UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2021March 31, 2022
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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Commission File Number | | Exact name of registrant as specified in its charter and principal office address and telephone number | | State of Incorporation | | I.R.S. Employer Identification No. |
001-37976 | | Southwest Gas Holdings, Inc. | | | | Delaware | | 81-3881866 |
| | 8360 S. Durango Drive | | | | | | |
| | Post Office Box 98510 | | | | | | |
| | Las Vegas, | Nevada | 89193-8510 | | | | |
| | (702) | 876-7237 | | | | | |
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1-7850 | | Southwest Gas Corporation | | | | California | | 88-0085720 |
| | 8360 S. Durango Drive | | | | | | |
| | Post Office Box 98510 | | | | | | |
| | Las Vegas, | Nevada | 89193-8510 | | | | |
| | (702) | 876-7237 | | | | | |
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Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Southwest Gas Holdings, Inc. Common Stock, $1 Par Value | | SWX | | New York Stock Exchange |
Preferred Stock Purchase Rights | | N/A | | New York Stock Exchange |
Indicate by check mark whether each 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 each registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether each registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that each registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Southwest Gas Holdings, Inc.:
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Large accelerated filer | | ☒ | | Accelerated filer | | ☐ |
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Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ |
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Emerging growth company | | ☐ | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Southwest Gas Corporation:
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Large accelerated filer | | ☐ | | Accelerated filer | | ☐ |
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Non-accelerated filer | | ☒ | | Smaller reporting company | | ☐ |
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Emerging growth company | | ☐ | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
Southwest Gas Holdings, Inc. Common Stock, $1 Par Value, 60,385,08466,852,050 shares as of OctoberApril 29, 2021.2022.
All of the outstanding shares of common stock ($1 par value) of Southwest Gas Corporation were held by Southwest Gas Holdings, Inc. as of OctoberApril 29, 2021.2022.
SOUTHWEST GAS CORPORATION MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (H)(1)(a) and (b) OF FORM 10-Q AND IS THEREFORE FILING THIS REPORT WITH THE REDUCED DISCLOSURE FORMAT AS PERMITTED BY GENERAL INSTRUCTION H(2).
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
FILING FORMAT
This quarterly report on Form 10-Q is a combined report being filed by two separate registrants: Southwest Gas Holdings, Inc. and Southwest Gas Corporation. Except where the content clearly indicates otherwise, any reference in the report to “we,” “us” or “our” is to the holding company or the consolidated entity of Southwest Gas Holdings, Inc. and all of its subsidiaries, including Southwest Gas Corporation, which is a distinct registrant that is a wholly owned subsidiary of Southwest Gas Holdings, Inc. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes representations only as to itself and makes no other representation whatsoever as to any other company.
Part I—Financial information in this Quarterly Report on Form 10-Q includes separate financial statements (i.e., balance sheets, statements of income, statements of comprehensive income, statements of cash flows, and statements of equity) for Southwest Gas Holdings, Inc. and Southwest Gas Corporation, in that order. The Notes to the Condensed Consolidated Financial Statements are presented on a combined basis for both entities. All Items other than Part I – Item 1 are combined for the reporting companies.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except par value)
(Unaudited)
| | | September 30, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
ASSETS | ASSETS | | | | | ASSETS | | | | |
Utility plant: | | |
Regulated operations plant: | | Regulated operations plant: | |
Gas plant | Gas plant | | $ | 8,742,806 | | | $ | 8,384,000 | | Gas plant | | $ | 10,891,910 | | | $ | 10,789,690 | |
Less: accumulated depreciation | Less: accumulated depreciation | | (2,499,488) | | | (2,419,348) | | Less: accumulated depreciation | | (3,443,053) | | | (3,397,736) | |
Construction work in progress | Construction work in progress | | 153,100 | | | 211,429 | | Construction work in progress | | 216,262 | | | 202,068 | |
Net utility plant | | 6,396,418 | | | 6,176,081 | | |
Other property and investments | | 1,305,334 | | | 834,245 | | |
Net regulated operations plant | | Net regulated operations plant | | 7,665,119 | | | 7,594,022 | |
Other property and investments, net | | Other property and investments, net | | 1,313,291 | | | 1,316,479 | |
Current assets: | Current assets: | | | | | Current assets: | | | | |
Cash and cash equivalents | Cash and cash equivalents | | 186,690 | | | 83,352 | | Cash and cash equivalents | | 624,666 | | | 222,697 | |
Accounts receivable, net of allowances | Accounts receivable, net of allowances | | 692,135 | | | 522,172 | | Accounts receivable, net of allowances | | 755,947 | | | 707,127 | |
Accrued utility revenue | Accrued utility revenue | | 39,700 | | | 82,400 | | Accrued utility revenue | | 52,000 | | | 84,900 | |
Income taxes receivable, net | Income taxes receivable, net | | 32,554 | | | 10,884 | | Income taxes receivable, net | | 16,937 | | | 16,816 | |
Deferred purchased gas costs | Deferred purchased gas costs | | 240,827 | | | 2,053 | | Deferred purchased gas costs | | 367,954 | | | 291,145 | |
Prepaid and other current assets | Prepaid and other current assets | | 200,700 | | | 170,152 | | Prepaid and other current assets | | 229,072 | | | 292,082 | |
Total current assets | Total current assets | | 1,392,606 | | | 871,013 | | Total current assets | | 2,046,576 | | | 1,614,767 | |
Noncurrent assets: | Noncurrent assets: | | | | | Noncurrent assets: | | | | |
Goodwill | Goodwill | | 791,902 | | | 345,184 | | Goodwill | | 1,773,671 | | | 1,781,332 | |
Deferred income taxes | Deferred income taxes | | 268 | | | 455 | | Deferred income taxes | | 44 | | | 121 | |
Deferred charges and other assets | Deferred charges and other assets | | 483,107 | | | 508,875 | | Deferred charges and other assets | | 450,786 | | | 458,536 | |
Total noncurrent assets | Total noncurrent assets | | 1,275,277 | | | 854,514 | | Total noncurrent assets | | 2,224,501 | | | 2,239,989 | |
Total assets | Total assets | | $ | 10,369,635 | | | $ | 8,735,853 | | Total assets | | $ | 13,249,487 | | | $ | 12,765,257 | |
CAPITALIZATION AND LIABILITIES | CAPITALIZATION AND LIABILITIES | | | | | CAPITALIZATION AND LIABILITIES | | | | |
Capitalization: | Capitalization: | | Capitalization: | |
Common stock, $1 par (authorized - 120,000,000 shares; issued and outstanding - 60,378,684 and 57,192,925 shares) | | $ | 62,009 | | | $ | 58,823 | | |
Common stock, $1 par (authorized - 120,000,000 shares; issued and outstanding - 66,849,225 and 60,422,081 shares) | | Common stock, $1 par (authorized - 120,000,000 shares; issued and outstanding - 66,849,225 and 60,422,081 shares) | | $ | 68,479 | | | $ | 62,052 | |
Additional paid-in capital | Additional paid-in capital | | 1,823,889 | | | 1,609,155 | | Additional paid-in capital | | 2,273,837 | | | 1,824,216 | |
Accumulated other comprehensive loss, net | Accumulated other comprehensive loss, net | | (55,951) | | | (61,003) | | Accumulated other comprehensive loss, net | | (43,972) | | | (46,761) | |
Retained earnings | Retained earnings | | 1,079,869 | | | 1,067,978 | | Retained earnings | | 1,190,738 | | | 1,114,313 | |
Total equity | Total equity | | 2,909,816 | | | 2,674,953 | | Total equity | | 3,489,082 | | | 2,953,820 | |
Redeemable noncontrolling interest | | 183,547 | | | 165,716 | | |
Redeemable noncontrolling interests | | Redeemable noncontrolling interests | | 135,984 | | | 196,717 | |
Long-term debt, less current maturities | Long-term debt, less current maturities | | 3,573,783 | | | 2,732,200 | | Long-term debt, less current maturities | | 4,559,758 | | | 4,115,684 | |
Total capitalization | Total capitalization | | 6,667,146 | | | 5,572,869 | | Total capitalization | | 8,184,824 | | | 7,266,221 | |
Current liabilities: | Current liabilities: | | | | | Current liabilities: | | | | |
Current maturities of long-term debt | Current maturities of long-term debt | | 297,271 | | | 40,433 | | Current maturities of long-term debt | | 291,069 | | | 297,324 | |
Short-term debt | Short-term debt | | 272,000 | | | 107,000 | | Short-term debt | | 1,474,000 | | | 1,909,000 | |
Accounts payable | Accounts payable | | 222,959 | | | 231,301 | | Accounts payable | | 256,606 | | | 353,365 | |
Customer deposits | Customer deposits | | 51,816 | | | 67,920 | | Customer deposits | | 57,620 | | | 59,327 | |
Income taxes payable, net | Income taxes payable, net | | 27,490 | | | 12,556 | | Income taxes payable, net | | 10,416 | | | 6,734 | |
Accrued general taxes | Accrued general taxes | | 60,656 | | | 48,640 | | Accrued general taxes | | 83,897 | | | 53,473 | |
Accrued interest | Accrued interest | | 38,600 | | | 20,536 | | Accrued interest | | 42,421 | | | 30,964 | |
Deferred purchased gas costs | Deferred purchased gas costs | | — | | | 54,636 | | Deferred purchased gas costs | | 297 | | | 5,736 | |
Other current liabilities | Other current liabilities | | 384,442 | | | 328,945 | | Other current liabilities | | 413,872 | | | 396,126 | |
Total current liabilities | Total current liabilities | | 1,355,234 | | | 911,967 | | Total current liabilities | | 2,630,198 | | | 3,112,049 | |
Deferred income taxes and other credits: | Deferred income taxes and other credits: | | | | | Deferred income taxes and other credits: | | | | |
Deferred income taxes and investment tax credits, net | Deferred income taxes and investment tax credits, net | | 789,141 | | | 647,453 | | Deferred income taxes and investment tax credits, net | | 803,771 | | | 768,868 | |
Accumulated removal costs | Accumulated removal costs | | 419,000 | | | 404,000 | | Accumulated removal costs | | 488,908 | | | 480,583 | |
Other deferred credits and other long-term liabilities | Other deferred credits and other long-term liabilities | | 1,139,114 | | | 1,199,564 | | Other deferred credits and other long-term liabilities | | 1,141,786 | | | 1,137,536 | |
Total deferred income taxes and other credits | Total deferred income taxes and other credits | | 2,347,255 | | | 2,251,017 | | Total deferred income taxes and other credits | | 2,434,465 | | | 2,386,987 | |
Total capitalization and liabilities | Total capitalization and liabilities | | $ | 10,369,635 | | | $ | 8,735,853 | | Total capitalization and liabilities | | $ | 13,249,487 | | | $ | 12,765,257 | |
The accompanying notes are an integral part of these statements.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Twelve Months Ended September 30, | | Three Months Ended March 31, | | | Twelve Months Ended March 31, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | | | 2022 | | 2021 |
Operating revenues: | Operating revenues: | | | | | | | | | | | | | Operating revenues: | | | | | | | | | |
Gas operating revenues | | $ | 255,848 | | | $ | 210,834 | | | $ | 1,070,576 | | | $ | 976,095 | | | $ | 1,445,066 | | | $ | 1,355,666 | | |
Regulated operations revenues | | Regulated operations revenues | | $ | 743,532 | | | $ | 521,932 | | | | $ | 1,743,390 | | | $ | 1,369,690 | |
Utility infrastructure services revenues | Utility infrastructure services revenues | | 632,848 | | | 580,392 | | | 1,525,448 | | | 1,408,698 | | | 2,065,038 | | | 1,877,264 | | Utility infrastructure services revenues | | 523,877 | | | 363,975 | | | | 2,318,563 | | | 1,978,770 | |
Total operating revenues | Total operating revenues | | 888,696 | | | 791,226 | | | 2,596,024 | | | 2,384,793 | | | 3,510,104 | | | 3,232,930 | | Total operating revenues | | 1,267,409 | | | 885,907 | | | | 4,061,953 | | | 3,348,460 | |
Operating expenses: | Operating expenses: | | | | | | | | | | | | | Operating expenses: | | | | | | | | | |
Net cost of gas sold | Net cost of gas sold | | 63,710 | | | 36,321 | | | 296,227 | | | 264,615 | | | 374,449 | | | 356,925 | | Net cost of gas sold | | 298,918 | | | 156,021 | | | | 573,804 | | | 338,037 | |
Operations and maintenance | Operations and maintenance | | 122,927 | | | 101,764 | | | 334,450 | | | 304,964 | | | 437,602 | | | 407,924 | | Operations and maintenance | | 149,303 | | | 106,690 | | | | 515,759 | | | 411,025 | |
Depreciation and amortization | Depreciation and amortization | | 91,380 | | | 80,139 | | | 267,670 | | | 245,009 | | | 354,688 | | | 324,995 | | Depreciation and amortization | | 122,646 | | | 93,442 | | | | 400,245 | | | 337,816 | |
Taxes other than income taxes | Taxes other than income taxes | | 20,109 | | | 15,787 | | | 60,134 | | | 47,507 | | | 76,087 | | | 63,195 | | Taxes other than income taxes | | 24,816 | | | 20,687 | | | | 84,472 | | | 67,769 | |
Utility infrastructure services expenses | Utility infrastructure services expenses | | 567,270 | | | 502,951 | | | 1,381,524 | | | 1,252,489 | | | 1,858,464 | | | 1,671,478 | | Utility infrastructure services expenses | | 503,232 | | | 335,614 | | | | 2,123,085 | | | 1,745,729 | |
Total operating expenses | Total operating expenses | | 865,396 | | | 736,962 | | | 2,340,005 | | | 2,114,584 | | | 3,101,290 | | | 2,824,517 | | Total operating expenses | | 1,098,915 | | | 712,454 | | | | 3,697,365 | | | 2,900,376 | |
Operating income | Operating income | | 23,300 | | | 54,264 | | | 256,019 | | | 270,209 | | | 408,814 | | | 408,413 | | Operating income | | 168,494 | | | 173,453 | | | | 364,588 | | | 448,084 | |
Other income and (expenses): | Other income and (expenses): | | | | | | | | | | | | | Other income and (expenses): | | | | | | | | | |
Net interest deductions | Net interest deductions | | (31,298) | | | (28,311) | | | (81,201) | | | (83,141) | | | (109,537) | | | (111,705) | | Net interest deductions | | (48,363) | | | (23,964) | | | | (143,597) | | | (107,061) | |
Other income (deductions) | Other income (deductions) | | (3,112) | | | 1,799 | | | (3,975) | | | (11,046) | | | 282 | | | (7,788) | | Other income (deductions) | | 1,244 | | | 448 | | | | (2,703) | | | 14,429 | |
Total other income and (expenses) | Total other income and (expenses) | | (34,410) | | | (26,512) | | | (85,176) | | | (94,187) | | | (109,255) | | | (119,493) | | Total other income and (expenses) | | (47,119) | | | (23,516) | | | | (146,300) | | | (92,632) | |
Income (loss) before income taxes | | (11,110) | | | 27,752 | | | 170,843 | | | 176,022 | | | 299,559 | | | 288,920 | | |
Income tax expense (benefit) | | (1,816) | | | 6,689 | | | 34,818 | | | 42,073 | | | 58,498 | | | 63,065 | | |
Net income (loss) | | (9,294) | | | 21,063 | | | 136,025 | | | 133,949 | | | 241,061 | | | 225,855 | | |
Net income attributable to noncontrolling interest | | 2,282 | | | 2,790 | | | 5,189 | | | 5,169 | | | 6,681 | | | 5,357 | | |
Net income (loss) attributable to Southwest Gas Holdings, Inc. | | $ | (11,576) | | | $ | 18,273 | | | $ | 130,836 | | | $ | 128,780 | | | $ | 234,380 | | | $ | 220,498 | | |
Earnings (loss) per share: | | | | | | | | | | | | | |
Income before income taxes | | Income before income taxes | | 121,375 | | | 149,937 | | | | 218,288 | | | 355,452 | |
Income tax expense | | Income tax expense | | 24,125 | | | 31,092 | | | | 32,681 | | | 70,627 | |
Net income | | Net income | | 97,250 | | | 118,845 | | | | 185,607 | | | 284,825 | |
Net income attributable to noncontrolling interests | | Net income attributable to noncontrolling interests | | 1,072 | | | 1,552 | | | | 5,943 | | | 7,750 | |
Net income attributable to Southwest Gas Holdings, Inc. | | Net income attributable to Southwest Gas Holdings, Inc. | | $ | 96,178 | | | $ | 117,293 | | | | $ | 179,664 | | | $ | 277,075 | |
Earnings per share: | | Earnings per share: | | | | | | | | | |
Basic | Basic | | $ | (0.19) | | | $ | 0.32 | | | $ | 2.23 | | | $ | 2.31 | | | $ | 4.03 | | | $ | 3.97 | | Basic | | $ | 1.58 | | | $ | 2.04 | | | | $ | 3.00 | | | $ | 4.90 | |
Diluted | Diluted | | $ | (0.19) | | | $ | 0.32 | | | $ | 2.23 | | | $ | 2.31 | | | $ | 4.02 | | | $ | 3.97 | | Diluted | | $ | 1.58 | | | $ | 2.03 | | | | $ | 2.99 | | | $ | 4.89 | |
Weighted average shares: | Weighted average shares: | | | | | | | | | | | | | Weighted average shares: | | | | | | | | | |
Basic | Basic | | 59,688 | | | 56,271 | | | 58,639 | | | 55,683 | | | 58,209 | | | 55,508 | | Basic | | 60,737 | | | 57,600 | | | | 59,919 | | | 56,564 | |
Diluted | Diluted | | 59,816 | | | 56,357 | | | 58,742 | | | 55,753 | | | 58,312 | | | 55,577 | | Diluted | | 60,854 | | | 57,679 | | | | 60,044 | | | 56,649 | |
The accompanying notes are an integral part of these statements.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Thousands of dollars)
(Unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Twelve Months Ended September 30, | | Three Months Ended March 31, | | | Twelve Months Ended March 31, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | | | 2022 | | 2021 |
Net income (loss) | | $ | (9,294) | | | $ | 21,063 | | | $ | 136,025 | | | $ | 133,949 | | | $ | 241,061 | | | $ | 225,855 | | |
Net income | | Net income | | $ | 97,250 | | | $ | 118,845 | | | | $ | 185,607 | | | $ | 284,825 | |
Other comprehensive income (loss), net of tax | Other comprehensive income (loss), net of tax | | | | | | | | | | | | | Other comprehensive income (loss), net of tax | | | | | | | | | |
Defined benefit pension plans: | Defined benefit pension plans: | | Defined benefit pension plans: | | | |
Net actuarial loss | | — | | | — | | | — | | | — | | | (43,730) | | | (54,026) | | |
Net actuarial gain (loss) | | Net actuarial gain (loss) | | — | | | — | | | | 44,974 | | | (43,730) | |
Amortization of prior service cost | Amortization of prior service cost | | 183 | | | 220 | | | 547 | | | 659 | | | 766 | | | 901 | | Amortization of prior service cost | | 33 | | | 182 | | | | 580 | | | 840 | |
Amortization of net actuarial loss | Amortization of net actuarial loss | | 8,474 | | | 7,187 | | | 25,420 | | | 21,563 | | | 32,608 | | | 26,004 | | Amortization of net actuarial loss | | 6,616 | | | 8,474 | | | | 32,036 | | | 30,037 | |
Prior service cost | | — | | | — | | | — | | | — | | | — | | | (1,426) | | |
| Regulatory adjustment | Regulatory adjustment | | (7,277) | | | (6,380) | | | (21,831) | | | (19,140) | | | 2,959 | | | 21,130 | | Regulatory adjustment | | (5,523) | | | (7,277) | | | | (65,273) | | | 4,753 | |
Net defined benefit pension plans | Net defined benefit pension plans | | 1,380 | | | 1,027 | | | 4,136 | | | 3,082 | | | (7,397) | | | (7,417) | | Net defined benefit pension plans | | 1,126 | | | 1,379 | | | | 12,317 | | | (8,100) | |
Forward-starting interest rate swaps (“FSIRS”): | Forward-starting interest rate swaps (“FSIRS”): | | | | | | | | | | | | | Forward-starting interest rate swaps (“FSIRS”): | | | | | | | | | |
Amounts reclassified into net income (loss) | | 413 | | | 783 | | | 1,240 | | | 2,054 | | | 1,653 | | | 2,689 | | |
Amounts reclassified into net income | | Amounts reclassified into net income | | 416 | | | 413 | | | | 1,655 | | | 2,244 | |
Net forward-starting interest rate swaps | Net forward-starting interest rate swaps | | 413 | | | 783 | | | 1,240 | | | 2,054 | | | 1,653 | | | 2,689 | | Net forward-starting interest rate swaps | | 416 | | | 413 | | | | 1,655 | | | 2,244 | |
Foreign currency translation adjustments | Foreign currency translation adjustments | | (2,056) | | | 1,024 | | | (324) | | | (1,187) | | | 2,576 | | | (280) | | Foreign currency translation adjustments | | 1,247 | | | 823 | | | | 444 | | | 6,541 | |
Total other comprehensive income (loss), net of tax | | (263) | | | 2,834 | | | 5,052 | | | 3,949 | | | (3,168) | | | (5,008) | | |
Comprehensive income (loss) | | (9,557) | | | 23,897 | | | 141,077 | | | 137,898 | | | 237,893 | | | 220,847 | | |
Comprehensive income attributable to noncontrolling interest | | 2,282 | | | 2,790 | | | 5,189 | | | 5,169 | | | 6,681 | | | 5,357 | | |
Comprehensive income (loss) attributable to Southwest Gas Holdings, Inc. | | $ | (11,839) | | | $ | 21,107 | | | $ | 135,888 | | | $ | 132,729 | | | $ | 231,212 | | | $ | 215,490 | | |
Total other comprehensive income, net of tax | | Total other comprehensive income, net of tax | | 2,789 | | | 2,615 | | | | 14,416 | | | 685 | |
Comprehensive income | | Comprehensive income | | 100,039 | | | 121,460 | | | | 200,023 | | | 285,510 | |
Comprehensive income attributable to noncontrolling interests | | Comprehensive income attributable to noncontrolling interests | | 1,072 | | | 1,552 | | | | 5,943 | | | 7,750 | |
Comprehensive income attributable to Southwest Gas Holdings, Inc. | | Comprehensive income attributable to Southwest Gas Holdings, Inc. | | $ | 98,967 | | | $ | 119,908 | | | | $ | 194,080 | | | $ | 277,760 | |
The accompanying notes are an integral part of these statements.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
| | | Nine Months Ended September 30, | | Twelve Months Ended September 30, | | Three Months Ended March 31, | | Twelve Months Ended March 31, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2022 | | 2021 |
CASH FLOW FROM OPERATING ACTIVITIES: | CASH FLOW FROM OPERATING ACTIVITIES: | | | | | | | | | CASH FLOW FROM OPERATING ACTIVITIES: | | | | | | | | |
Net income | Net income | | $ | 136,025 | | | $ | 133,949 | | | $ | 241,061 | | | $ | 225,855 | | Net income | | $ | 97,250 | | | $ | 118,845 | | | $ | 185,607 | | | $ | 284,825 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |
Depreciation and amortization | Depreciation and amortization | | 267,670 | | | 245,009 | | | 354,688 | | | 324,995 | | Depreciation and amortization | | 122,646 | | | 93,442 | | | 400,245 | | | 337,816 | |
Deferred income taxes | Deferred income taxes | | 45,374 | | | 37,752 | | | 58,339 | | | 45,815 | | Deferred income taxes | | 32,346 | | | 23,326 | | | 70,232 | | | 48,734 | |
Changes in current assets and liabilities: | Changes in current assets and liabilities: | | Changes in current assets and liabilities: | |
Accounts receivable, net of allowances | Accounts receivable, net of allowances | | (62,081) | | | (42,139) | | | (68,714) | | | (76,769) | | Accounts receivable, net of allowances | | (44,971) | | | 42,892 | | | (139,417) | | | (51,717) | |
Accrued utility revenue | Accrued utility revenue | | 42,700 | | | 42,600 | | | (3,200) | | | (700) | | Accrued utility revenue | | 32,900 | | | 31,900 | | | (1,500) | | | (2,400) | |
Deferred purchased gas costs | Deferred purchased gas costs | | (293,410) | | | 59,899 | | | (317,070) | | | 38,016 | | Deferred purchased gas costs | | (82,248) | | | (291,469) | | | (134,507) | | | (265,385) | |
Accounts payable | Accounts payable | | (51,086) | | | (59,031) | | | 251 | | | (14,817) | | Accounts payable | | (82,952) | | | (41,147) | | | 8,621 | | | 11,882 | |
Accrued taxes | Accrued taxes | | 5,954 | | | 17,991 | | | 3,134 | | | 26,075 | | Accrued taxes | | 33,964 | | | 34,636 | | | (7,397) | | | 19,430 | |
Other current assets and liabilities | Other current assets and liabilities | | 23,289 | | | 121,185 | | | 9,531 | | | 121,274 | | Other current assets and liabilities | | 79,680 | | | (5,255) | | | (4,274) | | | 25,719 | |
Gains on sale of equipment | | (5,365) | | | (581) | | | (6,632) | | | (2,897) | | |
Gains on sale of property and equipment | | Gains on sale of property and equipment | | (1,916) | | | (1,509) | | | (7,313) | | | (3,329) | |
Changes in undistributed stock compensation | Changes in undistributed stock compensation | | 7,676 | | | 5,789 | | | 9,001 | | | 6,618 | | Changes in undistributed stock compensation | | 4,180 | | | 3,658 | | | 9,816 | | | 7,956 | |
Equity AFUDC | Equity AFUDC | | — | | | (3,413) | | | (1,311) | | | (4,395) | | Equity AFUDC | | (258) | | | (981) | | | 723 | | | (4,644) | |
Changes in deferred charges and other assets | Changes in deferred charges and other assets | | (7,956) | | | (19,174) | | | (21,373) | | | (24,370) | | Changes in deferred charges and other assets | | (297) | | | (10,379) | | | (3,459) | | | (49,465) | |
Changes in other liabilities and deferred credits | Changes in other liabilities and deferred credits | | (57,269) | | | (52,018) | | | (67,922) | | | (54,996) | | Changes in other liabilities and deferred credits | | (3,704) | | | (50,416) | | | (26,917) | | | (57,365) | |
Net cash provided by operating activities | | 51,521 | | | 487,818 | | | 189,783 | | | 609,704 | | |
Net cash provided by (used in) operating activities | | Net cash provided by (used in) operating activities | | 186,620 | | | (52,457) | | | 350,460 | | | 302,057 | |
CASH FLOW FROM INVESTING ACTIVITIES: | CASH FLOW FROM INVESTING ACTIVITIES: | | | | | | | | | CASH FLOW FROM INVESTING ACTIVITIES: | | | | | | | | |
Construction expenditures and property additions | Construction expenditures and property additions | | (506,737) | | | (632,474) | | | (699,368) | | | (851,236) | | Construction expenditures and property additions | | (162,796) | | | (152,709) | | | (725,713) | | | (767,159) | |
Acquisition of businesses, net of cash acquired | Acquisition of businesses, net of cash acquired | | (830,395) | | | (250) | | | (830,145) | | | (28,355) | | Acquisition of businesses, net of cash acquired | | — | | | — | | | (2,354,260) | | | — | |
Changes in customer advances | Changes in customer advances | | 7,940 | | | 7,691 | | | 14,282 | | | 11,643 | | Changes in customer advances | | 7,693 | | | 4,286 | | | 19,381 | | | 12,885 | |
Other | Other | | 14,755 | | | 6,520 | | | 17,238 | | | 8,811 | | Other | | 893 | | | 3,563 | | | 15,586 | | | 8,136 | |
Net cash used in investing activities | Net cash used in investing activities | | (1,314,437) | | | (618,513) | | | (1,497,993) | | | (859,137) | | Net cash used in investing activities | | (154,210) | | | (144,860) | | | (3,045,006) | | | (746,138) | |
CASH FLOW FROM FINANCING ACTIVITIES: | CASH FLOW FROM FINANCING ACTIVITIES: | | | | | | | | | CASH FLOW FROM FINANCING ACTIVITIES: | | | | | | | | |
Issuance of common stock, net | Issuance of common stock, net | | 210,812 | | | 90,635 | | | 259,422 | | | 119,240 | | Issuance of common stock, net | | 453,495 | | | 48,990 | | | 618,146 | | | 185,087 | |
Centuri distribution to redeemable noncontrolling interest | | Centuri distribution to redeemable noncontrolling interest | | (39,649) | | | — | | | (39,649) | | | — | |
Dividends paid | Dividends paid | | (102,292) | | | (93,317) | | | (134,479) | | | (123,099) | | Dividends paid | | (35,970) | | | (32,619) | | | (141,573) | | | (128,117) | |
Issuance of long-term debt, net | Issuance of long-term debt, net | | 1,654,960 | | | 650,619 | | | 1,666,718 | | | 699,601 | | Issuance of long-term debt, net | | 709,927 | | | 10,659 | | | 2,359,964 | | | 573,058 | |
Retirement of long-term debt | Retirement of long-term debt | | (406,815) | | | (289,295) | | | (473,926) | | | (375,909) | | Retirement of long-term debt | | (143,453) | | | (21,228) | | | (574,889) | | | (302,466) | |
Change in credit facility and commercial paper | Change in credit facility and commercial paper | | (150,000) | | | (92,000) | | | (58,000) | | | (92,000) | | Change in credit facility and commercial paper | | (130,000) | | | — | | | (150,000) | | | — | |
Change in short-term debt | Change in short-term debt | | 165,000 | | | (157,000) | | | 218,000 | | | 24,000 | | Change in short-term debt | | (435,000) | | | 203,000 | | | (686,000) | | | 153,000 | |
Issuance of short-term debt | | Issuance of short-term debt | | — | | | — | | | 1,850,000 | | | — | |
Withholding remittance - share-based compensation | Withholding remittance - share-based compensation | | (1,254) | | | (2,736) | | | (1,254) | | | (2,736) | | Withholding remittance - share-based compensation | | (1,978) | | | (1,242) | | | (2,000) | | | (1,242) | |
Other | Other | | (4,355) | | | (1,596) | | | (6,161) | | | (4,090) | | Other | | (7,898) | | | (1,353) | | | (7,274) | | | (4,505) | |
Net cash provided by financing activities | Net cash provided by financing activities | | 1,366,056 | | | 105,310 | | | 1,470,320 | | | 245,007 | | Net cash provided by financing activities | | 369,474 | | | 206,207 | | | 3,226,725 | | | 474,815 | |
Effects of currency translation on cash and cash equivalents | Effects of currency translation on cash and cash equivalents | | 198 | | | (209) | | | 635 | | | (109) | | Effects of currency translation on cash and cash equivalents | | 85 | | | 103 | | | 142 | | | 646 | |
Change in cash and cash equivalents | Change in cash and cash equivalents | | 103,338 | | | (25,594) | | | 162,745 | | | (4,535) | | Change in cash and cash equivalents | | 401,969 | | | 8,993 | | | 532,321 | | | 31,380 | |
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | | 83,352 | | | 49,539 | | | 23,945 | | | 28,480 | | Cash and cash equivalents at beginning of period | | 222,697 | | | 83,352 | | | 92,345 | | | 60,965 | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | | $ | 186,690 | | | $ | 23,945 | | | $ | 186,690 | | | $ | 23,945 | | Cash and cash equivalents at end of period | | $ | 624,666 | | | $ | 92,345 | | | $ | 624,666 | | | $ | 92,345 | |
SUPPLEMENTAL INFORMATION: | SUPPLEMENTAL INFORMATION: | | | | | | | | | SUPPLEMENTAL INFORMATION: | | | | | | | | |
Interest paid, net of amounts capitalized | Interest paid, net of amounts capitalized | | $ | 57,128 | | | $ | 63,743 | | | $ | 98,567 | | | $ | 103,836 | | Interest paid, net of amounts capitalized | | $ | 35,262 | | | $ | 8,303 | | | $ | 131,311 | | | $ | 100,412 | |
Income taxes paid (received), net | Income taxes paid (received), net | | $ | 7,665 | | | $ | (16,006) | | | $ | 12,720 | | | $ | (13,625) | | Income taxes paid (received), net | | $ | 1,408 | | | $ | 1,651 | | | $ | 3,965 | | | $ | 10,764 | |
The accompanying notes are an integral part of these statements.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except per share amounts)
(Unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | |
Common stock shares | Common stock shares | | | | | | | | Common stock shares | | | | |
| | Beginning balances | 59,088 | | | 55,910 | | | 57,193 | | | 55,007 | | | Beginning balances | 60,422 | | | 57,193 | | |
| | Common stock issuances | 1,291 | | | 549 | | | 3,186 | | | 1,452 | | | Common stock issuances | 6,427 | | | 802 | | |
| | Ending balances | 60,379 | | | 56,459 | | | 60,379 | | | 56,459 | | | Ending balances | 66,849 | | | 57,995 | | |
Common stock amount | Common stock amount | | | | | | | | Common stock amount | | | | |
| | Beginning balances | $ | 60,718 | | | $ | 57,540 | | | $ | 58,823 | | | $ | 56,637 | | | Beginning balances | $ | 62,052 | | | $ | 58,823 | | |
| | Common stock issuances | 1,291 | | | 549 | | | 3,186 | | | 1,452 | | | Common stock issuances | 6,427 | | | 802 | | |
| | Ending balances | 62,009 | | | 58,089 | | | 62,009 | | | 58,089 | | | Ending balances | 68,479 | | | 59,625 | | |
Additional paid-in capital | Additional paid-in capital | | | | | | | | Additional paid-in capital | | | | |
| | Beginning balances | 1,733,572 | | | 1,523,630 | | | 1,609,155 | | | 1,466,937 | | | Beginning balances | 1,824,216 | | | 1,609,155 | | |
| | Common stock issuances | 90,317 | | | 36,184 | | | 214,734 | | | 92,877 | | | Common stock issuances | 449,621 | | | 50,953 | | |
| | Ending balances | 1,823,889 | | | 1,559,814 | | | 1,823,889 | | | 1,559,814 | | | Ending balances | 2,273,837 | | | 1,660,108 | | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | | | | | | | | Accumulated other comprehensive loss | | | | |
| | Beginning balances | (55,688) | | | (55,617) | | | (61,003) | | | (56,732) | | | Beginning balances | (46,761) | | | (61,003) | | |
| | Foreign currency exchange translation adjustment | (2,056) | | | 1,024 | | | (324) | | | (1,187) | | | Foreign currency exchange translation adjustment | 1,247 | | | 823 | | |
| | Net actuarial gain arising during period, less amortization of unamortized benefit plan cost, net of tax | 1,380 | | | 1,027 | | | 4,136 | | | 3,082 | | | Net actuarial gain arising during period, less amortization of unamortized benefit plan cost, net of tax | 1,126 | | | 1,379 | | |
| | FSIRS amounts reclassified to net income, net of tax | 413 | | | 783 | | | 1,240 | | | 2,054 | | | FSIRS amounts reclassified to net income, net of tax | 416 | | | 413 | | |
| | Ending balances | (55,951) | | | (52,783) | | | (55,951) | | | (52,783) | | | Ending balances | (43,972) | | | (58,388) | | |
Retained earnings | Retained earnings | | | | | | | | Retained earnings | | | | |
| | Beginning balances | 1,108,279 | | | 1,085,742 | | | 1,067,978 | | | 1,039,072 | | | Beginning balances | 1,114,313 | | | 1,067,978 | | |
| | Net income (loss) | (11,576) | | | 18,273 | | | 130,836 | | | 128,780 | | | Net income | 96,178 | | | 117,293 | | |
| | Dividends declared | (36,098) | | | (32,324) | | | (106,303) | | | (96,161) | | | Dividends declared | (41,909) | | | (34,876) | | |
| | Redemption value adjustments | 19,264 | | | (17,573) | | | (12,642) | | | (17,573) | | | Redemption value adjustments | 22,156 | | | (38,018) | | |
| | Ending balances | 1,079,869 | | | 1,054,118 | | | 1,079,869 | | | 1,054,118 | | | Ending balances | 1,190,738 | | | 1,112,377 | | |
Total equity ending balances | Total equity ending balances | $ | 2,909,816 | | | $ | 2,619,238 | | | $ | 2,909,816 | | | $ | 2,619,238 | | Total equity ending balances | $ | 3,489,082 | | | $ | 2,773,722 | | |
Dividends declared per common share | Dividends declared per common share | $ | 0.595 | | | $ | 0.57 | | | $ | 1.785 | | | $ | 1.71 | | Dividends declared per common share | $ | 0.62 | | | $ | 0.595 | | |
The accompanying notes are an integral part of these statements.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
| | | September 30, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
ASSETS | ASSETS | | | | | ASSETS | | | | |
Utility plant: | | |
Regulated operations plant: | | Regulated operations plant: | |
Gas plant | Gas plant | | $ | 8,742,806 | | | $ | 8,384,000 | | Gas plant | | $ | 8,997,234 | | | $ | 8,901,575 | |
Less: accumulated depreciation | Less: accumulated depreciation | | (2,499,488) | | | (2,419,348) | | Less: accumulated depreciation | | (2,572,184) | | | (2,538,508) | |
Construction work in progress | Construction work in progress | | 153,100 | | | 211,429 | | Construction work in progress | | 196,574 | | | 183,485 | |
Net utility plant | | 6,396,418 | | | 6,176,081 | | |
Other property and investments | | 149,926 | | | 143,611 | | |
Net regulated operations plant | | Net regulated operations plant | | 6,621,624 | | | 6,546,552 | |
Other property and investments, net | | Other property and investments, net | | 151,168 | | | 153,093 | |
Current assets: | Current assets: | | | | | Current assets: | | | | |
Cash and cash equivalents | Cash and cash equivalents | | 122,758 | | | 41,070 | | Cash and cash equivalents | | 475,876 | | | 38,691 | |
Accounts receivable, net of allowance | Accounts receivable, net of allowance | | 103,430 | | | 146,861 | | Accounts receivable, net of allowance | | 224,885 | | | 169,666 | |
Accrued utility revenue | Accrued utility revenue | | 39,700 | | | 82,400 | | Accrued utility revenue | | 52,000 | | | 84,900 | |
Income taxes receivable, net | Income taxes receivable, net | | 17,775 | | | 11,155 | | Income taxes receivable, net | | 5,351 | | | 7,826 | |
Deferred purchased gas costs | Deferred purchased gas costs | | 240,827 | | | 2,053 | | Deferred purchased gas costs | | 367,954 | | | 291,145 | |
Receivable from parent | | Receivable from parent | | 271 | | | 1,031 | |
Prepaid and other current assets | Prepaid and other current assets | | 170,470 | | | 152,748 | | Prepaid and other current assets | | 180,640 | | | 242,243 | |
Total current assets | Total current assets | | 694,960 | | | 436,287 | | Total current assets | | 1,306,977 | | | 835,502 | |
Noncurrent assets: | Noncurrent assets: | | | | | Noncurrent assets: | | | | |
Goodwill | Goodwill | | 10,095 | | | 10,095 | | Goodwill | | 10,095 | | | 10,095 | |
Deferred charges and other assets | Deferred charges and other assets | | 461,212 | | | 490,562 | | Deferred charges and other assets | | 394,454 | | | 405,021 | |
Total noncurrent assets | Total noncurrent assets | | 471,307 | | | 500,657 | | Total noncurrent assets | | 404,549 | | | 415,116 | |
Total assets | Total assets | | $ | 7,712,611 | | | $ | 7,256,636 | | Total assets | | $ | 8,484,318 | | | $ | 7,950,263 | |
CAPITALIZATION AND LIABILITIES | CAPITALIZATION AND LIABILITIES | | | | | CAPITALIZATION AND LIABILITIES | | | | |
Capitalization: | Capitalization: | | Capitalization: | |
Common stock | Common stock | | $ | 49,112 | | | $ | 49,112 | | Common stock | | $ | 49,112 | | | $ | 49,112 | |
Additional paid-in capital | Additional paid-in capital | | 1,617,796 | | | 1,410,345 | | Additional paid-in capital | | 1,620,616 | | | 1,618,911 | |
Accumulated other comprehensive loss, net | Accumulated other comprehensive loss, net | | (55,759) | | | (61,135) | | Accumulated other comprehensive loss, net | | (45,371) | | | (46,913) | |
Retained earnings | Retained earnings | | 851,645 | | | 835,146 | | Retained earnings | | 987,177 | | | 906,827 | |
Total equity | Total equity | | 2,462,794 | | | 2,233,468 | | Total equity | | 2,611,534 | | | 2,527,937 | |
Long-term debt, less current maturities | Long-term debt, less current maturities | | 2,309,857 | | | 2,438,206 | | Long-term debt, less current maturities | | 2,903,556 | | | 2,440,603 | |
Total capitalization | Total capitalization | | 4,772,651 | | | 4,671,674 | | Total capitalization | | 5,515,090 | | | 4,968,540 | |
Current liabilities: | Current liabilities: | | | | | Current liabilities: | | | | |
Current maturities of long-term debt | Current maturities of long-term debt | | 275,000 | | | — | | Current maturities of long-term debt | | 250,000 | | | 275,000 | |
Short-term debt | Short-term debt | | 250,000 | | | 57,000 | | Short-term debt | | 250,000 | | | 250,000 | |
Accounts payable | Accounts payable | | 113,810 | | | 161,646 | | Accounts payable | | 148,486 | | | 234,070 | |
Customer deposits | Customer deposits | | 51,816 | | | 67,920 | | Customer deposits | | 53,094 | | | 56,127 | |
| Accrued general taxes | Accrued general taxes | | 60,656 | | | 48,640 | | Accrued general taxes | | 81,423 | | | 53,064 | |
