Southwest Gas Holdings, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Amounts below are consolidated Southwest Gas Holdings, Inc. figures unless otherwise noted; dollar amounts are in millions except per-share data. The filing also includes separate statements for wholly owned Southwest Gas Corporation.
Business context
Southwest Gas Holdings operates regulated natural-gas distribution and transportation businesses in Arizona, Nevada, and California, and owns 96.6% of Centuri, a utility construction-services provider. Natural-gas results are seasonal, generally stronger in winter; Centuri’s activity typically improves in summer and fall. A holding-company reorganization became effective in January 2017, placing Southwest Gas and Centuri under Southwest Gas Holdings. Centuri remains part of Holdings’ consolidated continuing operations.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenues | $560.5 | $547.7 | $1,215.2 | $1,279.0 |
| Operating income | $43.4 | $28.1 | $162.9 | $162.2 |
| Net income attributable to Holdings | $17.9 | $8.9 | $87.2 | $84.4 |
| Diluted EPS | $0.37 | $0.19 | $1.82 | $1.77 |
| Operating cash flow | Not separately stated | Not separately stated | $198.2 | $417.2 |
| Construction expenditures and property additions | Not separately stated | Not separately stated | $262.2 | $264.9 |
- Utility operating margin, a non-GAAP measure: $190.7 million in Q2 versus $184.2 million; $506.5 million for the six months versus $495.7 million. Management defines this as gas operating revenue less net cost of gas sold.
- Balance sheet at June 30: Total assets were $5.665 billion; cash and cash equivalents were $29.7 million. Long-term debt, including current maturities, was approximately $1.713 billion; short-term debt was $2.5 million. