| Background, Organization, and Summary of Significant Accounting Policies | 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 distribution” segment), all of the shares of common stock of Centuri Group, Inc. (“Centuri,” or the “utility infrastructure services” segment), and until February 14, 2023, all of the shares of common stock of MountainWest Pipelines Holding Company (“MountainWest” or the “pipeline and storage” segment). In December 2022, the Company announced that its Board of Directors (the “Board”) unanimously determined to take strategic actions to simplify the Company’s portfolio of businesses. These actions included entering into a definitive agreement to sell 100% of MountainWest to Williams Partners Operating LLC (“Williams”) for $1.5 billion in total enterprise value, subject to certain adjustments (collectively, the “MountainWest sale”). Additionally, the Company determined it will pursue a spin-off of Centuri (the “Centuri spin-off”), to form a new independent publicly traded utility infrastructure services company. The MountainWest sale closed on February 14, 2023. The Centuri spin-off is expected to be completed in the fourth quarter of 2023 or the first quarter of 2024 and to be tax free to the Company and its stockholders for U.S. federal income tax purposes. See Note 8 - Dispositions 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 distribution segment are higher during winter periods due to the seasonality incorporated in its regulatory rate structures. Centuri is a strategic utility infrastructure services company dedicated to partnering with North America’s gas and electric 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 networks. Centuri operates in the U.S., primarily as NPL, Neuco, Linetec, and Riggs Distler, and in Canada, primarily as NPL Canada. Utility infrastructure services activity is seasonal in many of Centuri’s operating areas. Peak periods are the summer and fall months in colder climate areas, such as the northeastern and midwestern U.S. and in Canada. In warmer climate areas, such as the southwestern and southeastern U.S., utility infrastructure services activity continues year round. Basis of Presentation. The condensed consolidated financial statements of Southwest Gas Holdings, Inc. and subsidiaries and Southwest (with its subsidiaries) included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The year-end 2022 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 during the recently completed quarter, other than the sale of MountainWest, discussed above. 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 statement of results for the interim periods, have been made. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the 2022 Annual Report to Stockholders, which is incorporated by reference into the 2022 Form 10-K. In the first quarter of 2023, management identified a misstatement related to its accounting for the cost of gas sold at Southwest, thereby determining that Net cost of gas sold was overstated in 2021 and 2022 by $2.3 million and $5.7 million, respectively. Southwest made an adjustment in the first quarter of 2023 to reduce Net cost of gas sold and to increase its asset balance for Deferred purchased gas cost by $8 million. Also in the first quarter of 2023, the Company identified an approximately $21 million misstatement related to its initial estimation of the loss recorded upon reclassifying MountainWest as an asset held for sale during the year ended December 31, 2022. Consequently, the impairment loss for the year ended December 31, 2022 was understated by approximately $21 million, which was corrected in the first quarter of 2023. The Company (and Southwest, with respect to Net cost of gas sold) assessed, both quantitatively and qualitatively, the impact of these items on previously issued financial statements, concluding they were not material to any prior period or the current period financial statements. Other Property and Investments. Other property and investments on Southwest’s and the Company’s Condensed Consolidated Balance Sheets includes: (Thousands of dollars) March 31, 2023 December 31, 2022 Net cash surrender value of COLI policies $ 138,689 $ 136,245 Other property 5,897 33,152 Total Southwest Gas Corporation 144,586 169,397 Non-regulated property, equipment, and intangibles 1,698,327 1,677,218 Non-regulated accumulated provision for depreciation and amortization (624,693) (596,518) Other property and investments 32,107 31,075 Total Southwest Gas Holdings, Inc. $ 1,250,327 $ 1,281,172 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. The term non-regulated in regard to assets and related balances in the table above is in reference to the non-rate regulated operations of Centuri. Held for sale. The Company and Southwest have classified certain assets associated with its previous corporate headquarters as held for sale during the first quarter of 2023. An agreement for sale was signed in May 2023, subject to certain closing conditions, including possible extension periods. Amounts to be realized above the carrying value are not expected to be material to the financial statements overall. Management determined that the assets met the criteria