Accrued interest | Accrued interest | | 34,938 | | | 20,495 | | Accrued interest | | 34,676 | | | 22,926 | |
Deferred purchased gas costs | | — | | | 54,636 | | |
Payable to parent | | 207 | | | 142 | | |
| Other current liabilities | Other current liabilities | | 155,490 | | | 146,046 | | Other current liabilities | | 169,781 | | | 146,422 | |
Total current liabilities | Total current liabilities | | 941,917 | | | 556,525 | | Total current liabilities | | 987,460 | | | 1,037,609 | |
Deferred income taxes and other credits: | Deferred income taxes and other credits: | | | | | Deferred income taxes and other credits: | | | | |
Deferred income taxes and investment tax credits, net | Deferred income taxes and investment tax credits, net | | 618,597 | | | 581,100 | | Deferred income taxes and investment tax credits, net | | 673,874 | | | 638,828 | |
Accumulated removal costs | Accumulated removal costs | | 419,000 | | | 404,000 | | Accumulated removal costs | | 432,000 | | | 424,000 | |
Other deferred credits and other long-term liabilities | Other deferred credits and other long-term liabilities | | 960,446 | | | 1,043,337 | | Other deferred credits and other long-term liabilities | | 875,894 | | | 881,286 | |
Total deferred income taxes and other credits | Total deferred income taxes and other credits | | 1,998,043 | | | 2,028,437 | | Total deferred income taxes and other credits | | 1,981,768 | | | 1,944,114 | |
Total capitalization and liabilities | Total capitalization and liabilities | | $ | 7,712,611 | | | $ | 7,256,636 | | Total capitalization and liabilities | | $ | 8,484,318 | | | $ | 7,950,263 | |
The accompanying notes are an integral part of these statements.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands of dollars)
(Unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Twelve Months Ended September 30, | | | Three Months Ended March 31, | | Twelve Months Ended March 31, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | | | 2022 | | 2021 | | 2022 | | 2021 |
Gas operating revenues | | $ | 255,848 | | | $ | 210,834 | | | $ | 1,070,576 | | | $ | 976,095 | | | $ | 1,445,066 | | | $ | 1,355,666 | | |
Regulated operations revenues | | Regulated operations revenues | | | $ | 676,539 | | | $ | 521,932 | | | $ | 1,676,397 | | | $ | 1,369,690 | |
Operating expenses: | Operating expenses: | | | | | | | | | | | | | Operating expenses: | | | | | | | | | |
Net cost of gas sold | Net cost of gas sold | | 63,710 | | | 36,321 | | | 296,227 | | | 264,615 | | | 374,449 | | | 356,925 | | Net cost of gas sold | | | 297,121 | | | 156,021 | | | 572,007 | | | 338,037 | |
Operations and maintenance | Operations and maintenance | | 119,708 | | | 101,159 | | | 328,980 | | | 303,567 | | | 431,795 | | | 406,169 | | Operations and maintenance | | | 119,636 | | | 106,135 | | | 452,051 | | | 409,429 | |
Depreciation and amortization | Depreciation and amortization | | 61,359 | | | 55,942 | | | 187,688 | | | 173,865 | | | 249,118 | | | 230,158 | | Depreciation and amortization | | | 72,114 | | | 68,698 | | | 256,814 | | | 239,268 | |
Taxes other than income taxes | Taxes other than income taxes | | 20,109 | | | 15,787 | | | 60,134 | | | 47,507 | | | 76,087 | | | 63,195 | | Taxes other than income taxes | | | 21,652 | | | 20,687 | | | 81,308 | | | 67,769 | |
Total operating expenses | Total operating expenses | | 264,886 | | | 209,209 | | | 873,029 | | | 789,554 | | | 1,131,449 | | | 1,056,447 | | Total operating expenses | | | 510,523 | | | 351,541 | | | 1,362,180 | | | 1,054,503 | |
Operating income (loss) | | (9,038) | | | 1,625 | | | 197,547 | | | 186,541 | | | 313,617 | | | 299,219 | | |
Operating income | | Operating income | | | 166,016 | | | 170,391 | | | 314,217 | | | 315,187 | |
Other income and (expenses): | Other income and (expenses): | | | | | | | | | | | | | Other income and (expenses): | | | | | | | | | |
Net interest deductions | Net interest deductions | | (24,922) | | | (26,103) | | | (71,263) | | | (75,152) | | | (97,259) | | | (100,115) | | Net interest deductions | | | (26,610) | | | (22,166) | | | (102,004) | | | (98,256) | |
Other income (deductions) | Other income (deductions) | | (4,287) | | | 1,751 | | | (4,902) | | | (10,947) | | | (545) | | | (7,615) | | Other income (deductions) | | | 1,315 | | | 550 | | | (3,794) | | | 14,496 | |
Total other income and (expenses) | Total other income and (expenses) | | (29,209) | | | (24,352) | | | (76,165) | | | (86,099) | | | (97,804) | | | (107,730) | | Total other income and (expenses) | | | (25,295) | | | (21,616) | | | (105,798) | | | (83,760) | |
Income (loss) before income taxes | | (38,247) | | | (22,727) | | | 121,382 | | | 100,442 | | | 215,813 | | | 191,489 | | |
Income tax expense (benefit) | | (10,703) | | | (6,754) | | | 18,798 | | | 20,874 | | | 33,679 | | | 35,496 | | |
Net income (loss) | | $ | (27,544) | | | $ | (15,973) | | | $ | 102,584 | | | $ | 79,568 | | | $ | 182,134 | | | $ | 155,993 | | |
Income before income taxes | | Income before income taxes | | | 140,721 | | | 148,775 | | | 208,419 | | | 231,427 | |
Income tax expense | | Income tax expense | | | 28,926 | | | 30,060 | | | 28,204 | | | 37,193 | |
Net income | | Net income | | | $ | 111,795 | | | $ | 118,715 | | | $ | 180,215 | | | $ | 194,234 | |
The accompanying notes are an integral part of these statements.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Thousands of dollars)
(Unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Twelve Months Ended September 30, | | | Three Months Ended March 31, | | Twelve Months Ended March 31, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | | | 2022 | | 2021 | | 2022 | | 2021 |
Net income (loss) | | $ | (27,544) | | | $ | (15,973) | | | $ | 102,584 | | | $ | 79,568 | | | $ | 182,134 | | | $ | 155,993 | | |
Net income | | Net income | | | $ | 111,795 | | | $ | 118,715 | | | $ | 180,215 | | | $ | 194,234 | |
Other comprehensive income (loss), net of tax | Other comprehensive income (loss), net of tax | | | | | | | | | | | | | Other comprehensive income (loss), net of tax | | | | | | | | | |
Defined benefit pension plans: | Defined benefit pension plans: | | Defined benefit pension plans: | | | |
Net actuarial loss | | — | | | — | | | — | | | — | | | (43,730) | | | (54,026) | | |
Net actuarial gain (loss) | | Net actuarial gain (loss) | | | — | | | — | | | 44,974 | | | (43,730) | |
Amortization of prior service cost | Amortization of prior service cost | | 183 | | | 220 | | | 547 | | | 659 | | | 766 | | | 901 | | Amortization of prior service cost | | | 33 | | | 182 | | | 580 | | | 840 | |
Prior service cost | | — | | | — | | | — | | | — | | | — | | | (1,426) | | |
| Amortization of net actuarial loss | Amortization of net actuarial loss | | 8,474 | | | 7,187 | | | 25,420 | | | 21,563 | | | 32,608 | | | 26,004 | | Amortization of net actuarial loss | | | 6,616 | | | 8,474 | | | 32,036 | | | 30,037 | |
Regulatory adjustment | Regulatory adjustment | | (7,277) | | | (6,380) | | | (21,831) | | | (19,140) | | | 2,959 | | | 21,130 | | Regulatory adjustment | | | (5,523) | | | (7,277) | | | (65,273) | | | 4,753 | |
Net defined benefit pension plans | Net defined benefit pension plans | | 1,380 | | | 1,027 | | | 4,136 | | | 3,082 | | | (7,397) | | | (7,417) | | Net defined benefit pension plans | | | 1,126 | | | 1,379 | | | 12,317 | | | (8,100) | |
Forward-starting interest rate swaps (“FSIRS”): | Forward-starting interest rate swaps (“FSIRS”): | | | | | | | | | | | | | Forward-starting interest rate swaps (“FSIRS”): | | | | | | | | | |
Amounts reclassified into net income (loss) | | 413 | | | 783 | | | 1,240 | | | 2,054 | | | 1,653 | | | 2,689 | | |
Amounts reclassified into net income | | Amounts reclassified into net income | | | 416 | | | 413 | | | 1,655 | | | 2,244 | |
Net forward-starting interest rate swaps | Net forward-starting interest rate swaps | | 413 | | | 783 | | | 1,240 | | | 2,054 | | | 1,653 | | | 2,689 | | Net forward-starting interest rate swaps | | | 416 | | | 413 | | | 1,655 | | | 2,244 | |
Total other comprehensive income (loss), net of tax | Total other comprehensive income (loss), net of tax | | 1,793 | | | 1,810 | | | 5,376 | | | 5,136 | | | (5,744) | | | (4,728) | | Total other comprehensive income (loss), net of tax | | | 1,542 | | | 1,792 | | | 13,972 | | | (5,856) | |
Comprehensive income (loss) | | $ | (25,751) | | | $ | (14,163) | | | $ | 107,960 | | | $ | 84,704 | | | $ | 176,390 | | | $ | 151,265 | | |
Comprehensive income | | Comprehensive income | | | $ | 113,337 | | | $ | 120,507 | | | $ | 194,187 | | | $ | 188,378 | |
The accompanying notes are an integral part of these statements.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
| | | Nine Months Ended September 30, | | Twelve Months Ended September 30, | | Three Months Ended March 31, | | Twelve Months Ended March 31, |
| | | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2022 | | 2021 |
CASH FLOW FROM OPERATING ACTIVITIES: | CASH FLOW FROM OPERATING ACTIVITIES: | | | | | | | | | CASH FLOW FROM OPERATING ACTIVITIES: | | | | | | | | |
Net income | Net income | | $ | 102,584 | | | $ | 79,568 | | | $ | 182,134 | | | $ | 155,993 | | Net income | | $ | 111,795 | | | $ | 118,715 | | | $ | 180,215 | | | $ | 194,234 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |
Depreciation and amortization | Depreciation and amortization | | 187,688 | | | 173,865 | | | 249,118 | | | 230,158 | | Depreciation and amortization | | 72,114 | | | 68,698 | | | 256,814 | | | 239,268 | |
Deferred income taxes | Deferred income taxes | | 35,800 | | | 25,633 | | | 55,164 | | | 23,415 | | Deferred income taxes | | 34,560 | | | 14,952 | | | 72,845 | | | 52,242 | |
Changes in current assets and liabilities: | Changes in current assets and liabilities: | | Changes in current assets and liabilities: | |
Accounts receivable, net of allowance | Accounts receivable, net of allowance | | 43,430 | | | 70,129 | | | (22,766) | | | (7,135) | | Accounts receivable, net of allowance | | (55,219) | | | (27,631) | | | (50,394) | | | (25,673) | |
Accrued utility revenue | Accrued utility revenue | | 42,700 | | | 42,600 | | | (3,200) | | | (700) | | Accrued utility revenue | | 32,900 | | | 31,900 | | | (1,500) | | | (2,400) | |
Deferred purchased gas costs | Deferred purchased gas costs | | (293,410) | | | 59,899 | | | (317,070) | | | 38,016 | | Deferred purchased gas costs | | (76,809) | | | (291,469) | | | (129,068) | | | (265,385) | |
Accounts payable | Accounts payable | | (42,536) | | | (50,314) | | | 17,396 | | | (476) | | Accounts payable | | (67,584) | | | (33,076) | | | 23,256 | | | 18,441 | |
Accrued taxes | Accrued taxes | | 5,396 | | | 15,914 | | | (12,045) | | | 29,228 | | Accrued taxes | | 30,835 | | | 41,851 | | | (3,263) | | | (13,011) | |
Other current assets and liabilities | Other current assets and liabilities | | 18,608 | | | 74,892 | | | (7,739) | | | 76,194 | | Other current assets and liabilities | | 90,558 | | | 41,018 | | | (20,731) | | | (9,694) | |
Gain on sale of property | | Gain on sale of property | | (1,503) | | | — | | | (1,503) | | | — | |
Changes in undistributed stock compensation | Changes in undistributed stock compensation | | 5,437 | | | 4,492 | | | 6,239 | | | 4,928 | | Changes in undistributed stock compensation | | 3,239 | | | 2,908 | | | 6,723 | | | 5,706 | |
Equity AFUDC | Equity AFUDC | | — | | | (3,413) | | | (1,311) | | | (4,395) | | Equity AFUDC | | (76) | | | (981) | | | 905 | | | (4,644) | |
Changes in deferred charges and other assets | Changes in deferred charges and other assets | | (18,726) | | | (27,688) | | | (35,329) | | | (38,357) | | Changes in deferred charges and other assets | | (6,439) | | | (13,535) | | | (21,647) | | | (61,484) | |
Changes in other liabilities and deferred credits | Changes in other liabilities and deferred credits | | (55,905) | | | (52,532) | | | (68,509) | | | (55,536) | | Changes in other liabilities and deferred credits | | (4,033) | | | (48,782) | | | (27,637) | | | (58,008) | |
Net cash provided by operating activities | | 31,066 | | | 413,045 | | | 42,082 | | | 451,333 | | |
Net cash provided by (used in) operating activities | | Net cash provided by (used in) operating activities | | 164,338 | | | (95,432) | | | 285,015 | | | 69,592 | |
CASH FLOW FROM INVESTING ACTIVITIES: | CASH FLOW FROM INVESTING ACTIVITIES: | | | | | | | | | CASH FLOW FROM INVESTING ACTIVITIES: | | | | | | | | |
Construction expenditures and property additions | Construction expenditures and property additions | | (415,398) | | | (525,221) | | | (582,393) | | | (716,564) | | Construction expenditures and property additions | | (141,123) | | | (128,544) | | | (614,562) | | | (647,407) | |
Changes in customer advances | Changes in customer advances | | 7,940 | | | 7,691 | | | 14,282 | | | 11,643 | | Changes in customer advances | | 7,693 | | | 4,285 | | | 19,381 | | | 12,885 | |
Other | Other | | 65 | | | 183 | | | 653 | | | 139 | | Other | | (918) | | | (121) | | | (829) | | | 681 | |
| Net cash used in investing activities | Net cash used in investing activities | | (407,393) | | | (517,347) | | | (567,458) | | | (704,782) | | Net cash used in investing activities | | (134,348) | | | (124,380) | | | (596,010) | | | (633,841) | |
CASH FLOW FROM FINANCING ACTIVITIES: | CASH FLOW FROM FINANCING ACTIVITIES: | | | | | | | | | CASH FLOW FROM FINANCING ACTIVITIES: | | | | | | | | |
Contributions from parent | Contributions from parent | | 202,583 | | | 131,961 | | | 248,544 | | | 165,711 | | Contributions from parent | | — | | | 45,984 | | | 156,599 | | | 173,906 | |
Dividends paid | Dividends paid | | (82,000) | | | (77,500) | | | (109,000) | | | (102,400) | | Dividends paid | | (29,200) | | | (26,000) | | | (114,600) | | | (105,300) | |
Issuance of long-term debt, net | Issuance of long-term debt, net | | 297,318 | | | 446,508 | | | 297,318 | | | 446,508 | | Issuance of long-term debt, net | | 593,862 | | | — | | | 891,180 | | | 446,508 | |
Retirement of long-term debt | Retirement of long-term debt | | — | | | (125,000) | | | — | | | (125,000) | | Retirement of long-term debt | | (25,000) | | | — | | | (25,000) | | | (125,000) | |
Change in credit facility and commercial paper | Change in credit facility and commercial paper | | (150,000) | | | (92,000) | | | (58,000) | | | (92,000) | | Change in credit facility and commercial paper | | (130,000) | | | — | | | (150,000) | | | — | |
Change in short-term debt | Change in short-term debt | | 193,000 | | | (194,000) | | | 250,000 | | | (30,000) | | Change in short-term debt | | — | | | 210,000 | | | (17,000) | | | 170,000 | |
Withholding remittance - share-based compensation | Withholding remittance - share-based compensation | | (1,254) | | | (2,736) | | | (1,254) | | | (2,737) | | Withholding remittance - share-based compensation | | (1,978) | | | (1,242) | | | (1,999) | | | (1,242) | |
Other | Other | | (1,632) | | | (1,186) | | | (1,708) | | | (1,210) | | Other | | (489) | | | (205) | | | (2,104) | | | (1,352) | |
Net cash provided by financing activities | Net cash provided by financing activities | | 458,015 | | | 86,047 | | | 625,900 | | | 258,872 | | Net cash provided by financing activities | | 407,195 | | | 228,537 | | | 737,076 | | | 557,520 | |
| Change in cash and cash equivalents | Change in cash and cash equivalents | | 81,688 | | | (18,255) | | | 100,524 | | | 5,423 | | Change in cash and cash equivalents | | 437,185 | | | 8,725 | | | 426,081 | | | (6,729) | |
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | | 41,070 | | | 40,489 | | | 22,234 | | | 16,811 | | Cash and cash equivalents at beginning of period | | 38,691 | | | 41,070 | | | 49,795 | | | 56,524 | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | | $ | 122,758 | | | $ | 22,234 | | | $ | 122,758 | | | $ | 22,234 | | Cash and cash equivalents at end of period | | $ | 475,876 | | | $ | 49,795 | | | $ | 475,876 | | | $ | 49,795 | |
SUPPLEMENTAL INFORMATION: | SUPPLEMENTAL INFORMATION: | | | | | | | | | SUPPLEMENTAL INFORMATION: | | | | | | | | |
Interest paid, net of amounts capitalized | Interest paid, net of amounts capitalized | | $ | 53,220 | | | $ | 57,168 | | | $ | 92,778 | | | $ | 94,106 | | Interest paid, net of amounts capitalized | | $ | 15,757 | | | $ | 6,952 | | | $ | 99,045 | | | $ | 93,474 | |
Income taxes paid (received), net | Income taxes paid (received), net | | $ | — | | | $ | (22,962) | | | $ | 3,359 | | | $ | (22,262) | | Income taxes paid (received), net | | $ | — | | | $ | — | | | $ | (13,529) | | | $ | 3,359 | |
The accompanying notes are an integral part of these statements.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
(Unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | |
Common stock shares | Common stock shares | | | | | | | | | Common stock shares | | | | | |
| | Beginning and ending balances | | 47,482 | | | 47,482 | | | 47,482 | | | 47,482 | | | Beginning and ending balances | | 47,482 | | | 47,482 | | |
Common stock amount | Common stock amount | | | | | | | | | Common stock amount | | | | | |
| | Beginning and ending balances | | $ | 49,112 | | | $ | 49,112 | | | $ | 49,112 | | | $ | 49,112 | | | Beginning and ending balances | | $ | 49,112 | | | $ | 49,112 | | |
Additional paid-in capital | Additional paid-in capital | | | | | | | | | Additional paid-in capital | | | | | |
| | Beginning balances | | 1,529,419 | | | 1,329,843 | | | 1,410,345 | | | 1,229,083 | | | Beginning balances | | 1,618,911 | | | 1,410,345 | | |
| | Share-based compensation | | 1,435 | | | 1,137 | | | 4,868 | | | 2,397 | | | Share-based compensation | | 1,705 | | | 2,015 | | |
| | Contributions from Southwest Gas Holdings, Inc. | | 86,942 | | | 32,461 | | | 202,583 | | | 131,961 | | | Contributions from Southwest Gas Holdings, Inc. | | — | | | 45,984 | | |
| | Ending balances | | 1,617,796 | | | 1,363,441 | | | 1,617,796 | | | 1,363,441 | | | Ending balances | | 1,620,616 | | | 1,458,344 | | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | | | | | | | | | Accumulated other comprehensive loss | | | | | |
| | Beginning balances | | (57,552) | | | (51,825) | | | (61,135) | | | (55,151) | | | Beginning balances | | (46,913) | | | (61,135) | | |
| | Net actuarial gain arising during period, less amortization of unamortized benefit plan cost, net of tax | | 1,380 | | | 1,027 | | | 4,136 | | | 3,082 | | | Net actuarial gain arising during period, less amortization of unamortized benefit plan cost, net of tax | | 1,126 | | | 1,379 | | |
| | FSIRS amounts reclassified to net income, net of tax | | 413 | | | 783 | | | 1,240 | | | 2,054 | | | FSIRS amounts reclassified to net income, net of tax | | 416 | | | 413 | | |
| | Ending balances | | (55,759) | | | (50,015) | | | (55,759) | | | (50,015) | | | Ending balances | | (45,371) | | | (59,343) | | |
Retained earnings | Retained earnings | | | | | | | | | Retained earnings | | | | | |
| | Beginning balances | | 908,757 | | | 824,847 | | | 835,146 | | | 782,108 | | | Beginning balances | | 906,827 | | | 835,146 | | |
| | Net income (loss) | | (27,544) | | | (15,973) | | | 102,584 | | | 79,568 | | | Net income | | 111,795 | | | 118,715 | | |
| | Share-based compensation | | (168) | | | (139) | | | (685) | | | (641) | | | Share-based compensation | | (445) | | | (350) | | |
| | Dividends declared to Southwest Gas Holdings, Inc. | | (29,400) | | | (27,000) | | | (85,400) | | | (79,300) | | | Dividends declared to Southwest Gas Holdings, Inc. | | (31,000) | | | (27,500) | | |
| | Ending balances | | 851,645 | | | 781,735 | | | 851,645 | | | 781,735 | | | Ending balances | | 987,177 | | | 926,011 | | |
Total Southwest Gas Corporation equity ending balances | Total Southwest Gas Corporation equity ending balances | | $ | 2,462,794 | | | $ | 2,144,273 | | | $ | 2,462,794 | | | $ | 2,144,273 | | Total Southwest Gas Corporation equity ending balances | | $ | 2,611,534 | | | $ | 2,374,124 | | |
The accompanying notes are an integral part of these statements.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
Note 1 – Background, Organization, and Summary of Significant Accounting Policies
Nature of Operations. Southwest Gas Holdings, Inc. (together with its subsidiaries, the “Company”) is a holding company, owning all of the shares of common stock of Southwest Gas Corporation (“Southwest” or the “natural gas operations”distribution” segment) and, all of the shares of common stock of Centuri Group, Inc. (“Centuri,” or the “utility infrastructure services” segment), and all of the shares of common stock of MountainWest Pipelines Holding Company (“MountainWest,” or the “pipeline and storage” segment).
In October 2021, Southwest Gas Holdings, Inc. (the “Company”) entered into an agreement with Dominion Energy Questar Corporation, a wholly owned subsidiaryThe Company completed the acquisition of Dominion Energy, Inc., to acquire all equity interests in Dominion Energy Questar Pipeline, LLC and related entities (“Questar Pipelines”). Upon closing, in December 2021. Following the completion of the acquisition, the Company formed MountainWest which owns all of the membership interests in Questar Pipelines. In April 2022, the Company completed a general rebranding of the Questar Pipelines will operate as part of a standalone subsidiary of the Company, and will undergo new branding at or subsequent to close. The agreement provides for consideration of $1.545 billion in cash (subject to certain adjustments) and assumption of approximately $430 million of existing long-term debt. The agreement contains certain termination rights, including a mutual termination right exercisable at any time and a unilateral termination right exercisable by either party if certain conditions have not been met by December 31, 2021 (the initial termination date), subject to an extension unilaterally exercisable by either party if certain conditions have not been met, subsequently extending the initial termination date through June 30, 2022. The completion of this transaction is subject to closing conditions, including the expiration or termination of any waiting periodentities under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and approval of certain aspects of the transaction by the Federal Communications Commission.MountainWest name. The operations to be acquired wouldoperations further diversify the Company’s business in the midstream sector, with an expansion of regulated interstate natural gas pipelines and underground storage services, as partprimarily composed of regulated operations under the jurisdiction of the Federal Energy Regulatory Commission (the “FERC”), thereby expanding natural gas transportation services into Utah, Wyoming, and Colorado. The Company plans to initially fund this acquisition with a new 364-day term loan, followed by permanent financing. See Note 5 – Debt8 - Business Acquisitions for more information.
Southwest is engaged in the business of purchasing, distributing, and transporting natural gas for customers in portions of Arizona, Nevada, and California. Public utility rates, practices, facilities, and service territories of Southwest are subject to regulatory oversight. The timing and amount of rate relief can materially impact results of operations. Natural gas purchases and the timing of related recoveries can materially impact liquidity. Results for the natural gas operationsdistribution segment are higher during winter periods due to the seasonality incorporated in its regulatory rate structures.
Centuri is a comprehensivestrategic utility infrastructure services enterprisecompany dedicated to delivering a diverse array of solutions topartnering with North America’s gas and electric providers.providers to build and maintain the energy network that powers millions of homes across the United States (“U.S.”) and Canada. Centuri derives revenue primarily from installation, replacement, repair, and maintenance of energy distribution systems.networks. Centuri operations are generally conducted underoperates in the business names ofU.S., primarily as NPL, Construction Co. (“NPL”), NPL Canada Ltd. (“NPL Canada”), New England Utility Constructors, Inc. (“Neuco”),Neuco, Linetec, Services, LLC (“Linetec”), and Riggs Distler, & Company, Inc. (“Riggs Distler”).and in Canada, primarily as NPL Canada. Utility infrastructure services activity is seasonal in mostmany of Centuri’s operating areas. Peak periods are the summer and fall months in colder climate areas, such as the northeastern and midwestern United States (“U.S.”) and in Canada. In warmer climate areas, such as the southwestern and southeastern U.S., utility infrastructure services activity continues year round.
Centuri completed the acquisition of Drum Parent Inc.LLC (“Drum”), including Drum’s most significant operating subsidiary, Riggs Distler, in August 2021, thereby expanding Centuri’s electric infrastructure services footprint in the Northeastnortheast and Mid-Atlanticmid-Atlantic regions of the U.S. See Note 8 - Business Acquisitions for more information.
In March 2022, the Company announced that its Board of Directors (the “Board”) had determined to separate Centuri from the Company and authorized management to complete the separation within nine to twelve months. Management evaluated various alternatives to determine the optimal structure to maximize stockholder value and announced the separation structure was expected to be a tax-free spin-off in which stockholders of the Company would receive a prorated dividend of Centuri shares in association with the completion. Then, in April 2022, as a result of interest in the Company well in excess of a tender offer by an activist stockholder (Carl Icahn) to other stockholders, the Board authorized the review of a full range of strategic alternatives to maximize stockholder value. As part of this process, a strategic transactions committee of the Board (the “Strategic Transactions Committee”), consisting entirely of independent directors, will evaluate a sale of the Company, as well as a range of alternatives, including, but not limited to, a separate sale of its business units and/or pursuing the spin-off of Centuri.
Basis of Presentation. The condensed consolidated financial statements of Southwest Gas Holdings, Inc. and subsidiaries and Southwest included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The year-end condensed balance sheet data was derived from audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. No substantive change has occurred with regard to the Company’s business segments on the whole.
The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments, consisting of normal recurring items and estimates necessary for a fair depiction of results for the interim periods, have been made. In association with the novel Coronavirus (“COVID-19”) pandemic environment, utility operations, and to a large extent, utility infrastructure services, were deemed “essential services.” Management has considered the impact of the pandemic and adjusted certain estimates, where relevant, in the preparation of the condensed consolidated financial statements.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the 20202021 Annual Report to Stockholders, which is incorporated by reference into the 20202021 Form 10-K.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
Fair Value Measurements. Certain assets and liabilities are reported at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
U.S. GAAP states that a fair value measurement should be based on the assumptions that market participants would use in pricing the asset or liability and establishes a fair value hierarchy that ranks the inputs used to measure fair value by their reliability. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to fair values derived from unobservable inputs (Level 3 measurements). Financial assets and liabilities are categorized in their entirety based on the lowest level of input that is significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:
Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities that a company has the ability to access at the measurement date.
Level 2 – inputs other than quoted prices included within Level 1 that are observable for similar assets or liabilities, either directly or indirectly.
Level 3 – unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
The Company primarily used quoted market prices and other observable market pricing information in valuing cash and cash equivalents, long-term debt outstanding, and assets of the qualified pension plan and postretirement benefit plans required to be recorded and/or disclosed at fair value.
Other0Other Property and Investments. Other property and investments on Southwest’s and the Company’s Condensed Consolidated Balance Sheets includes:
| (Thousands of dollars) | (Thousands of dollars) | September 30, 2021 | | December 31, 2020 | (Thousands of dollars) | March 31, 2022 | | December 31, 2021 |
Southwest Gas Corporation: | | | | |
Net cash surrender value of COLI policies | Net cash surrender value of COLI policies | $ | 147,187 | | | $ | 140,874 | | Net cash surrender value of COLI policies | $ | 147,987 | | | $ | 149,947 | |
Other property | Other property | 2,739 | | | 2,737 | | Other property | 3,181 | | | 3,146 | |
Total Southwest Gas Corporation | Total Southwest Gas Corporation | 149,926 | | | 143,611 | | Total Southwest Gas Corporation | 151,168 | | | 153,093 | |
Centuri property, equipment, and intangibles | 1,592,461 | | | 1,089,414 | | |
Centuri accumulated provision for depreciation and amortization | (468,206) | | | (422,741) | | |
Non-regulated property, equipment, and intangibles | | Non-regulated property, equipment, and intangibles | 1,645,159 | | | 1,616,392 | |
Non-regulated accumulated provision for depreciation and amortization | | Non-regulated accumulated provision for depreciation and amortization | (540,206) | | | (512,343) | |
Other property and investments | Other property and investments | 31,153 | | | 23,961 | | Other property and investments | 57,170 | | | 59,337 | |
Total Southwest Gas Holdings, Inc. | Total Southwest Gas Holdings, Inc. | $ | 1,305,334 | | | $ | 834,245 | | Total Southwest Gas Holdings, Inc. | $ | 1,313,291 | | | $ | 1,316,479 | |
Included in the table above are the net cash surrender values of company-owned life insurance (“COLI”) policies. These life insurance policies on members of management and other key employees are used by Southwest to indemnify itself against the loss of talent, expertise, and knowledge, as well as to provide indirect funding for certain nonqualified benefit plans. Balances reflect impactsThe term non-regulated in regard to assets and related balances in the table above is in reference to the non-rate regulated operations of equityCenturi, and fixed-income securities underlying the cash surrender values at each reporting date; however, ultimately, only the insurance proceeds are ever actually received, due to management’s intent to hold the policies to maturity.a more limited extent, certain assets of MountainWest.
Cash and Cash Equivalents. For purposes of reporting consolidated cash flows, cashCash and cash equivalents include cash on hand and financial instruments with original maturities of three months or less. Such investments are carried at cost, which approximates market value. Cash and cash equivalents of the Company include $55 million of money market fund investments totaling approximately $169 million and $231 million, for Southwest and the Company, respectively, at September 30, 2021,March 31, 2022, and an insignificant amount at$20 million for the Company as of December 31, 2020.2021. The money market fund investmentsbalance for Southwest were insignificant at both balance sheet dates.as of December 31, 2021 was insignificant. These investments fall within Level 2 of the fair value hierarchy, due to the asset valuation methods used by money market funds. The Company had $7 million in restricted cash included in Cash and cash equivalents at March 31, 2022, related to residual proceeds received from its March 2022 common stock offering to be applied against its 364-day Term Loan Facility, which occurred in April 2022. The restricted cash balance is included in Cash and cash equivalents within the Company’s Condensed Consolidated Statement of Cash Flows as of March 31, 2022.
Typical non-cashNon-cash investing activities for the Company and Southwest include customer advances applied as contributions toward utility construction activity, and capital expenditures that were not yet paid as of period-end reporting dates, but rather were included in accounts payable. Typical activities that represent aspects of both non-cash investingtotaling approximately $26.1 million at March 31, 2022, and non-cash financing activities relate to right-of-use assets obtained in exchange for lease liabilities (including,$19.4 million at times, lease terminations and modifications). Amounts related to these collective activities were immaterial for the periods presented herein. See also Prepaid and other current assets below.
Intercompany Transactions. Centuri recognizes revenues generated from contracts with Southwest (see Note 7 – Segment Information). The accounts receivable balance, revenues, and associated profits are included in the condensed consolidated financial statements of the Company and Southwest and were not eliminated during consolidation in accordance with accounting treatment for rate-regulated entities.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021 |
December 31, 2021.Accounts Receivable, net of allowances. Business activity with respect to natural gas utility operations is conducted with customers located within the 3-state region of Arizona, Nevada, and California. Southwest’s accounts receivable are short-term in nature with no billing due dates customarily extending beyond one month, with customers’ credit worthiness assessed upon account creation by evaluation of other utility service and related payment history. Southwest lifted the moratorium on disconnection of natural gas service for non-payment in Arizona and Nevada in September 2021, which was initiated (at the same time as a moratorium on late fees) in March 2020 in response to the COVID-19 pandemic. The moratorium on disconnection continues to be in place for California and is expected to be liftedended in the fourth quarter ofNovember 2021. Southwest recommenced assessing late fees on past-due balances in Arizona and Nevada in April 2021, and expects to recommence late fees in California in the fourth quarter ofAugust 2021. Southwest iscontinues to actively workingwork with customers experiencing financial hardship by means of flexible payment options. Management continues to monitor expected credit lossesoptions, partnering with assistance agencies and participating in light of the impact of COVID-19. The allowance for uncollectible accounts receivable balances as of state-funded arrearage payment assistance programs.September 30, 2021 reflects the expected impact from the pandemic on balances as of that date, including consideration of customers’ ability to pay those amounts that are due.
Utility infrastructure services contracts receivable are recorded at face amounts less an allowance for doubtful accounts. Centuri’s customers are generally investment-grade gas and electric utility companies for which Centuri has historically recognized an insignificant amount of write-offs. Centuri has not been significantly impacted, nor does it anticipate it will experience significant difficulty in collecting amounts due, as a result of the current environment surrounding COVID-19 given the nature of its customers.
Activity between periods in the allowance for uncollectible accounts and the balances as of the periods presented within the Company’s and Southwest’s financial statements were not material to the condensed consolidated financial statements overall.
Deferred Purchased Gas CostsCosts. . The various regulatory commissions have established procedures to enable Southwestthe rate-regulated companies to adjust its billing rates for changes in the cost of natural gas purchased. The difference between the current cost of gas purchased and the cost of gas recovered in billed rates is deferred. Generally, these deferred amounts are recovered or refunded within one year.
In mid-February 2021, the central U.S. (from south Texas to North Dakota and the eastern Rocky Mountains) experienced extreme cold temperatures, which increased natural gas demand and caused supply issues due to wellhead freeze-offs, power outages, or other adverse operating conditions upstream of Southwest’s distribution systems. These conditions caused daily natural gas prices to reach unprecedented levels. During this time, Southwest secured natural gas supplies, albeit at substantially higher prices, maintaining service to its customers. The incremental cost for these supplies was approximately $250 million, funded using a 364-day364-day $250 million term loan executed in March 2021. The incremental gas costs were included, for collection from customers, as part of the purchased gas adjustment (“PGA”) mechanisms. The term loan was amended in March 2022 to extend the maturity date to March 2023 due to gas prices that, while not at levels incurred during the 2021 freeze, continue to be elevated (see Note 5 – Debt). The incremental gas costs are expected to continue to be collected from customers through the purchased gas adjustment (“PGA”) mechanisms.
Following the extreme weather event, an interstate transmission pipeline company billed Southwest, in addition to customary transmission costs, $65 million (later reduced to approximately $55 million) for pipeline imbalance charges, allegedly incurred during the period of the pipeline’s critical operation condition. However, Southwest formally disputed the imbalance charges, in addition to interest on that amount, believing that no amounts were due to the pipeline. In June 2021, the interstate transmission pipeline company requested approval from the Federal Energy Regulatory Commission (the “FERC”) to waive these imbalance charges and interest, affirming that they had the authority to elect the option to waive the underlying charges based on their tariff, but were seeking approval by the FERC for purposes of transparency and regulatory certainty. In August 2021, FERC approval was received. Consequently, no amounts were recognized by Southwest related to the original charge from the pipeline.
Prepaid and other current assets. Prepaid and other current assets includes gas pipefor Southwest include, among other things, materials and operating supplies of $5560 million at September 30, 2021March 31, 2022 and $5062.9 million at December 31, 20202021 (carried at weighted average cost).
