SECURITIES AND EXCHANGE COMMISSION
Form
10-QQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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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,
20172022OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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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. | | | California | | | | 81-3881866 | |
| | 5241 Spring Mountain Road
| | | | | Delaware | | 81-3881866 |
| | 8360 S. Durango Drive | | | | | | |
| | Post Office Box 98510 | | | | | | | | |
| | Las Vegas, Nevada 89193-8510 | Nevada | 89193-8510 | | | | | | |
| | (702) 876-7237
| | | | | | | | |
1-7850
| | Southwest Gas Corporation
| | | California
| | | | 88-0085720
| |
| | 5241 Spring Mountain Road
| | | | | | | | |
| | Post Office Box 98510 (702) | 876-7237 | | | | | | | |
| | Las Vegas, Nevada 89193-8510
| | | | | | | | |
1-7850 | | Southwest Gas Corporation | | | | California | | 88-0085720 |
| | 8360 S. Durango Drive | | | | | | |
| | (702) 876-7237 | Post Office Box 98510 | | | | | | |
| | Las Vegas, | Nevada | 89193-8510 | | | | |
| | (702) | 876-7237 | | | | | |
| | | | | | | | | | | | | | |
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 |
Indicate by check mark whether each registrantregistrant: (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 theeach 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that theeach registrant was required to submit and post such files). Yes ☒ No ☐ Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer,
or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“non-accelerated “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 | | ☐ |
| | | |
Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ |
| | | |
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 | | ☐ |
| | | |
Non-accelerated filer | | ☒ | | Smaller reporting company | | ☐ |
| | | |
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 Rule12b-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,
47,731,84067,067,822 shares as of October
27, 2017.31, 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
January 1, 2017.October 31, 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, 20172022 |
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
cash flows)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.
2
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 20172022 |
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, 2017 | | | DECEMBER 31, 2016 | |
ASSETS | | | | | | | | |
Utility plant: | | | | | | | | |
Gas plant | | $ | 6,440,547 | | | $ | 6,193,564 | |
Less: accumulated depreciation | | | (2,218,796 | ) | | | (2,172,966 | ) |
Acquisition adjustments, net | | | 81 | | | | 196 | |
Construction work in progress | | | 164,030 | | | | 111,177 | |
| | | | | | | | |
Net utility plant | | | 4,385,862 | | | | 4,131,971 | |
| | | | | | | | |
Other property and investments | | | 369,303 | | | | 342,343 | |
| | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | | 59,152 | | | | 28,066 | |
Accounts receivable, net of allowances | | | 301,792 | | | | 285,145 | |
Accrued utility revenue | | | 34,100 | | | | 76,200 | |
Income taxes receivable, net | | | 5,462 | | | | 4,455 | |
Deferred purchased gas costs | | | 6,230 | | | | 2,608 | |
Prepaids and other current assets | | | 132,182 | | | | 136,833 | |
| | | | | | | | |
Total current assets | | | 538,918 | | | | 533,307 | |
| | | | | | | | |
Noncurrent assets: | | | | | | | | |
Goodwill | | | 147,865 | | | | 139,983 | |
Deferred income taxes | | | 1,467 | | | | 1,288 | |
Deferred charges and other assets | | | 411,655 | | | | 432,234 | |
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Total noncurrent assets | | | 560,987 | | | | 573,505 | |
| | | | | | | | |
Total assets | | $ | 5,855,070 | | | $ | 5,581,126 | |
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CAPITALIZATION AND LIABILITIES | | | | | | | | |
Capitalization: | | | | | | | | |
Common stock, $1 par (authorized—60,000,000 shares; issued and outstanding—47,731,840 and 47,482,068 shares) | | $ | 49,362 | | | $ | 49,112 | |
Additionalpaid-in capital | | | 924,213 | | | | 903,123 | |
Accumulated other comprehensive income (loss), net | | | (42,818 | ) | | | (48,008 | ) |
Retained earnings | | | 784,934 | | | | 759,263 | |
| | | | | | | | |
Total Southwest Gas Holdings, Inc. equity | | | 1,715,691 | | | | 1,663,490 | |
Noncontrolling interest | | | (2,295 | ) | | | (2,217 | ) |
| | | | | | | | |
Total equity | | | 1,713,396 | | | | 1,661,273 | |
Redeemable noncontrolling interest | | | — | | | | 22,590 | |
Long-term debt, less current maturities | | | 1,731,981 | | | | 1,549,983 | |
| | | | | | | | |
Total capitalization | | | 3,445,377 | | | | 3,233,846 | |
| | | | | | | | |
Current liabilities: | | | | | | | | |
Current maturities of long-term debt | | | 28,453 | | | | 50,101 | |
Short-term debt | | | 110,500 | | | | — | |
Accounts payable | | | 159,382 | | | | 184,669 | |
Customer deposits | | | 70,162 | | | | 72,296 | |
Income taxes payable | | | 1,543 | | | | 1,909 | |
Accrued general taxes | | | 48,998 | | | | 42,921 | |
Accrued interest | | | 24,543 | | | | 17,939 | |
Deferred purchased gas costs | | | 14,971 | | | | 90,476 | |
Other current liabilities | | | 197,854 | | | | 168,064 | |
| | | | | | | | |
Total current liabilities | | | 656,406 | | | | 628,375 | |
| | | | | | | | |
Deferred income taxes and other credits: | | | | | | | | |
Deferred income taxes and investment tax credits | | | 894,011 | | | | 840,653 | |
Accumulated removal costs | | | 312,000 | | | | 308,000 | |
Other deferred credits and other long-term liabilities | | | 547,276 | | | | 570,252 | |
| | | | | | | | |
Total deferred income taxes and other credits | | | 1,753,287 | | | | 1,718,905 | |
| | |
| | | | | | | | |
Total capitalization and liabilities | | $ | 5,855,070 | | | $ | 5,581,126 | |
| | | | | | | | |
| | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
ASSETS | | | | |
Regulated operations plant: | | | | |
Gas plant | | $ | 11,166,691 | | | $ | 10,789,690 | |
Less: accumulated depreciation | | (3,536,274) | | | (3,397,736) | |
Construction work in progress | | 273,662 | | | 202,068 | |
Net regulated operations plant | | 7,904,079 | | | 7,594,022 | |
Other property and investments, net | | 1,311,334 | | | 1,316,479 | |
Current assets: | | | | |
Cash and cash equivalents | | 175,272 | | | 222,697 | |
Accounts receivable, net of allowances | | 779,558 | | | 707,127 | |
Accrued utility revenue | | 41,300 | | | 84,900 | |
Income taxes receivable, net | | 15,580 | | | 16,816 | |
Deferred purchased gas costs | | 381,351 | | | 291,145 | |
Prepaid and other current assets | | 316,578 | | | 292,082 | |
Total current assets | | 1,709,639 | | | 1,614,767 | |
Noncurrent assets: | | | | |
Goodwill | | 1,742,967 | | | 1,781,332 | |
Deferred income taxes | | 322 | | | 121 | |
Deferred charges and other assets | | 434,236 | | | 458,536 | |
Total noncurrent assets | | 2,177,525 | | | 2,239,989 | |
Total assets | | $ | 13,102,577 | | | $ | 12,765,257 | |
CAPITALIZATION AND LIABILITIES | | | | |
Capitalization: | | | | |
Common stock, $1 par (authorized - 120,000,000 shares; issued and outstanding - 67,063,730 and 60,422,081 shares) | | $ | 68,694 | | | $ | 62,052 | |
Additional paid-in capital | | 2,283,250 | | | 1,824,216 | |
Accumulated other comprehensive loss, net | | (50,232) | | | (46,761) | |
Retained earnings | | 1,111,203 | | | 1,114,313 | |
Total equity | | 3,412,915 | | | 2,953,820 | |
Redeemable noncontrolling interests | | 114,692 | | | 196,717 | |
Long-term debt, less current maturities | | 5,865,591 | | | 4,115,684 | |
Total capitalization | | 9,393,198 | | | 7,266,221 | |
Current liabilities: | | | | |
Current maturities of long-term debt | | 41,485 | | | 297,324 | |
Short-term debt | | 381,000 | | | 1,909,000 | |
Accounts payable | | 308,824 | | | 353,365 | |
Customer deposits | | 55,033 | | | 59,327 | |
Income taxes payable, net | | 4,516 | | | 6,734 | |
Accrued general taxes | | 72,941 | | | 53,473 | |
Accrued interest | | 41,484 | | | 30,964 | |
Deferred purchased gas costs | | 3,742 | | | 5,736 | |
Other current liabilities | | 404,703 | | | 396,126 | |
Total current liabilities | | 1,313,728 | | | 3,112,049 | |
Deferred income taxes and other credits: | | | | |
Deferred income taxes and investment tax credits, net | | 774,465 | | | 768,868 | |
Accumulated removal costs | | 500,052 | | | 480,583 | |
Other deferred credits and other long-term liabilities | | 1,121,134 | | | 1,137,536 | |
Total deferred income taxes and other credits | | 2,395,651 | | | 2,386,987 | |
Total capitalization and liabilities | | $ | 13,102,577 | | | $ | 12,765,257 | |
The accompanying notes are an integral part of these statements.
3
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 20172022 |
SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | THREE MONTHS ENDED | | | NINE MONTHS ENDED | | | TWELVE MONTHS ENDED | |
| | SEPTEMBER 30, | | | SEPTEMBER 30, | | | SEPTEMBER 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Operating revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Gas operating revenues | | $ | 213,059 | | | $ | 200,179 | | | $ | 935,823 | | | $ | 980,927 | | | $ | 1,276,308 | | | $ | 1,376,388 | |
Construction revenues | | | 380,094 | | | | 339,790 | | | | 872,536 | | | | 838,038 | | | | 1,173,576 | | | | 1,127,982 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total operating revenues | | | 593,153 | | | | 539,969 | | | | 1,808,359 | | | | 1,818,965 | | | | 2,449,884 | | | | 2,504,370 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Net cost of gas sold | | | 45,539 | | | | 39,056 | | | | 261,839 | | | | 324,072 | | | | 334,888 | | | | 460,836 | |
Operations and maintenance | | | 102,278 | | | | 102,438 | | | | 314,488 | | | | 301,979 | | | | 414,233 | | | | 400,222 | |
Depreciation and amortization | | | 58,529 | | | | 69,845 | | | | 189,089 | | | | 217,764 | | | | 260,457 | | | | 286,977 | |
Taxes other than income taxes | | | 14,046 | | | | 12,480 | | | | 43,325 | | | | 39,480 | | | | 56,221 | | | | 51,810 | |
Construction expenses | | | 342,629 | | | | 300,611 | | | | 806,586 | | | | 757,919 | | | | 1,073,090 | | | | 1,009,188 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total operating expenses | | | 563,021 | | | | 524,430 | | | | 1,615,327 | | | | 1,641,214 | | | | 2,138,889 | | | | 2,209,033 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating income | | | 30,132 | | | | 15,539 | | | | 193,032 | | | | 177,751 | | | | 310,995 | | | | 295,337 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other income and (expenses): | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest deductions | | | (19,494 | ) | | | (18,158 | ) | | | (56,863 | ) | | | (54,100 | ) | | | (76,423 | ) | | | (71,884 | ) |
Other income (deductions) | | | 2,876 | | | | 2,565 | | | | 8,788 | | | | 6,756 | | | | 11,501 | | | | 10,861 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total other income and (expenses) | | | (16,618 | ) | | | (15,593 | ) | | | (48,075 | ) | | | (47,344 | ) | | | (64,922 | ) | | | (61,023 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | 13,514 | | | | (54 | ) | | | 144,957 | | | | 130,407 | | | | 246,073 | | | | 234,314 | |
Income tax expense (benefit) | | | 3,094 | | | | (2,961 | ) | | | 47,411 | | | | 43,046 | | | | 82,833 | | | | 80,255 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | 10,420 | | | | 2,907 | | | | 97,546 | | | | 87,361 | | | | 163,240 | | | | 154,059 | |
Net income attributable to noncontrolling interests | | | 216 | | | | 435 | | | | 170 | | | | 500 | | | | 684 | | | | 1,079 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income attributable to Southwest Gas Holdings, Inc. | | $ | 10,204 | | | $ | 2,472 | | | $ | 97,376 | | | $ | 86,861 | | | $ | 162,556 | | | $ | 152,980 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Basic earnings per share | | $ | 0.21 | | | $ | 0.05 | | | $ | 2.05 | | | $ | 1.83 | | | $ | 3.42 | | | $ | 3.22 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Diluted earnings per share | | $ | 0.21 | | | $ | 0.05 | | | $ | 2.03 | | | $ | 1.82 | | | $ | 3.39 | | | $ | 3.20 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Dividends declared per share | | $ | 0.495 | | | $ | 0.450 | | | $ | 1.485 | | | $ | 1.350 | | | $ | 1.935 | | | $ | 1.755 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Average number of common shares outstanding | | | 47,628 | | | | 47,481 | | | | 47,577 | | | | 47,464 | | | | 47,553 | | | | 47,442 | |
Average shares outstanding (assuming dilution) | | | 47,986 | | | | 47,830 | | | | 47,912 | | | | 47,802 | | | | 47,896 | | | | 47,787 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | Twelve Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Operating revenues: | | | | | | | | | | | | |
Regulated operations revenues | | $ | 367,122 | | | $ | 255,848 | | | $ | 1,550,684 | | | $ | 1,070,576 | | | $ | 2,001,898 | | | $ | 1,445,066 | |
Utility infrastructure services revenues | | 758,466 | | | 632,848 | | | 1,988,433 | | | 1,525,448 | | | 2,621,646 | | | 2,065,038 | |
Total operating revenues | | 1,125,588 | | | 888,696 | | | 3,539,117 | | | 2,596,024 | | | 4,623,544 | | | 3,510,104 | |
Operating expenses: | | | | | | | | | | | | |
Net cost of gas sold | | 100,991 | | | 63,710 | | | 547,769 | | | 296,227 | | | 682,449 | | | 374,449 | |
Operations and maintenance | | 154,236 | | | 122,927 | | | 479,330 | | | 334,450 | | | 618,026 | | | 437,602 | |
Depreciation and amortization | | 116,933 | | | 91,380 | | | 347,589 | | | 267,670 | | | 450,960 | | | 354,688 | |
Taxes other than income taxes | | 23,356 | | | 20,109 | | | 70,778 | | | 60,134 | | | 90,987 | | | 76,087 | |
Utility infrastructure services expenses | | 680,135 | | | 567,270 | | | 1,829,560 | | | 1,381,524 | | | 2,403,503 | | | 1,858,464 | |
Total operating expenses | | 1,075,651 | | | 865,396 | | | 3,275,026 | | | 2,340,005 | | | 4,245,925 | | | 3,101,290 | |
Operating income | | 49,937 | | | 23,300 | | | 264,091 | | | 256,019 | | | 377,619 | | | 408,814 | |
Other income and (expenses): | | | | | | | | | | | | |
Net interest deductions | | (64,373) | | | (31,298) | | | (165,942) | | | (81,201) | | | (203,939) | | | (109,537) | |
Other income (deductions) | | 1,593 | | | (3,112) | | | 2 | | | (3,975) | | | 478 | | | 282 | |
Total other income and (expenses) | | (62,780) | | | (34,410) | | | (165,940) | | | (85,176) | | | (203,461) | | | (109,255) | |
Income (loss) before income taxes | | (12,843) | | | (11,110) | | | 98,151 | | | 170,843 | | | 174,158 | | | 299,559 | |
Income tax expense (benefit) | | (1,525) | | | (1,816) | | | 18,300 | | | 34,818 | | | 23,130 | | | 58,498 | |
Net income (loss) | | (11,318) | | | (9,294) | | | 79,851 | | | 136,025 | | | 151,028 | | | 241,061 | |
Net income attributable to noncontrolling interests | | 991 | | | 2,282 | | | 2,557 | | | 5,189 | | | 3,791 | | | 6,681 | |
Net income (loss) attributable to Southwest Gas Holdings, Inc. | | $ | (12,309) | | | $ | (11,576) | | | $ | 77,294 | | | $ | 130,836 | | | $ | 147,237 | | | $ | 234,380 | |
Earnings (loss) per share: | | | | | | | | | | | | |
Basic | | $ | (0.18) | | | $ | (0.19) | | | $ | 1.19 | | | $ | 2.23 | | | $ | 2.30 | | | $ | 4.03 | |
Diluted | | $ | (0.18) | | | $ | (0.19) | | | $ | 1.19 | | | $ | 2.23 | | | $ | 2.30 | | | $ | 4.02 | |
Weighted average shares: | | | | | | | | | | | | |
Basic | | 67,157 | | | 59,688 | | | 65,004 | | | 58,639 | | | 63,905 | | | 58,209 | |
Diluted | | 67,325 | | | 59,816 | | | 65,148 | | | 58,742 | | | 64,051 | | | 58,312 | |
The accompanying notes are an integral part of these statements.
4
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 20172022 |
SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | THREE MONTHS ENDED | | | NINE MONTHS ENDED | | | TWELVE MONTHS ENDED | |
| | SEPTEMBER 30, | | | SEPTEMBER 30, | | | SEPTEMBER 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Net income | | $ | 10,420 | | | $ | 2,907 | | | $ | 97,546 | | | $ | 87,361 | | | $ | 163,240 | | | $ | 154,059 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income (loss), net of tax | | | | | | | | | | | | | | | | | | | | | | | | |
Defined benefit pension plans: | | | | | | | | | | | | | | | | | | | | | | | | |
Net actuarial gain (loss) | | | — | | | | — | | | | — | | | | — | | | | (14,118 | ) | | | (18,922 | ) |
Amortization of prior service cost | | | 207 | | | | 207 | | | | 621 | | | | 621 | | | | 828 | | | | 828 | |
Amortization of net actuarial loss | | | 3,944 | | | | 4,196 | | | | 11,832 | | | | 12,586 | | | | 16,027 | | | | 17,915 | |
Regulatory adjustment | | | (3,555 | ) | | | (3,796 | ) | | | (10,667 | ) | | | (11,388 | ) | | | (2,741 | ) | | | (404 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net defined benefit pension plans | | | 596 | | | | 607 | | | | 1,786 | | | | 1,819 | | | | (4 | ) | | | (583 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Forward-starting interest rate swaps: | | | | | | | | | | | | | | | | | | | | | | | | |
Amounts reclassified into net income | | | 518 | | | | 518 | | | | 1,554 | | | | 1,556 | | | | 2,073 | | | �� | 2,073 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net forward-starting interest rate swaps | | | 518 | | | | 518 | | | | 1,554 | | | | 1,556 | | | | 2,073 | | | | 2,073 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | 1,012 | | | | (238 | ) | | | 1,861 | | | | 614 | | | | 1,408 | | | | 233 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total other comprehensive income, net of tax | | | 2,126 | | | | 887 | | | | 5,201 | | | | 3,989 | | | | 3,477 | | | | 1,723 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | | 12,546 | | | | 3,794 | | | | 102,747 | | | | 91,350 | | | | 166,717 | | | | 155,782 | |
Comprehensive income attributable to noncontrolling interests | | | 198 | | | | 427 | | | | 181 | | | | 521 | | | | 679 | | | | 1,089 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income attributable to Southwest Gas Holdings, Inc. | | $ | 12,348 | | | $ | 3,367 | | | $ | 102,566 | | | $ | 90,829 | | | $ | 166,038 | | | $ | 154,693 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | Twelve Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Net income (loss) | | $ | (11,318) | | | $ | (9,294) | | | $ | 79,851 | | | $ | 136,025 | | | $ | 151,028 | | | $ | 241,061 | |
Other comprehensive income (loss), net of tax | | | | | | | | | | | | |
Defined benefit pension plans: | | | | | | | | | | | | |
Net actuarial gain (loss) | | — | | | — | | | — | | | — | | | 44,974 | | | (43,730) | |
Amortization of prior service cost | | 34 | | | 183 | | | 100 | | | 547 | | | 282 | | | 766 | |
Amortization of net actuarial loss | | 6,616 | | | 8,474 | | | 19,847 | | | 25,420 | | | 28,321 | | | 32,608 | |
| | | | | | | | | | | | |
Regulatory adjustment | | (5,524) | | | (7,277) | | | (16,571) | | | (21,831) | | | (61,767) | | | 2,959 | |
Net defined benefit pension plans | | 1,126 | | | 1,380 | | | 3,376 | | | 4,136 | | | 11,810 | | | (7,397) | |
Forward-starting interest rate swaps (“FSIRS”): | | | | | | | | | | | | |
Amounts reclassified into net income | | — | | | 413 | | | 416 | | | 1,240 | | | 828 | | | 1,653 | |
Net forward-starting interest rate swaps | | — | | | 413 | | | 416 | | | 1,240 | | | 828 | | | 1,653 | |
Foreign currency translation adjustments | | (5,830) | | | (2,056) | | | (7,263) | | | (324) | | | (6,919) | | | 2,576 | |
Total other comprehensive income (loss), net of tax | | (4,704) | | | (263) | | | (3,471) | | | 5,052 | | | 5,719 | | | (3,168) | |
Comprehensive income (loss) | | (16,022) | | | (9,557) | | | 76,380 | | | 141,077 | | | 156,747 | | | 237,893 | |
Comprehensive income attributable to noncontrolling interests | | 991 | | | 2,282 | | | 2,557 | | | 5,189 | | | 3,791 | | | 6,681 | |
Comprehensive income (loss) attributable to Southwest Gas Holdings, Inc. | | $ | (17,013) | | | $ | (11,839) | | | $ | 73,823 | | | $ | 135,888 | | | $ | 152,956 | | | $ | 231,212 | |
The accompanying notes are an integral part of these statements.
5
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 20172022 |
SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | | | | | | | | |
| | NINE MONTHS ENDED | | | TWELVE MONTHS ENDED | |
| | SEPTEMBER 30 | | | SEPTEMBER 30 | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
CASH FLOW FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | |
Net income | | $ | 97,546 | | | $ | 87,361 | | | $ | 163,240 | | | $ | 154,059 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 189,089 | | | | 217,764 | | | | 260,457 | | | | 286,977 | |
Deferred income taxes | | | 49,409 | | | | 43,702 | | | | 74,439 | | | | 86,526 | |
Changes in current assets and liabilities: | | | | | | | | | | | | | | | | |
Accounts receivable, net of allowances | | | (15,330 | ) | | | 28,531 | | | | (13,765 | ) | | | (17,889 | ) |
Accrued utility revenue | | | 42,100 | | | | 41,700 | | | | (1,100 | ) | | | (800 | ) |
Deferred purchased gas costs | | | (79,127 | ) | | | 81,389 | | | | (114,658 | ) | | | 79,460 | |
Accounts payable | | | (26,771 | ) | | | (24,942 | ) | | | 19,866 | | | | 10,445 | |
Accrued taxes | | | 4,689 | | | | (7,055 | ) | | | 38,084 | | | | (11,033 | ) |
Other current assets and liabilities | | | 43,044 | | | | 12,022 | | | | 3,590 | | | | 22,034 | |
Gains on sale | | | (1,452 | ) | | | (4,117 | ) | | | (4,483 | ) | | | (4,200 | ) |
Changes in undistributed stock compensation | | | 9,199 | | | | 4,347 | | | | 10,308 | | | | 5,142 | |
AFUDC | | | (2,077 | ) | | | (1,893 | ) | | | (2,473 | ) | | | (2,890 | ) |
Changes in other assets and deferred charges | | | (14,470 | ) | | | 3,926 | | | | (1,436 | ) | | | 4,183 | |
Changes in other liabilities and deferred credits | | | 3,395 | | | | (4,813 | ) | | | (10,239 | ) | | | 702 | |
| | | | | | | | | | | | | | | | |
Net cash provided by operating activities | | | 299,244 | | | | 477,922 | | | | 421,830 | | | | 612,716 | |
| | | | | | | | | | | | | | | | |
CASH FLOW FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | |
Construction expenditures and property additions | | | (449,998 | ) | | | (404,388 | ) | | | (575,141 | ) | | | (555,819 | ) |
Acquisition of businesses, net of cash acquired | | | — | | | | (17,000 | ) | | | — | | | | (17,000 | ) |
Changes in customer advances | | | (1,951 | ) | | | 5,445 | | | | 504 | | | | 9,445 | |
Miscellaneous inflows | | | 9,160 | | | | 7,965 | | | | 14,234 | | | | 4,726 | |
| | | | | | | | | | | | | | | | |
Net cash used in investing activities | | | (442,789 | ) | | | (407,978 | ) | | | (560,403 | ) | | | (558,648 | ) |
| | | | | | | | | | | | | | | | |
CASH FLOW FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | |
Issuance of common stock, net | | | 11,563 | | | | 530 | | | | 11,505 | | | | 507 | |
Dividends paid | | | (68,503 | ) | | | (61,950 | ) | | | (89,870 | ) | | | (81,138 | ) |
Centuri distribution to redeemable noncontrolling interest | | | (204 | ) | | | (99 | ) | | | (544 | ) | | | (198 | ) |
Issuance of long-term debt, net | | | 104,308 | | | | 408,946 | | | | 119,308 | | | | 420,946 | |
Retirement of long-term debt | | | (100,240 | ) | | | (196,351 | ) | | | (159,162 | ) | | | (240,999 | ) |
Change in credit facility and commercial paper | | | 145,000 | | | | (150,000 | ) | | | 150,000 | | | | (97,000 | ) |
Change in short-term debt | | | 110,500 | | | | (18,000 | ) | | | 110,500 | | | | — | |
Principal payments on capital lease obligations | | | (796 | ) | | | (1,125 | ) | | | (1,025 | ) | | | (1,449 | ) |
Redemption of Centuri shares from noncontrolling parties | | | (23,000 | ) | | | — | | | | (23,000 | ) | | | — | |
Withholding remittance—share-based compensation | | | (3,176 | ) | | | (2,119 | ) | | | (3,176 | ) | | | (2,164 | ) |
Other | | | (1,104 | ) | | | (605 | ) | | | (2,068 | ) | | | (60 | ) |
| | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 174,348 | | | | (20,773 | ) | | | 112,468 | | | | (1,555 | ) |
| | | | | | | | | | | | | | | | |
Effects of currency translation on cash and cash equivalents | | | 283 | | | | (14 | ) | | | 103 | | | | (318 | ) |
| | | | | | | | | | | | | | | | |
Change in cash and cash equivalents | | | 31,086 | | | | 49,157 | | | | (26,002 | ) | | | 52,195 | |
Cash and cash equivalents at beginning of period | | | 28,066 | | | | 35,997 | | | | 85,154 | | | | 32,959 | |
| | | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 59,152 | | | $ | 85,154 | | | $ | 59,152 | | | $ | 85,154 | |
| | | | | | | | | | | | | | | | |
Supplemental information: | | | | | | | | | | | | | | | | |
Interest paid, net of amounts capitalized | | $ | 45,771 | | | $ | 47,134 | | | $ | 66,077 | | | $ | 68,445 | |
Income taxes paid (received) | | | 3,687 | | | | 6,530 | | | | (21,875 | ) | | | 9,899 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | Twelve Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
CASH FLOW FROM OPERATING ACTIVITIES: | | | | | | | | |
Net income | | $ | 79,851 | | | $ | 136,025 | | | $ | 151,028 | | | $ | 241,061 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | 347,589 | | | 267,670 | | | 450,960 | | | 354,688 | |
Deferred income taxes | | 22,955 | | | 45,374 | | | 38,793 | | | 58,339 | |
Changes in current assets and liabilities: | | | | | | | | |
Accounts receivable, net of allowances | | (78,719) | | | (62,081) | | | (68,192) | | | (68,714) | |
Accrued utility revenue | | 43,600 | | | 42,700 | | | (1,600) | | | (3,200) | |
Deferred purchased gas costs | | (92,200) | | | (293,410) | | | (142,518) | | | (317,070) | |
Accounts payable | | (29,353) | | | (51,086) | | | 72,159 | | | 251 | |
Accrued taxes | | 18,352 | | | 5,954 | | | 5,673 | | | 3,134 | |
Other current assets and liabilities | | (1,039) | | | 23,289 | | | (113,537) | | | 9,531 | |
Gains on sale of property and equipment | | (5,215) | | | (5,365) | | | (6,756) | | | (6,632) | |
Changes in undistributed stock compensation | | 7,855 | | | 7,676 | | | 9,473 | | | 9,001 | |
Equity AFUDC | | (912) | | | — | | | (912) | | | (1,311) | |
Changes in deferred charges and other assets | | 16,417 | | | (7,956) | | | 10,832 | | | (21,373) | |
Changes in other liabilities and deferred credits | | (25,826) | | | (57,269) | | | (42,186) | | | (67,922) | |
Net cash provided by operating activities | | 303,355 | | | 51,521 | | | 363,217 | | | 189,783 | |
CASH FLOW FROM INVESTING ACTIVITIES: | | | | | | | | |
Construction expenditures and property additions | | (612,516) | | | (506,737) | | | (821,405) | | | (699,368) | |
Acquisition of businesses, net of cash acquired | | (18,809) | | | (830,395) | | | (1,542,674) | | | (830,145) | |
Changes in customer advances | | 23,222 | | | 7,940 | | | 31,256 | | | 14,282 | |
Other | | 4,005 | | | 14,755 | | | 7,506 | | | 17,238 | |
Net cash used in investing activities | | (604,098) | | | (1,314,437) | | | (2,325,317) | | | (1,497,993) | |
CASH FLOW FROM FINANCING ACTIVITIES: | | | | | | | | |
Issuance of common stock, net | | 459,051 | | | 210,812 | | | 461,880 | | | 259,422 | |
Centuri distribution to redeemable noncontrolling interest | | (39,649) | | | — | | | (39,649) | | | — | |
Dividends paid | | (118,980) | | | (102,292) | | | (154,910) | | | (134,479) | |
Issuance of long-term debt, net | | 770,240 | | | 1,654,960 | | | 775,976 | | | 1,666,718 | |
Retirement of long-term debt | | (422,356) | | | (406,815) | | | (468,205) | | | (473,926) | |
Change in credit facility and commercial paper | | 8,000 | | | (150,000) | | | 138,000 | | | (58,000) | |
Change in short-term debt | | (380,253) | | | 165,000 | | | (593,253) | | | 218,000 | |
Issuance of short-term debt | | — | | | — | | | 1,850,000 | | | — | |
Withholding remittance - share-based compensation | | (2,105) | | | (1,254) | | | (2,115) | | | (1,254) | |
Other | | (19,929) | | | (4,355) | | | (16,303) | | | (6,161) | |
Net cash provided by financing activities | | 254,019 | | | 1,366,056 | | | 1,951,421 | | | 1,470,320 | |
Effects of currency translation on cash and cash equivalents | | (701) | | | 198 | | | (739) | | | 635 | |
Change in cash and cash equivalents | | (47,425) | | | 103,338 | | | (11,418) | | | 162,745 | |
Cash and cash equivalents at beginning of period | | 222,697 | | | 83,352 | | | 186,690 | | | 23,945 | |
Cash and cash equivalents at end of period | | $ | 175,272 | | | $ | 186,690 | | | $ | 175,272 | | | $ | 186,690 | |
SUPPLEMENTAL INFORMATION: | | | | | | | | |
Interest paid, net of amounts capitalized | | $ | 146,792 | | | $ | 57,128 | | | $ | 194,016 | | | $ | 98,567 | |
Income taxes paid, net | | $ | 10,317 | | | $ | 7,665 | | | $ | 6,860 | | | $ | 12,720 | |
The accompanying notes are an integral part of these statements.
6
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 20172022 |
SOUTHWEST GAS
CORPORATIONHOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
BALANCE SHEETSSTATEMENTS OF EQUITY
(
Thousands of dollars)In thousands, except per share amounts)
(Unaudited)
| | | | | | | | |
| | SEPTEMBER 30, | | | DECEMBER 31, | |
| | 2017 | | | 2016 | |
ASSETS | | | | | | | | |
Utility plant: | | | | | | | | |
Gas plant | | $ | 6,440,547 | | | $ | 6,193,564 | |
Less: accumulated depreciation | | | (2,218,796 | ) | | | (2,172,966 | ) |
Acquisition adjustments, net | | | 81 | | | | 196 | |
Construction work in progress | | | 164,030 | | | | 111,177 | |
| | | | | | | | |
Net utility plant | | | 4,385,862 | | | | 4,131,971 | |
| | | | | | | | |
Other property and investments | | | 115,841 | | | | 108,569 | |
| | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | | 46,467 | | | | 19,024 | |
Accounts receivable, net of allowances | | | 68,028 | | | | 111,845 | |
Accrued utility revenue | | | 34,100 | | | | 76,200 | |
Income taxes receivable, net | | | 6,440 | | | | 4,455 | |
Deferred purchased gas costs | | | 6,230 | | | | 2,608 | |
Prepaids and other current assets | | | 118,587 | | | | 126,363 | |
| | | | | | | | |
Total current assets | | | 279,852 | | | | 340,495 | |
| | | | | | | | |
Noncurrent assets: | | | | | | | | |
Goodwill | | | 10,095 | | | | 10,095 | |
Deferred charges and other assets | | | 393,942 | | | | 410,625 | |
Discontinued operations—construction services—assets | | | — | | | | 579,371 | |
| | | | | | | | |
Total noncurrent assets | | | 404,037 | | | | 1,000,091 | |
| | | | | | | | |
Total assets | | $ | 5,185,592 | | | $ | 5,581,126 | |
| | | | | | | | |
CAPITALIZATION AND LIABILITIES | | | | | | | | |
Capitalization: | | | | | | | | |
Common stock | | $ | 49,112 | | | $ | 49,112 | |
Additionalpaid-in capital | | | 917,581 | | | | 897,346 | |
Accumulated other comprehensive income (loss), net | | | (42,299 | ) | | | (45,639 | ) |
Retained earnings | | | 606,007 | | | | 767,061 | |
| | | | | | | | |
Total Southwest Gas Corporation equity | | | 1,530,401 | | | | 1,667,880 | |
Discontinued operations—construction servicesnon-owner equity | | | — | | | | 15,983 | |
Long-term debt, less current maturities | | | 1,520,790 | | | | 1,375,080 | |
| | | | | | | | |
Total capitalization | | | 3,051,191 | | | | 3,058,943 | |
| | | | | | | | |
Current liabilities: | | | | | | | | |
Current maturities of long-term debt | | | — | | | | 25,000 | |
Short-term debt | | | 83,000 | | | | — | |
Accounts payable | | | 92,257 | | | | 138,229 | |
Customer deposits | | | 70,162 | | | | 72,296 | |
Accrued general taxes | | | 48,998 | | | | 42,921 | |
Accrued interest | | | 24,406 | | | | 17,395 | |
Deferred purchased gas costs | | | 14,971 | | | | 90,476 | |
Payable to parent | | | 2,560 | | | | — | |
Other current liabilities | | | 109,705 | | | | 95,999 | |
| | | | | | | | |
Total current liabilities | | | 446,059 | | | | 482,316 | |
| | | | | | | | |
Deferred income taxes and other credits: | | | | | | | | |
Deferred income taxes and investment tax credits, net | | | 853,682 | | | | 806,109 | |
Accumulated removal costs | | | 312,000 | | | | 308,000 | |
Other deferred credits and other long-term liabilities | | | 522,660 | | | | 545,143 | |
Discontinued operations—construction services—liabilities | | | — | | | | 380,615 | |
| | | | | | | | |
Total deferred income taxes and other credits | | | 1,688,342 | | | | 2,039,867 | |
| | | | | | | | |
Total capitalization and liabilities | | $ | 5,185,592 | | | $ | 5,581,126 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 |
Common stock shares | | | | | | | |
| Beginning balances | 67,004 | | | 59,088 | | | 60,422 | | | 57,193 | |
| | Common stock issuances | 60 | | | 1,291 | | | 6,642 | | | 3,186 | |
| Ending balances | 67,064 | | | 60,379 | | | 67,064 | | | 60,379 | |
Common stock amount | | | | | | | |
| Beginning balances | $ | 68,634 | | | $ | 60,718 | | | $ | 62,052 | | | $ | 58,823 | |
| | Common stock issuances | 60 | | | 1,291 | | | 6,642 | | | 3,186 | |
| Ending balances | 68,694 | | | 62,009 | | | 68,694 | | | 62,009 | |
Additional paid-in capital | | | | | | | |
| Beginning balances | 2,279,493 | | | 1,733,572 | | | 1,824,216 | | | 1,609,155 | |
| | Common stock issuances | 3,757 | | | 90,317 | | | 459,034 | | | 214,734 | |
| Ending balances | 2,283,250 | | | 1,823,889 | | | 2,283,250 | | | 1,823,889 | |
Accumulated other comprehensive loss | | | | | | | |
| Beginning balances | (45,528) | | | (55,688) | | | (46,761) | | | (61,003) | |
| | Foreign currency exchange translation adjustment | (5,830) | | | (2,056) | | | (7,263) | | | (324) | |
| | Net actuarial gain arising during period, less amortization of unamortized benefit plan cost, net of tax | 1,126 | | | 1,380 | | | 3,376 | | | 4,136 | |
| | FSIRS amounts reclassified to net income, net of tax | — | | | 413 | | | 416 | | | 1,240 | |
| Ending balances | (50,232) | | | (55,951) | | | (50,232) | | | (55,951) | |
Retained earnings | | | | | | | |
| Beginning balances | 1,156,253 | | | 1,108,279 | | | 1,114,313 | | | 1,067,978 | |
| | Net income (loss) | (12,309) | | | (11,576) | | | 77,294 | | | 130,836 | |
| | Dividends declared | (41,696) | | | (36,098) | | | (125,337) | | | (106,303) | |
| | Redemption value adjustments | 8,955 | | | 19,264 | | | 44,933 | | | (12,642) | |
| Ending balances | 1,111,203 | | | 1,079,869 | | | 1,111,203 | | | 1,079,869 | |
Total equity ending balances | $ | 3,412,915 | | | $ | 2,909,816 | | | $ | 3,412,915 | | | $ | 2,909,816 | |
Dividends declared per common share | $ | 0.62 | | | $ | 0.595 | | | $ | 1.86 | | | $ | 1.785 | |
The accompanying notes are an integral part of these statements.
