Southwest Gas Holdings, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is a combined filing for Southwest Gas Holdings, Inc. and its wholly owned regulated utility subsidiary, Southwest Gas Corporation. The filing incorporates the companies’ financial statements and much of the detailed MD&A by reference to the 2018 Annual Report to Shareholders; the provided filing text does not include the full income statements, balance sheets, or cash flow statements.
Business context and key metrics
- Natural gas operations: Southwest distributes or transports gas in Arizona, Nevada, and California. It served 2.047 million customers at year-end and added 32,000 net customers in 2018. Management expected similar customer growth in 2019.
- Utility infrastructure services: Centuri provides gas and electric infrastructure construction, replacement, repair, and maintenance services. Approximately 83% of its 2018 revenue came from unit-price contracts. Fixed-price contract backlog was approximately $115.1 million at year-end; backlog is not a measure of profitability.
- Utility scale and investment: Southwest’s gas plant was $7.3 billion at December 31, 2018. It had incurred approximately $60 million in capital expenditures, including land, on a southern Arizona LNG facility; completion was expected in the second quarter of 2019, with service anticipated for winter 2019/2020.
- Revenue and margin mix: Southwest’s 2018 operating margin was 85% residential and small commercial, 3% other sales customers, and 12% transportation. Transportation represented 48% of system throughput. Consolidated revenue, profit, cash flow, and margin amounts are not clearly provided in the supplied filing text.
- Debt and liquidity: Variable-rate debt totaled $607.9 million at year-end, excluding $150 million of Nevada industrial development revenue bonds. The variable-rate balance was $670.5 million in 2017. A hypothetical 1 percentage-point rate increase would raise annual interest expense by approximately $6.08 million on the included balances. Total debt, cash balances, and available liquidity are not clearly provided in the supplied text.
- Dividends: The quarterly dividend was $0.52 per share throughout 2018. In February 2019, the board approved an increase to $0.545 per share, effective with the June 2019 payment. The stated target payout ratio is 55%–65% of consolidated EPS.
Changes versus the prior comparable period
- In November 2018, Centuri completed the acquisition of an 80% interest in Linetec Services, LLC. Linetec represented 2% of consolidated assets and less than 1% of 2018 consolidated revenue. The company excluded the newly acquired business from its controls evaluation through year-end and planned to complete its review and implementation of controls in 2019.
- Variable-rate debt, excluding the specified IDRBs, declined to $607.9 million from $670.5 million in 2017.
- Company-owned life insurance cash-surrender-value changes produced a $3.2 million loss in 2018, compared with $10.3 million of earnings in 2017. These changes affected earnings but not cash flow.
- The quarterly dividend increased from $0.495 in 2017 to $0.52 in 2018; a further increase was announced for 2019.
- Centuri reported that the 2017 Tax Cuts and Jobs Act eliminated bonus-depreciation incentives for most of its utility customers, a factor that could affect customer project activity.
Outlook, risks, and contingencies
- Southwest’s results are seasonal, with natural gas operations generally stronger in winter. Centuri’s revenue is generally lowest in the first quarter because of winter weather. Gas decoupling mechanisms are intended to stabilize annual utility margin, while purchased-gas adjustment clauses affect cash flow and working-capital needs but not directly profit margin.
- Management described customer growth expectations as similar to 2018. The LNG facility was expected to enter service in winter 2019/2020. The filing also noted that natural gas price volatility was expected to continue; rising gas costs can temporarily pressure liquidity and increase short-term borrowing needs before regulatory recovery.
- Key risks include regulatory decisions and delays in rate recovery, pipeline safety and environmental requirements, extreme weather and service interruptions, access to interstate pipeline capacity, interest-rate changes, cybersecurity incidents, acquisition integration, and Centuri’s customer concentration, labor availability, weather exposure, and fixed-price contract cost overruns.
- Southwest’s decoupling and infrastructure-replacement programs remain subject to regulatory discretion. Management stated that it could not predict the future impact of proposed or changing climate laws and regulations.
- Management believed the disclosed litigation would not have a material adverse impact, individually or in aggregate, while noting that claim costs may exceed insurance coverage. Southwest’s self-insured retention is $1 million per incident plus the first $4 million in total claims above that retention in the policy year; Centuri’s is $300,000 per occurrence.
Most important facts for investors to verify
- Review the incorporated 2018 Annual Report for consolidated and subsidiary revenue, net income, EPS, operating cash flow, capital spending, total debt, cash, credit facilities, and segment results; these values are not clearly presented in the supplied text.
- Confirm the status and final cost, regulatory recovery, and in-service timing of the southern Arizona LNG project.
- Assess Linetec’s post-acquisition contribution, integration progress, and completion of the planned controls review.
- Check the outcome and timing of pending rate proceedings, and whether gas-cost and infrastructure-investment recovery keeps pace with spending.
- Evaluate Centuri’s customer concentration, fixed-price contract exposure, backlog conversion, and labor and weather risks.
- Confirm the company’s total debt and liquidity position, including borrowing availability and exposure to variable rates.