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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, $1 par value New York Stock Exchange, Inc.
Pacific Stock Exchange, Inc.
9.125% Trust Originated Preferred Securities New York Stock Exchange, Inc.
Pacific Stock Exchange, Inc.
Stock Purchase Rights New York Stock Exchange, Inc.
Pacific Stock Exchange, Inc.
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 Y NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NONAFFILIATES OF THE REGISTRANT:
$824,362,704 at March 15, 1999
THE NUMBER OF SHARES OUTSTANDING OF COMMON STOCK:
Common Stock, $1 Par Value, 30,531,952 shares as of March 15, 1999
DOCUMENTS INCORPORATED BY REFERENCE
DESCRIPTION PART INTO WHICH INCORPORATED
----------- ----------------------------
Annual Report to Shareholders for the Year Ended December 31, 1998 Parts I, II, and IV
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TABLE OF CONTENTS
PART I
PAGE
----
ITEM 1. BUSINESS...................................................................... 1
Natural Gas Operations........................................................ 1
General Description......................................................... 2
Rates and Regulation........................................................ 2
Recent Regulatory and Legislative Developments.............................. 3
Competition................................................................. 4
Demand for Natural Gas...................................................... 5
Natural Gas Supply.......................................................... 5
Environmental Matters....................................................... 6
Employees................................................................... 6
Construction Services......................................................... 6
ITEM 2. PROPERTIES.................................................................... 7
ITEM 3. LEGAL PROCEEDINGS............................................................. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................... 9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................................... 9
ITEM 6. SELECTED FINANCIAL DATA....................................................... 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................................... 10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................... 10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................... 10
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...................................................... 10
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................ 10
ITEM 11. EXECUTIVE COMPENSATION........................................................ 15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................................... 20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................ 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K ..................................................................... 22
List of Exhibits............................................................ 23
SIGNATURES............................................................................. 27
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PART I
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 Company
issued approximately 1,439,000 shares of common stock valued at $24 million in
connection with the acquisition. The acquisition was accounted for as a
purchase. 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 (PriMerit), a wholly owned subsidiary, to
Norwest Corporation (Norwest) for $191 million pursuant to a definitive
agreement dated January 1996. For consolidated financial reporting purposes, the
financial services activities are disclosed as discontinued operations.
Financial information with respect to industry segments is included in Note
14 of the Notes to Consolidated Financial Statements which is included in the
1998 Annual Report to Shareholders and is incorporated herein by reference.
In December 1998, the Boards of Directors of the Company and ONEOK, Inc.
(ONEOK), headquartered in Tulsa, Oklahoma, announced a definitive agreement for
the Company to be merged into ONEOK. The agreement calls for ONEOK to pay cash
of $28.50 for each share of Company common stock outstanding. The transaction is
subject to customary conditions, including approvals from shareholders of the
Company and state regulators in Arizona, California, and Nevada. ONEOK expects
to account for the merger using the purchase method of accounting. If the merger
is consummated, the Company would operate as a division of ONEOK.
In February 1999, the Company announced that it had received an unsolicited
proposal from Southern Union Company (Southern Union), headquartered in Austin,
Texas, offering to acquire the Company for $32.00 per share in cash. The
proposal is preliminary in nature and subject to a number of contingencies and
uncertainties. Under the terms of the agreement with ONEOK, as a result of
certain preliminary determinations made by the Board of Directors of the
Company, the Board of Directors has authorized management to commence
substantive discussions with Southern Union regarding its proposal. No
assurances can be given that any agreement will be reached with Southern Union.
The merger agreement with ONEOK remains in full force and effect.
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NATURAL GAS OPERATIONS
GENERAL DESCRIPTION
Southwest is subject to regulation by the Arizona Corporation Commission
(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 1,209,000
residential, commercial, and industrial customers in geographically diverse
portions of Arizona, Nevada, and California. There were 58,000 customers added
to the system during 1998.
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:
RESIDENTIAL AND OTHER
FOR THE YEAR ENDED SMALL COMMERCIAL SALES CUSTOMERS TRANSPORTATION
------------------ ---------------- --------------- --------------
December 31, 1998 84% 5% 11%
December 31, 1997 83 5 12
December 31, 1996 80 6 14
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 48 percent of total system throughput in 1998. Although the
volumes were significant, these customers provide a much smaller proportionate
share of operating margin. In 1998, customers who utilized this service
transported 100 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, CPUC, and PUCN 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 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
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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, Southwest tariffs
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. These changes 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 1998
Annual Report to Shareholders.
The table below lists the docketed general rate filings last initiated
and/or completed within each ratemaking area:
MONTH
FINAL RATES
RATEMAKING AREA TYPE OF FILING MONTH FILED EFFECTIVE
- --------------- -------------- ----------- ---------
Arizona:
Central and Southern......... General rate case November 1996 September 1997
California:
Northern .................... Operational attrition November 1997 January 1998
Nevada:
Northern and Southern........ General rate case December 1995 July 1996
FERC:
Paiute....................... General rate case July 1996 January 1997
- -------------------
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.
The PUCN issued two decisions during 1998. The first identified the distinct
components of natural gas service. The second established a procedure by which
parties may request that a service be classified as "potentially competitive."
Once a service has been considered potentially competitive and the PUCN has
authorized other companies to provide service under an alternative plan of
regulation, Southwest could continue to provide service under its regulated
rates, or set up a new subsidiary and file for an affiliate to offer service.
The details of the PUCN restructuring plan are not fully developed at this time.
Also remaining are numerous issues such as unbundling rates, licensing of
alternative sellers, the utility's obligation to serve, and recovery of stranded
costs.
California
In January 1998, the CPUC opened a rulemaking proceeding designed to reform
the California natural gas industry by expanding opportunities for residential
and small commercial customers to have access to competing natural gas
suppliers. To accomplish this, the CPUC requested comments from interested
parties, such as Southwest, to assess the current market and regulatory
framework for the California natural gas industry and to develop reforms which
emphasize market-oriented policies to benefit all California natural gas
consumers. Southwest filed written comments with the CPUC in February 1998
addressing such issues as regulatory streamlining, unbundling, consumer
protection and other competitive issues. The CPUC Division of Strategic Planning
recommended that gas utilities fully unbundle services and exit the gas merchant
(gas supply) business.
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The CPUC established working groups to address safety concerns associated
with introducing competition in providing billing, metering, and services on the
customer side of the meter, and to develop consistency in policies, programs,
tariffs, rules, and procedures used by gas utilities throughout the state.
Reports from the working groups were submitted in August 1998.