7
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 20172022 |
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF INCOMEBALANCE SHEETS
(
In thousands)Thousands of dollars)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | THREE MONTHS ENDED | | | NINE MONTHS ENDED | | | TWELVE MONTHS ENDED | |
| | SEPTEMBER 30, | | | SEPTEMBER 30, | | | SEPTEMBER 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Continuing operations: | | | | | | | | | | | | | | | | | | | | | | | | |
Gas operating revenues | | $ | 213,059 | | | $ | 200,179 | | | $ | 935,823 | | | $ | 980,927 | | | $ | 1,276,308 | | | $ | 1,376,388 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Net cost of gas sold | | | 45,539 | | | | 39,056 | | | | 261,839 | | | | 324,072 | | | | 334,888 | | | | 460,836 | |
Operations and maintenance | | | 102,215 | | | | 102,438 | | | | 313,395 | | | | 301,979 | | | | 413,140 | | | | 400,222 | |
Depreciation and amortization | | | 46,194 | | | | 56,436 | | | | 153,643 | | | | 174,413 | | | | 212,693 | | | | 228,609 | |
Taxes other than income taxes | | | 14,046 | | | | 12,480 | | | | 43,325 | | | | 39,480 | | | | 56,221 | | | | 51,810 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total operating expenses | | | 207,994 | | | | 210,410 | | | | 772,202 | | | | 839,944 | | | | 1,016,942 | | | | 1,141,477 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating income (loss) | | | 5,065 | | | | (10,231 | ) | | | 163,621 | | | | 140,983 | | | | 259,366 | | | | 234,911 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other income and (expenses): | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest deductions | | | (17,421 | ) | | | (16,364 | ) | | | (51,622 | ) | | | (49,155 | ) | | | (69,464 | ) | | | (65,146 | ) |
Other income (deductions) | | | 3,081 | | | | 2,521 | | | | 8,744 | | | | 6,712 | | | | 10,308 | | | | 9,615 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total other income and (expenses) | | | (14,340 | ) | | | (13,843 | ) | | | (42,878 | ) | | | (42,443 | ) | | | (59,156 | ) | | | (55,531 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations before income taxes | | | (9,275 | ) | | | (24,074 | ) | | | 120,743 | | | | 98,540 | | | | 200,210 | | | | 179,380 | |
Income tax expense (benefit) | | | (5,251 | ) | | | (11,669 | ) | | | 38,307 | | | | 31,004 | | | | 65,887 | | | | 59,544 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | | (4,024 | ) | | | (12,405 | ) | | | 82,436 | | | | 67,536 | | | | 134,323 | | | | 119,836 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Discontinued operations—construction services: | | | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | | — | | | | 24,020 | | | | — | | | | 31,867 | | | | 21,649 | | | | 54,934 | |
Income tax expense | | | — | | | | 8,708 | | | | — | | | | 12,042 | | | | 7,842 | | | | 20,711 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Income | | | — | | | | 15,312 | | | | — | | | | 19,825 | | | | 13,807 | | | | 34,223 | |
Noncontrolling interests | | | — | | | | 435 | | | | — | | | | 500 | | | | 514 | | | | 1,079 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Income—discontinued operations | | | — | | | | 14,877 | | | | — | | | | 19,325 | | | | 13,293 | | | | 33,144 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (4,024 | ) | | $ | 2,472 | | | $ | 82,436 | | | $ | 86,861 | | | $ | 147,616 | | | $ | 152,980 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
ASSETS | | | | |
Regulated operations plant: | | | | |
Gas plant | | $ | 9,259,486 | | | $ | 8,901,575 | |
Less: accumulated depreciation | | (2,641,407) | | | (2,538,508) | |
Construction work in progress | | 241,457 | | | 183,485 | |
Net regulated operations plant | | 6,859,536 | | | 6,546,552 | |
Other property and investments, net | | 145,561 | | | 153,093 | |
Current assets: | | | | |
Cash and cash equivalents | | 25,151 | | | 38,691 | |
Accounts receivable, net of allowance | | 103,619 | | | 169,666 | |
Accrued utility revenue | | 41,300 | | | 84,900 | |
Income taxes receivable, net | | 2,619 | | | 7,826 | |
Deferred purchased gas costs | | 381,351 | | | 291,145 | |
Receivable from parent | | 95 | | | 1,031 | |
Prepaid and other current assets | | 243,297 | | | 242,243 | |
Total current assets | | 797,432 | | | 835,502 | |
Noncurrent assets: | | | | |
Goodwill | | 10,095 | | | 10,095 | |
Deferred charges and other assets | | 381,145 | | | 405,021 | |
Total noncurrent assets | | 391,240 | | | 415,116 | |
Total assets | | $ | 8,193,769 | | | $ | 7,950,263 | |
CAPITALIZATION AND LIABILITIES | | | | |
Capitalization: | | | | |
Common stock | | $ | 49,112 | | | $ | 49,112 | |
Additional paid-in capital | | 1,622,620 | | | 1,618,911 | |
Accumulated other comprehensive loss, net | | (43,121) | | | (46,913) | |
Retained earnings | | 900,428 | | | 906,827 | |
Total equity | | 2,529,039 | | | 2,527,937 | |
Long-term debt, less current maturities | | 3,042,082 | | | 2,440,603 | |
Total capitalization | | 5,571,121 | | | 4,968,540 | |
Current liabilities: | | | | |
Current maturities of long-term debt | | — | | | 275,000 | |
Short-term debt | | 225,000 | | | 250,000 | |
Accounts payable | | 150,572 | | | 234,070 | |
Customer deposits | | 51,833 | | | 56,127 | |
| | | | |
Accrued general taxes | | 66,582 | | | 53,064 | |
Accrued interest | | 30,685 | | | 22,926 | |
| | | | |
| | | | |
Other current liabilities | | 139,217 | | | 146,422 | |
Total current liabilities | | 663,889 | | | 1,037,609 | |
Deferred income taxes and other credits: | | | | |
Deferred income taxes and investment tax credits, net | | 666,604 | | | 638,828 | |
Accumulated removal costs | | 442,000 | | | 424,000 | |
Other deferred credits and other long-term liabilities | | 850,155 | | | 881,286 | |
Total deferred income taxes and other credits | | 1,958,759 | | | 1,944,114 | |
Total capitalization and liabilities | | $ | 8,193,769 | | | $ | 7,950,263 | |
The accompanying notes are an integral part of these statements.
8
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 20172022 |
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(
In thousands)Thousands of dollars)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | THREE MONTHS ENDED | | | NINE MONTHS ENDED | | | TWELVE MONTHS ENDED | |
| | SEPTEMBER 30, | | | SEPTEMBER 30, | | | SEPTEMBER 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Continuing operations: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) from continuing operations | | $ | (4,024 | ) | | $ | (12,405 | ) | | $ | 82,436 | | | $ | 67,536 | | | $ | 134,323 | | | $ | 119,836 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income (loss), net of tax | | | | | | | | | | | | | | | | | | | | | | | | |
Defined benefit pension plans: | | | | | | | | | | | | | | | | | | | | | | | | |
Net actuarial gain (loss) | | | — | | | | — | | | | — | | | | — | | | | (14,118 | ) | | | (18,922 | ) |
Amortization of prior service cost | | | 207 | | | | 207 | | | | 621 | | | | 621 | | | | 828 | | | | 828 | |
Amortization of net actuarial loss | | | 3,944 | | | | 4,196 | | | | 11,832 | | | | 12,586 | | | | 16,027 | | | | 17,915 | |
Regulatory adjustment | | | (3,555 | ) | | | (3,796 | ) | | | (10,667 | ) | | | (11,388 | ) | | | (2,741 | ) | | | (404 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net defined benefit pension plans | | | 596 | | | | 607 | | | | 1,786 | | | | 1,819 | | | | (4 | ) | | | (583 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Forward-starting interest rate swaps: | | | | | | | | | | | | | | | | | | | | | | | | |
Amounts reclassified into net income | | | 518 | | | | 518 | | | | 1,554 | | | | 1,556 | | | | 2,073 | | | | 2,073 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net forward-starting interest rate swaps | | | 518 | | | | 518 | | | | 1,554 | | | | 1,556 | | | | 2,073 | | | | 2,073 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total other comprehensive income, net of tax from continuing operations | | | 1,114 | | | | 1,125 | | | | 3,340 | | | | 3,375 | | | | 2,069 | | | | 1,490 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income (loss) from continuing operations | | | (2,910 | ) | | | (11,280 | ) | | | 85,776 | | | | 70,911 | | | | 136,392 | | | | 121,326 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Discontinued operations—construction services: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | | 14,877 | | | | — | | | | 19,325 | | | | 13,293 | | | | 33,144 | |
Foreign currency translation adjustments | | | — | | | | (238 | ) | | | — | | | | 614 | | | | (453 | ) | | | 233 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | | — | | | | 14,639 | | | | — | | | | 19,939 | | | | 12,840 | | | | 33,377 | |
Comprehensive income (loss) attributable to noncontrolling interests | | | — | | | | (8 | ) | | | — | | | | 21 | | | | (16 | ) | | | 10 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income attributable to discontinued operations—construction services | | | — | | | | 14,647 | | | | — | | | | 19,918 | | | | 12,856 | | | | 33,367 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income (loss) | | $ | (2,910 | ) | | $ | 3,367 | | | $ | 85,776 | | | $ | 90,829 | | | $ | 149,248 | | | $ | 154,693 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | Twelve Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Regulated operations revenues | | $ | 303,944 | | | $ | 255,848 | | | $ | 1,358,425 | | | $ | 1,070,576 | | | $ | 1,809,639 | | | $ | 1,445,066 | |
Operating expenses: | | | | | | | | | | | | |
Net cost of gas sold | | 100,441 | | | 63,710 | | | 544,216 | | | 296,227 | | | 678,896 | | | 374,449 | |
Operations and maintenance | | 121,537 | | | 119,708 | | | 368,984 | | | 328,980 | | | 478,554 | | | 431,795 | |
Depreciation and amortization | | 64,390 | | | 61,359 | | | 192,434 | | | 187,688 | | | 258,144 | | | 249,118 | |
Taxes other than income taxes | | 20,693 | | | 20,109 | | | 62,443 | | | 60,134 | | | 82,652 | | | 76,087 | |
Total operating expenses | | 307,061 | | | 264,886 | | | 1,168,077 | | | 873,029 | | | 1,498,246 | | | 1,131,449 | |
Operating income (loss) | | (3,117) | | | (9,038) | | | 190,348 | | | 197,547 | | | 311,393 | | | 313,617 | |
Other income and (expenses): | | | | | | | | | | | | |
Net interest deductions | | (29,417) | | | (24,922) | | | (84,660) | | | (71,263) | | | (110,957) | | | (97,259) | |
Other income (deductions) | | 1,678 | | | (4,287) | | | (440) | | | (4,902) | | | (97) | | | (545) | |
Total other income and (expenses) | | (27,739) | | | (29,209) | | | (85,100) | | | (76,165) | | | (111,054) | | | (97,804) | |
Income (loss) before income taxes | | (30,856) | | | (38,247) | | | 105,248 | | | 121,382 | | | 200,339 | | | 215,813 | |
Income tax expense (benefit) | | (8,657) | | | (10,703) | | | 17,918 | | | 18,798 | | | 28,458 | | | 33,679 | |
Net income (loss) | | $ | (22,199) | | | $ | (27,544) | | | $ | 87,330 | | | $ | 102,584 | | | $ | 171,881 | | | $ | 182,134 | |
The accompanying notes are an integral part of these statements.
9
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 20172022 |
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWSCOMPREHENSIVE INCOME
(Unaudited)
| | | | | | | | | | | | | | | | |
| | NINE MONTHS ENDED | | | TWELVE MONTHS ENDED | |
| | SEPTEMBER 30 | | | SEPTEMBER 30 | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
CASH FLOW FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | |
Net Income | | $ | 82,436 | | | $ | 87,361 | | | $ | 148,130 | | | $ | 154,059 | |
Income (loss) from discontinued operations | | | — | | | | 19,825 | | | | 13,807 | | | | 34,223 | |
| | | | | | | | | | | | | | | | |
Income from continuing operations | | | 82,436 | | | | 67,536 | | | | 134,323 | | | | 119,836 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 153,643 | | | | 174,413 | | | | 212,693 | | | | 228,609 | |
Deferred income taxes | | | 44,621 | | | | 39,953 | | | | 72,627 | | | | 76,837 | |
Changes in current assets and liabilities: | | | | | | | | | | | | | | | | |
Accounts receivable, net of allowances | | | 43,818 | | | | 91,680 | | | | (7,131 | ) | | | 8,543 | |
Accrued utility revenue | | | 42,100 | | | | 41,700 | | | | (1,100 | ) | | | (800 | ) |
Deferred purchased gas costs | | | (79,127 | ) | | | 81,389 | | | | (114,658 | ) | | | 79,460 | |
Accounts payable | | | (45,972 | ) | | | (47,060 | ) | | | 17,271 | | | | 1,467 | |
Accrued taxes | | | 4,092 | | | | (5,660 | ) | | | 29,143 | | | | 4,567 | |
Other current assets and liabilities | | | 32,453 | | | | (819 | ) | | | (224 | ) | | | 9,135 | |
Changes in undistributed stock compensation | | | 7,999 | | | | 4,347 | | | | 9,108 | | | | 5,142 | |
AFUDC | | | (2,077 | ) | | | (1,893 | ) | | | (2,473 | ) | | | (2,890 | ) |
Changes in other assets and deferred charges | | | (14,861 | ) | | | 3,664 | | | | (1,914 | ) | | | 3,834 | |
Changes in other liabilities and deferred credits | | | 2,883 | | | | (4,813 | ) | | | (10,751 | ) | | | 702 | |
| | | | | | | | | | | | | | | | |
Net cash provided by operating activities | | | 272,008 | | | | 444,437 | | | | 336,914 | | | | 534,442 | |
| | | | | | | | | | | | | | | | |
CASH FLOW FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | |
Construction expenditures and property additions | | | (395,463 | ) | | | (337,921 | ) | | | (514,661 | ) | | | (485,665 | ) |
Changes in customer advances | | | (1,951 | ) | | | 5,445 | | | | 504 | | | | 9,445 | |
Miscellaneous inflows | | | 2,407 | | | | 2,464 | | | | 2,925 | | | | 3,506 | |
Dividends received | | | — | | | | 2,801 | | | | 9,660 | | | | 5,602 | |
| | | | | | | | | | | | | | | | |
Net cash used in investing activities | | | (395,007 | ) | | | (327,211 | ) | | | (501,572 | ) | | | (467,112 | ) |
| | | | | | | | | | | | | | | | |
CASH FLOW FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | |
Issuance of common stock, net | | | — | | | | 530 | | | | (58 | ) | | | 507 | |
Contributions from parent | | | 11,659 | | | | — | | | | 11,659 | | | | — | |
Dividends paid | | | (60,497 | ) | | | (61,950 | ) | | | (81,864 | ) | | | (81,138 | ) |
Issuance of long-term debt, net | | | — | | | | 296,469 | | | | — | | | | 296,469 | |
Retirement of long-term debt | | | (25,000 | ) | | | (124,855 | ) | | | (25,000 | ) | | | (124,855 | ) |
Change in credit facility and commercial paper | | | 145,000 | | | | (150,000 | ) | | | 150,000 | | | | (97,000 | ) |
Change in short-term debt | | | 83,000 | | | | (18,000 | ) | | | 83,000 | | | | — | |
Withholding remittance—share-based compensation | | | (3,176 | ) | | | (2,119 | ) | | | (3,176 | ) | | | (2,164 | ) |
Other | | | (544 | ) | | | (605 | ) | | | (1,508 | ) | | | (9 | ) |
| | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 150,442 | | | | (60,530 | ) | | | 133,053 | | | | (8,190 | ) |
| | | | | | | | | | | | | | | | |
Net cash provided by discontinued operating activities | | | — | | | | 33,485 | | | | 57,680 | | | | 78,274 | |
Net cash used in discontinued investing activities | | | — | | | | (80,767 | ) | | | (11,049 | ) | | | (91,536 | ) |
Net cash provided by (used in) discontinued financing activities | | | — | | | | 39,757 | | | | (44,491 | ) | | | 6,635 | |
Effects of currency translation on cash and cash equivalents | | | — | | | | (14 | ) | | | (180 | ) | | | (318 | ) |
| | | | | | | | | | | | | | | | |
Change in cash and cash equivalents | | | 27,443 | | | | 49,157 | | | | (29,645 | ) | | | 52,195 | |
Change in cash and cash equivalents of discontinued operations included in discontinued operations construction services assets | | | — | | | | 7,539 | | | | (1,960 | ) | | | 6,945 | |
| | | | | | | | | | | | | | | | |
Change in cash and cash equivalents of continuing operations | | | 27,443 | | | | 56,696 | | | | (31,605 | ) | | | 59,140 | |
Cash and cash equivalents at beginning of period | | | 19,024 | | | | 21,376 | | | | 78,072 | | | | 18,932 | |
| | | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 46,467 | | | $ | 78,072 | | | $ | 46,467 | | | $ | 78,072 | |
| | | | | | | | | | | | | | | | |
Supplemental information: | | | | | | | | | | | | | | | | |
Interest paid, net of amounts capitalized | | $ | 40,751 | | | $ | 42,804 | | | $ | 59,448 | | | $ | 63,031 | |
| | | | | | | | | | | | | | | | |
Income taxes paid (received) | | $ | 4 | | | $ | (3,055 | ) | | $ | (27,952 | ) | | $ | (16,600 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | Twelve Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Net income (loss) | | $ | (22,199) | | | $ | (27,544) | | | $ | 87,330 | | | $ | 102,584 | | | $ | 171,881 | | | $ | 182,134 | |
Other comprehensive income (loss), net of tax | | | | | | | | | | | | |
Defined benefit pension plans: | | | | | | | | | | | | |
Net actuarial gain (loss) | | — | | | — | | | — | | | — | | | 44,974 | | | (43,730) | |
Amortization of prior service cost | | 34 | | | 183 | | | 100 | | | 547 | | | 282 | | | 766 | |
| | | | | | | | | | | | |
Amortization of net actuarial loss | | 6,616 | | | 8,474 | | | 19,847 | | | 25,420 | | | 28,321 | | | 32,608 | |
Regulatory adjustment | | (5,524) | | | (7,277) | | | (16,571) | | | (21,831) | | | (61,767) | | | 2,959 | |
Net defined benefit pension plans | | 1,126 | | | 1,380 | | | 3,376 | | | 4,136 | | | 11,810 | | | (7,397) | |
Forward-starting interest rate swaps (“FSIRS”): | | | | | | | | | | | | |
Amounts reclassified into net income (loss) | | — | | | 413 | | | 416 | | | 1,240 | | | 828 | | | 1,653 | |
Net forward-starting interest rate swaps | | — | | | 413 | | | 416 | | | 1,240 | | | 828 | | | 1,653 | |
Total other comprehensive income (loss), net of tax | | 1,126 | | | 1,793 | | | 3,792 | | | 5,376 | | | 12,638 | | | (5,744) | |
Comprehensive income (loss) | | $ | (21,073) | | | $ | (25,751) | | | $ | 91,122 | | | $ | 107,960 | | | $ | 184,519 | | | $ | 176,390 | |
The accompanying notes are an integral part of these statements.
10
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 20172022 |
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, |
| | 2022 | | 2021 | | 2022 | | 2021 |
CASH FLOW FROM OPERATING ACTIVITIES: | | | | | | | | |
Net income | | $ | 87,330 | | | $ | 102,584 | | | $ | 171,881 | | | $ | 182,134 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | 192,434 | | | 187,688 | | | 258,144 | | | 249,118 | |
Deferred income taxes | | 26,579 | | | 35,800 | | | 44,016 | | | 55,164 | |
Changes in current assets and liabilities: | | | | | | | | |
Accounts receivable, net of allowance | | 66,048 | | | 43,430 | | | (188) | | | (22,766) | |
Accrued utility revenue | | 43,600 | | | 42,700 | | | (1,600) | | | (3,200) | |
Deferred purchased gas costs | | (90,206) | | | (293,410) | | | (140,524) | | | (317,070) | |
Accounts payable | | (71,899) | | | (42,536) | | | 28,401 | | | 17,396 | |
Accrued taxes | | 18,725 | | | 5,396 | | | 21,082 | | | (12,045) | |
Other current assets and liabilities | | (5,908) | | | 18,608 | | | (94,787) | | | (7,739) | |
Gain on sale of property | | (1,503) | | | — | | | (1,503) | | | — | |
Changes in undistributed stock compensation | | 4,993 | | | 5,437 | | | 5,948 | | | 6,239 | |
Equity AFUDC | | (248) | | | — | | | (248) | | | (1,311) | |
Changes in deferred charges and other assets | | 1,112 | | | (18,726) | | | (8,905) | | | (35,329) | |
Changes in other liabilities and deferred credits | | (26,467) | | | (55,905) | | | (42,948) | | | (68,509) | |
Net cash provided by operating activities | | 244,590 | | | 31,066 | | | 238,769 | | | 42,082 | |
CASH FLOW FROM INVESTING ACTIVITIES: | | | | | | | | |
Construction expenditures and property additions | | (485,825) | | | (415,398) | | | (672,410) | | | (582,393) | |
Changes in customer advances | | 23,222 | | | 7,940 | | | 31,255 | | | 14,282 | |
Other | | (1,005) | | | 65 | | | (1,102) | | | 653 | |
| | | | | | | | |
Net cash used in investing activities | | (463,608) | | | (407,393) | | | (642,257) | | | (567,458) | |
CASH FLOW FROM FINANCING ACTIVITIES: | | | | | | | | |
Contributions from parent | | — | | | 202,583 | | | — | | | 248,544 | |
Dividends paid | | (92,200) | | | (82,000) | | | (121,600) | | | (109,000) | |
Issuance of long-term debt, net | | 593,862 | | | 297,318 | | | 593,862 | | | 297,318 | |
Retirement of long-term debt | | (275,000) | | | — | | | (275,000) | | | — | |
Change in credit facility and commercial paper | | 8,000 | | | (150,000) | | | 138,000 | | | (58,000) | |
Change in short-term debt | | (25,000) | | | 193,000 | | | (25,000) | | | 250,000 | |
Withholding remittance - share-based compensation | | (2,011) | | | (1,254) | | | (2,020) | | | (1,254) | |
Other | | (2,173) | | | (1,632) | | | (2,361) | | | (1,708) | |
Net cash provided by financing activities | | 205,478 | | | 458,015 | | | 305,881 | | | 625,900 | |
| | | | | | | | |
Change in cash and cash equivalents | | (13,540) | | | 81,688 | | | (97,607) | | | 100,524 | |
Cash and cash equivalents at beginning of period | | 38,691 | | | 41,070 | | | 122,758 | | | 22,234 | |
Cash and cash equivalents at end of period | | $ | 25,151 | | | $ | 122,758 | | | $ | 25,151 | | | $ | 122,758 | |
SUPPLEMENTAL INFORMATION: | | | | | | | | |
Interest paid, net of amounts capitalized | | $ | 76,141 | | | $ | 53,220 | | | $ | 113,161 | | | $ | 92,778 | |
Income taxes paid (received), net | | $ | 5 | | | $ | — | | | $ | (13,524) | | | $ | 3,359 | |
The accompanying notes are an integral part of these statements.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | | 2022 | | 2021 | | 2022 | | 2021 |
Common stock shares | | | | | | | | |
| Beginning and ending balances | | 47,482 | | | 47,482 | | | 47,482 | | | 47,482 | |
Common stock amount | | | | | | | | |
| Beginning and ending balances | | $ | 49,112 | | | $ | 49,112 | | | $ | 49,112 | | | $ | 49,112 | |
Additional paid-in capital | | | | | | | | |
| Beginning balances | | 1,622,006 | | | 1,529,419 | | | 1,618,911 | | | 1,410,345 | |
| | Share-based compensation | | 614 | | | 1,435 | | | 3,709 | | | 4,868 | |
| | Contributions from Southwest Gas Holdings, Inc. | | — | | | 86,942 | | | — | | | 202,583 | |
| Ending balances | | 1,622,620 | | | 1,617,796 | | | 1,622,620 | | | 1,617,796 | |
Accumulated other comprehensive loss | | | | | | | | |
| Beginning balances | | (44,247) | | | (57,552) | | | (46,913) | | | (61,135) | |
| | Net actuarial gain arising during period, less amortization of unamortized benefit plan cost, net of tax | | 1,126 | | | 1,380 | | | 3,376 | | | 4,136 | |
| | FSIRS amounts reclassified to net income, net of tax | | — | | | 413 | | | 416 | | | 1,240 | |
| Ending balances | | (43,121) | | | (55,759) | | | (43,121) | | | (55,759) | |
Retained earnings | | | | | | | | |
| Beginning balances | | 952,725 | | | 908,757 | | | 906,827 | | | 835,146 | |
| | Net income (loss) | | (22,199) | | | (27,544) | | | 87,330 | | | 102,584 | |
| | Share-based compensation | | (98) | | | (168) | | | (729) | | | (685) | |
| | Dividends declared to Southwest Gas Holdings, Inc. | | (30,000) | | | (29,400) | | | (93,000) | | | (85,400) | |
| Ending balances | | 900,428 | | | 851,645 | | | 900,428 | | | 851,645 | |
Total Southwest Gas Corporation equity ending balances | | $ | 2,529,039 | | | $ | 2,462,794 | | | $ | 2,529,039 | | | $ | 2,462,794 | |
The accompanying notes are an integral part of these statements.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
Note 1 –
NatureBackground, Organization, and Summary of
Operations and Basis of PresentationSignificant 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 and, prior to August 2017, 96.6%(“Southwest” or the “natural gas distribution” segment), all of the shares of common stock of Centuri Construction Group, Inc. During August 2017, Southwest Gas Holdings, Inc. acquired the remaining 3.4% equity interest in Centuri Construction Group, Inc. that was held by the previous owners (and was previously reflected as a redeemable noncontrolling interest). Refer to Note 9 – Construction Services Redeemable Noncontrolling Interestfor additional information.In January 2017, a previously contemplated and approved reorganization under a holding company structure was made effective. The reorganization was designed to provide further separation between regulated and unregulated businesses, and to provide additional financing flexibility. Coincident with the effective date of the reorganization, existing shareholders of Southwest Gas Corporation became shareholders of Southwest Gas Holdings, Inc., on aone-for-one basis, with the same number of shares and same ownership percentage as they held immediately prior to the reorganization. At the same time, Southwest Gas Corporation and Centuri Construction Group, Inc. (“Centuri”Centuri,” or the “construction“utility infrastructure services” segment) each became subsidiaries, and all of the publicly traded holding company; whereas, historically, Centuri had been a direct subsidiaryshares of Southwest Gas Corporation.
Southwest Gas Corporationcommon stock of MountainWest Pipelines Holding Company (“Southwest”MountainWest,” or the “natural gas operations segment”)“pipeline and storage” segment).
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.
The Company completed the acquisition of Dominion Energy Questar Pipeline, LLC and related entities (“Questar Pipelines”) in December 2021 and 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 entities under the MountainWest name. The acquired operations further diversify the Company’s business in the midstream sector, with an expansion of interstate natural gas pipelines and underground storage services, primarily 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. See Note 8 - Business Acquisitions for more information.
Centuri is a
comprehensive constructionstrategic utility infrastructure services
enterprisecompany dedicated to
meetingpartnering with North America’s gas and electric providers to build and maintain the
growing demandsenergy network that powers millions of
North American utilities, energyhomes across the United States (“U.S.”) and
industrial markets.Canada. Centuri derives revenue
primarily from installation, replacement, repair, and maintenance of energy
distribution systems,networks. Centuri operates in the U.S., primarily as NPL, Neuco, Linetec, and
developing industrial construction solutions. Centuri operationsRiggs Distler, and in Canada, primarily as NPL Canada. Utility infrastructure services activity is seasonal in many of Centuri’s operating areas. Peak periods are
generally conducted under the business names of NPL Construction Co. (“NPL”), NPL Canada Ltd. (“NPL Canada”, formerly Link-Line Contractors Ltd.), W.S. Nicholls Construction, Inc. (“W.S. Nicholls”), and Brigadier Pipelines Inc. (“Brigadier”). Typically, Centuri revenues are lowest during the first quarter of the year due to unfavorable winter weather conditions. Operating revenues typically improve as more favorable weather conditions occur during the summer and fall
months.Basismonths 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.
Centuri completed the acquisition of Presentation. The condensed consolidated financial statementsDrum Parent LLC (“Drum”), including Drum’s most significant operating subsidiary, Riggs Distler, in August 2021, thereby expanding Centuri’s electric infrastructure services footprint in the northeast and mid-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. Initially it was contemplated that the Centuri separation would take the form of a spin-off. Then, in April 2022, as a result of interest in the Company well in excess of an earlier tender offer to other shareholders by an activist stockholder (affiliates of Carl C. Icahn), 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, began evaluating 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 (collectively, the “Strategic Review”). On August 3, 2022, the Company announced that the Board had unanimously determined that the best path forward to maximize value for all stockholders is to (i) focus on its strategic plan while concluding the strategic review process for Southwest Gas Holdings, Inc. and subsidiariesSouthwest Gas Corporation; (ii) continue to review strategic alternatives for MountainWest; and (iii) continue to review strategic alternatives for Centuri, including a sale or spin-off of Centuri, among others.
On May 6, 2022, the Company entered into a Cooperation Agreement (the “Company”“Cooperation Agreement”) with Carl C. Icahn and the persons and entities referenced therein (collectively, the “Icahn Group”). In accordance with the Cooperation Agreement, among other things, John P. Hester, then President and Chief Executive Officer of the Company and Southwest, retired from his positions with the Company and Southwest and resigned from the Board. Karen S. Haller, the Company’s former Executive Vice President/Chief Legal and Administrative Officer, was appointed President and Chief Executive Officer of the Company and Chief Executive Officer of Southwest, and was appointed as a member of the Board effective immediately following the completion of the Company’s 2022 annual meeting of stockholders (the “2022 Annual Meeting”). Justin L. Brown, formerly Southwest’s Senior Vice President/General Counsel, was appointed as President of Southwest.
In addition, pursuant to the Cooperation Agreement, the Company agreed to appoint three new directors, Andrew W. Evans, H. Russell Frisby, Jr., and Henry P. Linginfelter (collectively, the “Initial Icahn Designees”), to the Board, which became effective immediately following the 2022 Annual Meeting. Also pursuant to the Cooperation Agreement, on May 27, 2022, the Icahn group informed the Company that it would cause Mr. Frisby to resign from the Board and requested that Andrew J. Teno be appointed to the Board to fill the vacancy created by Mr. Frisby’s resignation. As a result, on May 27, Mr. Frisby resigned from
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
the Board, effective immediately, and the Board appointed Mr. Teno to fill the vacancy created by Mr. Frisby’s resignation, effective immediately. The Icahn Group’s ability to designate directors to the Board is subject to certain ownership thresholds. Consistent with the terms of the Cooperation Agreement and pursuant to the terms of that certain Letter Agreement, dated as of August 3, 2022 (the “Letter Agreement” and together with the Cooperation Agreement, the “Initial Cooperation Agreement”), by and between the Company and the Icahn Group, the Company agreed to extend the date by which the Icahn Group was permitted to appoint a director other than Mr. Frisby to replace Mr. Cárdenas on the Board. On August 9, 2022, in accordance with the terms of the Initial Cooperation Agreement, Ruby Sharma was appointed to the Board to replace Mr. Cárdenas.
The Initial Cooperation Agreement required the Board to expand the Strategic Transactions Committee from three directors to six directors, comprised of the existing members of the Strategic Transactions Committee in addition to the three Initial Icahn Designees. Also, as the Icahn Group has the ability to designate at least three members of the Board, such individuals are to be included on the Strategic Transactions Committee. If the Icahn Group may only designate two members of the Board, then both would serve on the Strategic Transactions Committee.
On May 9, 2022, the Company also entered into Amendment No. 1 to the Rights Agreement dated October 10, 2021 (the “Original Rights Agreement” and as amended, the “Amended Rights Agreement”), to increase the triggering percentage from 10% to 24.9% pursuant to the terms of the Initial Cooperation Agreement and permit the subsequent consummation of the Offer. The Amended Rights Agreement expired on October 9, 2022. See details in the Company’s and Southwest’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “2021 Form 10-K”) regarding the Original Rights Agreement, as well as Note 4 – Common Stock in this current report on Form 10-Q.
An earlier civil suit (initiated in November 2021) by Icahn entities against the Company and certain directors and officers of the Company was subject to a stipulation of dismissal as part of the Initial Cooperation Agreement. The Initial Cooperation Agreement also provided for the reimbursement by the Company of certain out-of-pocket third-party expenses, including certain legal fees, incurred by the Icahn Group.
On October 24, 2022, the Company and the Icahn Group entered into an Amended and Restated Cooperation Agreement (the “Amended Cooperation Agreement”), which amended, restated, superseded, and replaced in its entirety the Initial Cooperation Agreement. Please see Note 9 - Subsequent Events for additional information about the Amended Cooperation Agreement.
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 2021 condensed balance sheet data was derived from audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United StatesU.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. As indicated above, in connection with the holding company reorganization, Centuri ceased to be a subsidiary of Southwest and became a subsidiary of Southwest Gas Holdings, Inc. To give effect to this change, the separate condensed consolidated financial statements related to Southwest Gas Corporation, which are included in thisForm 10-Q, depict Centuri-related amounts for periods prior to January 1, 2017 as discontinued operations. Because the transfer of Centuri from Southwest Gas Corporation to Southwest Gas Holdings, Inc. was effectuated as an equity transaction and not a sale, assets and liabilities subject to the discontinued operations presentation have been reflected as noncurrent on the Southwest Gas Corporation Condensed Consolidated Balance Sheet. Those assets and liabilities are detailed inNote 10 – Reorganization Impacts – Discontinued Operations Solely Related to Southwest Gas Corporation,and include both current andnon-current amounts.No substantive change has occurred with regard to the Company’s business segments on the whole or induring the primary businesses comprising those segments as a result of the foregoing organizational changes. Centuri operations continue to be part of continuing operations and included in the consolidated financial statements of Southwest Gas Holdings, Inc.
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
atas of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.
11
| | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
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 statementdepiction of results for the interim periods, have been made. It is suggested that these
These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
the notes thereto included in the
20162021 Annual Report to
Shareholders,Stockholders, which is incorporated by reference into the
20162021 Form 10-K.Prepaids and other current assets. Prepaids and other current assets includes gas pipe materials and operating supplies of $36 million at September 30, 2017 and $30 million at December 31, 2016 (carried at weighted average cost) and $24 million at September 30, 2017 and $953,000 at December 31, 2016 related to a regulatory asset associated with the Arizona decoupling mechanism (an alternative revenue program).
Other current liabilities. Other current liabilities of Southwest Gas Corporation include $21 million of dividends declared but not yet paid to Southwest Gas Holdings, Inc. at September 30, 2017.
Cash and Cash Equivalents. For purposes of reporting consolidated cash flows, cash and cash equivalents include cash on hand and financial instruments with a purchase-date maturity of three months or less. In general, cash and cash equivalents fall within Level 1 (quoted prices for identical financial instruments) of the three-level fair value hierarchy that ranks the inputs, used to measure fair value, by their reliability. However, cash and cash equivalents at September 30, 2017 and December 31, 2016 also includes money market fund investments of approximately $19.8 million and $5.3 million, respectively, which fall within Level 2 (significant other observable inputs) of the fair value hierarchy, due to the asset valuation methods used by money market funds.
