ITEM 1. BUSINESS
The registrant, Southwest Gas Corporation (the Company), is incorporated under the laws of the State of California effective March 1931. The executive offices of the Company are located at 5241 Spring Mountain Road, P.O. Box 98510, Las Vegas, Nevada, 89193-8510, telephone number (702) 876-7237.
The Company is principally engaged in the business of purchasing, transporting, and distributing natural gas to residential, commercial, and industrial customers in geographically diverse portions of Arizona, Nevada, and California (Southwest or the natural gas operations segment).
In April 1996, the Company acquired all of the outstanding stock of Northern Pipeline Construction Co. (Northern or the construction services segment) pursuant to a definitive agreement dated November 1995. The construction services segment provides utility companies with trenching and installation, replacement, and maintenance services for energy distribution systems.
In July 1996, the Company completed the sale of the assets and liabilities of PriMerit Bank, Federal Savings Bank, a wholly owned subsidiary, to Norwest Corporation. The financial services activities are designated as discontinued operations for consolidated financial reporting purposes.
Financial information with respect to industry segments is included in Note 12 of the Notes to Consolidated Financial Statements which is included in the 1999 Annual Report to Shareholders and is incorporated herein by reference.
In December 1998, the Board of Directors of the Company had announced an agreement for the Company to be acquired by ONEOK, Inc. (ONEOK). The transaction was subject to customary conditions, including approvals from the Company's shareholders and state regulators in Nevada, Arizona, and California.
The shareholders and Nevada regulators approved the merger agreement during the summer of 1999. However, the staff of the Arizona Corporation Commission (ACC) issued a report in January 2000 indicating they were unable to recommend approval of the merger due to concerns about ONEOK's actions and fitness to serve in Arizona. On January 18, 2000, the Company sent a letter to ONEOK demanding that ONEOK cure the deficiencies identified in the ACC staff report. On January 21, 2000, ONEOK responded to the Company's January 18th letter and stated that it was terminating the merger agreement with the Company. (See ITEM 3. LEGAL PROCEEDINGS herein for information concerning the status of litigation related to the proposed merger and Note 14 of the Notes to Consolidated Financial Statements, which is included in the 1999 Annual Report to Shareholders and incorporated herein by reference, for additional background information on the now terminated merger.)
NATURAL GAS OPERATIONS
GENERAL DESCRIPTION
Southwest is subject to regulation by the ACC, the Public Utilities Commission of Nevada (PUCN), and the California Public Utilities Commission (CPUC). These commissions regulate public utility rates, practices, facilities, and service territories in their respective states. The CPUC also regulates the issuance of all securities by the Company, with the exception of short-term borrowings. Certain accounting practices, transmission facilities, and rates are subject to regulation by the Federal Energy Regulatory Commission (FERC).
Southwest purchases, transports, and distributes natural gas to 1,274,000 residential, commercial, and industrial customers in geographically diverse portions of Arizona, Nevada, and California. There were 65,000 customers added to the system during 1999.
The table below lists the percentage of Southwest operating margin (operating revenues less net cost of gas) by major customer class for the years indicated:
Southwest is not dependent on any one or a few customers to the extent that the loss of any one or several would have a significant adverse impact on earnings.
Transportation of customer-secured gas to end-users on the Southwest system accounted for 53 percent of total system throughput in 1999. Although the volumes were significant, these customers provide a much smaller proportionate share of operating margin. In 1999, customers who utilized this service transported 119 million dekatherms.
The demand for natural gas is seasonal. Variability in weather from normal temperatures can materially impact results of operations. It is the opinion of management that comparisons of earnings for interim periods do not reliably reflect overall trends and changes in Southwest operations. Also, earnings for interim periods can be significantly affected by the timing of general rate relief.
RATES AND REGULATION
Rates that Southwest is authorized to charge its distribution system customers are determined by the ACC, PUCN, and CPUC in general rate cases and are derived using rate base, cost of service, and cost of capital experienced in a historical test year, as adjusted in Arizona and Nevada, and projected for a future test year in California. The FERC regulates the northern Nevada transmission and liquefied natural gas (LNG) storage facilities of Paiute Pipeline Company (Paiute), a wholly owned subsidiary, and the rates it charges for transportation of gas directly to certain end-users and to various local distribution companies (LDCs). The LDCs transporting on the Paiute system are: Sierra Pacific Power Company (serving Reno and Sparks, Nevada), Avista Utilities (serving South Lake Tahoe, California), and Southwest Gas Corporation (serving North Lake Tahoe, California and various locations throughout northern Nevada).