While the CPUC initially adopted an aggressive timetable for restructuring
the gas industry, legislation was enacted late in 1998 delaying the CPUC ability
to restructure the gas industry for residential customers until 2000 and
requiring the CPUC to report to the legislature whether such restructuring is in
the public interest. The CPUC will continue to hold hearings and take evidence
in preparation for the report to the legislature regarding natural gas
restructuring.
Arizona
Southwest agreed, as part of the 1997 Arizona rate case settlement, to
expand the eligibility for customers to qualify for transportation service.
Southwest also supported a proposal to open an investigation to address
competition in the natural gas industry, including the unbundling of rates and
services, which was filed in May 1998 by a potential competitor of Southwest. No
action has been taken on this proposal to date. In July 1998, Southwest filed a
proposal that would provide all customers with the option of choosing their own
gas suppliers by January 2000. The proposal was suspended into 1999 to allow gas
marketers and other interested parties additional time to study the proposal.
In May 1998, the Arizona Legislature approved House Bill 2663 (Bill),
providing for electric generation service competition and confirming the
authority of the ACC to open the service territories of the electric companies
within the state to competition. The customer choice provisions of the Bill
directed that during the initial construction of a residential structure,
electric and natural gas facilities, at a minimum, shall be installed in and to
the structure in a manner that provides the retail energy consumer with the
capability to choose between electricity and natural gas as an energy source for
each appliance application. Therefore, as a result of this provision of the
Bill, Southwest and other natural gas utilities in the state of Arizona are
assured that a natural gas option is available to all future customers.
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 discounted 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
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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 vehicles (NGVs) represent a nontraditional source of demand for
natural gas. Southwest encourages the use of NGVs throughout its service
territories. As of December 31, 1998, there were 48 public- and nonpublic-access
fueling stations and approximately 5,500 NGVs in use throughout Southwest
service territories. As more public fueling stations come on-line and stricter
vehicle emission standards are adopted, the demand for NGVs should increase.
NATURAL GAS SUPPLY
Southwest is responsible to acquire (purchase) and arrange delivery of
(transport) 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, including
suppliers on the spot market and those who provide firm supplies over short-term
and longer-term durations. During 1998, Southwest acquired gas supplies from
approximately 70 suppliers. This practice provides security against
nonperformance by any one supplier.
Balancing firm supply assurances against the associated costs dictates a
continually changing natural gas purchasing mix within the supply portfolios.
The current purchasing strategy of Southwest primarily involves
competitively-bid firm volumetric contracts with variable or index-based
pricing. This strategy allows Southwest to acquire gas at current market prices
but can result in 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 volatility with
higher prices in the heating season and lower prices during the summer or
off-peak consumption period. The latter part of 1996 and early 1997 witnessed
particularly steep price increases, whereas the two most recent winter periods
experienced more typical seasonal price volatility.
Gas supplies for the Southwest southern system (Arizona, southern Nevada,
and southern California properties) are primarily obtained from producing
regions in New Mexico (San Juan basin), Texas (Permian basin), and Rocky
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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 seasonal price differentials in obtaining natural gas
from a variety of sources to meet the growing demand of its customers.
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 to comply with stricter
environmental standards.
EMPLOYEES
At December 31, 1998, the natural gas operations segment had 2,429 regular
full-time equivalent employees. Southwest believes it has a good relationship
with its employees. No 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
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pricing reviews. During 1998, more than 89 percent of revenue was earned under
unit price contracts. As of December 31, 1998 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 15 major markets nationwide. Its customers
are the primary LDCs in those markets. Construction companies typically depend
on a few customers for their business. During 1998, Southwest accounted for 32
percent of Northern revenues. No other customers contributed more than 10
percent of revenues.
Employment fluctuates between seasonal construction periods, which are
normally heaviest in the summer and fall months. At December 31, 1998, Northern
had 1,267 regular full-time equivalent employees. Employment peaked in November
1998 when there were 1,621 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. 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 and a portion of the corporate headquarters office
complex located in Las Vegas, Nevada. Total gas plant, exclusive of leased
property, at December 31, 1998, was $2.1 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.
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The map below 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.
[MAP]
[THE FOLLOWING TEXT TO BE INSERTED IN EDGAR VERSION ONLY]
[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.]
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The information appearing in Part I, Item 1, pages 6 and 7 with respect to
the construction services segment is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as defendant in various legal proceedings. The
ultimate dispositions of these proceedings are not presently determinable;
however, it is the opinion of management that no litigation to which the Company
is subject will have a material adverse impact on its financial position or
results of operations.
On December 16, 1998, Arthur Klein, a purported shareholder of the Company,
filed a Complaint in the Superior Court of the State of California in San Diego
County (Case No. 726615) against the Company and its directors alleging one
cause of action for breach of fiduciary duty. The plaintiff alleges that the
consideration for the proposed merger with ONEOK is unfair and inadequate
because the Company's Board of Directors approved the definitive agreement with
ONEOK without conducting any auction or using another "market check" mechanism.
Plaintiff is proposing to represent a class of all shareholders of the Company
(excluding defendants and their affiliates and families). On March 22, 1999, the
plaintiff filed an Amended Complaint in which he alleges causes of action for
breach of fiduciary duty of loyalty and due care and breach of duty of candor.
By his Amended Complaint, plaintiff seeks
* to enjoin the merger with ONEOK,
* to rescind the definitive agreement with ONEOK,
* to implement an auction of the Company or similar process,
* to void the $30 million termination fee in the definitive agreement
with ONEOK in the event the definitive agreement with ONEOK is
terminated, the Company's Board of Directors recommends another
transaction, such as the merger proposed by Southern Union Company, or
in other similar circumstances, and
* unspecified damages.
The court has ordered the parties to conduct limited discovery and set a
preliminary injunction schedule, which, if followed, would result in a
telephonic ruling on plaintiff's motion for a preliminary injunction in May
1999.
The Company believes that it has valid defenses to plaintiff's claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
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 15,
1999, there were 24,186 holders of record of common stock, and the market price
of the common stock was $27. The quarterly market price of and dividends on
Company common stock required by this item are included in the 1998 Annual
Report to Shareholders and are incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Information required by this item is included in the 1998 Annual Report to
Shareholders and is incorporated herein by reference.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information required by this item is included in the 1998 Annual Report to
Shareholders and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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 1998 Annual Report to Shareholders and
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors. The names of the members of the Board of
Directors, the principal occupation of each member and his or her employer for
the last five years or longer, and the principal business of the corporation or
other organization, if any, in which such occupation or employment is carried
on, follow.
GEORGE C. BIEHL
Senior Vice President, Chief Financial Officer & Corporate Secretary
Southwest Gas Corporation
Director Since: 1998
Board Committees: Finance
Mr. Biehl, 51, joined the Company in 1990 as Senior Vice President and
Chief Financial Officer after serving in a number of capacities with Deloitte
Haskins & Sells (now Deloitte & Touche) for sixteen years and as chief financial
officer for PriMerit Bank for the five years before joining the Company. He also
assumed the responsibilities as Corporate Secretary for the Company in 1996. Mr.
Biehl graduated from Ohio State University with a degree in accounting and
earned his MBA with an emphasis in finance from Columbia University. He is a
licenced CPA in several states and is a member of the American Institute of
Certified Public Accountants. He is also a member of the Las Vegas Chamber of
Commerce Leadership Las Vegas Program, and serves on the finance committees of
several trade association groups.
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MANUEL J. CORTEZ
President and Chief Executive Officer
Las Vegas Convention and Visitors Authority
Director Since: 1991
Board Committees: Audit (Chairman), Compensation, Pension Plan Investment
Mr. Cortez, 60, served four terms (1977-1990) on the Clark County
Commission and is a former chairman of the Commission. He has been active on
various boards, including the Environmental Quality Policy Review Board, the Las
Vegas Valley Water District Board of Directors, and the University Medical
Center Board of Trustees, and served as chairman of the Liquor and Gaming
Licensing Board and the Clark County Sanitation District. He has also held
leadership roles with numerous civic and charitable organizations such as Boys
and Girls Clubs of Clark County, Lied Discovery Childrens Museum, and Boys Town.
Currently, Mr. Cortez holds professional memberships in the American Society of
Association Executives, the Professional Convention Managers Association, the
International Association of Convention and Visitors Bureaus, the American
Society of Travel Agents, and is on the board of directors for the Travel
Industry Association of America.
LLOYD T. DYER
Retired President and Chief Executive Officer
Harrah's
Director Since: 1978
Board Committees: Executive, Compensation (Chairman), Nominating
Mr. Dyer, 71, obtained a degree in banking and finance from the University
of Utah prior to his employment with Harrah's, a hotel/gaming corporation with
its principal facilities in Reno and Lake Tahoe, in 1957. He was elected
president and chief operating officer of Harrah's in 1975, and elected president
and chief executive officer in 1978. He remained in those positions with
Harrah's until his retirement in April 1980. Mr. Dyer is a trustee of the
William F. Harrah Trusts.
THOMAS Y. HARTLEY
Chairman of the Board, Southwest Gas Corporation
President and Chief Operating Officer, Colbert Golf Design and Development
Director Since: 1991
Board Committees: Executive (Chairman), Compensation, Nominating
Mr. Hartley, 65, obtained his degree in business from Ohio University in
1955, and was employed in various capacities by Deloitte Haskins & Sells (now
Deloitte & Touche) from 1959 until his retirement as an area managing partner in
1988. He joined Southwest Gas Corporation as Director in 1991 and was elected
Chairman of the Board of Directors in 1997. Mr. Hartley is actively involved in
numerous business and civic activities. He is a past chairman of the UNLV
Foundation and the Nevada Development Authority, and past president of the Las
Vegas Founders Club. He has also held voluntary executive positions with the Las
Vegas Founders Golf Foundation, the Las Vegas Chamber of Commerce, and the
Boulder Dam Area Council of the Boy Scouts of America. He is a director of
Sierra Health Services, Inc. and AmeriTrade Holdings Corporation.
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MICHAEL B. JAGER
Private Investor
Director Since: 1989
Board Committees: Audit, Finance, Pension Plan Investment (Chairman)
Mr. Jager, 67, obtained a degree in petroleum geology from Stanford
University in 1955. After a four-year employment with the Richfield Oil
Corporation as a petroleum geologist, he joined Frank H. Ayres & Son
Construction Company and was involved in the construction of subdivisions and
homes in southern California until 1979. Since that time he has consulted in the
single family residential development industry, and owns and manages a number of
businesses in Nevada.
LEONARD R. JUDD
Former President, Chief Operating Officer, and Director
Phelps Dodge Corporation
Director Since: 1988
Board Committees: Executive, Compensation, Nominating (Chairman)
Mr. Judd, 60, former president, chief operating officer, and director of
Phelps Dodge Corporation, joined Phelps Dodge in 1963 and worked at that
company's operations in Arizona, New Mexico, and New York City. He was elected
to the Phelps Dodge board of directors in 1987, president of Phelps Dodge Mining
Company in 1988, and became president and chief operating officer of Phelps
Dodge in 1989. He remained in those positions until the end of 1991. Mr. Judd is
a member of various professional organizations and is active in numerous civic
groups. He serves as a director of Morrison-Knudsen Corporation.
JAMES J. KROPID
President of James J. Kropid Investments
Director Since: 1997
Board Committees: Executive, Compensation, Finance
Mr. Kropid, 61, received his undergraduate degree from DePaul University
and participated in the executive development program at the University of
Illinois. He joined Centel Corporation in 1961 and became president of its
Central Telephone Company-Nevada/Texas division in 1987. In 1993, the Governor
of Nevada appointed him to the position of general manager of the Nevada State
Industrial Insurance System, a position in which he served for almost two years.
He is currently president of his own investment company. Mr. Kropid holds
executive and board positions with various civic and charitable organizations
including the National Conference for Community and Justice (formerly known as
the National Conference of Christians and Jews), Las Vegas YMCA, and the Boy
Scouts of America. He was formerly a board member for the Nevada Development
Authority, United Way of Southern Nevada, and treasurer of St. Jude's Ranch for
Children. He is a director of the Golf Company of Nevada.
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MICHAEL O. MAFFIE
President and Chief Executive Officer
Southwest Gas Corporation
Director Since: 1988
Board Committees: Executive
Mr. Maffie, 51, joined the Company in 1978 as Treasurer after seven years
with Arthur Andersen & Co. He was named Vice President/Finance and Treasurer in
1982, Senior Vice President and Chief Financial Officer in 1984, Executive Vice
President in 1987, President and Chief Operating Officer in 1988, and President
and Chief Executive Officer in 1993. He received his undergraduate degree in
accounting and his MBA degree in finance from the University of Southern
California. He serves as a director of Del Webb Corporation, Boyd Gaming
Corporation, and Norwest Bank/Nevada Division. A member of various civic and
professional organizations, he serves as chairman of the board of United Way of
Southern Nevada and trustee and treasurer of the UNLV Foundation. He also is a
director of the Pacific Coast Gas Association and the Institute of Gas
Technology.
CAROLYN M. SPARKS
Co-Founder
International Insurance Services, Ltd.