In the third quarter of 2021, For the Company, there were materials and operating supplies of $64.6 million and $67.4 million at March 31, 2022 and December 31, 2021, which included amounts for MountainWest. Also included in the balance for both Southwest classified certain assets associated with its previous corporate headquarters as held for sale. As a result,and the Company and Southwest reclassified approximately $was $52 million as of December 31, million from Net utility plant to Prepaid and other current assets on their respective Condensed Consolidated Balance Sheets during the third quarter2021 in accrued purchased gas cost, with no corresponding asset balance as of 2021; this was a non-cash item and therefore did not impact the Company’s or Southwest’s respective Condensed Consolidated Statements of Cash Flows.March 31, 2022 for either entity.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | March 31, 2022 |
Goodwill. Goodwill is assessed as of October 1st each year for impairment, or more frequently, if circumstances indicate an impairment to the carrying value of goodwill may have occurred. Management of the Company and Southwest considered its reporting units and segments, and determineddetermining that they remained consistent between periods presented below, and that no change was necessary with regard to the level at which goodwill is assessed for impairment. The acquisition of MountainWest resulted in a new reportable segment which is assessed for impairment beginning in 2022. Since December 31, 2020,2021, management also qualitatively assessed whether events during the first ninethree months of 20212022 may have resulted in conditions whereby the carrying value of goodwill was higher than its fair value, which if the case, could be an indication of a permanent
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021 |
impairment. Through this assessment, no such condition was believed to have existed and therefore, no impairment was deemed to have occurred. The Riggs Distler acquisitionGoodwill in August 2021 (see further discussion in Note 8 - Business Acquisitions) was deemed a stock purchase for tax purposes, and as a result, only pre-acquisition goodwill that was historically tax-deductible by Riggs Distler will continue to be deductible for tax purposes by the Company. Goodwill on Southwest’s and the Company’s Condensed Consolidated Balance Sheets includes:is as follows:
| | | | | | | | | | | | | | | | | | | | |
(Thousands of dollars) | | Natural Gas Operations | | Utility Infrastructure Services | | Total Company |
December 31, 2020 | | $ | 10,095 | | | $ | 335,089 | | | $ | 345,184 | |
Additional goodwill from Riggs Distler acquisition | | — | | | 446,794 | | | 446,794 | |
Foreign currency translation adjustment | | — | | | (76) | | | (76) | |
September 30, 2021 | | $ | 10,095 | | | $ | 781,807 | | | $ | 791,902 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Thousands of dollars) | | Natural Gas Distribution | | Utility Infrastructure Services | | Pipeline and Storage | | Total Company |
December 31, 2021 | | $ | 10,095 | | | $ | 785,058 | | | $ | 986,179 | | | $ | 1,781,332 | |
Measurement-period adjustments from Riggs Distler acquisition (a) | | — | | | (574) | | | — | | | (574) | |
Measurement-period adjustments from MountainWest acquisition (a) | | — | | | — | | | (8,690) | | | (8,690) | |
Foreign currency translation adjustment | | — | | | 1,603 | | | — | | | 1,603 | |
March 31, 2022 | | $ | 10,095 | | | $ | 786,087 | | | $ | 977,489 | | | $ | 1,773,671 | |
(a) See Note 8 - Business Acquisitions for details regarding measurement-period adjustments.
Other Current Liabilities. Management recognizes in its balance sheets various liabilities that are expected to be settled through future cash payment within the next twelve months, including amounts payable under regulatory mechanisms, customary accrued expenses for employee compensation and benefits, declared but unpaid dividends, and miscellaneous other accrued liabilities. Other current liabilities for the Company includesinclude $35.941.4 million and $32.6$36 million of dividends declared as of September 30, 2021March 31, 2022 and December 31, 2020, respectively, as well as liabilities included as part of the Riggs Distler acquisition.2021, respectively.
Other Income (Deductions). The following table provides the composition of significant items included in Other income (deductions) in Southwest’s and the Company’s Condensed Consolidated Statements of Income:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Twelve Months Ended September 30, | | Three Months Ended March 31, | | | Twelve Months Ended March 31, |
(Thousands of dollars) | (Thousands of dollars) | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | (Thousands of dollars) | 2022 | | 2021 | | | 2022 | | 2021 |
Southwest Gas Corporation - natural gas operations segment: | | | | | | | | | | | | |
Southwest Gas Corporation: | | Southwest Gas Corporation: | | | | | | | | |
Change in COLI policies | Change in COLI policies | $ | — | | | $ | 4,500 | | | $ | 5,800 | | | $ | 1,000 | | | $ | 14,000 | | | $ | 7,200 | | Change in COLI policies | $ | (2,000) | | | $ | 2,700 | | | | $ | 4,100 | | | $ | 27,400 | |
Interest income | Interest income | 1,365 | | | 1,412 | | | 3,312 | | | 3,214 | | | 4,113 | | | 4,630 | | Interest income | 2,801 | | | 716 | | | | 7,198 | | | 3,343 | |
Equity AFUDC | Equity AFUDC | — | | | 1,232 | | | — | | | 3,413 | | | 1,311 | | | 4,395 | | Equity AFUDC | 76 | | | 981 | | | | (905) | | | 4,644 | |
Other components of net periodic benefit cost | Other components of net periodic benefit cost | (3,506) | | | (5,005) | | | (10,516) | | | (15,016) | | | (15,522) | | | (18,780) | | Other components of net periodic benefit cost | (188) | | | (3,505) | | | | (10,704) | | | (18,522) | |
Miscellaneous income and (expense) | Miscellaneous income and (expense) | (2,146) | | | (388) | | | (3,498) | | | (3,558) | | | (4,447) | | | (5,060) | | Miscellaneous income and (expense) | 626 | | | (342) | | | | (3,483) | | | (2,369) | |
Southwest Gas Corporation - total other income (deductions) | Southwest Gas Corporation - total other income (deductions) | (4,287) | | | 1,751 | | | (4,902) | | | (10,947) | | | (545) | | | (7,615) | | Southwest Gas Corporation - total other income (deductions) | 1,315 | | | 550 | | | | (3,794) | | | 14,496 | |
Utility infrastructure services segment: | | | | | | | | | | | | |
Centuri, MountainWest, and Southwest Gas Holdings, Inc.: | | Centuri, MountainWest, and Southwest Gas Holdings, Inc.: | | | |
| Foreign transaction gain (loss) | Foreign transaction gain (loss) | (7) | | | — | | | (19) | | | (16) | | | (19) | | | (16) | | Foreign transaction gain (loss) | 3 | | | (3) | | | | (16) | | | (9) | |
Equity AFUDC | | Equity AFUDC | 182 | | | — | | | | 182 | | | — | |
Equity in earnings of unconsolidated investments | | Equity in earnings of unconsolidated investments | 515 | | | (8) | | | | 749 | | | 121 | |
Miscellaneous income and (expense) | Miscellaneous income and (expense) | 1,182 | | | 48 | | | 946 | | | (91) | | | 846 | | | (194) | | Miscellaneous income and (expense) | (771) | | | (91) | | | | 176 | | | (179) | |
Centuri - total other income (deductions) | 1,175 | | | 48 | | | 927 | | | (107) | | | 827 | | | (210) | | |
Corporate and administrative | — | | | — | | | — | | | 8 | | | — | | | 37 | | |
Consolidated Southwest Gas Holdings, Inc. - total other income (deductions) | $ | (3,112) | | | $ | 1,799 | | | $ | (3,975) | | | $ | (11,046) | | | $ | 282 | | | $ | (7,788) | | |
Southwest Gas Holdings, Inc. - total other income (deductions) | | Southwest Gas Holdings, Inc. - total other income (deductions) | $ | 1,244 | | | $ | 448 | | | | $ | (2,703) | | | $ | 14,429 | |
Included in the table above is the change in cash surrender values of COLI policies (including net death benefits recognized). Current tax regulations provide for tax-free treatment of life insurance (death benefit) proceeds. Therefore, changes in the cash surrender values of COLI policies, as they progress towards the ultimate death benefits, are also recorded without tax consequences. Refer also to the discussion of Other Property and Investments above and to Note 2 – Components of Net Periodic Benefit Cost.
Redeemable Noncontrolling Interest.Interests. In connection with the acquisition of Linetec in November 2018, the previous owner retained a 20% equity interest in Linetec,that entity, the reduction of which isbeing subject to certain rights based on the passage of time or upon the occurrence of certain triggering events.
Effective January 2022, the Company, through Centuri, had the right, but
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
not the obligation, to purchase at fair value (subject to a floor) a portion of the interest held by the previous owner, and in incremental amounts each year thereafter. In March 2022, the parties agreed to a partial redemption based on these provisions, and as a result, Centuri paid $39.6 million to the previous owner of Linetec for a 5.0% equity interest in Linetec, thereby reducing the balance continuing to be redeemable to 15% under the terms of the original agreement. In order to fund the redemption, Southwest Gas Holdings, Inc. contributed capital to Centuri.
Certain members of Riggs Distler management have a 1.42% interest in Drum, which is redeemable, subject to certain rights based on the passage of time or upon the occurrence of certain triggering events.
Significant changes in the value of the redeemable noncontrolling interest,interests, above a floor establisheddetermined at the acquisitionestablishment date, are recognized as they occur, and the carrying value is adjusted as necessary at each reporting date. The fair value is estimated using a market approach that utilizes certain financial metrics from guideline public companies of similar industry and operating characteristics. Based on the fair value model employed, the estimated redemption value of the Linetec redeemable noncontrolling interest decreased by approximately $22 million during the three months ended March 31, 2022. Adjustment to the redemption value also impacts retained earnings, as reflected in the Company’s Condensed Consolidated Statement of Equity, but does not impact net income. The following depicts the changechanges to the balancebalances of the redeemable noncontrolling interest:interests:
| | | | | |
(Thousands of dollars): | Redeemable Noncontrolling Interest |
Balance, December 31, 2020 | $ | 165,716 | |
Net income attributable to redeemable noncontrolling interest | 5,189 | |
Redemption value adjustment | 12,642 | |
Balance, September 30, 2021 | $ | 183,547 | |
| | | | | | | | | | | | | | | | | | | | |
(Thousands of dollars): | | Linetec | | Drum | | Total |
Balance, December 31, 2021 | | $ | 184,148 | | | $ | 12,569 | | | $ | 196,717 | |
Net income attributable to redeemable noncontrolling interests | | 1,103 | | | (31) | | | 1,072 | |
Redemption value adjustments | | (22,156) | | | — | | | (22,156) | |
Redemption of equity interest from noncontrolling party | | (39,649) | | | — | | | (39,649) | |
Balance, March 31, 2022 | | $ | 123,446 | | | $ | 12,538 | | | $ | 135,984 | |
Earnings Per Share. Basic earnings per share (“EPS”) in each period of this report were calculated by dividing net income attributable to Southwest Gas Holdings, Inc. by the weighted-average number of shares during those periods. Diluted EPS includes additional weighted-average common stock equivalents (performance shares and restricted stock units). Unless otherwise noted, the term “Earnings Per Share” refers to Basic EPS. A reconciliation of the denominator used in Basic and Diluted EPS calculations is shown in the following table:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Twelve Months Ended September 30, | | Three Months Ended March 31, | | | Twelve Months Ended March 31, |
(In thousands) | (In thousands) | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | (In thousands) | | 2022 | | 2021 | | | 2022 | | 2021 |
Weighted average basic shares | Weighted average basic shares | | 59,688 | | | 56,271 | | | 58,639 | | | 55,683 | | | 58,209 | | | 55,508 | | Weighted average basic shares | | 60,737 | | | 57,600 | | | | 59,919 | | | 56,564 | |
Effect of dilutive securities: | Effect of dilutive securities: | | Effect of dilutive securities: | | | |
Management Incentive Plan shares | | — | | | — | | | — | | | — | | | — | | | 3 | | |
Restricted stock units (1) | Restricted stock units (1) | | 128 | | | 86 | | | 103 | | | 70 | | | 103 | | | 66 | | Restricted stock units (1) | | 117 | | | 79 | | | | 125 | | | 85 | |
Weighted average diluted shares | Weighted average diluted shares | | 59,816 | | | 56,357 | | | 58,742 | | | 55,753 | | | 58,312 | | | 55,577 | | Weighted average diluted shares | | 60,854 | | | 57,679 | | | | 60,044 | | | 56,649 | |
(1) The number of securities included 115,000112,000 and 76,00075,000 performance shares during the three months ending September 30,March 31, 2022 and 2021, and 2020, 95,000114,000 and 63,000 performance shares during the nine months ending September 30, 2021 and 2020, and 93,000 and 57,00076,000 performance shares during the twelve months ending September 30,March 31, 2022 and 2021, and 2020, respectively, the total of which was derived by assuming that target performance will be achieved during the relevant performance period.
Contingency.Contingencies. Southwest maintains liability insurance for various risks associated with the operation of its natural gas pipelines and facilities. In connection with these liability insurance policies, Southwest is responsible for an initial deductible or self-insured retention amount per incident, after which the insurance carriers would be responsible for amounts up to the policy limits. For the policy year August 2021 to July 2022, these liability insurance policies require Southwest to be responsible for the first $1 million (self-insured retention) of each incident plus the first $4 million in aggregate claims above its self-insured retention in the policy year. In August 2021, a natural gas pipe operated by Southwest was involved in an explosion that injured four individuals and damaged property. The explosion was caused by a leak in the pipe, and is under investigation. Claims are expected to be filedIndividuals that were injured have each brought legal claims against Southwest.Southwest and other parties. If Southwest is deemed fully or partially responsible, Southwest estimates its net exposure could be as much asequal to the self-insured retention of $5 million (the maximum noted above). As of September 30,In 2021, pursuant to Accounting Standards Codification 450, Contingencies, Southwest recorded a $5 million liability related to this incident reflecting the maximum noted above; an estimate of actual loss greater than this exposure (to be covered by insurance) cannot be estimated as of the date these financial statements are issued.
Recent Accounting Standards Updates.
Accounting pronouncements adopted in 2021:
In December 2019, the Financial Accounting Standards Board (the “FASB”On November 29, 2021, Icahn Partners LP and Icahn Master Fund LP (collectively, “Icahn”) issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The update simplifies the accounting for income taxes by removing certain exceptions to the general principles, as well as improving consistent application in Topic 740 by clarifying and amending existing guidance. The Company and Southwest adopted the updatecommenced an action in the first quarterCourt of 2021,Chancery for the impactState of which was not material to the condensed consolidated financial statements of the Company or Southwest.
Delaware. The action is captioned Icahn Partners LP, et al. v. John P. Hester, et al., C.A. No.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
Recently issued accounting2021-1031-KSJM (Del. Ch.). The complaint names the Company and the individual members of the Board as defendants. The complaint seeks to allege breach of fiduciary duty claims and, among other things, seeks declaratory and injunctive relief to (1) limit the scope and manner of certain equity issuances by the Company; (2) allow Icahn to proceed with a Special Meeting proposal at the Company’s 2022 Annual Meeting; and (3) require the Board to approve Icahn’s slate of nominees as “continuing directors” under certain of the Company’s debt instruments. After filing the complaint, Icahn sought a temporary restraining order to prohibit defendants from making certain equity issuances. On December 21, 2021, the Court denied Icahn’s request. On January 19, 2022, the defendants filed a motion to dismiss the claims that were subject to Icahn’s motion for a temporary restraining order. The same day, the defendants filed an answer, denying the remaining claims in Icahn’s complaint. On February 11, 2022, defendants filed a motion for summary judgement on Icahn’s claims regarding a proposal for a special meeting. On April 5, 2022, following a hearing, the court granted defendants’ motion for summary judgment, finding that the Company properly rejected Icahn’s special meeting proposal. On April 27, 2022, the court entered an order dismissing Icahn’s special meeting proposal claims with prejudice and Icahn’s “continuing directors” claims without prejudice. In accordance with the Cooperation Agreement described in Note 9 - Subsequent Events, Icahn filed a stipulation of dismissal of the case with prejudice, which was entered by the court on May 9, 2022.
On November 18, 2021, the City Pension Fund for Firefighters and Police Officers in the City of Miami Beach (“City Pension Fund”) commenced a putative class action lawsuit in the Court of Chancery for the State of Delaware on behalf of a putative class of persons who purchased the Company’s stock. The action is captioned City Pension Fund for Firefighters and Police Officers in the City of Miami Beach v. Robert L. Boughner, et al., C.A. No. 2021-0990-KSJM (Del. Ch.). The complaint was later amended on November 30, 2021. The amended complaint names the Company and the individual members of the Board as defendants. The complaint seeks to assert breach of fiduciary duty claims, alleging that the Board’s recommendation that stockholders reject Icahn’s tender offer to purchase shares of the Company’s common stock omitted material information about the Company’s financial analysis; and seeks to have the Board approve Icahn’s slate of nominees as “continuing directors” under certain of the Company’s debt instruments. On March 9, 2022, City Pension Fund filed a motion for summary judgment on its claim that the Board omitted material information in its recommendation concerning Icahn’s tender offer. On April 19, 2022, City Pension Fund filed a notice of withdrawal of its motion for summary judgment. The Company believes that the claims lack merit and intends to vigorously defend against them.
Recent Accounting Standards Updates.
Accounting pronouncements that will be effective after 2021:or adopted in 2022:
In March 2020, the FASB issued ASU 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The update provides optional guidance for a limited time to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting, including when modifying a contract (during the eligibility period covered by the update to Topic 848) to replace a reference rate affected by such reform. The update applies only to contracts and hedging relationships that reference the London Interbank Offered Rate (“LIBOR”) or another rate expected to be discontinued due to reference rate reform. The guidance was eligible to be applied upon issuance on March 12, 2020, and can generally be applied through December 31, 2022, but to date, no further updates have occurred that would extend the optional guidance to the full tenor of LIBOR expiration dates occurring after 2022. Management will monitor the impacts this update might have on the Company’s and Southwest’s consolidated financial statements and disclosures, and will reflect such appropriately, in the event that the optional guidance is elected. ItManagement will also monitor further FASB action, if any, in regard to the full tenor of LIBOR expiration dates. See also LIBOR discussion in Note 5 – Debt.
In August 2020, the FASB issued ASU 2020-06 “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The update, amongst other amendments, improves the guidance related to the disclosures and earnings-per-share for convertible instruments and contracts in an entity’s own equity. The update is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years; early adoption is permitted. Management is evaluating what impacts, if any, this update might have onstarting in the Company’s consolidated financial statements and disclosures.first quarter of 2022 in regard to relevant contracts.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
Note 2 – Components of Net Periodic Benefit Cost
Southwest has a noncontributory qualified retirement plan with defined benefits covering substantially all employees and a separate unfunded supplemental retirement plan (“SERP”) which is limited to officers. Southwest also provides postretirement benefits other than pensions (“PBOP”) to its qualified retirees for health care, dental, and life insurance. The defined benefit qualified retirement plan, SERP and PBOP are not available to Southwest employees hired on or after January 1, 2022. Employees hired in 2022 or later periods are eligible for enhanced defined contributions as part of the Southwest 401(k) plan rather than participating in the defined benefit retirement plan.
The service cost component of net periodic benefit costs included in the table below is a component of an overhead loading process associated with the cost of labor. The overhead process ultimately results in allocation of service cost to the same accounts to which productive labor is charged. As a result, service costs become components of various accounts, primarily operations and maintenance expense, net utilityregulated operations plant, and deferred charges and other assets for both the Company and Southwest. The other components of net periodic benefit cost are reflected in Other income (deductions) on the Condensed Consolidated Statements of Income of each entity.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Qualified Retirement Plan |
| September 30, |
| Three Months | | Nine Months | | Twelve Months |
| 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
(Thousands of dollars) | | | | | | | | | | | |
Service cost | $ | 10,289 | | | $ | 8,576 | | | $ | 30,869 | | | $ | 25,725 | | | $ | 39,443 | | | $ | 32,191 | |
Interest cost | 10,108 | | | 11,388 | | | 30,324 | | | 34,165 | | | 41,714 | | | 46,416 | |
Expected return on plan assets | (18,088) | | | (16,324) | | | (54,264) | | | (48,972) | | | (70,588) | | | (64,033) | |
Amortization of net actuarial loss | 10,489 | | | 9,006 | | | 31,467 | | | 27,019 | | | 40,473 | | | 32,608 | |
Net periodic benefit cost | $ | 12,798 | | | $ | 12,646 | | | $ | 38,396 | | | $ | 37,937 | | | $ | 51,042 | | | $ | 47,182 | |
| | | | | | | | | | | |
| SERP |
| September 30, |
| Three Months | | Nine Months | | Twelve Months |
| 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
(Thousands of dollars) | | | | | | | | | | | |
Service cost | $ | 131 | | | $ | 97 | | | $ | 394 | | | $ | 292 | | | $ | 491 | | | $ | 359 | |
Interest cost | 358 | | | 401 | | | 1,074 | | | 1,204 | | | 1,474 | | | 1,644 | |
Amortization of net actuarial loss | 661 | | | 451 | | | 1,981 | | | 1,353 | | | 2,433 | | | 1,608 | |
Net periodic benefit cost | $ | 1,150 | | | $ | 949 | | | $ | 3,449 | | | $ | 2,849 | | | $ | 4,398 | | | $ | 3,611 | |
| | | | | | | | | | | |
| PBOP |
| September 30, |
| Three Months | | Nine Months | | Twelve Months |
| 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
(Thousands of dollars) | | | | | | | | | | | |
Service cost | $ | 423 | | | $ | 395 | | | $ | 1,269 | | | $ | 1,186 | | | $ | 1,664 | | | $ | 1,505 | |
Interest cost | 549 | | | 646 | | | 1,645 | | | 1,936 | | | 2,291 | | | 2,697 | |
Expected return on plan assets | (810) | | | (852) | | | (2,430) | | | (2,556) | | | (3,282) | | | (3,345) | |
Amortization of prior service costs | 239 | | | 289 | | | 719 | | | 867 | | | 1,007 | | | 1,185 | |
| | | | | | | | | | | |
Net periodic benefit cost | $ | 401 | | | $ | 478 | | | $ | 1,203 | | | $ | 1,433 | | | $ | 1,680 | | | $ | 2,042 | |
For new employees hired on or after January 1, 2022, the defined benefit retirement plan will be replaced with enhanced contributions to the 401(k) plan. The change is not applicable to existing employees, nor to employees hired during the remainder of 2021. Current employees will continue to be eligible to receive employer 401(k) matching contributions on one-half of amounts deferred by them, up to a maximum matching contribution of 3.5% of their eligible annual compensation. Employees hired after 2021 will be eligible for enhanced employer 401(k) contributions of 3% plus a matching contribution (dollar-for-dollar) up to 7% of eligible compensation. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Qualified Retirement Plan |
| March 31, |
| Three Months | | | | Twelve Months |
| 2022 | | 2021 | | | | | | 2022 | | 2021 |
(Thousands of dollars) | | | | | | | | | | | |
Service cost | $ | 11,028 | | | $ | 10,290 | | | | | | | $ | 41,897 | | | $ | 36,015 | |
Interest cost | 11,251 | | | 10,108 | | | | | | | 41,575 | | | 44,275 | |
Expected return on plan assets | (19,978) | | | (18,088) | | | | | | | (74,242) | | | (67,060) | |
Amortization of net actuarial loss | 8,117 | | | 10,489 | | | | | | | 39,583 | | | 37,507 | |
Net periodic benefit cost | $ | 10,418 | | | $ | 12,799 | | | | | | | $ | 48,813 | | | $ | 50,737 | |
| | | | | | | | | | | |
| SERP |
| March 31, |
| Three Months | | | | Twelve Months |
| 2022 | | 2021 | | | | | | 2022 | | 2021 |
(Thousands of dollars) | | | | | | | | | | | |
Service cost | $ | 106 | | | $ | 131 | | | | | | | $ | 501 | | | $ | 422 | |
Interest cost | 360 | | | 358 | | | | | | | 1,433 | | | 1,561 | |
Amortization of net actuarial loss | 588 | | | 660 | | | | | | | 2,570 | | | 2,014 | |
Net periodic benefit cost | $ | 1,054 | | | $ | 1,149 | | | | | | | $ | 4,504 | | | $ | 3,997 | |
| | | | | | | | | | | |
| PBOP |
| March 31, |
| Three Months | | | | Twelve Months |
| 2022 | | 2021 | | | | | | 2022 | | 2021 |
(Thousands of dollars) | | | | | | | | | | | |
Service cost | $ | 485 | | | $ | 423 | | | | | | | $ | 1,753 | | | $ | 1,608 | |
Interest cost | 613 | | | 548 | | | | | | | 2,258 | | | 2,485 | |
Expected return on plan assets | (807) | | | (810) | | | | | | | (3,236) | | | (3,366) | |
Amortization of prior service costs | 44 | | | 240 | | | | | | | 763 | | | 1,106 | |
| | | | | | | | | | | |
Net periodic benefit cost | $ | 335 | | | $ | 401 | | | | | | | $ | 1,538 | | | $ | 1,833 | |
Note 3 – Revenue
The following information about the Company’s revenues is presented by segment. Southwest encompasses the natural gas operations segment and Centuri encompasses the utility infrastructure services segment.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
Note 3 – Revenue
The following information about the Company’s revenues is presented by segment. Southwest encompasses the natural gas distribution segment, Centuri encompasses the utility infrastructure services segment, and MountainWest encompasses the pipeline and storage segment. Certain disclosures, where materially consistent with those provided most recently in Southwest’s and the Company’s 2021 Annual Report on Form 10-K, are not repeated below.
Natural Gas OperationsDistribution Segment:
GasSouthwest’s operating revenues included on the Condensed Consolidated Statements of Income of both the Company and Southwest include revenue from contracts with customers, which is shown below, disaggregated by customer type, and variousin addition to other categories of revenue:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Twelve Months Ended September 30, | | Three Months Ended March 31, | | | Twelve Months Ended March 31, |
(Thousands of dollars) | (Thousands of dollars) | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | (Thousands of dollars) | 2022 | | 2021 | | | 2022 | | 2021 |
Residential | Residential | $ | 147,326 | | | $ | 131,008 | | | $ | 743,791 | | | $ | 690,861 | | | $ | 1,011,450 | | | $ | 957,379 | | Residential | $ | 514,586 | | | $ | 403,143 | | | | $ | 1,147,055 | | | $ | 983,108 | |
Small commercial | Small commercial | 48,283 | | | 35,204 | | | 185,774 | | | 159,122 | | | 248,193 | | | 228,720 | | Small commercial | 123,984 | | | 81,398 | | | | 312,800 | | | 220,476 | |
Large commercial | Large commercial | 14,199 | | | 9,942 | | | 40,030 | | | 32,588 | | | 52,075 | | | 45,493 | | Large commercial | 20,161 | | | 12,673 | | | | 64,859 | | | 44,639 | |
Industrial/other | Industrial/other | 9,608 | | | 5,888 | | | 30,352 | | | 19,089 | | | 37,505 | | | 25,435 | | Industrial/other | 9,972 | | | 13,770 | | | | 38,515 | | | 33,310 | |
Transportation | Transportation | 21,884 | | | 21,040 | | | 68,217 | | | 65,281 | | | 91,151 | | | 89,364 | | Transportation | 26,632 | | | 24,536 | | | | 94,336 | | | 88,345 | |
Revenue from contracts with customers | Revenue from contracts with customers | 241,300 | | | 203,082 | | | 1,068,164 | | | 966,941 | | | 1,440,374 | | | 1,346,391 | | Revenue from contracts with customers | 695,335 | | | 535,520 | | | | 1,657,565 | | | 1,369,878 | |
Alternative revenue program revenues (deferrals) | Alternative revenue program revenues (deferrals) | 12,569 | | | 9,199 | | | (5,335) | | | 9,545 | | | (2,740) | | | 7,629 | | Alternative revenue program revenues (deferrals) | (23,499) | | | (16,373) | | | | 6,055 | | | (468) | |
Other revenues (1) | Other revenues (1) | 1,979 | | | (1,447) | | | 7,747 | | | (391) | | | 7,432 | | | 1,646 | | Other revenues (1) | 4,703 | | | 2,785 | | | | 12,777 | | | 280 | |
Total Gas operating revenues | $ | 255,848 | | | $ | 210,834 | | | $ | 1,070,576 | | | $ | 976,095 | | | $ | 1,445,066 | | | $ | 1,355,666 | | |
Total Regulated operations revenues | | Total Regulated operations revenues | $ | 676,539 | | | $ | 521,932 | | | | $ | 1,676,397 | | | $ | 1,369,690 | |
(1) Amounts include late fees and other miscellaneous revenues, and may also include the impact of certain regulatory mechanisms, such as cost-of-service components in customer rates expected to be returned to customers in future periods. Also includes the impacts of a temporary moratorium on late fees and disconnection for nonpayment during the COVID-19 pandemic.
Utility Infrastructure Services Segment:
The following tables display Centuri’s revenue, reflected as Utility infrastructure services revenues on the Condensed Consolidated Statements of Income of the Company, representing revenue from contracts with customers disaggregated by service and contract types:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | Twelve Months Ended September 30, |
(Thousands of dollars) | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Service Types: | | | | | | | | | | | |
Gas infrastructure services | $ | 393,122 | | | $ | 387,578 | | | $ | 961,836 | | | $ | 935,444 | | | $ | 1,287,552 | | | $ | 1,288,468 | |
Electric power infrastructure services | 155,456 | | | 115,386 | | | 347,061 | | | 282,992 | | | 475,895 | | | 346,432 | |
Other | 84,270 | | | 77,428 | | | 216,551 | | | 190,262 | | | 301,591 | | | 242,364 | |
Total Utility infrastructure services revenues | $ | 632,848 | | | $ | 580,392 | | | $ | 1,525,448 | | | $ | 1,408,698 | | | $ | 2,065,038 | | | $ | 1,877,264 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | Twelve Months Ended September 30, |
(Thousands of dollars) | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Contract Types: | | | | | | | | | | | |
Master services agreement | $ | 467,869 | | | $ | 437,914 | | | $ | 1,160,199 | | | $ | 1,076,961 | | | $ | 1,573,247 | | | $ | 1,438,540 | |
Bid contract | 164,979 | | | 142,478 | | | 365,249 | | | 331,737 | | | 491,791 | | | 438,724 | |
Total Utility infrastructure services revenues | $ | 632,848 | | | $ | 580,392 | | | $ | 1,525,448 | | | $ | 1,408,698 | | | $ | 2,065,038 | | | $ | 1,877,264 | |
| | | | | | | | | | | |
Unit price contracts | $ | 406,404 | | | $ | 377,284 | | | $ | 1,002,779 | | | $ | 985,673 | | | $ | 1,373,746 | | | $ | 1,359,352 | |
Fixed price contracts | 64,632 | | | 46,379 | | | 149,681 | | | 109,935 | | | 197,447 | | | 142,356 | |
Time and materials contracts | 161,812 | | | 156,729 | | | 372,988 | | | 313,090 | | | 493,845 | | | 375,556 | |
Total Utility infrastructure services revenues | $ | 632,848 | | | $ | 580,392 | | | $ | 1,525,448 | | | $ | 1,408,698 | | | $ | 2,065,038 | | | $ | 1,877,264 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | Twelve Months Ended March 31, |
(Thousands of dollars) | 2022 | | 2021 | | | | | | 2022 | | 2021 |
Service Types: | | | | | | | | | | | |
Gas infrastructure services | $ | 260,682 | | | $ | 221,837 | | | | | | | $ | 1,341,185 | | | $ | 1,265,288 | |
Electric power infrastructure services | 181,968 | | | 93,961 | | | | | | | 613,209 | | | 433,467 | |
Other | 81,227 | | | 48,177 | | | | | | | 364,169 | | | 280,015 | |
Total Utility infrastructure services revenues | $ | 523,877 | | | $ | 363,975 | | | | | | | $ | 2,318,563 | | | $ | 1,978,770 | |
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | Twelve Months Ended March 31, |
(Thousands of dollars) | 2022 | | 2021 | | | | | | 2022 | | 2021 |
Contract Types: | | | | | | | | | | | |
Master services agreement | $ | 356,543 | | | $ | 293,680 | | | | | | | $ | 1,715,841 | | | $ | 1,520,144 | |
Bid contract | 167,334 | | | 70,295 | | | | | | | 602,722 | | | 458,626 | |
Total Utility infrastructure services revenues | $ | 523,877 | | | $ | 363,975 | | | | | | | $ | 2,318,563 | | | $ | 1,978,770 | |
| | | | | | | | | | | |
Unit price contracts | $ | 302,523 | | | $ | 234,449 | | | | | | | $ | 1,437,156 | | | $ | 1,347,953 | |
Fixed price contracts | 86,537 | | | 34,594 | | | | | | | 319,685 | | | 164,750 | |
Time and materials contracts | 134,817 | | | 94,932 | | | | | | | 561,722 | | | 466,067 | |
Total Utility infrastructure services revenues | $ | 523,877 | | | $ | 363,975 | | | | | | | $ | 2,318,563 | | | $ | 1,978,770 | |
The following table provides information about contracts receivable and revenue earned on contracts in progress in excess of billings (contract assets), which are both included within Accounts receivable, net of allowances; the table also includesallowances, as well as amounts billed in excess of revenue earned on contracts (contract liabilities), which are included in Other current liabilities as of September 30, 2021March 31, 2022 and December 31, 20202021 on the Company’s Condensed Consolidated Balance Sheets:
| (Thousands of dollars) | (Thousands of dollars) | September 30, 2021 | | December 31, 2020 | (Thousands of dollars) | March 31, 2022 | | December 31, 2021 |
Contracts receivable, net | Contracts receivable, net | $ | 381,387 | | | $ | 278,316 | | Contracts receivable, net | $ | 309,876 | | | $ | 296,005 | |
Revenue earned on contracts in progress in excess of billings | Revenue earned on contracts in progress in excess of billings | 207,318 | | | 96,996 | | Revenue earned on contracts in progress in excess of billings | 197,620 | | | 214,774 | |
Amounts billed in excess of revenue earned on contracts | Amounts billed in excess of revenue earned on contracts | 19,954 | | | 4,507 | | Amounts billed in excess of revenue earned on contracts | 26,875 | | | 11,860 | |
The revenue earned on contracts in progress in excess of billings (contract asset) primarily relates to Centuri’s rights to consideration for work completed but not billed and/or approved for billing at the reporting date. These contract assets are transferred to contracts receivable when the rights become unconditional. The amounts billed in excess of revenue earned (contract liability) primarily relate to the advance consideration received from customers for which work has not yet been completed. The change in this contract liability balance from December 31, 20202021 to September 30, 2021March 31, 2022 is due to increases in cash received, net of revenue recognized, from contracts that commenced during the period, offset by revenue recognized of approximately $4.5$11.9 million that was included in this itembalance as of January 1, 2021,2022, after which time it became earned and the balance was reduced; the change also includes increases due to cash received, net of revenue recognized during the period, related to contracts that commenced during the period.reduced.
For contracts that have an original duration of one year or less, Centuri uses the practical expedient applicable to such contracts and does not consider/compute an interest component based on the time value of money. Furthermore, because of the short duration of these contracts, Centuri has not disclosed the transaction price for the remaining performance obligations as of the end of each reporting period or when the Company expects to recognize the revenue.
As of September 30, 2021,March 31, 2022, Centuri had 1829 contracts with an original duration of more than one year. The aggregate amount of the transaction price allocated to the unsatisfied performance obligations of these contracts as of September 30, 2021March 31, 2022 was $53.8$205.6 million. Centuri expects to recognize the remaining performance obligations over approximately the next twothree years; however, the timing of that recognition is largely within the control of the customer, including when the necessary equipment and materials required to complete the work are provided by the customer.
Utility infrastructure services contracts receivable consists of the following:
| (Thousands of dollars) | (Thousands of dollars) | September 30, 2021 | | December 31, 2020 | (Thousands of dollars) | March 31, 2022 | | December 31, 2021 |
Billed on completed contracts and contracts in progress | Billed on completed contracts and contracts in progress | $ | 380,484 | | | $ | 273,778 | | Billed on completed contracts and contracts in progress | $ | 308,798 | | | $ | 292,770 | |
Other receivables | Other receivables | 2,844 | | | 6,692 | | Other receivables | 1,430 | | | 3,492 | |
Contracts receivable, gross | Contracts receivable, gross | 383,328 | | | 280,470 | | Contracts receivable, gross | 310,228 | | | 296,262 | |
Allowance for doubtful accounts | Allowance for doubtful accounts | (1,941) | | | (2,154) | | Allowance for doubtful accounts | (352) | | | (257) | |
Contracts receivable, net | Contracts receivable, net | $ | 381,387 | | | $ | 278,316 | | Contracts receivable, net | $ | 309,876 | | | $ | 296,005 | |
Pipeline and Storage Segment:
MountainWest derives revenue on the basis of services rendered, commodities delivered, or contracts settled and includes amounts yet to be billed to customers. MountainWest generates revenue and earnings from annual reservation payments under firm peaking storage and firm transportation contracts. Straight-fixed-variable rate designs are used to allow for recovery of
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30,March 31, 2022 |
substantially all fixed costs in demand or reservation charges, thereby reducing the earnings impact of volume changes on gas transportation and storage operations.
MountainWest receives upfront payment for certain storage services it provides to customers, which are considered to be contract liabilities. These payments are amortized to revenue over the term of the contract.
The primary types of sales and service activities reported as revenue from contracts with customers are FERC-regulated gas transportation and storage service, and to a lesser extent, natural gas liquid (“NGL”) revenues consisting primarily of NGL processing services, and other revenue (consisting of natural gas sales, as well as services related to gathering and processing activities and miscellaneous service revenue).
Transportation and storage contracts are primarily stand-ready service contracts that include fixed reservation and variable usage fees. Fixed fees are recognized ratably over the life of the contract as the stand-ready performance obligations are satisfied, while variable usage fees are recognized when MountainWest has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the performance obligation completed to date. Substantially all of MountainWest’s revenues are derived from performance obligations satisfied over time, rather than recognized at a single point in time. Payment for most sales and services varies by contract type, but is typically due within a month of billing.
MountainWest typically receives or retains NGLs and natural gas from customers when providing natural gas processing, transportation, or storage services. MountainWest records the fair value of NGLs received as service revenue recognized over time and recognizes revenue from the subsequent sale of the NGLs to customers upon delivery. MountainWest typically retains some natural gas under certain transportation service arrangements, intended to facilitate performance of the service and allow for natural losses that occur. As the intent of the retention amount is to enable fulfillment of the contract rather than to provide compensation for services, the fuel allowance is not included in revenue.
MountainWest Regulated operations revenues on the Condensed Consolidated Statements of Income of the Company include revenue from contracts with customers, which is shown below, disaggregated by categories of sales and service activities.
| | | | | |
| Three Months Ended March 31, |
(Thousands of dollars) | 2022 |
Regulated gas transportation and storage revenues | $ | 61,977 | |
NGL revenues | 1,493 | |
Other revenues | 3,479 | |
Revenue from contracts with customers | 66,949 | |
Other revenues | 44 | |
Total Regulated operations revenues | $ | 66,993 | |
MountainWest has certain multi-year contracts with fixed-price performance obligations that were unsatisfied (or partially unsatisfied) at the end of the reporting period, whereby revenue will be earned over time as MountainWest stands ready to provide service. These amounts are not material to the financial statements overall. MountainWest also has certain contract liabilities related to consideration received from customers with an obligation to transfer goods or services subsequent to the balance sheet date, amounts for which are generally consistent between December 31, 2021 and March 31, 2022 and are not material.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | March 31, 2022 |
Note 4 – Common Stock
Shares of the Company’s common stock are publicly traded on the New York Stock Exchange, under the ticker symbol “SWX.” Share-based compensation related to Southwest and Centuri is based on stock awards to be issued in shares of Southwest Gas Holdings, Inc.