Rates charged to customers vary according to customer class and rate jurisdiction and are set at levels allowing for the recovery of all prudently incurred costs, including a return on rate base sufficient to pay interest on debt, preferred securities distributions, and a reasonable return on common equity. Rate base consists generally of the original cost of utility plant in service, plus certain other assets such as working capital and inventories, less accumulated depreciation on utility plant in service, net deferred income tax liabilities, and certain other deductions. Rate schedules in all of the Southwest service areas contain purchased gas adjustment (PGA) clauses, which allow Southwest to file for rate adjustments as the cost of purchased gas changes. Generally, tariffs in Nevada and California service territories provide for annual adjustment dates for changes in purchased gas costs. However, Southwest may request to adjust its rates more often than once each year, if conditions warrant. In Arizona, beginning in June 1999, Southwest adjusts its rates monthly for changes in purchased gas costs. PGA rate changes affect cash flows but have no direct impact on profit margin. Filings to change rates in accordance with PGA clauses are subject to audit by state regulatory commission staffs. Information with respect to recent PGA filings is included in the Rates and Regulatory Proceedings section of Management's Discussion and Analysis (MD&A), which is included in the 1999 Annual Report to Shareholders.
The table below lists the docketed general rate filings last initiated and/or completed within each ratemaking area:
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RECENT REGULATORY AND LEGISLATIVE DEVELOPMENTS
Nevada
In 1997, the Nevada Legislature passed, and the Governor signed into law, Assembly Bill (AB) 366. AB 366 provides the statutory framework for restructuring both the natural gas and electric industries in the State of Nevada to allow competition. The legislature left most of the decision making on restructuring to the PUCN. In addition to several organizational changes, AB 366 required the PUCN to create an alternative plan of regulation by July 1, 1998.
During 1998, the PUCN issued two natural gas-related restructuring orders. The orders identified the distinct components of natural gas service and established the procedures to request that a component of service be declared potentially competitive. In 1999, the PUCN continued the restructuring effort by adopting regulations for licensing requirements and fees for alternate sellers. Large commercial and industrial customers who currently have competitive gas supply purchase options can continue to be served by non-utility gas suppliers if the suppliers obtain a license from the PUCN to provide discretionary services. To date, three applications for discretionary service licensing have been approved. No party has come forward to register as a provider of competitive natural gas services or to request any utility services currently provided by Southwest be declared potentially competitive. Further issues such as unbundling of rates, licensing of alternative sellers, and recovery of stranded costs have not yet been decided by the PUCN.
During the 1999 legislative session, the Nevada Legislature passed, and the Governor signed into law, Senate Bill (SB) 438. SB 438 further refines the statutory framework for restructuring established in 1997 by Assembly Bill 366. The recent legislation did not specifically address the natural gas industry.
California
The CPUC continued its investigation, initiated in late 1997, to further reform the California natural gas industry. The focus of the investigation is to examine options to promote greater competition in the offering of gas commodity, transmission, storage, balancing, and other services for all customers of regulated natural gas utilities. Reports from working groups to examine the options and evaluate statewide consistency were submitted to the CPUC in August 1998. Hearings on various settlement proposals and the options are scheduled for the first quarter of 2000. In addition, legislation adopted in 1999 established the incumbent utility as the provider of last resort and the provider of safety-related services under any restructuring that the CPUC might adopt.
Arizona
In July 1998, Southwest filed a proposal that would provide all customers with the option of choosing their own gas suppliers. This filing was made as a response to its prior agreement in the 1997 Arizona rate case settlement to expand the eligibility for customers to qualify for transportation service. The filing was indefinitely suspended to allow gas marketers and other interested parties additional time to study the proposal. During 1999, Southwest received ACC approval to allow for core aggregation transportation. Core aggregation provides qualifying customers with multiple meters the opportunity to aggregate their volumes and receive transportation service. There is currently one customer with over 80 individual meters taking advantage of this service. Southwest will continue to work with the ACC to accomplish the goals of natural gas restructuring in the state of Arizona.
