  $ 792     $ 784     $ 2,376     $ 2,352     $ 3,159     $ 3,160  
                                                 
                                                 
   
PBOP
 
   
Period Ended September 30,
 
   
Three Months
   
Nine Months
   
Twelve Months
 
     2009      2008      2009      2008      2009      2008  
(Thousands of dollars)
                                               
Service cost
  $ 183     $ 182     $ 547     $ 548     $ 729     $ 751  
Interest cost
    593       581       1,778       1,743       2,359       2,319  
Expected return on plan assets
    (401 )     (534 )     (1,202 )     (1,604 )     (1,736 )     (2,140 )
Amortization of transition obligation
    216       216       650       650       867       867  
Amortization of net loss
    108       -       325       -       325       14  
Net periodic benefit cost
  $ 699     $ 445     $ 2,098     $ 1,337     $ 2,544     $ 1,811  


 
 7

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



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, 2009
                 
Revenues from external customers
  $ 235,020     $ 69,923     $ 304,943  
Intersegment revenues
    -       12,566       12,566  
Total
  $ 235,020     $ 82,489     $ 317,509  
Segment net income (loss)
  $ (11,367 )   $ 3,070     $ (8,297 )
                         
Three months ended September 30, 2008
                       
Revenues from external customers
  $ 268,450     $ 88,034     $ 356,484  
Intersegment revenues
    -       17,938       17,938  
Total
  $ 268,450     $ 105,972     $ 374,422  
Segment net income (loss)
  $ (19,678 )   $ 2,992     $ (16,686 )
                         
                         
                         
Nine months ended September 30, 2009
                       
Revenues from external customers
  $ 1,186,870     $ 168,707     $ 1,355,577  
Intersegment revenues
    -       39,442       39,442  
Total
  $ 1,186,870     $ 208,149     $ 1,395,019  
Segment net income
  $ 35,749     $ 5,341     $ 41,090  
                         
Nine months ended September 30, 2008
                       
Revenues from external customers
  $ 1,362,753     $ 225,558     $ 1,588,311  
Intersegment revenues
    -       47,022       47,022  
Total
  $ 1,362,753     $ 272,580     $ 1,635,333  
Segment net income
  $ 24,748     $ 4,993     $ 29,741  
                         
                         
                         
Twelve months ended September 30, 2009
                       
Revenues from external customers
  $ 1,615,512     $ 233,367     $ 1,848,879  
Intersegment revenues
    -       55,550       55,550  
Total
  $ 1,615,512     $ 288,917     $ 1,904,429  
Segment net income
  $ 64,748     $ 7,574     $ 72,322  
                         
Twelve months ended September 30, 2008
                       
Revenues from external customers
  $ 1,831,523     $ 298,893     $ 2,130,416  
Intersegment revenues
    -       65,228       65,228  
Total
  $ 1,831,523     $ 364,121     $ 2,195,644  
Segment net income
  $ 64,332     $ 8,546     $ 72,878  

 
 8

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



Note 4 – Comprehensive Income
 
                                     
   
Three Months Ended
   
Nine Months Ended
   
Twelve Months Ended
 
   
September 30,
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
 
      (Thousands of dollars)  
                                     
Net income (loss)
  $ (8,297 )   $ (16,686 )   $ 41,090     $ 29,741     $ 72,322     $ 72,878  
Net actuarial gain (loss) arising during period,
                                               
less amortization of unamortized benefit plan
                                               
cost, net of tax
    207       203       620       608       (6,564 )     689  
Comprehensive income (loss)
  $ (8,090 )   $ (16,483 )   $ 41,710     $ 30,349     $ 65,758     $ 73,567  
 
Tax expense (benefit) related to the net actuarial gain (loss) arising during the period, less amortization of unamortized benefit plan cost, for the three months, nine months, and twelve months ended September 30, 2009 was $126,000, $380,000, and $(4 million), respectively.  Tax expense related to the net actuarial gain arising during the period, less amortization of unamortized benefit plan cost for the three months, nine months, and twelve months ended September 30, 2008 was $124,000, $372,000, and $422,000, respectively.  Total accumulated other comprehensive loss as of September 30, 2009 was $18.8 million, net of $11.5 million of tax, and was composed entirely of unamortized benefit plan costs.

Note 5 – Common Stock

During the nine months ended September 30, 2009, the Company issued approximately 728,000 shares of common stock through the Dividend Reinvestment and Stock Purchase Plan (“DRSPP”), Employee Investment Plan, Restricted Stock/Unit Plan, and Management Incentive Plan.


 
 9

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



Note 6 – Long-Term Debt

Carrying amounts of the Company’s long-term debt and their related estimated fair values as of September 30, 2009 and December 31, 2008 are disclosed in the following table.  The fair value of the revolving credit facility and the variable-rate IDRBs approximates carrying value.  Market values for the debentures, fixed-rate IDRBs, and other indebtedness were determined based on dealer quotes using trading records for September 30, 2009 and December 31, 2008, as applicable, and other secondary sources which are customarily consulted for data of this kind.  Management believes the fair values for certain securities disclosed for September 30, 2009 and December 31, 2008 reflect the impacts of a constrained securities market and may differ significantly from those determined in a normal functioning credit market.