On April 8, 2021, the Company entered into a Sales Agency Agreement between the Company and BNY Mellon Capital Markets, LLC and J.P. Morgan Securities LLC (the “Equity Shelf Program”) for the offer and sale of up to $500 million of common stock from time to time in an at-the-market offering program. The shares are issued pursuant to the Company’s automatic shelf registration statement on Form S-3 (File No. 333-251074)., or “the Universal Shelf.” There was no activity in the Equity Shelf Program during the quarter ended March 31, 2022. The following table provides the life-to-date activity under the Equity Shelf Programthat program for the three-month and life-to-date periodsperiod ended September 30, 2021:March 31, 2022:
| | | | | | | | | | | |
| Three Months Ended | | Life-To-Date Ended |
| September 30, 2021 |
Gross proceeds | $ | 87,819,931 | | | $ | 158,180,343 | |
Less: agent commissions | (878,199) | | | (1,581,803) | |
Net proceeds | $ | 86,941,732 | | | $ | 156,598,540 | |
Number of shares sold | 1,251,810 | | | 2,302,407 | |
Weighted average price per share | $ | 70.15 | | | $ | 68.70 | |
| | | | | | | | | |
| | | |
| | |
Gross proceeds | | | $ | 158,180,343 | |
Less: agent commissions | | | (1,581,803) | |
Net proceeds | | | $ | 156,598,540 | |
Number of shares sold | | | 2,302,407 | |
Weighted average price per share | | | $ | 68.70 | |
As of September 30, 2021,March 31, 2022, the Company had up to $341,819,657approximately $341.8 million in common stock available for sale under the program. Net proceeds from the sale of shares of common stock under the Equity Shelf Program are intended for general corporate purposes, including the acquisition of property for the construction, completion, extension, or improvement of pipeline systems and facilities located in and around the communities served by Southwest, as well as for the repayment or repurchase of indebtedness (including amounts outstanding from time to time under the credit facilities, senior notes, term loan, or future credit facilities), and to provide for working capital.
In March 2022, the Company issued, through a separate prospectus supplement under the Universal Shelf, an aggregate of 6,325,000 shares of common stock, in an underwritten public offering price of $74.00 per share, resulting in proceeds to the Company of $452,253,312, net of an underwriters’ discount of $15,796,688. The Company used the net proceeds to repay a portion of the outstanding borrowings under the 364-day term loan credit agreement that was used to initially fund the MountainWest acquisition.
During the quarterthree months ended March 31, 2021, the Company sold essentially all of the remaining common stock available for sale under a previously effective equity shelf program.
During the nine months ended September 30, 2021,2022, the Company issued approximately 47,50065,000 shares of common stock through the Restricted Stock/Unit Plan and Omnibus Incentive Plan.
Additionally, during the ninethree months ended September 30, 2021,March 31, 2022, the Company issued 130,00037,000 shares of common stock through the Dividend Reinvestment and Stock Purchase Plan, raising approximately $8.5 million.
On October 10, 2021, the Company’s Board of Directors (the “Board”) authorized and declared a dividend of 1 preferred stock purchase right (a “Right”) for each share of common stock outstanding, $1 par value per share, of the Company to stockholders of record at the close of business on October 21, 2021. Each right entitles the registered holder to purchase from the Company one ten-thousandth (a “unit”) of a share of Series A Junior Participating Preferred Stock, no par value per share, of the Company at a purchase price of $321.70 per unit, subject to adjustment. Generally, the Rights become exercisable in the event any person or group of affiliated or associated persons acquires beneficial ownership of 10% (20% in the case of a passive institutional investor) or more of the Company’s common stock without the approval of the Board, and until such time, are inseparable from and trade with the Company’s common stock. The Rights were issued pursuant to the Rights Agreement dated October 10, 2021 (the “Rights Agreement”), between the Company and Equiniti Trust Company, as rights agent. The Rights expire at the close of business on October 9, 2022 or upon an earlier merger or other acquisition transaction involving the Company, redemption, or exchange as provided in the Rights Agreement.$2.5 million.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
Note 5 – Debt
Long-Term Debt
Long-term debt is recognized in the Company’s and Southwest’s Condensed Consolidated Balance Sheets generally at the carrying value of the obligations outstanding. Details surrounding the fair value as described in Note 1 – Background, Organization, and Summary of Significant Accounting Policies, and individual carrying values of instruments are provided in the table that follows.
| | | | September 30, 2021 | | December 31, 2020 | | | March 31, 2022 | | December 31, 2021 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
(Thousands of dollars) | (Thousands of dollars) | | | | | | | | | (Thousands of dollars) | | | | | | | | |
Southwest Gas Corporation: | Southwest Gas Corporation: | | Southwest Gas Corporation: | |
Debentures: | Debentures: | | Debentures: | |
Notes, 6.1%, due 2041 | Notes, 6.1%, due 2041 | | $ | 125,000 | | | $ | 167,755 | | | $ | 125,000 | | | $ | 174,858 | | Notes, 6.1%, due 2041 | | $ | 125,000 | | | $ | 146,293 | | | $ | 125,000 | | | $ | 166,380 | |
Notes, 4.05%, due 2032 | | Notes, 4.05%, due 2032 | | 600,000 | | | 598,242 | | | — | | | — | |
Notes, 3.875%, due 2022 | Notes, 3.875%, due 2022 | | 250,000 | | | 252,208 | | | 250,000 | | | 258,825 | | Notes, 3.875%, due 2022 | | 250,000 | | | 249,993 | | | 250,000 | | | 250,603 | |
Notes, 4.875%, due 2043 | Notes, 4.875%, due 2043 | | 250,000 | | | 307,385 | | | 250,000 | | | 317,190 | | Notes, 4.875%, due 2043 | | 250,000 | | | 272,933 | | | 250,000 | | | 307,538 | |
Notes, 3.8%, due 2046 | Notes, 3.8%, due 2046 | | 300,000 | | | 326,058 | | | 300,000 | | | 347,046 | | Notes, 3.8%, due 2046 | | 300,000 | | | 276,144 | | | 300,000 | | | 329,055 | |
Notes, 3.7%, due 2028 | Notes, 3.7%, due 2028 | | 300,000 | | | 331,536 | | | 300,000 | | | 344,553 | | Notes, 3.7%, due 2028 | | 300,000 | | | 303,660 | | | 300,000 | | | 325,191 | |
Notes, 4.15%, due 2049 | Notes, 4.15%, due 2049 | | 300,000 | | | 343,950 | | | 300,000 | | | 370,278 | | Notes, 4.15%, due 2049 | | 300,000 | | | 296,361 | | | 300,000 | | | 342,030 | |
Notes, 2.2%, due 2030 | Notes, 2.2%, due 2030 | | 450,000 | | | 447,287 | | | 450,000 | | | 474,552 | | Notes, 2.2%, due 2030 | | 450,000 | | | 398,066 | | | 450,000 | | | 440,838 | |
Notes, 3.18%, due 2051 | Notes, 3.18%, due 2051 | | 300,000 | | | 291,351 | | | — | | | — | | Notes, 3.18%, due 2051 | | 300,000 | | | 246,813 | | | 300,000 | | | 292,116 | |
8% Series, due 2026 | 8% Series, due 2026 | | 75,000 | | | 94,752 | | | 75,000 | | | 99,723 | | 8% Series, due 2026 | | 75,000 | | | 86,880 | | | 75,000 | | | 92,623 | |
Medium-term notes, 7.78% series, due 2022 | Medium-term notes, 7.78% series, due 2022 | | 25,000 | | | 25,513 | | | 25,000 | | | 26,663 | | Medium-term notes, 7.78% series, due 2022 | | — | | | — | | | 25,000 | | | 25,122 | |
Medium-term notes, 7.92% series, due 2027 | Medium-term notes, 7.92% series, due 2027 | | 25,000 | | | 31,936 | | | 25,000 | | | 33,802 | | Medium-term notes, 7.92% series, due 2027 | | 25,000 | | | 28,987 | | | 25,000 | | | 31,555 | |
Medium-term notes, 6.76% series, due 2027 | Medium-term notes, 6.76% series, due 2027 | | 7,500 | | | 9,116 | | | 7,500 | | | 9,613 | | Medium-term notes, 6.76% series, due 2027 | | 7,500 | | | 8,230 | | | 7,500 | | | 8,949 | |
Unamortized discount and debt issuance costs | Unamortized discount and debt issuance costs | | (20,727) | | | (17,822) | | | Unamortized discount and debt issuance costs | | (27,091) | | | (19,959) | | |
| | 2,386,773 | | | 2,089,678 | | | | 2,955,409 | | | 2,387,541 | | |
Revolving credit facility and commercial paper | Revolving credit facility and commercial paper | | — | | | — | | | 150,000 | | | 150,000 | | Revolving credit facility and commercial paper | | — | | | — | | | 130,000 | | | 130,000 | |
Industrial development revenue bonds: | Industrial development revenue bonds: | | | | | | Industrial development revenue bonds: | | | | | |
Variable-rate bonds: | | |
Tax-exempt Series A, due 2028 | Tax-exempt Series A, due 2028 | | 50,000 | | | 50,000 | | | 50,000 | | | 50,000 | | Tax-exempt Series A, due 2028 | | 50,000 | | | 50,000 | | | 50,000 | | | 50,000 | |
2003 Series A, due 2038 | 2003 Series A, due 2038 | | 50,000 | | | 50,000 | | | 50,000 | | | 50,000 | | 2003 Series A, due 2038 | | 50,000 | | | 50,000 | | | 50,000 | | | 50,000 | |
2008 Series A, due 2038 | 2008 Series A, due 2038 | | 50,000 | | | 50,000 | | | 50,000 | | | 50,000 | | 2008 Series A, due 2038 | | 50,000 | | | 50,000 | | | 50,000 | | | 50,000 | |
2009 Series A, due 2039 | 2009 Series A, due 2039 | | 50,000 | | | 50,000 | | | 50,000 | | | 50,000 | | 2009 Series A, due 2039 | | 50,000 | | | 50,000 | | | 50,000 | | | 50,000 | |
Unamortized discount and debt issuance costs | Unamortized discount and debt issuance costs | | (1,916) | | | (1,472) | | | Unamortized discount and debt issuance costs | | (1,853) | | | (1,938) | | |
| | 198,084 | | | 198,528 | | | | 198,147 | | | 198,062 | | |
Less: current maturities | Less: current maturities | | (275,000) | | | — | | | Less: current maturities | | (250,000) | | | (275,000) | | |
Long-term debt, less current maturities - Southwest Gas Corporation | | $ | 2,309,857 | | | $ | 2,438,206 | | | |
Centuri: | | | | | | |
Centuri term loan facility | | $ | 1,145,000 | | | $ | 1,146,431 | | | $ | 226,648 | | | $ | 230,824 | | |
Unamortized debt issuance costs | | (25,385) | | | (820) | | | |
| 1,119,615 | | | 225,828 | | | |
Southwest Gas Corporation total long-term debt, less current maturities | | Southwest Gas Corporation total long-term debt, less current maturities | | $ | 2,903,556 | | | $ | 2,440,603 | | |
Southwest Gas Holdings, Inc.: | | Southwest Gas Holdings, Inc.: | | | | | |
Centuri secured term loan facility | | Centuri secured term loan facility | | $ | 1,014,275 | | | $ | 1,000,329 | | | $ | 1,117,138 | | | $ | 1,117,841 | |
Centuri secured revolving credit facility | Centuri secured revolving credit facility | | 112,236 | | | 112,348 | | | 26,626 | | | 26,645 | | Centuri secured revolving credit facility | | 108,035 | | | 108,060 | | | 103,329 | | | 103,749 | |
Centuri other debt obligations | | 54,346 | | | 52,682 | | | 81,973 | | | 84,246 | | |
MountainWest unsecured senior notes, 3.53%, due in 2028 | | MountainWest unsecured senior notes, 3.53%, due in 2028 | | 102,001 | | | 95,819 | | | 102,078 | | | 102,078 | |
MountainWest unsecured senior notes, 4.875%, due in 2041 | | MountainWest unsecured senior notes, 4.875%, due in 2041 | | 199,765 | | | 176,488 | | | 199,926 | | | 199,926 | |
MountainWest unsecured senior notes, 3.91%, due in 2038 | | MountainWest unsecured senior notes, 3.91%, due in 2038 | | 147,760 | | | 131,379 | | | 147,735 | | | 147,735 | |
Other debt obligations | | Other debt obligations | | 148,981 | | | 142,712 | | | 51,665 | | | 50,003 | |
Unamortized discount and debt issuance costs | | Unamortized discount and debt issuance costs | | (23,546) | | | (24,466) | | |
Less: current maturities | Less: current maturities | | (22,271) | | | (40,433) | | | Less: current maturities | | (41,069) | | | (22,324) | | |
Long-term debt, less current maturities - Centuri | | $ | 1,263,926 | | | $ | 293,994 | | | |
Consolidated Southwest Gas Holdings, Inc.: | | | | | | |
Southwest Gas Corporation long-term debt | | $ | 2,584,857 | | | $ | 2,438,206 | | | |
Centuri long-term debt | | 1,286,197 | | | 334,427 | | | |
Less: current maturities | | (297,271) | | | (40,433) | | | |
Long-term debt, less current maturities - Southwest Gas Holdings, Inc. | | $ | 3,573,783 | | | $ | 2,732,200 | | | |
Southwest Gas Holdings, Inc. total long-term debt, less current maturities | | Southwest Gas Holdings, Inc. total long-term debt, less current maturities | | $ | 4,559,758 | | | $ | 4,115,684 | | |
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
The fair values of Southwest's and Centuri’s revolving credit facilities and Southwest’s IDRBs are categorized as Level 1 based on the FASB’s fair value hierarchy, due to the ability to access similar debt arrangements at measurement dates with comparable terms, including variable/market rates. The fair values of Southwest’s debentures (which include senior and medium-term notes) and Centuri's term loan facility as of September 30, 2021 were determined utilizing a market-based valuation approach, where fair values are determined based on evaluated pricing data, and as such are categorized as Level 2 in the hierarchy. Prior to amending its secured revolving credit and term loan facility in the third quarter 2021 (see below), the Centuri credit facility was categorized as Level 3, as fair values were based on a conventional discounted cash flow methodology utilizing current market pricing yield curves.
Southwest has a $400 million credit facility that is scheduled to expire in April 2025. Southwest designates $150 million of associated capacity as long-term debt and the remaining $250 million for working capital purposes. Interest rates for the credit facility are calculated at either LIBORthe Secured Overnight Financing Rate (“SOFR”) or an “alternate base rate,” plus in each case an applicable margin that is determined based on Southwest’s senior unsecured debt rating. At September 30, 2021,March 31, 2022, the applicable margin is 1.125% for loans bearing interest with reference to LIBORSOFR and 0.125% for loans bearing interest with reference to the alternative base rate. At September 30, 2021,March 31, 2022, no borrowings were outstanding on the long-term portion (including under the commercial paper program, discussed below) of the facility or on the short-term portion of this credit facility discussed below.
Southwest has a $50 million commercial paper program. Issuances under the commercial paper program are supported by Southwest’s revolving credit facility and, therefore, do not represent additional borrowing capacity under the credit facility. Borrowings under the commercial paper program are designated as long-term debt. Interest rates for the program are calculated at the then current commercial paper rate. At September 30, 2021,March 31, 2022, as noted above, no borrowings were outstanding under the commercial paper program.
In August 2021,March 2022, Southwest issued $300$600 million aggregate principal amount of 3.18%4.05% Senior Notes at a discount of 0.019%0.65%. The notes will mature in August 2051.March 2032. Southwest used the net proceeds fromto redeem the offering$250 million 3.875% notes due in April 2022 and to repay the outstanding balanceamounts under its credit facility, with the remaining net proceeds used for general corporate purposes.
As referred to above,Centuri has a $1.545 billion secured revolving credit and term loan multi-currency facility. Amounts can be borrowed in either Canadian or U.S. dollars. The revolving credit facility matures on August 27, 2021, Centuri, in association with2026 and the acquisition of Riggs Distler (see Note 8 - Business Acquisitions), entered into an amended and restated credit agreement. The agreement provided for a $1.145 billion secured term loan facility at a discount of 1.00%, and a $400 million securedmatures on August 27, 2028. Interest rates for the revolving credit facility which in addition to funding the Riggs Distler acquisition, refinanced the previous $590 millionand term loan facility. This multi-currency facility allows the borrower to request loan advancesare based on either a “base rate” or LIBOR, plus an applicable margin in either Canadian dollars or U.S. dollars. Amounts borrowed and repaid undercase. The capacity of the revolving line of credit portion of the facility is $400 million; related amounts borrowed and repaid are available to be re-borrowed. The term loan portion of the facility has a limit of $1.145 billion. The obligations under the credit agreement are secured by present and future ownership interests in substantially all direct and indirect subsidiaries of Centuri, substantially all of the tangible and intangible personal property of each borrower, certain of their direct and indirect subsidiaries, and all products, profits, and proceeds of the foregoing. The term loan facility matures on August 27, 2028 and the revolving credit facility matures on August 27, 2026.
Interest rates for the term loan facility and the revolving credit facility are based on either a “base rate” or LIBOR, plus an applicable margin in either case. The term loan facility is also subject to a LIBOR floor of 0.50%. Furthermore, Centuri Canada Division Inc. may borrow under the revolving credit facility with interest rates based on either a “base rate” or the Canadian Dealer Offered Rate (“CDOR”) plus the applicable margin, at the borrower’s option. The margin for the term loan facility will be 1.50% for base rate loans and 2.50% for LIBOR loans. The margin for the revolving credit facility ranges from 0.0% to 1.25% for base rate loans and from 1.00% to 2.25% for LIBOR loans, depending on Centuri’s net leverage ratio. Upon the occurrence of certain events providing for a transition away from LIBOR, or if LIBOR is no longer a widely recognized benchmark rate, Centuri may further amend the credit agreement with a replacement rate as set forth in the amended agreement. Centuri is also required to pay a commitment fee on the unused portion of the commitments. The commitment fee ranges from 0.15% to 0.35% per annum. The credit agreement contains certain customary representations and warranties, affirmative and negative covenants and events of default. There are no financial covenants related to the term loan facility. The revolving credit facility requires Centuri to maintain a maximum total net leverage ratio of 5.50 to 1.00 with a step-down to 4.75 to 1.0 on December 31, 2022, and a step-down to 4.00 to 1.00 on December 31, 2023; provided, however, Centuri may elect to increase the maximum total net leverage ratio up to 4.50 to 1.00 in connection with certain material acquisitions, with such increase being applicable for one year following such acquisition; and the agreement also requires Centuri to maintain a minimum interest coverage ratio of 2.50 to 1.00. Centuri’s assets securing the facility at September 30, 2021March 31, 2022 totaled $2.6 billion.$2.4 billion. At September 30, 2021, $1.257March 31, 2022, $1.122 billion in borrowings were outstanding under Centuri’s combined secured revolving credit and term loan facility. During March 2022, Centuri utilized proceeds of approximately $100 million in fixed-rate term loans secured by owned vehicles and equipment to repay a corresponding amount outstanding under the term loan facility.
MountainWest has 2 private placement unsecured senior notes and a public unsecured senior note, with a combined carrying value of $449.5 million and aggregate principal amount of $430 million. The carrying value is higher than the principal balance as amounts outstanding were recorded at their fair values as of the December 31, 2021 acquisition date of the MountainWest entities.
Short-Term Debt
Southwest Gas Holdings, Inc. has a $200 million credit facility that is scheduled to expire in December 2026 and is primarily used for short-term financing needs. Interest rates for the credit facility are calculated at either SOFR or the “alternate base rate” plus in each case an applicable margin. There was $69 million outstanding under this credit facility as of March 31, 2022.
As indicated above, under Southwest’s $400 million credit facility, no short-term borrowings were outstanding at March 31, 2022.
In March 2022, Southwest amended its $250 million Term Loan, extending the maturity date to March 21, 2023 and replacing LIBOR interest rate benchmarks with SOFR interest rate benchmarks. The proceeds were originally used to fund the increased cost of natural gas supply during the month of February 2021, caused by extreme weather conditions in the central U.S. Management extended the maturity date to fund recent increases in gas purchase costs, as reflected in the PGA. Interest rates for the amended term loan are calculated at either SOFR or an “alternate base rate,” plus in each case an applicable margin that is determined based on Southwest’s senior unsecured long-term debt rating. The applicable margin ranges from 0.550% to 1.000% for loans bearing interest with reference to SOFR and 0.000% for loans bearing interest with reference to an alternate base rate. The amended agreement contains a financial covenant requiring Southwest to maintain a ratio of funded debt to total capitalization not to exceed 0.70 to 1.00 as of the end of any quarter of any fiscal year.
In November 2021, Southwest Gas Holdings, Inc. entered into a 364-day term loan credit agreement (the “Credit Agreement”). The Credit Agreement provided for a $1.6 billion delayed-draw term loan (the “Term Loan Facility”) to fund and to pay fees, commissions, and expenses related to the Term Loan Facility and the acquisition of the equity interests in MountainWest (refer to Note 8 - Business Acquisitions). The Term Loan Facility was funded on December 31, 2021, and matures on December 30, 2022. Interest rates for the Term Loan Facility are based on either the “base rate” or LIBOR, plus an applicable margin. There was $1.16 billion outstanding under the Term Loan Facility as of March 31, 2022.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
Short-Term Debt
Southwest Gas Holdings, Inc. has a $100 million credit facility that is scheduled to expire in April 2025 and is primarily used for short-term financing needs. There was $22 million outstandingThe borrowings under this credit facility as of September 30, 2021.
As indicated above, under Southwest’s $400 million credit facility, no short-term borrowings were outstanding at September 30, 2021.
In March 2021, Southwest entered into a $250 million Term Loan that matures March 22, 2022. The proceeds were used to fund the increased cost of natural gas supply during the month of February 2021, caused by extreme weather conditions in the central U.S. (see Deferred Purchased Gas Costs in Note 1 – Background, Organization, and Summary of Significant Accounting Policies). Interest rates for the term loan are calculated at either LIBORfacility to temporarily finance the acquisition of MountainWest created a negative working capital condition for the Company, which as of March 31, 2022 is approximately $584 million. As of May 10, 2022, the Company does not have sufficient liquidity or an “alternate base rate,” plus in each case an applicable margin that is determined based on Southwest’s senior unsecuredcapital resources to repay the term loan facility without issuing new debt or equity. Management intends to issue long-term debt rating. The applicable margin ranges from 0.550% to 1.000% for loans bearing interest with reference to LIBOR and 0.000% for loans bearing interest with reference to an alternate base rate. The agreement contains a financial covenant requiring Southwest to maintain a ratio of funded debt to total capitalization not to exceed 0.70 to 1.00 aspermanently refinance the remaining portion of the end of any quarter of any fiscal year.
On November 1, 2021, the Company entered into a 364-day term loan credit agreement (the “Credit Agreement”). The Credit Agreement provides for a $1.6 billion delayed-draw term loan (the “Term Loan Facility”) to fund and to pay fees, commissions, and expenses related to the Term Loan Facility and the acquisition by the Company of the equity interests in Questar Pipelines. The Term Loan Facility matures 364 days from the date of the funding of the Term Loan Facility.facility.
The interest rate for the Term Loan FacilityManagement believes that its refinancing plan is based on either “base rate” or LIBOR, plus an applicable margin in either case.The applicable margin for the Term Loan Facility will be 0% to 0.50% for base rate loans and 0.75% to 1.50% for LIBOR loans, depending on the applicable pricing level in effect.Each of the interest rate spreads will increase by 0.25% at certain time intervals after the funding date. The commitment fee ranges from 0.060% to 0.175% per calendar quarter commencing January 3, 2022, depending on the applicable pricing level in effect. The pricing levels areprobable based on the Company’s seniorability to generate consistent cash flows, its current credit ratings, its relationships with its lenders and its prior history of successfully raising debt ratings. The interest rate is subjectand equity necessary to customary benchmark replacement provisions.fund its acquisitions and operations. As such, management has concluded that the Company can satisfy its obligations for at least the next twelve months from the issuance date of these financial statements.
The Credit Agreement contains representations and warranties, affirmative, negative, and financial covenants and events of default substantially similarCompany’s ability to access capital markets or to otherwise obtain sufficient financing may be affected by future conditions. If the Company is unable to execute its plan to refinance debt obligations, the Company’s existing credit facility. Subject to certain exceptions, after the funding date, the Company must make a mandatory prepayment from 100% of the net cash proceeds received by the Company or any offacility could be terminated, and amounts due under its subsidiaries from any debt offerings or equity issuances and/or 100% of the committed amount under any specified acquisition financings.revolver and other borrowing arrangements could be declared immediately due and payable.
LIBOR
Certain rates established at LIBOR are scheduled to be discontinued as a benchmark or reference rate after 2021, while other LIBOR-based rates are scheduled to be discontinued after June 2023. As of March 31, 2022, the Company had $2.17 billion in aggregate outstanding borrowings under Centuri’s combined facility and Southwest Gas Holdings, Inc.’s Term Loan Facility. Southwest had no outstanding borrowings or variable rate debt agreements with reference to LIBOR as of March 31, 2022. In order to mitigate the impact of a discontinuance on the Company’s and Southwest’s financial condition and results of operations of the Company, management will monitor developments and work with lenders to determine the appropriate replacement/alternative reference rate for variable rate debt. At this time the Company and Southwest can provide no assurances as to the impact a LIBOR discontinuance will have on their financial condition or results of operations. Any alternative rate may be less predictable or less attractive than LIBOR.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
Note 6 – Other Comprehensive Income and Accumulated Other Comprehensive Income
The following information presents the Company’s Other comprehensive income (loss), both before and after-tax impacts, within the Condensed Consolidated Statements of Comprehensive Income, which also impact Accumulated other comprehensive income (“AOCI”) in the Condensed Consolidated Balance Sheets and the Condensed Consolidated Statements of Equity.
Related Tax Effects Allocated to Each Component of Other Comprehensive Income (Loss)
| | | Three Months Ended September 30, 2021 | | Three Months Ended September 30, 2020 | | Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2021 |
(Thousands of dollars) | (Thousands of dollars) | | Before- Tax Amount | | Tax (Expense) or Benefit (1) | | Net-of- Tax Amount | | Before- Tax Amount | | Tax (Expense) or Benefit (1) | | Net-of- Tax Amount | (Thousands of dollars) | | Before- Tax Amount | | Tax (Expense) or Benefit (1) | | Net-of- Tax Amount | | Before- Tax Amount | | Tax (Expense) or Benefit (1) | | Net-of- Tax Amount |
Defined benefit pension plans: | Defined benefit pension plans: | | | | | | | | | | | | | Defined benefit pension plans: | | | | | | | | | | | | |
Amortization of prior service cost | Amortization of prior service cost | | $ | 239 | | | $ | (56) | | | $ | 183 | | | $ | 289 | | | $ | (69) | | | $ | 220 | | Amortization of prior service cost | | $ | 44 | | | $ | (11) | | | $ | 33 | | | $ | 240 | | | $ | (58) | | | $ | 182 | |
Amortization of net actuarial (gain)/loss | Amortization of net actuarial (gain)/loss | | 11,151 | | | (2,677) | | | 8,474 | | | 9,457 | | | (2,270) | | | 7,187 | | Amortization of net actuarial (gain)/loss | | 8,705 | | | (2,089) | | | 6,616 | | | 11,149 | | | (2,675) | | | 8,474 | |
Regulatory adjustment | Regulatory adjustment | | (9,575) | | | 2,298 | | | (7,277) | | | (8,394) | | | 2,014 | | | (6,380) | | Regulatory adjustment | | (7,268) | | | 1,745 | | | (5,523) | | | (9,575) | | | 2,298 | | | (7,277) | |
Pension plans other comprehensive income (loss) | Pension plans other comprehensive income (loss) | | 1,815 | | | (435) | | | 1,380 | | | 1,352 | | | (325) | | | 1,027 | | Pension plans other comprehensive income (loss) | | 1,481 | | | (355) | | | 1,126 | | | 1,814 | | | (435) | | | 1,379 | |
FSIRS (designated hedging activities): | FSIRS (designated hedging activities): | | FSIRS (designated hedging activities): | |
Amounts reclassified into net income | Amounts reclassified into net income | | 544 | | | (131) | | | 413 | | | 1,030 | | | (247) | | | 783 | | Amounts reclassified into net income | | 545 | | | (129) | | | 416 | | | 544 | | | (131) | | | 413 | |
FSIRS other comprehensive income (loss) | FSIRS other comprehensive income (loss) | | 544 | | | (131) | | | 413 | | | 1,030 | | | (247) | | | 783 | | FSIRS other comprehensive income (loss) | | 545 | | | (129) | | | 416 | | | 544 | | | (131) | | | 413 | |
Total other comprehensive income (loss) - Southwest Gas Corporation | Total other comprehensive income (loss) - Southwest Gas Corporation | | 2,359 | | | (566) | | | 1,793 | | | 2,382 | | | (572) | | | 1,810 | | Total other comprehensive income (loss) - Southwest Gas Corporation | | 2,026 | | | (484) | | | 1,542 | | | 2,358 | | | (566) | | | 1,792 | |
Foreign currency translation adjustments: | Foreign currency translation adjustments: | | | | | | | | | | | | | Foreign currency translation adjustments: | | | | | | | | | | | | |
Translation adjustments | Translation adjustments | | (2,056) | | | — | | | (2,056) | | | 1,024 | | | — | | | 1,024 | | Translation adjustments | | 1,247 | | | — | | | 1,247 | | | 823 | | | — | | | 823 | |
Foreign currency other comprehensive income (loss) | Foreign currency other comprehensive income (loss) | | (2,056) | | | — | | | (2,056) | | | 1,024 | | | — | | | 1,024 | | Foreign currency other comprehensive income (loss) | | 1,247 | | | — | | | 1,247 | | | 823 | | | — | | | 823 | |
Total other comprehensive income (loss) - Southwest Gas Holdings, Inc. | Total other comprehensive income (loss) - Southwest Gas Holdings, Inc. | | $ | 303 | | | $ | (566) | | | $ | (263) | | | $ | 3,406 | | | $ | (572) | | | $ | 2,834 | | Total other comprehensive income (loss) - Southwest Gas Holdings, Inc. | | $ | 3,273 | | | $ | (484) | | | $ | 2,789 | | | $ | 3,181 | | | $ | (566) | | | $ | 2,615 | |
| | | Nine Months Ended September 30, 2021 | | Nine Months Ended September 30, 2020 | |
(Thousands of dollars) | | Before- Tax Amount | | Tax (Expense) or Benefit (1) | | Net-of- Tax Amount | | Before- Tax Amount | | Tax (Expense) or Benefit (1) | | Net-of- Tax Amount | |
Defined benefit pension plans: | | | | | | | | | | | | | |
Amortization of prior service cost | | $ | 719 | | | $ | (172) | | | $ | 547 | | | $ | 867 | | | $ | (208) | | | $ | 659 | | |
Amortization of net actuarial (gain)/loss | | 33,448 | | | (8,028) | | | 25,420 | | | 28,372 | | | (6,809) | | | 21,563 | | |
Regulatory adjustment | | (28,725) | | | 6,894 | | | (21,831) | | | (25,184) | | | 6,044 | | | (19,140) | | |
Pension plans other comprehensive income (loss) | | 5,442 | | | (1,306) | | | 4,136 | | | 4,055 | | | (973) | | | 3,082 | | |
FSIRS (designated hedging activities): | | |
Amounts reclassified into net income | | 1,632 | | | (392) | | | 1,240 | | | 2,703 | | | (649) | | | 2,054 | | |
FSIRS other comprehensive income (loss) | | 1,632 | | | (392) | | | 1,240 | | | 2,703 | | | (649) | | | 2,054 | | |
Total other comprehensive income (loss) - Southwest Gas Corporation | | 7,074 | | | (1,698) | | | 5,376 | | | 6,758 | | | (1,622) | | | 5,136 | | |
Foreign currency translation adjustments: | | | | | | | | | | | | | |
Translation adjustments | | (324) | | | — | | | (324) | | | (1,187) | | | — | | | (1,187) | | |
Foreign currency other comprehensive income (loss) | | (324) | | | — | | | (324) | | | (1,187) | | | — | | | (1,187) | | |
Total other comprehensive income (loss) - Southwest Gas Holdings, Inc. | | $ | 6,750 | | | $ | (1,698) | | | $ | 5,052 | | | $ | 5,571 | | | $ | (1,622) | | | $ | 3,949 | | |
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021 |
| | | | Twelve Months Ended September 30, 2021 | | Twelve Months Ended September 30, 2020 | | | Twelve Months Ended March 31, 2022 | | Twelve Months Ended March 31, 2021 |
(Thousands of dollars) | (Thousands of dollars) | | Before- Tax Amount | | Tax (Expense) or Benefit (1) | | Net-of- Tax Amount | | Before- Tax Amount | | Tax (Expense) or Benefit (1) | | Net-of- Tax Amount | (Thousands of dollars) | | Before- Tax Amount | | Tax (Expense) or Benefit (1) | | Net-of- Tax Amount | | Before- Tax Amount | | Tax (Expense) or Benefit (1) | | Net-of- Tax Amount |
Defined benefit pension plans: | Defined benefit pension plans: | | | | | | | | | | | | | Defined benefit pension plans: | | | | | | | | | | | | |
Net actuarial gain/(loss) | Net actuarial gain/(loss) | | $ | (57,539) | | | $ | 13,809 | | | $ | (43,730) | | | $ | (71,087) | | | $ | 17,061 | | | $ | (54,026) | | Net actuarial gain/(loss) | | $ | 59,176 | | | $ | (14,202) | | | $ | 44,974 | | | $ | (57,539) | | | $ | 13,809 | | | $ | (43,730) | |
Amortization of prior service cost | Amortization of prior service cost | | 1,007 | | | (241) | | | 766 | | | 1,185 | | | (284) | | | 901 | | Amortization of prior service cost | | 763 | | | (183) | | | 580 | | | 1,106 | | | (266) | | | 840 | |
Amortization of net actuarial (gain)/loss | Amortization of net actuarial (gain)/loss | | 42,906 | | | (10,298) | | | 32,608 | | | 34,216 | | | (8,212) | | | 26,004 | | Amortization of net actuarial (gain)/loss | | 42,153 | | | (10,117) | | | 32,036 | | | 39,521 | | | (9,484) | | | 30,037 | |
Prior service cost | | — | | | — | | | — | | | (1,878) | | | 452 | | | (1,426) | | |
| Regulatory adjustment | Regulatory adjustment | | 3,894 | | | (935) | | | 2,959 | | | 27,803 | | | (6,673) | | | 21,130 | | Regulatory adjustment | | (85,887) | | | 20,614 | | | (65,273) | | | 6,255 | | | (1,502) | | | 4,753 | |
Pension plans other comprehensive income (loss) | Pension plans other comprehensive income (loss) | | (9,732) | | | 2,335 | | | (7,397) | | | (9,761) | | | 2,344 | | | (7,417) | | Pension plans other comprehensive income (loss) | | 16,205 | | | (3,888) | | | 12,317 | | | (10,657) | | | 2,557 | | | (8,100) | |
FSIRS (designated hedging activities): | FSIRS (designated hedging activities): | | FSIRS (designated hedging activities): | |
Amounts reclassified into net income | Amounts reclassified into net income | | 2,176 | | | (523) | | | 1,653 | | | 3,539 | | | (850) | | | 2,689 | | Amounts reclassified into net income | | 2,175 | | | (520) | | | 1,655 | | | 2,954 | | | (710) | | | 2,244 | |
FSIRS other comprehensive income (loss) | FSIRS other comprehensive income (loss) | | 2,176 | | | (523) | | | 1,653 | | | 3,539 | | | (850) | | | 2,689 | | FSIRS other comprehensive income (loss) | | 2,175 | | | (520) | | | 1,655 | | | 2,954 | | | (710) | | | 2,244 | |
Total other comprehensive income (loss) - Southwest Gas Corporation | Total other comprehensive income (loss) - Southwest Gas Corporation | | (7,556) | | | 1,812 | | | (5,744) | | | (6,222) | | | 1,494 | | | (4,728) | | Total other comprehensive income (loss) - Southwest Gas Corporation | | 18,380 | | | (4,408) | | | 13,972 | | | (7,703) | | | 1,847 | | | (5,856) | |
Foreign currency translation adjustments: | Foreign currency translation adjustments: | | | | | | | | | | | | | Foreign currency translation adjustments: | | | | | | | | | | | | |
Translation adjustments | Translation adjustments | | 2,576 | | | — | | | 2,576 | | | (280) | | | — | | | (280) | | Translation adjustments | | 444 | | | — | | | 444 | | | 6,541 | | | — | | | 6,541 | |
Foreign currency other comprehensive income (loss) | Foreign currency other comprehensive income (loss) | | 2,576 | | | — | | | 2,576 | | | (280) | | | — | | | (280) | | Foreign currency other comprehensive income (loss) | | 444 | | | — | | | 444 | | | 6,541 | | | — | | | 6,541 | |
Total other comprehensive income (loss) - Southwest Gas Holdings, Inc. | Total other comprehensive income (loss) - Southwest Gas Holdings, Inc. | | $ | (4,980) | | | $ | 1,812 | | | $ | (3,168) | | | $ | (6,502) | | | $ | 1,494 | | | $ | (5,008) | | Total other comprehensive income (loss) - Southwest Gas Holdings, Inc. | | $ | 18,824 | | | $ | (4,408) | | | $ | 14,416 | | | $ | (1,162) | | | $ | 1,847 | | | $ | 685 | |
(1)Tax amounts are calculated using a 24% rate. The Company has elected to indefinitely reinvest, in Canada, the earnings of Centuri’s Canadian subsidiaries, thus precluding deferred taxes on such earnings. As a result of this assertion, and no repatriation of earnings anticipated, the Company is not recognizing a tax effect or presenting a tax expense or benefit for currency translation adjustments reported in Other comprehensive income (loss).