Significantnon-cash investing and financing activities included the following: Upon contract expiration, customer advances of approximately $1.9 million and $3.6 million, during the first nine months of 2017 and 2016, respectively, were applied as contributions toward utility construction activity and representnon-cash investing activity.
Adoption of Accounting Standards Update (“ASU”) No. 2016-09. As of January 1, 2017, the Company adopted Financial Accounting Standards Board (“FASB”) ASUNo. 2016-09 “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The adoption of this update is considered a change in accounting principle. Among other things, the update clarifies that all cash payments made to taxing authorities on the employees’ behalf for withheld shares should be presented as financing activities on the statement of cash flows. This change is required to be presented in the cash flow statement retrospectively. A new category, Withholding remittance – share-based compensation has been added to the Cash Flow from Financing Activities section of the Condensed Consolidated Statements of Cash Flows for both Southwest Gas Holdings, Inc. and Southwest Gas Corporation. The withheld taxes were included in the Other current assets and liabilities line item of the Condensed Consolidated Statements of Cash Flows in previous periods. Therefore, upon adoption, amounts presented as cash inflows from Other current assets and liabilities under the Cash Flow from Operating Activities section of the Southwest Gas Holdings, Inc. Condensed Consolidated Statements of Cash Flows were revised from $9.9 million to $12 million for the nine months ended September 30, 2016 and inflows in the same category for the twelve months ended September 30, 2016 were revised from $19.9 million to $22 million. In addition, while standalone financial statements were not previously presented for natural gas operations, for reasons related to the holding company reorganization discussed above, they are now presented. Therefore, upon adoption of this standard, the Cash Flow from Operating Activities section of the Southwest Gas Corporation Condensed Consolidated Statements of Cash Flows reflects a reclassification of cash outflows from Other current assets and liabilities from $2.9 million to $819,000 for the nine months ended September 30, 2016 and cash inflows in the same category were revised from $7 million to $9.1 million for the twelve months ended September 30, 2016.
Under the new guidance, the Company can withhold any amount between the minimum and maximum individual statutory tax rates and still treat the entire award as equity. The Company intends to administer withholding such that awards under stock compensation programs will continue to be treated as equity awards.
In addition to the above, the update requires all incometax-related cash flows resulting from share-based payments (unrelated to employee withholding) be reported as operating activities on the statement of cash flows, a change from the previous requirement to present windfall tax benefits as an inflow from financing activities and an outflow from operating activities. The Company chose to apply this presentation requirement of the update prospectively as permitted. Therefore, prior periods were not impacted in implementing this provision of the update.
12
| | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value are required to be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The Company had no previously unrecognized tax benefits as a result of these changes; therefore, no cumulative effect adjustment to the Company’s opening retained earnings was required.
Goodwill. Goodwill is assessed as of October each year for impairment (required annually by U.S. GAAP), or otherwise, if circumstances indicate impairment to the carrying value of goodwill may have occurred. In consideration of the holding company reorganization, management of the Company considered its reporting units and segments and determined that historic judgments regarding its segments and reporting units continue to apply, and that no change was necessary with regard to the level at which goodwill is assessed for impairment. No impairment was deemed to have occurred in the first nine months of 2017.
| | | | | | | | | | | | |
(In thousands of dollars) | | Natural Gas Operations | | | Construction Services | | | Consolidated | |
December 31, 2016 | | $ | 10,095 | | | $ | 129,888 | | | $ | 139,983 | |
Foreign currency translation adjustment | | | — | | | | 7,882 | | | | 7,882 | |
| | | | | | | | | | | | |
September 30, 2017 | | $ | 10,095 | | | $ | 137,770 | | | $ | 147,865 | |
| | | | | | | | | | | | |
Intercompany Transactions. Centuri recognizes revenues generated from contracts with Southwest (seeNote 3—Segment Information). Centuri’s accounts receivable for these services are presented in the table below (thousands of dollars):
| | | | | | | | |
| | September 30, 2017 | | | December 31, 2016 | |
Centuri accounts receivable for services provided to Southwest | | $ | 11,486 | | | $ | 10,585 | |
| | | | | | | | |
The accounts receivable balance, revenues, and associated profits are included in the condensed consolidated financial statements of the Company and were not eliminated during consolidation in accordance with accounting treatment for rate-regulated entities.
Other Property and Investments.Other property and investments on Southwest’s and the Southwest Gas Holdings, Inc.Company’s Condensed Consolidated Balance Sheets includes (thousands of dollars): | | | | | | | | |
| | September 30, 2017 | | | December 31, 2016 | |
Centuri property and equipment | | $ | 493,599 | | | $ | 451,114 | |
Centuri accumulated provision for depreciation and amortization | | | (251,831 | ) | | | (228,374 | ) |
Net cash surrender value of COLI policies | | | 114,052 | | | | 106,744 | |
Other property | | | 13,483 | | | | 12,859 | |
| | | | | | | | |
Total | | $ | 369,303 | | | $ | 342,343 | |
| | | | | | | | |
13
includes: | | | | | | | | | | | |
(Thousands of dollars) | September 30, 2022 | | December 31, 2021 |
Net cash surrender value of COLI policies | $ | 141,705 | | | $ | 149,947 | |
Other property | 3,856 | | | 3,146 | |
Total Southwest Gas Corporation | 145,561 | | | 153,093 | |
Non-regulated property, equipment, and intangibles | 1,704,354 | | | 1,616,392 | |
Non-regulated accumulated provision for depreciation and amortization | (595,393) | | | (512,343) | |
Other property and investments | 56,812 | | | 59,337 | |
Total Southwest Gas Holdings, Inc. | $ | 1,311,334 | | | $ | 1,316,479 | |
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 20172022 |
Other Income (Deductions).The following table provides the composition of significant items included in Other income (deductions) in the condensed consolidated statements of income (thousands of dollars):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | | | Twelve Months Ended | |
| | September 30 | | | September 30 | | | September 30 | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Southwest Gas Corporation—natural gas operations segment: | | | | | | | | | | | | | | | | | | | | | | | | |
Change in COLI policies | | $ | 2,100 | | | $ | 2,300 | | | $ | 6,800 | | | $ | 5,400 | | | $ | 8,800 | | | $ | 7,500 | |
Interest income | | | 670 | | | | 522 | | | | 1,848 | | | | 1,279 | | | | 2,417 | | | | 1,664 | |
Equity AFUDC | | | 968 | | | | 611 | | | | 2,077 | | | | 1,893 | | | | 2,473 | | | | 2,890 | |
Miscellaneous income and (expense) | | | (657 | ) | | | (912 | ) | | | (1,981 | ) | | | (1,860 | ) | | | (3,382 | ) | | | (2,439 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Southwest Gas Corporation—total other income (deductions) | | | 3,081 | | | | 2,521 | | | | 8,744 | | | | 6,712 | | | | 10,308 | | | | 9,615 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Construction services segment: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | | | 1 | | | | — | | | | 2 | | | | 1 | | | | 2 | | | | 414 | |
Foreign transaction gain (loss) | | | (442 | ) | | | (3 | ) | | | (640 | ) | | | (22 | ) | | | (640 | ) | | | 28 | |
Miscellaneous income and (expense) | | | 231 | | | | 47 | | | | 676 | | | | 65 | | | | 1,825 | | | | 804 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Centuri—total other income (deductions) | | | (210 | ) | | | 44 | | | | 38 | | | | 44 | | | | 1,187 | | | | 1,246 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Corporate and administrative | | | 5 | | | | — | | | | 6 | | | | — | | | | 6 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated Southwest Gas Holdings, Inc.—total other income (deductions) | | $ | 2,876 | | | $ | 2,565 | | | $ | 8,788 | | | $ | 6,756 | | | $ | 11,501 | | | $ | 10,861 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Included in the table above isare the change innet cash surrender values of company-owned life insurance (“COLI”) policies (including net death benefits recognized).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, and to a more limited extent, certain assets of MountainWest.
Cash and Cash Equivalents. Cash and cash equivalents of the Company include $56 million and $20 million of money market fund investments at September 30, 2022 and December 31, 2021, respectively. The money market fund investments for Southwest were insignificant at both balance sheet dates. 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 $4.8 million and $11.6 million during the nine months ended September 30, 2022, respectively, and increased $16.1 million and $9.4 million during the twelve months ended September 30, 2022, 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 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 the 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 $76.5 million at September 30, 2022 and $62.9 million at December 31, 2021 (carried at weighted average cost). For the Company, there were materials and operating supplies of $80.8 million and $67.4 million at September 30, 2022 and December 31, 2021, respectively, which included amounts for MountainWest. Also included in the balance for both Southwest and the Company was $15.5 million and $51.6 million as of September 30, 2022 and December 31, 2021, respectively, in accrued purchased gas cost.
Goodwill. Goodwill is assessed as of October 1st 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. The acquisition of MountainWest resulted in a new reportable segment, which was assessed for impairment for the first time in 2022. Management considered whether the results of strategic initiatives in 2022 indicated it was more likely than not that the fair value of the Company’s reporting units were less than their carrying amounts. Through management’s assessments, no impairment was deemed to have occurred. 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 operations of Southwest, and across all operations of the Company, is included in their respective Condensed Consolidated Balance Sheets as follows:
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(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) | | — | | | (1,924) | | | — | | | (1,924) | |
Measurement-period adjustments from MountainWest acquisition (a) | | — | | | — | | | (28,177) | | | (28,177) | |
Foreign currency translation adjustment | | — | | | (8,264) | | | — | | | (8,264) | |
September 30, 2022 | | $ | 10,095 | | | $ | 774,870 | | | $ | 958,002 | | | $ | 1,742,967 | |
(a) See Note 8 - Business Acquisitions for details regarding measurement-period adjustments.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
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 $41.6 million and $36 million of dividends declared as of September 30, 2022 and December 31, 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, |
(Thousands of dollars) | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Southwest Gas Corporation: | | | | | | | | | | | |
Change in COLI policies | $ | (1,500) | | | $ | — | | | $ | (8,700) | | | $ | 5,800 | | | $ | (5,700) | | | $ | 14,000 | |
Interest income | 4,356 | | | 1,365 | | | 10,355 | | | 3,312 | | | 12,156 | | | 4,113 | |
Equity AFUDC | 91 | | | — | | | 248 | | | — | | | 248 | | | 1,311 | |
Other components of net periodic benefit cost | (188) | | | (3,506) | | | (563) | | | (10,516) | | | (4,068) | | | (15,522) | |
Miscellaneous income and (expense) | (1,081) | | | (2,146) | | | (1,780) | | | (3,498) | | | (2,733) | | | (4,447) | |
Southwest Gas Corporation - total other income (deductions) | 1,678 | | | (4,287) | | | (440) | | | (4,902) | | | (97) | | | (545) | |
Centuri, MountainWest, and Southwest Gas Holdings, Inc.: | | | | | | | | | | | |
| | | | | | | | | | | |
Foreign transaction gain (loss) | (182) | | | (7) | | | 35 | | | (19) | | | 32 | | | (19) | |
Equity AFUDC | 246 | | | — | | | 664 | | | — | | | 664 | | | — | |
Equity in earnings of unconsolidated investments | 624 | | | 67 | | | 1,867 | | | 168 | | | 1,925 | | | 159 | |
Miscellaneous income and (expense) | (773) | | | 1,115 | | | (2,124) | | | 778 | | | (2,046) | | | 687 | |
Southwest Gas Holdings, Inc. - total other income (deductions) | $ | 1,593 | | | $ | (3,112) | | | $ | 2 | | | $ | (3,975) | | | $ | 478 | | | $ | 282 | |
Included in the table above is the change in cash surrender values of COLI policies (including net death benefits recognized). Current tax regulations provide fortax-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.Recently Issued Accounting Standards Updates. Interest income primarily relates to Southwest’s regulatory asset balances, including its deferred purchased gas cost mechanisms. Refer also to the discussion of
Other Property and Investments above and to Note 2 – Components of Net Periodic Benefit Cost. Redeemable Noncontrolling Interests. In May 2014,connection with the FASB issuedacquisition of Linetec in November 2018, the update “Revenue from Contracts with Customers (Topic 606).” The update replaces muchprevious owner retained a 20% equity interest in that entity, the reduction of which is 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 not the obligation, to purchase at fair value (subject to a floor) a portion of the current guidance regarding revenue recognition including most industry-specific guidance.interest held by the previous owner, and in incremental amounts each year thereafter. In accordance withMarch 2022, the update, an entity will be requiredparties agreed to identify the contract with the customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction pricea partial redemption based on these provisions, and as a result, Centuri paid $39.6 million to the performance obligationsprevious owner of Linetec for a 5% equity interest in Linetec, thereby reducing the contract, and recognize revenue when (or as)balance continuing to be redeemable to 15% under the entity satisfies a performance obligation. In addition to the new revenue recognition requirements, entities will be required to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Entities may choose between two retrospective transition methods when applying the update. In July 2015, the FASB approved aone-year deferralterms of the effective date (annual periods beginning after December 15, 2017).original agreement. In March, April, May, and Decemberorder to fund the redemption, Southwest Gas Holdings, Inc. contributed capital to Centuri.
Certain members of
2016, the FASB issued updates to Topic 606 related to “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”, “Identifying Performance Obligations and Licensing,” “Narrow-Scope Improvements and Practical Expedients”, and certain “Technical Corrections and Improvements.” The amendmentsRiggs Distler management have a 1.42% interest in
the first two updates, respectively, provide guidance when another party, along with the entity, is involved in providing a good or service to a customer, and provide clarification with regard to identifying performance obligations and of the licensing implementation guidance in Topic 606. The third update includes improvements to the guidance on collectibility, noncash consideration, and completed contracts at transition. In addition, a practical expedient is provided for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The fourth update affects narrow aspects of the guidance as issued to date. Management plans to adopt all of these updates at the required adoption date,Drum, which is
for interim and annual reporting periods commencing January 2018.Deliberations have been ongoing byredeemable, subject to certain rights based on the utility industry, notably in connection with efforts to produce an accounting guide intended to be developed bypassage of time or upon the American Instituteoccurrence of Certified Public Accountants (“AICPA”). In association with this undertaking, the AICPA formed a number of industry task forces, including a Power & Utilities (“P&U”) Task Force, on which Company personnel actively participate via formal membership. Industry representatives and organizations, the largest auditing firms, the AICPA’s Revenue Recognition Working Group and its Financial Reporting Executive Committee have undertaken, and continue to undertake, consideration of several items relevant to the utility industry. Where applicable or necessary, the FASB’s Transition Resource Group (“TRG”) has also participated. Through the P&U Task Force undertakings, general determinations were made that contributions received in aid of construction (“CIAC”) efforts related to the industry’s pipe distribution and transmission systems are reimbursements of expenditures rather than revenue (consistent with current accounting practices). Furthermore, regarding the “collectibility” criterion in the update that must be met for revenue recognition, general determinations have been made that contracts for utility service (including service to lower income or lower credit quality customers)
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certain triggering events. | | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | 16 | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
represent genuine and valid contracts for which revenue is able to be recognized when service is rendered (consistent with current accounting practices). These determinations by the P&U industry are based on the various measures the industry takes to help ensure collectibility (e.g., proof of creditworthiness, customer deposits, late fee assessment, disconnection, servicere-establishment fees, collection processes, etc.), in addition to the regulatory mechanisms established under rate regulation to mitigate the impacts of individual customer nonpayment. Southwest has also actively worked with its peers in the rate-regulated natural gas industry and with the public accounting profession to finalize the accounting treatment for several other issues not separately addressed by the P&U Task Force.
With regard to the construction services segment, the principles of the new revenue recognition guidance are very similar to existing guidance for construction contractors. Similar to the P&U Task Force noted above, the AICPA formed the Engineering and Construction Contractors Task Force to assist the construction industry with implementing the new guidance. The accounting guide the AICPA intends to release is expected to provide implementation guidance related to several issues including 1) combining contracts and separating performance obligations; 2) estimating change orders, incentives, penalties, liquidated damages and other variable consideration items and 3) acceptable measures of progress when recognizing revenue over time.
Management of both segments of the Company has substantially completed assessments of sources of revenue and the effects that adoption of the new guidance will have on the Company’s (and Southwest’s in the case of utility operations) financial position, results of operations, and cash flows. Based on assessments completed to date, management believes that such impacts will not be material overall. Presentation and disclosure requirements of the new guidance will have the most impact on the Company’s financial statements and note disclosures. The Company is currently planning to adopt the new guidance in 2018 under the modified retrospective transition method, as permissible.
In January 2016, the FASB issued the update “Financial Instruments – Overall (Subtopic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” in order to improve the recognition and measurement of financial instruments. The update makes targeted improvements to existing U.S. GAAP by: 1) requiring equity investments to be measured at fair value with changes in fair value recognized in net income; 2) requiring the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 3) requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; 4) eliminating the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and 5) requiring a reporting entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. All entities can early adopt the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. Management believes this update will not have a material impact on its consolidated financial statements and disclosures.
In February 2016, the FASB issued the update “Leases (Topic 842).” Under the update, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date:
A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and
Aright-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. Though companies have historically been required to make disclosures regarding leases and of associated contractual obligations, leases (with terms longer than a year) will no longer existoff-balance sheet. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply
15
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 20172022 |
Significant changes in the value of the redeemable noncontrolling interests, above a full retrospective transition approach. Early application is permitted. Management currently plans to adopt the updatefloor determined at the required adoptionestablishment date, whichare recognized as they occur, and the carrying value is for interimadjusted 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 annual reporting periods commencing January 1, 2019. Existing leases have been historically documented under traditional leasing arrangementsoperating characteristics. Based on the fair value model employed, the estimated redemption value of the Linetec redeemable noncontrolling interest decreased by both segments. Management isapproximately $45 million during the nine months ended September 30, 2022. Adjustment to the redemption value also impacts retained earnings, as reflected in the processCompany’s Condensed Consolidated Statement of evaluating other typesEquity, but does not impact net income. The following depicts changes to the balances of arrangements that have the potentialredeemable noncontrolling interests:
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(Thousands of dollars): | | Linetec | | Drum | | Total |
Balance, December 31, 2021 | | $ | 184,148 | | | $ | 12,569 | | | $ | 196,717 | |
Net income (loss) attributable to redeemable noncontrolling interests | | 2,582 | | | (25) | | | 2,557 | |
Redemption value adjustments | | (44,933) | | | — | | | (44,933) | |
Redemption of equity interest from noncontrolling party | | (39,649) | | | — | | | (39,649) | |
Balance, September 30, 2022 | | $ | 102,148 | | | $ | 12,544 | | | $ | 114,692 | |
Earnings Per Share. Basic earnings per share (“EPS”) in each period of this report were calculated by dividing net income attributable to meetSouthwest Gas Holdings, Inc. by the definitionweighted-average number of a lease undershares during those periods. Diluted EPS includes additional weighted-average common stock equivalents (performance shares and restricted stock units). Unless otherwise noted, the new standard,term “Earnings Per Share” refers to Basic EPS. A reconciliation of the denominator used in Basic and Diluted EPS calculations is alsoshown in the processfollowing table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | Twelve Months Ended September 30, |
(In thousands) | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Weighted average basic shares | | 67,157 | | | 59,688 | | | 65,004 | | | 58,639 | | | 63,905 | | | 58,209 | |
Effect of dilutive securities: | | | | | | | | | | | | |
Restricted stock units (1) | | 168 | | | 128 | | | 144 | | | 103 | | | 146 | | | 103 | |
Weighted average diluted shares | | 67,325 | | | 59,816 | | | 65,148 | | | 58,742 | | | 64,051 | | | 58,312 | |
(1) The number of selecting software to efficiently implementsecurities included 156,000 and 115,000 performance shares during the standardthree months ending September 30, 2022 and 2021, 135,000 and 95,000 performance shares during the nine months ending September 30, 2022 and 2021, and 135,000 and 93,000 performance shares during the twelve months ending September 30, 2022 and 2021, respectively, the total of which was derived by assuming that target performance will be achieved during the relevant performance period.
Contingencies. Southwest maintains liability insurance for various risks associated with the operation of its natural gas operations segment.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 2022 to July 2023, 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 FASB recently issued proposed guidance that will allowexplosion was caused by a leak in the election of a practical expedient to not apply the new standard to existing easement contractspipe, and is under investigation. Individuals that were not previously assessedinjured have each brought legal claims against Southwest and other parties. If Southwest is deemed fully or partially responsible, Southwest estimates its net exposure could be equal to the self-insured retention of $5 million (the maximum noted above). 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 leases under historic guidance. However,of the date these financial statements are issued.
Other contingencies are also recognized where appropriate, if claims are brought, or expected to be brought, against the Company would stillor Southwest, where management expects it may settle (or be required to evaluate any new easements entered into aftersettle) claims in cash, or in some cases, by means of insurance indemnification. For instance, the effective datebalance of such reserves was updated in the second quarter of 2022 for $6.2 million related to a contract dispute. The amount was paid in the third quarter of 2022 and the matter is now closed.
As described above, the November 2021 civil suit filed by the Icahn Group against the Company and certain officers and directors was subject to a stipulation of dismissal with prejudice in May 2022, pursuant to the terms of the standardInitial Cooperation Agreement.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 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 complaint was later amended on November 30, 2021. The amended complaint named the Company and the individual members of the Board as defendants. The complaint sought to determine ifassert breach of fiduciary duty claims, alleging that the arrangements should be accountedBoard’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. In March 2022, the City Pension Fund filed a motion for as leases. Management is currently evaluatingsummary judgment on its claim; however, in April 2022, the new and proposed guidance in lightCity Pension Fund filed a notice of withdrawal of its customary leasing arrangements (and other arrangementsmotion for summary judgment. The Company believes that the claims lack merit and intends to vigorously defend against them.
Recent Accounting Standards Updates.
Accounting pronouncements effective or adopted in association with2022:
In March 2020, the new guidance) to determineFinancial Accounting Standards Board (the “FASB”) issued ASU 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the effect the new standard will have on its financial position, resultsEffects of operations, cash flows, and business processes.In June 2016, the FASB issued the update “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit LossesReference Rate Reform on Financial Instruments.Reporting.” The update amendsprovides 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, credit losses for financial assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis,including when modifying a contract (during the eligibility period covered by the update eliminatesto Topic 848) to replace a reference rate affected by such reform. The update applies only to contracts and hedging relationships that reference the “probable” threshold for initial recognition of credit losses in current U.S. GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset to present the net amountLondon Interbank Offered Rate (“LIBOR”) or another rate expected to be collected. For available for sale debt securities, credit losses shoulddiscontinued due to reference rate reform. The guidance was eligible to be measured inapplied upon issuance on March 12, 2020, and can generally be applied through December 31, 2022, and while a manner similarproposal by the FASB has occurred to current U.S. GAAP, howeverextend the optional guidance to the full tenor of LIBOR expiration dates occurring after 2022, to date, no such update has been made effective. Management will require that credit losses be presented as an allowance rather than as a write-down. This update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The update affects loans, debt securities, trade receivables, net investments in leases,off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded frommonitor the scope that have the contractual right to receive cash. The update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments in this update earlier as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is evaluating what impact, if any,impacts this update might have on itsthe Company’s and Southwest’s consolidated financial statements and disclosures.
disclosures, and will reflect such appropriately, in the event that the optional guidance is elected. Management 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
2016,2020, 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
update “Classification of Certain Cash Receipts and Cash Payments.” This update addresses the following specific cash flow issues: debt prepayment or debt extinguishment costs; settlement ofzero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relationguidance related to the
effective interest rate ofdisclosures and earnings-per-share for convertible instruments and contracts in an entity’s own equity. The Company and Southwest adopted the
borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance (“COLI”) policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows, including identification of the predominant nature in cases where cash receipts and payments have aspects of more than one class of cash flows. The update
is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. Management believes this update will not have a material impact on its consolidated cash flow statements and disclosures.In October 2016, the FASB issued the update “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory.” This update eliminates the current U.S. GAAP exception for all intra-entity sales of assets other than inventory. As a result, a reporting entity would recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though thepre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted; however, the guidance can only be adopted in the first interim periodquarter of a fiscal year. No such election2022, the impact of which was not material to adopt early was made by management. The modified retrospective approach will be required for transition to the new guidance, with a cumulative-effect adjustment recorded in retained earnings as of the beginning of the period of adoption. Management believes this update will not have a material impact on its consolidated financial statements and disclosures.
In January 2017,of the FASB issued the update “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The update eliminates Step 2 from the goodwill impairment test. The annual,Company or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s
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Southwest.
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SOUTHWEST GAS HOLDINGS, INC. | 18 | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from anytax-deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The update also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments should be applied on a prospective basis. The update is effective for fiscal and interim periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Management has determined that this update would have had no impact on the consolidated financial statements for the periods presented if it had been effective during those periods.
In March 2017, the FASB issued the update “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The update applies to all employers that offer employee benefits under defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715, Compensation – Retirement Benefits. The update requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, and be appropriately described. The update also allows only the service cost component (and not the other components of periodic benefit costs) to be eligible for capitalization when applicable, making no exception for specialized industries, includingrate-regulated industries.
Southwest is a rate-regulated utility offering pension and postretirement benefits to retired employees. It is anticipated that Southwest would continue to request recovery of the total costs of defined benefit plans in rate applications filed with its various regulatory bodies. Rate-regulated entities providing utility and transmission services have historically capitalized a portion of periodic benefit costs (includingnon-service cost components) in utility infrastructure (for instance, when productive labor is also charged to capital work orders). The portion capitalized has historically been a component of depreciation and related rate development through efforts of companies and their regulatory commissions. The Federal Energy Regulatory Commission (“FERC”) regulates interstate transmission pipelines and also establishes, via its Uniform System of Accounts, accounting practices of rate-regulated entities. Accounting guidelines by the FERC are typically also upheld by state commissions. Historically, those guidelines have been generally consistent with guidance in U.S. GAAP (including U.S. GAAP for rate-regulated entities). While formal guidance has not yet been published by the FERC, it is currently believed that the FERC will permit an election to either continue to capitalizenon-service benefit costs for regulatory reporting purposes or to cease capitalizing such costs and implement the Topic 715 update capitalization provisions “as is,” for regulatory purposes. Assuming the FERC formalizes the above elections, Southwest currently anticipates adopting the provisions of Topic 715 for both SEC reporting and regulatory purposes. Industry deliberations continue and management will be evaluating the various impacts this update will have on its consolidated financial statements and disclosures. It is estimated that approximately $3 million innon-service costs were capitalized as a component of gas plant during 2016. Totalnon-service costs were approximately $20 million in 2016.
17
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 20172022 |
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.
Net 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
are componentsis a component of an overhead loading process associated with the cost of labor. The overhead process ultimately results in allocation of
net periodic benefit costsservice cost to the same accounts to which productive labor is charged. As a result,
net periodic benefitservice 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.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Qualified Retirement Plan | |
| | Period Ended September 30, | |
| | Three Months | | | Nine Months | | | Twelve Months | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
(Thousands of dollars) | | | | | | | | | | | | | | | | | | | | | | | | |
Service cost | | $ | 5,848 | | | $ | 5,708 | | | $ | 17,544 | | | $ | 17,125 | | | $ | 23,252 | | | $ | 23,406 | |
Interest cost | | | 11,520 | | | | 11,507 | | | | 34,561 | | | | 34,520 | | | | 46,068 | | | | 45,577 | |
Expected return on plan assets | | | (13,799 | ) | | | (14,140 | ) | | | (41,397 | ) | | | (42,419 | ) | | | (55,536 | ) | | | (56,871 | ) |
Amortization of net actuarial loss | | | 6,001 | | | | 6,317 | | | | 18,003 | | | | 18,950 | | | | 24,319 | | | | 27,136 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net periodic benefit cost | | $ | 9,570 | | | $ | 9,392 | | | $ | 28,711 | | | $ | 28,176 | | | $ | 38,103 | | | $ | 39,248 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | SERP | |
| | Period Ended September 30, | |
| | Three Months | | | Nine Months | | | Twelve Months | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
(Thousands of dollars) | | | | | | | | | | | | | | | | | | | | | | | | |
Service cost | | $ | 77 | | | $ | 83 | | | $ | 232 | | | $ | 248 | | | $ | 315 | | | $ | 328 | |
Interest cost | | | 471 | | | | 464 | | | | 1,413 | | | | 1,394 | | | | 1,878 | | | | 1,818 | |
Amortization of net actuarial loss | | | 361 | | | | 346 | | | | 1,081 | | | | 1,038 | | | | 1,426 | | | | 1,361 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net periodic benefit cost | | $ | 909 | | | $ | 893 | | | $ | 2,726 | | | $ | 2,680 | | | $ | 3,619 | | | $ | 3,507 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | PBOP | |
| | Period Ended September 30, | |
| | Three Months | | | Nine Months | | | Twelve Months | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
(Thousands of dollars) | | | | | | | | | | | | | | | | | | | | | | | | |
Service cost | | $ | 367 | | | $ | 375 | | | $ | 1,101 | | | $ | 1,124 | | | $ | 1,476 | | | $ | 1,534 | |
Interest cost | | | 808 | | | | 795 | | | | 2,424 | | | | 2,386 | | | | 3,218 | | | | 3,136 | |
Expected return on plan assets | | | (839 | ) | | | (787 | ) | | | (2,518 | ) | | | (2,362 | ) | | | (3,305 | ) | | | (3,228 | ) |
Amortization of prior service costs | | | 333 | | | | 333 | | | | 1,001 | | | | 1,001 | | | | 1,335 | | | | 1,335 | |
Amortization of net actuarial loss | | | — | | | | 104 | | | | — | | | | 312 | | | | 105 | | | | 398 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net periodic benefit cost | | $ | 669 | | | $ | 820 | | | $ | 2,008 | | | $ | 2,461 | | | $ | 2,829 | | | $ | 3,175 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
18
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 |
| 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
(Thousands of dollars) | | | | | | | | | | | |
Service cost | $ | 11,028 | | | $ | 10,289 | | | $ | 33,084 | | | $ | 30,869 | | | $ | 43,374 | | | $ | 39,443 | |
Interest cost | 11,251 | | | 10,108 | | | 33,753 | | | 30,324 | | | 43,861 | | | 41,714 | |
Expected return on plan assets | (19,978) | | | (18,088) | | | (59,934) | | | (54,264) | | | (78,022) | | | (70,588) | |
Amortization of net actuarial loss | 8,117 | | | 10,489 | | | 24,351 | | | 31,467 | | | 34,839 | | | 40,473 | |
Net periodic benefit cost | $ | 10,418 | | | $ | 12,798 | | | $ | 31,254 | | | $ | 38,396 | | | $ | 44,052 | | | $ | 51,042 | |
| | | | | | | | | | | |
| SERP |
| September 30, |
| Three Months | | Nine Months | | Twelve Months |
| 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
(Thousands of dollars) | | | | | | | | | | | |
Service cost | $ | 106 | | | $ | 131 | | | $ | 318 | | | $ | 394 | | | $ | 450 | | | $ | 491 | |
Interest cost | 360 | | | 358 | | | 1,080 | | | 1,074 | | | 1,437 | | | 1,474 | |
Amortization of net actuarial loss | 588 | | | 661 | | | 1,763 | | | 1,981 | | | 2,424 | | | 2,433 | |
Net periodic benefit cost | $ | 1,054 | | | $ | 1,150 | | | $ | 3,161 | | | $ | 3,449 | | | $ | 4,311 | | | $ | 4,398 | |
| | | | | | | | | | | |
| PBOP |
| September 30, |
| Three Months | | Nine Months | | Twelve Months |
| 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
(Thousands of dollars) | | | | | | | | | | | |
Service cost | $ | 485 | | | $ | 423 | | | $ | 1,455 | | | $ | 1,269 | | | $ | 1,877 | | | $ | 1,664 | |
Interest cost | 613 | | | 549 | | | 1,839 | | | 1,645 | | | 2,387 | | | 2,291 | |
Expected return on plan assets | (807) | | | (810) | | | (2,421) | | | (2,430) | | | (3,230) | | | (3,282) | |
Amortization of prior service costs | 44 | | | 239 | | | 132 | | | 719 | | | 372 | | | 1,007 | |
| | | | | | | | | | | |
Net periodic benefit cost | $ | 335 | | | $ | 401 | | | $ | 1,005 | | | $ | 1,203 | | | $ | 1,406 | | | $ | 1,680 | |
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 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 the 2021 Form 10-K, are not repeated below.
Natural Gas Distribution Segment:
Southwest’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, in addition to other categories of revenue:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | Twelve Months Ended September 30, |
(Thousands of dollars) | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Residential | $ | 170,196 | | | $ | 147,326 | | | $ | 913,355 | | | $ | 743,791 | | | $ | 1,205,176 | | | $ | 1,011,450 | |
Small commercial | 61,780 | | | 48,283 | | | 264,494 | | | 185,774 | | | 348,934 | | | 248,193 | |
Large commercial | 19,590 | | | 14,199 | | | 60,740 | | | 40,030 | | | 78,081 | | | 52,075 | |
Industrial/other | 13,319 | | | 9,608 | | | 34,064 | | | 30,352 | | | 46,025 | | | 37,505 | |
Transportation | 22,936 | | | 21,884 | | | 74,034 | | | 68,217 | | | 98,057 | | | 91,151 | |
Revenue from contracts with customers | 287,821 | | | 241,300 | | | 1,346,687 | | | 1,068,164 | | | 1,776,273 | | | 1,440,374 | |
Alternative revenue program revenues (deferrals) | 13,609 | | | 12,569 | | | 1,132 | | | (5,335) | | | 19,648 | | | (2,740) | |
Other revenues (1) | 2,514 | | | 1,979 | | | 10,606 | | | 7,747 | | | 13,718 | | | 7,432 | |
Total Regulated operations revenues | $ | 303,944 | | | $ | 255,848 | | | $ | 1,358,425 | | | $ | 1,070,576 | | | $ | 1,809,639 | | | $ | 1,445,066 | |
(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) | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Service Types: | | | | | | | | | | | |
Gas infrastructure services | $ | 467,751 | | | $ | 393,122 | | | $ | 1,147,302 | | | $ | 961,836 | | | $ | 1,487,806 | | | $ | 1,287,552 | |
Electric power infrastructure services | 189,209 | | | 155,456 | | | 550,926 | | | 347,061 | | | 729,067 | | | 475,895 | |
Other | 101,506 | | | 84,270 | | | 290,205 | | | 216,551 | | | 404,773 | | | 301,591 | |
Total Utility infrastructure services revenues | $ | 758,466 | | | $ | 632,848 | | | $ | 1,988,433 | | | $ | 1,525,448 | | | $ | 2,621,646 | | | $ | 2,065,038 | |
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | Twelve Months Ended September 30, |
(Thousands of dollars) | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Contract Types: | | | | | | | | | | | |
Master services agreement | $ | 637,582 | | | $ | 467,869 | | | $ | 1,700,416 | | | $ | 1,160,199 | | | $ | 2,193,195 | | | $ | 1,573,247 | |
Bid contract | 120,884 | | | 164,979 | | | 288,017 | | | 365,249 | | | 428,451 | | | 491,791 | |
Total Utility infrastructure services revenues | $ | 758,466 | | | $ | 632,848 | | | $ | 1,988,433 | | | $ | 1,525,448 | | | $ | 2,621,646 | | | $ | 2,065,038 | |
| | | | | | | | | | | |
Unit price contracts | $ | 453,718 | | | $ | 406,404 | | | $ | 1,178,168 | | | $ | 1,002,779 | | | $ | 1,544,471 | | | $ | 1,373,746 | |
Fixed price contracts | 117,983 | | | 64,632 | | | 333,313 | | | 149,681 | | | 451,374 | | | 197,447 | |
Time and materials contracts | 186,765 | | | 161,812 | | | 476,952 | | | 372,988 | | | 625,801 | | | 493,845 | |
Total Utility infrastructure services revenues | $ | 758,466 | | | $ | 632,848 | | | $ | 1,988,433 | | | $ | 1,525,448 | | | $ | 2,621,646 | | | $ | 2,065,038 | |
The following table provides information about contracts receivable and revenue earned on contracts in progress in excess of billings (contract assets), both of which are included within Accounts receivable, net of allowances, 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, 2022 and December 31, 2021 on the Company’s Condensed Consolidated Balance Sheets:
| | | | | | | | | | | |
(Thousands of dollars) | September 30, 2022 | | December 31, 2021 |
Contracts receivable, net | $ | 398,345 | | | $ | 296,005 | |
Revenue earned on contracts in progress in excess of billings | 253,966 | | | 214,774 | |
Amounts billed in excess of revenue earned on contracts | 31,877 | | | 11,860 | |
The revenue earned on contracts in progress in excess of billings (contract asset) primarily relates to Centuri’s right 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, 2021 to September 30, 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 $11.9 million that was included in this balance as of January 1, 2022, after which time it became earned and the balance was 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, 2022, Centuri had 61 fixed price 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, 2022 was $430.3 million. Centuri expects to recognize the remaining performance obligations over approximately the next 2.7 years; however, the timing of that recognition is largely within the control of the customer, including when the necessary materials required to complete the work are provided by the customer.