   
September 30, 2009
   
December 31, 2008
 
   
Carrying
   
Market
   
Carrying
   
Market
 
   
Amount
   
Value
   
Amount
   
Value
 
(Thousands of dollars)
                       
Debentures:
                       
Notes, 8.375%, due 2011
  $ 200,000     $ 215,040     $ 200,000     $ 206,200  
Notes, 7.625%, due 2012
    200,000       220,390       200,000       203,880  
8% Series, due 2026
    75,000       90,905       75,000       79,163  
Medium-term notes, 7.59% series, due 2017
    25,000       28,736       25,000       25,560  
Medium-term notes, 7.78% series, due 2022
    25,000       29,747       25,000       25,793  
Medium-term notes, 7.92% series, due 2027
    25,000       30,031       25,000       26,245  
Medium-term notes, 6.76% series, due 2027
    7,500       8,074       7,500       7,004  
Unamortized discount
    (2,361 )             (2,837 )        
      555,139               554,663          
Revolving credit facility and commercial paper, due 2012
    99,300       99,300       150,000       150,000  
Industrial development revenue bonds:
                               
Variable-rate bonds:
                               
Tax-exempt Series A, due 2028
    50,000       50,000       50,000       50,000  
2003 Series A, due 2038
    50,000       50,000       50,000       50,000  
2008 Series A, due 2038
    50,000       50,000       50,000       50,000  
Fixed-rate bonds:
                               
6.10% 1999 Series A, due 2038
    12,410       11,569       12,410       9,375  
5.95% 1999 Series C, due 2038
    14,320       13,069       14,320       10,585  
5.55% 1999 Series D, due 2038
    8,270       7,124       8,270       5,752  
5.45% 2003 Series C, due 2038
    30,000       31,408       30,000       32,966  
5.25% 2003 Series D, due 2038
    20,000       13,890       20,000       15,859  
5.80% 2003 Series E, due 2038
    15,000       15,622       15,000       15,006  
5.25% 2004 Series A, due 2034
    65,000       56,544       65,000       43,929  
5.00% 2004 Series B, due 2033
    31,200       26,365       31,200       24,278  
4.85% 2005 Series A, due 2035
    100,000       80,376       100,000       62,862  
4.75% 2006 Series A, due 2036
    24,855       19,352       24,855       18,316  
Unamortized discount
    (3,503 )             (3,605 )        
      467,552               467,450          
Other
    5,891       6,035       21,194       20,993  
      1,127,882               1,193,307          
Less: current maturities
    (1,307 )             (7,833 )        
Long-term debt, less current maturities
  $ 1,126,575             $ 1,185,474          

 
 10

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



Note 7 – Derivatives and Fair Value Measurements

In managing its natural gas supply portfolios, Southwest has historically entered into fixed- and variable-price contracts, which qualify as derivatives.  In 2008, Southwest also began utilizing fixed-for-floating swap contracts (“Swaps”) to supplement its fixed-price contracts.  The fixed-price contracts, firm commitments to purchase a fixed amount of gas in the future at a fixed price, qualify for the normal purchases and normal sales exception that is allowed for contracts that are probable of delivery in the normal course of business and are exempt from fair value reporting.  The variable-price contracts have no significant market value.  The Swaps are recorded at fair value.

The fixed-price contracts and Swaps are utilized by Southwest under its volatility mitigation programs to effectively fix the price on approximately 50 percent of its natural gas portfolios.  The maturities of the Swaps highly correlate to actual purchases of natural gas, during timeframes ranging from October 2009 through October 2010.  Under such contracts, Southwest pays the counterparty at a fixed rate and receives from the counterparty a floating rate per MMBtu (“dekatherm”) of natural gas.  Only the net differential is actually paid or received.  The differential is calculated based on the notional amounts under the contracts (approximately 15.4 million dekatherms at September 30, 2009 and 6.5 million dekatherms at December 31, 2008).  Southwest does not utilize derivative financial instruments for speculative purposes, nor does it have trading operations.

The following table sets forth the gains and (losses) recognized on the Company's Swaps (derivatives) for the three months and nine months ended September 30, 2009 and their location in the income statement (thousands of dollars):

Derivatives not designated as hedging instruments:
           
               
 
Location of Gain or (Loss) Recognized in
 
Amount of Gain or (Loss) Recognized in Income
 
 
 Income on Derivative
 
on Derivative
 
     
Three Months Ended
   
Nine Months Ended
 
     
September 30, 2009
   
September 30, 2009
 
               
Swaps
Net cost of gas sold
  $ 6,872     $ (410 )
Swaps
Net cost of gas sold
    (6,872 ) *     410 *
Total
    $ -     $ -  
 
* Represents the impact of regulatory deferral accounting treatment under U.S. GAAP for rate-regulated utilities.

The estimated fair values of the derivatives were determined using future natural gas index prices (as more fully described below).  The Company has master netting arrangements with each counterparty that provide for the net settlement of all contracts through a single payment.  As applicable, the Company has elected to reflect the net amounts in its balance sheets.

 
 11

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



The following table sets forth the fair values of the Company's Swaps (derivatives) and their location in the balance sheets (thousands of dollars):
 

Derivatives not designated as hedging instruments:
                 
                     
September 30, 2009
   
Asset
   
Liability
       
 
Balance Sheet Location
 
Derivatives
   
Derivatives
   
Net Total
 
Swaps
Deferred charges and other assets
  $ 676     $ -     $ 676  
Swaps
Prepaids and other current assets
    3,706       (294 )     3,412  
Swaps
Other current liabilities
    675       (3,638 )     (2,963 )
Total
    $ 5,057     $ (3,932 )   $ 1,125  
                           
December 31, 2008
   
Asset
   
Liability
         
 
Balance Sheet Location
 
Derivatives
   
Derivatives
   
Net Total
 
Swaps
Deferred charges and other assets
  $ 380     $ (88 )   $ 292  
Swaps
Other current liabilities
    -       (14,440 )     (14,440 )
Total
    $ 380     $ (14,528 )   $ (14,148 )
 
Pursuant to regulatory deferral accounting treatment for rate-regulated utilities, Southwest records the unrealized gains and losses in fair value of the Swaps as a regulatory asset and/or liability.  When the Swaps settle, Southwest reverses any prior positions held and records the settled position as an increase or decrease of purchased gas under the related purchased gas adjustment (“PGA”) mechanism in determining its deferred PGA balances.  During the three months and nine months ended September 30, 2009, Southwest paid counterparties $2 million and $15.7 million, respectively, in settlements of matured Swaps.  Neither changes in the fair value of the Swaps nor settled amounts have a direct effect on earnings or other comprehensive income.  At September 30, 2009, regulatory assets/liabilities offsetting the amounts in the above table were recorded in Prepaids and other current assets ($3 million), Other current liabilities ($3.4 million), and Other deferred credits ($676,000).  At December 31, 2008, regulatory assets/liabilities offsetting the amounts in the above table were recorded in Prepaids and other current assets ($14.4 million) and Other deferred credits ($292,000).

