| 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”). The MountainWest sale closed on February 14, 2023. 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 Centuri spin-off is expected to be completed towards the end of 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. 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) June 30, 2023 December 31, 2022 Net cash surrender value of COLI policies $ 142,624 $ 136,245 Other property 6,340 33,152 Total Southwest Gas Corporation 148,964 169,397 Non-regulated property, equipment, and intangibles 1,737,114 1,677,218 Non-regulated accumulated provision for depreciation and amortization (652,644) (596,518) Other property and investments 34,328 31,075 Total Southwest Gas Holdings, Inc. $ 1,267,762 $ 1,281,172 Held for sale. In the first quarter of 2023, the Company and Southwest concluded certain assets associated with its previous corporate headquarters met the criteria to be classified as held for sale. 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 in the first quarter of 2023. Cash and Cash Equivalents. Cash and cash equivalents of the Company include $183.3 million and $30 million of money market fund investments at June 30, 2023 and December 31, 2022, respectively. The money market fund investments for Southwest were $181.4 million at June 30, 2023 and $17.6 million at December 31, 2022, respectively. Noncash investing activities include capital expenditures that were not yet paid, thereby remaining in accounts payable, the amounts related to which declined by approximately $34 million and $29.7 million during the six months ended June 30, 2023, for the Company and Southwest, respectively, and increased $1 million and $8.4 million for each of these entities during the twelve months ended June 30, 2023. The Other change in short-term debt as presented on the Company’s and Southwest’s Condensed Consolidated Statements of Cash Flows is comprised of repayments of short-term debt and changes in the current portion of the credit facility. Deferred purchased gas costs. In July 2023, the Arizona Corporation Commission (the “ACC”) approved an increase in the gas cost balancing account (“GCBA”) rate, over a two-year period, as an enhancement to the existing gas cost recovery mechanism, given the $358 million Arizona account balance existing as of May 31, 2023. The increased GCBA rate of $0.20 per therm will support timely recovery of the existing balance. Based on the design of base tariff gas cost rates in Arizona, a separate gas cost balancing recovery rate commonly in place, and the updated GCBA rate now in place, it is estimated that without regard to additional gas costs incurred or interest on the balance following the most recent balance sheet date of June 30, 2023, the account balance existing as of that date is deemed generally recoverable over the next twelve months, and it is therefore classified as a current asset on the balance sheets of the Company and Southwest. Prepaid and other current assets. Prepaid and other current assets for the Company and Southwest include, among other things, materials and operating supplies of $84.6 million at June 30, 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 unrecovered purchased gas costs, with no corresponding asset balance as of June 30, 2023. Goodwill. Since December 31, 2022, management qualitatively assessed whether events during the first six 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, no impairment was deemed to have occurred in the continuing segments of the Company. Goodwill in the Natural Gas Distribution and Utility Infrastructure Services segments is included in the 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 — 2,367 2,367 June 30, 2023 $ 11,155 $ 778,462 $ 789,617 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 $44.3 million and $41.6 million of dividends declared as of June 30, 2023 and December 31, 2022, respectively. Also included in the balance for the Company and Southwest was $54.1 million and $7.5 million related to a regulatory liability associated with the Arizona decoupling mechanism as of June 30, 2023 and December 31, 2022, as well as $37.5 million as of June 30, 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 June 30, Six Months Ended Twelve Months Ended (Thousands of dollars) 2023 2022 2023 2022 2023 2022 Southwest Gas Corporation: Change in COLI policies $ 3,900 $ (5,200) $ 6,300 $ (7,200) $ 8,100 $ (4,200) Interest income 14,515 3,198 26,986 5,999 37,170 9,165 Equity AFUDC — 81 — 157 (157) 157 Other components of net periodic benefit cost 5,234 (187) 10,193 (375) 9,817 (7,386) Miscellaneous expense (4,907) (1,325) (6,294) (699) (22,511) (3,798) Southwest Gas Corporation - total other income (deductions) 18,742 (3,433) 37,185 (2,118) 32,419 (6,062) Centuri and Southwest Gas Holdings, Inc.: Foreign transaction gain (loss) 273 214 (417) 217 343 207 Equity AFUDC — 236 82 418 129 418 Equity in earnings of unconsolidated investments 89 728 449 1,243 1,835 1,368 Miscellaneous income and (expense) 521 (572) 516 (1,223) (1,374) (23) Corporate and administrative (21) (8) 249 (128) 114 (135) Southwest Gas Holdings, Inc. - total other income (deductions) $ 19,604 $ (2,835) $ 38,064 $ (1,591) $ 33,466 $ (4,227) Interest income primarily relates to Southwest’s regulatory asset balances, including its deferred purchased gas cost mechanisms, the combined balance of which increased from $355 million as of June 30, 2022 to $786 million as of June 30, 2023. Refer also to Note 2 – Components of Net Periodic Benefit Cost . Miscellaneous expense for Southwest includes a variety of items, including reserves for uncompleted software projects at Southwest deemed non-recoverable from its utility operations. 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 partial 5% redemption (of the 15% then remaining). Centuri paid $39.9 million to the previous owner in April 2023, thereby reducing the balance continuing to be redeemable as of June 30, 2023 to 10% under the terms of the original agreement, with Centuri now owning a 90% stake in Linetec . Furthermore, 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 $35.3 million during the six months ended June 30, 2023 (notwithstanding the change resulting from the partial redemption noted above), and the estimated redemption value of the Drum redeemable noncontrolling interest increased by approximately $266,000 over the same period. 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 2,994 126 3,120 Redemption value adjustments 35,339 266 35,605 Redemption of equity interest from noncontrolling party (39,894) — (39,894) Balance, June 30, 2023 $ 145,204 $ 12,976 $ 158,180 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 Six Months Ended Twelve Months Ended (In thousands) 2023 2022 2023 2022 2023 2022 Weighted average basic shares 71,536 67,045 69,901 63,909 68,542 62,022 Effect of dilutive securities: Restricted stock units (1)(2) 186 — 171 132 — 135 Weighted average diluted shares 71,722 67,045 70,072 64,041 68,542 62,157 (1) The number of anti-dilutive restricted stock units excluded from the calculation of diluted shares during the the three months ended June 30, 2022 is 145,000, and 177,000 during the twelve months ended June 30, 2023. (2) The number of securities included 159,000 performance shares during the three months ended June 30, 2023, 146,000 and 125,000 performance shares during the six months ending June 30, 2023 and 2022, and 124,000 performance shares during the twelve months ended June 30, 2022, 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 13.6% for the three months ended June 30, 2023 , compared to 41.4% for the corresponding period in 2022 primarily due to pre-tax income differences and the amortization of excess deferred income taxes. The Company’s effective tax was 30.0% for the six months ended June 30, 2023, compared to 17.9% for corresponding period in 2022 primarily due to amortization of excess deferred income taxes, corporate-owned life insurance, and 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 (10.7)% for the three months ended June 30, 2023, compared to 50.9% for the corresponding period in 2022 primarily due to pre-tax income differences, the amortization of excess deferred income taxes, and corporate-owned life insurance. Southwest’s effective tax rate was 15.6% for the six months ended June 30, 2023 , compared to 19.5% in the corresponding period in 2022 primarily due to the amortization of excess accumulated deferred income taxes and corporate-owned life insurance. 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. Contingencies. In November 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.) and named the Company and the individual members of the Board as defendants. The complaint asserted breach of fiduciary duty claims, alleging that the Board’s recommendation that stockholders reject Icahn’s offer to purchase shares of the Company’s common stock omitted material information about the Company’s financial analysis; and sought to have the Board approve Icahn’s slate of nominees as “continuing directors” under certain of the Company’s debt instruments. The City Pension Fund filed a notice of withdrawal of its motion for summary judgment in April 2022, and on August 2, 2023, the Delaware Court of Chancery dismissed the lawsuit without prejudice, based on a stipulation among the parties. Recent Accounting Standards Updates. |