Utility infrastructure services contracts receivable consists of the following:
| | | | | | | | | | | |
(Thousands of dollars) | September 30, 2022 | | December 31, 2021 |
Billed on completed contracts and contracts in progress | $ | 400,831 | | | $ | 292,770 | |
Other receivables | 1,885 | | | 3,492 | |
Contracts receivable, gross | 402,716 | | | 296,262 | |
Allowance for doubtful accounts | (4,371) | | | (257) | |
Contracts receivable, net | $ | 398,345 | | | $ | 296,005 | |
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
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 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 services, and to a lesser extent, natural gas liquid (“NGL”) revenues consisting primarily of NGL processing services, and other revenue (including natural gas sales, and services related to gathering and processing activities, as well as 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 September 30, | | Nine Months Ended September 30, |
(Thousands of dollars) | 2022 |
Regulated gas transportation and storage revenues | $ | 59,283 | | | $ | 179,046 | |
NGL revenues | 1,469 | | | 4,838 | |
Other revenues | 2,385 | | | 8,244 | |
Revenue from contracts with customers | 63,137 | | | 192,128 | |
Other revenues | 41 | | | 131 |
Total Regulated operations revenues | $ | 63,178 | | | $ | 192,259 | |
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 Company’s 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 September 30, 2022 and are not material.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 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 under the Equity Shelf Program during the quarter ended September 30, 2022. The following table provides the life-to-date activity under that program through September 30, 2022:
| | | | | | | | | |
| | | |
| | |
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, 2022, the Company had approximately $341.8 million in common stock available for sale under the program.
In March 2022, the Company issued, through a separate prospectus supplement under the Universal Shelf, an aggregate of 6.325 million shares of common stock, in an underwritten public offering price of $74.00 per share, resulting in proceeds to the Company of $452.3 million, net of an 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.
During the nine months ended September 30, 2022, the Company issued approximately 216,000 shares of common stock through the Restricted Stock/Unit Plan and Omnibus Incentive Plan.
Additionally, during the nine months ended September 30, 2022, the Company issued 100,000 shares of common stock through the Dividend Reinvestment and Stock Purchase Plan, raising approximately $7.8 million.
In connection with the entry into the Initial Cooperation Agreement (see Note 1 – Background, Organization, and Summary of Significant Accounting Policies),the Company entered into the Amended Rights Agreement 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” to permit the Icahn Group to consummate the Offer. The Amended Rights Agreement expired on October 9, 2022.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 20172022 |
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 and individual carrying values of instruments are provided in the table that follows.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
(Thousands of dollars) | | | | | | | | |
Southwest Gas Corporation: | | | | | | | | |
Debentures: | | | | | | | | |
Notes, 6.1%, due 2041 | | $ | 125,000 | | | $ | 113,398 | | | $ | 125,000 | | | $ | 166,380 | |
Notes, 4.05%, due 2032 | | 600,000 | | | 506,346 | | | — | | | — | |
Notes, 3.875%, due 2022 | | — | | | — | | | 250,000 | | | 250,603 | |
Notes, 4.875%, due 2043 | | 250,000 | | | 202,383 | | | 250,000 | | | 307,538 | |
Notes, 3.8%, due 2046 | | 300,000 | | | 203,559 | | | 300,000 | | | 329,055 | |
Notes, 3.7%, due 2028 | | 300,000 | | | 267,903 | | | 300,000 | | | 325,191 | |
Notes, 4.15%, due 2049 | | 300,000 | | | 213,972 | | | 300,000 | | | 342,030 | |
Notes, 2.2%, due 2030 | | 450,000 | | | 340,763 | | | 450,000 | | | 440,838 | |
Notes, 3.18%, due 2051 | | 300,000 | | | 182,976 | | | 300,000 | | | 292,116 | |
8% Series, due 2026 | | 75,000 | | | 80,108 | | | 75,000 | | | 92,623 | |
Medium-term notes, 7.78% series, due 2022 | | — | | | — | | | 25,000 | | | 25,122 | |
Medium-term notes, 7.92% series, due 2027 | | 25,000 | | | 26,413 | | | 25,000 | | | 31,555 | |
Medium-term notes, 6.76% series, due 2027 | | 7,500 | | | 7,494 | | | 7,500 | | | 8,949 | |
Unamortized discount and debt issuance costs | | (26,701) | | | | | (19,959) | | | |
| | 2,705,799 | | | | | 2,387,541 | | | |
Revolving credit facility and commercial paper | | 138,000 | | | 138,000 | | | 130,000 | | | 130,000 | |
Industrial development revenue bonds: | | | | | | | | |
Tax-exempt Series A, due 2028 | | 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 | | 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 | | (1,717) | | | | | (1,938) | | | |
| | 198,283 | | | | | 198,062 | | | |
Less: current maturities | | — | | | | | (275,000) | | | |
Southwest Gas Corporation total long-term debt, less current maturities | | $ | 3,042,082 | | | | | $ | 2,440,603 | | | |
Southwest Gas Holdings, Inc.: | | | | | | | | |
SWH term loan facility | | $ | 1,147,747 | | | 1,148,057 | | | $ | — | | | $ | — | |
Centuri secured term loan facility | | 1,008,550 | | | 977,033 | | | 1,117,138 | | | 1,117,841 | |
Centuri secured revolving credit facility | | 150,571 | | | 150,740 | | | 103,329 | | | 103,749 | |
MountainWest unsecured senior notes, 3.53%, due in 2028 | | 101,843 | | | 86,345 | | | 102,078 | | | 102,078 | |
MountainWest unsecured senior notes, 4.875%, due in 2041 | | 199,431 | | | 152,581 | | | 199,926 | | | 199,926 | |
MountainWest unsecured senior notes, 3.91%, due in 2038 | | 147,812 | | | 103,398 | | | 147,735 | | | 147,735 | |
Other debt obligations | | 134,274 | | | 122,980 | | | 51,665 | | | 50,003 | |
Unamortized discount and debt issuance costs | | (25,234) | | | | | (24,466) | | | |
Less: current maturities | | (41,485) | | | | | (22,324) | | | |
Southwest Gas Holdings, Inc. total long-term debt, less current maturities | | $ | 5,865,591 | | | | | $ | 4,115,684 | | | |
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
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 the 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, 2022, the applicable margin is 1.125% for loans bearing interest with reference to SOFR and 0.125% for loans bearing interest with reference to the alternative base rate. At September 30, 2022, $138 million was outstanding on the long-term portion of the facility (no borrowings were outstanding under the commercial paper program, discussed below). No borrowings were outstanding on the short-term portion of the facility.
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, if any, are designated as long-term debt. Interest rates for the program are calculated at the then current commercial paper rate. At September 30, 2022, as noted above, no borrowings were outstanding under the commercial paper program.
In March 2022, Southwest issued $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 the $250 million 3.875% notes due in April 2022 and to repay outstanding amounts under its credit facility, with the remaining net proceeds used for general corporate purposes.
On September 26, 2022 (the “Amendment Date”), Southwest Gas Holdings, Inc., entered into Amendment No. 1 (“Amended Credit Agreement”) to the 364-day Term Loan Credit Agreement (the “Credit Agreement”). The Credit Agreement initially provided for a $1.6 billion delayed-draw term loan (the “Term Loan Facility”) to primarily fund the acquisition of the equity interests in MountainWest. As of the Amendment Date, approximately $1.15 billion in aggregate principal was outstanding under the Term Loan Facility, the same as that which was outstanding as of September 30, 2022. The Amended Credit Agreement, among other things, (1) extends the maturity date of the Term Loan to December 30, 2023, making the outstanding borrowings long-term as of September 30, 2022, and (2) replaces London Interbank Offered Rate (“LIBOR”) interest rate benchmarks with SOFR interest rate benchmarks. As part of the Amended Credit Agreement, the Company paid a non-refundable upfront fee in an amount equal to 0.10% of the aggregate principal amount outstanding as of the Amendment Date, and will pay additional fees based on any principal balance outstanding as of March 31, 2023, June 30, 2023, and September 30, 2023 of 0.10%, 0.15%, and 0.20%, respectively.
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, 2026 and the term loan facility matures on August 27, 2028. Interest rates for the revolving credit facility and term loan facility are based on either a “base rate,” LIBOR or CDOR, plus an applicable margin in either case. The capacity of the 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. Centuri’s assets securing the facility at September 30, 2022 totaled $2.6 billion. At September 30, 2022, $1.159 billion in borrowings were outstanding under Centuri’s combined secured revolving credit and term loan facility. On November 4, 2022, Centuri amended the financial covenants of the revolving credit facility to increase the maximum total net leverage ratio during the period from December 31, 2022 through December 31, 2023. See Note 9 - Subsequent Events for additional information about the amended credit facility.
MountainWest has two private placement unsecured senior notes and a public unsecured senior note, with a combined carrying value of $449.1 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 $156 million outstanding under this credit facility as of September 30, 2022.
As indicated above, under Southwest’s $400 million credit facility, no short-term borrowings were outstanding at September 30, 2022.
In March 2022, Southwest amended its $250 million Term Loan (the “March 2021 Term Loan”), extending the maturity date to March 21, 2023 and replacing LIBOR interest rate benchmarks with SOFR interest rate benchmarks. The proceeds were
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
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. There was $225 million outstanding under the March 2021 Term Loan as of September 30, 2022.
As disclosed in Note 1 – Background, Organization, and Summary of Significant Accounting Policies,the Company is exploring strategic alternatives, including a potential sale of MountainWest and/or Centuri. If MountainWest and/or Centuri is sold as part of the Strategic Review process, the proceeds will be used to repay the amounts borrowed to fund the acquisition. Otherwise, management intends to either issue long-term debt or equity securities to refinance the Term Loan Facility.
Management believes that its refinancing plan is probable based on the Company’s ability to generate consistent cash flows, its current credit ratings, its relationships with its lenders and its prior history of successfully raising debt and equity necessary to 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 Company’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 credit facility could be terminated, and amounts due under its revolver and other borrowing arrangements could be declared immediately due and payable.
LIBOR
Certain rates established at LIBOR were scheduled to be discontinued after 2021 as part of reference rate reform, while other LIBOR-based rates are scheduled to be discontinued after June 2023. As of September 30, 2022, the Company had $1.009 billion in outstanding borrowings under Centuri’s term loan facility. Southwest, MountainWest, and Southwest Gas Holdings, Inc. had no outstanding borrowings or variable rate debt agreements with reference to LIBOR as of September 30, 2022.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 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)
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| | Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 |
(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 | | $ | 44 | | | $ | (10) | | | $ | 34 | | | $ | 239 | | | $ | (56) | | | $ | 183 | |
Amortization of net actuarial (gain)/loss | | 8,705 | | | (2,089) | | | 6,616 | | | 11,151 | | | (2,677) | | | 8,474 | |
Regulatory adjustment | | (7,268) | | | 1,744 | | | (5,524) | | | (9,575) | | | 2,298 | | | (7,277) | |
Pension plans other comprehensive income (loss) | | 1,481 | | | (355) | | | 1,126 | | | 1,815 | | | (435) | | | 1,380 | |
FSIRS (designated hedging activities): | | | | | | | | | | | | |
Amounts reclassified into net income | | — | | | — | | | — | | | 544 | | | (131) | | | 413 | |
FSIRS other comprehensive income (loss) | | — | | | — | | | — | | | 544 | | | (131) | | | 413 | |
Total other comprehensive income (loss) - Southwest Gas Corporation | | 1,481 | | | (355) | | | 1,126 | | | 2,359 | | | (566) | | | 1,793 | |
Foreign currency translation adjustments: | | | | | | | | | | | | |
Translation adjustments | | (5,830) | | | — | | | (5,830) | | | (2,056) | | | — | | | (2,056) | |
Foreign currency other comprehensive income (loss) | | (5,830) | | | — | | | (5,830) | | | (2,056) | | | — | | | (2,056) | |
Total other comprehensive income (loss) - Southwest Gas Holdings, Inc. | | $ | (4,349) | | | $ | (355) | | | $ | (4,704) | | | $ | 303 | | | $ | (566) | | | $ | (263) | |
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| | Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 |
(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 | | $ | 132 | | | $ | (32) | | | $ | 100 | | | $ | 719 | | | $ | (172) | | | $ | 547 | |
Amortization of net actuarial (gain)/loss | | 26,114 | | | (6,267) | | | 19,847 | | | 33,448 | | | (8,028) | | | 25,420 | |
Regulatory adjustment | | (21,804) | | | 5,233 | | | (16,571) | | | (28,725) | | | 6,894 | | | (21,831) | |
Pension plans other comprehensive income (loss) | | 4,442 | | | (1,066) | | | 3,376 | | | 5,442 | | | (1,306) | | | 4,136 | |
FSIRS (designated hedging activities): | | | | | | | | | | | | |
Amounts reclassified into net income | | 545 | | | (129) | | | 416 | | | 1,632 | | | (392) | | | 1,240 | |
FSIRS other comprehensive income (loss) | | 545 | | | (129) | | | 416 | | | 1,632 | | | (392) | | | 1,240 | |
Total other comprehensive income (loss) - Southwest Gas Corporation | | 4,987 | | | (1,195) | | | 3,792 | | | 7,074 | | | (1,698) | | | 5,376 | |
Foreign currency translation adjustments: | | | | | | | | | | | | |
Translation adjustments | | (7,263) | | | — | | | (7,263) | | | (324) | | | — | | | (324) | |
Foreign currency other comprehensive income (loss) | | (7,263) | | | — | | | (7,263) | | | (324) | | | — | | | (324) | |
Total other comprehensive income (loss) - Southwest Gas Holdings, Inc. | | $ | (2,276) | | | $ | (1,195) | | | $ | (3,471) | | | $ | 6,750 | | | $ | (1,698) | | | $ | 5,052 | |
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
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| | Twelve Months Ended September 30, 2022 | | Twelve Months Ended September 30, 2021 |
(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: | | | | | | | | | | | | |
Net actuarial gain/(loss) | | $ | 59,176 | | | $ | (14,202) | | | $ | 44,974 | | | $ | (57,539) | | | $ | 13,809 | | | $ | (43,730) | |
Amortization of prior service cost | | 372 | | | (90) | | | 282 | | | 1,007 | | | (241) | | | 766 | |
Amortization of net actuarial (gain)/loss | | 37,263 | | | (8,942) | | | 28,321 | | | 42,906 | | | (10,298) | | | 32,608 | |
| | | | | | | | | | | | |
Regulatory adjustment | | (81,273) | | | 19,506 | | | (61,767) | | | 3,894 | | | (935) | | | 2,959 | |
Pension plans other comprehensive income (loss) | | 15,538 | | | (3,728) | | | 11,810 | | | (9,732) | | | 2,335 | | | (7,397) | |
FSIRS (designated hedging activities): | | | | | | | | | | | | |
Amounts reclassified into net income | | 1,087 | | | (259) | | | 828 | | | 2,176 | | | (523) | | | 1,653 | |
FSIRS other comprehensive income (loss) | | 1,087 | | | (259) | | | 828 | | | 2,176 | | | (523) | | | 1,653 | |
Total other comprehensive income (loss) - Southwest Gas Corporation | | 16,625 | | | (3,987) | | | 12,638 | | | (7,556) | | | 1,812 | | | (5,744) | |
Foreign currency translation adjustments: | | | | | | | | | | | | |
Translation adjustments | | (6,919) | | | — | | | (6,919) | | | 2,576 | | | — | | | 2,576 | |
Foreign currency other comprehensive income (loss) | | (6,919) | | | — | | | (6,919) | | | 2,576 | | | — | | | 2,576 | |
Total other comprehensive income (loss) - Southwest Gas Holdings, Inc. | | $ | 9,706 | | | $ | (3,987) | | | $ | 5,719 | | | $ | (4,980) | | | $ | 1,812 | | | $ | (3,168) | |
(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).
The following table represents a rollforward of AOCI, presented on the Company’s Condensed Consolidated Balance Sheets and its Condensed Consolidated Statements of Equity:
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| | Defined Benefit Plans | | FSIRS | | Foreign Currency Items | | |
(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, 2021 | | $ | (61,182) | | | $ | 14,685 | | | $ | (46,497) | | | $ | (545) | | | $ | 129 | | | $ | (416) | | | $ | 152 | | | $ | — | | | $ | 152 | | | $ | (46,761) | |
Translation adjustments | | — | | | — | | | — | | | — | | | — | | | — | | | (7,263) | | | — | | | (7,263) | | | (7,263) | |
Other comprehensive income (loss) before reclassifications | | — | | | — | | | — | | | — | | | — | | | — | | | (7,263) | | | — | | | (7,263) | | | (7,263) | |
FSIRS amount reclassified from AOCI (1) | | — | | | — | | | — | | | 545 | | | (129) | | | 416 | | | — | | | — | | | — | | | 416 | |
Amortization of prior service cost (2) | | 132 | | | (32) | | | 100 | | | — | | | — | | | — | | | — | | | — | | | — | | | 100 | |
Amortization of net actuarial loss (2) | | 26,114 | | | (6,267) | | | 19,847 | | | — | | | — | | | — | | | — | | | — | | | — | | | 19,847 | |
Regulatory adjustment (3) | | (21,804) | | | 5,233 | | | (16,571) | | | — | | | — | | | — | | | — | | | — | | | — | | | (16,571) | |
Net current period other comprehensive income (loss) attributable to Southwest Gas Holdings, Inc. | | 4,442 | | | (1,066) | | | 3,376 | | | 545 | | | (129) | | | 416 | | | (7,263) | | | — | | | (7,263) | | | (3,471) | |
Ending Balance AOCI September 30, 2022 | | $ | (56,740) | | | $ | 13,619 | | | $ | (43,121) | | | $ | — | | | $ | — | | | $ | — | | | $ | (7,111) | | | $ | — | | | $ | (7,111) | | | $ | (50,232) | |
(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, 2022 |
The following table represents a rollforward of AOCI, presented on Southwest’s Condensed Consolidated Balance Sheets:
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| | Defined Benefit Plans | | FSIRS | | |
(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, 2021 | | $ | (61,182) | | | $ | 14,685 | | | $ | (46,497) | | | $ | (545) | | | $ | 129 | | | $ | (416) | | | $ | (46,913) | |
FSIRS amount reclassified from AOCI (5) | | — | | | — | | | — | | | 545 | | | (129) | | | 416 | | | 416 | |
Amortization of prior service cost (6) | | 132 | | | (32) | | | 100 | | | — | | | — | | | — | | | 100 | |
Amortization of net actuarial loss (6) | | 26,114 | | | (6,267) | | | 19,847 | | | — | | | — | | | — | | | 19,847 | |
Regulatory adjustment (7) | | (21,804) | | | 5,233 | | | (16,571) | | | — | | | — | | | — | | | (16,571) | |
Net current period other comprehensive income attributable to Southwest Gas Corporation | | 4,442 | | | (1,066) | | | 3,376 | | | 545 | | | (129) | | | 416 | | | 3,792 | |
Ending Balance AOCI September 30, 2022 | | $ | (56,740) | | | $ | 13,619 | | | $ | (43,121) | | | $ | — | | | $ | — | | | $ | — | | | $ | (43,121) | |
(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.
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:
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(Thousands of dollars) | | September 30, 2022 | | December 31, 2021 |
Net actuarial loss | | $ | (372,896) | | | $ | (399,010) | |
Prior service cost | | (1,396) | | | (1,528) | |
Less: amount recognized in regulatory assets | | 317,552 | | | 339,356 | |
Recognized in AOCI | | $ | (56,740) | | | $ | (61,182) | |
Note
37 – Segment Information
The Company has
As a result of the MountainWest acquisition on December 31, 2021, management updated its segment reporting from the historical presentation of two reportable segments: natural gas operationssegments to three reportable segments, with MountainWest presented as the pipeline and construction 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 services provided to Southwest at contractual prices. Accounts receivable for these services, which are not eliminated during consolidation, are presented in the table below:
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(Thousands of dollars) | September 30, 2022 | | December 31, 2021 |
Centuri accounts receivable for services provided to Southwest | $ | 14,393 | | | $ | 15,166 | |
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
In order to reconcile
(below) to net income
(loss) as disclosed in the Condensed Consolidated Statements of Income, an Other column is included associated with impacts
related toof corporate and administrative activities related to Southwest Gas Holdings, Inc. The
following tables present revenues from external customers, intersegment revenues, and segment net income forfinancial information pertaining to the
two reportable segments (thousands of dollars): | | | | | | | | | | | | | | | | |
| | Natural Gas Operations | | | Construction Services | | | Other | | | Total | |
Three months ended September 30, 2017 | | | | | | | | | | | | | | | | |
Revenues from external customers | | $ | 213,059 | | | $ | 351,850 | | | $ | — | | | $ | 564,909 | |
Intersegment revenues | | | — | | | | 28,244 | | | | — | | | | 28,244 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 213,059 | | | $ | 380,094 | | | $ | — | | | $ | 593,153 | |
| | | | | | | | | | | | | | | | |
Segment net income (loss) | | $ | (4,024 | ) | | $ | 14,335 | | | $ | (107 | ) | | $ | 10,204 | |
| | | | | | | | | | | | | | | | |
Three months ended September 30, 2016 | | | | | | | | | | | | | | | | |
Revenues from external customers | | $ | 200,179 | | | $ | 312,531 | | | $ | — | | | $ | 512,710 | |
Intersegment revenues | | | — | | | | 27,259 | | | | — | | | | 27,259 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 200,179 | | | $ | 339,790 | | | $ | — | | | $ | 539,969 | |
| | | | | | | | | | | | | | | | |
Segment net income (loss) | | $ | (12,405 | ) | | $ | 14,877 | | | $ | — | | | $ | 2,472 | |
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| | | | |
| | Natural Gas Operations | | | Construction Services | | | Other | | | Total | |
Nine months ended September 30, 2017 | | | | | | | | | | | | | | | | |
Revenues from external customers | | $ | 935,823 | | | $ | 800,073 | | | $ | — | | | $ | 1,735,896 | |
Intersegment revenues | | | — | | | | 72,463 | | | | — | | | | 72,463 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 935,823 | | | $ | 872,536 | | | $ | — | | | $ | 1,808,359 | |
| | | | | | | | | | | | | | | | |
Segment net income (loss) | | $ | 82,436 | | | $ | 15,717 | | | $ | (777 | ) | | $ | 97,376 | |
| | | | | | | | | | | | | | | | |
Nine months ended September 30, 2016 | | | | | | | | | | | | | | | | |
Revenues from external customers | | $ | 980,927 | | | $ | 762,835 | | | $ | — | | | $ | 1,743,762 | |
Intersegment revenues | | | — | | | | 75,203 | | | | — | | | | 75,203 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 980,927 | | | $ | 838,038 | | | $ | — | | | $ | 1,818,965 | |
| | | | | | | | | | | | | | | | |
Segment net income | | $ | 67,536 | | | $ | 19,325 | | | $ | — | | | $ | 86,861 | |
| | | | | | | | | | | | | | | | |
| | | | |
| | Natural Gas Operations | | | Construction Services | | | Other | | | Total | |
Twelve months ended September 30, 2017 | | | | | | | | | | | | | | | | |
Revenues from external customers | | $ | 1,276,308 | | | $ | 1,078,195 | | | $ | — | | | $ | 2,354,503 | |
Intersegment revenues | | | — | | | | 95,381 | | | | — | | | | 95,381 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 1,276,308 | | | $ | 1,173,576 | | | $ | — | | | $ | 2,449,884 | |
| | | | | | | | | | | | | | | | |
Segment net income (loss) | | $ | 134,323 | | | $ | 29,010 | | | $ | (777 | ) | | $ | 162,556 | |
| | | | | | | | | | | | | | | | |
Twelve months ended September 30, 2016 | | | | | | | | | | | | | | | | |
Revenues from external customers | | $ | 1,376,388 | | | $ | 1,022,416 | | | $ | — | | | $ | 2,398,804 | |
Intersegment revenues | | | — | | | | 105,566 | | | | — | | | | 105,566 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 1,376,388 | | | $ | 1,127,982 | | | $ | — | | | $ | 2,504,370 | |
| | | | | | | | | | | | | | | | |
Segment net income | | $ | 119,836 | | | $ | 33,144 | | | $ | — | | | $ | 152,980 | |
| | | | | | | | | | | | | | | | |
Note 4 – Derivatives and Fair Value Measurements
Derivatives. In managing its natural gas supply portfolios, Southwest has historically entered into fixed-distribution, utility infrastructure services, and variable-price contracts, which qualifypipeline and storage segments are as derivatives. Additionally, Southwest utilizesfixed-for-floating swap contracts (“Swaps”) to supplement its fixed-price contracts. The fixed-price contracts, firm commitments to purchase a fixed amount of gas in the future at a fixed price, qualify for the normal purchases and normal sales exception that is allowed for contracts that are probable of delivery in the normal course of business, and are exempt from fair value reporting.
19
follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Thousands of dollars) | Natural Gas Distribution | | Utility Infrastructure Services | | Pipeline and Storage | | Other | | Total |
Three Months Ended September 30, 2022 | | | | | | | | | |
Revenues from external customers | $ | 303,944 | | | $ | 721,910 | | | $ | 63,178 | | | $ | — | | | $ | 1,089,032 | |
Intersegment revenues | — | | | 36,556 | | | — | | | — | | | 36,556 | |
Total | $ | 303,944 | | | $ | 758,466 | | | $ | 63,178 | | | $ | — | | | $ | 1,125,588 | |
Segment net income (loss) | $ | (22,199) | | | $ | 14,345 | | | $ | 12,320 | | | $ | (16,775) | | | $ | (12,309) | |
| | | | | | | | | |
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) | |
| | | | | | | | | |
(Thousands of dollars) | Natural Gas Operations | | Utility Infrastructure Services | | Pipeline and Storage | | Other | | Total |
Nine Months Ended September 30, 2022 | | | | | | | | | |
Revenues from external customers | $ | 1,358,425 | | | $ | 1,889,573 | | | $ | 192,259 | | | $ | — | | | $ | 3,440,257 | |
Intersegment revenues | — | | | 98,860 | | | — | | | — | | | 98,860 | |
Total | $ | 1,358,425 | | | $ | 1,988,433 | | | $ | 192,259 | | | $ | — | | | $ | 3,539,117 | |
Segment net income (loss) | $ | 87,330 | | | $ | (4,400) | | | $ | 44,326 | | | $ | (49,962) | | | $ | 77,294 | |
| | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Thousands of dollars) | Natural Gas Distribution | | Utility Infrastructure Services | | Pipeline and Storage | | Other | | Total |
Twelve Months Ended September 30, 2022 | | | | | | | | | |
Revenues from external customers | $ | 1,809,639 | | | $ | 2,495,169 | | | $ | 192,259 | | | $ | — | | | $ | 4,497,067 | |
Intersegment revenues | — | | | 126,477 | | | — | | | — | | | 126,477 | |
Total | $ | 1,809,639 | | | $ | 2,621,646 | | | $ | 192,259 | | | $ | — | | | $ | 4,623,544 | |
Segment net income (loss) | $ | 171,881 | | | $ | 3,223 | | | $ | 44,326 | | | $ | (72,193) | | | $ | 147,237 | |
| | | | | | | | | |
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 | |
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 20172022 |
The
variable-price contracts have no significant market value. The Swaps are recorded at fair value.The fixed-price contractscorporate and Swaps are utilized byadministrative activities for Southwest under its volatility mitigation programs to effectively fix the price on a portion (up to 25%Gas Holdings, Inc. in the Arizona and California jurisdictions) of its natural gas supply portfolios. The maturities of the Swaps highly correlate to forecasted purchases of natural gas, during time frames ranging from October 2017 through March 2019. Under such contracts, Southwest pays the counterparty a fixed rate and receives from the counterparty a floating rate per MMBtu (“dekatherm”) of natural gas. Only the net differential is actually paid or received. The differential is calculated based on the notional amounts under the contracts, which are detailed in the table below (thousands of dekatherms):
| | | | | | | | |
| | September 30, 2017 | | | December 31, 2016 | |
Contract notional amounts | | | 10,936 | | | | 10,543 | |
| | | | | | | | |
Southwest does not utilize derivative financial instruments for speculative purposes, nor does it have trading operations.
The following table sets forth the gains and (losses) recognized on the Swaps (derivatives) for the three-, nine-, and twelve-month periods ended September 30, 20172022 include expenses incurred related to shareholder activism and 2016related settlement activities, expenses incurred in conducting the Strategic Review, and their locationexpenses and financing costs for the MountainWest acquisition.
Note 8 - Business Acquisitions
In August 2021, the Company, through its subsidiaries, led principally by Centuri, completed the acquisition of Drum, including its primary subsidiary, Riggs Distler. In November 2021, certain members of Riggs Distler management acquired a 1.42% interest in Drum. See the Company’s 2021 Form 10-K for additional information about this acquisition.
Assets acquired and liabilities assumed in the
Condensed Consolidated Statementstransaction were recorded at their acquisition date fair values. Transaction costs associated with the acquisition were expensed as incurred. The Company’s allocation of
Income for both the
Company and Southwest:Gains (losses) recognized in income for derivatives not designated as hedging instruments:
(Thousandspurchase price was based on an evaluation of dollars)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended | | | Nine Months Ended | | | Twelve Months Ended | |
| | Location of Gain or (Loss) | | September 30 | | | September 30 | | | September 30 | |
Instrument | | Recognized in Income on Derivative | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Swaps | | Net cost of gas sold | | $ | (546 | ) | | $ | (2,072 | ) | | $ | (6,851 | ) | | $ | 2,253 | | | $ | (4,098 | ) | | $ | (656 | ) |
Swaps | | Net cost of gas sold | | | 546 | * | | | 2,072 | * | | | 6,851 | * | | | (2,253 | )* | | | 4,098 | * | | | 656 | * |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
* | Represents the impact of regulatory deferral accounting treatment under U.S. GAAP for rate-regulated entities.
|
No gains (losses) were recognized in net income or other comprehensive income during the periods presented for derivatives designated as cash flow hedging instruments. Previously, Southwest entered into two forward-starting interest rate swaps (“FSIRS”), both of which were designated cash flow hedges, to partially hedge the risk of interest rate variability during the period leading up to the planned issuance of debt. The first FSIRS terminated in December 2010. The second FSIRS terminated in March 2012. Losses on both FSIRS are being amortized overten-year periods from Accumulated other comprehensive income (loss) into interest expense.
The following table sets forth theappropriate fair values and represented management’s best estimate based on available data (including market data, data regarding customers of the Swapsacquired businesses, terms of acquisition-related agreements, analysis of historical and their location inprojected results, and other types of data). The analysis included consideration of types of intangibles that were acquired, including customer relationships, trade name, and backlog. Certain payments were estimated as of the Condensed Consolidated Balance Sheets for both the Companyacquisition date and Southwest (thousands of dollars):
Fair values of derivatives not designated as hedging instruments:
| | | | | | | | | | | | | | |
September 30, 2017 Instrument | | Balance Sheet Location | | Asset Derivatives | | | Liability Derivatives | | | Net Total | |
Swaps | | Prepaids and other current assets | | $ | 56 | | | $ | (22 | ) | | $ | 34 | |
Swaps | | Other current liabilities | | | 27 | | | | (1,899 | ) | | | (1,872 | ) |
Swaps | | Other deferred credits | | | 1 | | | | (768 | ) | | | (767 | ) |
| | | | | | | | | | | | | | |
Total | | | | $ | 84 | | | $ | (2,689 | ) | | $ | (2,605 | ) |
| | | | | | | | | | | | | | |
| | | | |
December 31, 2016 Instrument | | Balance Sheet Location | | Asset Derivatives | | | Liability Derivatives | | | Net Total | |
Swaps | | Deferred charges and other assets | | $ | 899 | | | $ | (54 | ) | | $ | 845 | |
Swaps | | Prepaids and other current assets | | | 3,551 | | | | (19 | ) | | | 3,532 | |
| | | | | | | | | | | | | | |
Total | | | | $ | 4,450 | | | $ | (73 | ) | | $ | 4,377 | |
| | | | | | | | | | | | | | |
20
| | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
were adjusted when amounts were finalized.
The final estimated fair values of assets acquired and liabilities assumed as of August 27, 2021, and as updated through August 27, 2022, are as follows:
| | | | | | | | | | | | | | | | | | | | |
(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 | | | (0.3) | | | 0.4 | |
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 | | | 0.8 | | | 447.6 | |
Total assets acquired | | 1,018.4 | | | (31.0) | | | 987.4 | |
| | | | | | |
Trade and other payables | | 46.2 | | | — | | | 46.2 | |
Finance lease obligations | | 27.5 | | | 1.2 | | | 28.7 | |
Contract liabilities | | 12.7 | | | 0.1 | | | 12.8 | |
Operating lease obligations | | 1.5 | | | — | | | 1.5 | |
Other liabilities | | 5.3 | | | (1.2) | | | 4.1 | |
Deferred tax liabilities | | 94.8 | | | (24.8) | | | 70.0 | |
Total liabilities assumed and noncontrolling interest | | 188.0 | | | (24.7) | | | 163.3 | |
Net assets acquired | | $ | 830.4 | | | $ | (6.3) | | | $ | 824.1 | |
The Company incurred and expensed acquisition costs of $14 million, included in Utility infrastructure services expenses in the natural gas derivatives were determined using future natural gas index prices (as more fully described below). Master netting arrangements exist with each counterparty that provideCompany’s Condensed Consolidated Statement of Income for the net settlement (in the settlement month) of all contracts through a single payment. As applicable, management has elected to reflect the net amounts in its balance sheets. There was no outstanding collateral associated with the Swaps during either period shown in the above table.Pursuant to regulatory deferral accounting treatment for rate-regulated entities, unrealized gains and losses in fair value of the Swaps are recorded as a regulatory asset and/or liability. When the Swaps mature, any prior positions held are reversed and the settled position is recorded as an increase or decrease of purchased gas under the related purchased gas adjustment (“PGA”) mechanism in determining its deferred PGA balances. Neither changes in fair value, nor settled amounts, of Swaps have a direct effect on earnings or other comprehensive income.
The following table shows the amounts Southwest paid to and received from counterparties for settlements of matured Swaps.
| | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | | | Twelve Months Ended | |
(Thousands of dollars) | | September 30, 2017 | | | September 30, 2017 | | | September 30, 2017 | |
Paid to counterparties | | $ | 143 | | | $ | 1,555 | | | $ | 2,655 | |
| | | | | | | | | | | | |
Received from counterparties | | $ | — | | | $ | 1,685 | | | $ | 2,060 | |
| | | | | | | | | | | | |
The following table details the regulatory assets/(liabilities) offsetting the derivatives at fair value in the Condensed Consolidated Balance Sheets for both the Company and Southwest (thousands of dollars).
| | | | | | |
September 30, 2017 Instrument | | Balance Sheet Location | | Net Total | |
Swaps | | Other current liabilities | | $ | (34 | ) |
Swaps | | Prepaids and other current assets | | | 1,872 | |
Swaps | | Deferred charges and other assets | | | 767 | |
| | |
December 31, 2016 Instrument | | Balance Sheet Location | | Net Total | |
Swaps | | Other deferred credits | | $ | (845 | ) |
Swaps | | Other current liabilities | | | (3,532 | ) |
Fair Value Measurements. The estimated fair values of Southwest’s Swaps were determined attwelve months ended September 30, 20172022. No acquisition-related costs were incurred during the three and December 31, 2016 using New York Mercantile Exchange (“NYMEX”) futures settlement prices for delivery of natural gas at Henry Hub adjusted by the price of NYMEX ClearPort basis Swaps, which reflect the difference between the price of natural gas at a given delivery basinnine months ended September 30, 2022, and the Henry Hub pricing points. These Level 2 inputs (inputs, other than quoted prices, for similar assets or liabilities) are observable in the marketplace throughout the full term of the Swaps, but have been credit-risk adjusted with no significant impactimpacts to earnings resulted from the overall fair value measurement.
The following table sets forth, by level within the three-level fair value hierarchy that ranks the inputs used to measure fair value by their reliability, the financial assets and liabilities that were accounted for at fair value by both the Company and Southwest:
21
| | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
Level 2—Significant other observable inputs
| | | | | | | | |
(Thousands of dollars) | | September 30, 2017 | | | December 31, 2016 | |
Assets at fair value: | | | | | | | | |
Prepaids and other current assets—Swaps | | $ | 34 | | | $ | 3,532 | |
Deferred charges and other assets—Swaps | | | — | | | | 845 | |
Liabilities at fair value: | | | | | | | | |
Other current liabilities—Swaps | | | (1,872 | ) | | | — | |
Other deferred credits—Swaps | | | (767 | ) | | | — | |
| | | | | | | | |
Net Assets (Liabilities) | | $ | (2,605 | ) | | $ | 4,377 | |
| | | | | | | | |
No financial assets or liabilities associated with the Swaps, which were accounted for at fair value, fell within Level 1 (quoted prices in active markets for identical financial assets) or Level 3 (significant unobservable inputs) of the fair value hierarchy.