Approximately $828,000The remaining balance of realized losses (net of tax) related to the remaining balance of Southwest’s previously settled forward-starting interest rate swap (“FSIRS”), included in AOCI at September 30, 2021, will beMarch 31, 2022, was reclassified into interest expense withinduring the next 6three months (the remainder of the amortization period for the balance) as the related interest payments on long-term debt occur.ended March 31, 2022.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | March 31, 2022 |
The following table represents a rollforward of AOCI, presented on the Company’s Condensed Consolidated Balance Sheets and its Condensed Consolidated Statements of Equity:
| | | | Defined Benefit Plans | | FSIRS | | Foreign Currency Items | | | | | Defined Benefit Plans | | FSIRS | | Foreign Currency Items | | |
(Thousands of dollars) | (Thousands of dollars) | | Before-Tax | | Tax (Expense) Benefit (4) | | After-Tax | | Before-Tax | | Tax (Expense) Benefit (4) | | After-Tax | | Before-Tax | | Tax (Expense) Benefit | | After-Tax | | AOCI | (Thousands of dollars) | | Before-Tax | | Tax (Expense) Benefit (4) | | After-Tax | | Before-Tax | | Tax (Expense) Benefit (4) | | After-Tax | | Before-Tax | | Tax (Expense) Benefit | | After-Tax | | AOCI |
Beginning Balance AOCI December 31, 2020 | | $ | (77,720) | | | $ | 18,653 | | | $ | (59,067) | | | $ | (2,719) | | | $ | 651 | | | $ | (2,068) | | | $ | 132 | | | $ | — | | | $ | 132 | | | $ | (61,003) | | |
Beginning Balance AOCI December 31, 2021 | | Beginning Balance AOCI December 31, 2021 | | $ | (61,182) | | | $ | 14,685 | | | $ | (46,497) | | | $ | (545) | | | $ | 129 | | | $ | (416) | | | $ | 152 | | | $ | — | | | $ | 152 | | | $ | (46,761) | |
Translation adjustments | Translation adjustments | | — | | | — | | | — | | | — | | | — | | | — | | | (324) | | | — | | | (324) | | | (324) | | Translation adjustments | | — | | | — | | | — | | | — | | | — | | | — | | | 1,247 | | | — | | | 1,247 | | | 1,247 | |
Other comprehensive income (loss) before reclassifications | Other comprehensive income (loss) before reclassifications | | — | | | — | | | — | | | — | | | — | | | — | | | (324) | | | — | | | (324) | | | (324) | | Other comprehensive income (loss) before reclassifications | | — | | | — | | | — | | | — | | | — | | | — | | | 1,247 | | | — | | | 1,247 | | | 1,247 | |
FSIRS amount reclassified from AOCI (1) | FSIRS amount reclassified from AOCI (1) | | — | | | — | | | — | | | 1,632 | | | (392) | | | 1,240 | | | — | | | — | | | — | | | 1,240 | | FSIRS amount reclassified from AOCI (1) | | — | | | — | | | — | | | 545 | | | (129) | | | 416 | | | — | | | — | | | — | | | 416 | |
Amortization of prior service cost (2) | Amortization of prior service cost (2) | | 719 | | | (172) | | | 547 | | | — | | | — | | | — | | | — | | | — | | | — | | | 547 | | Amortization of prior service cost (2) | | 44 | | | (11) | | | 33 | | | — | | | — | | | — | | | — | | | — | | | — | | | 33 | |
Amortization of net actuarial loss (2) | Amortization of net actuarial loss (2) | | 33,448 | | | (8,028) | | | 25,420 | | | — | | | — | | | — | | | — | | | — | | | — | | | 25,420 | | Amortization of net actuarial loss (2) | | 8,705 | | | (2,089) | | | 6,616 | | | — | | | — | | | — | | | — | | | — | | | — | | | 6,616 | |
Regulatory adjustment (3) | Regulatory adjustment (3) | | (28,725) | | | 6,894 | | | (21,831) | | | — | | | — | | | — | | | — | | | — | | | — | | | (21,831) | | Regulatory adjustment (3) | | (7,268) | | | 1,745 | | | (5,523) | | | — | | | — | | | — | | | — | | | — | | | — | | | (5,523) | |
Net current period other comprehensive income (loss) attributable to Southwest Gas Holdings, Inc. | Net current period other comprehensive income (loss) attributable to Southwest Gas Holdings, Inc. | | 5,442 | | | (1,306) | | | 4,136 | | | 1,632 | | | (392) | | | 1,240 | | | (324) | | | — | | | (324) | | | 5,052 | | Net current period other comprehensive income (loss) attributable to Southwest Gas Holdings, Inc. | | 1,481 | | | (355) | | | 1,126 | | | 545 | | | (129) | | | 416 | | | 1,247 | | | — | | | 1,247 | | | 2,789 | |
Ending Balance AOCI September 30, 2021 | | $ | (72,278) | | | $ | 17,347 | | | $ | (54,931) | | | $ | (1,087) | | | $ | 259 | | | $ | (828) | | | $ | (192) | | | $ | — | | | $ | (192) | | | $ | (55,951) | | |
Ending Balance AOCI March 31, 2022 | | Ending Balance AOCI March 31, 2022 | | $ | (59,701) | | | $ | 14,330 | | | $ | (45,371) | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,399 | | | $ | — | | | $ | 1,399 | | | $ | (43,972) | |
(1)The FSIRS reclassification amount is included in Net interest deductions on the Company’s Condensed Consolidated Statements of Income.
(2)These AOCI components are included in the computation of net periodic benefit cost (see Note 2 – Components of Net Periodic Benefit Cost for additional details).
(3)The regulatory adjustment represents the portion of the activity above that is expected to be recovered through rates in the future (the related regulatory asset is included in Deferred charges and other assets on the Company’s Condensed Consolidated Balance Sheets).
(4)Tax amounts are calculated using a 24% rate.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021 |
The following table represents a rollforward of AOCI, presented on Southwest’s Condensed Consolidated Balance Sheets:
| | | | Defined Benefit Plans | | FSIRS | | | | | Defined Benefit Plans | | FSIRS | | |
(Thousands of dollars) | (Thousands of dollars) | | Before-Tax | | Tax (Expense) Benefit (8) | | After-Tax | | Before-Tax | | Tax (Expense) Benefit (8) | | After-Tax | | AOCI | (Thousands of dollars) | | Before-Tax | | Tax (Expense) Benefit (8) | | After-Tax | | Before-Tax | | Tax (Expense) Benefit (8) | | After-Tax | | AOCI |
Beginning Balance AOCI December 31, 2020 | | $ | (77,720) | | | $ | 18,653 | | | $ | (59,067) | | | $ | (2,719) | | | $ | 651 | | | $ | (2,068) | | | $ | (61,135) | | |
Beginning Balance AOCI December 31, 2021 | | Beginning Balance AOCI December 31, 2021 | | $ | (61,182) | | | $ | 14,685 | | | $ | (46,497) | | | $ | (545) | | | $ | 129 | | | $ | (416) | | | $ | (46,913) | |
FSIRS amount reclassified from AOCI (5) | FSIRS amount reclassified from AOCI (5) | | — | | | — | | | — | | | 1,632 | | | (392) | | | 1,240 | | | 1,240 | | FSIRS amount reclassified from AOCI (5) | | — | | | — | | | — | | | 545 | | | (129) | | | 416 | | | 416 | |
Amortization of prior service cost (6) | Amortization of prior service cost (6) | | 719 | | | (172) | | | 547 | | | — | | | — | | | — | | | 547 | | Amortization of prior service cost (6) | | 44 | | | (11) | | | 33 | | | — | | | — | | | — | | | 33 | |
Amortization of net actuarial loss (6) | Amortization of net actuarial loss (6) | | 33,448 | | | (8,028) | | | 25,420 | | | — | | | — | | | — | | | 25,420 | | Amortization of net actuarial loss (6) | | 8,705 | | | (2,089) | | | 6,616 | | | — | | | — | | | — | | | 6,616 | |
Regulatory adjustment (7) | Regulatory adjustment (7) | | (28,725) | | | 6,894 | | | (21,831) | | | — | | | — | | | — | | | (21,831) | | Regulatory adjustment (7) | | (7,268) | | | 1,745 | | | (5,523) | | | — | | | — | | | — | | | (5,523) | |
Net current period other comprehensive income attributable to Southwest Gas Corporation | Net current period other comprehensive income attributable to Southwest Gas Corporation | | 5,442 | | | (1,306) | | | 4,136 | | | 1,632 | | | (392) | | | 1,240 | | | 5,376 | | Net current period other comprehensive income attributable to Southwest Gas Corporation | | 1,481 | | | (355) | | | 1,126 | | | 545 | | | (129) | | | 416 | | | 1,542 | |
Ending Balance AOCI September 30, 2021 | | $ | (72,278) | | | $ | 17,347 | | | $ | (54,931) | | | $ | (1,087) | | | $ | 259 | | | $ | (828) | | | $ | (55,759) | | |
Ending Balance AOCI March 31, 2022 | | Ending Balance AOCI March 31, 2022 | | $ | (59,701) | | | $ | 14,330 | | | $ | (45,371) | | | $ | — | | | $ | — | | | $ | — | | | $ | (45,371) | |
(5) The FSIRS reclassification amount is included in Net interest deductions on Southwest’s Condensed Consolidated Statements of Income.
(6)These AOCI components are included in the computation of net periodic benefit cost (see Note 2 – Components of Net Periodic Benefit Cost for additional details).
(7)The regulatory adjustment represents the portion of the activity above that is expected to be recovered through rates in the future (the related regulatory asset is included in Deferred charges and other assets on Southwest’s Condensed Consolidated Balance Sheets).
(8)Tax amounts are calculated using a 24% rate.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | March 31, 2022 |
The following table represents amounts (before income tax impacts) included in AOCI (in the tables above), that have not yet been recognized in net periodic benefit cost:
| (Thousands of dollars) | (Thousands of dollars) | | September 30, 2021 | | December 31, 2020 | (Thousands of dollars) | | March 31, 2022 | | December 31, 2021 |
Net actuarial loss | Net actuarial loss | | $ | (469,335) | | | $ | (502,783) | | Net actuarial loss | | $ | (390,305) | | | $ | (399,010) | |
Prior service cost | Prior service cost | | (1,768) | | | (2,487) | | Prior service cost | | (1,484) | | | (1,528) | |
Less: amount recognized in regulatory assets | Less: amount recognized in regulatory assets | | 398,825 | | | 427,550 | | Less: amount recognized in regulatory assets | | 332,088 | | | 339,356 | |
Recognized in AOCI | Recognized in AOCI | | $ | (72,278) | | | $ | (77,720) | | Recognized in AOCI | | $ | (59,701) | | | $ | (61,182) | |
Note 7 – Segment Information
The Company hasAs a result of the MountainWest acquisition on December 31, 2021, management updated its segment reporting from the historical presentation of 2 reportable segments: natural gas operationssegments to 3 reportable segments, with MountainWest presented as the pipeline and utility infrastructure services.storage segment. Southwest has a single reportable segment that is referred to herein ascomprises the natural gas operationsdistribution segment ofand Centuri comprises the Company.utility infrastructure services segment.
Centuri accounts for the services provided to Southwest at contractual prices at contract inception. Accounts receivable for these services, which are not eliminated during consolidation, are presented in the table below:
| (Thousands of dollars) | (Thousands of dollars) | September 30, 2021 | | December 31, 2020 | (Thousands of dollars) | March 31, 2022 | | December 31, 2021 |
Centuri accounts receivable for services provided to Southwest | Centuri accounts receivable for services provided to Southwest | $ | 15,376 | | | $ | 13,956 | | Centuri accounts receivable for services provided to Southwest | $ | 15,522 | | | $ | 15,166 | |
UtilityIn order to reconcile (below) to net income as disclosed in the Condensed Consolidated Statements of Income, an Other column is included associated with impacts of corporate and administrative activities related to Southwest Gas Holdings, Inc. The financial information pertaining to the natural gas distribution, utility infrastructure services, total assets increased significantly since December 31, 2020, primarily due to Centuri’s acquisition of Riggs Distler (see Note 8 - Business Acquisitions),and pipeline and storage segments are as follows:
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(Thousands of dollars) | September 30, 2021 | | December 31, 2020 |
Centuri segment assets | $ | 2,671,974 | | | $ | 1,475,237 | |
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(Thousands of dollars) | Natural Gas Distribution | | Utility Infrastructure Services | | Pipeline and Storage | | Other | | Total |
Three Months Ended March 31, 2022 | | | | | | | | | |
Revenues from external customers | $ | 676,539 | | | $ | 495,544 | | | $ | 66,993 | | | $ | — | | | $ | 1,239,076 | |
Intersegment revenues | — | | | 28,333 | | | — | | | — | | | 28,333 | |
Total | $ | 676,539 | | | $ | 523,877 | | | $ | 66,993 | | | $ | — | | | $ | 1,267,409 | |
Segment net income (loss) | $ | 111,795 | | | $ | (23,486) | | | $ | 16,930 | | | $ | (9,061) | | | $ | 96,178 | |
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Three Months Ended March 31, 2021 | | | | | | | | | |
Revenues from external customers | $ | 521,932 | | | $ | 339,772 | | | $ | — | | | $ | — | | | $ | 861,704 | |
Intersegment revenues | — | | | 24,203 | | | — | | | — | | | 24,203 | |
Total | $ | 521,932 | | | $ | 363,975 | | | $ | — | | | $ | — | | | $ | 885,907 | |
Segment net income (loss) | $ | 118,715 | | | $ | (859) | | | $ | — | | | $ | (563) | | | $ | 117,293 | |
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
In order to reconcile (below) to net income as disclosed in the Condensed Consolidated Statements of Income, an Other column is included associated with impacts of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Thousands of dollars) | Natural Gas Distribution | | Utility Infrastructure Services | | Pipeline and Storage | | Other | | Total |
Twelve Months Ended March 31, 2022 | | | | | | | | | |
Revenues from external customers | $ | 1,676,397 | | | $ | 2,212,087 | | | $ | 66,993 | | | $ | — | | | $ | 3,955,477 | |
Intersegment revenues | — | | | 106,476 | | | — | | | — | | | 106,476 | |
Total | $ | 1,676,397 | | | $ | 2,318,563 | | | $ | 66,993 | | | $ | — | | | $ | 4,061,953 | |
Segment net income (loss) | $ | 180,215 | | | $ | 17,793 | | | $ | 16,930 | | | $ | (35,274) | | | $ | 179,664 | |
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Twelve Months Ended March 31, 2021 | | | | | | | | | |
Revenues from external customers | $ | 1,369,690 | | | $ | 1,852,910 | | | $ | — | | | $ | — | | | $ | 3,222,600 | |
Intersegment revenues | — | | | 125,860 | | | — | | | — | | | 125,860 | |
Total | $ | 1,369,690 | | | $ | 1,978,770 | | | $ | — | | | $ | — | | | $ | 3,348,460 | |
Segment net income (loss) | $ | 194,234 | | | $ | 84,207 | | | $ | — | | | $ | (1,366) | | | $ | 277,075 | |
The corporate and administrative activities related tofor Southwest Gas Holdings, Inc. The financial information pertainingin the three- and twelve-month periods ended March 31, 2022 include expenses incurred related to shareholder activism, in addition to expenses and financing costs for the MountainWest acquisition, as well as expenses for services performed following December 31, 2021, but related to the natural gas operations and utility infrastructure services segments is as follows:
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(Thousands of dollars) | Natural Gas Operations | | Utility Infrastructure Services | | Other | | Total |
Three Months Ended September 30, 2021 | | | | | | | |
Revenues from external customers | $ | 255,848 | | | $ | 606,006 | | | $ | — | | | $ | 861,854 | |
Intersegment revenues | — | | | 26,842 | | | — | | | 26,842 | |
Total | $ | 255,848 | | | $ | 632,848 | | | $ | — | | | $ | 888,696 | |
Segment net income (loss) | $ | (27,544) | | | $ | 18,540 | | | $ | (2,572) | | | $ | (11,576) | |
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Three Months Ended September 30, 2020 | | | | | | | |
Revenues from external customers | $ | 210,834 | | | $ | 548,300 | | | $ | — | | | $ | 759,134 | |
Intersegment revenues | — | | | 32,092 | | | — | | | 32,092 | |
Total | $ | 210,834 | | | $ | 580,392 | | | $ | — | | | $ | 791,226 | |
Segment net income (loss) | $ | (15,973) | | | $ | 34,873 | | | $ | (627) | | | $ | 18,273 | |
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(Thousands of dollars) | Natural Gas Operations | | Utility Infrastructure Services | | Other | | Total |
Nine Months Ended September 30, 2021 | | | | | | | |
Revenues from external customers | $ | 1,070,576 | | | $ | 1,450,719 | | | $ | — | | | $ | 2,521,295 | |
Intersegment revenues | — | | | 74,729 | | | — | | | 74,729 | |
Total | $ | 1,070,576 | | | $ | 1,525,448 | | | $ | — | | | $ | 2,596,024 | |
Segment net income (loss) | $ | 102,584 | | | $ | 32,797 | | | $ | (4,545) | | | $ | 130,836 | |
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Nine Months Ended September 30, 2020 | | | | | | | |
Revenues from external customers | $ | 976,095 | | | $ | 1,306,481 | | | $ | — | | | $ | 2,282,576 | |
Intersegment revenues | — | | | 102,217 | | | — | | | 102,217 | |
Total | $ | 976,095 | | | $ | 1,408,698 | | | $ | — | | | $ | 2,384,793 | |
Segment net income (loss) | $ | 79,568 | | | $ | 50,936 | | | $ | (1,724) | | | $ | 128,780 | |
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(Thousands of dollars) | Natural Gas Operations | | Utility Infrastructure Services | | Other | | Total |
Twelve Months Ended September 30, 2021 | | | | | | | |
Revenues from external customers | $ | 1,445,066 | | | $ | 1,957,667 | | | $ | — | | | $ | 3,402,733 | |
Intersegment revenues | — | | | 107,371 | | | — | | | 107,371 | |
Total | $ | 1,445,066 | | | $ | 2,065,038 | | | $ | — | | | $ | 3,510,104 | |
Segment net income (loss) | $ | 182,134 | | | $ | 56,723 | | | $ | (4,477) | | | $ | 234,380 | |
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Twelve Months Ended September 30, 2020 | | | | | | | |
Revenues from external customers | $ | 1,355,666 | | | $ | 1,738,430 | | | $ | — | | | $ | 3,094,096 | |
Intersegment revenues | — | | | 138,834 | | | — | | | 138,834 | |
Total | $ | 1,355,666 | | | $ | 1,877,264 | | | $ | — | | | $ | 3,232,930 | |
Segment net income (loss) | $ | 155,993 | | | $ | 66,615 | | | $ | (2,110) | | | $ | 220,498 | |
acquisition.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021 |
Note 8 - Business Acquisitions
OnIn August 27, 2021, the Company, through its subsidiaries, led principally by Centuri, completed the acquisition of a privately held regional infrastructure services business, Drum, Parent, Inc. (“Drum”), for $830.4 million in cash consideration, and also assumed a long-term financing lease obligation. Drum, andincluding its primary subsidiary, Riggs Distler. In November 2021, certain members of Riggs Distler & Company, Inc. (“Riggs Distler”), are now wholly owned subsidiaries ofmanagement acquired a 1.42% interest in Drum. See the Company.
The acquisition extended the utility services operations in the northeastern region of the U.S. and providesCompany’s 2021 Form 10-K for additional opportunities for expansion of the amount of work Centuri performs for electric and gas utilities. Funding for the acquisition was provided by proceeds from Centuri’s new term loan facility, as described in Note 5 – Debt.
The Company is currently performing a detailed valuation analysis of the assets and liabilities of the acquired company, which was substantially completed during the third quarter of 2021. Certain payments were estimated as of the acquisition date and will be adjusted when paid. The necessary analysis will consider acquired intangibles (including customer relationships, trademarks, and backlog). Based on preliminary results, a substantial portion of the purchase price will be allocated to goodwill and other finite-lived intangible assets.information about this acquisition.
Assets acquired and liabilities assumed in the transaction were recorded at their acquisition date fair values. Transaction costs associated with the acquisition were expensed as incurred. The Company’s allocation of the purchase price was based on an evaluation of the appropriate fair values and represented management’s best estimate based on available data (including market data, data regarding customers of the acquired businesses, terms of acquisition-related agreements, analysis of historical and projected results, and other types of data). The analysis included consideration of types of intangibles that were acquired, including those indicated above. The gross contractual receivable is $81 million, exclusivecustomer relationships, trade name, and backlog. Certain payments were estimated as of $12 million representing specific customer accounts thatthe acquisition date and were deemed uncollectible. Of the $12 million, anyadjusted when amounts subsequently collected prior to December 31, 2021 would pass to the sellers.were finalized. Further adjustments may still occur. Due to the estimations made, the final purchase accounting has not yet been completed. Further refinement is expected tocompleted and further refinements may occur, including potential changes to income taxes, fixed assets, and intangibles.taxes.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | March 31, 2022 |
The preliminary estimated fair values of assets acquired and liabilities assumed as of August 27, 2021, and as updated through March 31, 2022, are as follows (in millionsfollows:
| | | | | | | | | | | | | | | | | | | | |
(Millions of dollars) | | Acquisition Date | | Measurement Period Adjustments | | Revised Acquisition Date |
Cash and cash equivalents | | $ | 1.9 | | | $ | — | | | $ | 1.9 | |
Accounts receivable | | 69.1 | | | (8.6) | | | 60.5 | |
Contract assets | | 40.1 | | | 7.4 | | | 47.5 | |
Income taxes receivable, net | | 0.7 | | | — | | | 0.7 | |
Right of use assets under operating leases | | 1.5 | | | — | | | 1.5 | |
Prepaid expenses | | 5.2 | | | — | | | 5.2 | |
Property and equipment | | 118.1 | | | 1.2 | | | 119.3 | |
Intangible assets | | 335.0 | | | (31.5) | | | 303.5 | |
Goodwill | | 446.8 | | | 2.1 | | | 448.9 | |
Total assets acquired | | 1,018.4 | | | $ | (29.4) | | | $ | 989.0 | |
| | | | | | |
Trade and other payables | | 46.2 | | | — | | | 46.2 | |
Finance lease obligations | | 27.5 | | | 1.2 | | | 28.7 | |
Contract liabilities | | 12.7 | | | — | | | 12.7 | |
Operating lease obligations | | 1.5 | | | — | | | 1.5 | |
Other liabilities | | 5.3 | | | (0.9) | | | 4.4 | |
Deferred tax liabilities | | 94.8 | | | (23.4) | | | 71.4 | |
Total liabilities assumed and noncontrolling interest | | 188.0 | | | (23.1) | | | 164.9 | |
Net assets acquired | | $ | 830.4 | | | $ | (6.3) | | | $ | 824.1 | |
The Company incurred and expensed acquisition costs of dollars):$14 million, included in Utility infrastructure services expenses in the Company’s Condensed Consolidated Statement of Income for the twelve months ended March 31, 2022. No acquisition-related costs were incurred during the three months ended March 31, 2022, and no significant impacts to earnings resulted from the measurement-period adjustments reflected above.
| | | | | | | | |
Cash and cash equivalents | | $ | 1.9 | |
Accounts receivable | | 69.1 | |
Contract assets | | 40.1 | |
Income taxes receivable, net | | 0.7 | |
Right of use assets under operating leases | | 1.5 | |
Prepaid expenses | | 5.2 | |
Property and equipment | | 118.1 | |
Intangible assets | | 335.0 | |
Goodwill | | 446.8 | |
Total assets acquired | | 1,018.4 | |
| | |
Trade and other payables | | 46.2 | |
Finance lease obligations | | 27.5 | |
Contract liabilities | | 12.7 | |
Operating lease obligations | | 1.5 | |
Other liabilities | | 5.3 | |
Deferred tax liabilities | | 94.8 | |
Total liabilities assumed | | 188.0 | |
Net assets acquired | | $ | 830.4 | |
In December 2021 Southwest Gas Holdings, Inc. completed the acquisition of Dominion Energy Questar Pipeline, LLC and related entities (subsequently rebranded as “MountainWest”), which resulted in MountainWest becoming a wholly owned subsidiary of the Company. See the Company’s 2021 Form 10-K for additional information about this acquisition.Assets acquired and liabilities assumed in the transaction were recorded at their acquisition date fair values. Transaction costs associated with the acquisition were expensed as incurred. The majority of the operations acquired are subject to FERC rate-regulation and therefore are accounted for pursuant to ASC 980, Regulated Operations. The fair values of MountainWest’s assets and liabilities, subject to rate making and cost recovery provisions, provide revenues derived from costs of service, including a return on investment of assets and liabilities included in rate base. Accordingly, the carrying values of such assets and liabilities were deemed to approximate their fair values. The fair value of the MountainWest assets and liabilities assumed that are not subject to the rate-regulation provisions discussed above include a 50% equity method investment, non-regulated property, plant and equipment, and long-term debt assumed; related fair values were determined using a market approach, income approach, or cost approach, as appropriate. Amounts related to post-closing payments were estimated as of the acquisition date and adjusted when determined during the period ended March 31, 2022. No other measurement period adjustments occurred during the period. However, the final purchase accounting has not yet been completed and further refinements may occur, including finalization of income tax-related amounts.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
The amounts allocated to major classespreliminary estimated fair values of intangiblesassets acquired and liabilities assumed as of December 31, 2021, and as updated through March 31, 2022, are as follows:
| | | | | | | | | | | | | | |
(Thousands of dollars) | | Estimated fair Value | | Estimated Weighted Average Useful Life in Years |
Backlog | | $ | 5,000 | | | 1 |
Trade names | | 60,000 | | | 15 |
Customer relationships | | 270,000 | | | 19 |
| | $ | 335,000 | | | |
| | | | | | | | | | | | | | | | | | | | |
(Millions of dollars) | | Acquisition Date | | Measurement Period Adjustments | | Revised Acquisition Date |
Gas plant, net | | $ | 1,047.4 | | | $ | — | | | $ | 1,047.4 | |
Other property and investments | | 51.3 | | | — | | | 51.3 | |
Cash and cash equivalents | | 17.6 | | | — | | | 17.6 | |
Accounts receivable, net of allowances | | 26.6 | | | 2.9 | | | 29.5 | |
Prepaid and other current assets | | 27.4 | | | — | | | 27.4 | |
Deferred charges and other assets | | 31.1 | | | — | | | 31.1 | |
Goodwill | | 986.2 | | | (8.7) | | | 977.5 | |
Deferred income taxes | | 15.4 | | | (1.3) | | | 14.1 | |
Total assets acquired | | 2,203.0 | | | (7.1) | | | 2,195.9 | |
| | | | | | |
Long-term debt | | 449.7 | | | — | | | 449.7 | |
Accounts payable | | 7.0 | | | — | | | 7.0 | |
Deferred purchased gas costs | | 5.7 | | | — | | | 5.7 | |
Customer deposits | | 3.2 | | | — | | | 3.2 | |
Accrued general taxes | | 0.4 | | | — | | | 0.4 | |
Accrued interest | | 4.7 | | | — | | | 4.7 | |
Other current liabilities | | 14.5 | | | — | | | 14.5 | |
Accumulated removal costs | | 56.6 | | | — | | | 56.6 | |
Other deferred credits | | 85.6 | | | — | | | 85.6 | |
Total liabilities assumed | | 627.4 | | | — | | | 627.4 | |
Net assets acquired | | $ | 1,575.6 | | | $ | (7.1) | | | $ | 1,568.5 | |
The Company incurred and expensed acquisition costs of $14$18.5 million for the twelve months ended March 31, 2022, which wereare included in Utility infrastructure services expensesOperations and maintenance expense on the Company’s Condensed Consolidated Statement of Income. Acquisition-relatedNo acquisition-related costs of $13.2 million and $14 million were incurred during the three and nine months ended September 30,March 31, 2022 and no impacts to earnings resulted from the measurement-period adjustments reflected above. The Company has a transition services agreement with the sellers for a period of up to twelve months from the acquisition date of December 31, 2021, respectively.to continue certain corporate and administrative functions for the entities acquired while MountainWest is established as an independent enterprise.
The preliminary allocation of
Note 9 - Subsequent Events
On May 6, 2022, the purchase price of Drum was accounted for inCompany entered into a Cooperation Agreement (the “Cooperation Agreement”) with Carl Icahn and the persons and entities listed therein (collectively, the “Icahn Group”). In accordance with applicable accounting guidance. Goodwill consists of the value associated withCooperation Agreement, John P. Hester, the assembled workforce, consolidation of operations,President and the estimated economic value attributable to future opportunities related to the transaction. As the business of Drum was deemed a stock purchase for tax purposes, only pre-acquisition goodwill of $76 million that was historically tax-deductible by Riggs will continue to be deductible for tax purposes by the Company.
The following unaudited pro forma financial information reflects the consolidated results of operationsChief Executive Officer of the Company assumingand Southwest and a member of the acquisition had taken place on January 1, 2020. The most significant pro forma adjustments relate to: (i) reflecting approximately $30 million in transaction costs (incurred by CenturiBoard and Riggs Distler) in the nine months ended September 30, 2020,Southwest Board (the “SWG Board” and, excluding such coststogether with the Board, the “Southwest Boards”), retired as President and Chief Executive Officer of the Company and resigned from the threeSouthwest Boards, effective as of May 6, 2022. Karen S. Haller, the Company’s former Executive Vice President / Chief Legal & Administrative Officer, was appointed as President and nine month periods ended September 30, 2021,Chief Executive Officer of Southwest, effective as of May 6, 2022, and (ii) reflecting incremental interest expense relatedas a member of the Board, effective immediately following the completion of the Company’s 2022 annual meeting of stockholders (the “2022 Annual Meeting”).
In addition, pursuant to the Cooperation Agreement, the Company has agreed to appoint 3 new loan facilitydirectors, Andrew W. Evans, H. Russell Frisby, Jr. and Henry P. Linginfelter (collectively, the “Icahn Designees”), to the Board, effective immediately following the 2022 Annual Meeting, and, unless within 90 days of $7 million and $27 million in the three and nine month periods, respectively, ended September 30, 2021, and approximately $9 million and $24.5 million in the comparable periods in 2020. This information is preliminary in nature and subject to change based upon final purchase price adjustments. Amounts are in thousands of dollars, except per share amounts.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Total operating revenues | $ | 956,120 | | | $ | 907,512 | | | $ | 2,903,658 | | | $ | 2,702,062 | |
Net income (loss) attributable to Southwest Gas Holdings, Inc. | $ | (8,918) | | | $ | 12,688 | | | $ | 120,828 | | | $ | 84,049 | |
Basic earnings (loss) per share | $ | (0.15) | | | $ | 0.23 | | | $ | 2.06 | | | $ | 1.51 | |
Diluted earnings (loss) per share | $ | (0.15) | | | $ | 0.23 | | | $ | 2.06 | | | $ | 1.51 | |
Actual results from operations for Riggs Distler, excluding transaction costs and interest expense on acquisition related debt incurred by Centuri, included in the Consolidated Statements of Income since the date of acquisition are as follows (in thousandsthe Cooperation Agreement, the Board has determined to pursue a spin-off of dollars):
| | | | | | | | |
| | Nine Months Ended September 30, 2021 |
Utility infrastructure services revenues | | $ | 49,520 | |
Net income attributable to Southwest Gas Holdings, Inc. | | $ | 1,646 | |
Centuri to the exclusion of other strategic alternatives, the Icahn Group has the ability to designate a fourth director, Andrew J. Teno, unless Mr. Teno has previously replaced one of the other Icahn Designees, in which case the fourth director will be such Icahn Designee. The Icahn Group’s ability to designate directors to the Board is subject to certain ownership thresholds following the closing of the previously announced tender offer by the Icahn Group to purchase any and all shares of common stock of the Company (the “Offer”).
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
The Cooperation Agreement requires the Board to expand the Strategic Transactions Committee from 3 directors to 6 directors, comprised of the current members of the Strategic Transactions Committee and the 3 Icahn Designees. For so long as the Icahn Group has the ability to designate at least three members of the Board, three of such designees shall be included on the Strategic Transactions Committee. If the Icahn Group may only designate two members of the Board, then both of such designees shall serve on the Strategic Transactions Committee.
In addition, the Cooperation Agreement provides that the Icahn Group will amend the Offer, to (i) provide that the number of shares of common stock to be purchased in the Offer shall not exceed that number of shares of common stock which, together with the shares of Common Stock beneficially owned by the Icahn Group, would exceed 24.9% of the then outstanding shares of Common Stock, (ii) extend the expiration date of the Offer (the “Expiration Date”) to May 19, 2022 and that the Expiration Date shall not be further extended, and (iii) to waive any conditions to the Offer that have not been satisfied and consummate the Offer and pay for the tendered shares of Common Stock as promptly as practicable after the Expiration Date.
Pursuant to the Cooperation Agreement, the Icahn Group caused the parties to the action filed by Icahn Partners LP and Icahn Partners Master Fund LP in the Court of Chancery of the State of Delaware on November 29, 2021 (Civil Action No. 2021-1031-KSJM), naming as defendants the Company and certain directors and officers of the Company, to file a stipulation of dismissal with prejudice, which was entered by the court on May 9, 2022
In connection with the entry into the Cooperation Agreement, the Company entered into Amendment No. 1 to Rights Agreement (the “Rights Agreement Amendment”) by and between the Company and Equiniti Trust Company. The Rights Agreement Amendment amends the Rights Agreement, dated October 10, 2021, to increase the beneficial ownership percentage included in the definition of “Acquiring Person” from 10% to 24.9% and to delete the concept of a “Passive Institutional Investor.”
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | March 31, 2022 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Southwest Gas Holdings, Inc. is a holding company that owns all of the shares of common stock of Southwest Gas Corporation (“Southwest” or the “natural gas operations”distribution” segment) and, all of the shares of common stock of Centuri Group, Inc. (“Centuri,” or the “utility infrastructure services” segment), as well as all of the membership interests in the newly formed MountainWest Pipelines Holding Company (“MountainWest,” or the “pipeline and storage” segment). Southwest Gas Holdings, Inc. and its subsidiaries are collectively referred to as the “Company.”
In October 2021, theThe Company entered into an agreement forcompleted the acquisition of Dominion Energy Questar Pipeline, LLC (“Questar Pipelines”) and related entities (“in December 2021. Following the acquisition, the Company formed MountainWest which owns all of the membership interests of Questar Pipelines”),Pipelines. In April 2022, the Company completed a general rebranding of the Questar Pipelines entities under the MountainWest name. The acquired operations further diversify the Company’s business including an essential Rocky Mountain energy hub with 2,160-milesover 2,000 miles of highly contracted, FERC-regulated interstate natural gas pipelines providing transportation and underground storage services in Utah, Wyoming, and Colorado. The operations to be acquired would further diversify the Company’s business with an expansion of FERC-regulated interstate natural gas pipelines and underground storage services, thereby expanding transportation services into Utah, Wyoming, and Colorado. The Company plans to initially fund this acquisition with a new 364-day term loan, followed by permanent financing. The transaction is expected to be completed near year-end 2021. The acquisition remains subject to certain conditions and approvals, and we can provide no assurances that it will be completed within the anticipated timeline or at all. See Note 1 – Background, Organization, and Summary of Significant Accounting Policies for additional information.
OnIn October 10, 2021, our Board of Directors (the “Board”) authorized and declared a dividend of one preferred stock purchase right for each share of common stock outstanding to stockholders of record at the close of business on October 21, 2021.
In March 2022, the Company announced that the Board had determined to separate Centuri from the Company and authorized management to complete the separation within nine to twelve months from the date of such announcement. Management evaluated various alternatives to determine the optimal structure to maximize stockholder value and subsequently announced the separation structure is expected to be a tax-free spin-off in which stockholders of the Company would receive a prorated dividend of Centuri shares in association with the completion. Then, in April 2022, as a result of interest in the Company well in excess of a tender offer by an activist stockholder (Carl Icahn) to other stockholders, the Board authorized the review of a full range of strategic alternatives intended to maximize stockholder value. As part of this process, a strategic review committee of the Board, consisting entirely of independent directors, will evaluate a sale of the Company, as well as a range of alternatives, including, but not limited to, a separate sale of its business units and/or pursuing the spin-off of Centuri. There can be no assurances that the Company will be able to successfully separate Centuri on the anticipated timeline or at all, nor assurances that other strategic alternatives considered will be executed or maximize value as intended. See “Item 1A - Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q.
As described in Note 9 - Subsequent Events, on May 6, 2022, the Company entered into a Cooperation Agreement with Carl C. Icahn and the persons and entities named therein (the “Icahn Group”). In accordance with the Cooperation Agreement, among other things, (i) Karen S. Haller has replaced John C. Hester as the Company’s President and Chief Executive Officer, (ii) the Icahn Group has certain board designation rights, (iii) the Icahn Group has agreed to terminate its previously announced tender offer, and (iv) the Icahn Group caused its affiliates to file a stipulation of dismissal with prejudice dismissing the action filed by them on November 29, 2021, which was entered by the Delaware Court of Chancery on May 9, 2022. See Note 4 – Common Stock9 - Subsequent Events. for more information.
Southwest is engaged in the business of purchasing, distributing, and transporting natural gas for customers in portions of Arizona, Nevada, and California. Southwest is the largest distributor of natural gas in Arizona, selling and transporting natural gas in most of central and southern Arizona, including the Phoenix and Tucson metropolitan areas. In January 2022, Southwest completed the purchase of the Graham County Utilities, Inc. (“GCU”) gas distribution system, located in Graham County, Arizona. Southwest is also the largest distributor of natural gas in Nevada, serving the majority of southern Nevada, including the Las Vegas metropolitan area, and portions of northern Nevada. In addition, Southwest distributes and transports natural gas for customers in portions of California, including the Lake Tahoe area and the high desert and mountain areas in San Bernardino County. Through its subsidiaries, Southwest operates two federally regulated interstate pipelines serving portions of the foregoing northern territories of Nevada and California.
As of September 30, 2021,March 31, 2022, Southwest had 2,147,0002,171,000 residential, commercial, industrial, and other natural gas customers, of which 1,146,0001,161,000 customers were located in Arizona, 799,000806,000 in Nevada, and 202,000204,000 in California. In January 2022, approximately 5,300 customers became part of Southwest’s gas distribution operations that were formerly served by GCU. Over the past twelve months, first-time meter sets were approximately 38,000, compared to 37,000 the same as for the twelve months ended September 2020. In comparison to the September 30, 2020 total of 2,112,000 customers, there was an offsetting decrease related to management’s lifting its moratorium on disconnection of service for non-payment. Southwest implemented the moratorium in March 2020 and also ceased charging late fees due to the COVID-19 pandemic. Southwest recommenced assessing late fees in Nevada and Arizona in April 2021, and expects to recommence late fees in California in the fourth quarter of 2021. The moratorium on disconnections for non-payment was lifted in September 2021 for Arizona and Nevada. The moratorium continues to be in place for California, which is expected to be lifted in the fourth quarter 2021. Residential and small commercial customers represented over 99% of the total customer base. During the twelve months ended September 30, 2021, 53%March 31, 2022, 54% of operating margin (gas operating(Regulated operations revenues less the net cost of gas sold) was earned in Arizona, 35%34% in Nevada, and 12%12% in California. During this same period, Southwest earned 85% of its operating margin from residential and small commercial customers, 4% from other sales customers, and 11% from transportation customers. While these generalThese patterns are expected to remain materially consistent for the foreseeable future, the continuing COVID-19 pandemic, as discussed further below, could impact these statistics and associated patterns in the short term.future.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | March 31, 2022 |
Southwest recognizes operating revenues from the distribution and transportation of natural gas (and related services) to customers. Operating margin is a financial measure defined by management as gas operatingRegulated operations revenues less the net cost of gas sold. However, operating margin is not specifically defined in accounting principles generally accepted in the United States (“U.S. GAAP”). Thus, operating margin is considered a non-GAAP measure. Management uses this financial measure because natural gas operatingRegulated operations revenues include the net cost of gas sold, which is a tracked cost that is passed through to customers without markup under purchased gas adjustment (“PGA”) mechanisms. Fluctuations in the net cost of gas sold impact revenues on a dollar-for-dollar basis, but do not impact operating margin or operating income. Therefore, management believes operating margin provides investors and other interested parties with useful and relevant information to analyze Southwest’s financial performance in a rate-regulated environment. The principal factors affecting changes in operating margin are general rate relief (including impacts of infrastructure trackers) and customer growth. Commission decisions on the amount and timing of such relief may impact our earnings. Refer to the Summary Operating Results table below for a reconciliation of Grossgross margin to
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021 |
operating margin, and refer to Rates and Regulatory Proceedings in this Management’s Discussion and Analysis, for details of various rate proceedings.
The demand for natural gas is seasonal, with greater demand in the colder winter months and decreased demand in the warmer summer months. All of Southwest’s service territories have decoupled rate structures (alternative revenue programs), which are designed to eliminate the direct link between volumetric sales and revenue, thereby mitigating the impacts of unusual weather variability and conservation on operating margin, allowing Southwest to pursue energy efficiency initiatives.
