Business context and reporting period
Southwest Gas Holdings, Inc. filed this combined Form 10-Q for the quarter ended June 30, 2021; it also reports Southwest Gas Corporation separately. Holdings’ two segments are regulated natural gas operations in Arizona, Nevada, and California, and utility infrastructure services through Centuri. The gas business is seasonal, with earnings generally higher in winter. Unless stated otherwise, amounts below are for Holdings and are in U.S. dollars.
Financial and operating performance
| Metric | Three months ended June 30, 2021 | Six months ended June 30, 2021 |
|---|---|---|
| Total operating revenue | $821.4 million, up 8.5% year over year | $1.707 billion, up 7.1% |
| Operating income | $59.3 million, down from $67.6 million | $232.7 million, up from $215.9 million |
| Net income attributable to Holdings | $25.1 million, down from $38.0 million | $142.4 million, up from $110.5 million |
| Basic earnings per share | $0.43, versus $0.68 | $2.45, versus $2.00 |
| Operating cash flow | Not provided for the quarter separately | $1.4 million, versus $375.1 million |
In Q2, natural gas operating margin, a company-defined non-GAAP measure equal to gas revenue less gas cost, rose to $216.3 million from $195.0 million. Rate relief contributed about $15 million and customer growth about $2 million; higher late-fee revenue also helped. Gas operations’ Q2 net income was $11.4 million versus $11.9 million, as lower other income—principally lower COLI gains—offset margin growth.
Centuri’s Q2 revenue increased to $528.6 million from $494.8 million, but segment contribution to Holdings’ net income fell to $15.1 million from $26.3 million. Expenses increased faster than revenue, reflecting work mix, reduced activity from two significant customers, lower-margin operating efficiencies, and higher fuel and equipment rental costs. Six-month Centuri revenue increased to $892.6 million, while its contribution declined to $14.3 million from $16.1 million.
Balance sheet, cash flow, and liquidity
At June 30, Holdings reported cash of $47.6 million, current assets of $1.007 billion, and current liabilities of $1.272 billion. Long-term debt, including current maturities, plus short-term debt totaled approximately $3.116 billion. Cash was down from $83.4 million at year-end 2020; short-term debt increased to $318 million from $107 million. The filing attributes the sharp decline in six-month operating cash flow primarily to purchased-gas adjustment (PGA) timing and related gas-cost under-collections, as well as other working-capital changes.
Six-month construction expenditures and property additions were $338.0 million for Holdings. Holdings raised $121.3 million net from common-stock issuance during the six months and paid $67.1 million in dividends. Its at-the-market equity program authorized up to $500 million; $70.4 million gross proceeds had been raised under the program by June 30, leaving approximately $429.6 million available. The quarterly dividend was increased to $0.595 per share, and the Board’s stated target payout ratio is 55%–65% of consolidated EPS.
Material changes, outlook, and risks
- Extreme-weather gas costs: February 2021 cold weather drove about $250 million of incremental gas supply costs. Southwest financed this with a 364-day, $250 million term loan due March 2022 and expects recovery through PGA mechanisms. At June 30, the PGA under-collection was $235.1 million, recorded as an asset; collection timing affects liquidity.
- Disputed pipeline charges: A pipeline initially billed $65 million, later reduced to approximately $55 million, for imbalance charges and interest. Southwest disputes the charges and has not recognized a liability. The pipeline sought FERC approval to waive them; approval was pending at filing.
- Planned acquisition: Centuri agreed in June to acquire Drum Parent and its U.S. operations, principally Riggs Distler, for $855 million, subject to adjustments and closing conditions. Closing was expected in Q3 2021, with funding planned through a new Centuri term loan. Either party could terminate if the deal was not completed before October 31, 2021; rating agencies had indicated a possible negative credit-rating impact.
- Capital program and regulation: Management estimated approximately $2.1 billion of natural-gas-segment construction spending for 2021–2023, including about $700 million in 2021. It expected operating cash flows to fund about 50% of gas-segment construction and dividend requirements over that three-year period, with other needs met through debt, equity, or other financing. Rate relief, regulatory recovery and timing remain important to earnings and cash flow.
- COVID-19 and customer collections: The gas-service disconnection moratorium was expected to end in the second half of 2021; late fees had resumed in Arizona and Nevada, with California resumption expected later in 2021. Management said the pandemic had not materially disrupted operations to date, but future effects on collections, projects, and customer demand remained uncertain.
- Other risks and unusual items: Natural-gas recovery timing, regulatory decisions, Centuri’s customer and project mix, weather-dependent storm work, acquisition execution and financing, and variable-rate debt benchmark transition from LIBOR could affect results. A new Southwest customer service system went live in May 2021 and materially changed internal control over financial reporting; management reported controls remained effective.
The filing does not provide formal full-year EPS or revenue guidance. Management notes interim gas results are seasonal and not necessarily indicative of a full year. It also reported that no material market-risk changes had occurred since the 2020 Form 10-K.
Important facts for investors to verify
- Whether the $235.1 million PGA under-collection is recovered on the anticipated schedule and how repayment of the $250 million term loan is funded.
- The outcome of the FERC waiver request for the disputed pipeline charges and any resulting cash or earnings effect.
- Whether the Riggs acquisition closed, its final purchase price and financing terms, and any effect on debt levels or credit ratings.
- Whether Centuri’s revenue growth translates into improved margins, particularly given reduced work from two significant customers and volatile storm-restoration activity.
- Regulatory outcomes and timing for rate relief and recovery of COYL, VSP, customer-system, and pandemic-related costs.
- Customer payment and collection trends as disconnection and late-fee policies change, together with the cash-flow impact of working capital and gas-cost recovery.