Director Since: 1988
Board Committees: Audit, Finance (Chairperson), Pension Plan Investment
Mrs. Sparks, 57, graduated from the University of California Berkeley in
1963, and with her husband, co-founded International Insurance Services, Ltd.,
in 1966 in Las Vegas. She served on the University and Community College System
of Nevada Board of Regents from 1984 to 1996, and in 1991 was elected to a
two-year term as chair of the Board of Regents. Mrs. Sparks is actively involved
with numerous charitable and civic organizations, including founding and
chairing the University Medical Center Foundation and the Children's Miracle
Network Telethon. She is currently chair of the Nevada Children's Center
Foundation and has been elected to the Foundation Boards of the University of
Nevada Las Vegas and the Community College of Southern Nevada.
ROBERT S. SUNDT
Retired President
Sundt Corp.
Director Since: 1987
Board Committees: Executive, Finance, Nominating, Pension Plan Investment
Mr. Sundt, 72, has been associated with Sundt Corp. in a variety of
positions since 1948. He was named President of Sundt Corp. in 1983. He is now
retired and has no continuing association with Sundt Corp. He is a member of the
American Institute of Constructors, Consulting Constructors Council of America,
and a life director of the Associated General Contractors of America. He was a
member of the American Arbitration Association and has served as an arbitrator
on disputes concerning the construction industry. He is a past member of the
Construction Industry Presidents Forum. Mr. Sundt is affiliated with a number of
community organizations and is past chairman of the Tucson Metropolitan Chamber
of Commerce.
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TERRANCE "TERRY" L. WRIGHT
President and Chief Executive Officer
Nevada Title Insurance Company
Director Since: 1997
Board Committees: Audit, Compensation, Pension Plan Investment
Mr. Wright, 49, received his undergraduate degree in business
administration and his juris doctorate from DePaul University. He joined Chicago
Title Insurance Company while in law school and after graduation remained with
the company and eventually moved to the Las Vegas, Nevada office. In 1978, he
acquired the assets of Western Title to form what is now known as Nevada Title
Insurance Company. Mr. Wright is also associate general counsel for A.G. Spanos
Enterprises, Inc., one of the nation's largest apartment complex builders. He is
a member of the California and Illinois bar associations and is affiliated
professionally with the Las Vegas Board of Realtors, Nevada Land Title
Association, Las Vegas Executives, Opportunity Village, TPC board of governors,
Young President's Organization, and is past-chairman of the Nevada Development
Authority. Mr. Wright is also a trustee and an executive committee member of the
UNLV Foundation.
(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:
PERIOD POSITION
NAME AGE POSITION HELD
---- --- -------- ---------------
Michael O. Maffie 51 President and Chief Executive Officer 1994-Present
George C. Biehl 51 Senior Vice President/Chief Financial Officer and 1996-Present
Corporate Secretary
Senior Vice President and Chief Financial Officer 1994-1996
James P. Kane 52 Senior Vice President/Operations 1997-Present
Vice President/Southern Arizona Division 1994-1997
James F. Lowman 52 Senior Vice President/Central Arizona Division 1994-Present
Dudley J. Sondeno 46 Senior Vice President/Chief Knowledge and
Technology Officer 1994-Present
Edward S. Zub 50 Senior Vice President/Regulation and Product Pricing 1996-Present
Vice President/Rates & Regulation 1994-1996
(c) Identification of Certain Significant Employees. None.
(d) Family Relationships. None of the Directors or Executive Officers are
related to any other either by blood, marriage or adoption.
(e) Business Experience. Information with respect to Directors is described
in (a) above. 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.
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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 1998 all but one of the required reports were filed timely. The Form
4 listing acquisitions by Carolyn Sparks, as trustee and beneficiary of the
Sparks Family Trust, of 4,000 shares of Common Stock was not filed timely. An
amended Form 4 for Mrs. Sparks listing the August 1998 purchase was filed in
January 1999.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTORS COMPENSATION
Outside directors receive an annual retainer of $24,000, plus $1,000 for
each Board of Directors or committee meeting attended. Committee chairpersons
receive an additional $500 for each committee meeting attended. The Chairman of
the Board of Directors receives an additional $50,000 annually for serving in
that capacity. Directors who are full-time employees of the Company or its
subsidiaries receive no additional compensation for service on the Board.
Each outside director received in May 1998, options to purchase 2,000
shares of the Common Stock under the provisions of the Option Plan. Under the
terms of the Option Plan, each outside director is entitled to receive
additional options to purchase 2,000 shares of the Common Stock on the date of
each Annual Meeting during the ten-year term of the Option Plan. The purchase
price for the options is the market price of the Common Stock on the date of the
grant and will become exercisable, in increments over three years, commencing
with the first anniversary of the grant. All options granted to the outside
directors will expire ten years after the date of each grant. The Option Plan
contains change in control provisions.
Outside directors may defer their compensation until retirement or
termination of their status as directors. Any cash they receive from the
cancellation of any outstanding options as a result of a change in control of
the Company may also be deferred. At retirement or termination, amounts deferred
will be paid out over 5, 10, 15, or 20 years. Amounts deferred receive interest
at 150 percent of the Moody's Composite Bond Rate.
The Company also provides a retirement plan for its outside directors. With
a minimum of 10 years of service, an outside director can retire and receive an
annual benefit for life equal to the annual retainer, at retirement, for serving
on the Company's Board. Directors who retire before age 65, after satisfying the
minimum service obligation, will receive retirement benefits upon reaching age
65. Upon a change in control of the Company, each of the directors of the
Company with at least eight years of service will be entitled to receive
retirement benefits.
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EXECUTIVE COMPENSATION
The following table provides compensation earned by the Company's Chief
Executive Officer and each of the four most highly compensated executive
officers of the Company, at year-end 1998, for the years ended December 31,
1998, 1997, and 1996.