COMPETITION
Electric utilities are Southwest's principal competitors for the residential and small commercial markets throughout its service areas. Competition for space heating, general household, and small commercial energy needs generally occurs at the initial installation phase when the customer/builder typically makes the decision as to which type of equipment to install and operate. The customer will generally continue to use the chosen energy source for the life of the equipment. As a result of its success in these markets, Southwest has experienced consistent growth among the residential and small commercial customer classes.
Unlike residential and small commercial customers, certain large commercial, industrial, and electric generation customers have the capability to switch to alternative energy sources. Southwest has been successful in retaining these customers by setting rates at levels competitive with alternative energy sources such as electricity, fuel oils, and coal. As a result, management does not anticipate any material adverse impact on its operating margin from fuel switching.
Southwest continues to compete with interstate transmission pipeline companies, such as El Paso Natural Gas Company (El Paso), Kern River Gas Transmission Company (Kern River), and Tuscarora Gas Transmission Company, to provide service to large end-users. End-use customers located in close proximity to these interstate pipelines pose a potential bypass threat and, therefore, require Southwest to closely monitor each customer situation and provide competitive service in order to retain the customer.
Southwest has maintained an intensive effort to mitigate these competitive threats through the use of negotiated transportation contract rates, special long-term contracts with electric generation and cogeneration customers, and new tariff programs. One such program provides an opportunity for potential bypass customers in Arizona to purchase natural gas-related services as a bundled package, including the procurement of gas supply. Southwest enters into gas supply contracts for eligible customers, which are not included in its system supply portfolio, and provides nomination and balancing services on behalf of the customer. This program, as well as other competitive response initiatives and otherwise competitive rates, has helped mitigate the financial impact from the threat of bypass and the potential loss of margin currently earned from large customers.
DEMAND FOR NATURAL GAS
Deliveries of natural gas by Southwest are made under a priority system established by each regulatory commission having jurisdiction over Southwest. The priority system is intended to ensure that the gas requirements of higher-priority customers, primarily residential customers and nonresidential customers who use 500 therms of gas per day or less, are fully satisfied on a daily basis before lower-priority customers, primarily electric utility and large industrial customers able to use alternative fuels, are provided any quantity of gas or capacity.
Demand for natural gas is greatly affected by temperature. On cold days, use of gas by residential and commercial customers may be as much as eight times greater than on warm days because of increased use of gas for space heating. To fully satisfy this increased high-priority demand, gas is withdrawn from storage, or peaking supplies are purchased from suppliers. If necessary, service to interruptible lower-priority customers may be curtailed to provide the needed delivery system capacity. Southwest maintains no backlog on its orders for gas service.
NATURAL GAS SUPPLY
Southwest is responsible for acquiring (purchasing) and arranging delivery of (transporting) natural gas to its system for all sales customers. Southwest believes that natural gas supplies and pipeline capacity for transportation will remain plentiful and readily available.
The primary objective of Southwest with respect to gas supply is to ensure that adequate, as well as economical, supplies of natural gas are available from reliable sources. Gas is acquired from a wide variety of sources and a mix of purchase provisions, including spot market purchases and firm supplies over short-term and longer-term durations. During 1999, Southwest acquired gas supplies from approximately 60 suppliers. This practice provides security against nonperformance by any one supplier.
Balancing reliable supply assurances with the associated costs results in a continually changing mix of purchase provisions within the supply portfolios. To address the unique requirements of its various market areas, Southwest assembles and administers separate natural gas supply portfolios for each of its jurisdictional areas. All natural gas purchases, firm and spot market, are made in a competitive bid environment. California purchases are pursuant to both index-based and fixed-price firm pricing arrangements as well as daily spot market purchases. For the Nevada and Arizona portfolios, the majority of purchases involve index-based firm pricing arrangements. However, at the direction of the respective state regulatory commissions, a portion of the firm supplies are contracted on a fixed-price basis. This process allows Southwest to acquire gas at current market prices with some mitigation of price volatility. In managing its gas supply portfolio, Southwest does not currently utilize stand-alone derivative financial instruments, but may do so in the future to hedge against possible price increases and help mitigate the regulatory risk of a gas cost disallowance during periods of rising prices. Any such change would be undertaken only with regulatory commission authorization.
Natural gas prices have historically demonstrated seasonal trends with higher prices in the winter heating season and lower prices during the summer or off-peak consumption period. However, the increased use of natural gas for electric power generation, with power generation loads in the west generally peaking during the summer, appears to be shrinking the historical winter/summer price differentials.