The estimated fair values of Southwest’s Swaps were determined at September 30, 2009 using NYMEX futures settlement prices for delivery of natural gas at Henry Hub adjusted by the price of NYMEX ClearPort basis Swaps, which reflect the difference between the price of natural gas at a given delivery basin and the Henry Hub pricing points.  These Level 2 inputs are observable in the marketplace throughout the full term of the Swaps, but have been credit-risk adjusted with no significant impact to the overall fair value measure.

The following table sets forth, by level within the three-level fair value hierarchy that ranks the inputs used to measure fair value by their reliability, the Company's financial assets and liabilities that were accounted for at fair value as of September 30, 2009 and December 31, 2008:

Level 2 - Significant other observable inputs
           
             
(Thousands of dollars)
 
September 30, 2009
   
December 31, 2008
 
             
Assets at fair value:
           
Prepaids and other current assets - swaps
  $ 3,412     $ -  
Deferred charges and other assets - swaps
    676       292  
                 
Liabilities at fair value:
               
Other current liabilities - swaps
    (2,963 )     (14,440 )
                 
Net Assets (Liabilities)
  $ 1,125     $ (14,148 )
 
No financial assets or liabilities fell within Level 1 or Level 3 of the fair value hierarchy.

 
 12

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



ITEM 2.                  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Southwest Gas Corporation and its subsidiaries (the “Company”) consist of 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.

On a seasonally adjusted basis as of September 30, 2009, Southwest had 1,803,000 residential, commercial, industrial, and other natural gas customers, of which 972,000 customers were located in Arizona, 652,000 in Nevada, and 179,000 in California.  Residential and commercial customers represented over 99 percent of the total customer base.  During the twelve months ended September 30, 2009, 54 percent of operating margin was earned in Arizona, 35 percent in Nevada, and 11 percent in California.  During this same period, Southwest earned 86 percent of operating margin from residential and small commercial customers, 4 percent from other sales customers, and 10 percent from transportation customers.  These general patterns are expected to continue.

Southwest recognizes operating revenues 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 principal factors affecting operating margin are general rate relief, weather, conservation and efficiencies, and customer growth.  Of these, weather is the primary reason for volatility in margin.  Variances in temperatures from normal levels, especially in Arizona where rates are highly leveraged, can have a significant impact on the margin and associated net income of the Company.

NPL 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.  NPL currently operates in 18 major markets nationwide.  Construction activity is cyclical and can be significantly impacted by changes in general and local economic conditions, including the housing market, interest rates, employment levels, job growth, the equipment resale market, and local and federal tax rates.  Generally, revenues and profits are lowest during the first quarter of the year due to less favorable winter weather conditions.  Operating results typically improve as more favorable weather conditions occur during the summer and fall months.

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 2008 Annual Report to Shareholders, which is incorporated by reference into the 2008 Form 10-K, and the first and second quarter 2009 reports on Form 10-Q.


 
 13

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 


 
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 89 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
 
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
 
   
(In thousands, except per share amounts)
 
                                     
Contribution to net income (loss)
                                   
Natural gas operations
  $ (11,367 )   $ (19,678 )   $ 35,749     $ 24,748     $ 64,748     $ 64,332  
Construction services
    3,070       2,992       5,341       4,993       7,574       8,546  
Net income (loss)
  $ (8,297 )   $ (16,686 )   $ 41,090     $ 29,741     $ 72,322     $ 72,878  
                                                 
Average number of common
                                               
    shares outstanding
    44,855       43,581       44,671       43,307       44,497       43,150  
                                                 
Basic earnings (loss) per share
                                               
Consolidated
  $ (0.18 )   $ (0.38 )   $ 0.92     $ 0.69     $ 1.63     $ 1.69  
                                                 
                                                 
Natural Gas Operations
                                               
Operating margin
  $ 130,502     $ 134,420     $ 518,857     $ 523,444     $ 730,831     $ 740,473  
 
Contribution to consolidated net income (loss) from natural gas operations improved $8.3 million in the third quarter of 2009 compared to the same period in 2008.  The improvement in contribution primarily resulted from a $4.9 million increase in the cash surrender values of COLI policies in the third quarter of 2009 compared to a $3.7 million decrease in the third quarter of 2008.  The construction services contribution was relatively flat compared to the same period in 2008.

3rd Quarter 2009 Overview

Gas operations highlights include the following:
 
·
Operating margin decreased approximately $4 million, or three percent, compared to the prior-year’s quarter as the positive impact of Arizona rate relief ($5 million) was more than offset by the negative impact ($9 million) of a return to a seasonal margin methodology in California
 
·
Operations and maintenance expenses decreased two percent between quarters
 
·
Depreciation expense decreased one percent between quarters due to lower depreciation rates in the Nevada and California rate jurisdictions
 
·
COLI cash surrender values significantly increased between quarters
 
·
Net financing costs decreased $1.6 million between quarters
·      Liquidity position remains strong
 
·
Nevada general rate increase and decoupling mechanism approved effective November 2009

 
 14

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



Nevada Rate Relief.  In October 2009, the Public Utilities Commission of Nevada (“PUCN”) authorized general rate relief in Nevada effective November 2009 that is designed to increase annual operating income by approximately $19.1 million.  The rate decision also authorized a decoupled rate structure that will help stabilize annual operating margin in Nevada.  See Nevada General Rate Case for additional details of the rate decision.