SUMMARY COMPENSATION TABLE (1)
LONG-TERM COMPENSATION
--------------------------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION ---------------------- --------------------
------------------------------------------------------ RESTRICTED
BONUS ($) STOCK LTIP ALL OTHER
NAME AND ---------------------- OTHER ANNUAL AWARD(S) OPTIONS/ PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) UTILITY(2) NON-UTILITY COMPENSATION($) ($)(2)(3)(4) SARS(#) ($) ($) (5)
------------------ ---- -------- ---------- ----------- --------------- ------------ -------- ------- ------------
Michael O. Maffie 1998 486,301 234,005 0 0 350,997 25,000 N/A 59,410
President & C.E.O. 1997 462,192 132,015 0 0 198,022 25,000 N/A 54,036
1996 435,479 129,602 500,000 0 194,403 90,000 N/A 46,210
George C. Biehl 1998 225,425 72,385 0 0 108,577 7,500 N/A 19,830
Senior Vice President/ 1997 214,877 40,762 0 0 61,143 7,500 N/A 17,329
Chief Financial Officer 1996 204,773 40,324 200,000 0 60,485 30,000 N/A 13,700
& Corporate Secretary
Edward S. Zub 1998 180,137 59,283 0 0 88,928 7,500 N/A 20,352
Senior Vice President/ 1997 160,729 56,871 0 0 47,807 7,500 N/A 16,583
Regulation & Product 1996 138,484 28,802 0 0 43,223 25,000 N/A 12,723
Pricing
James F. Lowman 1998 169,116 54,136 0 0 81,206 3,750 N/A 13,702
Senior Vice President/ 1997 161,401 35,665 0 0 45,998 3,750 N/A 12,279
Central Arizona Division 1996 154,015 29,336 0 0 44,004 15,000 N/A 10,316
Dudley J. Sondeno 1998 167,616 53,669 0 0 80,514 6,250 N/A 14,218
Senior Vice President/ 1997 159,901 30,387 0 0 45,581 6,250 N/A 13,983
Chief Knowledge & 1996 152,529 29,952 0 0 44,928 25,000 N/A 11,209
Technology Officer
(1) All compensation reflected in the Summary Compensation Table is reported
on an earned basis for each fiscal year.
(2) Utility bonuses and restricted stock awards earned for calendar years
1996, 1997, and 1998 were paid and awarded in 1997, 1998, and 1999,
respectively. Restricted stock awards are paid in Common Stock following
successful completion of a three-year restriction period.
(3) Dividends equal to the dividends paid on the Common Stock will be
accrued on the restricted stock during the restriction period.
(4) The total number of restricted stock awards granted in 1996, 1997, and
1998, for calendar years 1995, 1996, and 1997, and their value based on
the closing price of the Common Stock on the New York Stock Exchange on
December 31, 1998, for the named executive officers are as follows:
Shares Value
------ -----
Mr. Maffie 33,564 $893,642
Mr. Biehl 10,465 278,631
Mr. Zub 7,504 199,794
Mr. Lowman 7,737 205,998
Mr. Sondeno 7,777 207,063
(5) The amounts shown in this column for each year consist of above-market
interest on deferred compensation (in excess of 120 percent of the
Applicable Federal Long-term Rate) and matching contributions under the
Company's executive deferral plan. Under the plan, executive officers
may defer up to 100 percent of their annual cash compensation. Interest
on such deferrals is set at 150 percent of the Moody's Seasoned
Corporate Bond Rate. As part of the plan, the Company provides matching
contributions that parallel the contributions
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made under the Company's 401(k) plan, which is available to all Company
employees, equal to one-half of the deferred amount, up to six percent
of their annual salary. The breakdown of this compensation for each
named executive officer is as follows:
Above-market Matching
Interest Contributions
-------- -------------
Mr. Maffie $44,842 $14,568
Mr. Biehl 13,078 6,752
Mr. Zub 14,963 5,389
Mr. Lowman 8,635 5,067
Mr. Sondeno 9,196 5,022
- ----------------
OPTIONS/SARS GRANTED IN 1998
The following table sets forth the number of shares of the Company's Common
Stock subject to stock options granted under the 1996 Stock Incentive Plan
(Option Plan) to the named executive officers listed in the Summary Compensation
Table during 1998, together with related information.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------------ ANNUAL RATES
NUMBER OF PERCENT OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS/SARS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM (2)
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED (#) (1) FISCAL YEAR ($/SH) DATE 5 PERCENT 10 PERCENT
---- --------------- ---------------- -------- ---------- --------- ----------
Michael O. Maffie 25,000 25.00 $23.06 7/20/08 $363,234 $916,734
George C. Biehl 7,500 7.50 23.06 7/20/08 108,970 275,020
Edward S. Zub 7,500 7.50 23.06 7/20/08 108,970 275,020
James F. Lowman 3,750 3.75 23.06 7/20/08 54,485 137,510
Dudley J. Sondeno 6,250 6.25 23.06 7/20/08 90,809 229,184
- ---------------
(1) Forty percent of the options become exercisable one year after the
grant. Thirty percent of the options become exercisable two years after
the grant, with the remaining becoming exercisable on the third
anniversary of the grant.
(2) The 5 percent and 10 percent growth rates for the period ending July 20,
2008, which were determined in accordance with the rules of the SEC,
illustrate that the potential future value of the granted options is
linked to future increases in growth of the price of the Common Stock.
Because the exercise price for the options equals the market price of
the Common Stock on the date of the grant, there will be no gain to the
named executive officers without an increase in the stock price. The 5
percent and 10 percent growth rates are for illustration only and are
not intended to be predictive of future growth.
- -------------------
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OPTIONS/SAR EXERCISES AND YEAR-END VALUES
Shown below is information with respect to unexercised options granted
under the Option Plan to the named executive officers and held by them at
December 31, 1998.
AGGREGATED OPTION/SAR EXERCISES IN 1998 AND
YEAR-END OPTION/SAR VALUES
NO. OF NO. OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS/SARS AT OPTIONS/SARS AT
ON VALUES DECEMBER 31, 1998 DECEMBER 31, 1998 (1)
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE (2)
---- -------- -------- ----------- ---------------- ----------- -----------------
Michael O. Maffie 0 $0 73,000 67,000 $807,375 $515,438
George C. Biehl 0 0 24,000 21,000 266,625 165,094
Edward S. Zub 0 0 20,500 19,500 225,938 147,656
James F. Lowman 0 0 12,000 10,500 133,313 82,547
Dudley J. Sondeno 0 0 20,000 17,500 222,188 137,578
- ----------------
(1) Represents the difference between the exercise prices for in-the-money
options and the closing price of $26.63 for the Company's Common Stock
on the New York Stock Exchange on December 31, 1998, times the number of
in-the-money options.
(2) Unexercisable options are those options which have been granted but
cannot yet be exercised due to the Code restrictions on the value of
incentive options, restrictions incorporated into the Option Plan, and
the specific option agreements.
- -----------------
BENEFIT PLANS
Southwest Gas Basic Retirement Plan. The named executive officers
participate in the Company's non-contributory, defined benefit retirement plan,
which is available to all employees of the Company and its subsidiaries (other
than Northern Pipeline Construction Co.). Benefits are based upon an employee's
years of service, up to a maximum of 30 years, and the employee's highest 5
consecutive years salary, excluding bonuses, within the final 10 years of
service.
