Southwest Gas Corp. Reports Operating Results (10-Q)

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May 09, 2009
Southwest Gas Corp. (SWX, Financial) filed Quarterly Report for the period ended 2009-03-31.

SOUTHWEST GAS CORP. is principally engaged in the business of purchasingtransporting and distributing natural gas in portions of Arizona Nevadaand California. The Company also engaged in financial services activitiesthrough PriMerit Bank Federal Savings Bank (PriMerit or the Bank) a wholly owned subsidiary. Southwest Gas Corp. has a market cap of $909.3 million; its shares were traded at around $20.4 with a P/E ratio of 14.4 and P/S ratio of 0.4. The dividend yield of Southwest Gas Corp. stocks is 4.5%. Southwest Gas Corp. had an annual average earning growth of 3.9% over the past 5 years.

Highlight of Business Operations:

Contribution to consolidated net income from natural gas operations increased $519,000 in the first quarter of 2009 compared to same period in 2008. The improvement in contribution primarily resulted from lower financing costs partially offset by a decrease in operating margin and increased operating costs. The first quarter of 2009 contribution to consolidated net income from construction services improved $310,000 from the same period in 2008. The improvement between periods was primarily due to lower costs and increased gains on the sale of equipment.

Company-Owned Life Insurance (“COLI”). Southwest has life insurance policies on members of management and other key employees to indemnify itself against the loss of talent, expertise, and knowledge, as well as to provide indirect funding for certain nonqualified benefit plans. The COLI policies have a combined net death benefit value of approximately $137 million at March 31, 2009. The net cash surrender value of these policies (which is the cash amount that would be received if Southwest voluntarily terminated the policies) is approximately $45 million at March 31, 2009 and is included in the caption “Other property and investments” on the balance sheet. Cash surrender values are directly influenced by the investment portfolio underlying the insurance policies. This portfolio includes both equity and fixed income (mutual fund) investments. As a result, generally the cash surrender value (but not the net death benefit) moves up and down consistent with the movements in the broader stock and bond markets. During the first quarter of 2009, Southwest recognized a net decline in the cash surrender values of its COLI policies of $1.6 million (compared to a net decline of $2.1 million in the same period of 2008). During the twelve months ended March 31, 2009, Southwest recognized a net decline in the cash surrender values of its COLI policies of $11.5 million (compared to a net decline of $945,000 in the same period of 2008). Current tax regulations provide for tax-free treatment of life insurance (death benefit) proceeds. Therefore, the changes in the cash surrender value components of COLI policies as they progress toward the ultimate death benefits are also recorded without tax consequences. Currently, the Company intends to hold the COLI policies for their duration and purchase additional policies as necessary.

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

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

Operating margin decreased a net $1 million in the first quarter of 2009 compared to the first quarter of 2008. The positive impacts to margin of rate relief and rate changes were approximately $22 million, consisting of $9 million in Arizona, $1 million of rate relief in California and nearly $12 million related to the return to a seasonal margin methodology in California. As a result of weather-related usage variations in Arizona, new margin from rate relief during the first quarter was approximately $3 million to $4 million less than expected. Differences in heating demand, caused primarily by weather variations, negatively impacted operating margin by approximately $17 million as overall temperatures in the current quarter were significantly warmer than normal ($13 million), while temperatures were somewhat colder than normal ($4 million) in the first quarter of 2008. Energy efficiency and conservation resulting from the sluggish economy negatively impacted operating margin by an estimated $6 million. Customer growth had a negligible positive impact as only 2,000 net new customers were added during the last twelve months.

Depreciation expense increased $1.7 million, or four percent, as a result of additional plant in service. Average gas plant in service for the current period increased $215 million, or five percent, compared to the corresponding period a year ago. This was attributable to the upgrade of existing operating facilities and the expansion of the system to accommodate customer growth.

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