Centuri is a comprehensive utilitystrategic infrastructure services enterprise dedicatedcompany that partners with regulated utilities to delivering a diverse arraybuild and maintain the energy network that powers millions of solutionshomes and businesses across the United States (“U.S.”) and Canada. With an unwavering commitment to North America’sserve as long-term partners to customers and communities, Centuri’s employees enable regulated utilities to safely and reliably deliver natural gas and electric providers. Centuri derives revenue primarily from installation, replacement, repair, and maintenance of energy distribution systems.electricity, as well as achieve their goals for environmental sustainability. Centuri operates in 6970 primary locations across 4544 states and provinces in the United States (“U.S.”) and Canada. Centuri operates in the U.S., primarily as NPL, Neuco, Linetec, and Riggs Distler, Inc. (“Riggs Distler”), and in Canada, primarily as NPL Canada. In June 2021, Centuri entered into an agreement for the acquisition of Drum Parent, Inc. (“Drum”) and its U.S. operations, consisting principally of the utility infrastructure services operations of Drum’s primary subsidiary, Riggs Distler, serving utility customers in the Northeast and Mid-Atlantic regions. The transaction was completed in August 2021. Information surrounding this acquisition can be found in Note 8 - Business Acquisitions.
Utility infrastructure services activity can be impacted by changes in infrastructure replacement programs of utilities, weather, and local and federal regulation (including tax rates and incentives). Utilities continue to implement or modify system integrity management programs to enhance safety pursuant to federal and state mandates. These programs have resulted in multi-year utility system replacement projects throughout the U.S. Generally, Centuri revenues are lowest during the first quarter of the year due to less favorable winter weather conditions. Revenues typically improve as more favorable weather conditions occur during the summer and fall months. In cases of severe weather, such as following a regional storm, Centuri may be engaged to perform restoration activities related to above-ground utility infrastructure.infrastructure, and related results impacts are not solely within the control of management. In addition, in certain circumstances, such as with large bid contracts (especially those of a longer duration), or unit-price contracts with revenue caps, results may be impacted by differences between costs incurred and those anticipated when the work was originally bid. Work awarded, or failing to be awarded, by individual large customers can significantly impact operating results.
COVID-19 PandemicMountainWest is an interstate natural gas transmission pipeline company that provides transportation and underground storage services to customers in Utah, Wyoming, and Colorado. A substantial portion of its revenue results from reservation charges, but variable rates are also included as part of its primarily rate-regulated rate structures.
While the novel coronavirus (“COVID-19”) pandemic has been ongoing since the first quarter of 2020, management has remained focused on the impacts to local and U.S. economies, including the breadth of vaccine deployment, the level of commerce/employment, as well as impacts from new virus variants on these economies. Our utility operations, as essential services, have been ongoing during this time and Southwest has continued to provide services to meet the demand of its customers. Consistent with federal and state guidelines and protocols, Southwest has continued to operate across its territories. Similarly, Centuri has continued nearly all operations from the outset of the pandemic in the U.S., and demand has not significantly diminished. For the duration of the pandemic, the ability to work may nonetheless be impacted by individuals contracting or being exposed to COVID-19, governmental requirements or restrictions in some of the Company’s jurisdictions, or by management imposed restrictions for safety precautions; to date, these factors have not had a significant impact on the Company’s ability to maintain operations. Employees at some offices (including corporate headquarters) continue to work from home on a temporary basis; Southwest has introduced plans for employees to begin returning to the office environment at the safest, most appropriate time, which is currently anticipated in the first quarter of 2022, while Centuri employees have resumed work in the office. At the same time, management is also focused on the need for adaptability in an environment of virus variants and governmental actions related thereto. Both segments continueCompany continues to facilitate administration, communication, and all critical functions, supported by deployed technology whenever employees are working remotely.functions. To date, there has not been a significant disruption in the Company’s supply chains, transportation network, or ability to serve customers.
As noted earlier, management had a moratorium on natural gas disconnections for non-payment that was lifted in our Nevada and Arizona jurisdictions in the third quarter of 2021, with the expectation to lift the moratorium in California in the fourth quarter of 2021. Southwest continues to work with customers experiencing financial hardship through flexible payment arrangements. Management also continues to coordinate with certain governmental and nonprofit entities for customer payment assistance. Management has increased the allowance for uncollectibles; however, neither this nor other measures associated with the moratorium have had a material impact on our financial position overall. See Accounts receivable, net of allowances in Note 1 – Background, Organization, and Summary of Significant Accounting Policies. In the utility infrastructure services segment, a limited number of Centuri customers at the outset of the pandemic delayed some projects, and crews were temporarily reduced; however, most work continued, while following appropriate government protocols. Some crew reductions are ongoing in specific areas; however, the associated revenue impacts have not been significant. Management continues to monitor these circumstances, the future impacts of which are not currently known, such as the impact from business curtailments, weak market conditions, or any restrictions that may limit the timing of fulfillment by Centuri of its contractual obligations.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021 |
The extent to which COVID-19 may adversely impact the Company’s business depends on future developments, including the timing of full resumption of commerce across our service territories, the deployment of vaccines and population immunity, the state of local and North American economies, and impacts of these collective conditions on our customers, in addition to other unmitigated effects related to the virus and its variants. Managementdevelopments; however, management does not currently expect the impact of these conditionsimpacts to be material to the Company’s liquidity or financial position overall; however, continued uncertainty of economic and operational impacts means management cannot predict whether the related financial impact in future periods will be different from impacts reflected for the three, nine, and twelve months ended September 30, 2021. In anticipation of a redeployment of employees to their normal work locations, management created a multi-phase reintegration plan to safeguard the well-being of our teams. Management will continue to monitor developments by government officials, and those affecting employees, customers, and operations, and will take additional steps as necessary to address impacts from the pandemic. Events and circumstances arising after September 30, 2021, including those resulting from COVID-19, will be reflected in management’s estimates for future periods.overall.
This Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto, as well as MD&A, included in the 20202021 Annual Report to Stockholders, which is incorporated by reference into the 20202021 Form 10-K.
Executive Summary
The items discussed in this Executive Summary are intended to provide an overview of the results of the Company’s and Southwest’s operations. As needed, certain items are covered in greater detail in later sections of MD&A. As reflected in the table below, the natural gas operations segment accounted for an average of 74% of twelve-month-to-date consolidated net income over the past two years. Natural gas sales are seasonal, peaking during the winter months; therefore, results of operations for interim periods are not necessarily indicative of results for a full year.
Summary Operating Results
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Period Ended September 30, |
| | Three Months | | Nine Months | | Twelve Months |
(In thousands, except per share amounts) | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Contribution to net income | | | | | | | | | | | | |
Natural gas operations | | $ | (27,544) | | | $ | (15,973) | | | $ | 102,584 | | | $ | 79,568 | | | $ | 182,134 | | | $ | 155,993 | |
Utility infrastructure services | | 18,540 | | | 34,873 | | | 32,797 | | | 50,936 | | | 56,723 | | | 66,615 | |
Corporate and administrative | | (2,572) | | | (627) | | | (4,545) | | | (1,724) | | | (4,477) | | | (2,110) | |
Net income (loss) | | $ | (11,576) | | | $ | 18,273 | | | $ | 130,836 | | | $ | 128,780 | | | $ | 234,380 | | | $ | 220,498 | |
| | | | | | | | | | | | |
Weighted average common shares | | 59,688 | | | 56,271 | | | 58,639 | | | 55,683 | | | 58,209 | | | 55,508 | |
Basic earnings (loss) per share | | | | | | | | | | | | |
Consolidated | | $ | (0.19) | | | $ | 0.32 | | | $ | 2.23 | | | $ | 2.31 | | | $ | 4.03 | | | $ | 3.97 | |
| | | | | | | | | | | | |
Natural Gas Operations | | | | | | | | | | | | |
Reconciliation of Gross Margin to Operating Margin (Non-GAAP measure) | | | | | | | | | | | | |
Utility Gross Margin | | $ | 62,681 | | | $ | 57,188 | | | $ | 392,190 | | | $ | 354,854 | | | $ | 566,065 | | | $ | 524,010 | |
Plus: | | | | | | | | | | | | |
Operations and maintenance (excluding Admin. & General) expense | | 68,098 | | | 61,383 | | | 194,471 | | | 182,761 | | | 255,434 | | | 244,573 | |
Depreciation and amortization expense | | 61,359 | | | 55,942 | | | 187,688 | | | 173,865 | | | 249,118 | | | 230,158 | |
Operating margin | | $ | 192,138 | | | $ | 174,513 | | | $ | 774,349 | | | $ | 711,480 | | | $ | 1,070,617 | | | $ | 998,741 | |
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
3rd
Executive Summary
The items discussed in this Executive Summary are intended to provide an overview of the results of the Company’s and Southwest’s operations and are covered in greater detail in later sections of MD&A.
Summary Operating Results
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Period Ended March 31, |
| | Three Months | | | | Twelve Months |
(In thousands, except per share amounts) | | 2022 | | 2021 | | | | | | 2022 | | 2021 |
Contribution to net income | | | | | | | | | | | | |
Natural gas distribution | | $ | 111,795 | | | $ | 118,715 | | | | | | | $ | 180,215 | | | $ | 194,234 | |
Utility infrastructure services | | (23,486) | | | (859) | | | | | | | 17,793 | | | 84,207 | |
Pipeline and storage | | 16,930 | | | — | | | | | | | 16,930 | | | — | |
Corporate and administrative | | (9,061) | | | (563) | | | | | | | (35,274) | | | (1,366) | |
Net income | | $ | 96,178 | | | $ | 117,293 | | | | | | | $ | 179,664 | | | $ | 277,075 | |
| | | | | | | | | | | | |
Weighted average common shares | | 60,737 | | | 57,600 | | | | | | | 59,919 | | | 56,564 | |
Basic earnings per share | | | | | | | | | | | | |
Consolidated | | $ | 1.58 | | | $ | 2.04 | | | | | | | $ | 3.00 | | | $ | 4.90 | |
| | | | | | | | | | | | |
Natural Gas Distribution | | | | | | | | | | | | |
Reconciliation of Gross Margin to Operating Margin (Non-GAAP measure) | | | | | | | | | | | | |
Utility Gross Margin | | $ | 233,882 | | | $ | 233,156 | | | | | | | $ | 571,051 | | | $ | 546,171 | |
Plus: | | | | | | | | | | | | |
Operations and maintenance (excluding Admin. & General) expense | | 73,422 | | | 64,057 | | | | | | | 276,525 | | | 246,214 | |
Depreciation and amortization expense | | 72,114 | | | 68,698 | | | | | | | 256,814 | | | 239,268 | |
Operating margin | | $ | 379,418 | | | $ | 365,911 | | | | | | | $ | 1,104,390 | | | $ | 1,031,653 | |
1st Quarter 20212022 Overview
Natural gas operationsSouthwest Gas Holdings highlights include the following:
•Announced the Board’s evaluation of strategic alternatives, including a potential sale of the Company, sale of business segments, and/or spin-off of Centuri
•37,000Issued 6,325,000 shares of common stock, raising $452 million in net proceeds
•Corporate and administrative expenses include impact of interest on $1.6 billion term loan and activism costs
Natural gas distribution highlights include the following:
•38,000 first-time meters sets occurred over the past 12 months
•Operating margin increased $18 $14 million
•Issued $300$600 million in 3.18% 30-year4.05% 10-year Notes
•Nevada general rate case finalized with rate relief effective April 2022
Utility infrastructure services highlights include the following:
•Utility infrastructure servicesRecord revenues increased $52of $524 million in the first quarter of 2022, an increase of $160 million, or 9%
•44%, coCompletedmpared to the acquisitionfirst quarter of Riggs Distler for $830 million in August 2021
•$13 million of acquisition costs incurredResults impacted by inflationary pressures and incremental interest and amortization associated with Riggs Distler
•AmendedPipeline and restated credit agreement in connection with the Riggs Distler acquisition; $1.145 billion secured term loan facility and $400 million secured revolving credit facility
Southwest Gas Holdingsstorage highlights include the following:
•Announced planned acquisitionRecognized revenue of Questar Pipelines for $1.545 billion in cash (subject to certain adjustments) and assumption of approximately $430$67 million of existing long-term debt
•Authorized a preferred stock purchase right for each outstanding common share
•Contributed $17 million to consolidated net income, which is net of Amended$8.7 million of one-time stand-up and Restated Bylaws
integration costs
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
Results of Natural Gas OperationsDistribution
Quarterly Analysis
| | | Three Months Ended September 30, | | Three Months Ended March 31, |
(Thousands of dollars) | (Thousands of dollars) | | 2021 | | 2020 | (Thousands of dollars) | | 2022 | | 2021 |
Gas operating revenues | | $ | 255,848 | | | $ | 210,834 | | |
Regulated operations revenues | | Regulated operations revenues | | $ | 676,539 | | | $ | 521,932 | |
Net cost of gas sold | Net cost of gas sold | | 63,710 | | | 36,321 | | Net cost of gas sold | | 297,121 | | | 156,021 | |
Operating margin | Operating margin | | 192,138 | | | 174,513 | | Operating margin | | 379,418 | | | 365,911 | |
Operations and maintenance expense | Operations and maintenance expense | | 119,708 | | | 101,159 | | Operations and maintenance expense | | 119,636 | | | 106,135 | |
Depreciation and amortization | Depreciation and amortization | | 61,359 | | | 55,942 | | Depreciation and amortization | | 72,114 | | | 68,698 | |
Taxes other than income taxes | Taxes other than income taxes | | 20,109 | | | 15,787 | | Taxes other than income taxes | | 21,652 | | | 20,687 | |
Operating income (loss) | | (9,038) | | | 1,625 | | |
Operating income | | Operating income | | 166,016 | | | 170,391 | |
Other income (deductions) | Other income (deductions) | | (4,287) | | | 1,751 | | Other income (deductions) | | 1,315 | | | 550 | |
Net interest deductions | Net interest deductions | | 24,922 | | | 26,103 | | Net interest deductions | | 26,610 | | | 22,166 | |
Loss before income taxes | | (38,247) | | | (22,727) | | |
Income tax benefit | | (10,703) | | | (6,754) | | |
Contribution to consolidated results | | $ | (27,544) | | | $ | (15,973) | | |
Income before income taxes | | Income before income taxes | | 140,721 | | | 148,775 | |
Income tax expense | | Income tax expense | | 28,926 | | | 30,060 | |
Contribution to consolidated net income | | Contribution to consolidated net income | | $ | 111,795 | | | $ | 118,715 | |
Contribution from natural gas operationsdistribution operations decreased $11.6$6.9 million betwebetween the thirdfirst quarters of 20212022 and 2020.2021. The decline was primarily due to an increase in Operations and maintenance expense, higher Depreciation and amortization, and a decreasean increase in Other income,Net interest deductions, partially offset by an increase in Operating margin.
Operating margin increased $18 million.$14 million quarter over quarter. Approximately $2$7 million of incremental margin was attributable to customer growth fromincluding 37,00038,000 first-time meter sets during the last twelve months. Rate relief in Arizona, Nevada, and California added $13$1 million of margin. Also contributing to the increase were customer late fees that were $1.5$2.8 million greater in the current quarter due to the lifting of the moratorium in 2021 on such fees in Arizona, Nevada, and Nevada that had beenCalifornia. The moratorium was previously in place sincebeginning in March 2020. 2020 to provide temporary relief to customers during the COVID-19 pandemic. Amounts collected from and returned to customers associated with regulatory account balances as well asand programs, including $6.2 million in incremental (previously unrecovered) revenue associated with Vintage Steel Pipe (“VSP”) and Customer-Owned Yard Line (“COYL”) programs in Arizona, also contributed to the improvement. Refer to Rates and Regulatory Proceedings below. Other differences in miscellaneous revenue and margin from customers outside the decoupling mechanisms also impactedcontributed to the remaining net variance between quarters.
Operations and maintenance expenseexpense increased $18.5$13.5 million between quarters reflecting a $5 million legal reserve (as described in betNote 1 – Background, Organization, and Summary of Significant Accounting Policies), a $1.7 million increaseween quarters. In addition to general inflationary impacts, other increases occurred in the service-related component of employee pension costs (see $775,000 increase reflected in service cost for the three plans in Note 2 - Components of Net Periodic Benefit Cost) and $2.2$3.5 million of incremental temporary staffing,specifically related to customer service, system support, and billing. Other increases included employee and benefit-related costs ($1.2 million) and increased general business insurance ($800,000). The prior year period expense levels included more modest expense levels overall due to COVID-environment reduced training, and stabilization costs associated with a new customer information system implemented in May 2021. In addition, the timing of vacation, other time-off, and miscellaneous employee benefits resulted in an increase of $2.5 million when compared to the COVID-impacted third quarter of 2020. Increased expenditures for pipeline damage prevention programs, higher travel and training costs, and general cost increases were also recognized in the current quarter.related amounts.
Depreciation and amortization expenseexpense increased $5.4$3.4 million, or 10%5%, betweenbetween quarters, primarily due to a $574$564 million,, or 7%, increase in average gas plant in service compared to the corresponding quarter a year ago, includingago. Offsetting the replacement of the customer information system, which occurred in May 2021. Software/systems have shorter useful lives than pipeline assets. Amortizationincrease, amortization related to regulatory account recoveries increaseddecreased approximately $1.5 million$700,000 between quarters, andwhich is also reflected as an increase in Operating margin above. TheThe increase in plant was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled pipe replacement activities, and new infrastructure.
Taxes other than income taxesOther income increased $4 million between quarters primarily due to an increase in Arizona property taxes.
Other incom$765,000e decreased $6 million, including a decline in income from COLI policies.. The current quarter reflects no changea $2 million decline in COLI policy cash surrender values, while the prior-year quarter reflected a $4.5$2.7 million increase. These fluctuations primarily result from changes in the portion of the cash surrender values that are associated with equity securities, and are directionally consistent with the broader securities markets. Amounts associated with the allowance for funds used during construction (“AFUDC”) decreased $1.2 million in the current quarter compared to the prior year quarter due to an update to the assumptions related to the impact short-term borrowings have on AFUDC. Partially offsetting these combined impacts is aThis decrease in thewas offset by non-service-related components of employee pension and other postretirement benefit costs, which decreased $3.3 million between quarters. Interest income increased $2.1 million between quarters due to the increased receivable position of the Purchased Gas Adjustment. A gain of $1.5 million was recognized on the sale of non-regulated property in the first quarter of 2022.
Net interest deductions decreased $1increased $4.4 million in the thirdfirst quarter of 2021,2022, as compared to the prior-year quarter, primarily due
related to a decreaselower interest in the amortization ofprior-year quarter, as a carrying amount related to an interest-related regulatory balance in Arizona.annual excess accumulated deferred tax
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
(“EADIT”) balance in Arizona was required to be returned to customers, thereby reducing interest when the carrying charge regulatory liability balance was amortized for the return ($1.5 million), and due to higher interest in the current period due to $300 million of Senior Notes issued in August 2021, and to a lesser extent, $600 million of Senior Notes issued in March 2022.
Results of Natural Gas OperationsDistribution
Nine-MonthTwelve-Month Analysis
| | | Nine Months Ended September 30, | | Twelve Months Ended March 31, |
(Thousands of dollars) | (Thousands of dollars) | | 2021 | | 2020 | (Thousands of dollars) | | 2022 | | 2021 |
Gas operating revenues | | $ | 1,070,576 | | | $ | 976,095 | | |
Regulated operations revenues | | Regulated operations revenues | | $ | 1,676,397 | | | $ | 1,369,690 | |
Net cost of gas sold | Net cost of gas sold | | 296,227 | | | 264,615 | | Net cost of gas sold | | 572,007 | | | 338,037 | |
Operating margin | Operating margin | | 774,349 | | | 711,480 | | Operating margin | | 1,104,390 | | | 1,031,653 | |
Operations and maintenance expense | Operations and maintenance expense | | 328,980 | | | 303,567 | | Operations and maintenance expense | | 452,051 | | | 409,429 | |
Depreciation and amortization | Depreciation and amortization | | 187,688 | | | 173,865 | | Depreciation and amortization | | 256,814 | | | 239,268 | |
Taxes other than income taxes | Taxes other than income taxes | | 60,134 | | | 47,507 | | Taxes other than income taxes | | 81,308 | | | 67,769 | |
Operating income | Operating income | | 197,547 | | | 186,541 | | Operating income | | 314,217 | | | 315,187 | |
Other income (deductions) | Other income (deductions) | | (4,902) | | | (10,947) | | Other income (deductions) | | (3,794) | | | 14,496 | |
Net interest deductions | Net interest deductions | | 71,263 | | | 75,152 | | Net interest deductions | | 102,004 | | | 98,256 | |
Income before income taxes | Income before income taxes | | 121,382 | | | 100,442 | | Income before income taxes | | 208,419 | | | 231,427 | |
Income tax expense | Income tax expense | | 18,798 | | | 20,874 | | Income tax expense | | 28,204 | | | 37,193 | |
Contribution to consolidated net income | Contribution to consolidated net income | | $ | 102,584 | | | $ | 79,568 | | Contribution to consolidated net income | | $ | 180,215 | | | $ | 194,234 | |
CContribontributionution to consolidated net income from natural gas distribution operations to consolidated net income increased $23decreased $14 million between the first nine months of 2021twelve-month periods ended March 2022 and 2020.2021. The increasedecline was due primarily due to an improvement in Operating margin and Other income (deductions) and a decline in Net interest deductions, offset by increases in Depreciation and amortization, Operations and maintenance expense, Depreciation and amortization, and Taxes other than income taxes.taxes, and a decrease in Other income (deductions), offset by an increase in Operating margin.
Operating margiman rgin increased $73 millionincreased $62.9 between periods. Customer growth provided $14 million, including $10and combined rate relief provided $44 million attributable to customer growth. Rate relief contributed an additional $46 million inof incremental operating margin. LateAlso contributing to the increase were customer late fees also increased (approximately $725,000), asthat were $8 million greater in the current period due to lifting the moratorium dueon such fees in all jurisdictions, which was initially instituted in March 2020 to COVID was liftedprovide temporary relief to customers during the pandemic. Additionally, regulatory account balance returns and charges re-commenced, as described earlier. Residual impacts include those relatedrecoveries increased approximately $2.1 million between periods. Incremental (previously unrecovered) VSP and COYL revenue in Arizona ($5.2 million combined, between twelve-month periods) also contributed to regulatory mechanisms, including recovery/return of regulatory program balances (primarily offset in amortization expense), in addition to margin from customers outside the decoupling mechanisms.variance between periods.
Operations and maintenance expense expense increased $25.4$43 million, or 8%10%, between periods, includingperiods. In addition to general inflationary impacts, Southwest also experienced $7 million of higher legal-claim related costs (including a $5 million legal reserve as described in the third quarterNote 1 – Background, Organization, and Summary of 2021Significant Accounting Policies), higher levels of service-related pension costs ($6.1 million), customer service, system support, and a $5 million increase in the service-related component of pension cost. Other increases includebilling costs ($7.9 million), increased expenditures for pipeline integrity management and damage prevention programs associated with a growing infrastructure($4 million) and customer base,general business insurance ($2.7 million), as well as increased medical and increases in customer service-relatedother employee benefit costs. Prior year expense levels were uncharacteristically low due to COVID-period reduced training/travel and information technology costs.other cost savings.
Depreciation and amortization expenseexpense increased $13.8 million, or 8%, between periods primarily due to a $557$17.5 million, or 7%, between periods primarily due to a $562 million, or 7%, increase in average gas plant in service between periods.since the corresponding period in the prior year. The increase in gas plant was attributableattributable to pipeline capacity reinforcement work, franchise requirements, scheduled pipe replacement activities, and new infrastructure, as well as the implementation of thea new customer information system placed into production in Maythe second quarter of 2021. Recoveries associated withAmortization of regulatory programaccount balances as noted above, resultedimpacted expense in a $3 million increaseboth periods, which is offset in amortization expense compared to the first nine months of 2020.Operating margin above.
Taxes other than income taxes increased $12.6$13.5 million between periods primarily due to an increase in property taxes in Arizona, and to a lesser extent, in the California and Nevada jurisdictions.
Other income (deductions) improved $6 million overall between periods. The current period reflects $5.8 million in income from the combined effects of an increase in COLIcome decreased $18.3 million between the twelve-month periods of 2022 and 2021, primarily due to current-period income of $4.1 million related to COLI policy cash surrender values and recognizednet death benefits wrecognized, compared to the twelve months ended March 31, 2021 which reflected hile the prior-year period reflected $1an exceptionally large increase in values of $27.4 million in COLI-related income. The non-service cost components(including $3.7 million of employee pension and other postretirement benefit costs were $4.5 million lower between periods. Lowernet death benefits). Additionally, equity AFUDC partially offset the improvements in the current period.
Net interest deductions decreased $3.9was lower by $5.6 million, between periods primarily due to amortization of an interest-related regulatory balance in Arizona.
The income tax amount in both quarters includes the amortization of Excess Accumulated Deferred Income Tax (“EADIT”) balances and the impacts of COLI cash surrender value increases, which are recognized without tax consequences.impact short-term borrowings have
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
Results of Natural Gas Operations
Twelve-Month Analysis
| | | | | | | | | | | | | | |
| | Twelve Months Ended September 30, |
(Thousands of dollars) | | 2021 | | 2020 |
Gas operating revenues | | $ | 1,445,066 | | | $ | 1,355,666 | |
Net cost of gas sold | | 374,449 | | | 356,925 | |
Operating margin | | 1,070,617 | | | 998,741 | |
Operations and maintenance expense | | 431,795 | | | 406,169 | |
Depreciation and amortization | | 249,118 | | | 230,158 | |
Taxes other than income taxes | | 76,087 | | | 63,195 | |
Operating income | | 313,617 | | | 299,219 | |
Other income (deductions) | | (545) | | | (7,615) | |
Net interest deductions | | 97,259 | | | 100,115 | |
Income before income taxes | | 215,813 | | | 191,489 | |
Income tax expense | | 33,679 | | | 35,496 | |
Contribution to consolidated net income | | $ | 182,134 | | | $ | 155,993 | |
Contribution to consolidated net income from natural gas operations increased $26 million between the twelve-month periods ended September 2021 and 2020. The increase was due primarily to an increase in Operating margin and Other income, offset by increases in Operations and maintenance expense, Depreciation and amortization, and Taxes other than income taxes.
Operating margin increased $72 million between periods. Customer growth provided $13 million, and combined rate relief provided $52 million of incremental operating margin.on AFUDC rates. Offsetting these impacts was a reduction in late fees ($817,000) due to the pandemic-period moratorium on these fees from March 2020 through March 2021 (resuming in Arizona and Nevada in April 2021). Regulatory account balance return/recoveries impacted both periods, in addition to margin from customers outside the decoupling mechanisms.
Operations and maintenance wereexpense increased $26 million, or 6%, between periods primarily due to higher legal-claim related costs as noted earlier, higher levels of service-related pension costs ($7.3 million), expenditures for pipeline damage prevention programs associated with a growing infrastructure and customer base, increased customer-related and information technology costs, and higher reserves for customer accounts deemed uncollectible.
Depreciation and amortization expense increased $19 million, or 8%, between periods primarily due to a $579 million, or 7%, increase in average gas plant in service since the corresponding period in the prior year and due to a $3.8 million increase in regulatory account amortization.
Taxes other than income taxes increased $12.9 million between periods primarily due to an increase in property taxes in Arizona, and to a lesser extent, in Southwest’s California and Nevada jurisdictions.
Other income increased $7.1 million between the twelve-month periods of 2021 and 2020, primarily due to a current-period $14 million increase in COLI policy cash surrender values and recognized death benefits, compared to the twelve months ended September 30, 2020, which reflected a $7.2 million increase. The non-service cost components of employee pension and other postretirement benefit costs were $3.3which were $7.8 million lower between periods, and interest income which was offset by lower equity AFUDC.increased $3.9 million between periods. A gain on sale of non-regulated property in the most recent twelve-month period also impacted the variance between periods.
Net interest deductions decreased $2.9deductions increased $3.7 million between periods primarily due to decreasesincreased interest associated with $300 million of Senior Notes issued in August 2021, and to a lesser extent, $600 million of Senior Notes issued in March 2022.
Income tax expense decreased $9 million between the twelve-month period ended March 31, 2022 and 2021, primarily due to a reduction in pre-tax book income, additional amortization of an interest-related regulatory balanceEADIT ($5 million), and to a lesser extent, changes in Arizona.
Arizona and California state apportionment percentages of $2.8 million. Income tax expense in both periods reflects that COLI results are recognized without tax consequences,consequences.
Results of Utility Infrastructure Services
Quarterly Analysis
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
(Thousands of dollars) | | 2022 | | 2021 |
Utility infrastructure services revenues | | $ | 523,877 | | | $ | 363,975 | |
Operating expenses: | | | | |
Utility infrastructure services expenses | | 503,232 | | | 335,614 | |
Depreciation and amortization | | 37,612 | | | 24,744 | |
Operating income (loss) | | (16,967) | | | 3,617 | |
Other income (deductions) | | (486) | | | (102) | |
Net interest deductions | | 11,131 | | | 1,622 | |
Income (loss) before income taxes | | (28,584) | | | 1,893 | |
Income tax expense (benefit) | | (6,170) | | | 1,200 | |
Net income (loss) | | (22,414) | | | 693 | |
Net income attributable to noncontrolling interests | | 1,072 | | | 1,552 | |
Contribution to consolidated results attributable to Centuri | | $ | (23,486) | | | $ | (859) | |
Utility infrastructure services revenues increased $159.9 million, or 44%, in the first quarter of 2022 when compared to the prior-year quarter, including $113.8 million from Riggs Distler. Revenues from electric infrastructure services increased $88 million in the first quarter of 2022 when compared to the prior-year quarter, of which $67.5 million was recorded by Riggs Distler. Included in electric infrastructure services revenues overall was $14 million from emergency restoration services performed by Linetec and Riggs Distler following tornado and other storm damage to customers’ above-ground utility infrastructure in and around the Gulf Coast and eastern regions of the U.S., compared to $9 million in the prior-year quarter. Centuri’s revenues derived from storm-related services vary from period to period due to the unpredictable nature of weather-related events, and when this type of work is performed, it typically generates a higher profit margin than core infrastructure services, due to improved operating efficiencies related to equipment utilization and absorption of fixed costs. The current quarter increase also reflectsincluded approximately $38.8 million in gas infrastructure services revenues, including $13.6 million recorded by Riggs Distler, primarily from increased volumes under master service agreements.
Utility infrastructure services expenses increased $167.6 million in the amortizationfirst quarter of EADIT balances.2022 when compared to the prior-year quarter. The overall increase includes $104.1 million incurred by Riggs Distler, and incremental costs related to the higher volume of infrastructure services provided. Changes in mix of work and inflationary pressures led to higher input costs including fuel and subcontractor expenses, while higher rental and tooling costs were incurred in support of growth in our electric infrastructure business. The incremental impact of fuel costs in the current environment is estimated at $5 million. These impacts are in contrast to the first quarter of 2021, when favorable weather and mix of work provided improved efficiencies and relative favorable results were uncustomary compared to first quarters that typically bring higher losses, given the seasonal nature of the business and winter-weather hampering effects on construction efforts. Also included in total Utility infrastructure services expenses were general and administrative costs, which increased approximately $7.1 million between quarters, including $4 million of general and administrative costs incurred by Riggs Distler. Other administrative costs increased due to the continued growth in the business. Gains on sale of equipment in the first quarter of 2022 and 2021 (reflected as an offset to Utility infrastructure services expenses) were approximately $413,000 and $1.5 million, respectively.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
Depreciation and amortization expense increased $12.9 million between quarters, of which $12.3 million was recorded by Riggs Distler. The remaining increase was attributable to equipment and computer systems purchased to support the growing volume of infrastructure work.
The increase in Net interest deductions of $9.5 million was primarily due to incremental interest related to outstanding borrowings under Centuri’s $1.545 billion amended and restated secured revolving credit and term loan facility in conjunction with the acquisition of Riggs Distler.
Results of Utility Infrastructure Services
QuarterlyTwelve-Month Analysis
| | | Three Months Ended September 30, | | Twelve Months Ended March 31, |
(Thousands of dollars) | (Thousands of dollars) | | 2021 | | 2020 | (Thousands of dollars) | | 2022 | | 2021 |
Utility infrastructure services revenues | Utility infrastructure services revenues | | $ | 632,848 | | | $ | 580,392 | | Utility infrastructure services revenues | | $ | 2,318,563 | | | $ | 1,978,770 | |
Operating expenses: | Operating expenses: | | Operating expenses: | |
Utility infrastructure services expenses | Utility infrastructure services expenses | | 567,270 | | | 502,951 | | Utility infrastructure services expenses | | 2,123,085 | | | 1,745,729 | |
Depreciation and amortization | Depreciation and amortization | | 30,021 | | | 24,197 | | Depreciation and amortization | | 130,511 | | | 98,548 | |
Operating income | Operating income | | 35,557 | | | 53,244 | | Operating income | | 64,967 | | | 134,493 | |
Other income (deductions) | Other income (deductions) | | 1,175 | | | 48 | | Other income (deductions) | | 683 | | | (67) | |
Net interest deductions | Net interest deductions | | 6,257 | | | 2,000 | | Net interest deductions | | 30,508 | | 7,992 | |
Income before income taxes | Income before income taxes | | 30,475 | | | 51,292 | | Income before income taxes | | 35,142 | | | 126,434 | |
Income tax expense | Income tax expense | | 9,653 | | | 13,629 | | Income tax expense | | 11,406 | | 34,477 | |
Net income | Net income | | 20,822 | | | 37,663 | | Net income | | 23,736 | | | 91,957 | |
Net income attributable to noncontrolling interest | | 2,282 | | | 2,790 | | |
Contribution to consolidated results attributable to Centuri | | $ | 18,540 | | | $ | 34,873 | | |
Net income attributable to noncontrolling interests | | Net income attributable to noncontrolling interests | | 5,943 | | 7,750 | |
Contribution to consolidated net income attributable to Centuri | | Contribution to consolidated net income attributable to Centuri | | $ | 17,793 | | | $ | 84,207 | |
Utility infrastructure services revenuesrevenues increased $52.5$339.8 million, or 17%, in the third quartercurrent twelve-month period compared to the corresponding period of 2021,including $277.7 million recorded by Riggs Distler subsequent to its acquisition on August 27, 2021. Revenues from electric infrastructure services increased $179.7 million in 2022 when compared to the prior-year quarter, including $49.5prior year, of which $175.5 million from was recorded by Riggs Distler subsequent toDistler. Included in the August 27, 2021 acquisition date. Revenues specific toincremental electric infrastructure services work increased $40.1 million inrevenues during the third quartertwelve-month period of 2021 when compared to the prior-year quarter, of which $34.1 million related to Riggs Distler. Included in electric services revenues overall2022 was $45.7$70.5 million from emergency restoration services performed by Linetec and Riggs Distler, following hurricane, tornado, and other storm damage to customers’ above-ground utility infrastructure in and around the Gulf Coast and eastern regions of the U.S., as compared to $48.7$90.5 million in similar services during the third quarter of the prior yeartwelve-month period in regard2021. The remaining increase in revenue was attributable to Linetec. Storm restoration work typically generates a higher profit margin than corecontinued growth with existing gas infrastructure services, due to improved operating efficiencies related to equipment utilizationcustomers under master service and absorption of fixed costs. Partially offsetting the improved revenues overall wasbid agreements, partially offset by reduced work with two significant gas infrastructure services customers during the third quarter of 20212022 twelve-month period (totaling $17.1$60.6 million), due to timing andthe mix of projects under each customer’s multi-year capital spending programs.
Utility infrastructure services expensesexpenses increased $64.3$377.4 million, (including $13or 22%, between periods (including $14 million of professional fees related to the acquisition of Riggs Distler) in the third quarter of 2021, compared to the prior-year quarter, and also included $42.4. The increase overall includes $249 million in expenses (including storm-related) recordedincurred by Riggs Distler subsequent to the acquisition, as well as other incremental costs related to electric infrastructure services (inclusive of storm-related work)work and costs necessary for the completion of additional gas infrastructure work. Higher fuel costs, and equipment rental expense, and subcontractor expenses were also incurred due to the mix of work and in support of growth in our electric infrastructure business. IncludedExpenses in relation to revenues, and therefore, profit margins, can be impacted by the mix of work and inefficiencies from equipment and facility utilization and under-absorption of other fixed costs, which occurred due to the reduced work from the two large customers and lower revenues from emergency restoration services as noted above. Also included in total Utility infrastructure services expenses were general and administrative costs, which increased approximately $18$26.5 million between comparative periods, including $13the noted $14 million of acquisition-related professional fees and an additional $13.3 million of professional fees previously noted, $3 million of othergeneral and administrative costs incurred by Riggs Distler subsequent to the acquisition, and otheracquisition. Other administrative costs resulting from generalincreased due to the growth in the business. The reduction in revenues with two large customers,Gains on sale of equipment (reflected as noted earlier, resulted in an unfavorable impact on profit margins duringoffset to Utility infrastructure services expenses) were approximately $5.8 million and $3.3 million for the third quartertwelve-month periods of 2022 and 2021, due to reduced operating efficiencies from equipment and facility utilization and under-absorption of other fixed costs.
Other income increased $1.1 million between quarters attributable to proceeds from life insurance policies of $1.7 million, partially offset by $700,000 of unamortized loan fees that were expensed in connection with Centuri’s debt refinancing.respectively.
Depreciation and amortization eexpensexp increased $32 million bense increased $5.8 million between quarters,etween the current and prior-year twelve-month periods, of which $4.7$29.1 million was recorded by Riggs Distler subsequent to the acquisition. The remaining increase was attributable to equipment and computer systems purchased to support the growing volume of infrastructure work.
The increase in Net interest deductions of $4.3 million was primarily due to incremental interest related to outstanding borrowings under Centuri’s $1.545 billion amended and restated secured revolving credit and term loan facility in conjunction with the acquisition of Riggs Distler.
Income tax expense decreased $4 million between quarters, primarily due to reduced profitability in 2021. Certain costs related to the Riggs Distler acquisition were non-deductible for U.S. federal income tax purposes, impacting the recorded Income tax expense during the third quarter of 2021.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021 |
Results of Utility Infrastructure Services
Nine-Month Analysis
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(Thousands of dollars) | | 2021 | | 2020 |
Utility infrastructure services revenues | | $ | 1,525,448 | | | $ | 1,408,698 | |
Operating expenses: | | | | |
Utility infrastructure services expenses | | 1,381,524 | | | 1,252,489 | |
Depreciation and amortization | | 79,982 | | | 71,144 | |
Operating income | | 63,942 | | | 85,065 | |
Other income (deductions) | | 927 | | | (107) | |
Net interest deductions | | 9,511 | | | 7,138 | |
Income before income taxes | | 55,358 | | | 77,820 | |
Income tax expense | | 17,372 | | | 21,715 | |
Net income | | 37,986 | | | 56,105 | |
Net income attributable to noncontrolling interest | | 5,189 | | | 5,169 | |
Contribution to consolidated net income attributable to Centuri | | $ | 32,797 | | | $ | 50,936 | |
Utility infrastructure services revenues increased $116.8 million in the first nine months of 2021 when compared to the same period in the prior year primarily due to incremental electric infrastructure revenues of $64.1 million. Included in the incremental electric infrastructure revenues during the first nine months of 2021 was $57.9 million from emergency restoration services performed by Linetec and Riggs Distler following hurricane, tornado, and other storm damage to customers’ above-ground utility infrastructure in and around the Gulf Coast and eastern regions of the U.S., compared to $55.9 million in the first nine months of the prior year in regard to Linetec. The remaining increase in revenues was attributable to increased work under existing master service agreements and bid projects for gas infrastructure services in the central and eastern U.S. regions and Canada, partially offset by reduced work with two significant customers ($61.1 million) during the first nine months of 2021, due to the timing and mix of projects under each customer’s multi-year capital spending programs.
Utility infrastructure services expenses increased $129 million (including $14 million of acquisition costs) in the first nine months of 2021 as compared to the same period in 2020, primarily due to costs to complete additional electric and gas infrastructure work. Operating efficiencies during the first nine months of 2021 from favorable weather conditions were offset by higher fuel, equipment rental, payroll, and subcontractor costs caused by changes in the mix of work and continued growth in our electric infrastructure business. The significant reduction in revenues with two large customers noted above, resulted in an unfavorable impact on profit margins during the first nine months of 2021, due to reduced operating efficiencies from equipment and facility utilization and under-absorption of other fixed costs. Centuri recognized $2.5 million in wage and rent subsidies from the Canadian government amidst the COVID-19 environment during 2021, compared to $4.1 million in the prior nine-month period, in each case, recorded as a reduction in Utility infrastructure services expense. Included in total Utility infrastructure services expenses were general and administrative costs, which increased $21.9 million in 2021 compared to 2020, associated with growth of the business (including $14 million of professional fees related to the acquisition of Riggs Distler and $3 million of administrative costs incurred by Riggs Distler subsequent to the acquisition). Gains on sale of equipment (reflected as an offset to Utility infrastructure services expenses) were approximately $5.4 million and $600,000 in the nine-month periods in 2021 and 2020, respectively.
Depreciation and amortization expense increased approximately $8.8 million between periods, of which $4.7 million was recorded by Riggs Distler subsequent to the acquisition. The remaining increase was attributable to equipment and computer systems purchased to support the growing volume of infrastructure work.
The increase in Net interest deductions of $2.4 million was due to incremental interest from outstanding borrowings under Centuri’s $1.545 billion amended and restated secured revolving credit and term loan facility discussed earlier, partially offset by lower interest from lower borrowings in 2021 compared to 2020 on Centuri’s facility prior to the 2021 refinancing.
Income tax expense in 2021 was impacted by the combined effects of reduced profitability and certain non-deductible costs related to the Riggs Distler acquisition in 2021.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021 |
Results of Utility Infrastructure Services
Twelve-Month Analysis
| | | | | | | | | | | | | | |
| | Twelve Months Ended September 30, |
(Thousands of dollars) | | 2021 | | 2020 |
Utility infrastructure services revenues | | $ | 2,065,038 | | | $ | 1,877,264 | |
Operating expenses: | | | | |
Utility infrastructure services expenses | | 1,858,464 | | | 1,671,478 | |
Depreciation and amortization | | 105,570 | | | 94,837 | |
Operating income | | 101,004 | | | 110,949 | |
Other income (deductions) | | 827 | | | (210) | |
Net interest deductions | | 11,642 | | 10,710 | |
Income before income taxes | | 90,189 | | | 100,029 | |
Income tax expense | | 26,785 | | 28,057 | |
Net income | | 63,404 | | | 71,972 | |
Net income attributable to noncontrolling interest | | 6,681 | | 5,357 | |
Contribution to consolidated net income attributable to Centuri | | $ | 56,723 | | | $ | 66,615 | |
Utility infrastructure services revenues increased $187.8 million, or 10%, in the current twelve-month period compared to the corresponding period of 2020, primarily due to incremental electric infrastructure revenues of $129.5 million from expansion of work with existing customers and securing work with new customers. Included in the incremental electric infrastructure revenues during the twelve-month period of 2021 was $83.5 million from emergency restoration services performed by Linetec and Riggs Distler following hurricane, tornado, and other storm damage to customers’ above-ground utility infrastructure in and around the Gulf Coast and eastern regions of the U.S., compared to $55.9 million in the twelve-month period of the prior year. Centuri’s revenues derived from storm-related services vary from period to period due to the unpredictable nature of weather-related events. The remaining increase in revenue was attributable to continued growth with existing gas infrastructure customers under master service and bid agreements.
Utility infrastructure services expenses increased $187 million (including $14 million of acquisition costs) between periods, largely due to incremental costs related to electric infrastructure work, including costs associated with storm restoration work overall and other costs incurred by Riggs Distler following its acquisition in August 2021, as well as costs necessary for the completion of additional gas infrastructure work. Storm restoration work typically generates a higher profit margin than core infrastructure services, due to improved operating efficiencies related to equipment utilization and absorption of fixed costs. Also included in Utility infrastructure services expenses were general and administrative costs, which increased $30.5 million during the twelve-month period in 2021 when compared to 2020, due to $14 million in professional fees incurred related to Centuri’s acquisition of Riggs Distler, $3 million of costs incurred by Riggs Distler subsequent to the acquisition, higher payroll and operating costs associated with continued growth of the business, and higher profit-based incentive compensation. Offsetting these increases were lower insurance costs from favorable claims experience under Centuri’s self-insurance programs. Gains on sale of equipment (reflected as an offset to Utility infrastructure services expenses) were approximately $6.6 million and $2.9 million for the twelve-month periods in 2021 and 2020, respectively.
Depreciation and amortization expense increased $10.7 million between the current and prior-year twelve-month periods. The increase was primarily attributable to incremental costs related to electric infrastructure depreciation of $6.3 million, including $4.7 million from Riggs Distler. The remaining increase is attributable to equipment and computer systems implemented to support the growing volume of work being performed.
The increase in Net interest deductions of $932,000 was primarily due to incremental interest related to outstanding borrowings under Centuri’s $1.545 billion amended and restated secured revolving credit and term loan facility that was entered into during August 2021 in conjunction with the acquisition of Riggs Distler. This increase was partially offset by lower interest associated with reduced borrowings in 2021, compared to the same period of 2020, under Centuri’s credit facility existing prior to the 2021 refinancing.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
Net interest deductions increased $22.5 millionbetween periods due to incremental interest related to outstanding borrowings under Centuri’s $1.545 billion amended and restated secured revolving credit and term loan facility in conjunction with the acquisition of Riggs Distler.
Results of Pipeline and Storage
Quarterly Analysis
The first quarter of 2022 was the first reporting period of post-acquisition operating results for the pipeline and storage segment.
| | | | | | | | | | |
| | Three Months Ended March 31, | | |
(Thousands of dollars) | | 2022 | | |
Regulated operations revenues | | $ | 66,993 | | | |
Operating expenses: | | | | |
Net cost of gas sold | | 1,797 | | | |
Operations and maintenance expense | | 24,312 | | | |
Depreciation and amortization | | 12,920 | | | |
Taxes other than income taxes | | 3,164 | | | |
Operating income | | 24,800 | | | |
Other income (deductions) | | 543 | | | |
Net interest deductions | | 4,382 | | | |
Income before income taxes | | 20,961 | | | |
Income tax expense | | 4,031 | | | |
Contribution to consolidated results attributable to MountainWest | | $ | 16,930 | | | |
Current period operating results include rate-regulated transmission and subscription storage revenues of $61.1 million. Operating expenses include $8.7 million of costs associated with integrating MountainWest, including employee retention payments. Additional integration costs will be incurred in future periods until integration efforts are completed.
Rates and Regulatory Proceedings
Southwest is subject to the regulation of the Arizona Corporation Commission (the “ACC”), the Public Utilities Commission of Nevada (the “PUCN”), the California Public Utilities Commission (the “CPUC”), and the Federal Energy Regulatory Commission (the “FERC”). Due to the size of Southwest’s regulated operations and the frequency of rate cases and other procedural activities with its commissions, the following discussion focuses primarily on the proceedings within its natural gas distribution operations.
General Rate Relief and Rate Design
Rates charged to customers vary according to customer class and rate jurisdiction and are set by the individual state and federal regulatory commissions that govern Southwest’s service territories. Southwest makes periodic filings for rate adjustments as the cost of providing service changes (including the cost of natural gas purchased), and as additional investments in new or replacement pipeline and related facilities are made. Rates are intended to provide for recovery of all commission-approved costs and a reasonable return on investment. The mix of fixed and variable components in rates assigned to various customer classes (rate design) can significantly impact the operating margin actually realized by Southwest. Management has worked with its regulatory commissions in designing rate structures that strive to provide affordable and reliable service to its customers while mitigating volatility in prices to customers and stabilizing returns to investors. Such rate structures were in place in all of Southwest’s operating areas during all periods for which results of natural gas distribution operations are disclosed above.
Arizona Jurisdiction
Arizona General Rate Case. In May 2019,December 2021, Southwest filed a general rate case application requestingproposing a revenue increase of approximately $90.7 million. Although updated rates related to increase revenue by approximately $57 million to update the cost of service to reflect recent U.S. tax reform changes, incorporating the return of excess deferred income taxes to customers, and to reflect capital investments, including certain post-test year additions and the southern Arizona liquefied natural gas (“LNG”) facility. The application included a proposed 10.3% return on equity (“ROE”) relative to a capital structure of 51.1% equity. Southwest later updated its request multiple times, in order to reflect the actual amortization of EADIT resulting from U.S. tax reform and to include additional post-test year plant associated with its Customer-owned Yard Line (“COYL”) and Vintage Steel Pipe (“VSP”) programs, and to reflect certain other aspects of cost of service, including a revised proposed ROE of 10.15%. The request and amendments included the retention of a fully decoupledprevious rate design, other previously approved regulatory mechanisms, and a new infrastructure tracking mechanism for specific plastic pipe, in addition to a proposal for a renewable natural gas (“RNG”) program as part of its PGA mechanism. Southwest entered into a stipulation for certain aspects of the case including continuing the COYL program; establishing a Tax Expense Adjustor Mechanism to track annual changes in the amortization of EADIT, as well as any future changes in the federal tax rate; including a 10-year amortization of EADIT associated with deemed “unprotected” plant; addressing other aspects regarding EADIT; incorporating various tariff proposals; and incorporating other ratemaking adjustments. EADIT associated with “protected” plant relates to timing differences from using accelerated depreciation for tax purposes and another method for book purposes, and unprotected amounts relate to all other timing differences. Following the hearing and the legal briefing process, the updated proposal reflected a request to increase rates by $80.7 million.
A final decision was issued in December 2020, with new rates becomingbecame effective in January 2021, resultingthe most significant driver for the new request is the necessity to reflect in an overall annual revenue increaserates the substantial capital investments that have been made since the end of $36.8the test year in the previous case, including the customer information system implemented in May 2021. The current filing is based on a test year ended August 31, 2021 and proposes a return on common equity of 9.90% relative to a target equity ratio of 51%. Recovery (over three years) of the approximately $12 million and the continuation of both full revenue decoupling and the COYL program. The overall increase reflects the inclusion of six months (as compared to eleven months previously contemplated) of post-test year plant additions. An ROE of 9.1% was approved with a capital structure comprised of 48.9% long-term debt and 51.1% common equity. See additional discussion related to the outstanding deferral
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | March 31, 2022 |
balance associated with the LNG facility in addition to the COYL and VSP programs below. The continuation of the property tax tracker was supported(see below) is included in the finalrequest, along with the approximately $2.5 million (also over three years) in late payment charges that were suppressed from customer accounts during the COVID-19 pandemic. A request to continue the Delivery Charge Adjustment (“DCA”), Southwest’s full-revenue decoupling mechanism, is also included, while no changes to Southwest’s existing rate design are proposed. A decision as wasis anticipated by the Tax Expense Adjustor Mechanism (noted above). Whileend of 2022, with new rates expected to be effective in the RNG proposal was not approved as partfirst quarter of the decision, the ACC conducted a workshop in May 2021 to further explore the role of RNG in Arizona.2023.
Delivery Charge Adjustment. The Delivery Charge Adjustment (“DCA”)DCA is filed each April, which along with other reporting requirements, contemplates a rate to recover the over- or under-collected margin tracker (decoupling mechanism) amounts based on the balance at the end of the preceding calendar year. Inreporting period. An April 2020, Southwest filed to adjust the existing2022 filing proposes a rate to consider, instead,return $10.5 million, the modestover-collected balance existing at the end of February 2020. Ultimately, the ACC elected to set the rate to zero in an effort to provide some measure of customer relief in light of the COVID-19 pandemic, and at the time of both the April filing and the ACC decision, the balance was a liability (in an over-recovered status). For 2021, once again, the balance at the end of the preceding calendar year was a modest positive balance, but in an over-collected status by the time rates would be requested to be re-set. Therefore, the zero rate will be maintained until the next annual filing date.first quarter 2022.
LNGTax Reform.In the most recently concluded Arizona general rate proceeding, a Tax Expense Adjustor Mechanism (“TEAM”) was approved to timely recognize any future tax rate changes resulting from federal or state tax legislation. In addition, the TEAM tracks and returns/recovers the revenue requirement impact of changes in EADIT amortization compared to the amount authorized in the most recently concluded rate case. In December 2021, Southwest filed its inaugural TEAM rate application for the recovery of approximately $4.3 million associated with the mechanism. The commission staff is expected to issue its report on the filing in the secondquarter of 2022 for ACC consideration at a subsequent open meeting.
Liquefied Natural Gas (“LNG”) Facility. In 2014, Southwest sought ACC preapproval to construct, operate, and maintain a 233,000 dekatherm LNG facility in southern Arizona. This facility is intended to enhance service reliability and flexibility related to natural gas deliveries in the southern Arizona area by providing a local storage option, and to be connectedconnecting directly to Southwest’s distribution system. Southwest was ultimately granted approval for construction and deferral of costs. The facility was placed in service in December 2019. The capital costs and the operating expenses associated with plant operation were approved and considered and
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021 |
approved as part of Southwest’s recently approvedprevious general rate case. Approximately $12 million in costs, incurred following the in-service date of the facility and after the period considered as part of the recently concludedprevious general rate case, were deferred in the previously authorized regulatory asset account and will beare included for consideration in the next Arizonacurrent general rate case application.
COYL Program.Customer-Owned Yard Line (“COYL”) Program. Southwest originally received approval, in connection with its 2010 Arizona general rate case, to implement a program to conduct leak surveys, and if leaks were present, to replace and relocate service lines and meters for Arizona customers whose meters were set off from the customer’s home, representing a non-traditional configuration. In 2014, the ACC approved “Phase II” of the COYL program, which included the replacement of non-leaking COYLs. Annual surcharges are designed to collect the revenue requirement associated with the program. In a February 2019 filing, Southwest requested to increase its surcharge to recover a revenue requirement of $6.7 million (an increase of $3.2 million) associated with $26.6 million in capital projects completed in 2018. The ACC ultimately issued an Order in October 2019 authorizing Southwest to retain the existing annual surcharge in place, while it reviewed the program as part of the general rate case. As indicated earlier, parties to the rate case stipulated to continue the COYL program and recommended recovery of certain plant as part of a post-test year plant adjustment, with inclusion of related amounts in base rates. The ACC final rate case decision limited post-test year plant to six months (inclusive of COYL plant), and limited future COYL activity to the replacement of leaking COYLs, or in cases when other replacement activity is taking place in the vicinity. A filing in May 2021 proposed the recovery of the remainingpreviously unrecovered surcharge revenue from 2019 and 2020 revenue requirement associated with prior COYL program activity. The filing proposed the associated revenue requirement (approximately(collectively, $13.7 million) be recovered over one year.a one-year period. In November 2021, the ACC approved full recovery overwithin the proposed one-year timeline, with the associated rate expected to befor which was implemented during thatthe same month.
VSP Program. As part of In a settlement agreement from its 2016 Arizona general rate case, Southwest received approval to implement a VSP replacement program. As part of the program, Southwest proposed to begin replacing the pipe on an accelerated basis and recover the costs through an annual surcharge filing. Once implemented, surcharges to collect the annual revenue requirement associated with the capital expenditures were designed to be revised annually under the program. In February 2019,2022 filing, Southwest requested to increase its surcharge revenue by $9.5$3.4 million (to $11.9 million)to recover the revenue requirement associated with theprevious investments made since August 2020 and through calendar year 2021, with a proposed rate implementation of June 2022.
Vintage Steel Pipe (“VSP”) Program. Southwest received approval, in connection with its 2016 Arizona general rate case, to implement a VSP replacement program, due to having a substantial amount of approximately $100 millionpre-1970s vintage steel pipe in 2018 VSP capital projects. The ACC’s October 2019 Order authorizing Southwest to retain the existing annual surcharge indicated the program would be subject to reviewArizona. However, as part of the generalSouthwest’s most recent rate case. As noted above, thecase decision in the most recent general rate case provided for a post-test year plant adjustment period of six months (including for VSP). However,2020, the ACC ultimately decided to discontinue the accelerated VSP program at this time.program. A filing in May 2021 proposed the recovery of the otherwisepreviously unrecovered surcharge revenue requirement (associated with years 2019 through 2022), relatedrelating to VSP plant investmentinvestments during 2019 and 2020, which was not included as part of the recently concluded rate case. The filing proposed the associated revenue requirement (approximatelywith approximately $60 million)million to be recovered over a three-year period. In November 2021, the ACC approved full recovery over the proposed three-year timeline, electing to permit the recovery rate to beupdated rates for which were implemented in March 2022.
Customer Data Modernization Initiative. Southwest embarked on an initiative to replace its customer information system and gas transaction systems, each to be utilized to support all Southwest service territories. Combined, these undertakings were referred to as the Customer Data Modernization Initiative (the “CDMI”). In March 2019, Southwest filed an application with the ACC seeking an accounting order to track and defer all costs associated with the CDMI to mitigate adverse financial implications associated with this multi-year initiative. The ACC issued a decision in this matter in early April 2021 denying Southwest’s request for a regulatory asset, indicating that the requested recovery mechanism was not warranted, and that Southwest could, instead, seek to recover the costs as part of a future rate case. The total CDMI costs were estimated at approximately $174 million, of which $96 million would be allocable to the Arizona rate jurisdiction. The customer information system was placed in service in May 2021.
Graham County Utilities. In April 2021, Southwest and Graham County Utilities, Inc. (“GCU”) filed a joint application with the ACC for approval to transfer assets of GCU to Southwest and extend Southwest’s Certificate of Public Convenience and Necessity to serve the more than 5,000 associated customers.customers, for a purchase price of $3.5 million. Approval of the application would provide forby the ACC was received in December 2021 with final transfer in mid-January 2022. Former GCU customers continue to be served under existing GCU rates until such time as they are rolled into Southwest’s rates, which is proposed to take place in conjunction with the effective date of rates resulting from the natural gas system of GCU to Southwest for the purchase price of $3.5 million and the addition of more than 5,000 customers. A decision is expected in the fourth quarter of 2021. currently pending Arizona general rate case.
California Jurisdiction
California General Rate Case. In August 2019, Southwest filed a general rate case based on a 2021 test year, seeking authority to increase rates in its California rate jurisdictions, after being granted earlier permission to extend the rate case cycle by two years and continue its 2.75% previously approved Post-Test Year (“PTY”) attrition adjustments for 2019 and 2020. The proposed
Southwest reached an agreement in principle with the Public Advocate’s Office, which was unanimously approved by the CPUC on March 25, 2021, including a $6.4 million total combined revenue increase with a 10% return on common equity, relative to a 52% equity ratio. Approximately $4 million of $12.8 millionthe original proposed increase was net of a $10.9 million revenue reduction associated with changes from U.S. tax reform. The overall revenue request also included $1.6 million of EADIT proposed to be returned to customersa North Lake
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
each year until the amount is reset again later as part of a future rate case. Southwest’s proposal included an ROE of 10.5% relative to a 53% equity ratio; continuation of annual post-test year margin adjustments of 2.75%; implementation of various safety-related programs, including a targeted pipe replacement program and a meter protection program (with a combination of measures, such as snow sheds, excess flow valves, upgraded meter set piping and upgraded Encoder Receiver Transmitter protocol); as well as an expansion of the school COYL replacement program.
Southwest reached an agreement in principle with the Public Advocate’s Office, which was unanimously approved by the CPUC on March 25, 2021, including a $6.4 million total combined revenue increase with a 10% ROE, relative to a 52% equity ratio. Approximately $4 million of the original proposed increase was associated with a North Lake Tahoe project that would not ultimately be completed by the beginning of 2021; consequently, the parties agreed to provide for recovery of the cost of service impacts of the project through a future surcharge. The rate case decision maintains Southwest’s existing 2.75% annual attrition adjustments and the continuation of the pension balancing account, and a proposed increase in the residential basic service charge from $5.00 to $5.75 per month.account. It also includes cumulative expenditures totaling $119 million over the five-year rate cycle to implement risk-informed proposals, consisting of thea school COYL replacement, meter protection, and pipe replacement programs. Although new rates were originally anticipated to be in place by January 1, 2021, in light of an administrative delay, Southwest was granted authority to establish a general rate case memorandum account to track the impacts related to the delay in the implementation of new rates for purposes of later recovery. New rates were ultimately implemented April 1, 2021.
Attrition Filing. Following the 2021 implementation of new rates approved as part of the recently concluded general rate case, Southwest is also authorized to implement annual PTY attrition increases of 2.75% starting, the first annual adjustment of which began in January 2022.
Greenhouse Gas (“GHG”) Compliance. California Assembly Bill Number 32 and regulations promulgated by the California Air Resources Board, require Southwest, as a covered entity, to comply with applicable requirements associated with California GHG emissions reporting and the California Cap and Trade Program. The CPUC issued a decision in 2018 adopting an allocation methodology to distribute the net revenues or costs. Southwest began amortizing its then existing net cost balance over a 12-month period with recovery rates effective July 2018 for all applicable rate schedules. In addition, for years 2019-2020, the decision adopted an allocation methodology to distribute the revenue proceeds through a California Climate Credit to active residential customers in April of each year, which has continued in the current year. GHG compliance costs recovered through rates have no impact on earnings.
Renewable Natural Gas. In February 2019, Southwest filed an application that, among other things, sought to formally allow renewable natural gas (or biomethane) as an includible component of Southwest’s gas supply portfolio through the Biomethane Gas Program (“BGP”). This proposal was designed to further the goals of the California Global Warming Solutions Act of 2006, the California Low Carbon Fuel Standard, Senate Bills 1383 and 1440, as well as current or future legislative or regulatory efforts to reduce greenhouse gas emissions. Implementation of the BGP addresses cost recovery as part of Southwest’s existing Gas Cost Incentive Mechanism related to the purchase or sale of biomethane. The CPUC issued a final decision approving the proposal in March 2020.
Customer Data Modernization Initiative.Initiative (“CDMI”). In April 2019, Southwest filed an application with the CPUC seeking authority to establish a two-way, interest bearinginterest-bearing balancing account to record costs associated with the CDMI to mitigate adverse financial implications associated with this multi-year project. Approximately $19 million of the estimated $174 million total for the CDMI would be allocable to the California rate jurisdiction. Southwest filedproject (including a separate request to establish a memorandum account while the CPUC considered its application request to establish the two-way balancing account.new customer information system, ultimately implemented in May 2021). Effective October 2019, the CPUC granted Southwest’sa memorandum account, request, which allowed Southwest to track costs, including operations and maintenance costs and capital-related costs, such as depreciation, taxes, and return associated with California’s portion of the CDMI.CDMI (initially estimated at $19 million). The balance tracked in the memorandum account was transferred to the two-way balancing account in July 2020. A rate to begin recovering the balance accumulated through June 30, 2020 was established and made effective September 1, 2020, and updated in January 2021, August 2021, and updated further in August 2021.January 2022. This rate is expected to be updated at least annually. As noted earlier, the customer information system, the largest of the two systems associated with the CDMI, was placed in service in May 2021.
Emergency Relief Program Related to COVID-19. Carbon Offset Program.In March 2020,2022, Southwest filed an application to seek approval to offer a voluntary program to California customers to purchase carbon offsets in light of the COVID-19 pandemic, Southwest requestedan effort to provide customers additional options to reduce their respective GHG emissions. A request to establish a memorandumtwo-way balancing account to track program-related costs and revenues was included as part of customer protections under Emergency Relief regulations implementedthe application. Southwest anticipates a decision in California in 2019 (in the event of a state or federal declared emergency or disaster). The CPUC passed an emergency resolution on April 16, 2020 authorizing and directing utilities to implement customer protections and to establish memorandum accounts to track the financial impacts of complying with the resolution. On May 1, 2020, Southwest requested to establish a COVID-19 Pandemic Protections Memorandum Account (“CPPMA”) to record incremental costs and lost revenues incurred by Southwest associated with its implementation of the protections outlined in the CPUC resolution. The protections were retroactively applied to March 4, 2020, the date Governor Gavin Newsom declared a state of emergency2023.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021 |
related to COVID-19. The CPPMA was originally effective March 4, 2020 through April 16, 2021, but was extended through September 30, 2021. These customer protections focus on flexible payment plan options, additional protections for income-qualified customers, as well as the suspension of disconnections for non-payment and waiver of deposit and late fee requirements. Tracked amounts will be considered by the CPUC for future recovery.
Nevada Jurisdiction
Nevada General Rate Case.Case In June 2021, Southwest filed a Notice of Intent to file a general rate case, and on. On August 31, 2021, Southwest filed its most recent general rate case, which proposeswas further updated by a certification filing on December 17, 2021. The request proposed a combined revenue increase of approximately $30.5 million. This$28.7 million (as of certification); the most significant driver for the new request also proposesis the necessity to reflect in rates the substantial capital investments that have been made since the end of the test year in the previous case, including the customer information system that was implemented in May 2021. The filing included a proposed return on common equity of 9.90% with a target equity ratio of 51%; a request to recoverrecovery over two years of approximately $6.6 million in previously deferred late payment charges related to a regulatory asset associated with COVID-19 (as noted below);COVID-19; and a continuation of full-revenuefull revenue decoupling withunder the General Revenues Adjustment (“GRA”) mechanism. The filing utilizesutilized a test year ended May 31, 2021 test year with certification of certaincertification-period adjustments through November 30, 2021. A decision is expected inOn February 7, 2022, the first quarter of 2022 with new rates effective April 2022.
Southwest’s previous general rate case application wasparties filed a stipulation with the PUCN, in February 2020, which requestedproviding for a statewide overall general raterevenue increase of approximately $38.3 million. The request sought an ROE$14.05 million, a return on common equity of 10%9.40% relative to a proposed capital structure of 50% target equity ratio, and continuation of the GRASouthwest’s full revenue decoupling mechanism. The PUCN issued its finalstipulation was approved by the commission, and new rates became effective April 1, 2022. The commission’s order in September 2020, which provided for an authorized combined revenue increase of approximately $23 million for northern and southern Nevada and continuation of the previously authorized 9.25% ROE, with a capital structure of 49.26% equity and 50.74% debt. Southwest’s GRA was authorized to continue without modification. Full costdid not include recovery of the unamortized balance of excluded software projects from the previous general rate case was authorizedapproximate $6.6 million in this case, along with the inclusion of all proposed Gas Infrastructure Replacement (“GIR”) and Mesquite Expansion projects in rate base, as well as full recovery of test year and certification operations and maintenance expensespreviously deferred late payment charges related to a regulatory asset associated with the CDMI. Rates became effective in October 2020.
In association with an earlier Nevada rate case decision in December 2018, management requested reconsideration of several issues in the case; however, the PUCN ultimately granted no further relief. Management decided to seek judicial review of the PUCN’s rate order, which was considered in January 2020. The District Court Judge deferred to the PUCN’s original findings. In March 2020, Southwest filed an appeal with the Nevada Supreme Court, which remains active; the resolution will likely take up to 24 months from the date of the appeal. COVID 19 (as noted below).
General Revenues Adjustment. As noted above, the continuation of the GRA was affirmed as part of Southwest’s previousmost recent general rate case with an expansion to include a large customer class (with average monthly throughput requirements greater than 15,000 therms), effective October 2020, and a request to continue the GRA is included in the most recently filed general rate case request.April 2022. Southwest makes Annual Rate Adjustment (“ARA”) filings to update rates to recover or return amounts associated with various regulatory mechanisms, including the GRA. In May 2020, Southwest made its most recent ARA filing which proposed an annualized margin decrease of $5.3 million in southern Nevada and an increase of $1.6 million in northern Nevada. The ARA filing was resolved through a settlement of the parties, in which the proposed changes associated with the GRA were approved, effective January 2021. With timing changes approved in the most recent ARA, the next ARA filing will be made in November 2021 with a test year endedrelated to balances as of September 30, 2021. New rates related to that filing will be effective July 1, 2022. While there is no impact to net income overall from adjustments to recovery rates associated with the related regulatory balances, operating cash flows are impacted by such changes.
COYL Program. In August 2021, Southwest filed a joint petition with the Regulatory Operations Staff of the PUCN proposing a Nevada COYL replacement program to include residential COYLs, public schools,school COYLs, and any other COYLs that are identified to be a safety concern. The proposal contemplatespetition was approved in January 2022 and provides for capital investments ofup to $5 million per year for five years with $2 million allocated to northern Nevada and $3 million allocated to southern Nevada, and the establishment of a regulatory asset to track the capital- relatedcapital-related costs. After five years, the program will be reassessed to determine if it should be continued. Southwest anticipates a decision by the end of the year.
RNG. In January 2021, Southwest filed an application seeking approval to purchase RNG for incorporation into its gas supply portfolio pursuant to Senate Bill 154 (2019). Southwest sought authority to purchase up to 3% of 2035 forecasted demands in an effort to reach the established legislative goals of 1% or more by 2025, 2% or more by 2030 and 3% or more by 2035. In October 2021, the PUCN issued an order authorizing Southwest to purchase up to 1.99% of annual forecasted demand each year between 2021 and year end 2029.
Infrastructure Replacement Mechanism. In 2014, the PUCN approved final rules for the GIRGas Infrastructure Replacement (“GIR”) mechanism, which provided for the deferral and recovery of certain costs associated with accelerated replacement of qualifying infrastructure that would not otherwise provide incremental revenues between general rate cases. Associated with the replacement of various types of pipe infrastructure under the mechanism (Early Vintage Plastic Pipe, COYL, and VSP), the related regulations provide Southwest with the opportunity to file a GIR “Advance Application” annually to seek preapproval of qualifying replacement projects.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
related regulations provide Southwest with the opportunity to file a GIR “Advance Application” annually to seek preapproval of qualifying replacement projects.
In cases where preapproval of projects is requested and granted, a GIR rate application is separately filed to reset the GIR recovery surcharge rate related to previously approved and completed projects. On September 30, 2021, Southwest filed its latest rate application to reset the recovery surcharge to include cumulative deferrals through August 31, 2021. The updated surcharge rate is expected to result in an annual revenue decrease of approximately $1.4 million in southern Nevada and an annual revenue increase of $66,000 in northern Nevada. A decision is expected inThe parties reached a stipulation that was approved by the fourth quarter 2021 withcommission and new rates anticipatedbecame effective January 1, 2022.
Conservation and Energy Efficiency. The PUCN allows deferral (and later recovery) of approved conservation and energy efficiency costs, recovery rates for which are adjusted in association with ARA filings. In its May 2020November 2021 ARA filing, Southwest proposed annualized margin decreases of $313,000$574,000 and $55,000$434,700 for southern and northern Nevada, respectively, which were approved and becamerequested to become effective in January 2021.July 2022. In May 2021, Southwest filed its proposed Conservation and Energy Efficiency plan for the years 2022 – 2024, with a proposed annual budget amount of approximately $3 million. In OctoberA PUCN decision received in the fourth quarter 2021 the PUCN approvedauthorized the continuation of Southwest’s currently authorized commercial incentives program, residential incentives programprograms and energy education with an annual budget of approximately $1.4$1.3 million.
Expansion and Economic Development Legislation.Legislation. In January 2016, final regulations were approved by the PUCN associated with legislation (“SB 151”) previously introduced and signed into law in Nevada. The legislation authorized natural gas utilities to expand their infrastructure to provide service to unserved and underserved areas in Nevada.
In November 2017, Southwest filed for preapproval of a project to extend service to Mesquite, Nevada, in accordance with the SB 151 regulations. Ultimately, the PUCN issued an order approving Southwest’s proposal for the expansion, including a capital investment of approximately $28 million and Southwest provides periodic updates and adjusts the construction of approximately 37 miles of distribution pipeline (includingrates to recover the approach main). The annual revenue requirement associated with the project is $2.8 million. A volumetricinvestments to serve customers as part of the ARA filings and rate applicable to all southern Nevada customers (including new customers in Mesquite), was implemented in October 2019 to recover the cost. Southwest’s May 2020 ARA filing, which proposed an annualized margin increasecase proceedings. As of $185,000, reflects the cumulative deferred revenue requirement associated withMarch 2022, approximately 40 miles of natural gas infrastructure has been installed throughout the Mesquite facilities that were placed in service through April 30, 2020. During 2020, Southwest continued serving certain customers in Mesquite from an approved “virtual” pipeline network, providing temporary natural gas supply using portions of the approved distribution system and compressed natural gas. Construction of the tap site, approach main, as well as distribution mains was completed and facilities were placed in service in December 2020. A distribution loop, included in the initial estimated cost, is expected to be in service later this year.expansion area.
In June 2019, Southwest filed for preapproval to construct the infrastructure necessary to expand natural gas service to Spring Creek, near Elko, Nevada, and to implement a cost recovery methodology to timely recover the associated revenue requirement consistent with the SB 151 regulations. Expansion to the Spring Creek area near Elko, Nevada consistsThe expansion facilities consist of a high-pressure approach main and associated regulator stations, an interior backbone, and thean extension of the distribution system from the interior backbone system.backbone. The total capital investment was estimated to be $61.9 million. A stipulation was reached with the parties and approved by the PUCN in December 2019, largely accepting Southwest’s proposal with modificationsincluding in regard to the rate recovery allocationsallocation amongst northern Nevada, Elko, and Spring Creek expansion customers. Construction of the initial phase of the expansion began in the third quarter of 2020, and service commenced to the first Spring Creek customers in December 2020. TheAs of March 31, 2022, approximately 28 miles of natural gas infrastructure has been installed throughout the Spring Creek expansion overall, as part of the earlier estimate,area, and is anticipated to be completed in 2026.
Customer Data Modernization Initiative. In March 2019, Southwest filed a request seeking authority to establish a regulatory asset to defer the revenue requirement related to the CDMI to mitigate the financial attrition associated with the multi-year project. Approximately $59 million of the estimated $174 million cost of the CDMI would be allocable to the Nevada rate jurisdictions. A hearing was held in August 2019 and the PUCN issued a decision in September 2019, denying Southwest’s request for regulatory asset treatment, finding a general rate case to be the most appropriate avenue to address such costs. In response to the PUCN’s decision, Southwest filed a Petition for Reconsideration in October 2019, which was denied. As part of its 2020 general rate case filing, Southwest was authorized to include CDMI operations and maintenance costs since the beginning of the associated test year as part of its revenue requirement in the case. The customer information system portion of the CDMI was placed in service in May 2021 and the related capital costs, as well as ongoing operations and maintenance expenses, are included in Southwest’s recent general rate case request.
Regulatory Asset Related to COVID-19. The PUCN issued an order directing utilities within the state to establish regulatory asset accounts, effective March 12, 2020, the date thatthe Governor Steve Sisolak declared a state of emergency related to COVID-19, to track the financial impacts associated with maintaining service for customers affected by COVID-19, including those whose service would have been otherwise terminated/disconnected. These costs,amounts, totaling approximately $6.6 million, arewere included in Southwest’s recentrecently concluded general rate case requestrequest. The commission ultimately decided that the deferred late payment charges that made up the $6.6 million did not qualify as costs of maintaining service and have a proposed two-year recovery period.denied recovery. However, this amount was previously fully reserved by management pending the outcome of the ultimate proceeding.
Proposed Carbon Offset Program. In June 2021, Southwest filed an application to seek approval to offer a voluntary program to northern and southern Nevada customers to purchase carbon offsets in an effort to provide customers additional options to reduce their respective GHG emissions. A request to establish a regulatory asset to track program-related costs and revenues was included as part of the application. The parties reached a stipulation that was approved by the commission in December 2021 approving Southwest’s proposal. Implementation of the program is expected in the second quarter of 2022.
FERC Jurisdiction
General Rate Case. In 2020, Great Basin Gas Transmission Company (“Great Basin”), a wholly owned subsidiary of Southwest, reached an agreement in principle with the FERC Staff providing that its three largest transportation customers and all storage customers would be required to have primary service agreement terms of at least five years, that term-differentiated rates would continue generally, and included a 9.90% pre-tax rate of return. Interim rates were made effective February 2020. As part of the settlement, Great Basin will not file a rate case later than May 31, 2025.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
reduce their respective GHG emissions. A request to establish a regulatory asset to track program-related costs and revenues was included as part of the application. A decision is expected in the first quarter of 2022.
FERC Jurisdiction
General Rate Case. Great Basin Gas Transmission Company (“Great Basin”), formerly Paiute Pipeline Company, a wholly owned subsidiary of Southwest, filed a general rate case with the FERC in May 2019. The filing fulfilled an obligation from the settlement agreement reached in an earlier general rate case. In January 2020, an agreement in principle was reached with the FERC Staff and intervenors to settle the case, the results of which would not significantly impact revenues overall. The agreement required the three largest transportation customers and all storage customers to have primary terms remaining of at least five years under their agreements, provided for the continuance of term-differentiated rates generally, and included a 9.90% pre-tax rate of return. Interim rates were made effective February 2020, and in August 2020 a FERC letter order approving the settlement became final. As part of the settlement, it was agreed that a future rate case would not be filed prior to January 1, 2022, but would be filed no later than May 31, 2025.
PGA Filings
The rate schedules in all of Southwest’s service territories contain provisions that permit adjustment to rates as the cost of purchased gas changes. These deferred energy provisions and purchased gas adjustment clauses are collectively referred to as “PGA” clauses. Differences between gas costs recovered from customers and amounts paid for gas by Southwest result in over- or under-collections. Balances are recovered from or refunded to customers on an ongoing basis with interest. As of September 30, 2021,March 31, 2022, under-collections in each of Southwest’s service territories resulted in an asset of $240.8$368 million on the Company’s and Southwest’s Condensed Consolidated Balance Sheets. The significant changeincrease in the PGA balance was primarily due to incremental natural gasduring the first quarter of 2022 includes nearly $400 million in commodity and transmission costs associated with an extreme weather event in the central U.S. in mid-February 2021.incurred during this period. See also Deferred Purchased Gas Costs in Note 1 – Background, Organization, and Summary of Significant Accounting Policies in this quarterly report on Form 10-Q.
Filings to change rates in accordance with PGA clauses are subject to audit by state regulatory commission staffs. PGA changes impact cash flows but have no direct impact on operating margin. However, gas cost deferrals and recoveries can impact comparisons between periods of individual consolidated income statement components. These include Gas operatingRegulated operations revenues, Net cost of gas sold, Net interest deductions, and Other income (deductions).
The following table presents Southwest’s outstanding PGA balances receivable/(payable):
| (Thousands of dollars) | (Thousands of dollars) | | September 30, 2021 | | December 31, 2020 | | September 30, 2020 | (Thousands of dollars) | | March 31, 2022 | | December 31, 2021 | | March 31, 2021 |
Arizona | Arizona | | $ | 191,907 | | | $ | (3,901) | | | $ | (14,674) | | Arizona | | $ | 255,472 | | | $ | 214,387 | | | $ | 194,446 | |
Northern Nevada | Northern Nevada | | 4,924 | | | (8,601) | | | (12,724) | | Northern Nevada | | 13,700 | | | 12,632 | | | 3,036 | |
Southern Nevada | Southern Nevada | | 38,964 | | | (42,134) | | | (45,506) | | Southern Nevada | | 93,153 | | | 55,967 | | | 31,849 | |
California | California | | 5,032 | | | 2,053 | | | (3,338) | | California | | 5,629 | | | 8,159 | | | 9,555 | |
| | $ | 240,827 | | | $ | (52,583) | | | $ | (76,242) | | | $ | 367,954 | | | $ | 291,145 | | | $ | 238,886 | |
Not included in the PGA balances table above are $297,000 at March 31, 2022 and $5.7 million at December 31, 2021 in deferred purchased gas cost liabilities for MountainWest.