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PENSION PLAN TABLE (1)
YEARS OF SERVICE
ANNUAL --------------------------------------------------------------
COMPENSATION 10 15 20 25 30 (2)
------------ -- -- -- -- ------
$50,000 $ 8,750 $13,125 $ 17,500 $21,875 $26,250
100,000 17,500 26,250 35,000 43,750 52,500
150,000 26,250 39,375 52,500 65,625 78,750
200,000 35,000 52,500 70,000 87,500 105,000
250,000 43,750 65,625 87,500 109,375 131,250
300,000 52,500 78,750 105,000 131,250 157,500
350,000 61,250 91,875 122,500 153,125 183,750
400,000 70,000 105,000 140,000 175,000 210,000
450,000 78,750 118,125 157,500 196,875 236,250
500,000 87,500 131,250 175,000 218,750 262,500
550,000 96,250 144,375 192,500 240,625 288,750
600,000 105,000 157,500 210,000 262,500 315,000
- ------------------
(1) For 1999, the maximum annual compensation that can be considered in
determining benefits under the Plan is $160,000. For future years the
maximum annual compensation will be adjusted to reflect changes in the
cost of living as established by the Internal Revenue Service.
(2) Years of service beyond 30 years will not increase benefits under the
basic retirement plan.
- -----------------
Compensation covered under the basic retirement plan is based on salary
depicted in the Summary Compensation Table. As of December 31, 1998, the
credited years of service for the named executive officers shown in the Summary
Compensation Table are as follows: Mr. Maffie, 20 years; Mr. Biehl, 13 years;
Mr. Zub, 20 years; Mr. Lowman, 29 years; and Mr. Sondeno, 19 years.
Amounts shown in the pension plan table are straight life annuity amounts
notwithstanding the availability of joint survivorship benefit provisions.
Benefits paid under the basic and supplemental retirement plans are not reduced
by any Social Security benefits received.
Supplemental Retirement Plan. The named executive officers also participate
in the Company's supplemental retirement plan (SERP). Such officers with 10 or
more years of service may retire at age 55 or older and will receive benefits
under the SERP. Benefits from the SERP, when added to benefits received under
the basic retirement plan, will equal 60 percent of each officer's highest
12-months of salary, as depicted in the Summary Compensation Table. For Mr.
Maffie, compensation used to determine such benefits includes salary, cash
bonuses other than the 1996 non-utility bonus, and the payment of restrictive
stock awards depicted in the Summary Compensation Table. The cost to the Company
for benefits under the SERP for any one of the named executive officers cannot
generally be properly allocated or determined because of the overall plan
assumptions and options available.
SEVERANCE AND CHANGE IN CONTROL ARRANGEMENTS
In July 1998, the Company amended the existing employment agreements with
seven of its designated officers (including the named executive officers), and
entered into change in control agreements with its remaining officers. The
employment agreements generally provide for the payment, upon termination of
employment by the Company without cause, as defined therein, of up to one and
one-half years of the amount of total annual compensation (base salary, a
predetermined level of incentive compensation and fringe benefits), and up to
three years of total annual compensation for Mr. Maffie. The employment
agreements further provide for the payment, upon the termination of employment
for
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"good reason," as defined therein, within two years following a change in
control of the Company, of an amount equal to two to two and one-half times
total annual compensation for each of these officers, other than Mr. Maffie who
would receive three times total annual compensation. The change in control
agreements for the other officers parallel the change in control provisions of
the employment agreements.
Restricted stock awards, stock options, or stock appreciation rights will
vest and become immediately exercisable upon a change in control. Benefits under
the SERP will also vest and/or accelerate. If any payment under these agreements
would constitute a "parachute payment" subject to excise tax under the Code, the
officer will be entitled to an additional "gross-up" payment. The terms of these
agreements are for 24 months for each of the officers, other than Mr. Maffie
whose agreement is for 36 months. Each of the agreements will be automatically
extended annually for successive one-year periods, unless canceled by the
Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The directors who served on the Company's Compensation Committee during
1998 were Lloyd T. Dyer (Chairman), Manuel J. Cortez, Thomas Y. Hartley, Leonard
R. Judd, James J. Kropid, and James R. Lincicome. Director Kropid joined the
committee after the retirement of James R. Lincicome at last year's Annual
Meeting of Shareholders. Mr. Lincicome served on the committee during 1998 until
his retirement in May 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners. A group of investment
companies headed by Mario J. Gabelli reported in February 1999, that it owned
3,023,883 shares of the Common Stock (approximately 9.9 percent as of March 15,
1999). The Company has been advised that the investment companies hold the
shares as investment advisors for other beneficial owners.
(b) Security Ownership of Management. The following table discloses all
Common Stock of the Company beneficially owned by the directors and the
executive officers of the Company, as of March 15, 1999.
NO. OF SHARES PERCENT OF OUTSTANDING
DIRECTOR/EXECUTIVE OFFICER BENEFICIALLY OWNED (1) COMMON STOCK (2)
-------------------------- ---------------------- ----------------------
George C. Biehl 49,220 (3)(4) *
Manuel J. Cortez 6,259 (5) *
Lloyd T. Dyer 8,881 (5)(6) *
Thomas Y. Hartley 17,630 (5)(7) *
Michael B. Jager 8,620 (5)(8) *
Leonard R. Judd 6,300 (5)(9) *
James J. Kropid 3,098 (10) *
Michael O. Maffie 134,276 (3)(11) *
Carolyn M. Sparks 10,820 (5)(12) *
Robert S. Sundt 9,300 (5)(13) *
Terrance L. Wright 1,714 (14) *
James F. Lowman 30,811 (15) *
Dudley J. Sondeno 33,392 (16) *
Edward S. Zub 38,893 (17) *
Other Executive Officers 70,560 (18) *
-------
Total 429,774 1.4
======= ===
- ---------------
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(1) The Common Stock holdings listed in this column include performance
shares granted to the Company's executive officers under the Company's
Management Incentive Plan (MIP) for 1996, 1997, and 1998 and exercisable
options issued under the 1996 Stock Incentive Plan (Option Plan).
(2) As of March 15, 1999, the directors and executive officers of the
Company beneficially owned, including exercisable options and MIP
performance shares, 429,774 shares, which represent 1.4 percent of the
Company's outstanding shares. No individual officer or director owned
more than 1 percent of the Common Stock.
(3) Number of shares does not include 6,618 shares held by the Southwest Gas
Corporation Foundation, which is a charitable trust. Messrs. Maffie and
Biehl are trustees of the Foundation but disclaim beneficial ownership
of said shares.