Customers.  During the twelve months ended September 30, 2009, Southwest completed 21,000 first-time meter sets.  These meter sets led to just 1,000 net additional active meters between September 2008 and September 2009 on a seasonally adjusted basis.  The difference between first-time meter sets and incremental active meters indicates a continuing build-up of unoccupied homes, a trend first experienced during 2007.  Southwest is projecting net growth will remain sluggish (1% or less) for 2009 as high foreclosure rates and recessionary conditions persist throughout its service territories.  Once housing supply and demand come back into balance, Southwest expects to experience a correction in which customer additions exceed first-time meter sets.  Although management cannot predict the timing of a turn around, it is not likely to occur in the near term.

Weather.  The rate structures in each of Southwest’s three states provide varying levels of protection from risks that drive operating margin volatility, particularly weather risk.  During the first nine months of 2009, the estimated weather impact on operating margin was a reduction of $17 million, including $13 million from the first quarter when Arizona experienced one of its warmest winters in 100 years.  For comparison purposes, during the first nine months of 2008, weather resulted in an estimated favorable operating margin impact of $1 million.

In Southwest’s California service territories, weather impacts were completely offset by the margin tracking mechanism allowing margin to grow as authorized in its most recent general rate case.  In Nevada, the negative impacts were mitigated by a declining block rate structure.  Most of the reduction occurred in Arizona, where rates are highly leveraged and a single block rate structure is in effect.  In addition, the heating season is fairly condensed in Arizona; therefore variations from “normal” temperatures can cause significant volatility in operating margin as over 50 percent of Southwest’s annual operating margin is normally earned in Arizona.

Conservation, Energy Efficiencies, and Economic Impacts on Consumption.  A significant portion of Southwest’s operating margin (primarily in Arizona and partially in Nevada) has been recognized based on the volumetric usage of its customers.  Historically the impacts of this rate design methodology have been most pronounced when temperatures varied from normal levels.  Over the longer-term, average usage has also declined due to new home construction practices and energy efficient appliances.  Recently, the continued downturn in the economy and associated pro-active conservation efforts have resulted in an unprecedented drop in average per-customer usage.  For the nine months ended September 30, 2009, the estimated impact of these non-weather-related volumetric declines was a reduction to operating margin of $8 million.  The decoupling methodology authorized in the recent Nevada rate case, effective November 2009, is designed to mitigate this impact in Nevada.  Management continues to work with regulators in Arizona to establish a decoupling methodology that would allow the Company to support and encourage conservation efforts without jeopardizing the recognition of authorized operating margin.

Company-Owned Life Insurance (“COLI”).  Southwest has life insurance policies on members of management and other key employees to indemnify itself against the loss of talent, expertise, and knowledge, as well as to provide indirect funding for certain nonqualified benefit plans.  The COLI policies have a combined net death benefit value of approximately $137 million at September 30, 2009.  The net cash surrender value of these policies (which is the cash amount that would be received if Southwest voluntarily terminated the policies) is approximately $57 million at September 30, 2009 and is included in the caption “Other property and investments” on the balance sheet.  Cash surrender values are directly influenced by the investment portfolio underlying the insurance policies.  This portfolio includes both equity and fixed income (mutual fund) investments.  As a result, generally the cash surrender value (but not the net death benefit) moves up and down consistent with the movements in the broader stock and bond markets.  See the Other Income (Deductions) section of Note 1 - Nature of Operations and Basis of Presentation for additional details.  Current tax regulations provide for tax-free treatment of life insurance (death benefit) proceeds.  Therefore, the changes in the cash surrender value components of COLI policies as they progress toward the ultimate death benefits are also recorded without tax consequences.  Currently, the Company intends to hold the COLI policies for their duration and purchase additional policies as necessary.

 
 15

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



Liquidity.  During 2008 and 2009, significant attention has been paid to companies’ liquidity and credit risks.  Focus on these risks will likely continue given the current national economic environment.  The Company has experienced no significant impacts to its liquidity position from the ongoing credit crisis.  Southwest believes its liquidity position remains strong for several reasons.  First, Southwest has a $300 million credit facility maturing in May 2012, $150 million of which is designated for working capital needs.  The facility is composed of eight major banking institutions.  Historically, usage of the facility has been low and concentrated in the first half of the winter heating period when gas purchases require temporary financing.  Second, natural gas prices have remained low and beneficial rate mechanisms have resulted in steady gas-cost related operating cash flows.  Third, Southwest has no significant debt maturities prior to February 2011.  Because of Southwest’s strong liquidity position, in December 2008, Southwest was able to take advantage of the current credit market by repurchasing $75 million of IDRBs at a net deferred gain of $14 million.


 
16 

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



Results of Natural Gas Operations

Quarterly Analysis
           
   
Three Months Ended
 
   
September 30,
 
   
2009
   
2008
 
   
(Thousands of dollars)
 
Gas operating revenues
  $ 235,020     $ 268,450  
Net cost of gas sold
    104,518       134,030  
  Operating margin
    130,502       134,420  
Operations and maintenance expense
    85,773       87,489  
Depreciation and amortization
    41,401       41,623  
Taxes other than income taxes
    8,265       8,103  
  Operating income (loss)
    (4,937 )     (2,795 )
Other income (expense)
    3,952       (4,548 )
Net interest deductions
    18,904       20,521  
Net interest deductions on subordinated debentures
    1,933       1,933  
  Income (loss) before income taxes
    (21,822 )     (29,797 )
Income tax expense (benefit)
    (10,455 )     (10,119 )
  Contribution to consolidated net income (loss)
  $ (11,367 )   $ (19,678 )
 
Contribution to consolidated net income (loss) from natural gas operations improved $8.3 million in the third quarter of 2009 compared to 2008.  The improvement in contribution reflects higher other income and the benefit of lower operating expenses and financing costs, partially offset by lower operating margin.