Gas supplies for the southern system of Southwest (Arizona, southern Nevada, and southern California properties) are primarily obtained from producing regions in New Mexico (San Juan basin), Texas (Permian basin), and Rocky Mountain areas. For its northern system (northern Nevada and northern California properties), Southwest primarily obtains gas from Rocky Mountain producing areas and from Canada.
Southwest arranges for transportation of gas to its Arizona, Nevada, and California service territories through the pipeline systems of El Paso, Kern River, Northwest Pipeline Corporation, and Southern California Gas Company. Supply and pipeline capacity availability on both short- and long-term bases are continually monitored by Southwest to ensure the continued reliability of service to its customers. Southwest currently receives firm transportation service, both on a short- and long-term basis, for all of its service territories on the four pipeline systems noted above, and has interruptible contracts in place that allow additional capacity to be acquired as needed.
The current level of contracted firm interstate capacity is sufficient to serve each of the service territories. As the need arises to acquire additional capacity on one of the interstate pipeline transmission systems, primarily due to customer growth, Southwest considers available options to obtain the capacity, either through the use of firm contracts with a pipeline company or by purchasing capacity on the open market. While firm contracts provide stability and guaranteed rights to capacity, they are generally a more expensive alternative.
Southwest continues to evaluate natural gas storage as an option to enable it to take advantage of daily and seasonal natural gas price differentials and as a resource to help meet both projected and unanticipated peak-day requirements of its rapidly growing customer base.
ENVIRONMENTAL MATTERS
Federal, state, and local laws and regulations governing the discharge of materials into the environment have had little direct impact upon Southwest. Environmental efforts, with respect to matters such as protection of endangered species and archeological finds, have increased the complexity and time required to obtain pipeline rights-of-way and construction permits. However, increased environmental legislation and regulation are also beneficial to the natural gas industry. Because natural gas is one of the most environmentally safe fossil fuels currently available, its use helps energy users comply with stricter environmental standards.
EMPLOYEES
At December 31, 1999, the natural gas operations segment had 2,482 regular full-time equivalent employees. Southwest believes it has a good relationship with its employees. In May 1999, non-exempt employees in the Central Arizona Division voted to have the International Brotherhood of Electrical Workers (IBEW) represent them in employee-related matters with Southwest. Nearly half of the approximately 500 eligible employees in the Central Arizona Division voted against representation by the IBEW. The Company has filed objections to the union's conduct during the organizing effort and has appealed to the National Labor Relations Board in Washington, D.C. to set aside the election. The appeals process could take up to two years to complete. No other natural gas operations segment employees are represented by a union.
Reference is hereby made to Item 10 in Part III of this report on Form 10-K for information relative to the executive officers of the Company.
CONSTRUCTION SERVICES
Northern Pipeline Construction Co. (Northern or the construction services segment) is a full-service underground piping contractor which provides utility companies with trenching and installation, replacement, and maintenance services for energy distribution systems. Northern contracts primarily with LDCs to install, repair, and maintain energy distribution systems from the town border station to the end-user meter. The primary focus of business operations is main and service replacement as well as new business installations. Construction work varies from relatively small projects to the piping of entire communities. Construction activity is seasonal. Peak construction periods are the summer and fall months in colder climate areas, such as the Midwest. In the warmer climate areas, such as the southwestern United States, construction continues year round.
Northern business activities are often concentrated in utility service territories where existing gas lines are scheduled for replacement. An LDC will typically contract with Northern to provide pipe replacement services and new line installations. Contract terms generally specify unit price or fixed-price arrangements. Unit price contracts establish prices for all of the various services to be performed during the contract period. These contracts often have annual pricing reviews. During 1999, approximately 94 percent of revenue was earned under unit price contracts. As of December 31, 1999 no significant backlog exists with respect to outstanding construction contracts.
Competition within the industry is limited to several regional competitors in what can be characterized as a largely fragmented industry. Northern currently operates in approximately 16 major markets nationwide. Its customers are the primary LDCs in those markets. During 1999, Northern served 40 major customers, with Southwest accounting for approximately 34 percent of their revenues. With the exception of one other customer that accounted for approximately 11 percent of revenues, no other customer had a significant contribution to Northern's revenues.
Employment fluctuates between seasonal construction periods, which are normally heaviest in the summer and fall months. At December 31, 1999, Northern had 1,523 regular full-time equivalent employees. Employment peaked in October 1999 when there were 1,824 employees. The majority of the employees are represented by collective bargaining agreements, which is typical of the utility construction industry.
Operations are conducted from 17 field locations with corporate headquarters located in Phoenix, Arizona. All buildings are leased from third parties. The lease terms are typically two to three years. Field location facilities consist of a small building for repairs and acreage to store equipment.
ITEM 2.
ITEM 2. PROPERTIES
The plant investment of Southwest consists primarily of transmission and distribution mains, compressor stations, peak shaving/storage plants, service lines, meters, and regulators which comprise the pipeline systems and facilities located in and around the communities served. Southwest also includes other properties such as land, buildings, furnishings, work equipment, and vehicles in plant investment. The northern Nevada and northern California properties of Southwest are referred to as the northern system; the Arizona, southern Nevada, and southern California properties are referred to as the southern system. Several properties are leased by Southwest, including an LNG storage plant on its northern Nevada system, a portion of the corporate headquarters office complex located in Las Vegas, Nevada, and the administrative offices in Phoenix, Arizona. Total gas plant, exclusive of leased property, at December 31, 1999 was $2.2 billion, including construction work in progress. It is the opinion of management that the properties of Southwest are suitable and adequate for its purposes.
Substantially all gas main and service lines of Southwest are constructed across property owned by others under right-of-way grants obtained from the record owners thereof, on the streets and grounds of municipalities under authority conferred by franchises or otherwise, or on public highways or public lands under authority of various federal and state statutes. None of the numerous county and municipal franchises are exclusive, and some are of limited duration. These franchises are renewed regularly as they expire, and Southwest anticipates no serious difficulties in obtaining future renewals.
With respect to the right-of-way grants, Southwest has had continuous and uninterrupted possession and use of all such rights-of-way, and the associated gas mains and service lines, commencing with the initial stages of the construction of such facilities. Permits have been obtained from public authorities in certain instances to cross, or to lay facilities along, roads and highways. These permits typically are revocable at the election of the grantor, and Southwest occasionally must relocate its facilities when requested to do so by the grantor. Permits have also been obtained from railroad companies to cross over or under railroad lands or rights-of-way, which in some instances require annual or other periodic payments and are revocable at the grantors' elections.
Southwest operates two primary pipeline transmission systems: (i) a system owned by Paiute, a wholly owned subsidiary, extending from the Idaho-Nevada border to the Reno, Sparks, and Carson City areas and communities in the Lake Tahoe area in both California and Nevada and other communities in northern and western Nevada; and (ii) a system extending from the Colorado River at the southern tip of Nevada to the Las Vegas distribution area.
The following map shows the locations of major Southwest facilities and transmission lines, and principal communities to which Southwest supplies gas either as a wholesaler or distributor. The map also shows major supplier transmission lines that are interconnected with the Southwest systems.
The information appearing in Part I, Item 1, pages 6 and 7 with respect to the construction services segment is incorporated herein by reference.
[MAP]
[DESCRIPTION: Map of Arizona, Nevada, and California indicating the location of Southwest service areas. Service areas in Arizona include most of the central and southern areas of the state including Phoenix, Tucson, Yuma, and surrounding communities. Service areas in northern Nevada include Carson City, Yerington, Fallon, Lovelock, Winnemucca, and Elko. Service areas in southern Nevada include the Las Vegas valley (including Henderson and Boulder City) and Laughlin. Service areas in southern California include Barstow, Big Bear, Needles, and Victorville. Service areas in northern California include the north shore of Lake Tahoe and portions of Truckee. Companies providing gas transportation services for the Company are indicated by showing the location of their pipelines. Major transporters include El Paso Natural Gas Company, Kern River Gas Transmission Company, Northwest Pipeline Corporation, and Southern California Gas Company. The location of the Paiute Pipeline Company transmission pipeline (extending from the Idaho/Nevada border to the Reno/Tahoe area) and Southwest's pipeline (extending from Laughlin/Bullhead City to the Las Vegas valley) are indicated. The LNG facility is located near Lovelock, Nevada.]