(4) The holdings include 24,000 shares which Mr. Biehl has the right to
acquire through the exercise of options under the Option Plan.
(5) The holdings include 4,300 shares which the non-employee directors have
the right to acquire through the exercise of options under the Option
Plan.
(6) Number of shares include 4,581 shares over which Mr. Dyer has shared
voting and investment control with his spouse through a family trust.
(7) Number of shares include 311 shares over which Mr. Hartley has shared
voting and investment control with his spouse through a family trust.
(8) Number of shares includes 2,320 shares over which Mr. Jager has shared
voting and investment control with his spouse through a family trust and
2,000 shares held in trust for Mr. Jager's spouse, over which Mr. Jager
has no control.
(9) Number of shares includes 2,000 shares over which Mr. Judd has shared
voting and investment control with his spouse.
(10) The holdings include 1,464 shares which Mr. Kropid has the right to
acquire through the exercise of options under the Option Plan and 1,634
shares over which he has shared voting and investment power with his
spouse through a family trust. The family trust also holds 1,500 shares
of Trust Originated Preferred Securities issued by the Company's
financing subsidiary, Southwest Gas Capital I.
(11) The holdings include 73,000 shares which Mr. Maffie has the right to
acquire through the exercise of options under the Option Plan and 3,044
shares over which he has shared voting and investment control with his
spouse.
(12) Number of shares includes 5,000 shares over which Mrs. Sparks has shared
voting and investment control with her spouse through a family trust and
1,520 shares held as joint tenants with her spouse.
(13) Number of shares includes 5,000 shares over which Mr. Sundt has shared
voting and investment control with his spouse.
(14) The holdings include 1,464 shares which Mr. Wright has the right to
acquire through the exercise of options under the Option Plan.
(15) The holdings include 12,000 shares which Mr. Lowman has the right to
acquire through the exercise of options under the Option Plan.
21
24
(16) The holdings include 20,000 shares which Mr. Sondeno has the right to
acquire through the exercise of options under the Option Plan.
(17) The holdings include 20,500 shares which Mr. Zub has the right to
acquire through the exercise of options under the Option Plan and 105
shares held solely by his spouse.
(18) The holdings of other executive officers include 42,000 shares that can
be acquired through the exercise of options under the Option Plan.
- ----------------
(c) Changes in Control. In December 1998, the Company announced a
definitive agreement to be acquired by ONEOK, Inc. See ITEM 1. BUSINESS.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
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 1998 Annual Report to Shareholders under the following
captions:
Report of Independent Public Accountants.....................39
Consolidated Balance Sheets..................................40
Consolidated Statements of Income............................41
Consolidated Statements of Cash Flows........................42
Consolidated Statements of Stockholders' Equity..............43
Notes to Consolidated Financial Statements...................44
(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 February 10, 1999, reporting
summary financial information for the year ended December 31, 1998.
(c) See List of exhibits.
22
25
LIST OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
2.01(15) Agreement between Southwest Gas Corporation, The Southwest
Companies and PriMerit Bank, Federal Savings Bank, as sellers and
Norwest Corporation as buyer, dated April 10, 1996, regarding sale
of assets and liabilities of PriMerit Bank.
2.02(24) Agreement and Plan of Merger by and among ONEOK, Inc., Oasis
Acquisition Corporation, and Southwest Gas Corporation dated as of
December 14, 1998.
3(i)(20) Restated Articles of Incorporation, as amended.
3(ii) Amended Bylaws of Southwest Gas Corporation.
4.01(1) Indenture between the Company and Bank of America National Trust
and Savings Association, as successor by merger to Security Pacific
National Bank, as Trustee, dated August 1, 1986, with respect to 9%
Series A and Series B and 8 3/4% Series C Debentures.
4.02(6) Sixth Supplemental Indenture of the Company to Bank of America
National Trust and Savings Association, as successor by merger to
Security Pacific National Bank, as Trustee, dated as of June 16,
1992, supplementing and amending the Indenture dated as of August
1, 1986, with respect to 9 3/4% Debentures, Series F, due 2002.
4.03(7) Indenture between Clark County, Nevada, and Bank of America Nevada
as Trustee, dated September 1, 1992, with respect to the issuance
of $130,000,000 Industrial Development Revenue Bonds (Southwest Gas
Corporation), $30,000,000 1992 Series A, due 2027, and $100,000,000
1992 Series B, due 2032.
4.04(8) Indenture between Clark County, Nevada, and Harris Trust and
Savings Bank as Trustee, dated December 1, 1993, with respect to
the issuance of $75,000,000 Industrial Development Revenue Bonds
(Southwest Gas Corporation), 1993 Series A, due 2033.
4.05(8) Indenture between City of Big Bear Lake, California, and Harris
Trust and Savings Bank as Trustee, dated December 1, 1993, with
respect to the issuance of $50,000,000 Industrial Development
Revenue Bonds (Southwest Gas Corporation Project), 1993 Series A,
due 2028.
4.06(16) Indenture between the Company and Harris Trust and Savings Bank
dated July 15, 1996, with respect to Debt Securities.
4.07(17) First Supplemental Indenture of the Company to Harris Trust and
Savings Bank dated August 1, 1996, supplementing and amending the
Indenture dated as of July 15, 1996, with respect to 7 1/2% and 8%
Debentures, due 2006 and 2026, respectively.
4.08(19) Second Supplemental Indenture of the Company to Harris Trust and
Savings Bank dated December 30, 1996, supplementing and amending
the Indenture dated as of July 15, 1996, with respect to
Medium-Term Notes.
4.09(3) Certificate of Trust of Southwest Gas Capital I.
4.10(11) Amended and Restated Declaration of Trust of Southwest Gas
Capital I.
23
26
4.11(11) Form of Preferred Security (attached as Annex I to Exhibit A to the
Amended and Restated Declaration of Trust of Southwest Gas Capital
I included as Exhibit 4.10 hereto).
4.12(4) Form of Guarantee with respect to Preferred Securities.
4.13(10) Southwest Gas Capital I Preferred Securities Guarantee by the
Company and Harris Trust and Savings Bank, dated as of October 31,
1995.
4.14(10) Form of Subordinated Debt Security (included in the First
Supplemental Indenture included as Exhibit 4.16 hereto).
4.15(10) Subordinated Debt Securities Indenture between the Company and
Harris Trust and Savings Bank, dated as of October 31, 1995.
4.16(10) First Supplemental Indenture between the Company and Harris Trust
and Savings Bank, dated as of October 31, 1995, supplementing and
amending the Indenture dated as of October 31, 1995, with respect
to the 9.125% Subordinated Debt Securities.