Operating margin decreased by approximately $4 million in the third quarter of 2009 compared to the third quarter of 2008.  The decline resulted from a $9 million decrease related to the return to a seasonal margin methodology in California, partially offset by rate relief of $5 million in Arizona.  This completes the seasonal adjustment impacts to margin in California.  Customer growth was not a factor as only 1,000 net new customers (on a comparative seasonally adjusted basis) were added during the last twelve months.

Operations and maintenance expense decreased $1.7 million, or two percent, principally due to effectively using technology and being selective in filling employee vacancies.

Depreciation expense decreased $222,000, or one percent, as a result of lower depreciation rates in the California ($3 million annualized reduction) and Nevada ($2.3 million annualized reduction) rate jurisdictions effective in January and June 2009, respectively.  Average gas plant in service for the current period increased $184 million, or four 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.

Other income increased $8.5 million between quarters as the cash surrender values of COLI policies increased by $4.9 million in the third quarter of 2009 compared to a decrease of $3.7 million in the prior-year quarter, partially offset by lower interest income.

Net financing costs decreased $1.6 million between the third quarters of 2009 and 2008 primarily due to a reduction in outstanding debt, including the redemption of $75 million of long-term debt in December 2008, and reduced interest rates associated with Southwest’s commercial credit and other variable-rate facilities.

 
 17

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



Nine-Month Analysis
           
   
Nine Months Ended
 
   
September 30,
 
   
2009
   
2008
 
   
(Thousands of dollars)
 
Gas operating revenues
  $ 1,186,870     $ 1,362,753  
Net cost of gas sold
    668,013       839,309  
  Operating margin
    518,857       523,444  
Operations and maintenance expense
    257,281       256,298  
Depreciation and amortization
    125,613       123,565  
Taxes other than income taxes
    27,880       27,913  
  Operating income
    108,083       115,668  
Other income (expense)
    4,589       (6,710 )
Net interest deductions
    55,617       62,811  
Net interest deductions on subordinated debentures
    5,798       5,797  
  Income before income taxes
    51,257       40,350  
Income tax expense
    15,508       15,602  
  Contribution to consolidated net income
  $ 35,749     $ 24,748  

Contribution to consolidated net income from natural gas operations increased $11 million in the first nine months of 2009 compared to the same period a year ago. The increase in contribution was primarily due to higher other income and reduced financing costs, partially offset by lower operating margin and increased operating expenses.

Operating margin decreased approximately $4 million between periods.  Positive impacts to operating margin from rate relief were approximately $22 million, consisting of $20 million in Arizona and $2 million in California.  Differences in heating demand, caused primarily by weather variations, negatively impacted operating margin by approximately $18 million as overall temperatures in the current period were significantly warmer than normal ($17 million), while temperatures were somewhat colder than normal ($1 million) in the corresponding period in 2008.  Conservation resulting from the sluggish economy and energy efficiency negatively impacted operating margin by an estimated $8 million.  Customer growth had a nominal effect on operating margin.

Operations and maintenance expense increased $983,000, or less than one percent, principally due to the impact of modest general cost increases, tempered by labor efficiencies.

Depreciation expense increased $2 million, or two percent, as a result of construction activities, partially offset by lower depreciation rates in the Nevada and California rate jurisdictions in 2009.  Average gas plant in service increased $201 million, or five percent, as compared to the first nine months of 2008.  The increase reflects ongoing capital expenditures for the upgrade of existing operating facilities and the expansion of the system.

Other income increased $11.3 million between periods as the cash surrender values of COLI policies increased by $6.9 million in the first nine months of 2009 compared to a reduction of $6.3 million in the first nine months of 2008, partially offset by a $1.8 million decrease in interest income.

Net financing costs decreased $7.2 million between the first nine months of 2009 and the same period in 2008 primarily due to lower average debt outstanding, including the redemption of $75 million of long-term debt in December 2008, and reduced interest rates on variable-rate debt.

 
 18

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



Twelve-Month Analysis
           
   
Twelve Months Ended
 
   
September 30,
 
   
2009
   
2008
 
   
(Thousands of dollars)
 
Gas operating revenues
  $ 1,615,512     $ 1,831,523  
Net cost of gas sold
    884,681       1,091,050  
  Operating margin
    730,831       740,473  
Operations and maintenance expense
    339,643       336,659  
Depreciation and amortization
    168,385       163,275  
Taxes other than income taxes
    36,747       37,213  
  Operating income
    186,056       203,326  
Other income (expense)
    (2,170 )     (7,362 )
Net interest deductions
    75,902       84,781  
Net interest deductions on subordinated debentures
    7,730       7,729  
  Income before income taxes
    100,254       103,454  
Income tax expense
    35,506       39,122  
  Contribution to consolidated net income
  $ 64,748     $ 64,332  
 
Contribution to consolidated net income from natural gas operations was relatively flat for the current twelve-month period as compared to the same period a year ago.  The slight improvement in contribution was a result of greater other income and reduced financing costs, partially offset by a decline in operating margin and an increase in operating expenses.

Operating margin decreased a net $9 million between periods.  Rate relief provided $24 million of operating margin, consisting of $22 million in Arizona and $2 million in California.  Customer growth contributed $1 million in operating margin.  Differences in heating demand caused primarily by weather variations between periods resulted in a $22 million operating margin decrease as warmer-than-normal temperatures were experienced during both periods (during the twelve-month period of 2009, operating margin was negatively impacted by $29 million, while the negative impact in the twelve-month period of 2008 was $7 million).  Conservation resulting from current economic conditions and energy efficiency negatively impacted operating margin by an estimated $12 million.

Operations and maintenance expense increased $3 million, or one percent, principally due to the impact of general cost increases.  The increase was mitigated by lower staffing levels and labor efficiencies associated with the conversion to electronic meter reading.

Depreciation expense increased $5.1 million, or three percent, as a result of additional plant in service, partially offset by lower depreciation rates in the Nevada and California rate jurisdictions in 2009.  Average gas plant in service for the twelve-month period of 2009 increased $210 million, or five percent, as compared to the twelve-month period of 2008.  This was attributable to the upgrade of existing operating facilities and the expansion of the system.

Other income improved $5.2 million between the twelve-month periods of 2009 and 2008.  This was primarily due to a $1.2 million increase in the cash surrender values of COLI policies in the current period compared to cash surrender value declines in the prior period of $7.3 million, partially offset by a $2.2 million reduction in interest income between the twelve-month periods.

Net financing costs decreased $8.9 million between the twelve-month periods of 2009 and 2008 primarily due to a reduction in outstanding debt and lower interest rates associated with Southwest’s commercial credit and other variable-rate facilities.

 
 19

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



Results of Construction Services

NPL’s operating results continue to be influenced by the general slow down in the new housing market.  Although management cannot predict the timing of a turn around in the new housing market, it is not likely to occur in the near term.

Contribution to consolidated net income from construction services for the three months ended September 30, 2009 was relatively flat compared to the same period of 2008.  Gains on sales of equipment were $310,000 for the three months ended September 30, 2009 and $429,000 for the corresponding period of 2008.

Revenues decreased $23.5 million primarily due to a reduction in new construction work resulting from the general slow down in the new housing market.  Construction expenses declined $21.7 million primarily due to the reduction in new construction work, lower fuel and fuel-related expenses, and cost-saving initiatives.

Contribution to consolidated net income from construction services for the nine months ended September 30, 2009 increased $348,000 compared to the same period of 2008.  The improvement was primarily due to a reduction in construction expenses including fuel and fuel-related expenses and lower financing costs.  Gains on sales of equipment were $2.2 million for the nine months ended September 30, 2009 and $2.1 million for the corresponding period of 2008.

Revenues decreased $64.4 million primarily due to a reduction in the volume of new construction work.  Construction expenses decreased $61.1 million between periods primarily due to the reduced workload, lower fuel and fuel-related expenses, and cost-saving initiatives.  Interest expense declined $406,000 between periods due to a reduction in long-term borrowings.

Contribution to consolidated net income from construction services for the twelve-month period of 2009 decreased $972,000 compared to the same period of 2008.  This decrease was due primarily to a reduction in the volume of new construction work.  Gains on sales of equipment were $2.2 million for the twelve-month period of 2009 and $2.5 million for the twelve-month period of 2008.

Revenues decreased $75.2 million due primarily to a reduction in the volume of higher-margin new construction work resulting from the general slow down in the new housing market.  Construction expenses decreased $69.9 million due primarily to the reduction in new construction work and lower fuel and fuel-related expenses.  Interest expense decreased $656,000 between the twelve-month periods due to a reduction in long-term borrowings.

NPL’s revenues and operating profits are influenced by weather, customer requirements, mix of work, local economic conditions, bidding results, and the equipment resale market.  Generally, revenues and profits are lowest during the first quarter of the year due to unfavorable winter weather conditions.  Operating results typically improve as more favorable weather conditions occur during the summer and fall months.

Rates and Regulatory Proceedings

Nevada General Rate Case.  Southwest filed a general rate application with the PUCN in April 2009 requesting an increase in authorized annual operating revenues of $28.8 million, or 5.9 percent in the Company’s southern Nevada rate jurisdiction and $1.7 million, or 1.4 percent in the northern Nevada rate jurisdiction.  At the rebuttal stage in the case, Southwest had reduced its combined southern and northern Nevada requested revenue increase to $27.8 million.  The PUCN issued its Order in this proceeding in October with rates effective November 2009.  Southwest's last general rate increase occurred in 2004.  The Order provided for a revenue increase of $17.6 million in southern Nevada based on an overall rate of return of 7.40% and a 10.15% return on equity.  Northern Nevada experienced a revenue decrease of $0.5 million with an overall rate of return of 8.29% and a 10.15% return on equity.  On a combined basis, the rate case decision is designed to increase operating income by $19.1 million.  The Company was also authorized to implement a decoupled rate structure based on PUCN regulations that will help stabilize operating margin by insulating the Company from the effects of lower usage (including volumes associated with unusual weather).  It will also allow the Company to more aggressively pursue customer conservation opportunities through implementation of substantive conservation and energy efficiency programs.

 
 20

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



The PUCN Order also included the following:
 
·
Authorized capital structure utilizing 47 percent common equity,
 
·
10.15% return on equity (consisting of 10.40% overall equity return, reduced by 25 basis points for the expected reduction in risk associated with implementation of the decoupling mechanism),
 
·
Authorized rate base of $820 million in southern Nevada and $117 million in northern Nevada,
 
·
Adoption of the Company’s recommendation to offset a $20.5 million deferred gain on the sale of the former southern Nevada operations facility against the cost of the land purchased for new facilities by $12.8 million and eliminating approximately $5.9 million of deferred costs associated with a government-mandated pipe inspection program (the remaining $1.8 million will be accreted to income over 4 years),
 
·
Approval of a tracking mechanism for gas cost-related uncollectible expense, and
 
·
Inclusion for ratemaking purposes of several post test period adjustments (including the new southern Nevada operations facilities), thus mitigating regulatory lag associated with these recently completed construction projects.