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In December 1998, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) pursuant to which the Company agreed to be acquired by ONEOK, Inc. (ONEOK). The Merger Agreement was amended on April 25, 1999 following the receipt of unsolicited offers to acquire the Company from Southern Union Company (Southern Union) which were rejected by the Company. On January 4, 2000, the staff of the ACC issued a report that stated it was unable to recommend approval of the merger of the Company and ONEOK due to concerns about ONEOK's actions and fitness to serve in Arizona. On January 18, 2000, the Company sent a letter to ONEOK demanding that ONEOK cure the deficiencies identified in the ACC staff report. On January 21, 2000, ONEOK responded to the Company's letter and stated that it was terminating the merger agreement with the Company. Litigation is pending in California, Arizona, and Oklahoma relating to the now terminated acquisition of the Company by ONEOK and the Company's rejection of Southern Union's unsolicited offers which is described below.
California Litigation - ---------------------
On December 16, 1998, Arthur Klein filed a purported class action complaint on behalf of himself and shareholders of the Company (excluding defendants and their affiliates and families) in the Superior Court of the State of California in San Diego County (Case No. 726615) against the Company and its directors. The complaint has been amended three times. As amended, the complaint alleges breach of the duties of loyalty, due care, candor and good faith and fair dealing and sets forth claims relating to the Company's proxy statement for its annual meeting of shareholders in 1999, including allegations of misrepresentations or omissions relating to the proposed acquisition of the Company by ONEOK and the rejection of the Southern Union offers. The complaint, as amended, further seeks to implement an auction of the Company or similar process, unspecified damages, and a declaration that the action is properly maintainable as a class action on behalf of all shareholders.
On March 31, 1999, the Court allowed John Mauricio to file a complaint in intervention. On May 4, 1999, Southern Union intervened in the purported shareholder class action and filed a complaint in intervention. Southern Union's complaint was thereafter severed from the purported shareholder class action and has been dismissed.
On June 9, 1999, the Company signed a Memorandum of Understanding (MOU) with the shareholder plaintiffs' counsel to settle the purported shareholder class action. The MOU set forth the parties' agreement in principle settling all of the shareholders' claims arising out of the actions of the Company and its directors relating to the proposed acquisition of the Company by ONEOK, including allegations of misrepresentations or omissions in the proxy statement, and was to be incorporated into a final Stipulation of Settlement. The MOU was subject to several conditions, including the consummation of the acquisition of the Company by ONEOK, a condition that will not be satisfied. The MOU was not an admission of any of the plaintiffs' allegations. The Company and its directors have denied and continue to deny that they have committed or attempted to commit any wrongdoing or breached any duty owed to the Company or its shareholders.
The case has been removed from the California Superior Court in San Diego to the U.S. District Court for the Southern District of California (Case No. 99 cv 1891B (JAH)). On October 6, 1999, GAMCO Investors, Inc. and Gabelli Funds LLC filed a notice of appearance in this matter.
Nevada Litigation - -----------------
On April 30, 1999, the Company filed a complaint against Southern Union in the U.S. District Court, District of Nevada (Case No. CV-99-0530-JBF-LRL) alleging a breach of the confidentiality and standstill agreement between the Company and Southern Union, breach of the implied covenant of good faith and fair dealing, misappropriation of trade secrets, intentional interference with contract, intentional interference with prospective economic advantage and other violations of California and Nevada law. The Company amended its complaint on May 6, 1999, adding an additional claim against Southern Union pursuant to Section 14(a) of the Securities Exchange Act of 1934. On July 22, 1999, Southern Union filed a motion for leave to amend its answer in the Nevada federal action and to assert counterclaims
against the Company. The counterclaims mirror the contractual claims filed by Southern Union in the Arizona action described below. Southern Union's motion for leave to amend has been granted. On March 8, 2000, this action was transferred to the United States District Court of Arizona.