Capital Resources and Liquidity
Historically, cash on hand and cash flows from operations have provided a substantial portion of cash used in investing activities (primarily for construction expenditures and property additions). In recent years, Southwest has undertaken significant pipe replacement activities to fortify system integrity and reliability, including on an accelerated basis in association with certain gas infrastructure replacement programs. This activity has necessitated the issuance of both debt and equity securities to supplement cash flows from operations. The Company, endeavorsin executing on its plans to fund the MountainWest acquisition, initially funded the transaction through short-term borrowings, which would be refinanced through a multi-pronged permanent financing plan by the second quarter of 2022, some of which was executed during the first quarter of 2022 as the Company used $452 million in net proceeds from its underwritten offering of common stock to repay a portion of such short-term borrowings. In the interim, its working capital resources are necessarily low compared to its short-term obligations, which will be alleviated once management completes its execution on the remainder of its plan. The Company’s capitalization strategy is to maintain an appropriate balance of equity and debt to preserve investment-grade credit ratings, which shouldhelp minimize interest costs. Investment-grade credit ratings have been maintained following the acquisition.
The Company’s Cash and cash equivalents as of March 31, 2022 and December 31, 2021 were $625 million and $223 million, respectively. The increase in Cash and cash equivalents between periods is largely attributable to Southwest’s net proceeds received from the $600 million 4.05% Senior Notes issuance in March 2022, which were partially used in March 2022 to pay down amounts then outstanding on the credit facility, and in April 2022, to redeem the $250 million 3.875% Senior Notes then maturing, in addition to funding interest payments on various debt ($23 million), with the remaining cash available for general corporate purposes. Additionally, the Company received a $34 million dividend from MountainWest in March 2022, which was partially used in April 2022 to pay a post-closing payment adjustment to the sellers in connection with the MountainWest acquisition (see Note 8 - Business Acquisitions).
Cash Flows
Southwest Gas Holdings, Inc.:
Operating Cash Flows. Cash flows from consolidated operating activities decreased $436increased $239 million in the first ninethree months of 20212022 as compared to the same period of 2020.2021. The declineimprovement in cash flows primarily resulted from amounts underthe change in purchased gas adjustment mechanisms,costs, including amounts resulting from the temporary escalationincurred and deferred, as well as when amounts are incorporated in gas commodity prices during the first quarter of 2021 associated with the extreme cold temperatures in the central U.S. (see Note 1 – Background, Organization, and Summary of Significant Accounting Policies). Other impacts includecustomer bills to recover or return deferred balances. The prior period included a decrease ($45 million) in recoveries related$50 million incremental contribution to the Arizona decoupling mechanism balance between nine-month periods, and the impact of changes in components of working capital overall.noncontributory qualified
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
retirement plan (reflected as a change in other liabilities and deferred credits). Other impacts include benefits from depreciation and changes in components of working capital overall, including collections of accounts receivable balances in the utility infrastructure services segment.
The corporate and administrative expenses/outflows for Southwest Gas Holdings, Inc. in the three- and twelve-month periods ended March 31, 2022 include expenses incurred related to shareholder activism, in addition to expenses and financing costs for the MountainWest acquisition, as well as expenses for services performed following December 31, 2021, but related to the acquisition.
Investing Cash Flows. Cash used in consolidated investing activities increased $696$9 million in the first ninethree months of 20212022 as compared to the same period of 2020.2021. The change was primarily due to Centuri’s acquisition of Riggs Distler (see Note 8 - Business Acquisitions). The overallan increase was offset by a decrease in capital expenditures in the natural gas operationsdistribution segment.
Financing Cash Flows. Net cash provided by consolidated financing activities increased $1.3 billion$163 million in the first ninethree months of 20212022 as compared to the same period of 2020.2021. The change was primarily due to Centuri,Southwest’s issuance of $600 million in association with the acquisition of Riggs Distler, entering into an amended and restated credit agreement. The agreement provided for a $1.145 billion secured term loan facility and a $400 million secured revolving credit facility, whichnotes, in addition to funding the Riggs Distler acquisition, refinancedCompany’s $452 million in net proceeds from the previous $590 million loan facility. Approximately $1.26 billionissuance of common stock in an underwritten public offering in the current period. Part of the proceeds of Southwest’s notes issuance was used to pay down the amounts then outstanding under the combined facility aslong-term portion of September 30, 2021. Additionally,its credit facility. The Company used the Company issued approximately $120 million more innet proceeds from the common stock underissuance to repay a portion of its equity shelf programs364-day Term Loan Facility that was funded in the first nine months of 2021 compared to issuances inDecember 2021. In February 2022, Southwest also redeemed $25 million 7.78% series Medium-term notes then maturing. By comparison, the prior year,period included $203 million net proceeds from the short-term portion of Southwest’s credit facility and also increased its dividend.
During the nine months ended September 30, 2021, the Company also issued 130,000 sharesCompany’s credit facility, all of common stock through the Dividend Reinvestment and Stock Purchase Plan, raising approximately $8.5 million.which is considered short-term.
The capital requirements and resources of the Company generally are determined independently for the natural gas operations and utility infrastructure servicesindividual business segments. Each business activitysegment is generally responsible for securing its own external debt financing sources. However, the holding company may raise funds through stock issuances or other external financing sources. See Note 4 – Common Stock.sources in support of each business segment.
Southwest Gas Corporation:
Operating Cash Flows. Cash flows fromprovided by operating activities decreased $382increased $260 million in the first ninethree months of 20212022 as compared to the same period of 2020.2021. The declineimprovement in operating cash flows was primarily attributable to the impacts related to deferred purchased gas costs, and the Arizona decoupling mechanism noted above, andas well as to other working capital changes.
Investing Cash Flows. Cash used in investing activities decreased $110increased $10 million in the first ninethree months of 20212022 as compared to the same period of 2020.2021. The change was primarily due to a decreaseincreases in capital expenditures in 20212022 as compared to the same period in the prior year. See also Gas Segment Construction Expenditures and Financing below.
Financing Cash Flows. Net cash provided by financing activitiesactivities increased $372$179 million in thethe first ninethree months of 20212022 as compared to the same period of 2020. 2021. The increase was primarily due to Southwest’s issuance of $600 million in notes in the first quarter of 2022 that was not used until April 2022 to redeem $250 million Term Loan issuedin maturing notes, but was used to repay the then outstanding amounts on its credit facility. Offsetting this increase was the redemption of $25 million 7.78% series Medium-term notes that matured in February 2022, parent contributions received in the first quarter of 2021 to fund the increased cost of natural gas supply during the extreme cold weather event. Additionally, Southwest issued $300 millionthat did not recur in notes during the current period, compared to $450 million in notes issued2022, and proceeds in the prior period, and also redeemed $125year from a $250 million in notes in September 2020 that were otherwise due in December 2020. Borrowings and repayments between periods under Southwest’s credit facility, as well as and increase in dividends paid, comprisedTerm Loan issued to fund increased gas purchased costs during the remainder of the change.2021 freeze. See Note 5 – Debt.
Gas Segment Construction Expenditures, Debt Maturities, and Financing
During the twelve-month period ended September 30, 2021,March 31, 2022, construction expenditures for the natural gas operationsdistribution segment were $582 million.$615 million (not including amounts incurred for capital expenditures but not yet paid). The majority of these expenditures represented costs associated with the replacement of existing transmission, distribution, and general plant (including costs to implement our customer information system).fortify system integrity and reliability.
Management estimates natural gas segment construction expenditures during the three-yearfive-year period ending December 31, 20232026 will be approximately $2.1 billion.$2.5 to $3.5 billion. Of this amount, approximately $650 million to $675$700 million is scheduled to be incurred in 2021.2022. Southwest plans to continue to request regulatory support to undertake projects, or to accelerate projects as necessary, for the improvement of system flexibility and reliability, or to expand, where relevant, to unserved or underserved areas. Southwest may expand existing, or initiate new, programs. Significant replacement activities are expected to continue well beyond the next few years. See also Rates and Regulatory Proceedings. During the three-year period, cash flows from operating activities of Southwest are expected to provide approximately 50%69% of the funding for gas operations of Southwest and total construction expenditures and dividend requirements. As of March 31, 2022, Southwest had $250 million, 3.875% notes maturing (repaid in April 2022), and a $250 million Term Loan due in March 2023. Any additional cash requirements, including construction-related, and paydownpay down or refinancing of debt, are expected to be provided by existing credit facilities,
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | March 31, 2022 |
equity contributions from the Company, and/or other external financing sources. The timing, types, and amounts of additional external financings will be dependent on a number of factors, including the cost of gas purchases, conditions in the capital markets, timing and amounts of rate relief, timing and amounts of surcharge collections from, or amounts returned to, customers related to other regulatory mechanisms and programs, as well as growth levels in Southwest’s service areas and earnings. External financings may include the issuance of debt securities, bank and other short-term borrowings, and other forms of financing.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021 |
As noted earlier, in August 2021, Southwest issued $300 million aggregate principal amount of 3.18% Senior Notes at a discount of 0.019%. The notes will mature in August 2051. Southwest used the net proceeds from the offering to repay the outstanding balance under its credit facility, with the remaining net proceeds used for general corporate purposes.
In April 2021, the Company entered into a Sales Agency Agreement between the Company and BNY Mellon Capital Markets, LLC and J.P. Morgan Securities LLC (the “Equity Shelf Program”) for the offer and sale of up to $500 million of common stock from time to time in at-the-market offerings under the related prospectus supplement filed with the Securities and Exchange Commission (the “SEC”) the same month. The Company issued $88 million under this multi-year program during the third quarter of 2021. Net proceeds from the sales of shares of common stock under the Equity Shelf Program are intended for general corporate purposes, including the acquisition of property for the construction, completion, extension, or improvement of pipeline systems and facilities located in and around the communities served by Southwest, as well as for repayment or repurchase of indebtedness (including amounts outstanding from time to time under the credit facilities, senior notes, Term Loan or future credit facilities), and to provide for working capital.
In May 2019, the Company filed an earlier automatic shelf registration statement with the SEC for the offer and sale of up to $300 million of common stock from time to time in at-the-market offerings under the related prospectus and sales agency agreement. The Company issued the remaining capacity ($46 million) of this equity program during the quarter ended March 31, 2021.
During the twelve months ended September 30, 2021, 3,699,445 shares were issued in at-the-market offerings at an average price of $67.86 per share with gross proceeds of $251 million, agent commissions of $2.5 million, and net proceeds of $248.5 million under the equity shelf programs noted above. See Note 4 – Common Stock for more information.
Bonus Depreciation
In 2017, with the enactment of U.S. tax reform, the bonus depreciation deduction percentage changed from 50% to 100% for “qualified property” placed in service after September 27, 2017 and before 2023. The bonus depreciation tax deduction phases out starting in 2023, by 20% for each of the five following years. Qualified property excludes most public utilityregulated operations property. The Company estimates bonus depreciation will defer the payment of approximately $20$27 million (which relates to utility infrastructure services operations) of federal income taxes for 2021, none of which relates to natural gas operations.2022.
Dividend Policy
Dividends are payable on the Company’s common stock at the discretion of the Board. In setting the dividend rate, the Board currently targets a payout ratio of 55% to 65% of consolidated earnings per share and considers, among other factors, current and expected future earnings levels, our ongoing capital expenditure plans, expected external funding needs, and our ability to maintain strong investment-grade credit ratings and liquidity. The Company has paid dividends on its common stock since 1956 and has increased that dividend each year since 2007. In February 2021,2022, the Board elected to increase the quarterly dividend from $0.57$0.595 to $0.595$0.62 per share, representing a 4.4% 4.2% increase, effective with the June 20212022 payment.
Liquidity
Liquidity refers to the ability of an enterprise to generate sufficient amounts of cash through its operating activities and external financing to meet its cash requirements. Several factors (some of which are out of the control of the Company) that could significantly affect liquidity in the future include: variability of natural gas prices, changes in ratemaking policies of regulatory commissions, regulatory lag, customer growth in the natural gas distribution segment, the ability to access and obtain capital from external sources, interest rates, changes in income tax laws, pension funding requirements, inflation, and the level of earnings. Natural gas prices and related gas cost recovery rates, as well as plant investment, have historically had the most significant impact on liquidity.
On an interim basis, Southwest defers over- or under-collections of gas costs to PGA balancing accounts. In addition, Southwest uses this mechanism to either refund amounts over-collected or recoup amounts under-collected as compared to the price paid for natural gas during the period since the last PGA rate change went into effect. At September 30, 2021,March 31, 2022, the combined balance in the PGA accounts totaled an under-collection of $241$368 million. See PGA Filings for more information.
In March 2021,2022, Southwest issued aamended its $250 million Term Loan, that will mature inextending the maturity date to March 22, 2022, or 364 days after issuance.21, 2023. The proceeds were originally used to fund the increased cost of natural gas supply during the month of February 2021 caused by extreme weather conditions in the central U.S. The Term Loan was extended as a result of the current gas cost environment and management’s funding plans for purchases.
In March 2022, Southwest Gas Holdings, Inc. hasissued $600 million aggregate principal amount of 4.05% Senior Notes at a discount of 0.65%. The notes will mature in March 2032. Southwest used the net proceeds to redeem $250 million 3.875% notes due in April 2022 and to repay outstanding amounts under its credit facility, with a borrowing capacity of $100 million that expires in April 2025. This facility is intendedthe remaining net proceeds used for short-term financing needs. At September 30, 2021, $22 million was outstanding under this facility.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021 |
general corporate purposes.Southwest has a credit facility, with a borrowing capacity of $400 million, which expires in April 2025. Southwest designates $150 million of the facility for long-term borrowing needs and the remaining $250 million for working capital purposes. The maximum amount outstanding on the long-term portion of the credit facility (including a commercial paper program) during the first ninethree months of 20212022 was $150 million.$150 million. The maximum amount outstanding on the short-term portion of the credit facility during the first ninethree months of 20212022 was $125 million.$85 million. As of September 30, 2021,March 31, 2022, no borrowings were outstanding on the short-term portionor long-term portions of this credit facility. The credit facility can be used as necessary to meet liquidity requirements, including temporarily financing under-collected PGA balances, or meeting the refund needs of over-collected balances. The credit facility has been adequate for Southwest’s working capital needs outside of funds raised through operations and other types of external financing. As indicated, any additional cash requirements would include the existing credit facility, equity contributions from the Company, and/or other external financing sources.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | March 31, 2022 |
Southwest has a $50 million commercial paper program. Any issuance under the commercial paper program is supported by Southwest’s current revolving credit facility and, therefore, does not represent additional borrowing capacity. Any borrowing under the commercial paper program during 20212022 will be designated as long-term debt. Interest rates for the commercial paper program are calculated at the current commercial paper rate during the borrowing term. At September 30, 2021,March 31, 2022, there were no borrowings outstanding under this program.
In August 2021, in association with the acquisition of Riggs Distler (refer toCenturi has a senior secured revolving credit and term loan facility. The Note 8 - Business Acquisitions), Centuri entered into an amended and restated credit agreement (refer to Note 5 – Debt). The line of credit portion comprises $400 million; associated amounts borrowed and repaid are available to be re-borrowed. The term loan facility portion provided approximately $1.145 billion. The term loan facility expires on August 27, 2028 and the revolving credit facility expires on August 27, 2026. This multi-currency facility allows the borrower to request loan advances in either Canadian dollars or U.S. dollars. The obligations under the credit agreement are secured by present and future ownership interests in substantially all direct and indirect subsidiaries of Centuri, substantially all of the tangible and intangible personal property of each borrower, and certain of their direct and indirect subsidiaries, and all products, profits, and proceeds of the foregoing. Centuri assets securing the facility at September 30, 2021March 31, 2022 totaled $2.6$2.4 billion. The maximum amount outstanding on the combined facility during the first ninethree months of 20212022 was $1.3 billion.$1.2 billion. As of September 30, 2021, $112March 31, 2022, $108 million was outstanding on the revolving credit facility, in addition to $1.145$1.01 billion that was outstanding on the term loan portion of the facility. Also at September 30, 2021,March 31, 2022, there was approximately $235$239 million, net of letters of credit, available for borrowing under the line of credit.
Southwest Gas Holdings, Inc. has a credit facility with a borrowing capacity of $200 million that expires in December 2026. This facility is intended for short-term financing needs. At March 31, 2022, $69 million was outstanding under this facility.
In November 2021, the Company entered into a $1.6 billion delayed-draw Term Loan Facility that was funded on December 31, 2021 in connection with the acquisition of MountainWest. This term loan matures on December 30, 2022. There was $1.16 billion outstanding under this Term Loan Facility as of March 31, 2022, included in the total of $1.474 billion of total short-term debt and current maturities of $291 million. This contributed to a negative working capital position of $584 million as of March 31, 2022, and the Company does currently not have sufficient liquidity or capital resources to repay this debt at maturity without issuing new debt or equity. In April 2022, the Company used a portion of proceeds from the issuance of $600 million Senior Notes issued in March 2022 to redeem $250 million in Senior Notes then maturing and included in current maturities as of March 31, 2022. In March 2022, the Company used net proceeds from the issuance of a common stock offering (see below) to repay a portion of borrowings under the Term Loan Facility. Management intends to satisfy the remainder of this obligation through the issuance of long-term debt. However, management maintains the discretion to seek alternative sources, and can provide no assurances as to its ability to refinance this obligation with the intended method or on attractive terms.
In March 2022, the Company sold, through a prospectus supplement under its Universal Shelf program, an aggregate of 6,325,000 shares of common stock, with an underwritten public offering price of $74.00 per share, resulting in proceeds to the Company of $452.2 million, net of the underwriters’ discount of $15.8 million. The Company used the net proceeds to repay a portion of the outstanding borrowings under the 364-day term loan credit agreement that was used to initially fund the MountainWest acquisition.
In April 2021, the Company entered into a Sales Agency Agreement between the Company and BNY Mellon Capital Markets, LLC and J.P. Morgan Securities LLC (the “Equity Shelf Program”) for the offer and sale of up to $500 million of common stock from time to time in at-the-market offerings under the related prospectus supplement filed with the Securities and Exchange Commission (the “SEC”) the same month. There was no activity under this multi-year program during the first quarter of 2022. Net proceeds from the sales of shares of common stock under the Equity Shelf Program are intended for general corporate purposes, including the acquisition of property for the construction, completion, extension, or improvement of pipeline systems and facilities located in and around the communities served by Southwest, as well as for repayment or repurchase of indebtedness (including amounts outstanding from time to time under the credit facilities, senior notes, Term Loan or future credit facilities), and to provide for working capital. The Company had approximately $341.8 million available under the program as of March 31, 2022.
During the twelve months ended March 31, 2022, 2,302,407 shares were issued in at-the-market offerings under the foregoing program at an average price of $68.70 per share with gross proceeds of $158.2 million, agent commissions of $1.6 million, and net proceeds of $156.6 million under the equity shelf program noted above. See Note 4 – Common Stock for more information.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | March 31, 2022 |
Interest rates for the credit facilities of the holding company, Southwest, and Centuri, and for Southwest’sCompany’s Term Loan Facility and Centuri’s credit facility contain LIBOR-based rates. Upon the occurrence of certain events providing for a transition away from LIBOR, or when LIBOR is no longer a widely recognized benchmark rate, the holding company and Southwest each may amend their respective credit facility as set forth in their credit facility agreement, which is also the case of Southwest’s Term Loan, in order to accommodate a replacement benchmark as set forth in the agreements. Certain LIBOR-based rates are scheduled to be discontinued as a benchmark or reference rate after 2021, while other LIBOR-based rates are scheduled to be discontinued after June 2023. As of March 31, 2022, the Company had $2.17 billion billion in aggregate outstanding borrowings under Centuri’s credit facility and the Company’s Term Loan Facility. In order to mitigate the impact of a LIBOR discontinuance on the Company’s and Southwest’s financial condition and results of operations, management will monitor developments and work with lenders, where relevant, to determine the appropriate replacement/alternative reference rate for variable rate debt. At this time the Company and Southwest can provide no assurances as to the impact a LIBOR discontinuance will have on theirits financial condition or results of operations. Any alternative rate may be less predictable or less attractive than LIBOR.
The Company has a Sales Agency Agreement with BNY Mellon Capital Markets, LLC and J.P. Morgan Securities LLC for the offer and sale of up to $500 million of common stock from time to time in at-the-market offerings, which is an additional source of liquidity. The Company had approximately $341.8 million available under the program as of September 30, 2021.
On October 5, 2021, the Company and Dominion Energy Questar Corporation, a wholly owned subsidiary of Dominion Energy, Inc., entered into a Purchase and Sale Agreement pursuant to which the Company would acquire the equity interests in Questar Pipelines. Pursuant to the Purchase and Sale Agreement, the purchase price is $1.545 billion in cash and the assumption of approximately $430 million in existing long-term debt. The Company has entered into an agreement for a new 364-day term loan that will provide the necessary consideration. If the acquisition closes as planned by the end of 2021, the Company expects this will be followed by permanent financing. See Note 5 – Debt.
Forward-Looking Statements
This quarterly report contains statements which constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“Reform Act”). All statements other than statements of historical fact included or incorporated by reference in this quarterly report are forward-looking statements, including, without limitation, statements regarding the Company’s plans, objectives, goals, intentions, projections, strategies, future events or performance, negotiations, and underlying assumptions. The words “may,���” “if,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “continue,” “forecast,” “intend,” “endeavor,” “promote,” “seek,” and similar words and
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021 |
expressions are generally used and intended to identify forward-looking statements. For example, statements regarding plans to review a full range of strategic alternatives to maximize stockholder value, refinance near-term maturities, to separate Centuri from the Company, those regarding operating margin patterns, customer growth, the composition of our customer base, price volatility, seasonal patterns, payment of debt, the Company’s COLI strategy, replacement market and new construction market, our intent and ability to complete planned acquisitions and at amounts originally set out, impacts from the COVID-19 pandemic, including on our employees, customers, or otherwise, our financial position, revenue, earnings, cash flows, debt covenants, operations, regulatory recovery, work deployment or resumption and related uncertainties stemming from this pandemic or otherwise, expected impacts of valuation adjustments associated with any redeemable noncontrolling interest, the profitability of storm work, mix of work, or absorption of fixed costs by larger infrastructure services customers including Southwest, the impacts of U.S. tax reform including disposition in any regulatory proceeding and bonus depreciation tax deductions, the impact of recent PHMSAPipeline and Hazardous Materials Safety Administration rulemaking, the amounts and timing for completion of estimated future construction expenditures, plans to pursue infrastructure programs or programs under SB151SB 151 legislation, forecasted operating cash flows and results of operations, net earnings impacts or recovery of costs from gas infrastructure replacement and COYL programs and surcharges, funding sources of cash requirements, amounts generally expected to be reflected in future period revenues from regulatory rate proceedings including amounts requested or settled from recent and ongoing general rate cases or other regulatory proceedings, the outcome of judicial review of the previous Nevada rate case, rates and surcharges, PGA administration and recovery, and other rate adjustments, sufficiency of working capital and current credit facilities, bank lending practices, the Company’s views regarding its liquidity position, ability to raise funds and receive external financing capacity and the intent and ability to issue various financing instruments and stock under the existing at-the-market equity program or otherwise, future dividend increases and the Board’s current target dividend payout ratio, pension and postretirement benefits, certain impacts of tax acts, the effect of any other rate changes or regulatory proceedings, contract or construction change order negotiations, impacts of accounting standard updates, statements regarding future gas prices, gas purchase contracts and pipeline imbalance charges or claims related thereto, recoverability of regulatory assets, the impact of certain legal proceedings or claims, and the timing and results of future rate hearings, including any ongoing or future general rate cases and other proceedings, and the final resolution for recovery of the CDMI-related amounts and balances in any jurisdiction, and statements regarding pending approvals are forward-looking statements. All forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act.
A number of important factors affecting the business and financial results of the Company could cause actual results to differ materially from those stated in the forward-looking statements. These factors include, but are not limited to, customer growth rates, conditions in the housing market, the impacts of COVID-19 including that which may result from a continued or sustained restriction by government officials or otherwise, including impacts on employment in our territories, the health impacts to our customers and employees due to the persistence of the virus or virus variants or efficacy of vaccines, the ability to collect on customer accounts due to the suspension or lifted moratorium on late fees or service disconnection in any or all jurisdictions, the ability to obtain regulatory recovery of all costs and financial impacts resulting from this pandemic, the ability of the infrastructure services business to resume or continue work with all customers and the impact of a delay or termination of work as a result thereof, the impacts of future restrictions placed on our business by government regulation or otherwise (such as self-imposed restrictions for the safety of employees and customers), including related to personal distancing, investment in personal protective equipment and other protocols, the impact of a resurgence of the virus or its variants, following the ongoing resumption of commerce in our territories, and decisions of Centuri customers (including Southwest) as to whether to pursue capital projects due to economic impacts resulting from the pandemic or otherwise, the ability to recover and timing thereof related to costs associated with the PGA mechanisms or other
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | March 31, 2022 |
regulatory assets or programs, the effects of regulation/deregulation, governmental or regulatory policy regarding pipeline safety, greenhouse gas emissions, natural gas or alternative energy, the regulatory support for ongoing infrastructure programs or expansions, the timing and amount of rate relief, the timing and methods determined by regulators to refund amounts to customers resulting from U.S. tax reform, changes in rate design, variability in volume of gas or transportation service sold to customers, changes in gas procurement practices, changes in capital requirements and funding, the impact of credit rating actions and conditions in the capital markets on financing costs, the impact of variable rate indebtedness associated with or without a discontinuance of LIBOR including in relation to amounts of indebtedness then outstanding, changes in construction expenditures and financing, levels of or changes in operations and maintenance expenses, or other costs, including fuel costs and other costs impacted by inflation or otherwise, geopolitical influences on the business or its costs, effects of pension or other postretirement benefit expense forecasts or plan modifications, accounting changes and regulatory treatment related thereto, currently unresolved and future liability claims and disputes, changes in pipeline capacity for the transportation of gas and related costs, results of Centuri bid work, the impact of weather on Centuri’s operations, projections about acquired business’ earnings or those planned (including accretion within the first twelve months)months or other periods) and future acquisition-related costs, the timing and magnitude of costs necessary to integrate and stand up newly acquired operations, administration, and systems, and the ability to complete stand-up for MountainWest prior to the expiration of the transition services agreement, the ability to attract, hire, and maintain necessary staff and management for our collective operations, impacts of changes in value of any redeemable noncontrolling interest if at other than fair value, Centuri utility infrastructure expenses, differences between actual and originally expected outcomes of Centuri bid or other fixed-price construction agreements, outcomes from contract and change order negotiations, ability to successfully procure new work and impacts from work awarded or failing to be awarded from significant customers (collectively, including from Southwest), the mix of work awarded, the amount of work awarded to Centuri following the lifting of work stoppages or
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021 |
reduction, the result of productivity inefficiencies from regulatory requirements or otherwise, delays in commissioning individual projects, acquisitions and management’s plans related thereto, the ability of management to successfully finance, close, and assimilate acquired businesses, the impact on our stock price or our credit ratings due to undertaking or failing to undertake acquisition activity or other strategic endeavors, the impact on our stock price, costs, or businesses from the stock rights program, actions or disruptions of significant shareholders and costs related thereto, competition, our ability to raise capital in external financings, our ability to continue to remain within the ratios and other limits subject to our debt covenants, and ongoing evaluations in regard to goodwill and other intangible assets. In addition, the Company can provide no assurance that its discussions regarding certain trends or plans relating to its financing and operating expenses will continue, proceed as planned, or cease to continue in future periods. For additional information on the risks associated with the Company’s business, see Item 1A. Risk Factors and Item 7A. Quantitative and Qualitative Disclosures About Market Risk in the Annual Report on Form 10-K for the year ended December 31, 2020, as updated in association with the Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 and in this quarterly report on Form 10-Q.2021.
All forward-looking statements in this quarterly report are made as of the date hereof, based on information available to the Company and Southwest as of the date hereof, and the Company and Southwest assume no obligation to update or revise any of its forward-looking statements, even if experience or future changes show that the indicated results or events will not be realized. We caution you not to unduly rely on any forward-looking statement(s).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7A. Quantitative and Qualitative Disclosures about Market Risk in the 20202021 Annual Report on Form 10-K filed with the SEC. No material changes have occurred related to the disclosures about market risk.
ITEM 4. CONTROLS AND PROCEDURES
Management of Southwest Gas Holdings, Inc. and Southwest Gas Corporation has established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in their respective reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to management of each company, including each respective Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and benefits of controls must be considered relative to their costs. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or management override of the control. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
In August 2021, the Company, through its utility infrastructure services subsidiaries, completed the acquisition of Drum Parent, Inc. (“Drum”) and its U.S. operations consisting principally of the utility infrastructure services operations of Drum’s primary subsidiary, Riggs Distler & Company, Inc. (“Riggs Distler”), a privately held infrastructure services business. Existing assets of the acquired business represents 2% of consolidated total assets and 2% of consolidated revenues for the period ended September 30, 2021 and is not significant to the Company’s consolidated financial statements. As permitted by SEC guidance for newly acquired businesses, the Company’s management elected to exclude Riggs Distler from its evaluation of disclosure controls and procedures and management’s report on changes in internal control over financial reporting from the date of the acquisition through September 30, 2021. The Company’s management is in the process of reviewing the operations of Riggs Distler and implementing the Company’s internal control structure over the acquired operations. This review will be completed in 2022.
Based on the most recent evaluation, as of September 30, 2021,March 31, 2022, management of Southwest Gas Holdings, Inc. and Southwest Gas Corporation, including the Chief Executive Officer and Chief Financial Officer, believes the Company’s and Southwest’s disclosure controls and procedures are effective at attaining the level of reasonable assurance noted above.
There have been no changes in the Company’s or Southwest’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the third quarter of 2021 that have materially affected, or are likely to materially affect the Company’s internal control over financial reporting.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
There have been no changes in the Company’s or Southwest’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the first quarter of 2022 that have materially affected, or are likely to materially affect the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company isand Southwest are named as a defendant in various legal proceedings. The ultimate dispositions of these proceedings are not presently determinable; however, it is the opinion of management that none of this litigation individually or in the aggregate will have a material adverse impact on the Company’s or Southwest’s financial position or results of operations. See Contingency within Note 1 – Background, Organization, and Summary of Significant Accounting Policies for potential future liability claims.ongoing litigation, including litigation filed by certain stockholders and by funds managed by Carl Icahn.
ITEM 1A. Described below areis a risk factorsfactor that we have identified that may have a negative impact on our future financial performance or affect whether we achieve the goals or expectations expressed or implied in any forward-looking statements contained herein. TheseThis risk factors supplement,factor supplements, and dodoes not replace, the Risk Factors and other disclosures made in our Annual Report on Form 10-K filed February 25, 2021 or Quarterly Report on Form 10-Q for the quarter ended June 30, 2021.March 1, 2022.
Financial, Economic, and MarketGeneral Risks
There may be unexpected delays in the completionOur ongoing review of the acquisition of Questar Pipelines, or it may not be completed at all.
As mentioned above in Note 1 to Part I Item 1, in October 2021 the Company entered into an agreement to purchase Dominion Energy Questar Pipeline, LLC and related entities (“Questar Pipelines”), a FERC-regulated interstate natural gas pipeline group that provides transportation and underground storage services in Utah, Wyoming, and Colorado. The acquisition is currently expected to close near year-end 2021, conditioned on the satisfaction or waiver (where legally permissible) of conditions in the Purchase and Sale Agreement (“Agreement”). The Agreement provides that either the Company or Questar Pipelines may terminate the Agreement if the acquisition has not occurred before December 31, 2021, subject to an extension if certain conditions have not been met, subsequently extending the termination date through June 30, 2022. Certain events may delay the completion of the acquisition or result in a termination of the Agreement. Some of these events are outside the control of either party. In particular, we are obligated to obtain various other third-party consents and approvals, and we can provide no assurances that such clearances, consents, or approvals will be obtained on terms acceptable to us, or at all. We may incur significant additional costs in connection with any delay in completing the acquisition or termination of the Agreement, in addition to significant transaction costs, including legal, financial advisory, accounting, and other costs beyond that which we have already incurred. We cannot provide assurance that the conditions to the completion of the acquisition will be satisfied or waived or that any adverse change, effect, event, circumstance, occurrence, or statement of facts thatstrategic alternatives could give rise to the termination of the Agreement will not occur, and we cannot provide any assurances as to whether or when the acquisition will be completed on the terms set forth in the Agreement or at all.
Failure to complete the acquisition of Questar Pipelines in a timely manner or at all could negatively affect our stock price. Completion of the acquisition could negativelymaterially impact our credit ratings.
We can provide no assurance that an acquisition will occur or that the conditions to it will be satisfied or waived in a timely manner, or at all. Also, we can provide no assurance that an event, change, or other circumstance that could give rise to the terminationstrategic direction, business, and results of an Agreement will not occur. Delays in completing an acquisition or the failure to complete one at all could negatively impact the market price of our common stock and it could decline significantly, particularly to the extent that the current market price reflects a market assumption that an acquisition will be completed. If an acquisition is delayed for any reason, we will be subject to several risks, including the diversion of management focus and resources from operational matters and other strategic opportunities while working to complete the acquisition. In addition, certain credit ratings agencies have indicated that an acquisition could have a negative impact on our current credit ratings.operations. We can provide no assurances as to the final determinationstructure or timing of any strategic transaction or that one will be completed at all.
On April 18, 2022, we announced that our Board authorized a thorough review of a full range of strategic alternatives to maximize stockholder value. As part of this process, the Company will evaluate a sale of the Company, as well as a range of alternatives, including, but not limited to, a separate sale of its business units and/or pursuing the previously disclosed spin-off of Centuri. A committee of the Board, comprised entirely of independent directors, is overseeing the process. The timing, benefits, and outcome of the strategic review process or the structure, terms and specific risks and uncertainties associated with any downgradeparticular strategic transaction are uncertain. Pursuit of any such strategic alternative could result in material disruptions in our (or Southwest’s) ratingsbusiness and what impact such a downgrade wouldotherwise have an adverse effect on our businesses.
Our business could be negatively affected as a result of actions of activist shareholders.
In October 2021, certain funds affiliated with Carl Icahn initiated a tender offer for sharesthe trading price of our common stock and threatened a proxy contest with respector our results of operations. We can provide no assurances as to the electionstructure or timing of directorsany potential strategic transaction or that one will be completed at our 2022 Annual Meeting of Stockholders. Responding to actions such as these and other actions by activist shareholders can be costly and time-consuming, disrupt our operations, and divert the attention of management and our employees. Perceived uncertainties among current and potential customers, employees, and other parties as to our future direction may result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel and business partners. These actions could also cause our stock price to experience periods of volatility.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021 |
Following the completion of the acquisition of Questar Pipelines, we may be unable to successfully integrate Questar Pipelines into our business and realize the anticipated benefits of the acquisition.
We may not be able to achieve the anticipated benefits of the acquisition of Questar Pipelines. We may not be able to integrate Questar Pipeline’s business without increases in costs or other difficulties. We and Questar are expecting to enter into a transition services agreement for a period of time following closing of the transaction. Upon the expiration of the anticipated transition services agreement, we may not be able to hire or retain sufficient staff to operate the Questar Pipelines business efficiently. Any unexpected costs or delays incurred in connection with the integration of Questar Pipelines could have a material adverse effect on our business, results of operations, financial condition, as well as the market price of our common stock.all.
ITEMS 2 through 3. None.
ITEM 4. MINE SAFETY DISCLOSURES Not applicable.
ITEM 5. OTHER INFORMATION None.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
ITEM 6. EXHIBITS
The following documents are filed, or furnished, as applicable, as part of this report on Form 10-Q: | | | | | | | | |
Exhibit 2.02* | - | |
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Exhibit 3(i) | - | |
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Exhibit 3.01 | - | |
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Exhibit 4.01 | - | SecondThird Supplemental Indenture, dated August 20, 2021,March 22, 2022, by and between Southwest Gas Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee. Incorporated herein by reference to Exhibit 4.1 to Form 8-K dated August 18, 2021,March 17, 2022. File Nos. 001-37976 and 001-07850. | |
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Exhibit 4.02 | - | | |
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Exhibit 4.03 | - | | |
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Exhibit 4.0410.1 | - | RightsAmendment No. 1, dated as of March 22, 2022, to the Term Loan Agreement, dated October 10,as of March 23, 2021, betweenby and among Southwest Gas Holdings, Inc.Corporation, the lenders, book runners and Equiniti Trust Company,syndication agents party thereto and The Bank of New York Mellon, as RightsAdministrative Agent. Incorporated herein by reference to Exhibit 4.110.1 to Form 8-K dated October 10, 2021,March 17, 2022. File No. 001-37976.Nos. 001-37976 and 001-07850. | |
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Exhibit 10.01 | - | Credit Agreement with Wells Fargo Securities, LLC and BofA Securities, Inc., as joint lead arrangers, Wells Fargo Bank, National Association, as administrative agent, Bank of America, N.A., as syndication agent, and the other lenders and agents party thereto. Incorporated herein by reference to Exhibit 10.1 to Form 8-K dated August 27, 2021, File No. 001-37976. |
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Exhibit 31.0131.01* | - | | |
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Exhibit 31.0231.02* | - | | |
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Exhibit 32.0132.01* | - | | |
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Exhibit 32.0232.02* | - | |
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Exhibit 101.INS101* | - | The following materials from the Quarterly Report on Form 10-Q of Southwest Gas Holdings, Inc. and Southwest Gas Corporation for the quarter ended March 31, 2022, were formatted in Inline XBRL Instance Document - the(Extensible Business Reporting Language): (1) Southwest Gas Holdings, Inc. and Subsidiaries Condensed Consolidated Balance Sheets, (ii) Southwest Gas Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Income, (iii) Southwest Gas Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Comprehensive Income, (iv) Southwest Gas Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows, (v) Southwest Gas Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Equity, (vi) Southwest Gas Corporation and Subsidiaries Condensed Consolidated Balance Sheets, (vii) Southwest Gas Corporation and Subsidiaries Condensed Consolidated Statements of Income, (viii) Southwest Gas Corporation and Subsidiaries Condensed Consolidated Statements of Comprehensive Income, (ix) Southwest Gas Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows, (x) Southwest Gas Corporation and Subsidiaries Condensed Consolidated Statements of Equity. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
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Exhibit 101.SCH104* | - | XBRL Schema Document |
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Exhibit 101.CAL | - | XBRL Calculation Linkbase Document |
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Exhibit 101.DEF | - | XBRL Definition Linkbase Document |
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Exhibit 101.LAB | - | XBRL Label Linkbase Document |
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Exhibit 101.PRE | - | XBRL Presentation Linkbase Document |
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Exhibit 104 | - | Cover Page Interactive Data File (embedded within the Inline XBRL document). | |
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*The Company has omitted schedules and other similar attachments to such agreement pursuant to Item 601(b) of Regulation S-K. The Company will furnish a copy of such omitted document to the SEC upon request.Filed herewith. | |
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2021March 31, 2022 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Southwest Gas Holdings, Inc. |
(Registrant) |
Dated: November 9, 2021May 10, 2022
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/s/ LORI L. COLVIN |
Lori L. Colvin |
Vice President/Controller and Chief Accounting Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Southwest Gas Corporation |
(Registrant) |
Dated: November 9, 2021May 10, 2022
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/s/ LORI L. COLVIN |
Lori L. Colvin |
Vice President/Controller and Chief Accounting Officer |