Southwest Gas Holdings, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022, compared with the three months ended March 31, 2021, unless otherwise noted. The filing is a combined report for Southwest Gas Holdings, Inc. and its wholly owned subsidiary, Southwest Gas Corporation. Amounts below are in millions of dollars unless stated otherwise.
Business context
Southwest Gas Holdings operates natural gas distribution through Southwest Gas, utility infrastructure services through Centuri, and pipeline and storage through MountainWest. MountainWest was acquired at the end of 2021, so Q1 2022 includes its first quarter of results; this makes year-over-year comparisons reflect a larger business. The company also acquired Riggs Distler through Centuri in August 2021.
Key financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total operating revenue | $1,267.4 | $885.9 |
| Operating income | $168.5 | $173.5 |
| Net income attributable to Holdings | $96.2 | $117.3 |
| Basic and diluted EPS | $1.58 | $2.04 basic; $2.03 diluted |
| Operating cash flow | $186.6 | $(52.5) |
| Construction expenditures and property additions | $(162.8) | $(152.7) |
- Revenue rose 43%, driven in part by higher gas costs passed through to customers, MountainWest, and Centuri growth. Gas-cost recovery mechanisms generally pass commodity costs through without markup, so revenue growth did not translate into higher operating income.
- Operating income fell about 3% and net income attributable to Holdings fell about 18%. Net interest deductions increased to $48.4 million from $24.0 million, while operating expenses also increased.
- Southwest’s regulated operating margin, a company-defined non-GAAP measure, increased to $379.4 million from $365.9 million. Natural gas distribution contributed $111.8 million of net income, versus $118.7 million.
- Centuri reported revenue of $523.9 million, up 44%, but contributed a $23.5 million loss versus a $0.9 million loss a year earlier. Management cited inflationary input costs, higher fuel and subcontractor costs, acquisition-related interest and amortization, and seasonal first-quarter conditions.
- MountainWest contributed $16.9 million of net income on $67.0 million of revenue. Its results included $8.7 million of integration and stand-up costs.
- Operating cash flow improved substantially year over year, mainly due to purchased-gas-cost timing and working-capital changes. Cash and cash equivalents were $624.7 million at March 31, versus $222.7 million at December 31, 2021.
Debt and liquidity
- Holdings reported long-term debt, net of current maturities, of $4,559.8 million, current maturities of $291.1 million, and short-term debt of $1,474.0 million at March 31. The filing reported negative working capital of approximately $584 million.
- A $1.6 billion delayed-draw term loan used to finance the MountainWest acquisition had $1.16 billion outstanding and matures December 30, 2022. Management said the company could not repay it at maturity without new debt or equity and intended to refinance the remaining balance with long-term debt. Management considered refinancing probable, but stated that access to financing could be affected by future conditions.
- Southwest issued $600 million of 4.05% senior notes due 2032 in March. Proceeds were used to repay credit-facility borrowings and, after quarter-end, to redeem $250 million of notes due in April 2022, with remaining funds for general corporate purposes.
- Holdings issued 6.325 million shares in March for net proceeds of approximately $452.3 million, used to reduce the acquisition term loan. The quarter-end share count was approximately 66.85 million, compared with 60.42 million at year-end.
- Southwest’s purchased-gas adjustment accounts showed an under-collection of approximately $368 million at March 31. Recovery timing affects cash flow and liquidity; the filing says gas-cost deferrals and recoveries do not directly affect operating margin.
Outlook, commentary, and notable items
- Management estimated natural gas distribution construction expenditures of $650 million to $700 million in 2022 and $2.5 billion to $3.5 billion over 2022–2026. It expected Southwest operating cash flows to fund approximately 69% of gas-segment funding needs, including construction and dividends, over the stated three-year period.
- The Nevada general rate case was approved, with a $14.05 million statewide revenue increase effective April 1, 2022. Arizona’s pending rate case requested approximately $90.7 million in additional revenue; a decision was anticipated by year-end 2022, with rates expected in Q1 2023.
- In March, the board announced plans to separate Centuri, expected to be a tax-free spin-off, with a target completion within nine to twelve months. In April, the board broadened its review to include a potential company sale, separate business-unit sales, and the Centuri spin-off. The filing cautioned that no transaction or timing was assured.
- After quarter-end, a May 6 cooperation agreement with Carl Icahn included CEO John Hester’s retirement, Karen Haller’s appointment as CEO of Southwest, and Icahn Group board-designation rights. The agreement also addressed the tender offer and dismissal of Icahn’s related lawsuit.
- Southwest had recorded a $5 million liability for an August 2021 pipeline explosion that injured four people and damaged property; the incident remained under investigation. The company estimated its net exposure could equal its $5 million self-insured retention.
- Management described inflation, regulatory rate timing, gas-price and recovery timing, Centuri project mix and customer awards, weather, refinancing access, and strategic-review execution as risks. It said COVID-19 had not significantly disrupted operations to date and was not then expected to materially affect overall liquidity or financial position.
Important facts for investors to verify
- Progress, cost, and terms of refinancing the remaining MountainWest acquisition term loan before its December 2022 maturity.
- Cash-flow effects and recovery schedules for the $368 million purchased-gas under-collection, including changes in gas prices and customer billing.
- Whether Centuri’s margins recover from Q1 losses amid inflation, seasonal conditions, and customer work-volume changes.
- Outcomes and timing of the strategic-alternatives review, including any Centuri separation, sale, or other transaction.
- Regulatory decisions and effective dates for the Arizona and other rate proceedings, and the realized impact of approved rate relief.
- Developments in the pipeline-explosion claims and any changes to the recorded liability or estimated insurance coverage.