With regard to the fair values of assets associated with pension and postretirement benefit plans, asset values were last updated as required as ofmeasurement-period adjustments reflected above.
In December
2016. Refer to Note 10 – Pension and Other Post Retirement Benefits in the 2016 Annual Report to Shareholders on Form10-K.Note 5 – Common Stock
In January 2017, the holding company reorganization was made effective and each outstanding share of Southwest Gas Corporation common stock was converted into a share of common stock in2021, Southwest Gas Holdings, Inc. completed the acquisition of Dominion Energy Questar Pipeline, LLC and related entities (subsequently rebranded as “MountainWest”), on aone-for-one basis. The ticker symbol of the stock, “SWX,” remained unchanged, and Southwest Gas Corporation becamewhich resulted in MountainWest becoming a wholly owned subsidiary of Southwest Gas Holdings, Inc.
On March 29, 2017, the Company filedCompany. 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 Securities Exchange Commission (“SEC”) an automatic shelf registration statementacquisition 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 FormS-3 (FileNo. 333-217018), which became effective upon filing, investment of assets and liabilities included in rate base. Accordingly, the carrying values of such assets
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
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 and deferred taxes were estimated as of the acquisition date and adjusted when determined during the period ended September 30, 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.
The estimated fair values of assets acquired and liabilities assumed as of December 31, 2021, as updated through September 30, 2022, are as follows:
| | | | | | | | | | | | | | | | | | | | |
(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 | | | (28.2) | | | 958.0 | |
Deferred income taxes, net | | 15.4 | | | 20.9 | | | 36.3 | |
Total assets acquired | | 2,203.0 | | | (4.4) | | | 2,198.6 | |
| | | | | | |
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 | | | $ | (4.4) | | | $ | 1,571.2 | |
The Company incurred and expensed acquisition costs of $18.5 million for the offer and sale of up to $150 million of common stock from time to time inat-the-market offerings under the prospectus included therein and in accordance with the Sales Agency Agreement, dated March 29, 2017, between the Company and BNY Mellon Capital Markets, LLC (the “Equity Shelf Program”). During the three months and nine months ending September 30, 2017, the Company sold, through the continuous equity offering program with BNY Mellon Capital Markets, LLC as agent, an aggregate of 147,077 shares of the Company’s common stock in the open market at a weighted average price of $80.07 per share, resulting in proceeds to the Company of $11,659,104, net of $117,769 in agent commissions. As of September 30, 2017, the Company had up to $138,223,127 of 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. Commensurate with these intentions, proceeds during the 3rd quarter of 2017 were contributed to, and reflected in the records of, Southwest (as a capital contribution from the parent holding company).During the ninetwelve months ended September 30, 2017, the Company issued approximately 103,000 shares of common stock through the Restricted Stock/Unit Plan2022, which are included in Operations and Management Incentive Plan.
Note 6 – Long-Term Debt
Carrying amounts of long-term debt and related estimated fair values as of September 30, 2017 and December 31, 2016 are disclosed in the following table. Southwest’s revolving credit facility (including commercial paper) and the variable-rate Industrial Development Revenue Bonds (“IDRBs”) approximate their carrying values, as they are repaid quickly (in the case of credit facility borrowings) and have interest rates that reset frequently. These are categorized as Level 1 due to Southwest’s ability to access similar debt arrangements at measurement dates with comparable terms, including variable/market rates. The fair values of Southwest’s debentures, senior notes, and fixed-rate IDRBs were determined utilizing a market-based valuation approach, where fair values are determined based on evaluated
22
| | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
pricing data, such as broker quotes and yields for similar securities adjusted for observable differences. Significant inputs used in the valuation generally include benchmark yield curves, credit ratings and issuer spreads. The external credit rating, coupon rate, and maturity of each security are considered in the valuation, as applicable. The fair values of debentures and fixed-rate IDRBs are categorized as Level 2 (observable market inputs based on market prices of similar securities). The Centuri secured revolving credit and term loan facility and Centuri other debt obligations (not actively traded) are categorized as Level 3, based on significant unobservable inputs to their fair values. Because Centuri’s debt is not publicly traded, fair values for the secured revolving credit and term loan facility and other debt obligations were based on a conventional discounted cash flow methodology and utilized current market pricing yield curves, across Centuri’s debt maturity spectrum, of other industrial bonds with an assumed credit rating comparable to the Company’s.
| | | | | | | | | | | | | | | | |
| | September 30, 2017 | | | December 31, 2016 | |
| | Carrying | | | Market | | | Carrying | | | Market | |
| | Amount | | | Value | | | Amount | | | Value | |
(Thousands of dollars) | | | | | | | | | | | | | | | | |
Southwest Gas Corporation: | | | | | | | | | | | | | | | | |
Debentures: | | | | | | | | | | | | | | | | |
Notes, 4.45%, due 2020 | | $ | 125,000 | | | $ | 130,325 | | | $ | 125,000 | | | $ | 129,703 | |
Notes, 6.1%, due 2041 | | | 125,000 | | | | 154,434 | | | | 125,000 | | | | 149,734 | |
Notes, 3.875%, due 2022 | | | 250,000 | | | | 258,943 | | | | 250,000 | | | | 254,900 | |
Notes, 4.875%, due 2043 | | | 250,000 | | | | 275,168 | | | | 250,000 | | | | 266,793 | |
Notes, 3.8%, due 2046 | | | 300,000 | | | | 292,578 | | | | 300,000 | | | | 283,029 | |
8% Series, due 2026 | | | 75,000 | | | | 97,218 | | | | 75,000 | | | | 94,691 | |
Medium-term notes, 7.59% series, due 2017 | | | — | | | | — | | | | 25,000 | | | | 25,040 | |
Medium-term notes, 7.78% series, due 2022 | | | 25,000 | | | | 29,174 | | | | 25,000 | | | | 29,290 | |
Medium-term notes, 7.92% series, due 2027 | | | 25,000 | | | | 31,964 | | | | 25,000 | | | | 31,905 | |
Medium-term notes, 6.76% series, due 2027 | | | 7,500 | | | | 8,920 | | | | 7,500 | | | | 8,769 | |
Unamortized discount and debt issuance costs | | | (9,498 | ) | | | | | | | (9,931 | ) | | | | |
| | | | | | | | | | | | | | | | |
| | | 1,173,002 | | | | | | | | 1,197,569 | | | | | |
| | | | | | | | | | | | | | | | |
Revolving credit facility and commercial paper | | | 150,000 | | | | 150,000 | | | | 5,000 | | | | 5,000 | |
| | | | | | | | | | | | | | | | |
Industrial development revenue bonds: | | | | | | | | | | | | | | | | |
Variable-rate bonds: | | | | | | | | | | | | | | | | |
Tax-exempt Series A, due 2028 | | | 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 | | | 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 | | | (2,212 | ) | | | | | | | (2,489 | ) | | | | |
| | | | | | | | | | | | | | | | |
| | | 197,788 | | | | | | | | 197,511 | | | | | |
| | | | | | | | | | | | | | | | |
Less: current maturities | | | — | | | | | | | | (25,000 | ) | | | | |
| | | | | | | | | | | | | | | | |
Long-term debt, less current maturities - Southwest Gas Corporation | | $ | 1,520,790 | | | | | | | $ | 1,375,080 | | | | | |
| | | | | | | | | | | | | | | | |
Centuri: | | | | | | | | | | | | | | | | |
Centuri term loan facility | | $ | 107,250 | | | | 107,403 | | | $ | 106,700 | | | | 106,819 | |
Unamortized debt issuance costs | | | (383 | ) | | | | | | | (516 | ) | | | | |
| | | | | | | | | | | | | | | | |
| | | 106,867 | | | | | | | | 106,184 | | | | | |
Centuri secured revolving credit facility | | | 81,250 | | | | 81,402 | | | | 41,185 | | | | 41,292 | |
Centuri other debt obligations | | | 51,527 | | | | 51,978 | | | | 52,635 | | | | 52,840 | |
Less: current maturities | | | (28,453 | ) | | | | | | | (25,101 | ) | | | | |
| | | | | | | | | | | | | | | | |
Long-term debt, less current maturities - Centuri | | $ | 211,191 | | | | | | | $ | 174,903 | | | | | |
| | | | | | | | | | | | | | | | |
Consolidated Southwest Gas Holdings, Inc.: | | | | | | | | | | | | | | | | |
Southwest Gas Corporation long-term debt | | $ | 1,520,790 | | | | | | | $ | 1,400,080 | | | | | |
Centuri long-term debt | | | 239,644 | | | | | | | | 200,004 | | | | | |
Less: current maturities | | | (28,453 | ) | | | | | | | (50,101 | ) | | | | |
| | | | | | | | | | | | | | | | |
Long-term debt, less current maturities - Southwest Gas Holdings, Inc. | | $ | 1,731,981 | | | | | | | $ | 1,549,983 | | | | | |
| | | | | | | | | | | | | | | | |
23
| | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
In March 2017, Southwest amended its credit facility, increasing the borrowing capacity from $300 million to $400 million. Also, the facility was previously scheduled to expire in March 2021 and was extended to March 2022. Southwest continues to designate $150 million of capacity related to the facility as long-term debt and with the total capacity now available, has designated the remaining $250 million for working capital purposes. Interest rates for the credit facility are calculated at either the London Interbank Offered Rate (“LIBOR”) or an “alternate base rate,” plus in each case an applicable margin that is determined based on the Southwest’s senior unsecured debt rating. At September 30, 2017, the applicable margin is 1% for loans bearing interest with reference to LIBOR and 0% for loans bearing interest with reference to the alternative base rate. At September 30, 2017, $150 million was outstanding on the long-term portion and $83 million was outstanding on the short-term portion of this credit facility (SeeNote 7 – Short-Term Debt).
At September 30, 2017, Centuri has a $300 million secured revolving credit and term loan facility that is scheduled to expire in October 2019. This facility includes a revolving credit facility and a term loan facility. The term loan facility portion had an initial limit of approximately $150 million, which was reached in 2014 and had $107 million outstanding (after repayments) at September 30, 2017. The $300 million revolving credit and term loan facility is secured by substantially all of Centuri’s assets except those explicitly excluded under the terms of the agreement (including owned real estate and certain certificated vehicles). Centuri assets securing the facility at September 30, 2017 totaled $526 million. At September 30, 2017, $189 million in borrowings were outstanding under the Centuri facility.
Note 7 – Short-Term Debt
In March 2017, Southwest Gas Holdings, Inc. entered into a credit facility with a borrowing capacity of $100 million that expires in March 2022. The Company intends to utilize this facility for short-term financing needs. Interest rates for this facility are calculated at either the LIBOR or the “alternate base rate,” plus in each case an applicable margin that is determined basedmaintenance expense on the Company’s senior unsecured debt rating. The applicable margin ranges from 0.75% to 1.50% for loans bearing interest with reference to LIBOR and from 0% to 0.5% for loans bearing interest with reference to the alternative base rate. The Company is also required to pay a commitment fee on the unfunded portionCondensed Consolidated Statement of the commitments based on its senior unsecured long-term debt rating. The commitment fee ranges from 0.075% to 0.200% per annum. At September 30, 2017, $27.5 million was outstanding under this facility.
As discussed inNote 6 – Long-Term Debt, Southwest has a $400 million credit facility that is scheduled to expire in March 2022, of which $250 million has been designated by management for working capital purposes. Southwest had $83 million in short-term borrowings outstanding at September 30, 2017 under this facility.
24
| | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
Note 8 – Equity, Other Comprehensive Income, and Accumulated Other Comprehensive Income
The table below provides details of activity in equity and the redeemable noncontrolling interest for Southwest Gas Holdings, Inc. on a consolidated basisIncome. No acquisition-related costs were incurred during the nine months ended September 30, 2017.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Southwest Gas Holdings, Inc. Equity | | | | | | | | | | |
| | | | | | | | | | | Accumulated | | | | | | | | | | | | Redeemable | |
| | | | | | | | Additional | | | Other | | | | | | Non- | | | | | | Noncontrolling | |
| | Common Stock | | | Paid-in | | | Comprehensive | | | Retained | | | controlling | | | | | | Interest | |
(In thousands, except per share amounts) | | Shares | | | Amount | | | Capital | | | Income (Loss) | | | Earnings | | | Interest | | | Total | | | (Temporary Equity) | |
DECEMBER 31, 2016 | | | 47,482 | | | $ | 49,112 | | | $ | 903,123 | | | $ | (48,008 | ) | | $ | 759,263 | | | $ | (2,217 | ) | | $ | 1,661,273 | | | $ | 22,590 | |
Common stock issuances | | | 250 | | | | 250 | | | | 21,090 | | | | | | | | | | | | | | | | 21,340 | | | | | |
Net income (loss) | | | | | | | | | | | | | | | | | | | 97,376 | | | | (78 | ) | | | 97,298 | | | | 248 | |
Redemption value adjustments | | | | | | | | | | | | | | | | | | | (355 | ) | | | | | | | (355 | ) | | | 355 | |
Foreign currency exchange translation adj. | | | | | | | | | | | | | | | 1,850 | | | | | | | | | | | | 1,850 | | | | 11 | |
Redemption of Centuri shares from noncontrolling parties | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (23,000 | ) |
Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net actuarial gain (loss) arising during period, less amortization of unamortized benefit plan cost, net of tax | | | | | | | | | | | | | | | 1,786 | | | | | | | | | | | | 1,786 | | | | | |
Amounts reclassified to net income, net of tax (FSIRS) | | | | | | | | | | | | | | | 1,554 | | | | | | | | | | | | 1,554 | | | | | |
Centuri dividend to redeemable noncontrolling interest | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (204 | ) |
Dividends declared | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common: $1.485 per share | | | | | | | | | | | | | | | | | | | (71,350 | ) | | | | | | | (71,350 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
SEPTEMBER 30, 2017 | | | 47,732 | | | $ | 49,362 | | | $ | 924,213 | | | $ | (42,818 | ) | | $ | 784,934 | | | $ | (2,295 | ) | | $ | 1,713,396 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2022 and no impacts to earnings resulted from the measurement-period adjustments reflected above. The table below provides detailsCompany has a transition services agreement with the sellers for a period of activityup to twelve months from the acquisition date of December 31, 2021, to continue certain corporate and administrative functions for the entities acquired while MountainWest is established as an independent enterprise. The Company currently expects that a limited number of activities under the transition services agreement will be extended, and of those extended, certain will occur through the second quarter of 2023.
Note 9 - Subsequent Events
On October 24, 2022, the Company and the Icahn Group entered into the Amended Cooperation Agreement, which amended, restated, superseded, and replaced in equity for Southwest Gas Corporation duringits entirety the nine months ended September 30, 2017. Effective in January 2017, Southwest became a subsidiary of Southwest Gas Holdings, Inc., and only equity sharesInitial Cooperation Agreement.
In accordance with the terms of the
latter are publicly traded, underAmended Cooperation Agreement, the
ticker symbol “SWX.” | | | | | | | | | | | | | | | | | | | | | | | | |
| | Southwest Gas Corporation Equity | | | | |
| | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | | Additional | | | Other | | | | | | | |
| | Common Stock | | | Paid-in | | | Comprehensive | | | Retained | | | | |
(In thousands, except per share amounts) | | Shares | | | Amount | | | Capital | | | Income (Loss) | | | Earnings | | | Total | |
DECEMBER 31, 2016 | | | 47,482 | | | $ | 49,112 | | | $ | 897,346 | | | $ | (45,639 | ) | | $ | 767,061 | | | $ | 1,667,880 | |
Net income | | | | | | | | | | | | | | | | | | | 82,436 | | | | 82,436 | |
Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | |
Net actuarial gain (loss) arising during period, less amortization of unamortized benefit plan cost, net of tax | | | | | | | | | | | | | | | 1,786 | | | | | | | | 1,786 | |
Amounts reclassified to net income, net of tax (FSIRS) | | | | | | | | | | | | | | | 1,554 | | | | | | | | 1,554 | |
Distribution to Southwest Gas Holdings, Inc. investment in discontinued operations | | | | | | | | | | | | | | | | | | | (182,773 | ) | | | (182,773 | ) |
Stock-based compensation (a) | | | | | | | | | | | 8,576 | | | | | | | | (587 | ) | | | 7,989 | |
Dividends declared to Southwest Gas Holdings, Inc. | | | | | | | | | | | | | | | | | | | (60,130 | ) | | | (60,130 | ) |
Contributions from Southwest Gas Holdings, Inc. | | | | | | | | | | | 11,659 | | | | | | | | | | | | 11,659 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
SEPTEMBER 30, 2017 | | | 47,482 | | | $ | 49,112 | | | $ | 917,581 | | | $ | (42,299 | ) | | $ | 606,007 | | | $ | 1,530,401 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(a) | Stock-based compensation is based on stock awards of Southwest Gas Corporation to be issued in shares of Southwest Gas Holdings, Inc. The table above gives effect to the holding company reorganization whereby Southwest and Centuri became subsidiaries of the Company. The historic investment in Centuri was distributed to the parent holding company. This presentation is only applicable to Southwest and not to the Company overall, as Centuri continues to be included in
|
25
Company agreed with the Icahn Group, among other things, to nominate each of Andrew W. Evans, Henry P. Linginfelter, Ruby Sharma, and Andrew J. Teno (each, an “Icahn Designee” and, collectively, the “Icahn Designees”) for election at the Company’s 2023 annual meeting of stockholders (the “2023 Annual Meeting”). In addition, subject to qualifications set forth in the Amended Cooperation Agreement, the Amended Cooperation Agreement provides that the standstill restrictions on the Icahn Group will remain in effect until, and the Amended Cooperation Agreement will terminate upon, the later of (x) the conclusion of the 2023 Annual Meeting and (y) the earlier of | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
| the continuing operations of the Company. Also in connection with the holding company creation, compensation plans of Southwest include programs that will be settled with equity shares issued by Southwest Gas Holdings, Inc. Management has determined that when no consideration is directly exchanged for these programs between Southwest and the Company, the accounting impact at Southwest for these programs is reflected both as compensation expense and as an equity contribution (of the parent) in Southwest.
|
The following information provides insight into amounts impacting 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 in the Condensed Consolidated Balance Sheets and the associated column in the equity table above, as well as the Redeemable Noncontrolling Interest. See Note 4 – Derivatives and Fair Value Measurements for additional information on the FSIRS.
Related Tax Effects Allocated to Each Component of Other Comprehensive Income (Loss)
(Thousands of dollars)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2017 | | | Three Months Ended September 30, 2016 | |
| | Before- | | | Tax | | | Net-of- | | | Before- | | | Tax | | | Net-of- | |
| | Tax | | | (Expense) | | | Tax | | | Tax | | | (Expense) | | | Tax | |
| | Amount | | | or Benefit (1) | | | Amount | | | Amount | | | or Benefit (1) | | | Amount | |
Defined benefit pension plans: | | | | | | | | | | | | | | | | | | | | | | | | |
Amortization of prior service cost | | $ | 333 | | | $ | (126 | ) | | $ | 207 | | | $ | 333 | | | $ | (126 | ) | | $ | 207 | |
Amortization of net actuarial (gain)/loss | | | 6,362 | | | | (2,418 | ) | | | 3,944 | | | | 6,767 | | | | (2,571 | ) | | | 4,196 | |
Regulatory adjustment | | | (5,734 | ) | | | 2,179 | | | | (3,555 | ) | | | (6,122 | ) | | | 2,326 | | | | (3,796 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Pension plans other comprehensive income (loss) | | | 961 | | | | (365 | ) | | | 596 | | | | 978 | | | | (371 | ) | | | 607 | |
FSIRS (designated hedging activities): | | | | | | | | | | | | | | | | | | | | | | | | |
Amounts reclassifed into net income | | | 835 | | | | (317 | ) | | | 518 | | | | 835 | | | | (317 | ) | | | 518 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
FSIRS other comprehensive income | | | 835 | | | | (317 | ) | | | 518 | | | | 835 | | | | (317 | ) | | | 518 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total other comprehensive income (loss) - Southwest Gas Corporation | | | 1,796 | | | | (682 | ) | | | 1,114 | | | | 1,813 | | | | (688 | ) | | | 1,125 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments: | | | | | | | | | | | | | | | | | | | | | | | | |
Translation adjustments | | | 1,012 | | | | — | | | | 1,012 | | | | (238 | ) | | | — | | | | (238 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency other comprehensive income (loss) | | | 1,012 | | | | — | | | | 1,012 | | | | (238 | ) | | | — | | | | (238 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total other comprehensive income (loss) - Southwest Gas Holdings, Inc. | | $ | 2,808 | | | $ | (682 | ) | | $ | 2,126 | | | $ | 1,575 | | | $ | (688 | ) | | $ | 887 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | Nine Months Ended September 30, 2017 | | | Nine Months Ended September 30, 2017 | |
| | Before- | | | Tax | | | Net-of- | | | Before- | | | Tax | | | Net-of- | |
| | Tax | | | (Expense) | | | Tax | | | Tax | | | (Expense) | | | Tax | |
| | Amount | | | or Benefit (1) | | | Amount | | | Amount | | | or Benefit (1) | | | Amount | |
Defined benefit pension plans: | | | | | | | | | | | | | | | | | | | | | | | | |
Amortization of prior service cost | | $ | 1,001 | | | $ | (380 | ) | | $ | 621 | | | $ | 1,001 | | | $ | (380 | ) | | $ | 621 | |
Amortization of net actuarial (gain)/loss | | | 19,084 | | | | (7,252 | ) | | | 11,832 | | | | 20,300 | | | | (7,714 | ) | | | 12,586 | |
Regulatory adjustment | | | (17,204 | ) | | | 6,537 | | | | (10,667 | ) | | | (18,368 | ) | | | 6,980 | | | | (11,388 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Pension plans other comprehensive income (loss) | | | 2,881 | | | | (1,095 | ) | | | 1,786 | | | | 2,933 | | | | (1,114 | ) | | | 1,819 | |
FSIRS (designated hedging activities): | | | | | | | | | | | | | | | | | | | | | | | | |
Amounts reclassifed into net income | | | 2,507 | | | | (953 | ) | | | 1,554 | | | | 2,508 | | | | (952 | ) | | | 1,556 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
FSIRS other comprehensive income | | | 2,507 | | | | (953 | ) | | | 1,554 | | | | 2,508 | | | | (952 | ) | | | 1,556 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total other comprehensive income (loss)—Southwest Gas Corporation | | | 5,388 | | | | (2,048 | ) | | | 3,340 | | | | 5,441 | | | | (2,066 | ) | | | 3,375 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments: | | | | | | | | | | | | | | | | | | | | | | | | |
Translation adjustments | | | 1,861 | | | | — | | | | 1,861 | | | | 614 | | | | — | | | | 614 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency other comprehensive income (loss) | | | 1,861 | | | | — | | | | 1,861 | | | | 614 | | | | — | | | | 614 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total other comprehensive income (loss) | | $ | 7,249 | | | $ | (2,048 | ) | | $ | 5,201 | | | $ | 6,055 | | | $ | (2,066 | ) | | $ | 3,989 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
26
| | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended September 30, 2017 | | | Twelve Months Ended September 30, 2016 | |
| | Before- | | | Tax | | | Net-of- | | | Before- | | | Tax | | | Net-of- | |
| | Tax | | | (Expense) | | | Tax | | | Tax | | | (Expense) | | | Tax | |
| | Amount | | | or Benefit (1) | | | Amount | | | Amount | | | or Benefit (1) | | | Amount | |
Defined benefit pension plans: | | | | | | | | | | | | | | | | | | | | | | | | |
Net actuarial gain/(loss) | | $ | (22,770 | ) | | $ | 8,652 | | | $ | (14,118 | ) | | $ | (30,519 | ) | | $ | 11,597 | | | $ | (18,922 | ) |
Amortization of prior service cost | | | 1,335 | | | | (507 | ) | | | 828 | | | | 1,335 | | | | (507 | ) | | | 828 | |
Amortization of net actuarial (gain)/loss | | | 25,850 | | | | (9,823 | ) | | | 16,027 | | | | 28,895 | | | | (10,980 | ) | | | 17,915 | |
Regulatory adjustment | | | (4,420 | ) | | | 1,679 | | | | (2,741 | ) | | | (653 | ) | | | 249 | | | | (404 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Pension plans other comprehensive income (loss) | | | (5 | ) | | | 1 | | | | (4 | ) | | | (942 | ) | | | 359 | | | | (583 | ) |
FSIRS (designated hedging activities): | | | | | | | | | | | | | | | | | | | | | | | | |
Amounts reclassifed into net income | | | 3,344 | | | | (1,271 | ) | | | 2,073 | | | | 3,344 | | | | (1,271 | ) | | | 2,073 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
FSIRS other comprehensive income (loss) | | | 3,344 | | | | (1,271 | ) | | | 2,073 | | | | 3,344 | | | | (1,271 | ) | | | 2,073 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total other comprehensive income (loss)—Southwest Gas Corporation | | | 3,339 | | | | (1,270 | ) | | | 2,069 | | | | 2,402 | | | | (912 | ) | | | 1,490 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments: | | | | | | | | | | | | | | | | | | | | | | | | |
Translation adjustments | | | 1,408 | | | | — | | | | 1,408 | | | | 233 | | | | — | | | | 233 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency other comprehensive income (loss) | | | 1,408 | | | | — | | | | 1,408 | | | | 233 | | | | — | | | | 233 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total other comprehensive income (loss)—Southwest Gas Holdings, Inc. | | $ | 4,747 | | | $ | (1,270 | ) | | $ | 3,477 | | | $ | 2,635 | | | $ | (912 | ) | | $ | 1,723 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Tax amounts are calculated using a 38% rate. The Company has elected to indefinitely reinvest the earnings of Centuri’s Canadian subsidiaries in Canada, thus preventing deferred taxes on such earnings. As a result of this assertion, the Company is not recognizing any tax effect or presenting a tax expense or benefit for the currency translation adjustment amount reported in Other Comprehensive Income, as repatriation of earnings is not anticipated.
|
Approximately $2.1 million of realized losses (net of tax) related to the FSIRS, reported in Accumulated other comprehensive income (“AOCI”) at September 30, 2017, will be reclassified into interest expense within the next 12 months as the related interest payments on long-term debt occur.
The following table represents a rollforward of AOCI, presented on the Company’s Condensed Consolidated Balance Sheets:
AOCI—Rollforward
(Thousands of dollars)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Defined Benefit Plans | | | FSIRS | | | Foreign Currency Items | | | | |
| | 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, 2016 | | $ | (57,613 | ) | | $ | 21,893 | | | $ | (35,720 | ) | | $ | (15,999 | ) | | $ | 6,080 | | | $ | (9,919 | ) | | $ | (2,369 | ) | | $ | — | | | $ | (2,369 | ) | | $ | (48,008 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Translation adjustments | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,861 | | | | — | | | | 1,861 | | | | 1,861 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income before reclassifications | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,861 | | | | — | | | | 1,861 | | | | 1,861 | |
FSIRS amounts reclassified from AOCI (1) | | | — | | | | — | | | | — | | | | 2,507 | | | | (953 | ) | | | 1,554 | | | | — | | | | — | | | | — | | | | 1,554 | |
Amortization of prior service cost (2) | | | 1,001 | | | | (380 | ) | | | 621 | | | | — | | | | — | | | | —�� | | | | — | | | | — | | | | — | | | | 621 | |
Amortization of net actuarial loss (2) | | | 19,084 | | | | (7,252 | ) | | | 11,832 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 11,832 | |
Regulatory adjustment (3) | | | (17,204 | ) | | | 6,537 | | | | (10,667 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (10,667 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net current period other comprehensive income (loss) | | | 2,881 | | | | (1,095 | ) | | | 1,786 | | | | 2,507 | | | | (953 | ) | | | 1,554 | | | | 1,861 | | | | — | | | | 1,861 | | | | 5,201 | |
Less: Translation adjustment attributable to redeemable noncontrolling interest | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 11 | | | | — | | | | 11 | | | | 11 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net current period other comprehensive income (loss) attributable to Southwest Gas Holdings, Inc. | | | 2,881 | | | | (1,095 | ) | | | 1,786 | | | | 2,507 | | | | (953 | ) | | | 1,554 | | | | 1,850 | | | | — | | | | 1,850 | | | | 5,190 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance AOCI September 30, 2017 | | $ | (54,732 | ) | | $ | 20,798 | | | $ | (33,934 | ) | | $ | (13,492 | ) | | $ | 5,127 | | | $ | (8,365 | ) | | $ | (519 | ) | | $ | — | | | $ | (519 | ) | | $ | (42,818 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | The FSIRS reclassification amounts are included in the Net interest deductions line item on the Company’s Condensed Consolidated Statements of Income.
|
(2) | These AOCI components are included in the computation of net periodic benefit cost (seeNote 2 – Components of Net Periodic Benefit Costfor 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 the Deferred charges and other assets line item on the Company’s Condensed Consolidated Balance Sheets).
|
(4) | Tax amounts are calculated using a 38% rate.
|
27
| | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
The following table represents a rollforward of AOCI, presented on Southwest’s Condensed Consolidated Balance Sheets:
AOCI—Rollforward
(Thousands of dollars)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Defined Benefit Plans | | | FSIRS | | | | |
| | Before-Tax | | | Tax (Expense) Benefit (8) | | | After-Tax | | | Before-Tax | | | Tax (Expense) Benefit (8) | | | After-Tax | | | AOCI | |
Beginning Balance AOCI December 31, 2016 | | $ | (57,613 | ) | | $ | 21,893 | | | $ | (35,720 | ) | | $ | (15,999 | ) | | $ | 6,080 | | | $ | (9,919 | ) | | $ | (45,639 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
FSIRS amounts reclassified from AOCI (5) | | | — | | | | — | | | | — | | | | 2,507 | | | | (953 | ) | | | 1,554 | | | | 1,554 | |
Amortization of prior service cost (6) | | | 1,001 | | | | (380 | ) | | | 621 | | | | — | | | | — | | | | — | | | | 621 | |
Amortization of net actuarial loss (6) | | | 19,084 | | | | (7,252 | ) | | | 11,832 | | | | — | | | | — | | | | — | | | | 11,832 | |
Regulatory adjustment (7) | | | (17,204 | ) | | | 6,537 | | | | (10,667 | ) | | | — | | | | — | | | | — | | | | (10,667 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net current period other comprehensive income (loss) attributable to Southwest Gas Corporation | | | 2,881 | | | | (1,095 | ) | | | 1,786 | | | | 2,507 | | | | (953 | ) | | | 1,554 | | | | 3,340 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance AOCI September 30, 2017 | | $ | (54,732 | ) | | $ | 20,798 | | | $ | (33,934 | ) | | $ | (13,492 | ) | | $ | 5,127 | | | $ | (8,365 | ) | | $ | (42,299 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(5) | The FSIRS reclassification amounts are included in the Net interest deductions line item on Southwest’s Condensed Consolidated Statements of Income.
|
(6) | These AOCI components are included in the computation of net periodic benefit cost (seeNote 2 – Components of Net Periodic Benefit Costfor 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 the Deferred charges and other assets line item on Southwest’s Condensed Consolidated Balance Sheets).
|
(8) | Tax amounts are calculated using a 38% rate.
|
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:
Amounts Recognized in AOCI (Before Tax)
(Thousands of dollars)
| | | | | | | | |
| | September 30, 2017 | | | December 31, 2016 | |
Net actuarial (loss) gain | | $ | (411,889 | ) | | $ | (430,973 | ) |
Prior service cost | | | (4,702 | ) | | | (5,703 | ) |
Less: amount recognized in regulatory assets | | | 361,859 | | | | 379,063 | |
| | | | | | | | |
Recognized in AOCI | | $ | (54,732 | ) | | $ | (57,613 | ) |
| | | | | | | | |
Note 9 – Construction Services Redeemable Noncontrolling Interest
In conjunction with the acquisition of the Canadian construction businesses in October 2014, the previous owners of the acquired companies retained a 3.4% equity interest in Centuri, which, subject to an eligibility timeline, would have been redeemable at the election of the noncontrolling parties (in its entirety) beginning in July 2022. In August 2017, in advance of when otherwise eligible, the parties agreed to a current redemption. Southwest Gas Holdings, Inc. paid $23 million to the previous owners, thereby acquiring the remaining 3.4% equity interest in Centuri in accordance with an early redemption agreement. Accordingly, Centuri is now a wholly owned subsidiary of the Company.
28
| | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
The following depicts changes to the balance of the redeemable noncontrolling interest between the indicated periods.
| | | | |
| | Redeemable Noncontrolling Interest | |
(Thousands of dollars): | | | |
Balance, December 31, 2016 | | $ | 22,590 | |
Net income attributable to redeemable noncontrolling interest | | | 248 | |
Foreign currency exchange translation adjustment | | | 11 | |
Centuri dividend to redeemable noncontrolling interest | | | (204 | ) |
Adjustment to redemption value | | | 355 | |
Redemption of Centuri shares from noncontrolling parties | | | (23,000 | ) |
| | | | |
Balance, September 30, 2017 | | $ | — | |
| | | | |
Note 10 – Reorganization Impacts – Discontinued Operations Solely Related to Southwest Gas Corporation
No substantive change has occurred with regard to the Company’s business segments on the whole, or in the primary businesses comprising those segments (Centuri operations continue to be part of continuing operations of the controlled group of companies), and financial information related to Centuri continues to be included in condensed consolidated financial statements of Southwest Gas Holdings, Inc.
However, as part of the holding company reorganization effective January 2017, Centuri is no longer a subsidiary of Southwest; whereas historically, Centuri had been a direct subsidiary of Southwest. To give effect to this change, the condensed consolidated financial statements related to Southwest Gas Corporation, which are separately included in thisForm 10-Q, depict Centuri-related amounts as discontinued operations for periods prior to January 2017.
Due to the discontinued operations accounting reflection, the following disclosures provide additional information regarding the assets, liabilities, equity, revenues, and expenses of Centuri which are shown as discontinued operations on the condensed consolidated financial statements of Southwest Gas Corporation for periods prior to the beginning of 2017.
The following table presents the major categories of assets and liabilities within the amounts reported as discontinued operations – construction services in the Condensed Consolidated Balance Sheet of Southwest Gas Corporation:
| | | | |
(Thousands of dollars) | 32 | December 31, 2016 |
| |
Assets:
| | | | | | | |
Other property and investments SOUTHWEST GAS HOLDINGS, INC. | | $ | 233,774 | Form 10-Q |
Cash and cash equivalents SOUTHWEST GAS CORPORATION | | | 9,042 | September 30, 2022 |
Accounts receivable, net of allowances
| | | 173,300 | |
Prepaids and other current assets
| | | 10,470 | |
Goodwill
| | | 129,888 | |
Other noncurrent assets
| | | 22,897 | |
(1) immediately following the time at which Andrew J. Teno (or any Replacement Designee for Mr. Teno, as such term is defined in the Amended Cooperation Agreement) is no longer serving on the Board and (2) thirty (30) days prior to the expiration of the advance notice deadline for the submission of director nominees in connection with the Company’s 2024 Annual Meeting of Stockholders (as such term is defined in the Amended Cooperation Agreement); provided, however, that the Amended Cooperation Agreement will terminate automatically on the date on which the Board re-appoints as a director any former director of the Board (i.e., any person who was a director of the Board prior to the 2022 Annual Meeting, but was not a director of the Board immediately after the 2022 Annual Meeting), without the approval of a majority of the Icahn Designees.
Pursuant to the terms of the Amended Cooperation Agreement, the Company further agreed with the Icahn Group (i) to maintain one-year terms and annual elections for all directors serving on the Board through the term of the Amended Cooperation Agreement, (ii) to establish the record date for the 2023 Annual Meeting for a time within thirty (30) days of March 21, 2023, and (iii) that in the event that the Strategic Transactions Committee approves any separation of the Company’s businesses into two or more independent, publicly traded companies (any such separation, a “Spinoff” and each such resulting independent, publicly traded company, a “SpinCo”) during the term of the Amended Cooperation Agreement and while Icahn Group owns a Net Long Position of a number of shares of Common Stock that is at least 50% of the Tender Offer Closing Amount (each such term, as defined in the Amended Cooperation Agreement), any such SpinCo will be organized in Delaware, any such SpinCo’s board of directors will be annually elected for one-year terms and the first meeting of stockholders for such SpinCo will be held no earlier than the nine-month anniversary of the consummation of the Spinoff and no later than the twelve-month anniversary of the Spinoff, subject to certain exceptions set forth in the Amended Cooperation Agreement.
