Southwest Gas Holdings, Inc. annual report, FY2019

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Southwest Gas Holdings, Inc. — 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. This combined filing covers Southwest Gas Holdings, Inc. and its wholly owned regulated utility, Southwest Gas Corporation; financial statements and MD&A are incorporated by reference rather than reproduced in the supplied filing text.

Business context and reporting period

The company operates two segments: natural gas distribution and transportation in Arizona, Nevada, and California through Southwest Gas, and utility infrastructure services across the U.S. and Canada through Centuri. The utility added 34,000 net customers in 2019, ending the year with approximately 2.081 million customers. Management expected similar customer growth in 2020. The utility’s results are seasonal, generally stronger in winter; Centuri’s activity is typically lower in the first quarter.

Financial metrics

  • Revenue, earnings, margins, and cash flow: The supplied text does not provide clear consolidated or segment totals, year-over-year changes, or margin and cash-flow figures. These statements and the MD&A are incorporated by reference.
  • Debt and interest-rate exposure: Variable-rate debt totaled $715.8 million at year-end 2019, compared with $607.9 million in 2018, excluding specified Nevada industrial development revenue bonds. A hypothetical 1-percentage-point rate change would alter annual interest expense by approximately $7.16 million at the 2019 balance, versus $6.08 million in 2018. These figures do not represent total debt.
  • Liquidity: The filing notes that purchased-gas cost changes affect cash flows and may require short-term borrowing, while PGA mechanisms generally allow recovery of gas costs from customers. No clear year-end cash, liquidity, or operating cash-flow amount is provided in the supplied text.
  • Utility operating indicators: Gas plant, including construction work in progress, was approximately $8 billion. Residential and small-commercial customers represented 84% of utility operating margin in 2019, versus 85% in 2018; transportation represented 13%, versus 12%.
  • Centuri indicators: Approximately 79% of 2019 revenue came from unit-price contracts. Year-end backlog on outstanding fixed-price contracts was approximately $122.8 million; backlog is not a measure of profitability or remaining performance obligations.

Material changes versus prior comparable period

  • Utility customer count rose by 34,000 net additions in 2019. Customer totals and growth for the prior year are not stated in the supplied text.
  • Variable-rate debt increased to $715.8 million from $607.9 million; the filing’s sensitivity estimate for a 1-point rate move also increased.
  • Natural-gas transportation’s share of utility operating margin increased to 13% from 12%, while residential and small-commercial share declined to 84% from 85%.
  • A 233,000-dekatherm southern Arizona LNG facility entered service in December 2019. The prior Enstor storage contract, with a maximum inventory quantity of 600,000 dekatherms, ended in March 2019.
  • Southwest Gas Holdings reincorporated from California to Delaware effective September 20, 2019.

Outlook, commentary, risks, and unusual items

  • Rate cases filed in Arizona in May 2019 and California in August 2019 remained pending at year-end; a Paiute Pipeline FERC rate case filed in May 2019 was also pending. California annual attrition rates took effect in January 2020. Southwest planned to file a Nevada rate case in late February 2020.
  • Management described natural-gas supply as ample and competitively priced, and stated that contracted firm pipeline capacity and delivered purchases were sufficient for forecast peak-day needs. Gas-cost recovery mechanisms mitigate direct commodity-margin exposure but can affect liquidity and borrowing needs.
  • The company planned to continue fixed-price gas purchases for California; it did not plan Arizona fixed-price term or swap purchases beyond October 2020. It does not currently use such purchases or swaps for Nevada.
  • The board approved a 4.6% increase in the quarterly dividend, from $0.545 to $0.570 per share, effective with the June 2020 payment. The company reported annual dividend increases since 2007.
  • Principal risks include regulatory decisions and delays in rate recovery, pipeline safety and service interruptions, gas-price volatility and liquidity needs, interest-rate and credit-rating exposure, climate and electrification policy, cybersecurity, severe operating incidents, and Centuri’s weather, customer concentration, labor, fixed-price contract, and client-budget risks.
  • Management stated that pending litigation was not expected to have a material adverse effect, individually or in aggregate. The filing reported effective disclosure controls and no material fourth-quarter 2019 changes in internal control over financial reporting.

Important facts for investors to verify

  • Review the incorporated 2019 annual report and MD&A for actual revenue, net income, segment results, cash flows, capital expenditures, total debt, and year-over-year comparisons; those values are not clear in the supplied text.
  • Check outcomes and timing of the pending Arizona, California, and Paiute rate proceedings, including authorized returns and recoverability of costs.
  • Assess debt maturities, liquidity facilities, covenants, and variable-rate exposure beyond the limited debt figures and sensitivity disclosed here.
  • Track Centuri’s customer concentration, contract backlog conversion and profitability, labor availability, and exposure to fixed-price cost overruns.
  • Confirm dividend capacity against earnings, capital requirements, and subsidiary debt or regulatory restrictions.