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Southwest Gas Corp. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: August 9, 2010 02:38PM
Southwest Gas Corp. (SWX) filed Quarterly Report for the period ended 2010-06-30. Southwest Gas Corp. has a market cap of $1.49 billion; its shares were traded at around $32.91 with a P/E ratio of 12.51 and P/S ratio of 0.79. The dividend yield of Southwest Gas Corp. stocks is 3.04%. Southwest Gas Corp. had an annual average earning growth of 2.2% over the past 10 years.SWX is in the portfolios of Jim Simons of Renaissance Technologies LLC, Kenneth Fisher of Fisher Asset Management, LLC, Kenneth Fisher of Fisher Asset Management, LLC.
Highlight of Business Operations:
Company-Owned Life Insurance (COLI). Southwest has life insurance policies on members of management and other key employees to indemnify itself against the loss of talent, expertise, and knowledge, as well as to provide indirect funding for certain nonqualified benefit plans. The COLI policies have a combined net death benefit value of approximately $196 million at June 30, 2010. The net cash surrender value of these policies (which is the cash amount the Company would receive if it voluntarily terminated the policies) is approximately $58 million at June 30, 2010 and is included in the caption Other property and investments on the balance sheet. Cash surrender values are directly influenced by the investment portfolio underlying the insurance policies. This portfolio includes both equity and fixed income (mutual fund) investments. As a result, generally the cash surrender value (but not the net death benefit) moves up and down consistent with the movements in the broader stock and bond markets. In the three and six months ended June 30, 2010, the Company recognized declines in the cash surrender values of the COLI policies of $3.6 million and $2.1 million, respectively, which was reflected in Other income (deductions). For the three and six months ended June 30, 2009, cash surrender values increased $3.7 million and $2.1 million, respectively. The twelve months ended June 30, 2010 reflect an increase of $4.3 million in the cash surrender values of the COLI policies (compared to a net decline of $7.4 million in the twelve months ended June 30, 2009). Current tax regulations provide for tax-free treatment of life insurance (death benefit) proceeds. Therefore, the changes in the cash surrender value components of COLI policies as they progress towards the ultimate death benefits are also recorded without tax consequences. Currently, the Company intends to hold the COLI policies for their duration and purchase additional policies as necessary.
Liquidity. Southwest believes its liquidity position remains strong. Southwest has a $300 million credit facility maturing in May 2012, $150 million of which is designated for working capital needs. The facility is provided through a consortium of eight major banking institutions. Usage of the facility in the second quarter of 2010 was minimal. There was no balance outstanding at June 30, leaving the entire $300 million available for long-term and working capital needs. The lower usage was primarily due to improved profitability, natural gas prices that were relatively stable, and gas-cost related rate mechanisms that favorably impacted operating cash flows. The current slowdown in housing construction has also allowed Southwest to fund construction expenditures primarily with internally generated cash.
Operating margin increased $8 million in the second quarter of 2010 compared to the second quarter of 2009. Differences in heating demand, caused primarily by weather variations in Arizona, provided $4 million of the operating margin increase as temperatures in the current quarter were relatively normal, while temperatures were warmer than normal in the second quarter of 2009. Rate relief provided $4 million of the operating margin increase, consisting of $3 million in Nevada and $1 million in California. Customer growth provided a minimal benefit as 16,000 net new customers were added during the last twelve months.
Other income declined $7.6 million between quarters as the cash surrender values of COLI policies decreased by $3.6 million in the second quarter of 2010 compared to an increase of $3.7 million in the prior-year quarter.
Operating margin increased $31 million between periods. Rate relief provided $14 million of the increase, consisting of $12 million in Nevada and $2 million in California. Differences in heating demand caused primarily by weather variations in Arizona between periods resulted in a $17 million operating margin increase as temperatures in the current six-month period were normal, while temperatures were significantly warmer than normal in the same period of 2009. Customer growth had a negligible impact on operating margin.
Other income decreased $6.3 million between the six-month periods of 2010 and 2009. This was primarily due to a $2.1 million decrease in the cash surrender values of COLI policies in the current period compared to cash surrender value increases in the prior-year period of $2.1 million. Costs associated with certain Arizona non-recoverable pipe replacement work also increased $1.5 million between periods.
Stocks Discussed: SWX,