Additionally, on November 4, 2022, Centuri amended the financial covenants of its revolving credit facility to increase the maximum total net leverage ratio during the period from December 31, 2022 through December 31, 2023 (the “Credit Facility Amendment”). The Credit Facility Amendment also transitioned the interest rate benchmark for the revolving credit facility from LIBOR to SOFR. The applicable margin for the revolving credit facility now ranges from 1.0% to 2.5% for SOFR loans and from 0.0% to 1.5% for CDOR and “base rate” loans, depending on Centuri’s total net leverage ratio. Further, the Credit Facility Amendment increases a letter of credit sub-facility from $100 million to $125 million. The Credit Facility Amendment did not modify any terms of the term loan facility.
| | | | |
Discontinued operations - construction services - assets
| | $ | 579,371 | |
| | | | |
Liabilities:
| | | | |
Current maturities of long-term debt
| 33 | $ | 25,101 | |
Accounts payable
| | | 46,440 | |
Other current liabilities
| | | 74,518 | |
Long-term debt, less current maturities
| | | 174,903 | |
Deferred income taxes and other deferred credits
| | | 59,653 | |
| | | | |
Discontinued operations—construction services—liabilities
| | $ | 380,615 | |
| | | | |
29
| | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 20172022 |
Executive Summary
The following table presents the componentsitems discussed in this Executive Summary are intended to provide an overview of the Discontinuedresults of the Company’s and Southwest’s operations – construction servicesnon-owner equity amount shownand are covered in greater detail in later sections of MD&A.
Summary Operating Results
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Period Ended September 30, |
| | Three Months | | Nine Months | | Twelve Months |
(In thousands, except per share amounts) | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Contribution to net income | | | | | | | | | | | | |
Natural gas distribution | | $ | (22,199) | | | $ | (27,544) | | | $ | 87,330 | | | $ | 102,584 | | | $ | 171,881 | | | $ | 182,134 | |
Utility infrastructure services | | 14,345 | | | 18,540 | | | (4,400) | | | 32,797 | | | 3,223 | | | 56,723 | |
Pipeline and storage | | 12,320 | | | — | | | 44,326 | | | — | | | 44,326 | | | — | |
Corporate and administrative | | (16,775) | | | (2,572) | | | (49,962) | | | (4,545) | | | (72,193) | | | (4,477) | |
Net income (loss) | | $ | (12,309) | | | $ | (11,576) | | | $ | 77,294 | | | $ | 130,836 | | | $ | 147,237 | | | $ | 234,380 | |
| | | | | | | | | | | | |
Weighted average common shares | | 67,157 | | | 59,688 | | | 65,004 | | | 58,639 | | | 63,905 | | | 58,209 | |
Basic earnings (loss) per share | | | | | | | | | | | | |
Consolidated | | $ | (0.18) | | | $ | (0.19) | | | $ | 1.19 | | | $ | 2.23 | | | $ | 2.30 | | | $ | 4.03 | |
| | | | | | | | | | | | |
Natural Gas Distribution | | | | | | | | | | | | |
Reconciliation of Gross Margin to Operating Margin (Non-GAAP measure) | | | | | | | | | | | | |
Utility Gross Margin | | $ | 58,021 | | | $ | 62,681 | | | $ | 391,540 | | | $ | 392,190 | | | $ | 569,675 | | | $ | 566,065 | |
Plus: | | | | | | | | | | | | |
Operations and maintenance (excluding Admin. & General) expense | | 81,092 | | | 68,098 | | | 230,235 | | | 194,471 | | | 302,924 | | | 255,434 | |
Depreciation and amortization expense | | 64,390 | | | 61,359 | | | 192,434 | | | 187,688 | | | 258,144 | | | 249,118 | |
Operating margin | | $ | 203,503 | | | $ | 192,138 | | | $ | 814,209 | | | $ | 774,349 | | | $ | 1,130,743 | | | $ | 1,070,617 | |
3rd Quarter 2022 Overview
Southwest Gas Holdings highlights include the following:
•Corporate and administrative expenses include impact of interest on remaining $1.1 billion term loan ($12.7 million), and shareholder activism/settlement, as well as Strategic Review costs
•Amended 364-day Term Loan Credit Agreement in connection with the MountainWest acquisition extending maturity date to December 2023
Natural gas distribution highlights include the following:
•40,000 first-time meters sets occurred over the past 12 months
•Operating margin increased $11 million in the Southwest Gas Corporation Condensed Consolidated Balance Sheet: | | | | |
(Thousands of dollars) | | December 31, 2016 | |
Construction services equity | | $ | (4,390 | ) |
Construction services noncontrolling interest | | | (2,217 | ) |
Construction services redeemable noncontrolling interest | | | 22,590 | |
| | | | |
Discontinued operations - construction servicesnon-owner equity | | $ | 15,983 | |
| | | | |
The following table presentsthird quarter of 2022 compared to the major income statement componentsprior year quarter
•$193 million capital investment during the quarter
•Operations and maintenance expense overall increased a modest 1.5%
•COLI results declined $1.5 million compared to the prior-year quarter
Utility infrastructure services highlights include the following:
•Record revenues of discontinued operations – construction services reported$758 million in the Condensed Consolidated Income Statementsthird quarter of Southwest Gas Corporation:Results2022, an
increase of Construction Services | | | | | | | | | | | | | | | | |
| | Three | | | Nine | | | Twelve | | | Twelve | |
| | Months Ended | | | Months Ended | | | Months Ended | | | Months Ended | |
(Thousands of dollars) | | September 30, 2016 | | | September 30, 2016 | | | September 30, 2017 | | | September 30, 2016 | |
Construction revenues | | $ | 339,790 | | | $ | 838,038 | | | $ | 301,040 | | | $ | 1,127,982 | |
Operating expenses: | | | | | | | | | | | | | | | | |
Construction expenses | | | 300,611 | | | | 757,919 | | | | 266,504 | | | | 1,009,188 | |
Depreciation and amortization | | | 13,409 | | | | 43,351 | | | | 12,318 | | | | 58,368 | |
| | | | | | | | | | | | | | | | |
Operating income | | | 25,770 | | | | 36,768 | | | | 22,218 | | | | 60,426 | |
Other income (deductions) | | | 44 | | | | 44 | | | | 1,149 | | | | 1,246 | |
Net interest deductions | | | 1,794 | | | | 4,945 | | | | 1,718 | | | | 6,738 | |
| | | | | | | | | | | | | | | | |
Income before income taxes | | | 24,020 | | | | 31,867 | | | | 21,649 | | | | 54,934 | |
Income tax expense | | | 8,708 | | | | 12,042 | | | | 7,842 | | | | 20,711 | |
| | | | | | | | | | | | | | | | |
Net income | | | 15,312 | | | | 19,825 | | | | 13,807 | | | | 34,223 | |
Net income attributable to noncontrolling interests | | | 435 | | | | 500 | | | | 514 | | | | 1,079 | |
| | | | | | | | | | | | | | | | |
Discontinued operations - construction services - net income | | $ | 14,877 | | | $ | 19,325 | | | $ | 13,293 | | | $ | 33,144 | |
| | | | | | | | | | | | | | | | |
30
$126 million, or 20%, compared to the third quarter of 2021 •Costs continued to be impacted by inflation, including higher fuel, subcontractor, and equipment rental costs
Pipeline and storage highlights include the following:
•Recognized revenue of $63 million in the third quarter of 2022
•Contributed $12.3 million to consolidated net income, net of $5.7 million of stand-up and integration costs
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 20172022 |
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 prior to August 2017, 96.6%, all of the shares of common stock of Centuri Construction Group, Inc. (“Centuri”Centuri,” or the “construction“utility infrastructure services” segment). During August 2017, Southwest Gas Holdings, Inc. acquired the remaining 3.4% equity interest in Centuri that was held by the previous owners (and reflected, as a redeemable noncontrolling interest). Therefore, Centuri is now a wholly owned subsidiary of Southwest Gas Holdings, Inc. Also,well as partall of the holding company reorganization effective January 2017, Centuricommon stock of the recently formed MountainWest Pipelines Holding Company (“MountainWest,” or the “pipeline and Southwest are now subsidiaries of Southwest Gas Holdings, Inc.; whereas historically, Centuri had been a direct subsidiary of Southwest.storage” segment). Southwest Gas Holdings, Inc. and its subsidiaries are collectively referred to as the “Company.”
The Company completed the acquisition of Dominion Energy Questar Pipeline, LLC and related entities (“Questar Pipelines”) in December 2021. Following the acquisition, the Company formed MountainWest, which owns all of the membership interests of Questar 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 over 2,000 miles of highly contracted, FERC-regulated interstate natural gas pipelines providing transportation and underground storage services in Utah, Wyoming, and Colorado.
In October 2021, our Board of Directors (the “Company”“Board”) have twoauthorized 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 segments (natural gas operationson October 21, 2021, in accordance with the terms and construction services)conditions set forth in the Rights Agreement. The Amended Rights Agreement expired on October 9, 2022, in accordance with its terms.
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. In April 2022, as a result of interest in the Company well in excess of a tender offer to other of our stockholders by an activist stockholder (affiliates of Carl C. Icahn), the Board authorized the review of a full range of strategic alternatives intended to maximize stockholder value. As part of this process, a strategic transactions committee of the Board, consisting entirely of independent directors, would 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 (collectively, the “Strategic Review”). On August 3, 2022, the Company announced that the Board had unanimously determined that the best path forward to maximize value for all stockholders is to (i) focus on the strategic plan and while concluding the strategic review process for Southwest Gas Holdings, Inc. and Southwest Gas Corporation; (ii) continue to review strategic alternatives for MountainWest; and (iii) continue to review strategic alternatives for Centuri, including a sale or spin-off of Centuri, among others. There can be no assurances that the strategic alternatives considered will be executed or maximize value as intended. See “Item 1A - Risk Factors” included in the Company’s Quarterly Report on Form 10-Q filed May 10, 2022.
As described in Note 1 – Background, Organization, and Summary of Significant Accounting Policies, on May 6, 2022, the Company entered into the Initial Cooperation Agreement with the Icahn Group. Pursuant to the Initial Cooperation Agreement, the Company, among other things, made certain previously disclosed changes to the Board of Directors and management team. On October 24, 2022, the Company and the Icahn Group entered into the Amended Cooperation Agreement, which are discussed below.amended, restated, superseded, and replaced in its entirety the Initial Cooperation Agreement. Under the Amended Cooperation Agreement, certain of the standstill provisions in the Initial Cooperation Agreement were extended, the Ichan Group’s governance rights were amended and the Company agreed to certain actions in connection with the 2023 Annual Meeting. Please see See
Note 9 - Subsequent Events for additional information about the Amended Cooperation Agreement. 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 centralNevada, and
southern Arizona, including the Phoenix and Tucson metropolitan areas. Southwest is also the largest distributor of natural gas in Nevada, serving the Las Vegas metropolitan area and northern Nevada. In addition, Southwest distributes and transports natural gas for customers in portions of
California, includingCalifornia. Additionally, through its subsidiaries, Southwest operates two regulated interstate pipelines serving portions of the
Lake Tahoe areanorthern territories of Nevada and
the high desert and mountain areas in San Bernardino County.California.
As of September 30, 2017 (on a seasonally adjusted basis),2022, Southwest had 1,999,000 2,180,000 residential, commercial, industrial, and other natural gas customers, of which 1,065,0001,166,000 customers were located in Arizona, 741,000810,000 in Nevada, and 193,000204,000 in California. ResidentialIn January 2022, approximately 5,300 customers became part of Southwest’s gas distribution operations that were formerly served by Graham County Utilities (“GCU”). Over the past twelve months, first-time meter sets were approximately 40,000, compared to 37,000 for the twelve months ended September 2021. Residential and small commercial customers represented over 99% of thethe total customer base. During the twelve months ended September 30, 2017, 2022, 54% of operating margin was earned in Arizona, 35% in Nevada, and 11% in California. During this same period, Southwest earned 85% of its operating margin (gas operating(Regulated operations revenues less the net cost of gas sold) was earned in Arizona, 34% in Nevada, and 12% in California. During this same period, Southwest earned 85% of its operating margin from residential and small commercial customers, 3%4% from other sales customers, and 12% from11% from transportation customers. These general patterns are expected to remain materially consistent for the foreseeableforeseeable future. 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
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
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 anon-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 adollar-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 relief may impact our earnings. Refer to the Summary Operating Results table below for a reconciliation of gross margin to 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 constructionstrategic infrastructure services
enterprise dedicatedcompany that partners with regulated utilities to
meetingbuild and maintain the
growing demandsenergy network that powers millions of
North Americanhomes and businesses across the United States (“U.S.”) and Canada. With an unwavering commitment to serve as long-term partners to customers and communities, Centuri’s employees enable regulated utilities
energyto safely and
industrial markets. Centuri derives revenue from installation, replacement, repair,reliably deliver natural gas and
maintenance of energy distribution systems, and developing industrial construction solutions.electricity, as well as achieve their goals for environmental sustainability. Centuri operates in
24 major markets71 primary locations across 45 states and provinces in the
United States (primarilyU.S. and Canada. Centuri operates in the U.S., primarily as
NPL)NPL, Neuco, Linetec, and Riggs Distler, and in
3 major markets in Canada,
(asprimarily as NPL
Canada (formerly Link-Line Contractors Ltd.), and W.S. Nicholls).ConstructionCanada.
Utility infrastructure services activity
is cyclical and can be
significantly impacted by changes in
weather, general and local economic conditions (including the housing market), interest rates, employment levels, job growth, pipeinfrastructure replacement programs of utilities,
weather, and local and federal regulation (including tax rates and incentives).
During the past few years, utilities31
| | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
have implementedUtilities continue to implement or modified pipelinemodify system integrity management programs to enhance safety pursuant to federal and state mandates. These programs coupled with recent bonus depreciation tax deduction incentives, have resulted in a significant increase in multi-year pipelineutility 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. This is expectedIn cases of severe weather, such as following a regional storm, Centuri may be engaged to perform restoration activities related to above-ground utility infrastructure, and related results impacts are not solely within the control of management. In addition, in both the U.S. and Canadian markets. 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 impact operating results.
MountainWest 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, to date, there has not been a significant disruption in the Company’s supply chains, transportation network, or ability to serve customers. The extent to which COVID-19 may adversely impact the Company’s business depends on future developments; however, management does not currently expect impacts to be material to the Company’s liquidity or financial position overall.
All of our businesses may be impacted by economic conditions that impact businesses generally, such as inflationary impacts on goods and services consumed in the business, rising interest rates, labor markets and costs (including in regard to contracted or professional services), and the availability of those resources.
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
the MD&A included in the
20162021 Annual Report to
Shareholders,Stockholders, which is incorporated by reference into the
20162021 Form
10-K.Executive Summary
The items discussed 10-K, in this Executive Summary are intendedaddition to provide an overview of the results of the Company’s operations. As needed, certain items are coveredRisk Factors included in greater detail in later sections of management’s discussionthese documents, and analysis. As reflected in the table below, the natural gas operations segment accounted for an average of 81% oftwelve-month-to-date consolidated net income over the past two years. As such, management’s discussion and analysis is primarily focused on that segment. 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 | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
| | (In thousands, except per share amounts) | |
Contribution to net income | | | | | | | | | | | | | | | | | | | | | | | | |
Natural gas operations | | $ | (4,024 | ) | | $ | (12,405 | ) | | $ | 82,436 | | | $ | 67,536 | | | $ | 134,323 | | | $ | 119,836 | |
Construction services | | | 14,335 | | | | 14,877 | | | | 15,717 | | | | 19,325 | | | | 29,010 | | | | 33,144 | |
Corporate and administrative | | | (107 | ) | | | — | | | | (777 | ) | | | — | | | | (777 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 10,204 | | | $ | 2,472 | | | $ | 97,376 | | | $ | 86,861 | | | $ | 162,556 | | | $ | 152,980 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Average number of common shares outstanding | | | 47,628 | | | | 47,481 | | | | 47,577 | | | | 47,464 | | | | 47,553 | | | | 47,442 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Basic earnings per share | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated | | $ | 0.21 | | | $ | 0.05 | | | $ | 2.05 | | | $ | 1.83 | | | $ | 3.42 | | | $ | 3.22 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Natural Gas Operations | | | | | | | | | | | | | | | | | | | | | | | | |
Gas operating revenues | | $ | 213,059 | | | $ | 200,179 | | | $ | 935,823 | | | $ | 980,927 | | | $ | 1,276,308 | | | $ | 1,376,388 | |
Net cost of gas sold | | | 45,539 | | | | 39,056 | | | | 261,839 | | | | 324,072 | | | | 334,888 | | | | 460,836 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating margin | | $ | 167,520 | | | $ | 161,123 | | | $ | 673,984 | | | $ | 656,855 | | | $ | 941,420 | | | $ | 915,552 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
32
as updated from time to time. | | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | 36 | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
3rd Quarter 2017 Overview
Natural gas operations highlights:
Benefits of Arizona rate case reflected in quarterly operating results
32,000 net new customers in last 12 months (1.6% growth rate)
Depreciation and amortization expense declined $10 million compared to the prior-year quarter
Operating income increased $15.3 million compared to the prior-year quarter
Targeting $27 million of vintage steel pipe replacement in Arizona during 2017
Achieved 2 million natural gas utility customers in early November 2017
Construction services highlights:
Revenues increased $40.3 million compared to the prior-year quarter
Construction expenses increased $42 million compared to the prior-year quarter
Depreciation and amortization expense declined $1.1 million compared to the prior-year quarter
The Company acquired the residual 3.4% interest in Centuri in August 2017
Southwest Gas Holdings highlights:
Amended and restated bylaws to eliminate cumulative voting and enact majority voting
33
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 20172022 |
Results of Natural Gas
Operations | | | | | | | | |
| | Three Months Ended September 30, | |
| | 2017 | | | 2016 | |
| | (Thousands of dollars) | |
Gas operating revenues | | $ | 213,059 | | | $ | 200,179 | |
Net cost of gas sold | | | 45,539 | | | | 39,056 | |
| | | | | | | | |
Operating margin | | | 167,520 | | | | 161,123 | |
Operations and maintenance expense | | | 102,215 | | | | 102,438 | |
Depreciation and amortization | | | 46,194 | | | | 56,436 | |
Taxes other than income taxes | | | 14,046 | | | | 12,480 | |
| | | | | | | | |
Operating income (loss) | | | 5,065 | | | | (10,231 | ) |
Other income (deductions) | | | 3,081 | | | | 2,521 | |
Net interest deductions | | | 17,421 | | | | 16,364 | |
| | | | | | | | |
Income (loss) before income taxes | | | (9,275 | ) | | | (24,074 | ) |
Income tax expense (benefit) | | | (5,251 | ) | | | (11,669 | ) |
| | | | | | | | |
Contribution to consolidated net income (loss) | | $ | (4,024 | ) | | $ | (12,405 | ) |
| | | | | | | | |
Distribution
Quarterly Analysis
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
(Thousands of dollars) | | 2022 | | 2021 |
Regulated operations revenues | | $ | 303,944 | | | $ | 255,848 | |
Net cost of gas sold | | 100,441 | | | 63,710 | |
Operating margin | | 203,503 | | | 192,138 | |
Operations and maintenance expense | | 121,537 | | | 119,708 | |
Depreciation and amortization | | 64,390 | | | 61,359 | |
Taxes other than income taxes | | 20,693 | | | 20,109 | |
Operating loss | | (3,117) | | | (9,038) | |
Other income (deductions) | | 1,678 | | | (4,287) | |
Net interest deductions | | 29,417 | | | 24,922 | |
Loss before income taxes | | (30,856) | | | (38,247) | |
Income tax benefit | | (8,657) | | | (10,703) | |
Contribution to consolidated results | | $ | (22,199) | | | $ | (27,544) | |
Results from natural gas distribution operations improved $5 million between the third quarters of 2022 and 2021. The improvement was primarily due to an increase in Operating margin and Other income (deductions), offset by an increase in Net interest deductions and a decrease in Income tax benefit.
Operating margin increased
$6$11.4 million
between quarters. Rate relief in Arizona (effective April 2017) and California provided $4 million in operating margin (seeRates and Regulatory Proceedings).quarter over quarter. Approximately $2 million
in increased operatingof incremental margin was attributable to customer growth,
as 32,000 net new customers were addedincluding 40,000 first-time meter sets during the last twelve months.
Rate relief primarily in Nevada, and to a lesser extent in California, added approximately $4 million of combined margin. Amounts collected from customers associated with previously unrecovered Vintage Steel Pipe (“VSP”) and Customer-Owned Yard Line (“COYL”) programs in Arizona ($5.2 million) also contributed to the improvement. Refer to Rates and Regulatory Proceedings later in this MD&A for more information. Other differences in miscellaneous revenue and margin from customers outside the decoupling mechanisms contributed to the remaining net variance between quarters.
Operations and maintenance expense was relatively flat between quarters. Decreases in employee-related benefit costs more than offset increases in other general costs.Depreciation and amortization expense decreased $10increased $1.8 million between
between quarters primarily due to reduced depreciation ratescontractor costs for event-driven pipeline integrity, reliability and engineering services ($2.8 million), costs for temporary/contractor services for customer and technology support ($800,000), and an increase in Arizona,the reserve for customer accounts deemed uncollectible ($2.5 million). These costs were offset by a result of the recent Arizona general rate case decision. Partially offsetting the decline was reduction in legal-claim related costs (the prior-year quarter reflected a $5 million legal reserve) and a reduction in labor and miscellaneous employee benefits. Depreciation and amortization expense increased depreciation associated with a $317$3 million, or 5%, between quarters, primarily due to a $513 million, or 6%, increase in average gas plant in service for the current quarter as compared to the corresponding quarter a year ago. The increase in plant was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled pipe replacement activities, and new infrastructure. Regulatory amortization was comparable between periods.
Other income increased $6 million. The non-service-related components of employee pension and other postretirement benefit costs were $3.3 million lower between quarters. Interest income increased $3 million between quarters primarily due to the increased receivable position related to the PGA mechanisms. Offsetting these and other improvements was a $1.5 million decline in COLI policy cash surrender values, while the prior-year quarter reflected no change.
Net interest deductions increased $4.5 million in the third quarter of 2022, as compared to the prior-year quarter, primarily due to interest associated with the issuance of $600 million of Senior Notes in March 2022.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
Results of Natural Gas Operations
Nine-Month Analysis
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(Thousands of dollars) | | 2022 | | 2021 |
Gas operating revenues | | $ | 1,358,425 | | | $ | 1,070,576 | |
Net cost of gas sold | | 544,216 | | | 296,227 | |
Operating margin | | 814,209 | | | 774,349 | |
Operations and maintenance expense | | 368,984 | | | 328,980 | |
Depreciation and amortization | | 192,434 | | | 187,688 | |
Taxes other than income taxes | | 62,443 | | | 60,134 | |
Operating income | | 190,348 | | | 197,547 | |
Other income (deductions) | | (440) | | | (4,902) | |
Net interest deductions | | 84,660 | | | 71,263 | |
Income before income taxes | | 105,248 | | | 121,382 | |
Income tax expense | | 17,918 | | | 18,798 | |
Contribution to consolidated results | | $ | 87,330 | | | $ | 102,584 | |
Contribution from natural gas distribution operations to consolidated net income decreased $15.3 million between the first nine months of 2022 and 2021. The decline was primarily due to increases in Operations and maintenance expense, Depreciation and amortization, and Net interest deductions, partially offset by an increase in Operating margin and Other income (deductions).
Operating margin increased $39.9 million, including $13 million attributable to customer growth. Rate relief contributed an additional $14 million. Also contributing to the increase were customer late fees that were $4 million greater in the current period due to the lifting (in 2021) of a moratorium on such fees. The moratorium was previously in place beginning in March 2020 to provide temporary relief to customers during the COVID-19 pandemic. Amounts collected in the current period from customers associated with previously unrecovered VSP and COYL programs in Arizona totaled $16.9 million. Partially offsetting these improvements were amounts related to the recovery/return associated with other regulatory programs; however, such amounts also reduced amortization expense. The residual difference in Operating margin primarily relates to miscellaneous service revenue and customers that are not part of the decoupling mechanisms.
Operations and maintenance expense increased $40 million between periods primarily due to general inflationary impacts, including specific increases related to labor and related pension and benefit costs ($15 million), temporary/contractor services for customer and technology support ($5 million), contractor costs for pipeline integrity, reliability, and engineering, some of which were event driven ($6.5 million), an increase in the reserve for customer accounts deemed uncollectible ($4.5 million), and higher legal and claim-related costs ($2.8 million).
Depreciation and amortization expense increased $4.7 million, or 3%, between periods primarily due to a $540 million, or 6%, increase in average gas plant in service between periods, the impact of which was offset by reduced amounts ($6.2 million) associated with the return/recovery of regulatory account balances, compared to the first nine months of 2021. The increase in plant was attributable to pipeline reinforcement work, franchise requirements, scheduled pipe replacement activities, and new infrastructure, as well as the implementation of the customer information system, which occurred in May 2021.
Taxes other than income taxes increased $2.3 million, or 4%, between periods primarily due to an increase in property taxes in Nevada and California.
Other income (deductions) improved $4.5 million overall between periods. The current period reflects an $8.7 million decline in COLI policy cash surrender values, while the prior-year period reflected $5.8 million in income from the combined effects of an increase in values and recognized death benefits. Offsetting these impacts were non-service cost components of employee pension and other postretirement benefits, which decreased $10 million between periods, and interest income, which increased $7 million between periods due to the increased receivable position of the PGA mechanisms. Additionally, a gain of $1.5 million was recognized on the sale of non-regulated property in the first quarter of 2022.
Net interest deductions increased $13.4 million between periods, primarily due to higher interest associated with $300 million of Senior Notes issued in August 2021, $600 million of Senior Notes issued in March 2022.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
Results of Natural Gas Distribution
Twelve-Month Analysis
| | | | | | | | | | | | | | |
| | Twelve Months Ended September 30, |
(Thousands of dollars) | | 2022 | | 2021 |
Regulated operations revenues | | $ | 1,809,639 | | | $ | 1,445,066 | |
Net cost of gas sold | | 678,896 | | | 374,449 | |
Operating margin | | 1,130,743 | | | 1,070,617 | |
Operations and maintenance expense | | 478,554 | | | 431,795 | |
Depreciation and amortization | | 258,144 | | | 249,118 | |
Taxes other than income taxes | | 82,652 | | | 76,087 | |
Operating income | | 311,393 | | | 313,617 | |
Other income (deductions) | | (97) | | | (545) | |
Net interest deductions | | 110,957 | | | 97,259 | |
Income before income taxes | | 200,339 | | | 215,813 | |
Income tax expense | | 28,458 | | | 33,679 | |
Contribution to consolidated results | | $ | 171,881 | | | $ | 182,134 | |
Contribution to consolidated net income from natural gas distribution operations decreased $10 million between the twelve-month periods ended September 2022 and 2021. The decline was due primarily to increases in Operations and maintenance expense, Depreciation and amortization, Taxes other than income taxes, and Net interest deductions, offset by an increase in Operating margin and a reduction to Income tax expense.
Operating margin increased $60 million between periods. Customer growth provided $16 million, and combined rate relief provided $29 million of incremental operating margin. Also contributing to the increase were customer late fees that were $5.8 million greater in the current period due to lifting the earlier moratorium on such fees in all jurisdictions. Approved VSP and COYL revenue in Arizona also contributed to the improvement between periods ($17.5 million). Offsetting these increases were lower recoveries associated with regulatory account balances ($6 million), which is mitigated by a comparable decrease in amortization expense between periods (discussed below).
Operations and maintenance expense increased $47 million between periods. In addition to general inflationary impacts, specific increases include temporary/contractor services for customer and technology support services ($7.9 million), employee labor and related pension and benefit costs ($17.8 million), contractor costs for pipeline integrity, reliability, and engineering services, some of which were event driven ($8.3 million), an increase in the reserve for customer accounts deemed uncollectible ($4.7 million), and higher legal and claim-related costs ($3 million). The prior year expense levels were uncharacteristically low due to COVID-period reduced training/travel and other cost savings.
Depreciation and amortization expense increased $9 million, or 4%, between periods primarily due to a $546 million, or 6%, increase in average gas plant in service since the corresponding period in the prior year, offset by a reduction ($6 million) in amortization of regulatory account balances, as discussed in regard to Operating margin above. The increase in gas plant was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled and accelerated pipe replacement activities, and new infrastructure.infrastructure, as well as the implementation of a new customer information system placed into production in the second quarter of 2021.
Taxes other than income taxes increased $6.6 million between periods primarily due to an increase in property taxes in Arizona, and to a lesser extent, in California and Nevada.
Other income increased $448,000 between the twelve-month periods of 2022 and 2021. The current-period reflects a $5.7 million decline in COLI policy cash surrender values, compared to the twelve months ended September 30, 2021, which reflected an increase in values of $14 million including net death benefits. Offsetting these impacts were non-service cost components of employee pension and other postretirement benefit costs, which were $11.5 million lower between periods, and interest income, which increased $8 million between periods.
Net interest deductions increased $14 millionbetween periods primarily due to increased 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.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
Income tax expense decreased $5.2 million between the twelve-month periods ended September 30, 2022 and 2021, primarily due to a reduction in pre-tax book income, amortization of excess accumulated deferred income taxes (“EADIT”) ($2.3 million), and changes in Arizona and California state apportionment percentages of $3.1 million. Income tax expense in both periods reflects that COLI results are recognized without tax consequences.
Results of Utility Infrastructure Services
Quarterly Analysis
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
(Thousands of dollars) | | 2022 | | 2021 |
Utility infrastructure services revenues | | $ | 758,466 | | | $ | 632,848 | |
Operating expenses: | | | | |
Utility infrastructure services expenses | | 680,135 | | | 567,270 | |
Depreciation and amortization | | 39,811 | | | 30,021 | |
Operating income | | 38,520 | | | 35,557 | |
Other income (deductions) | | (110) | | | 1,175 | |
Net interest deductions | | 16,608 | | | 6,257 | |
Income before income taxes | | 21,802 | | | 30,475 | |
Income tax expense | | 6,466 | | | 9,653 | |
Net income | | 15,336 | | | 20,822 | |
Net income attributable to noncontrolling interests | | 991 | | | 2,282 | |
Contribution to consolidated results | | $ | 14,345 | | | $ | 18,540 | |
Utility infrastructure services revenues increased $125.6 million in the third quarter of 2022 when compared to the prior-year quarter, including an increase of $89 million from Riggs Distler, which was acquired on August 27, 2021. Revenues from electric infrastructure services increased $33.8 million in the third quarter of 2022 when compared to the prior-year quarter, of which $27.9 million was recorded by Riggs Distler. Included in electric infrastructure services revenues in the third quarter of 2022 was $17.5 million from emergency restoration services performed by Linetec, Riggs Distler, and National Powerline following storm damage to customers’ above-ground utility infrastructure in and around the Gulf Coast and eastern regions of the U.S. and Canada, compared to $45.7 million in the prior year period. 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 includes approximately $74.6 million in gas infrastructure services revenues, including $14 million recorded by Riggs Distler, primarily from increased volumes under master service agreements. Work mix and volume were otherwise negatively impacted during the current quarter due to certain customers’ supply chain challenges in procuring necessary materials.
Utility infrastructure services expenses increased $112.9 million in the third quarter of 2022 when compared to the prior-year quarter, including increases of $83.8 million incurred by Riggs Distler in 2022 when compared to the prior-year quarter, and incremental costs related to the higher volume of work otherwise. Changes in mix of work, including lower volumes of storm related activities, and inflation led to higher input costs, including fuel and subcontractor expenses, as well as increased project related travel and equipment rental costs incurred by the electric infrastructure business. Fuel costs alone increased $9.5 million in the current quarter, including $1.6 million incurred by Riggs Distler. A loss of $5.7 million was incurred on a gas infrastructure bid project during the current quarter due to higher costs than anticipated. This project is anticipated to reach substantial completion by the end of 2022, and additional compensation is being pursued with the customer. Increased project-related travel expenses of $4.5 million were incurred during the period. Also included in total Utility infrastructure services expenses were general and administrative costs, which decreased approximately $18 million between quarters, primarily due to higher property taxes associatedacquisition costs of $13 million incurred in the prior year quarter in connection with net plant additionsthe acquisition of Riggs Distler in addition to lower incentive compensation incurred during the current quarter. Gains on sale of equipment in the third quarter of 2022 and 2021 (reflected as an offset to Utility infrastructure services expenses) were approximately $1.7 million and $1.3 million, respectively.
Depreciation and amortization expense increased property taxes in Arizona, including the impact of a property tax tracking mechanism enacted as part of the recently settled Arizona general rate case.Other income increased $560,000 $9.8 million
between quarters, of which $8.7 million was recorded by Riggs Distler. The remaining increase was attributable to equipment purchased to support the growing volume of infrastructure work.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
The increase in Net interest deductions of $10.4 million was primarily due to an increaseincremental outstanding borrowings under Centuri’s $1.545 billion amended and restated secured revolving credit and term loan facility in conjunction with the equity portionacquisition of the allowance for funds used during construction (“AFUDC”) associated withRiggs Distler, in addition to higher construction expenditures. The equity portion of AFUDC represents the cost of equity funds used to finance utility construction. The equity AFUDC improvement was partially offset by a decline between quarters in income from company-owned life insurance (“COLI”) policies. The current quarter reflects $2.1 million of income associated with COLI policy cash surrender value increases, while the prior-year quarter reflected $2.3 million of COLI-related income. COLI amounts in each quarter were greater than expected.Net interest deductions increased $1.1rates on outstanding variable-rate borrowings.
Income tax expense decreased $3.2 million between quarters, primarily due to the September 2016 issuancereduced profitability in 2022.
Results of $300Utility Infrastructure Services
Nine-Month Analysis
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(Thousands of dollars) | | 2022 | | 2021 |
Utility infrastructure services revenues | | $ | 1,988,433 | | | $ | 1,525,448 | |
Operating expenses: | | | | |
Utility infrastructure services expenses | | 1,829,560 | | | 1,381,524 | |
Depreciation and amortization | | 116,286 | | | 79,982 | |
Operating income | | 42,587 | | | 63,942 | |
Other income (deductions) | | (743) | | | 927 | |
Net interest deductions | | 40,337 | | | 9,511 | |
Income before income taxes | | 1,507 | | | 55,358 | |
Income tax expense (benefit) | | 3,350 | | | 17,372 | |
Net income (loss) | | (1,843) | | | 37,986 | |
Net income attributable to noncontrolling interest | | 2,557 | | | 5,189 | |
Contribution to consolidated results | | $ | (4,400) | | | $ | 32,797 | |
Utility infrastructure services revenues increased $463 million in the first nine months of senior notes, partially offset by reductions associated with the redemption of debt ($24.9 million of 4.75% IDRBs in September 2016) and lower interest expense associated with PGA balances as2022 when compared to the prior-year quarter.34
| | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
Resultssame period in the prior year, including an increase of Natural Gas Operations
Nine-Month Analysis
| | | | | | | | |
| | Nine Months Ended September 30, | |
| | 2017 | | | 2016 | |
| | (Thousands of dollars) | |
Gas operating revenues | | $ | 935,823 | | | $ | 980,927 | |
Net cost of gas sold | | | 261,839 | | | | 324,072 | |
| | | | | | | | |
Operating margin | | | 673,984 | | | | 656,855 | |
Operations and maintenance expense | | | 313,395 | | | | 301,979 | |
Depreciation and amortization | | | 153,643 | | | | 174,413 | |
Taxes other than income taxes | | | 43,325 | | | | 39,480 | |
| | | | | | | | |
Operating income | | | 163,621 | | | | 140,983 | |
Other income (deductions) | | | 8,744 | | | | 6,712 | |
Net interest deductions | | | 51,622 | | | | 49,155 | |
| | | | | | | | |
Income before income taxes | | | 120,743 | | | | 98,540 | |
Income tax expense | | | 38,307 | | | | 31,004 | |
| | | | | | | | |
Contribution to consolidated net income | | $ | 82,436 | | | $ | 67,536 | |
| | | | | | | | |
The contribution$353.2 million recorded by Riggs Distler, which was acquired on August 27, 2021 . Revenues from electric infrastructure services increased $203.9 million in 2022 when compared to consolidated net income from natural gas operations increased $14.9the prior year, of which $163.2 million betweenwas recorded by Riggs Distler. Included in electric infrastructure services revenues overall during the first nine months of 20172022 was $36.5 million from emergency restoration services performed by Linetec, Riggs Distler, and 2016. The improvement was primarily dueNational Powerline following storm damage to higher operating margincustomers’ above-ground utility infrastructure in and lower depreciation expense, partially offset by an increase in operationsaround the Gulf Coast and maintenance expenses.
Operating margin increased $17eastern regions of the U.S. and Canada, compared to $57.9 million between the comparative nine-month periods. Rate relief in the Arizona and California jurisdictions provided $10first nine months of the prior year. The current year increase also includes approximately $185.5 million in operating margin (seeRates and Regulatory Proceedings). The remaining $7gas infrastructure services revenues, including $45.4 million increase was attributable to customer growth.