Arizona Litigation - ------------------
On July 19, 1999, Southern Union filed a complaint in the United States District Court of Arizona (Civ '99 1294 PHX ROS), which was amended on October 11, 1999. As amended, the complaint alleges that the Company, Michael O. Maffie, President and Chief Executive Officer of the Company, Thomas Y. Hartley, Chairman of the Board of the Company, and Edward Zub, Senior Vice President Regulation and Pricing of the Company, ONEOK, Larry W. Brummett, Chairman of the Board and Chief Executive Officer of ONEOK, James C. Kneale, Chief Financial Officer and Treasurer of ONEOK, John A. Gaberino, Jr., Senior Vice President and General Counsel of ONEOK, Eugene Dubay, President and Chief Operating Officer of Kansas Gas Service, a division of ONEOK, James Irvin, a Commissioner of the Arizona Corporation Commission, and Jack Rose, a resident of the State of Arizona, have conspired to block the Company's shareholders from voting upon Southern Union's offer and have acted to ensure that the Company's Board of Directors would approve and recommend the ONEOK offer to the Company's shareholders and to influence the vote of members of regulatory commissions required to approve the proposed acquisition of the Company by ONEOK in violation of state and federal criminal laws. The complaint, as amended, further alleges that the defendants fraudulently induced Southern Union to enter into the February 21, 1999 confidentiality and standstill agreement, Southwest breached the terms of that agreement and its covenant of good faith and fair dealing, and all defendants, other than Southwest and Mr. Hartley, intentionally interfered with a business relationship between the Company and Southern Union and tortiously interfered with contractual relations between the Company and Southern Union.
Southern Union seeks damages in an amount not less than $750 million to be trebled for the alleged violations of state and federal criminal law, compensatory damages in an amount not less than $750 million, plus interest, rescission of the confidentiality and standstill agreement between the Company and Southern Union and punitive damages.
On January 24, 2000, the Company filed a complaint against ONEOK and Southern Union in the United States District Court for the District of Arizona (Case No. CIV'00, 0119 PHX VAM). The lawsuit seeks unspecified damages from ONEOK for breach of contract, breach of the implied covenant of good faith and fair dealing, fraud in the inducement, and fraud related to its actions connected to the Merger Agreement and its cancellation of the Merger Agreement.
The Company has also sued Southern Union seeking unspecified damages for breach of contract, breach of the implied covenant of good faith and fair dealing, and interference with a contract, all related to Southern Union's attempts to block the proposed Southwest Gas-ONEOK combination after Southern Union's unsolicited offer was rejected by the Company.
Oklahoma Litigation - -------------------
On January 21, 2000, ONEOK filed a complaint against the Company in the United States District Court for the Northern District of Oklahoma (Case No. 00CV063 K) seeking a declaratory judgment that ONEOK properly terminated the merger agreement.
Other Proceedings - -----------------
The Company has been named as defendant in various other legal proceedings. The ultimate dispositions of these proceedings are not presently determinable; however, it is the opinion of management that none of this litigation will have a material adverse impact on the Company's financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal markets on which the common stock of the Company is traded are the New York Stock Exchange and the Pacific Stock Exchange. At March 14, 2000, there were 22,759 holders of record of common stock, and the market price of the common stock was $19. The quarterly market price of and dividends on Company common stock required by this item are included in the 1999 Annual Report to Shareholders and are incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Information required by this item is included in the 1999 Annual Report to Shareholders and is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information required by this item is included in the 1999 Annual Report to Shareholders and is incorporated herein by reference.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Southwest Gas Corporation and Notes thereto, together with the report of Arthur Andersen LLP, Independent Public Accountants, are included in the 1999 Annual Report to Shareholders and are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors. Information with respect to Directors is set forth under the heading "Election of Directors" in the definitive Proxy Statement dated March 31, 2000, which by this reference is incorporated herein.
(b) Identification of Executive Officers. The name, age, position and period position held during the last five years for each of the Executive Officers of the Company are as follows:
(c) Identification of Certain Significant Employees. None.
(d) Family Relationships. No Directors or Executive Officers are related to any other either by blood, marriage, or adoption.
(e) Business Experience. Information with respect to Directors is set forth under the heading "Election of Directors" in the definitive Proxy Statement dated March 31, 2000, which by this reference is incorporated herein. All Executive Officers have held responsible positions with the Company for at least five years as described in (b) above.
(f) Involvement in Certain Legal Proceedings. None.
(g) Promoters and Control Persons. None.
Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of the Securities Exchange Act of 1934 requires officers and directors, and persons who own more than ten percent of a registered class of equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (SEC) and the New York Stock Exchange. Officers, directors, and beneficial owners of more than ten percent of any class of equity securities are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
The Company has adopted procedures to assist its directors and executive officers in complying with Section 16(a) of the Securities and Exchange Act of 1934, as amended, which includes assisting in the preparation of forms for filing. For 1999, all required reports were filed timely.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is set forth under the heading "Executive Compensation and Benefits" in the definitive Proxy Statement dated March 31, 2000, which by this reference is incorporated herein.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners. Information with respect to security ownership of certain beneficial owners is set forth under the heading "Securities Ownership by Nominees, Executive Officers, and Beneficial Owners" in the definitive Proxy Statement dated March 31, 2000, which by this reference is incorporated herein.