California General Rate Cases.  Effective January 2009 Southwest received general rate relief in California.  The California Public Utilities Commission (“CPUC”) decision authorized an overall increase of $2.8 million in 2009 with an additional $400,000 deferred to 2010.  In addition, attrition increases were approved to be effective for the years 2010-2013 of 2.95% in southern and northern California and $100,000 per year for the South Lake Tahoe rate jurisdiction.  The CPUC also authorized a return to a seasonal margin methodology which has resulted in significant quarterly swings in reported operating margin (2009 versus 2008).  In addition to the comparative operating margin increase of $1.7 million recognized in the first nine months of 2009, an increase of approximately $1.1 million for the fourth quarter of 2009 is expected.  The CPUC also authorized lower depreciation rates which reduce annualized depreciation expense by $3 million.

FERC General Rate Case.  Paiute Pipeline Company, a subsidiary of the Company, filed a general rate case with the Federal Energy Regulatory Commission (“FERC”) in February 2009.  The filing fulfills an obligation from the settlement agreement reached in the 2005 Paiute general rate case.  The application requests an increase in operating revenues of approximately $3.9 million.  A final decision has not been rendered and the parties to the case are in settlement discussions; however, in accordance with FERC requirements, new rates went into effect in August 2009, subject to refund.

Arizona energy efficiency and decoupling proceeding.  The Arizona Corporation Commission (“ACC”) convened a series of workshops earlier in 2009 to evaluate “rate and regulatory incentives” and establish standards to promote energy efficiency and conservation for utility customers.  In conjunction with these workshops, Southwest and other interested parties submitted proposed regulations to the ACC in June 2009.  Rate designs which would decouple revenues from customer usage were the topic of much discussion in the proceeding, and were incorporated in several of the parties’ draft regulations.  The ACC Staff is reviewing the proposals and will develop a draft regulation for consideration by the ACC.  A final decision in the matter may be made in the next several months.

PGA Filings
 
The rate schedules in all of Southwest’s service territories contain provisions that permit adjustments to rates as the cost of purchased gas changes. These deferred energy provisions and purchased gas adjustment clauses are collectively referred to as “PGA” clauses.  Differences between gas costs recovered from customers and amounts paid for gas by Southwest result in over- and under-collections.  At September 30, 2009, over-collections in all service territories resulted in a liability of $103 million on the Company’s balance sheet.  Filings to change rates in accordance with PGA clauses are subject to audit by state regulatory commission staffs.  PGA changes impact cash flows but have no direct impact on profit margin.  However, gas cost deferrals and recoveries can impact comparisons between periods of individual income statement components.  These include Gas operating revenues, Net cost of gas sold, Net interest deductions, and Other income (deductions).
 
 
 21

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



As of September 30, 2009, December 31, 2008, and September 30, 2008, Southwest had the following outstanding PGA balances payable (millions of dollars):

   
September 30, 2009
   
December 31, 2008
   
September 30, 2008
 
Arizona
  $ (38.8 )   $ (9.6 )   $ (6.9 )
Northern Nevada
    (3.5 )     (1.5 )     (5.4 )
Southern Nevada
    (54.7 )     (19.9 )     (17.0 )
California
    (5.9 )     (2.1 )     (4.4 )
    $ (102.9 )   $ (33.1 )   $ (33.7 )

Capital Resources and Liquidity

Cash on hand and cash flows from operations have generally been sufficient over the past two years to provide for net investing activities (primarily construction expenditures and property additions).  During the past two years, the Company has been able to reduce the net amount of debt outstanding (including short-term borrowings).  The Company’s capitalization strategy is to maintain an appropriate balance of equity and debt (including subordinated debentures and short-term borrowings).

To facilitate future financings, the Company has a universal shelf registration statement providing for the issuance and sale of registered securities from time to time, which may consist of secured debt, unsecured debt, preferred stock, or common stock.  The number and dollar amount of securities issued under the universal shelf registration statement, which was filed with the SEC and automatically declared effective in December 2008, will be determined at the time of the offerings and presented in the applicable prospectuses.

Cash Flows

Operating Cash Flows.  Cash flows provided by consolidated operating activities increased $68.8 million in the first nine months of 2009 as compared to the same period in 2008. The primary driver of the change was temporary fluctuations in working capital components.  Operating cash flows were also impacted by an increase in net income between the nine-month periods.

In February 2009, the American Recovery and Reinvestment Act of 2009 (“Act”) was signed into law.  This Act provides a 50 percent bonus tax depreciation deduction for qualified property acquired or constructed and placed in service in 2009.  Southwest estimates that the bonus depreciation deduction will defer the payment of approximately $22 million of federal income taxes during 2009 to future periods.

Investing Cash Flows.  Cash used in consolidated investing activities decreased $1 million in the first nine months of 2009 as compared to the same period in 2008.  The decrease was primarily due to reductions in construction expenditures and equipment purchases, a result of the new housing market slowdown, partially offset by the receipt of an exchange fund deposit in 2008.

Financing Cash Flows.  Cash used in consolidated financing activities increased $44.6 million during the first nine months of 2009 as compared to the same period in 2008 primarily due to fluctuations in short-term borrowings and long-term debt retirements that occurred in 2008.  Beginning in the second quarter of 2009, the Company began making open-market common stock purchases associated with the Employee Investment Plan rather than issuing new common stock.  Dividends paid increased in the first nine months of 2009 as compared to 2008 as a result of a quarterly dividend increase and an increase in the number of shares outstanding.

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.

 
 22

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



Gas Segment Construction Expenditures and Financing

During the twelve-month period ended September 30, 2009, construction expenditures for the natural gas operations segment were $246 million including the recently completed construction of two new operations centers for the Southern Nevada Division.  Approximately 58 percent of these 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 were $329 million which provided sufficient funding for construction expenditures and dividend requirements of the natural gas operations segment.