Operations and maintenance expenserecorded by Riggs Distler, primarily from increased $11.4 million, or 4%, between periods due primarily to higher general cost increases. Approximately $5 million of the incremental costs recognized were associated with the amount and timing of employee incentive plan grants (including accelerated recognition for retirement eligible employees).
Depreciation and amortization expense decreased $20.8 million between periods primarily due to reduced depreciation rates in Arizona, a result of the recent Arizona general rate case decision. The depreciation decrease also included a decline of approximately $3.7 million in amortization related to the recovery of regulatory assets.volumes under master service agreements. Partially offsetting these declines was depreciation associated with a $325 million, or 5%, increase in average gas plant in service forimprovements were impacts from work mix and volume that were negatively impacted during the current period as compared to the prior period. The increase in gas plant was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled and accelerated pipe replacement activities, and new infrastructure.
Taxes other than income taxes increased $3.8 million between periods primarilyfirst nine months of 2022 due to higher property taxes associated with net plant additions and increased property taxescertain customers’ supply chain challenges in Arizona, including the impact of the Arizona property tax tracking mechanism.
Other income, which principally includes returns on COLI policies andnon-utilityprocuring necessary materials.
Utility infrastructure services expenses increased $2$448 million between periods. The current period reflects $6.8 million of income associated with COLI policy cash surrender value increases, while the prior-year period reflected $5.4 million of COLI-related income. COLI amounts in each period were greater than expected.Net interest deductions increased $2.5 million between periods, primarily due to the September 2016 issuance of $300 million of senior notes, partially offset by reductions associated with debt redemptions ($100 million of 4.85% IDRBs in July 2016 and $24.9 million of 4.75% IDRBs in September 2016) and lower interest expense associated with PGA balances as compared to the prior-year period.
35
| | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
Results of Natural Gas Operations
Twelve-Month Analysis
| | | | | | | | |
| | Twelve Months Ended September 30, | |
| | 2017 | | | 2016 | |
| | (Thousands of dollars) | |
Gas operating revenues | | $ | 1,276,308 | | | $ | 1,376,388 | |
Net cost of gas sold | | | 334,888 | | | | 460,836 | |
| | | | | | | | |
Operating margin | | | 941,420 | | | | 915,552 | |
Operations and maintenance expense | | | 413,140 | | | | 400,222 | |
Depreciation and amortization | | | 212,693 | | | | 228,609 | |
Taxes other than income taxes | | | 56,221 | | | | 51,810 | |
| | | | | | | | |
Operating income | | | 259,366 | | | | 234,911 | |
Other income (deductions) | | | 10,308 | | | | 9,615 | |
Net interest deductions | | | 69,464 | | | | 65,146 | |
| | | | | | | | |
Income before income taxes | | | 200,210 | | | | 179,380 | |
Income tax expense | | | 65,887 | | | | 59,544 | |
| | | | | | | | |
Contribution to consolidated net income | | $ | 134,323 | | | $ | 119,836 | |
| | | | | | | | |
Contribution to consolidated net income from natural gas operations increased by $14.5 million between the twelve-month periods of 2017 and 2016. The improvement was primarily due to higher operating margin and lower depreciation expense, partially offset by an increase in operations and maintenance expenses and interest expense.
Operating margin increased $26 million between periods including a combined $13 million of rate relief in the Arizona and California jurisdictions, as well as Paiute Pipeline Company. Customer growth provided $9 million in operating margin, while operating margin associated with recoveriesfirst nine months of regulatory assets, infrastructure replacement mechanisms, customers outside the decoupling mechanisms, and other miscellaneous revenues improved $4 million.
Operations and maintenance expense increased $12.9 million, or 3%, between periods primarily due to general cost increases, partially offset by lower pension expense. Approximately $5.6 million of the incremental costs recognized were associated with the amount and timing of employee incentive plan grants (including accelerated recognition for retirement-eligible employees). Pipeline integrity management and damage prevention programs collectively increased $500,000.
Depreciation and amortization expense decreased $15.9 million between periods primarily due to reduced depreciation rates in Arizona, a result of the recent Arizona general rate case decision. Partially offsetting the decline was depreciation associated with a $335 million, or 6%, increase in average gas plant in service for the current period as compared to the prior period. The increase in gas plant was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled and accelerated pipe replacement activities, and new infrastructure.
Taxes other than income taxes increased $4.4 million between periods primarily due to higher property taxes associated primarily with net plant additions and increased property taxes in Arizona, including the impact of a property tax regulatory tracking mechanism resulting from the recent Arizona general rate case.
Other income increased $693,000 between the twelve-month periods of 2017 and 2016. The current period reflects an $8.8 million increase in COLI policy cash surrender values, while the prior-year period reflected $7.5 million of combined COLI-related income and recognized death benefits. COLI amounts in each period were greater than expected.
Net interest deductions increased $4.3 million between periods, primarily due to the September 2016 issuance of $300 million of senior notes. The increase was partially offset by reductions associated with the redemption of debt ($100 million of 4.85% IDRBs in July 2016 and $24.9 million of 4.75% IDRBs in September 2016) and lower interest expense associated with PGA balances as compared to the prior-year period.
36
| | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
Results of Construction Services
Quarterly Analysis
| | | | | | | | |
| | Three Months Ended September 30, | |
| | 2017 | | | 2016 | |
| | (Thousands of dollars) | |
Construction revenues | | $ | 380,094 | | | $ | 339,790 | |
Operating expenses: | | | | | | | | |
Construction expenses | | | 342,629 | | | | 300,611 | |
Depreciation and amortization | | | 12,335 | | | | 13,409 | |
| | | | | | | | |
Operating income | | | 25,130 | | | | 25,770 | |
Other income (deductions) | | | (210 | ) | | | 44 | |
Net interest deductions | | | 1,962 | | | | 1,794 | |
| | | | | | | | |
Income before income taxes | | | 22,958 | | | | 24,020 | |
Income tax expense | | | 8,407 | | | | 8,708 | |
| | | | | | | | |
Net income | | | 14,551 | | | | 15,312 | |
Net income attributable to noncontrolling interests | | | 216 | | | | 435 | |
| | | | | | | | |
Contribution to consolidated net income attributable to Centuri | | $ | 14,335 | | | $ | 14,877 | |
| | | | | | | | |
Contribution to consolidated net income from construction services in the current quarter decreased by $542,0002022 when compared to the prior-year quarter. The decrease is primarily duesame period in the prior year, including increases of $322.9 million incurred by Riggs Distler in 2022, and incremental costs related to the higher volume of work otherwise. Changes in mix of work and inflation led to higher constructioninput costs relativeincluding fuel and subcontractor expenses, as well as increased project-related travel and equipment rental costs incurred by the electric infrastructure business. Fuel costs increased $27.6 million in the current year
, including $6.4 million incurred by Riggs Distler. Increased project-related travel expenses of $10.4 million were incurred during the current year. Also included in total Utility infrastructure services expenses were general and administrative costs, which decreased $5.6 million in 2022 compared to increased revenues, resulting from apre-tax loss on a project described below,2021, primarily attributable to $13.8 million incurred in the prior year period in connection with the acquisition of Riggs Distler, in addition to lower incentive compensation costs in the current year, partially offset by a decline in depreciationincreased general and amortization.Revenues increased $40.3 million, or 12%, between quarters primarily due to an increase in pipe replacement work with existing customers. A significant portionadministrative costs incurred by Riggs Distler of the increase relates to bid jobs that are expected to be substantially complete by year end.
Construction expenses increased $42 million, or 14%, between quarters due to additional pipe replacement work. Results were negatively impacted by higher construction costs for a water pipe replacement project, for which Centuri has requested increased cost recovery. No additional work orders will be accepted on the project pending resolution of Centuri’s request.$8.8 million. Gains on sale of equipment (reflected as an offset to constructionUtility infrastructure services expenses) were approximately $25,000$3.7 million and $1.4$5.4 million forin the third quarters of 2017nine-month periods in 2022 and 2016,2021, respectively.
Depreciation and amortization
decreased $1.1expense increased $36.3 million between
quarters, primarily dueperiods, of which $34.2 million was recorded by Riggs Distler in 2022. The remaining increase was attributable to
a $2 million reduction associated with the extension of the estimated useful lives of certain depreciable equipment during the past 12 months, partially offset by an increase in depreciation for additional equipment purchased to support the growing volume of
infrastructure work
being performed.37
overall.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 20172022 |
Results
The increase in Net interest deductions of Construction ServicesNine-Month Analysis
| | | | | | | | |
| | Nine Months Ended September 30, | |
| | 2017 | | | 2016 | |
| | (Thousands of dollars) | |
Construction revenues | | $ | 872,536 | | | $ | 838,038 | |
Operating expenses: | | | | | | | | |
Construction expenses | | | 806,586 | | | | 757,919 | |
Depreciation and amortization | | | 35,446 | | | | 43,351 | |
| | | | | | | | |
Operating income | | | 30,504 | | | | 36,768 | |
Other income (deductions) | | | 38 | | | | 44 | |
Net interest deductions | | | 5,095 | | | | 4,945 | |
| | | | | | | | |
Income before income taxes | | | 25,447 | | | | 31,867 | |
Income tax expense | | | 9,560 | | | | 12,042 | |
| | | | | | | | |
Net income | | | 15,887 | | | | 19,825 | |
Net income attributable to noncontrolling interests | | | 170 | | | | 500 | |
| | | | | | | | |
Contribution to consolidated net income attributable to Centuri | | $ | 15,717 | | | $ | 19,325 | |
| | | | | | | | |
Contribution to consolidated net income from construction services for
$30.8 million during the first nine months of 2017 declined2022was primarily due to incremental 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, in addition to higher interest rates on outstanding variable-rate borrowings. Income tax decreased $14 million between periods, primarily due to reduced profitability in 2022.
Results of Utility Infrastructure Services
Twelve-Month Analysis
| | | | | | | | | | | | | | |
| | Twelve Months Ended September 30, |
(Thousands of dollars) | | 2022 | | 2021 |
Utility infrastructure services revenues | | $ | 2,621,646 | | | $ | 2,065,038 | |
Operating expenses: | | | | |
Utility infrastructure services expenses | | 2,403,503 | | | 1,858,464 | |
Depreciation and amortization | | 153,947 | | | 105,570 | |
Operating income | | 64,196 | | | 101,004 | |
Other income (deductions) | | (603) | | | 827 | |
Net interest deductions | | 51,825 | | 11,642 | |
Income before income taxes | | 11,768 | | | 90,189 | |
Income tax expense | | 4,754 | | | 26,785 | |
Net income | | 7,014 | | | 63,404 | |
Net income attributable to noncontrolling interests | | 3,791 | | 6,681 | |
Contribution to consolidated results | | $ | 3,223 | | | $ | 56,723 | |
Utility infrastructure services revenues increased $556.6 million in the current twelve-month period compared to the corresponding period of 2021, including $467.5 million of increases recorded by $3.6Riggs Distler, which was acquired on August 27, 2021. Revenues from electric infrastructure services increased $253.2 millionin 2022 when compared to the prior-year period. prior twelve-month period, of which $237.1 million was recorded by Riggs Distler. Included in the electric infrastructure revenues during the twelve-month period of 2022 was $43.9 million from emergency restoration services performed by Linetec, Riggs Distler, and National Powerline, 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. and Canada, as compared to $83.5 million in similar services during the twelve-month period of 2021. The decrease is primarily dueremaining increase in revenue was attributable to higher construction costs relative to increased revenues,continued growth with existing gas infrastructure customers under master service and bid agreements, partially offset by a decline in depreciation and amortization.Revenues increased $34.5 million, or 4%, in the first nine months of 2017 when compared to the prior-year period primarily due to increased pipe replacement work. Partially offsetting increases in revenues was a temporaryreduced work stoppage bywith a significant customer that beganduring the twelve-month period ending September 30, 2022 (totaling $30 million), due to the mix of projects under its multi-year capital spending program. Work mix and volume were otherwise negatively impacted during the current twelve-month period due to certain customers’ supply chain challenges in procuring necessary materials.
Utility infrastructure services expenses increased $545 million between periods. The increase overall includes $425.3 million incurred by Riggs Distler subsequent to the acquisition, as well as incremental costs related to electric infrastructure services work and costs necessary for the completion of additional gas infrastructure work. Higher fuel costs, equipment rental expense, and subcontractor expenses were also incurred due to inflation, the mix of work, and in support of growth in our electric infrastructure business. Expenses in relation to revenues, and therefore, profit margins, can be impacted by inefficiencies from equipment and facility utilization and under-absorption of other fixed costs, which occurred due to the reduced work from the noted large customer and lower revenues from emergency restoration services as noted above. Also included in total Utility infrastructure services expenses were general and administrative costs, which decreased approximately $4.8 million between comparative periods, primarily attributable to $14 millionincurred in the first quarterprior period in connection with the acquisition of 2017 and continued through part of the second quarter of 2017 resultingRiggs Distler, in a $26.3 million reduction in revenues, comparedaddition to the prior-year period, and a $3.7 millionpre-tax losslower incentive compensation costs incurred in the current nine-month period. The temporary work stoppage was initiated due to state-mandated requalificationyear; these were partially offset by higher other general and administrative costs incurred by Riggs Distler of employees of all contractors working within the jurisdictional boundary of one state. Operations resumed gradually following the requalification of Centuri’s employees during the second quarter of 2017. Additionally, inclement weather in several operating areas negatively impacted revenues and reduced productivity$14.8 million in the first quarter of 2017.Construction expenses increased $48.7 million, or 6%, between periods. The increase in construction expenses is disproportionate to revenues noted above due in part to logistics surrounding the timing and length of the temporary work stoppage with the significant customer and to higher labor costs incurred to complete work during inclement weather conditions in the first quarter. In addition, results were negatively impacted by higher construction andstart-up costs related to the water pipe replacement project, for which Centuri is pursuing cost recovery. current period.
Gains on sale of equipment (reflected as an offset to constructionUtility infrastructure services expenses) were approximately $1.5$5.3 million and $4.1$6.6 million for the first nine monthstwelve-month periods of 20172022 and 2016,2021, respectively. Depreciation and amortization expense increased $48.4 million between the current and prior-year twelve-month periods, of which $46.3 million relates to Riggs Distler.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
Net interest deductions increased $40.2 million between periods due to incremental 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, in addition to higher interest rates on outstanding variable-rate borrowings.
Income tax expense decreased $7.9$22 million between periods, primarily due to an $8.2reduced profitability in 2022.
Results of Pipeline and Storage
Quarterly and Nine-Month Analysis
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | |
(Thousands of dollars) | | 2022 | | |
Regulated operations revenues | | $ | 63,178 | | | $ | 192,259 | | | |
Operating expenses: | | | | | | |
Net cost of gas sold | | 550 | | | 3,553 | | | |
Operations and maintenance expense | | 25,198 | | | 74,251 | | | |
Depreciation and amortization | | 12,732 | | | 38,869 | | | |
Taxes other than income taxes | | 2,663 | | | 8,335 | | | |
Operating income | | 22,035 | | | 67,251 | | | |
Other income (deductions) | | 353 | | | 1,691 | | | |
Net interest deductions | | 4,553 | | | 13,449 | | | |
Income before income taxes | | 17,835 | | | 55,493 | | | |
Income tax expense | | 5,515 | | | 11,167 | | | |
Contribution to consolidated results | | $ | 12,320 | | | $ | 44,326 | | | |
Operating results for the Pipeline and Storage segment included rate-regulated transmission and subscription storage revenues of $59.3 million reduction in depreciation associated with the extension of the estimated useful lives of certain depreciable equipment and $179 million during the past 12 months, partially offset by an increase in depreciation for additional equipment purchased to support the growing volume of work being performed.38
| | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
Results of Construction Services
Twelve-Month Analysis
| | | | | | | | |
| | Twelve Months Ended September 30, | |
| | 2017 | | | 2016 | |
| | (Thousands of dollars) | |
Construction revenues | | $ | 1,173,576 | | | $ | 1,127,982 | |
Operating expenses: | | | | | | | | |
Construction expenses | | | 1,073,090 | | | | 1,009,188 | |
Depreciation and amortization | | | 47,764 | | | | 58,368 | |
| | | | | | | | |
Operating income | | | 52,722 | | | | 60,426 | |
Other income (deductions) | | | 1,187 | | | | 1,246 | |
Net interest deductions | | | 6,813 | | | | 6,738 | |
| | | | | | | | |
Income before income taxes | | | 47,096 | | | | 54,934 | |
Income tax expense | | | 17,402 | | | | 20,711 | |
| | | | | | | | |
Net income | | | 29,694 | | | | 34,223 | |
Net income attributable to noncontrolling interests | | | 684 | | | | 1,079 | |
| | | | | | | | |
Contribution to consolidated net income attributable to Centuri | | $ | 29,010 | | | $ | 33,144 | |
| | | | | | | | |
Contribution to consolidated net income from construction services for the twelve-month periodthree- and nine-months ended September 30, 2017 decreased $4.12022.
Operating expenses include $5.7 million comparedand $18.9 million, during the three- and nine-month periods, respectively, ended September 30, 2022, related to integrating MountainWest, including employee retention payments incurred. Additional integration costs will be incurred in future periods until integration efforts are completed. Rates and Regulatory Proceedings
Southwest is subject to the
same periodregulation of
2016. The decrease is primarily due to higher construction costs relative to increased revenues, resulting inpre-tax losses on certain projects, partially offset by a decline in depreciationthe Arizona Corporation Commission (the “ACC”), the Public Utilities Commission of Nevada (the “PUCN”), the California Public Utilities Commission (the “CPUC”), and
amortization.Revenues increased $45.6 million, or 4%, in the current twelve-month period comparedFederal Energy Regulatory Commission (the “FERC”). Due to the same periodsize of 2016Southwest’s regulated operations and the frequency of rate cases and other procedural activities with its commissions, the following discussion focuses primarily due to additional pipe replacement work for existingon the proceedings within its natural gas distribution customers. Duringoperations.
General Rate Relief and Rate Design
Rates charged to customers vary according to customer class and rate jurisdiction and are set by the
past several years, Centuri has focused its effortsindividual 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
obtaining replacement work under both blanket contracts and incremental bid projects. For both twelve-month periods ended September 30, 2017 and 2016, revenues from replacement work provided over 60% of total revenues.Construction expenses increased $63.9 million, or 6%, between periods, due to additional pipe replacement work, higher labor costs experienced due to changes in theinvestment. The mix of workfixed 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 existingits regulatory commissions in designing rate structures that strive to provide affordable service to customers while mitigating volatility in prices to customers and higherstabilizing returns to investors. Such rate structures were in place in all of Southwest’s operating expenses to support increased growth in operations. The logistics surrounding the timing and length of a temporary work stoppage with a significant customerareas during the first six months of 2017 and higher labor costs incurred to complete work during inclement weather conditions in the first quarter of 2017 resulted in costs disproportionate to revenues. Results were negatively impacted by higherstart-up and construction costs for a water pipe replacement project,all periods for which Centuri has requested increased cost recovery. No additional work orders will be accepted on the project pending resolutionresults of Centuri’s request. Gains on sale of equipment (reflected as an offset to construction expenses) were $4.5 million and $4.2 million for the twelve-month periods ended September 30, 2017 and 2016, respectively.
Depreciation and amortization decreased $10.6 million between the current and prior-year periods primarily due to an $11.1 million reduction associated with the extension of the estimated useful lives of certain depreciable equipment over the last twelve months, partially offset by an increase in depreciation for additional equipment purchased to support the growing volume of work being performed.
39
| | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
Rates and Regulatory Proceedings
natural gas distribution operations are disclosed above.
Arizona General Rate Case. In December 2021, Southwest filed a general rate case application withproposing a revenue increase of approximately $90.7 million. Although updated rates related to the Arizona Corporation Commission (“ACC”) previous rate case became effective in January 2021, the most significant driver for the December 2021 request was 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 implemented
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
in May 2016 requesting an increase in authorized annual operating revenues of approximately $32 million, or 4.2%, to reflect existing levels of expense2021. The filing was based on a test year ended August 31, 2021 and requested returns, in addition to reflecting capital investments made by Southwest since June 2010. The application requested an overall rate of return of 7.82% on an original cost rate base of $1.336 billion,proposed a 10.25% return on common equity of 9.90% relative to a target equity ratio of 51%. Southwest also proposed a twelve-month post-test year adjustment to reflect otherwise non-revenue producing plant in service as of August 31, 2022 and certain expense adjustments. Recovery (over three years) of the approximately $12 million related to the outstanding deferral balance associated with the LNG facility (see below) was included in the request, along with the approximate $2.1 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, was also included, while no changes to Southwest’s existing rate design are proposed.
At a hearing held in September 2022, Southwest, the Utilities Division Staff (the “Staff”), and the Residential Utility Consumer Office jointly stipulated to several issues, including a target capital structure utilizing 52% common equity. The filing includedconsisting of 50% equity and 50% debt; a depreciation study that supported a proposal to reduce currently effective depreciation expense by approximately $42 million, which was considered in the overall requested amount. This expense reduction coupled with9.30% return on equity; and foregoing recovery of the requested revenue increase, resulted in a net annual operating income increase request of $74 million. A settlement was reached among several parties in December 2016 and a formal draft settlement was filed in January 2017. HearingsCOVID-19 moratorium waived late fees, as well as an acquisition premium related to the recent Graham County acquisition. Among the uncontested issues identified prior to the hearing were held in February 2017, and the ACC approved the settlement agreement in April 2017. The settlement provides for an overall operating revenue increase of $16 million and the capital structure and cost of capital as proposed by Southwest, with the exception of the return on common equity, which was set at 9.50%. Depreciation expense is expected to be reduced by $44.7 million, for a combined net annual operating income increase of $60.7 million. Other key elements of the settlement include approval of the continuation and expansion of the current Customer-Owned Yard Line (“COYL”) program (adding the ability to seek out COYLs through a targeted approach and mobilization of work crews for replacement), implementation of a vintage steel pipe replacement program, and a continuation of the current decoupledDCA mechanism, the continuation of the existing rate design, excluding a winter-period adjustment to rates, making the mechanism fundamentally similar to that which exists in Nevada. The settlement also included a property tax tracking mechanism to defer changes inand Southwest’s alternate property tax expense for recovery or returncalculation, reflecting actual incurred property tax expense in 2021, instead of a pro-forma adjustment reflecting forecasted property tax expense. Although these issues were resolved amongst the parties, these and other items in the nextcase are still subject to the Administrative Law Judge’s recommended order and opinion that will be considered by the ACC. A decision and resulting new rates are anticipated in the first quarter 2023.
Delivery Charge Adjustment. The 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) balance. An April 2022 request proposed a rate to return $10.5 million, the over-collected balance existing at the end of the first quarter 2022, which was approved effective July 1, 2022.
Tax Reform. In the most recently concluded Arizona general rate proceeding, a Tax Expense Adjustor Mechanism (“TEAM”) was approved to timely recognize tax rate changes resulting from federal or state tax legislation following the TEAM implementation. In addition, the TEAM tracks and returns/recovers the revenue requirement impact of changes in amortization of EADIT (including that which resulted from 2017 U.S. federal tax reform) compared to the amount authorized in the most recently concluded rate case. NewIn December 2021, Southwest filed its inaugural TEAM rate application, which proposed an approximate $4.7 million refund, comprised of an approximate $9 million decrease in revenue requirement offset by an under-collected balance of approximately $4.3 million. Staff issued a proposed order supporting the TEAM credit, which was approved by the ACC with rates were effective April 2017. The settlement also includes a three-year rate case moratorium prohibiting a new application to adjust base rates from being filed prior to May 2019.LNG (“November 1, 2022.
Liquefied Natural Gas”Gas (“LNG”) Facility. In January 2014, Southwest filed an application with thesought ACC seeking 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 inrelated to natural gas deliveries in the southern Arizona area by providing a local storage option, to be operated by Southwest and connectedconnecting directly to itsSouthwest’s distribution system. InSouthwest was ultimately granted approval for construction and deferral of costs. The facility was placed in service in December 2014, Southwest received an order from2019. The capital costs and the ACC grantingpre-approvaloperating expenses associated with plant operation were approved and considered as part of Southwest’s application to constructprevious general rate case. Approximately $12 million in costs, incurred following the LNG facility and the deferralin-service date of costs, up to $50 million. Following the December 2014 preapproval, Southwest purchased the site for the facility and completed detailed engineering design specifications forafter the purpose of soliciting bids for the engineering, procurement and construction (“EPC”)period considered as part of the facility. Southwest solicited requests for proposals for the EPC phaseprevious general rate case, were deferred as part of the project,previously authorized regulatory asset account, and are included for consideration in October 2016 made a filing with the ACC to modify the previously issued Order to update thepre-approved costs to reflect anot-to-exceed amount of $80 million, which was approved by the ACC in December 2016. Through September 2017,current general rate case application.
Customer-Owned Yard Line (“COYL”) Program. Southwest has incurred approximately $21.7 million in capital expenditures toward the project (including land acquisition costs). Construction commenced during the third quarter of 2017 and is expected to be completed by the end of 2019.COYL Program. Southwestoriginally received approval, in connection with an earlierits 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, which is notrepresenting a traditionalnon-traditional configuration. Customers with this configurationA filing in May 2021 proposed the recovery of previously unrecovered surcharge revenue from 2019 and 2020 (collectively, $13.7 million) over a one-year period. Such amounts related to plant investments that were previously responsible for the costmade in advance of maintaining these lines and were subject to the immediate cessation of natural gas service iflow-pressure leaks occurred. Effective June 2013,those periods. In November 2021, the ACC authorizedapproved full recovery within the proposed timeline, the rate for which was implemented the same month. In a surcharge to recover the costs of depreciationFebruary 2022 filing, Southwest requested andpre-tax return on the costs incurred to replace and relocate service lines and meters. The surcharge is revised annually as the program progresses. In 2014, Southwest received approval to add a “Phase II” componentincrease its surcharge revenue by $3.4 million to the COYL program to include the replacement ofnon-leaking COYLs. In the most recent annual COYL filing made in February 2017, Southwest requested to establish an annual surcharge to collect $1.8 million related torecover the revenue requirement associated with $12.1 millioninvestments made since August 2020 and through calendar year 2021. The rate was implemented in capital projects completed under both Phase I and Phase II during 2016. In June 2017,2022. A decrease in the ACC issued a decision approvingCOYL rate will become effective in November 2022 to reflect the surcharge application. All capital work completed in earlier years was incorporated in Southwest’s Arizona rate base in connectionexpiration of the collection period associated with the recently completed general rate case proceeding, as discussed2019 and 2020 COYL program revenue referred to above.
40
| | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
Recovery of the remaining investments is ongoing.
Vintage Steel Pipe Program.(“VSP”) Program. Southwest received approval, in connection with its most recent2016 Arizona general rate case, to implement a vintage steel pipe (“VSP”)VSP replacement program. Southwest currently has approximately 6,000 milesprogram, due to having a substantial amount ofpre-1970s vintage steel pipe in Arizona. However, as part of Southwest’s most recent rate case decision in 2020, the ACC ultimately decided to discontinue the accelerated VSP program. A filing in May 2021 proposed the recovery of previously unrecovered surcharge revenue relating to investments during 2019 and 2020, with approximately $60 million to be recovered over a three-year period. In November
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
2021, the ACC approved full recovery over the proposed three-year timeline with updated rates which became effective in March 2022.
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, for a purchase price of $3.5 million. Approval of the application by 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 start replacing the pipe on an accelerated basis and to recover the costs through an annual surcharge filing that will be made in February of each year. The surcharge is designed to be revised annually as the program progresses. A Plan of Administration (“POA”), which was filed in March of 2017 and was approvedtake place in conjunction with the effective date of rates resulting from the currently pending Arizona general rate case. Resolution is expected in the first quarter of 2023. See also Arizona General Rate Case above and the discussion of stipulation by the parties to the pending case outlined the VSP program requirements and established the timeline for future project plans and surcharge requests. Southwest is currently targeting the replacement of nearly 40 miles of VSP during 2017 totaling approximately $27 million and replacement projects during 2018 of approximately $100 million.in regard to GCU.
California Jurisdiction
Attrition Filing. In November 2016, Southwest made its latest annual post-test year (“PTY”) attrition filing with the California Public Utilities Commission (“CPUC”), requesting annual revenue increases of $2.1 million in southern California, $513,000 in northern California, and $256,000 for South Lake Tahoe. This filing was approved in December 2016 and rates were made effective in January 2017. At the same time, rates were updated to recover the regulatory asset associated with the revenue decoupling mechanism, or margin tracker.
California General Rate Case. In December 2016, Southwest filed to modify theCase. Southwest’s most recent general rate case decisionwas concluded following 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 extend the current rate case cycle by two years, including extensiona 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 the annual PTY attrition adjustments through 2020 from 2018. That latestfiling. The rate case decision would have requiredmaintains Southwest’s existing 2.75% annual attrition adjustments and the continuation of the pension balancing account. It also includes cumulative expenditures totaling $119 million over the five-year rate cycle to implement risk-informed proposals, consisting of a school COYL replacement, meter protection, and pipe replacement programs. New rates were ultimately implemented April 1, 2021, with Southwest permitted to file its nextestablish a general rate application by September 2017. Expedited consideration was requested and in June 2017,case memorandum account to track the CPUC approved the request, thereby extending the rate case filing deadline. Southwest believes this extension isimpacts of a delay in the public interest as it provides rate stability to customersimplementation of new rates (between January 1, 2021 and the date rates were implementation) for two additional years consistent withpurposes of later recovery.
Attrition Filing. Following the current reasonable2021 implementation of rates approved as part of the last general rate case, Southwest is also authorized to continue annual Post Test Year (“PTY”) attrition increases of 2.75%, the first of which began in January 2022.
Customer Data Modernization Initiative (“CDMI”). In April 2019, Southwest filed an application with the CPUC seeking authority to establish a two-way, interest-bearing balancing account to record costs associated with the CDMI to mitigate adverse financial implications related to the multi-year project (including a new customer information system, ultimately implemented in May 2021). Effective October 2019, the CPUC granted a memorandum account, which allowed Southwest to track costs, including operations and the current revenue requirementmaintenance costs and rate ofcapital-related costs, such as depreciation, taxes, and return are not in need of adjustment (with the continuationassociated with California’s portion of the currently approved 2.75% PTY attrition adjustment for the two additional years).Nevada Jurisdiction
General Revenues Adjustment.In June 2016, Southwest requested authorization from the Public Utilities Commission of Nevada (“PUCN”) to adjust rates associated with its revenue decoupling mechanism (General Revenues Adjustment, or “GRA”)CDMI (initially estimated at $19 million). The filingbalance tracked in the memorandum account was approvedtransferred to the two-way balancing account in December 2016, with ratesJuly 2020. A rate to begin recovering the balance accumulated through June 30, 2020 was established and made effective September 1, 2020, and updated multiple times since, including in January 2017. The2022. This rate adjustment is expected to refund approximately $16.7 million during 2017. be updated at least annually.
Carbon Offset Program. In June 2017,March 2022, Southwest filed an application to adjustseek approval to offer a voluntary program to California customers to purchase carbon offsets in an effort to provide customers additional options to reduce their respective GHG emissions. A request to establish a two-way balancing account to track program-related costs and revenues was included as part of the GRA surcharge effective January 2018,application. The CPUC issued Decision 22-09-010 dismissing Southwest’s application without prejudice. Southwest intends to file a new application in the fourth quarter 2022 addressing the concerns raised by third parties, which included a request to demonstrate that purchased offsets would result in GHG emissions reductions.
Building Decarbonization. CPUC Decision 22-09-026 was issued regarding the elimination of gas line extension monetary allowances, a 10-year refundable payment option, and the 50% discount payment option for both residential and non-residential customers of all gas utilities. This applies to new applications for gas line extensions submitted on or after July 1, 2023. Although this decision eliminates the various allowances related to line extensions, it does not preclude extending natural gas service to customers.
Residential Disconnection Protections. Decision 22-08-037 was issued by the CPUC establishing disconnection protections for residential customers of small and multi-jurisdictional utilities, including Southwest. A similar decision was adopted for four large California utilities in 2020. This decision prohibits the utility from assessing credit deposits for residential customers establishing or re-establishing service and prohibits the assessment of reconnection fees for residential customers among other provisions. The decision, however, also provides authorization to establish a two-way balancing account to track residential uncollectible charges for future recovery in a general rate case subject to relevant cap.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
Nevada Jurisdiction
Nevada General Rate Case. Southwest filed its most recently concluded Nevada general rate case in August 2021, which was further updated by a certification filing in December 2021. The request proposed a combined revenue increase of approximately $28.7 million (as of the certification date); the most significant driver for which was the substantial capital investments that were 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%; recovery of approximately $6.6 million in previously deferred late payment charges related to a regulatory asset associated with COVID-19; and continuation of full revenue decoupling under the General Revenues Adjustment (“GRA”) mechanism. On February 7, 2022, the parties filed a stipulation with the PUCN, providing for a statewide revenue increase of $14.05 million, a return on common equity of 9.40% relative to a 50% target equity ratio, and continuation of Southwest’s full revenue decoupling mechanism. The stipulation was approved by the PUCN, duringand new rates became effective April 1, 2022. The PUCN’s order did not include recovery of the third quarterapproximate $6.6 million in deferred late payment charges related to a regulatory asset associated with COVID-19, which had previously been reserved.
General Revenues Adjustment. As noted above, the continuation of 2017. Thisthe GRA was affirmed as part of Southwest’s most recent general rate case with an expansion to include a large customer class (with average monthly throughput requirements greater than 15,000 therms), effective 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. Southwest made its most recent ARA filing in November 2021 related to balances as of September 30, 2021. New rates related to that filing became effective July 1, 2022. The next ARA filing will resultbe made in a decrease in collections from customersNovember 2022 related to balances as of $15.4 million, based on the over-recovered balance in the account at the end of April 2017.September 2022, with new rates expected to become effective July 1, 2023. While there is no impact to net income overall from this rate adjustment,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 school COYLs, and any other COYLs that are identified to be a safety concern. The petition was approved in January 2022 and provides for capital investments up to $5 million per year for five years and the establishment of a regulatory asset to track the capital-related costs. After five years, the program will be reduced as the regulatory liability balance is refunded.reassessed to determine if it should be continued.
Infrastructure Replacement Mechanisms.Mechanism.In January 2014, the PUCN approved final rules for athe Gas Infrastructure Replacement (“GIR”) mechanism, to deferwhich provided for the deferral and recoverrecovery of certain costs associated with accelerated replacement of qualifying infrastructure that doeswould not otherwise currently provide incremental revenues.revenues between general rate cases. Associated with suchthe replacement of various types of pipe infrastructure under the mechanism each year,(Early Vintage Plastic Pipe, COYL, and VSP), the related regulations provide Southwest fileswith the opportunity to file a Gas Infrastructure Replacement (“GIR”) Advance Application requesting authorityGIR “Advance Application” annually to replaceseek preapproval of qualifying infrastructurereplacement projects.
In cases where preapproval of projects has been requested and filesgranted, a GIR rate application has been separately as part of an annual GIR filingfiled to reset the GIR recovery surcharge rate related to previously approved and completed projects. For projects approved in 2015 and completed in 2016, the annualized revenue was approximately $4.5 million. InOn September 2016,27, 2022, Southwest filed its latest rate application to adjustreset the recovery surcharge in January 2023 to include cumulative deferrals through August 31, 2022. However, in November 2022, Southwest reached a settlement with parties (stipulation expected to be filed the same month) to discontinue the GIR, surchargewith no further ratemaking following the current year. An immaterial GIR balance existed as of September 30, 2022. Commission approval of the stipulation is anticipated to recover the annual revenue requirement for amounts previously deferred. This filing was approvedbe received in December 20162022.
Conservation and newEnergy 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 November 2021 ARA filing, Southwest proposed annualized margin decreases of $574,000 and $434,700 for southern and northern Nevada, respectively, which became effective January 2017. In June 2016,in July 2022. Separately, in May 2022, Southwest filed an Advance Application for projects expected to be completed during 2017, proposing approximately $60 million of accelerated pipe replacement to include early vintage plastic, early vintage steel, and a COYL program. The COYL program, while not large in magnitude, represents the firstapplication seeking approval of its kind in Nevada, modeled after the program in placeannual Conservation and Energy Efficiency Plan Report for several years in Southwest’s Arizona jurisdiction. The PUCN issued an Order on the Advance Application in October 2016, approving approximately $57.3 million of replacement work2021, with an annualized revenue requirement estimated at approximately $5.3 million. With regardno proposed modifications to the proposed COYL program, approval was granted for the northern Nevada rate jurisdiction, but consideration for the southern Nevada rate jurisdiction was deferred until 2020, at which time certain early vintage plastic pipe programs are expected to be completed. In September 2017, Southwest filed to adjust the GIR surcharge to recover the annual revenue requirement for amounts previously deferred. For projects approved in 2016 and completed by July of 201741
| | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
, the deferred annualized revenue requirement is approximately $8.7 million. This filing is expected to be approved in December 2017 with rates becoming effective January 2018.
