| 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), and until April 22, 2024, all of the shares of common stock of Centuri Group, Inc. (“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). References throughout this document to “Centuri” relate to Centuri Group, Inc., for periods prior to April 22, 2024, or more recently, to Centuri Holdings, Inc. 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. The sale closed on February 14, 2023. Also as part of this simplification strategy, the Company previously communicated that it would pursue a separation of Centuri. In April 2024, the Company and Centuri Holdings, Inc. announced the completion of an initial public offering of Centuri Holdings, Inc. common stock (the “Centuri IPO”). Following the Centuri IPO, the Company owns approximately 81% of Centuri. Through the first quarter of 2024 and leading up to the Centuri IPO, Centuri continued to be wholly owned by Southwest Gas Holdings, Inc. Centuri continues to be consolidated as part of these financial statements, and will continue to be consolidated until such time as the conditions for consolidation are no longer met. Centuri now makes separate filings with the Securities and Exchange Commission (the “SEC”) as a public company. The Company’s common stock continues to trade under the ticker symbol “SWX,” while Centuri’s common stock trades under the ticker symbol “CTRI.” See Note 8 - Centuri Separation . 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, highlighted by the significant amount of cash existing as of the end of the second quarter of 2024, reflective of the collection of gas cost under purchased gas cost mechanisms as a component of customer bills. While mechanisms exist in all states in which Southwest operates, which effectively and primarily decouple authorized operating cost recovery and profitability from the volume of natural gas sold, thereby also incentivizing energy conservation, 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 of Southwest (with its subsidiaries) included herein have been prepared pursuant to the rules and regulations of the SEC. The year-end 2023 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, other than the Centuri IPO and the resulting noncontrolling interest in Centuri, 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, as well as 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. Centuri and the Company do not always have the same basis of presentation, which could result in differences between the amounts presented in the Company’s financial information related to Centuri, and amounts included in Centuri’s separate publicly filed financial information. The most significant difference during the periods presented in this Form 10-Q were due to Centuri recording income tax expense using an annual effective tax rate methodology, while the Company followed a discrete method consistent with regulated utility accounting. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Southwest and the Company included in our 2023 Annual Report on Form 10-K for the fiscal year ended December 31, 2023. 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 earlier period or to the period of correction. 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, 2024 December 31, 2023 Net cash surrender value of COLI policies $ 151,218 $ 146,546 Other property 4,521 6,112 Total Southwest Gas Corporation 155,739 152,658 Non-regulated property, equipment, and intangibles 1,751,844 1,752,094 Non-regulated accumulated provision for depreciation and amortization (711,499) (675,632) Other property and investments 38,858 37,220 Total Southwest Gas Holdings, Inc. $ 1,234,942 $ 1,266,340 Held for sale. In the first quarter of 2023, the Company and Southwest concluded certain assets associated with their 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. In 2023, the Company and Southwest recorded an estimated loss of $5.2 million on the assets based upon an updated fair value less costs to sell. The sale was completed in January 2024. Cash and Cash Equivalents. Cash and cash equivalents of the Company include $314.1 million and $48.9 million of money market fund investments at June 30, 2024 and December 31, 2023, respectively. Of these amounts, $308 million and $38.6 million at June 30, 2024 and December 31, 2023, respectively, were held by Southwest. Refer to discussion above regarding recent collections under Southwest’s purchased gas adjustment mechanisms. Noncash investing activities include capital expenditures that were not yet paid, thereby remaining in accounts payable, amounts related to whi ch declined by approximately $8.5 million for the Company an d increased b y approximately $2.2 million for Southwest during the six months ended June 30, 2024; and d eclined approximately $34 million and $29.7 million dur ing the six months ended June 30, 2023 , for the Company and Southwest, respectively. The Company and Southwest expanded their presentation in the first quarter 2024 to show the Change in short-term portion of credit facility and Repayment of short-term debt as separate line items within their Condensed Consolidated Statements of Cash Flows. The comparable prior-year period has been updated to reflect this change. Prepaid and other current assets. Prepaid and other current assets for the Company and Southwest include, among other things, materials and operating supplies of $82.7 million at June 30, 2024 and $83.4 million at December 31, 2023 (carried at weighted average cost). Goodwill. Goodwill is assessed as of October 1 each year for impairment, or more frequently, if circumstances indicate an impairment to the carrying value of goodwill may have occurred. The Company’s reporting units for goodwill are its operating segments, which are also its reportable segments. Since December 31, 2023, management qualitatively assessed whether events during the first six months of 2024 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, 2023 $ 11,155 $ 778,574 $ 789,729 Foreign currency translation adjustment — (3,554) (3,554) June 30, 2024 $ 11,155 $ 775,020 $ 786,175 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 $44.4 million of dividends declared as of both June 30, 2024 and December 31, 2023, respectively. Also included in the balance for the Company and Southwest was $46 million and $87.6 million in accrued purchased gas cost as of June 30, 2024 and December 31, 2023, 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 June 30, Six Months Ended (Thousands of dollars) 2024 2023 2024 2023 Southwest Gas Corporation: Change in COLI policies $ 1,000 $ 3,900 $ 4,600 $ 6,300 Interest income 9,137 14,515 18,913 26,986 Equity AFUDC 1,835 — 3,674 — Other components of net periodic benefit cost 4,130 5,234 8,261 10,193 Miscellaneous expense (1,891) (4,907) (3,137) (6,294) Southwest Gas Corporation - total other income (deductions) 14,211 18,742 32,311 37,185 Centuri, MountainWest, and Southwest Gas Holdings, Inc.: Foreign transaction gain (loss) (103) 273 (1) (417) Equity AFUDC — — — 82 Equity in earnings (loss) of unconsolidated investments (44) 89 (157) 449 Miscellaneous income and (expense) 855 521 898 516 Corporate and administrative 20 (21) 9 249 Southwest Gas Holdings, Inc. - total other income (deductions) $ 14,939 $ 19,604 $ 33,060 $ 38,064 Interest income primarily relates to Southwest’s regulatory asset balances, including its deferred purchased gas cost mechanisms, the combined balance of which ranged from an asset balance of $786 million as of June 30, 2023 to a net liability balanc e of $82 million as of June 30, 2024. Interest income is earned on asset balances and interest expense is incurred on liability balances. Refer also to Note 2 – Components of Net Periodic Benefit Cost for details regarding Other components of net periodic benefit cost. Noncontrolling Interest . In connection with the Centuri IPO, the Company recorded a noncontrolling intere st as part of equity in the Condensed Consolidated Balance Sheet (associated with the interests held by the new investors), and recognized the excess of the fair value of the Centuri IPO proceeds over the carrying value of the noncontrolling interest, in addition to a portion of Accumulated other comprehensive loss relevant to the proportional interest of the noncontrolling parties in Centuri, within Additional paid-in capital. The Condensed Consolidated Statements of Income include multiple components of comprehensive income attributable to noncontrolling interests following the Centuri IPO. These amounts, including those distinguishable from net income attributed to these parties, are separately presented in the Condensed Consolidated Statements of Equity. Refer also to Note 8 - Centuri Separation . Redeemable Noncontrolling Interests . Separate from the noncontrolling ownership interests in Centuri, in connection with the earlier acquisition of Linetec in November 2018, the previous Linetec owner initially retained a 20% equity interest in that entity, with redemption of that interest 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 Linetec 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, agreed to a partial 5% redemption (of the 15% then remaining). In April 2023, Centuri paid $39.9 million to the previous Linetec owner, thereby reducing the balance continuing to be redeemable at that time to 10% under the terms of the original agreement. In March 2024, the parties entered into an agreement to redeem the remaining 10% equity interest for $92 million, which resulted in Centuri owning all of the equity interest in Linetec as of March 31, 2024. The Company paid the $92 million in April 2024, in accordance with the agreement. Separately, certain members of Riggs Distler management hold a 1.41% interest in Drum Parent, Inc. (“Drum”), the parent of Riggs Distler, which is redeemable, subject to certain rights based on the passage of time or upon the occurrence of certain triggering events. A portion of the redeemable noncontrolling interest was funded through promissory notes made to noncontrolling interest holders bearing interest at the prime rate plus 2%. During the first quarter of 2024, Centuri forgave all outstanding promissory notes and unpaid interest owed from the Riggs Distler noncontrolling interest holders and in exchange, obtained a 0.47% portion of the equity interest in Drum that had been funded through these notes. This comprises most of the change noted below as redemption of Drum interests during the first six months of 2024. Additionally, during the first quarter of 2024, Centuri reached an agreement to purchase 0.13% of the noncontrolling interest in Drum for $0.8 million, the majority which was accrued in March 2024 and ultimately paid in April 2024. The remaining noncontrolling interest in Drum outstanding as of June 30, 2024 was 0.81%, with Centuri owning over 99% of Drum following these 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. 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, 2023 $ 91,978 $ 12,689 $ 104,667 Net income (loss) attributable to redeemable noncontrolling interests (193) 28 (165) Redemption value adjustments 194 — 194 Redemption of equity interest from noncontrolling party (91,979) (5,046) (97,025) Balance, June 30, 2024 $ — $ 7,671 $ 7,671 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 share units 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 June 30, Six Months Ended (In thousands) 2024 2023 2024 2023 Weighted average basic shares 71,839 71,536 71,784 69,901 Effect of dilutive securities: Restricted stock units (1) 176 186 165 171 Weighted average diluted shares 72,015 71,722 71,949 70,072 (1) The number of securities included 144,000 and 159,000 performance share units during the three months ended June 30, 2024 and June 30, 2023, the total of which was derived by assuming that target performance will be achieved during the relevant performance period. During the six months ended June 30, 2024 and June 30, 2023, respectively, the number of securities included 140,000 and 146,000 performance share units, 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 17.1% for the three months ended June 30, 2024, compared to 13.6% for the corresponding period in 2023 primarily due to pre-tax income differences, the amortization of excess deferred income taxes, and nondeductible costs associated with the Centuri IPO. The Company’s effective tax was 16.5% for the six months ended June 30, 2024, compared to 30.0% for corresponding period in 2023 primarily due to amortization of excess deferred income taxes, nondeductible costs associated with the Centuri IPO, and the MountainWest sale in 2023, which included the impact of book versus tax basis differences related to that transaction. The tax impacts of further separation of Centuri will depend on the ultimate separation path (See Note 8 - Centuri Separation ). Southwest’s effective tax rate was 6.3% for the three months ended June 30, 2024, compared to (10.7)% for the corresponding period in 2023 primarily due to pre-tax income differences, differences in the amount of amortization of excess deferred income taxes between periods, and the impacts of company-owned life insurance. Southwest’s effective tax rate was 16.4% for the six months ended June 30, 2024, compared to 15.6% in the corresponding period in 2023, including the impacts of the items noted above. The effective tax rates varied from the statutory rate primarily as the result of the amortization of excess deferred income taxes. In April 2023, the Internal Revenue Service 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, and implementing technology system functionality, to determine the potential impact on their financial position, results of operations, and cash flows. Due to the Company’s current tax net operating loss position, the adoption is not expected to result in immediate cash tax benefits. Recent Accounting Standards Updates. Recently issued accounting pronouncement that will be effective in 2024 and later periods: In November 2023, the Financial Accounting Standards Board (the “FASB”) issued ASU 2023-07 “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” The update, among other amendments, requires disclosure of significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included within each reported measure of segment profit or loss, as well as an amount and description of the composition of other segment items to reconcile to segment profit or loss. The update also requires the title and position of the entity’s CODM to be disclosed, and extends certain annual disclosures to interim periods. The provisions of the update are effective for fiscal years beginning after December 15, 2023 and interim periods within the fiscal years beginning after December 15, 2024. Early adoption is permitted. Management is evaluating the impacts this update might have on the Company’s and Southwest’s disclosures. Recently issued accounting pronouncement that will be effective after 2024: In December 2023, the FASB issued ASU 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The update, among other amendments, provides for enhanced income tax information primarily through changes in the rate reconciliation and income taxes paid. The update is effective for annual periods beginning after December 15, 2024; early adoption is permitted. Management is evaluating the impacts this update might have on the Company’s and Southwest’s disclosures. |