At December 31, 2008, Southwest initially estimated that construction expenditures during the three-year period ending December 31, 2011 would be approximately $720 million.  Based on current economic and growth indicators, the actual amount will likely be 15 to 20 percent less than originally estimated.  During the three-year period ended December 31, 2011, cash flows from operating activities are still estimated to fund over 85 percent of the gas operations total construction expenditures and dividend requirements.  Southwest has $200 million in long-term debt due in 2011.  During this time frame, the Company initially expected to raise $40 million to $50 million from its various common stock programs; however, the amount of capital raised by Southwest will also likely decline based on the expected reduction in construction expenditures.  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’s service areas, and earnings.  These external financings may include the issuance of both debt and equity securities, bank and other short-term borrowings, and other forms of financing.

During the nine months ended September 30, 2009, the Company issued shares of common stock through the Dividend Reinvestment and Stock Purchase Plan (“DRSPP”) and Employee Investment Plan, raising approximately $14 million.  No other financing activities were necessary during the period.

Dividend Policy

The Company has a common stock dividend policy which states that common stock dividends will be paid at a prudent level that is within the normal dividend payout range for its respective businesses, and that the dividend will be established at a level considered sustainable in order to minimize business risk and maintain a strong capital structure throughout all economic cycles.  In February 2009, the Board of Directors increased the quarterly dividend payout from 22.5 cents to 23.75 cents per share, effective with the June 2009 payment.

Liquidity

Liquidity refers to the ability of an enterprise to generate sufficient amounts of cash through its operating activities and external financing to meet its cash requirements.  Several general factors (some of which are out of the control of the Company) that could significantly affect liquidity in future years include variability of natural gas prices, changes in the ratemaking policies of regulatory commissions, regulatory lag, customer growth in the natural gas segment’s service territories, Southwest’s ability to access and obtain capital from external sources, interest rates, changes in income tax laws, pension funding requirements, inflation, and the level of Company earnings.  Natural gas prices and related gas cost recovery rates have historically had the most significant impact on Company liquidity.

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, 2009, the combined balance in the PGA accounts totaled an over-collection of $103 million.  See PGA Filings for more information on recent regulatory filings.


 
 23

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



In the current challenging capital market environment, the Company has not, to date, experienced significant impacts on its financing activities.  Limited availability of commercial paper and temporarily higher interest rates in 2008 are the most significant impacts the Company has experienced.  The Company has a $300 million credit facility that expires in May 2012.  Southwest has designated $150 million of the $300 million facility as long-term debt and the remaining $150 million for working capital purposes.  At September 30, 2009, $99.3 million was outstanding on the long-term portion and no borrowings were outstanding on the short-term portion of the credit facility.  The credit facility can be used as necessary to meet liquidity requirements, including temporarily financing under-collected PGA balances, if any.  This credit facility has been, and is expected to continue to be, adequate for Southwest’s working capital needs outside of funds raised through operations and other types of external financing.  Management believes the Company currently has a solid liquidity position.

Credit Ratings.  In April 2009, Standard & Poor’s Ratings Services (“S&P”) upgraded the Company’s unsecured long-term debt ratings from BBB- (with a positive outlook) to BBB (with a stable outlook).  S&P cited the Company’s stronger financial performance due to reduced debt leverage and the recent general rate increase in the Company’s Arizona service territory as reasons for the upgrade.  The change in credit rating will result in an annualized estimated decrease of $200,000 to $300,000 in interest expense and fees on existing variable-rate debt.

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,
     
2009
 
2008
           
 
Ratio of earnings to fixed charges
 
2.21
 
2.01
 
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 net amortized debt costs.

Forward-Looking Statements

This quarterly report contains statements which constitute “forward-looking statements” within the meaning of the Private 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 operating margin earned, customer growth, the composition of our customer base, average per-customer usage, price volatility, risks and costs associated with having non-performing assets associated with new homes, timing of improvements in the housing market, amount and timing for completion of estimated future construction expenditures, forecasted operating cash flows and results of operations, funding sources of cash requirements, sufficiency of working capital, bank lending practices, the Company’s views regarding its liquidity position, ability to raise funds and receive external financing, the amount and form of any such financing, liquidity, the impact of the application of certain accounting standards, certain tax benefits from the American Recovery and Reinvestment Act of 2009, statements regarding future gas prices, gas purchase contracts and derivative financial interests, the impact of certain legal proceedings, and the timing and results of future rate hearings and approvals are forward-looking statements. All forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act.

 
 24

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



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, conditions in the housing market, our ability to recover costs through our PGA mechanisms, 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 pension expense forecasts, 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 and 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, 2008.

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).

ITEM 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Item 7A. Quantitative and Qualitative Disclosures about Market Risk in the Company’s 2008 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 and to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.  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 may not be detected.

Based on the most recent evaluation, as of September 30, 2009, 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 2009 that have materially affected, or are likely to materially affect, the Company’s internal controls over financial reporting.


 
 25

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



PART II - OTHER INFORMATION

ITEM 1.          LEGAL PROCEEDINGS

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.

ITEM 6.          EXHIBITS

 
The following documents are filed as part of this report on Form 10-Q:
       
 
Exhibit 12.01
-
Computation of Ratios of Earnings to Fixed Charges.
 
Exhibit 31.01
-
Section 302 Certifications.
 
Exhibit 32.01
-
Section 906 Certifications.

 
 26

 
SOUTHWEST GAS CORPORATION
Form 10-Q
September 30, 2009
 



SIGNATURES

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 6, 2009
 
   
 
/s/ Roy R. Centrella
 
Roy R. Centrella
 
Vice President/Controller and Chief Accounting Officer


 
 27