In May 2017, Southwest filed a GIR Advance Application with the PUCN for projects totaling approximately $66 million that are expected to be completed during 2018. Similar to previous years, the proposed projects consist of early vintage plastic and early vintage steel pipe, as well as the continuation of the previously approved COYL program in northern Nevada. Southwest entered into$1.3 million annual budget for years 2022-2024. The parties reached a settlement agreement with the intervening parties and filed a proposed stipulation requesting the Commission approve the settlement agreement. The settlement agreement proposed that the request be approved as filed and that Southwest be authorized to start replacing COYLs in southern Nevada in certain situations, and to recover costs through the GIR mechanism. The PUCN issued an Order on the GIR Advance Application in September 2017, approving approximately $65.7 million of replacement work (with an annualized revenue requirement estimated at approximately $6 million) and the COYL provisions in southern Nevada.
Subsequent to three GIR rate applications, the GIR regulations require Southwest to either file a general rate case or a request for waiver before it can file another GIR advance application. The October 2016 approved rate application was the third such filing by Southwest subject to these regulations, necessitating a request for waiver to permit Southwest to proceed with the GIR program without filing a general rate case in 2017. This waiver was approved by the PUCN in January 2017; however, in order to continue the GIR program in 2018 (for projects recommended for completion under the program after 2018), a general rate case will need to be filed before June 2018.
Conservation and Energy Efficiency (“CEE”). In June 2015, Southwest requested recovery of energy efficiency and conservation development and implementation costs, including promotions and incentives for various programs, as originally approved for deferral by the PUCN effective November 2009. While recovery of initial program costs was approved as part of the most recent general rate case, amounts incurred subsequent to May 2012 (the certification period) continued to be deferred. Approved rates for thepost-May 2012 costs deferred (including previously expected program expenditures for 2016) became effective January 2016 and resulted in annualized margin increases of $2 million in northern Nevada and $8.5 million in southern Nevada. Then, as part of the ARA filing approved in December 2016, Southwest modified rates, effective January 2017, expected to result in annualized margin decreases of $1.4 million in northern Nevada and $1.3 million in southern Nevada to return over-collected balances. There is, however, no anticipated impact to net income overall from these decreases as amortization expense will also be reduced.
July 2022.
Expansion and Economic Development Legislation.Legislation. In February 2015,January 2016, final regulations were approved by the PUCN associated with legislation (“SB 151”) waspreviously introduced and signed into law in Nevada directing the PUCN to adopt regulations authorizingNevada. The legislation authorized natural gas utilities to expand their infrastructure consistent with a program of economic development. This includes providing gasto provide service to unserved and underserved areas in Nevada, as well as attracting and retaining utility customers and accommodating the expansion of existing business customers. SB 151 was signed into law in May 2015. The draft regulations were reviewed by the Legislative Council Bureau and final regulations were approved by the PUCN in January 2016.Nevada.
In November 2017, Southwest filed for preapproval of a project to extend service to include the service territory of Mesquite, Nevada, in accordance with the SB 151 regulations. This project proposesUltimately, the extensionPUCN issued an order approving Southwest’s proposal for the expansion, and Southwest provides periodic updates and adjusts the rates to recover the revenue requirement associated with the investments to serve customers as part of existing facilitiesSouthwest’s ARA filings and rate case proceedings. As of September 2022, more than 42 miles of natural gas infrastructure have been installed throughout the Mesquite expansion area.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
In June 2019, Southwest filed for preapproval to
Mesquite at an estimated cost of approximately $30 million. The cost is proposedconstruct the infrastructure necessary to
be recovered through a volumetric surcharge on all southern Nevada customers. A second phase is then proposed to convert existing homes toexpand natural gas service
which willto Spring Creek, near Elko, Nevada, and to implement a cost recovery methodology to recover the associated revenue requirement consistent with the SB 151 regulations. The expansion facilities consist of a high-pressure approach main and associated regulator stations, an interior backbone, and an extension of the distribution system from the interior backbone. The total capital investment was estimated to be
charged as$61.9 million. A stipulation was reached with the parties and approved by the PUCN in December 2019, including a
separate surcharge to Mesquite customers only. A decision on this proposal is expected within the required210-day time period for filings of this type.Federal Energy Regulatory Commission (“FERC”) Jurisdiction
2018 Expansion. In response to growing demand in the Carson City and South Lake Tahoe areas of northern California andrate recovery allocation amongst northern Nevada, Paiute Pipeline Company (“Paiute”) evaluated shipper interestElko, and Spring Creek expansion customers. Construction began in acquiring additional transportation capacity and executed precedent agreements for incremental transportation capacity with Southwest during the third quarter of 2016. 2020, and service commenced to the first Spring Creek customers in December 2020. As of September 2022, approximately 48 miles of natural gas infrastructure have been installed throughout the Spring Creek expansion area, and is anticipated to be completed in 2026.
Carbon Offset Program. In October 2016, Paiute initiatedJune 2021, Southwest filed an application seeking approval to offer apre-filing review process 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 PUCN in December 2021 approving Southwest’s proposal. The program is offered for customer participation starting in the fourth quarter of 2022.
FERC Jurisdiction
Great Basin 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 file a rate case no later than May 31, 2025.
MountainWest Overthrust Pipeline. On September 22, 2022 the FERC issued an order initiating an investigation, pursuant to section 5 of the Natural Gas Act, to determine whether rates currently charged by MountainWest Overthrust Pipeline, LLC (“Overthrust Pipeline”) are just and reasonable and setting the matter for hearing. The FERC directed Overthrust Pipeline to file a cost and revenue study by December 6, 2022. Provided Overthrust Pipeline does not settle the matter earlier, a hearing would be held on July 18, 2023, an expansion project, which was approved duringinitial decision from the same month. In July 2017, a certificate application was filed, which includedFERC administrative law judge would be due October 31, 2023, and an applicant environmental assessment. The project is anticipatedorder from the FERC would be expected in mid to consist of 8.5 miles of additional transmission pipeline infrastructure at an approximate cost of $18 million. Iflate 2024. Any rate impact from this proceeding would be applied prospectively following the process progresses as planned, a decision should be received by April 2018 and the additional facilities could be in place by the end of 2018.42
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
FERC’s order.
The rate schedules in all of Southwest’s service territories contain provisions that permit adjustmentsadjustment 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. AtBalances are recovered from or refunded to customers on an ongoing basis with interest. As of September 30, 2017,2022, under-collections in Arizona and Northern Nevadaeach of Southwest’s service territories resulted in an asset of approximately $6.2 million and over-collections in Southern Nevada and California resulted in a liability of $15$381 million on the Company’s and Southwest’s condensed consolidated balance sheets.Condensed Consolidated Balance Sheets. See also Deferred Purchased Gas cost rates paid to suppliers have been higher than amounts recovered from customers during the first nine monthsCosts in Note 1 – Background, Organization, and Summary of 2017, resultingSignificant Accounting Policies in fluctuations since December 31, 2016. Tariff rates have been adjusted in all jurisdictions during this period. 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
profitoperating 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):
| | | | | | | | | | | | |
| | September 30, 2017 | | | December 31, 2016 | | | September 30, 2016 | |
Arizona | | $ | 1,324 | | | $ | (20,349 | ) | | $ | (34,425 | ) |
Northern Nevada | | | 4,906 | | | | (3,339 | ) | | | (10,326 | ) |
Southern Nevada | | | (13,711 | ) | | | (66,788 | ) | | | (77,402 | ) |
California | | | (1,260 | ) | | | 2,608 | | | | (1,246 | ) |
| | | | | | | | | | | | |
| | $ | (8,741 | ) | | $ | (87,868 | ) | | $ | (123,399 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
(Thousands of dollars) | | September 30, 2022 | | December 31, 2021 | | September 30, 2021 |
Arizona | | $ | 269,811 | | | $ | 214,387 | | | $ | 191,907 | |
Northern Nevada | | 15,619 | | | 12,632 | | | 4,924 | |
Southern Nevada | | 94,707 | | | 55,967 | | | 38,964 | |
California | | 1,214 | | | 8,159 | | | 5,032 | |
| | $ | 381,351 | | | $ | 291,145 | | | $ | 240,827 | |
Not included in the PGA balances table above are $3.7 million at September 30, 2022 and $5.7 million at December 31, 2021 in deferred purchased gas cost liabilities for MountainWest.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
Capital Resources and Liquidity
Cash
Historically, cash on hand and cash flows from operations
in the past twelve months have
generally provided
the majoritya substantial portion of cash used in investing activities (primarily for construction expenditures and property additions). In recent years,
certainSouthwest has undertaken significant pipe replacement
has been accelerated to take advantage of bonus depreciation tax incentives andactivities to fortify system integrity and reliability,
notablyincluding on an accelerated basis in association with
newcertain gas infrastructure replacement
programsprograms. This activity has necessitated the issuance of both debt and equity securities to supplement cash flows from operations. The Company, in executing on its plans to fund the MountainWest acquisition, initially funded the transaction through short-term borrowings, which was expected to be refinanced through a multi-pronged permanent financing plan, some of which was executed during the first quarter of 2022 as
discussed above. During this same time, benefits were derivedthe Company used $452 million in net proceeds from
debt refinancing and strategic debt redemptions.its underwritten offering of common stock to repay a portion of such short-term borrowings. The term loan for the MountainWest acquisition was amended in September 2022 to extend the maturity date to December 2023. The Company’s capitalization strategy is to maintain an appropriate balance of equity and debt to
maintain strongpreserve investment-grade credit ratings, which
shouldhelp minimize interest costs.
Investment-grade credit ratings have been maintained following the acquisition.
Southwest Gas Holdings, Inc.:
Operating Cash Flows.Cash flows provided byfrom consolidated operating activities decreased $179increased $252 million in the first nine months of 20172022 as compared to the same period of 2016.2021. The declineimprovement in operating cash flows was primarily attributable toresulted from the change in deferred purchased gas costs, noted above. Referincluding amounts incurred and deferred, as well as impacts related toResults when amounts are incorporated in customer bills to recover or return deferred balances. The prior period also included a $50 million discretionary supplemental contribution to the noncontributory qualified retirement plan (reflected as a change in other liabilities and deferred credits). Other impacts include changes in components of Naturalworking capital overall.
The corporate and administrative expenses/outflows for Southwest Gas
OperationsHoldings, Inc. in the nine- and
Rates twelve-month periods ended September 30, 2022 include outlays related to shareholder activism and Regulatory Proceedings.the Strategic Review, in addition to outlays related to expenditures/financing costs for the MountainWest acquisition.
Investing Cash Flows.Cash used in consolidated investing activities increased $35decreased $710 million in the first nine months of 20172022 as compared to the same period of 2016.2021. The change was primarily due to increased constructionCenturi’s acquisition of Riggs Distler in 2021 (see Note 8 - Business Acquisitions). The overall decrease was offset by an increase in capital expenditures in both the natural gas operations segment, including scheduleddistribution and accelerated replacement activity.utility infrastructure services segments. The priorcurrent period also included an outflowa post-closing payment of $17$18.8 million to facilitate a construction servicesin association with the Mountain West acquisition.
Financing Cash Flows.Net cash provided by consolidated financing activities increased $195 milliondecreased $1.1 billion in the first nine months of 20172022 as compared to the same period of 2016.2021. The increasechange was primarily due to activity under theborrowings associated with Centuri’s acquisition of Riggs Distler in 2021. The agreement provided for a $1.145 billion secured term loan facility and a $400 million secured revolving credit facility, which in addition to funding the Riggs Distler acquisition, refinanced Centuri’s previous $590 million loan facility.
Additionally contributing to the change were borrowings by Southwest, including the March 2021 Term Loan to initially finance a gas cost runup caused by the 2021 freeze event in and
commercial paper program (an increase in borrowings inaround the
current-year nine-month periodcentral U.S. due to Winter Storm Uri and the
repayment of borrowings in the prior-year nine-month period). The prior period included proceeds in utility operations from theAugust 2021 issuance of $300 million in
senior notes. The Company also issued approximately $12 million during 2017notes, as well as borrowings under the Company’s credit facility, offset by repayment of amounts under Southwest’s facility in
stock under its Equity Shelf Program. See alsoNote 5 – Common Stock, and the discussion below. The first nine months of 2017 includes the August 2017 $23 million purchase of the previous owners’ interest in Centuri. See alsoNote 9 – Construction Services Redeemable Noncontrolling Interest for additional information.43
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
Dividends paid increased2021; by comparison, in the first nine months of 2017 as compared to the same period of 2016 as a result of an increase2022, financing activities were largely undertaken in the quarterly dividend rate and an increaseconcert with reductions in the number of shares outstanding.
other borrowings. The Company issued approximately 103,000 additional sharesreduced its 364-day Term Loan facility (utilized to finance the MountainWest acquisition) through net proceeds of $452 million from the issuance of common stock collectively throughin an underwritten public offering in the Restricted Stock/Unit Plancurrent year. Proceeds from other equity issuances by the holding company were nominal in 2022 (and those in 2021 were contributed to Southwest). Furthermore, while debt proceeds were received by Southwest’s March 2022 issuance of $600 million in notes, it also redeemed, in February 2022, $25 million 7.78% series Medium-term notes then maturing, as well as $250 million in notes maturing in April 2022. Southwest also repaid (during 2022) $25 million of amounts outstanding on the March 2021 Term Loan utilized to finance the gas cost runup in 2021, and paid down the Management Incentive Plan.
Southwest Gas Corporation:
Operating Cash Flows.Cash flows provided by operatingbalance existing at the time under its credit facility. The Company had higher borrowings under its credit facility in the current period given its expenditures for shareholder activism and settlement activities, decreased $172 million inalong with the Strategic Review. Centuri’s line of credit and term loan facility borrowings during the first nine months of 2017 as compared to the same period of 2016. The decline in operating cash flows was primarily attributable to the change in deferred purchased gas costs as discussed above. Refer toResults of Natural Gas Operations andRates and Regulatory Proceedings.
Investing Cash Flows.Cash used in investing activities increased $68 million2021 exceeded amounts in the first nine months of 2017 as compared tocurrent period. Dividends paid in 2022 were higher than during the samecomparative period of 2016. The change was primarily due to additional construction expenditures, as indicated above.
Financing Cash Flows.Net cash provided by financing activities increased $211 million in the first nine months of 2017 as compared to the same period of 2016. The increase was primarily due to activity under the credit facility and commercial paper program (an increase in borrowings in the current-year nine-month period and the repayment of borrowings in the prior-year nine-month period). The prior period included proceeds from the issuance of $300 million in senior notes as discussed above. The current period included capital contributions from Southwest Gas Holdings, Inc.
2021.
The capital requirements and resources of the Company generally are determineddetermined independently for the natural gas operations and construction servicesindividual business segments. Each business activitysegment is generally responsible for securing its own financing sources. However, the holding company may raise funds through stock issuances or other external financing sources in support of each business segment.
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
Southwest Gas Corporation:
Operating Cash Flows. Cash flows provided by operating activities increased $214 million in the first nine months of 2022 as compared to the same period of 2021. The improvement in operating cash flows was primarily attributable to the impacts related to deferred purchased gas costs (described above), as well as to other working capital changes. Gas costs incurred were higher in both periods compared to earlier recent historical periods, and while gas costs incurred in the first nine months of 2022 were higher than during 2021, collections from customers in the 2022 period were substantially higher than collections during the nine-month period of 2021, which includes the effects of when gas costs are incorporated into customer rates.
Investing Cash Flows. Cash used in investing activities increased $56 million in the first nine months of 2022 as compared to the same period of 2021. The change was primarily due to increases in capital expenditures in 2022, partly offset by an increase in collection of customer advances for construction 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 activities decreased $253 million in the first nine months of 2022 as compared to the same period of 2021. The decline was primarily due to the impacts cited above, including that the 2021 period included proceeds to finance gas purchases during Winter Storm Uri; by comparison, in 2022, financing proceeds were utilized to repay other amounts due. As indicated, Southwest issued $600 million in notes in the first quarter of 2022, and paid down amounts then outstanding under its credit facility and redeemed $250 million in notes maturing in April 2022. Southwest also redeemed $25 million 7.78% series Medium-term notes that matured in February 2022, and $25 million of amounts outstanding under the March 2021 Term Loan used to fund increased gas purchased costs during the 2021 freeze event. It also borrowed additional amounts under its credit facility during 2022 (after having paid down amounts earlier in the year), whereas it repaid amounts in 2021. However, during the first nine months of 2021, Southwest issued $300 million in notes. See Note 5 – Debt. Furthermore, parent capital contributions from equity issuances in 2021 have not recurred in 2022, while dividends paid to the parent holding company were higher in the current period.
Gas Segment Construction Expenditures, Debt Maturities, and Financing
During the twelve-month period ended September 30,
2017,2022, construction expenditures for the natural gas
operationsdistribution segment were
$515 million.$672 million (not including amounts incurred for capital expenditures not yet paid). The majority of these expenditures represented costs associated with
scheduled and acceleratedthe replacement of existing transmission, distribution, and general
plant. Cash flows from operating activities of Southwest were $337 million during this timeplant to fortify system integrity and
provided approximately 57% of construction expenditures and dividend requirements.Southwestreliability.
Management estimates natural gas segment construction expenditures during the three-yearfive-year period ending December 31, 20192026 will be between $1.6approximately $2.5 billion and $1.8to $3.5 billion. Of this amount, approximately $570$650 million to $675 million is expected to be incurred in 2017.during calendar year 2022. Southwest plans to continue as appropriate, to request regulatory support to undertake projects, or to accelerate projects that improveas necessary, for the improvement of system flexibility and reliability, (including replacement of early vintage plastic and steel pipe). This includes the recent approvalor to complete accelerated replacement projects in Nevada of $57.3 million and $65.7 million in 2017 and 2018, respectively. It also incorporates programs included in the recently approved Arizona general rate case settlement (the continuation of the COYL program and implementation of a vintage steel pipe replacement program).expand, where relevant, to unserved or underserved areas. Southwest may expand existing, or initiate new, programs. If efforts continue to be successful, significantSignificant replacement activities are expected to continue well beyond the next few years. See alsoRates and Regulatory Proceedings for discussion of Nevada infrastructure, Arizona COYL, and an LNG facility.. During the three-year period, cash flows from operating activities of Southwest are expected to provide approximately 60% to 70%69% of the funding for gas operations of Southwest and total construction expenditures and dividend requirements. As of September 30, 2022, Southwest had the March 2021 Term Loan with an outstanding balance of $225 million, due in March 2023. Any additional cash requirements, including construction-related, and pay down or refinancing of debt, are expected to be provided by existing credit facilities, equity contributions from the Company, and/or other external financing sources. The timing, types, and amounts of any 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 couldmay include the issuance of debt securities, bank and other short-term borrowings, and other forms of financing.In March 2017, the Company filed with the Securities Exchange Commission (“SEC”) an automatic shelf registration statement for the offer and sale of up to $150 million of common stock from time to time inat-the-market offerings under the prospectus included therein and in accordance with the Sales Agency Agreement, dated March 29, 2017, between the Company and BNY Mellon Capital Markets, LLC (the “Equity Shelf Program”). Sales of the shares will
44
| | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
continue to be made at market prices prevailing at the time of sale. 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 Southwest serves.
During the nine months ended September 30, 2017, 147,077 shares were issued inat-the-market offerings at an average price of $80.07 per share with gross proceeds of $11.8 million, agent commissions of $118,000, and net proceeds of $11.7 million. SeeNote 5 – Common Stock for more information.
Bonus Depreciation
In December 2015, the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”) was enacted extending the 50% bonus depreciation tax deduction for qualified property acquired or constructed and placedin-service during 2015 (and additional years as noted below) as well as other tax deductions, credits, and incentives. The bonus depreciation tax deduction will be phased out over five years. The PATH Act provides for a 50% bonus depreciation tax deduction in 2015 through 2017, 40% in 2018, 30% in 2019, and no deduction after 2019. Based on forecasted qualifying construction expenditures, Southwest estimates the bonus depreciation provision of the PATH Act will defer the payment of approximately $29 million of federal income taxes for 2017, resulting in a minimal amount of federal income tax being paid.
Dividends are payable on the Company’s common stock at the discretion of the Board of Directors (“Board”).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, and expected external funding needs, our payout ratio, and our ability to maintain stronginvestment-grade credit ratings and liquidity. The Company has paid dividends on its common stock since 1956 and has increased that dividend each year since 2007.2007. In February 2017,2022, the Board elected to increase the quarterly dividend from $0.45$0.595 to $0.495$0.62 per share, representing a 10% 4.2% increase, effective with the June 20172022 payment. The Board currently targets a payout ratio of 55% to 65% of consolidated earnings per share.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
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
general factors (some of which are out of the control of the Company) that could significantly affect liquidity in
the future
years include: variability of natural gas prices, changes in
the ratemaking policies of regulatory commissions, regulatory lag, customer growth in the natural gas
segment’s service territories,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, 2017,2022, the combined balance in the PGA accounts totaled an over-collectionunder-collection of $8.7 million. See$381 million. See PGA Filingsfor more information. In March 2017,2022, Southwest Gas Holdings, Inc. entered intoamended the $250 million March 2021 Term Loan, extending the maturity date to March 21, 2023. As noted above, 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 March 2021 Term Loan was extended as a result of the current gas cost environment and management’s funding plans for purchases. At September 30, 2022, there was $225 million outstanding under the March 2021 Term Loan.
In March 2022, Southwest issued $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 the remaining net proceeds used for general corporate purposes.
Southwest has a credit facility, with a borrowing capacity of $100$400 million, thatwhich expires in March 2022. The Company intends to utilize this facility for short-term financing needs. At September 30, 2017, $27.5 million was outstanding on this facility.In March 2017,April 2025. Southwest Gas Corporation amended its credit facility, increasing the borrowing capacity from $300 million to $400 million, and extended the term of the facility from March 2021 to March 2022. Southwest continues to designatedesignates $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 t
he credit facility (including a commercial paper program, as noted below)program) during the first nine months of 20172022 was $150 million. AtThe maximum amount outstanding on the short-term portion of the credit facility during the first nine months of 2022 was $85 million. As of September 30, 2017, $1502022, $138 million was outstanding on the long-term portion of this credit facility and $83 millionnone was outstanding on the short-term portion of this credit facility.portion. The creditcredit facility can be used as necessary to meet liquidityliquidity requirements, including temporarily financing under-collected PGA balances, if any, or meeting the refund needs of over-collected balances. ThisThe credit facility has been45
| | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
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.
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 2022 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, 2017, 2022, there were no borrowings were outstanding under this program. Centuri has a $300 millionsenior secured revolving credit and term loan facility that is scheduledmulti-currency facility. The line of credit portion comprises $400 million; associated amounts borrowed and repaid are available to expire in October 2019.be re-borrowed. The term loan facility portion had provided approximately $1.145 billion in financing. The term loan initial limitfacility 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 approximately $150 million, which was reached in 2014 and; $107 million was outstanding (after repayments)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. Centuri assets securing the facility at September 30, 2017. The secured revolving credit facility portion also has a limit of $150 million; amounts borrowed and repaid under this portion of the facility are available to bere-borrowed.2022 totaled $2.6 billion. The maximum amount outstanding on the creditcombined facility during the first nine months of 20172022 was $104 million. At$1.2 billion. As of September 30, 2017, $81.32022, $151 million was outstanding on the secured revolving credit facility, in addition to $1.009 billion that was outstanding on the term loan portion of the facility. Also at September 30, 2017,2022, there was approximately $52$186 million, net ofof letters of credit, available for borrowing under the line of credit. On November 4, 2022, Centuri amended the financial covenants of the revolving credit facility to increase the maximum total net leverage ratio during the period from December 31, 2022 through December 31, 2023. The following table sets forthCredit Facility Amendment also transitioned the ratios of earnings to fixed chargesinterest rate benchmark for the Company. Duerevolving credit facility from LIBOR to SOFR. The applicable margin for the revolving credit facility now ranges from 1.0% to 2.5% for SOFR loans and from 0.0% to 1.5% for CDOR and “base rate” loans, depending on Centuri’s total net leverage ratio. Further, the Credit Facility Amendment increases a letter of credit sub-facility from $100 million to $125 million. The Credit Facility Amendment did not modify any terms of the term loan facility.
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
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 September 30, 2022, $156 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. In March 2022, the Company used net proceeds from the issuance of common stock (see below) to repay a portion of borrowings under the Term Loan Facility. On September 26, 2022 (the “Amendment Date”), the Company entered into Amendment No. 1 to the
seasonal natureTerm Loan Facility. The Amendment, among other things, (1) extended the maturity date of the
Company’s business, these ratios are computedTerm Loan to December 30, 2023, and (2) replaced LIBOR interest rate benchmarks with SOFR interest rate benchmarks. There was $1.15 billion outstanding under this Term Loan Facility as of September 30, 2022. As part of the Amendment, the Company paid a non-refundable upfront fee in an amount equal to 0.10% of the aggregate principal amount outstanding as of the Amendment Date, and will pay additional fees based on
a twelve-month basis: | | | | | | | | |
| | For the Twelve Months Ended | |
| | September 30, 2017 | | | December 31, 2016 | |
Ratio of earnings to fixed charges | | | 3.50 | | | | 3.46 | |
Earnings are defined as the sumany principal balance outstanding on March 31, 2023, June 30, 2023, and September 30, 2023 of pretax income plus fixed charges. Fixed charges consist of all interest expense including capitalized interest,one-third of rent expense (that approximates the interest component of such expense)0.10%, 0.15%, and 0.20%, respectively. Management intends to pay off the remainder of the Term Loan Facility through the issuance of long-term debt or equity securities or using the proceeds from a sale of MountainWest and/or Centuri. 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 million 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
amortized debt costs.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 Facility 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 third 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 September 30, 2022. See Note 4 – Common Stock for more information.
Interest rates for Centuri’s term loan contain LIBOR-based rates. Certain LIBOR-based rates were discontinued as a benchmark or reference rate after 2021, while other LIBOR-based rates are scheduled to be discontinued after June 2023. As of September 30, 2022, the Company had $1.009 billion in aggregate outstanding borrowings under Centuri’s term loan facility. In order to mitigate the impact of a LIBOR discontinuance on the Company’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 can provide no assurances as to the impact a LIBOR discontinuance will have on its financial condition or results of operations. Any alternative rate may be less predictable or less attractive than LIBOR.
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 expressions are generally used and intended to identify forward-looking statements. For example, statements regarding plans to review strategic alternatives to maximize stockholder value, refinance near-term maturities, to separate Centuri or other entities from the Company, those regarding operating margin patterns, customer growth, the composition of our customer base, price volatility, seasonal patterns, payment of debt, interest savings, the Company’s COLI strategy, replacement market and new construction market, our intent and ability to complete planned acquisitions or divestitures 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
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
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,
amountthe impact of recent Pipeline and Hazardous Materials Safety Administration rulemaking, the amounts and timing for completion of estimated future construction expenditures,
including the LNG facility in southern Arizona, the cost of the 2018 Paiute expansion project in northern Nevada and northern California,plans to pursue infrastructure programs or programs under SB 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
2017 or future period revenues from regulatory rate proceedings including amounts
resultingrequested or settled from
the settled Arizonarecent and ongoing general rate
case,cases or other regulatory proceedings, 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
commonvarious financing instruments and stock under the
Equity Shelf Program,existing at-the-market equity program or otherwise, future dividend increases and the Board’s current target dividend payout ratio, pension and
post-retirementpostretirement benefits, certain
benefitsimpacts of tax acts, the effect of any
other rate changes or regulatory proceedings, contract or construction change order negotiations, impacts of accounting standard updates,
infrastructure replacement mechanisms and the COYL program, statements regarding future gas prices, gas purchase contracts and
derivative financial instruments,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
46
| | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
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 resumed restriction by government officials or otherwise, including impacts on employment in our territories, impacts related to supply chains, the health impacts to our customers and employees due to the virus or virus variants or efficacy of vaccines, the ability to recover costs throughcollect on customer accounts due to the PGA mechanismssuspension or other regulatory assets,lifted moratorium on late fees or service disconnection in any or all jurisdictions, 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, the impact of a resurgence of the virus or its variants, 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 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 impact of other regulatory proceedings, including the MountainWest Overthrust Section 5 rate case before the FERC, 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 and prices, impacts of inflation, 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 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 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 constructionutility 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, and 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 reduction, the recent work stoppage,result of productivity inefficiencies from regulatory requirements or otherwise, delays in commissioning individual projects, acquisitions and divestitures 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 or divestiture activity or other strategic endeavors, impacts by divestiture or otherwise in the event the fair value of one or more reporting units/segments, components thereof, or other assets, are below their carrying values, the impact on our stock price, costs, or businesses from agreements,
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
actions or disruptions related to 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, seeItem 1A. Risk FactorsandItem 7A. Quantitative and Qualitative Disclosures About Market Risk in the Annual Report onForm 10-K for the year ended December 31, 2016.2021, and as updated in quarterly reports, including in association with this Quarterly Report on Form 10-Q.
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 assumesand 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 |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SeeItem 7A. Quantitative and Qualitative Disclosures about Market Risk in the 20162021 Annual Report on Form10-K filed with the SEC. No material changes have occurred related to the disclosures about market risk. ITEM 4. | CONTROLS AND PROCEDURES |
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.
Based on the most recent evaluation, as of September 30,
2017,2022, management of Southwest Gas Holdings, Inc.
, including the Chief Executive Officer and
Chief Financial Officer, believe the Company’s disclosure controls and procedures are effective at attaining the level of reasonable assurance noted above.47
| | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2017 |
There have been no changes in the Company’s internal controls over financial reporting (as defined in Rules13a-15(f) and15d-15(f) of the Exchange Act) during the third quarter of 2017 that have materially affected, or are likely to materially affect, the Company’s internal controls over financial reporting.
Based on the most recent evaluation, as of September 30, 2017, management of Southwest Gas Corporation, including the Chief Executive Officer and Chief Financial Officer, believebelieves 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
controlscontrol over financial reporting (as defined in Rules
13a-15(f) and
15d-15(f) of the Exchange Act) during the third quarter of
20172022 that have materially affected, or are likely to materially affect
Southwest’sthe Company’s internal
controlscontrol over financial reporting.
PART
II—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 withinNote 1 – Background, Organization, and Summary of Significant Accounting Policies for ongoing and dismissed litigation, including litigation filed by certain stockholders and by funds managed by Carl C. Icahn. ITEM 1A. Described below is a risk factor 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. This risk factor supplements, and does not replace, the Risk Factors and other disclosures made in our Annual Report on Form 10-K filed March 1, 2022 and our Quarterly Reports on Form 10-Q filed May 10, 2022 and August 9, 2022.
Operational Risks
Certain of our costs, such as operating expenses (including labor, fuel, and materials) at Southwest, Centuri, and MountainWest, and interest and general and administrative expenses at all three segments and the Company could be adversely impacted by periods of heightened inflation, which could have an adverse impact on our results of operations.
ITEMS 1A through 3. None. | | | | | | | | |
| 53 | |
ITEM 4. | MINE SAFETY DISCLOSURESNot applicable. | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
In recent months, the consumer price index has increased substantially and may continue to remain at elevated levels for an extended period of time. Federal policies and recent global events, such as the volatility in prices of oil and natural gas, and the conflict between Russia and Ukraine, may have exacerbated, and may continue to exacerbate, increases in the consumer price index. In addition, during periods of rising inflation, variable interest rates and the interest rates of any debt securities we, Southwest, MountainWest, or Centuri issue will likely be higher than more recent debt issuances, which will further tend to reduce returns to our stockholders. A sustained or further increase in inflation could have a material adverse impact on our operating expenses incurred in connection with, among others, the cost of natural gas supply, labor, products, and services required for operations, maintenance and capital improvements at Southwest and MountainWest, and fuel, labor, and materials costs at Centuri, as well as general administrative expenses for all three segments.
With regard to Southwest, rate schedules in each of its service territories contain purchased gas adjustment clauses which permit Southwest to file for rate adjustments to recover increases in the cost of purchased gas. Increases in the cost of purchased gas have no direct impact on our profit margins but do affect cash flows and can therefore impact the amount of our capital resources. In order to help cope with the effects of inflation on its operations, Southwest may file requests for rate increases to cover the increased cost of purchased gas or other types of expenditures noted above. However, there can be no assurance that Southwest will be able to obtain adequate and timely rate relief to offset the effects of inflation and any non-recovery of costs or regulatory lag will reduce our cash flows and earnings. As a result, during inflationary periods in which the inflation rate exceeds the rate increases applicable to purchased gas, or other types of expenditures, we may not adequately mitigate the impact of inflation, which may adversely affect our business, financial condition, results of operations, and cash flows.
Additionally, inflationary pricing has had and may continue to have a negative effect on the construction costs necessary to complete projects at Centuri, particularly with respect to fuel, labor, and materials costs discussed above. Centuri is experiencing pressures on fuel, materials, and certain labor costs as a result of the inflationary environment and current general labor shortage, which has resulted in increased competition for skilled labor and wage inflation. Centuri has not been able to, and may not be able to, fully adjust its contract pricing to compensate for these cost increases, which has affected, and may continue to affect, Centuri’s profitability and cash flows. Inflationary pressures and related recessionary concerns in light of governmental and central bank efforts to mitigate inflation could also cause uncertainty for Centuri’s customers and affect the level of their project activity, which could also adversely affect Centuri’s profitability and cash flows.
As inflation persists, the Federal Reserve has and may continue to raise benchmark interest rates, which likely will cause our borrowing costs to increase over time. As a result of the inflationary factors discussed above affecting the Company, Southwest, MountainWest, and Centuri, our business, financial condition, results of operations, cash flows, and liquidity could be adversely affected over time.
ITEMS 2 through 3. None.
ITEM 4. MINE SAFETY DISCLOSURES Not applicable.
ITEM 5. OTHER INFORMATION None.
ITEM 5. | OTHER INFORMATIONNone. | | | | | | | |
| 54 | |
| | | | | | | | |
SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 2022 |
ITEM 6. EXHIBITS
The following documents are filed, or furnished, as applicable, as part of this report onForm 10-Q: | | | | | | | | | | | | | | |
Exhibit 10.1 | - | Amendment No. 1 to the 364-Day Term Loan Credit Agreement, dated November 1, 2021, with the lenders party thereto, JPMorgan Chase Bank, N.A, as Administrative Agent, Bank of America, N.A. as Syndication Agent, JPMorgan Chase Bank, N.A. and BofA Securities, Inc. as Joint Lead Arranger and Joint Bookrunner, and MUFG Bank, Ltd. as Documentation Agent. Incorporated herein by reference to Exhibit 10.1 to Form 8-K dated September 29, 2022, File No. 001-37976. | | |
| | | | |
Exhibit 3(i)10.2 | - | —
| | | | |
| | | | |
Exhibit 3(ii)10.3 | - | —
| | | | |
Exhibit 10.01* | | —
| | Centuri 2017 Short-Term Incentive Plan. |
Exhibit 12.0110.4# | - | —
| | Computation of Ratios of Earnings to Fixed Charges – Southwest Gas Holdings, Inc. |
| | | | |
Exhibit 31.0131.01# | - | —
| | | | |
| | | | |
Exhibit 31.0231.02# | - | —
| | | | |
| | | | |
Exhibit 32.0132.01# | - | —
| | | | |
| | | | |
Exhibit 32.0232.02# | - | —
| | | | |
Exhibit 101.INS | | —
| | XBRL Instance Document |
Exhibit 101SCH | | —
| | XBRL Schema Document |
Exhibit 101.CAL | | —
| | XBRL Calculation Linkbase Document |
Exhibit 101.DEF | | —
| | XBRL Definition Linkbase Document |
Exhibit 101.LAB | | —
| | XBRL Label Linkbase Document |
Exhibit101.PRE | | —
| | XBRL Presentation Linkbase Document |
* | Management Incentive Plan
|
48
| | |
Exhibit 101# | - | The following materials from the Quarterly Report on Form 10-Q of Southwest Gas Holdings, Inc. and Southwest Gas Corporation for the quarter ended September 30, 2022, were formatted in Inline XBRL (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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104# | | Cover Page Interactive Data File (embedded within the Inline XBRL document). | | |
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# Filed herewith. | | |
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SOUTHWEST GAS HOLDINGS, INC. | | Form 10-Q |
SOUTHWEST GAS CORPORATION | | September 30, 20172022 |
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) |
Date:
Dated: November
7, 20179, 2022 | | |
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/s/ GREGORY J. PETERSON LORI L. COLVIN |
Gregory J. PetersonLori 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, 2022
Date: November 7, 2017
/s/ LORI L. COLVIN |
/s/ GREGORY J. PETERSON Lori L. Colvin |
Gregory J. Peterson |
Vice President/Controller and Chief Accounting Officer |
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