(b) Security Ownership of Management. Information with respect to security ownership of management is set forth under the heading "Securities Ownership by Nominees, Executive Officers, and Beneficial Owners" in the definitive Proxy Statement dated March 31, 2000, which by this reference is incorporated herein.
(c) Changes in Control. None.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report on Form 10-K:
(1) The Consolidated Financial Statements of the Company (including the Report of Independent Public Accountants) required to be reported herein are incorporated by reference to the information reported in the 1999 Annual Report to Shareholders under the following captions:
Report of Independent Public Accountants...........34 Consolidated Statements of Income..................35 Consolidated Balance Sheets........................36 Consolidated Statements of Cash Flows..............38 Consolidated Statements of Stockholders' Equity....39 Notes to Consolidated Financial Statements.........40
(2) All schedules have been omitted because the required information is either inapplicable or included in the Notes to Consolidated Financial Statements.
(3) See List of exhibits.
(b) Reports on Form 8-K.
The Company filed a Form 8-K, dated January 20, 2000 reporting that the Arizona Corporation Commission delayed hearings regarding the proposed merger between Southwest Gas Corporation and ONEOK to February 22, 2000.
The Company filed a Form 8-K on January 26, 2000 reporting that ONEOK had terminated the proposed merger between Southwest Gas Corporation and ONEOK. The Form 8-K also reported that on January 24, 2000 the Company filed a complaint against ONEOK and Southern Union Company in the United States District Court for the District of Arizona seeking unspecified damages against both companies.
The Company filed a Form 8-K dated February 3, 2000 reporting that the California Public Utilities Commission approved the Joint Petition relating to the Northern California Expansion Project.
The Company filed a Form 8-K, dated February 22, 2000 reporting summary financial information for the quarter and year ended December 31, 1999.
(c) See List of exhibits.
LIST OF EXHIBITS
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(1) Incorporated herein by reference to the Registration Statement on Form S-3, No. 33-7931.
(2) Incorporated herein by reference to the Registration Statement on Form S-3, No. 33-55621.
(3) Incorporated herein by reference to the Registration Statement on Form S-3, No. 33-62143.
(4) Incorporated herein by reference to Amendment No. 1 to Registration Statement on Form S-3, No. 33-62143.
(5) Incorporated herein by reference to the report on Form 10-K for the year ended December 31, 1982.
(6) Incorporated herein by reference to the report on Form 10-Q for the quarter ended June 30, 1992.
(7) Incorporated herein by reference to the report on Form 10-Q for the quarter ended September 30, 1992.
(8) Incorporated herein by reference to the report on Form 10-K for the year ended December 31, 1993.
(9) Incorporated herein by reference to the report on Form 10-Q for the quarter ended September 30, 1995.
(10) Incorporated herein by reference to the report on Form 8-K dated October 26, 1995.
(11) Incorporated herein by reference to the report on Form 10-K for the year ended December 31, 1995.
(12) Incorporated herein by reference to the Proxy Statement dated May 30, 1996.
(13) Incorporated herein by reference to the report on Form 8-K dated July 26, 1996.
(14) Incorporated herein by reference to the report on Form 8-K dated July 31, 1996.
(15) Incorporated herein by reference to the report on Form 10-Q for the quarter ended September 30, 1996.
(16) Incorporated herein by reference to the report on Form 8-K dated December 30, 1996.
(17) Incorporated herein by reference to the report on Form 10-Q for the quarter ended March 31, 1997.
(18) Incorporated herein by reference to the report on Form 10-Q for the quarter ended June 30, 1997.
(19) Incorporated herein by reference to the report on Form 10-K for the year ended December 31, 1997.
(20) Incorporated herein by reference to the report on Form 10-Q for the quarter ended September 30, 1998.
(21) Incorporated herein by reference to the report on Form 8-K dated December 14, 1998.
(22) Incorporated herein by reference to the report on Form 10-K for the year ended December 31, 1998.
(23) Incorporated herein by reference to the report on Form 8-K dated April 25, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 24, 2000 By /s/ MICHAEL O. MAFFIE ------------------------------------- Michael O. Maffie, President and Chief Executive Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX