Southwest Gas Holdings, Inc. quarterly report, Q2 FY2022

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Southwest Gas Holdings, Inc. — Q2 2022 Form 10-Q

Business context and period. This combined, unaudited filing covers the quarter and six months ended June 30, 2022, for Southwest Gas Holdings and its wholly owned natural gas utility, Southwest Gas Corporation. Holdings reports three segments: natural gas distribution, Centuri utility infrastructure services, and MountainWest pipeline and storage. MountainWest was acquired in December 2021, and Centuri acquired Riggs Distler in August 2021, limiting comparability with 2021.

Key financial results

Unless stated otherwise, figures below are for Southwest Gas Holdings consolidated and are in millions of dollars.

  • Revenue: Q2 revenue was $1,146.1 million, up 39.5% from $821.4 million. First-half revenue was $2,413.5 million, up 41.4% from $1,707.3 million. Growth reflects the acquired MountainWest and Riggs Distler businesses as well as activity in existing operations.
  • Profit and margins: Q2 operating income fell to $45.7 million from $59.3 million; the operating margin was approximately 4.0%, versus 7.2%. Holdings reported a Q2 net loss attributable to the company of $6.6 million, or $0.10 per diluted share, versus net income of $25.1 million, or $0.43 per share. First-half attributable net income was $89.6 million, or $1.40 per diluted share, down from $142.4 million, or $2.45 per share. Natural gas distribution operating margin, a company-defined non-GAAP measure, rose to $231.3 million in Q2 from $216.3 million and to $610.7 million for the first half from $582.2 million.
  • Segment performance: Q2 contributions to consolidated results were a $2.3 million loss from natural gas distribution, $4.7 million from Centuri, and $15.1 million from MountainWest; corporate and administrative activities contributed a $24.1 million loss. Centuri Q2 revenue rose 34% to $706.1 million, but costs, including fuel, subcontractor and equipment-rental costs, pressured results. MountainWest generated $62.1 million of Q2 revenue. For the first half, Centuri contributed a loss of $18.7 million, versus income of $14.3 million a year earlier.
  • Cash flow and investment: First-half operating cash flow was $263.6 million, compared with $1.4 million in 2021; management attributed much of the change to purchased-gas cost deferrals and recovery timing. Investing cash outflow was $365.8 million, including $367.9 million of construction expenditures and property additions. Financing provided $95.4 million. Cash at June 30 was $216.0 million.
  • Debt and liquidity: Holdings reported $4,588.5 million of long-term debt, $41.3 million of current maturities and $1,462.7 million of short-term debt. The short-term balance included $1.15 billion under the term loan used to fund the MountainWest acquisition, due December 30, 2022. The company disclosed a $707 million working-capital deficit and said it lacked sufficient liquidity to repay that loan at maturity without new debt or equity. Management intended to refinance with long-term debt or extend the loan, and considered refinancing probable; it concluded it could meet obligations for at least 12 months from issuance of the financial statements. Southwest Gas Corporation separately reported $2,904.1 million of long-term debt and $225 million of short-term debt.
  • Equity and dividends: In March, Holdings issued 6.325 million shares at $74 per share, receiving approximately $452 million net, primarily to repay acquisition-related borrowing. The quarterly dividend was raised to $0.62 per share from $0.595, effective with the June payment.

Material changes, outlook and risks

  • Operating results weakened despite revenue growth: Q2 operating income and attributable earnings declined year over year. Higher utility O&M, interest expense and corporate costs contributed. Management cited approximately $15 million of transitory Q2 utility O&M costs, including legal claims, uncollectible accounts, customer-support-system stabilization and pipeline integrity work. COLI results also declined $8.3 million year over year.
  • Natural gas distribution benefited from customer growth, Nevada rate relief effective April 1, 2022, and recoveries under Arizona pipe-replacement programs. The Arizona general rate case sought approximately $90.7 million in increased revenue, with a decision anticipated by year-end 2022 and rates expected in Q1 2023. The Nevada rate case resulted in a $14.05 million statewide revenue increase effective April 1, 2022.
  • No earnings guidance is provided in the supplied filing text. The company estimated natural gas distribution construction expenditures of approximately $600–$650 million in 2022 and $2.5–$3.5 billion over 2022–2026. The Board’s stated dividend payout-ratio target was 55%–65% of consolidated earnings per share.
  • Centuri faced customer supply-chain constraints that affected work mix and volumes, along with inflation in fuel, labor, subcontracting and equipment costs. The filing warns these conditions could delay projects, increase costs and reduce margins. Utility operations also face regulatory timing, gas-price and recovery-timing, capital-market, interest-rate and inflation risks.
  • The Board’s strategic review followed shareholder activism and a May 2022 cooperation agreement with the Icahn Group, which included board changes and the completion of its tender offer. On August 3, 2022, after quarter-end, the Board said it would end the strategic review for Holdings and Southwest Gas Corporation, while continuing to review alternatives for MountainWest and Centuri, including a Centuri sale or spin-off. Execution and value outcomes are not assured.
  • Contingencies include a $5 million recorded liability for a 2021 pipeline explosion and injury claims, and a $6.2 million Q2 accrual for a contract dispute. A separate shareholder class-action lawsuit remained pending; the Icahn Group’s earlier suit was dismissed with prejudice under the cooperation agreement.

Most important facts for investors to verify

  • Whether Holdings refinanced or extended the $1.15 billion term loan before its December 2022 maturity, and the resulting cost and terms.
  • Whether the strategic review of MountainWest and Centuri led to a transaction, and how any proceeds or separation would affect debt, earnings and shareholders.
  • How much of reported revenue and growth came from acquisitions versus existing operations, and whether Centuri’s margins recover as supply constraints and inflation evolve.
  • Progress and final outcomes in the Arizona rate case, other regulatory proceedings, and recovery of purchased-gas and infrastructure costs.
  • Developments in the pipeline incident, contract dispute and pending shareholder litigation, including any changes to recorded reserves or insurance recoveries.