4.17(2) Form of Deposit Agreement.
4.18(2) Form of Depositary Receipt (attached as Exhibit A to Deposit
Agreement included as Exhibit 4.17 hereto).
4.19 Amended and Restated Rights Agreement between the Company and
Harris Trust Company, as Rights Agent, dated as of February 9,
1999.
4.20 The Company hereby agrees to furnish to the SEC, upon request, a
copy of any instruments defining the rights of holders of long-term
debt issued by Southwest Gas Corporation or its subsidiaries.
10.01(5) Participation Agreement among the Company and General Electric
Credit Corporation, Prudential Insurance Company of America, Aetna
Life Insurance Company, Merrill Lynch Interfunding, Bank of America
through purchase of Valley Bank of Nevada, Bankers Trust Company
and First Interstate Bank of Nevada, dated as of July 1, 1982.
10.02(18) Amended and Restated Lease Agreement between the Company and Spring
Mountain Road Associates, dated as of July 1, 1996.
10.03(8) Financing Agreement between the Company and Clark County, Nevada,
dated September 1, 1992.
10.04(8) Financing Agreement between the Company and Clark County, Nevada,
dated as of December 1, 1993.
10.05(8) Project Agreement between the Company and City of Big Bear Lake,
California, dated as of December 1, 1993.
10.06(9) Southwest Gas Corporation Executive Deferral Plan, amended and
restated as of May 10, 1994.
10.07(14) Southwest Gas Corporation Directors Deferral Plan, together with
first amendment dated March 5, 1996.
10.08(8) Southwest Gas Corporation Board of Directors Retirement Plan,
amended and restated as of October 1, 1993.
10.09(22) Southwest Gas Corporation Management Incentive Plan, amended and
restated January 1, 1995.
24
27
10.10(9) Southwest Gas Corporation Supplemental Retirement Plan, amended and
restated as of May 10, 1994.
10.11(23) Form of Employment Agreement with Company Officers.
10.12(23) Form of Change in Control Agreement with Company Officers.
10.13(12) Merger Agreement among the Company and Northern Pipeline
Construction Co., dated as of November 13, 1995.
10.14(13) Southwest Gas Corporation 1996 Stock Incentive Plan.
10.15(21) $350 million Revolving Credit Agreement among the Company, Union
Bank of Switzerland, et al., dated as of June 12, 1997.
12.01 Computation of Ratios of Earnings to Fixed Charges and Ratios of
Earnings to Combined Fixed Charges and Preferred Stock Dividends of
the Company.
13.01 Portions of 1998 Annual Report incorporated by reference to the
Form 10-K.
21.01 List of subsidiaries of Southwest Gas Corporation.
23.01 Consent of Arthur Andersen LLP, Independent Public Accountants.
27.01 Financial Data Schedule (filed electronically only).
- -----------------
(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 June 30, 1994
(10) Incorporated herein by reference to the report on Form 10-Q for the quarter
ended September 30, 1995.
(11) Incorporated herein by reference to the report on Form 8-K dated October
26, 1995.
(12) Incorporated herein by reference to the report on Form 10-K for the year
ended December 31, 1995.
25
28
(13) Incorporated herein by reference to the Proxy Statement dated May 30, 1996.
(14) Incorporated herein by reference to the report on Form 10-Q for the quarter
ended June 30, 1996.
(15) Incorporated herein by reference to the report on Form 8-K dated July 19,
1996.
(16) Incorporated herein by reference to the report on Form 8-K dated July 26,
1996.
(17) Incorporated herein by reference to the report on Form 8-K dated July 31,
1996.
(18) Incorporated herein by reference to the report on Form 10-Q for the quarter
ended September 30, 1996.
(19) Incorporated herein by reference to the report on Form 8-K dated December
30, 1996.
(20) Incorporated herein by reference to the report on Form 10-Q for the quarter
ended March 31, 1997.
(21) Incorporated herein by reference to the report on Form 10-Q for the quarter
ended June 30, 1997.
(22) Incorporated herein by reference to the report on Form 10-K for the year
ended December 31, 1997.
(23) Incorporated herein by reference to the report on Form 10-Q for the quarter
ended September 30, 1998.
(24) Incorporated herein by reference to the report on Form 8-K dated December
14, 1998.
26
29
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 25, 1999 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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ GEORGE C. BIEHL Senior Vice President, March 25, 1999
- ------------------------------------ Chief Financial Officer and
(George C. Biehl) Corporate Secretary
/s/ EDWARD A. JANOV Vice President, Controller and March 25, 1999
- ------------------------------------ Chief Accounting Officer
(Edward A. Janov)
27
30
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ GEORGE C. BIEHL Director, Senior Vice President, March 25, 1999
-------------------- Chief Financial Officer and
(George C. Biehl) Corporate Secretary
/s/ MANUEL J. CORTEZ Director March 25, 1999
--------------------
(Manuel J. Cortez)
/s/ LLOYD T. DYER Director March 25, 1999
-----------------
(Lloyd T. Dyer)
/s/ THOMAS Y. HARTLEY Chairman of the Board March 25, 1999
--------------------- of Directors
(Thomas Y. Hartley)
/s/ MICHAEL B. JAGER Director March 25, 1999
--------------------
(Michael B. Jager)
/s/ LEONARD R. JUDD Director March 25, 1999
-------------------
(Leonard R. Judd)
/s/ JAMES J. KROPID Director March 25, 1999
-------------------
(James J. Kropid)
/s/ MICHAEL O. MAFFIE Director, President and March 25, 1999
--------------------- Chief Executive Officer
(Michael O. Maffie)
/s/ CAROLYN M. SPARKS Director March 25, 1999
---------------------
(Carolyn M. Sparks)
/s/ ROBERT S. SUNDT Director March 25, 1999
-------------------
(Robert S. Sundt)
/s/ TERRANCE L. WRIGHT Director March 25, 1999
----------------------
(Terrance L. Wright)
28
31
EXHIBITS INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
3(ii) Amended Bylaws of Southwest Gas Corporation.
4.19 Amended and Restated Rights Agreement between the Company and
Harris Trust Company, as Rights Agent, dated as of February 9,
1999.
12.01 Computation of Ratios of Earnings to Fixed Charges and Ratios of
Earnings to Combined Fixed Charges and Preferred Stock Dividends of
the Company.
13.01 Portions of 1998 Annual Report incorporated by reference to the
Form 10-K.
21.01 List of subsidiaries of Southwest Gas Corporation.
23.01 Consent of Arthur Andersen LLP, Independent Public Accountants.
27.01 Financial Data Schedule (filed electronically only).