to be classified as held for sale as of March 31, 2023. As a result, the Company and Southwest reclassified approximately $27 million from Other property and investments to current assets held for sale on their respective Condensed Consolidated Balance Sheets at March 31, 2023. Cash and Cash Equivalents. Cash and cash equivalents of the Company include $32.7 million and $30 million of money market fund investments at March 31, 2023 and December 31, 2022, respectively. The money market fund investments for Southwest were $29.6 million at March 31, 2023 and $17.6 million at December 31, 2022, respectively. These investments fall within Level 2 of the fair value hierarchy, due to the asset valuation methods used by money market funds. Noncash investing activities for the Company and Southwest include capital expenditures that were not yet paid, thereby remaining in accounts payable, the amounts related to which declined by approximately $37.3 million and $34.2 million during the three months ended March 31, 2023, respectively, and increased $5.5 million and $5.7 million during the twelve months ended March 31, 2023, respectively. Accounts Receivable, net of allowances. Following an earlier moratorium on account disconnections amidst the COVID-19 environment, account collection efforts resumed in 2021 in all jurisdictions in which Southwest operates. Ultimately, some accounts that are receivable at the end of any reporting date may not be collected, and if collection is unsuccessful, such accounts are written off. Estimates as to collectibility are made on an ongoing basis. However, Southwest continues to actively work with customers experiencing financial hardship by means of flexible payment options and partnering with assistance agencies. The cost of gas included in customer rates also influences account balances at each reporting date. Deferred Purchased Gas Costs. The various regulatory commissions have established procedures to enable rate-regulated companies to adjust 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. Prepaid and other current assets. Prepaid and other current assets for Southwest include, among other things, materials and operating supplies of $79 million at March 31, 2023 and $77.3 million at December 31, 2022 (carried at weighted average cost). Also included in the balance was $207 million as of December 31, 2022 in accrued purchased gas cost, with no corresponding asset balance as of March 31, 2023. Goodwill. Goodwill is assessed as of October 1 st each year for impairment, or more frequently, if circumstances indicate it may be more likely than not that the fair value of a reporting unit is less than its carrying value. The Company’s reporting units for goodwill are its operating segments, which are also its reportable segments. Since December 31, 2022, management qualitatively assessed whether events during the first three months of 2023 indicated it was more likely than not that the fair value of our reporting units was less than their carrying value, which if the case, could be an indication of a goodwill impairment. Through management’s assessments during first quarter of 2023, no impairment was deemed to have occurred in the continuing segments of the Company. However, there can be no assurances that future assessments of goodwill will not result in an impairment, and various factors, including changes in the business, strategic initiatives, economic conditions, governmental monetary policies, interest rates, or others, on their own or in combination with each other, could result in the fair value of reporting units being lower than their carrying values. Goodwill in the Natural Gas Distribution and Utility Infrastructure Services segments is included in their respective Condensed Consolidated Balance Sheets as follows: (Thousands of dollars) Natural Gas Utility Infrastructure Total Company December 31, 2022 $ 11,155 $ 776,095 $ 787,250 Foreign currency translation adjustment — 84 84 March 31, 2023 $ 11,155 $ 776,179 $ 787,334 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 include $44.2 million and $41.6 million of dividends declared as of March 31, 2023 and December 31, 2022, respectively. Also included in the balance was $68 million as of March 31, 2023 in accrued purchased gas cost, with no corresponding liability balance as of December 31, 2022. 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 March 31, Twelve Months Ended (Thousands of dollars) 2023 2022 2023 2022 Southwest Gas Corporation: Change in COLI policies $ 2,400 $ (2,000) $ (1,000) $ 4,100 Interest income 12,471 2,801 25,853 7,198 Equity AFUDC — 76 (76) (905) Other components of net periodic benefit cost 4,959 (188) 4,396 (10,704) Miscellaneous income and (expense) (1,387) 626 (18,929) (3,483) Southwest Gas Corporation - total other income (deductions) 18,443 1,315 10,244 (3,794) Centuri, MountainWest, and Southwest Gas Holdings, Inc.: Foreign transaction gain (loss) (690) 3 284 (16) Equity AFUDC 82 182 365 182 Equity in earnings of unconsolidated investments 360 515 2,474 749 Miscellaneous income and (expense) (5) (651) (2,467) 303 Corporate and administrative 270 (120) 127 (127) Southwest Gas Holdings, Inc. - total other income (deductions) $ 18,460 $ 1,244 $ 11,027 $ (2,703) 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. Interest income primarily relates to Southwest’s regulatory asset balances, including its deferred purchased gas cost mechanisms. Interest income includes carrying charges on regulatory account balances, including deferred purchased gas cost balances, which increased from $368 million as of March 31, 2022 to $970 million as of March 31, 2023. Refer also to Note 2 – Components of Net Periodic Benefit Cost . Redeemable Noncontrolling Interests. In connection with the acquisition of Linetec in November 2018, the previous owner initially retained a 20% equity interest in that entity, with redemption being subject to certain rights based on the passage of time or upon the occurrence of certain triggering events. Effective in 2022, the Company, through Centuri, had the right, but 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, reducing the noncontrolling interest to 15%, and in March 2023, agreeing once again to a 5% redemption (of the 15% then remaining), and to thereby reduce the noncontrolling interest to 10% under the terms of the original agreement. As a result of this most recent election, Centuri accrued $39.9 million as of March 31, 2023, which was paid to the previous owner of Linetec in April 2023. The impact of this transaction has been excluded from the Company’s Condensed Consolidated Statement of Cash Flows for 2023 due to its noncash nature in advance of the April 2023 payment. The remaining balance continuing to be redeemable as of March 31, 2023 is 10% under the terms of the original agreement, with Centuri now owning a 90% stake in Linetec . 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 interests, above a floor determined at the establishment 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 increased approximately $5.8 million during the three months ended March 31, 2023, notwithstanding the change resulting from the partial redemption noted above. Valuation adjustments also impact retained earnings, as reflected in the Company’s Condensed Consolidated Statement of Equity, but do not impact net income. The following depicts changes to the balances of the redeemable noncontrolling interests: (Thousands of dollars): Linetec Drum Total Balance, December 31, 2022 $ 146,765 $ 12,584 $ 159,349 Net income attributable to redeemable noncontrolling interests 1,683 56 1,739 Redemption value adjustments 5,832 — 5,832 Redemption of equity interest from noncontrolling party (39,894) — (39,894) Balance, March 31, 2023 $ 114,386 $ 12,640 $ 127,026 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 Twelve Months Ended (In thousands) 2023 2022 2023 2022 Weighted average basic shares 68,265 60,737 67,413 59,919 Effect of dilutive securities: Restricted stock units (1)(2) 154 117 — 125 Weighted average diluted shares 68,419 60,854 67,413 60,044 (1) The number of anti-dilutive restricted stock units excluded from the calculation of diluted shares during the twelve months ended March 31, 2023 is 166,000. (2) The number of securities included 132,000 and 112,000 performance shares during the three months ended March 31, 2023 and 2022, and 149,000 and 114,000 performance shares during the twelve months en ded March 31, 2023 and 2022, respectively, the total of which was derived by assuming that target performance will be achieved during the relevant performance period. Income Taxes. The Company’s effective tax rate was 37.6% for the three months ended March 31, 2023, compared to 19.9% for the corresponding period in 2022. The effective tax rate increase was primarily due to the MountainWest sale, and includes the impact of book versus tax basis differences related to the transaction (See Note 8 - Dispositions ). Southwest’s effective tax rate was 18.3% for the three months ended March 31, 2023, compared to 20.6% in the prior year quarter. These amounts varied from the statutory rate primarily as the result of the amortization of excess deferred income taxes. In April 2023, the Internal Revenue Service (“IRS”) issued Revenue Procedure 2023-15, which provides a safe harbor method of accounting that taxpayers may use to determine whether expenditures to repair, maintain, replace, or improve natural gas transmission and distribution property must be capitalized for tax purposes. The Company and Southwest are currently reviewing this revenue procedure to determine the potential impact on their financial position, results of operations, and cash flows. Recent Accounting Standards Updates. Accounting pronouncements effective or adopted in 2023: In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 the topic) to replace a reference rate affected by reference rate reform. The update applies only to contracts and hedging relationships that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. In December 2022, the FASB issued ASU 2022-06 “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848.” The update provides deferral of the sunset date of Topic 848 from December 31, 2022 to December 31, 2024. Management will continue to 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. See also LIBOR discussion in Note 5 – Debt . |
