Southwest Gas Holdings, Inc. — Q3 2020 Form 10-Q
Business and period: Combined filing for Southwest Gas Holdings, Inc. and its wholly owned utility subsidiary, Southwest Gas Corporation. The company operates regulated natural gas distribution and transportation in Arizona, Nevada, and California, and Centuri, a utility infrastructure services business. The quarter ended September 30, 2020; comparisons below are to 2019. Dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Consolidated operating revenue | $791.2 | $725.2 | $2,384.8 | $2,271.8 |
| Operating income | $54.3 | $38.3 | $270.2 | $233.6 |
| Net income attributable to Holdings | $18.3 | $5.4 | $128.8 | $122.2 |
| Basic and diluted EPS | $0.32 | $0.10 | $2.31 | $2.26 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $487.8 | $378.5 |
- Revenue growth was led by Centuri: utility infrastructure services revenue rose 12.6% in Q3 to $580.4 million; natural gas revenue was nearly flat at $210.8 million.
- Centuri contributed $34.9 million to consolidated net income in Q3, up from $25.8 million. Southwest’s natural gas operations reported a seasonal Q3 net loss of $16.0 million, improved from a $20.0 million loss a year earlier.
- For the first nine months, gas operating margin, a company-defined non-GAAP measure (gas revenue less net gas costs), increased to $711.5 million from $696.5 million. Natural gas operations’ net income contribution declined to $79.6 million from $86.7 million; Centuri’s increased to $50.9 million from $36.7 million.
- Nine-month investing cash outflow was $618.5 million, including $632.5 million of construction expenditures and property additions. Financing cash inflow was $105.3 million, versus $275.6 million in 2019.
- At September 30, cash was $23.9 million; consolidated long-term debt, less current maturities, was $2.686 billion, with $54 million of short-term debt. Total equity was $2.619 billion. Holdings reported $839.2 million of current liabilities and $732.8 million of current assets.
Changes, outlook, and risks
- Q3 consolidated operating income increased $16.0 million year over year. Management attributed the improvement mainly to higher Centuri activity and lower natural gas operations maintenance expense, partly offset by higher depreciation and interest costs.
- Centuri’s Q3 included $48.7 million of hurricane-related restoration revenue. Management described Q3 revenue and net income as records. Storm restoration work is variable and may carry higher margins than routine work.
- COVID-19-related customer disconnection and late-fee moratoria continued; their duration was uncertain. Management cited possible pressure on collections and future credit losses, while reporting no significant disruption to operations or supply chains to date. Centuri experienced project delays and crew reductions, mainly in Q2. The company said pandemic effects in future periods remained uncertain.
- Southwest issued $450 million of 2.20% senior notes due 2030 in June and redeemed $125 million of 4.45% notes in September. Credit facilities were amended to extend maturity to April 2025. Management reported $628 million of available borrowing capacity across company facilities at quarter-end.
- Southwest’s Nevada rate case was finalized, authorizing an approximately $23 million annual revenue increase effective October 2020. An Arizona rate case decision was expected in Q4 2020. A California settlement, if approved, was expected to produce new rates in January 2021.
- Management estimated natural gas segment construction expenditures of approximately $2.1 billion over the three years ending December 31, 2022, including about $700 million in 2020. It expected operating cash flows to fund approximately 50% of construction spending and dividend requirements over that three-year period; remaining needs may require debt, equity contributions, or other financing.
- Unusual items include a $17.6 million increase in the estimated redemption value of Linetec’s redeemable noncontrolling interest, recorded as an adjustment to retained earnings rather than net income. Q3 other income also benefited from a $4.5 million increase in COLI policy values; management noted such values fluctuate with underlying markets.
- Key risks include regulatory timing and cost recovery, customer payment capacity, COVID-19 impacts, Centuri project awards and execution, construction costs, pension funding, capital-market access, and LIBOR transition. Management reported no material adverse effect expected from pending litigation; the filing gives no clear quantified exposure.
Investor facts to verify
- Track the outcomes and effective rates from the Arizona case and California settlement, and whether regulators permit recovery of pandemic-related costs.
- Assess collections, allowance for uncollectible accounts, and effects of any extension or lifting of the customer disconnection moratorium.
- Separate recurring Centuri performance from storm restoration work, and monitor project delays, contract economics, and customer concentration.
- Reconcile planned infrastructure investment with operating cash generation, debt maturities, borrowing availability, and potential equity issuance under the remaining equity shelf program.
- Monitor the impact of the $17.6 million noncontrolling-interest redemption-value adjustment and volatility in COLI values on reported results and equity.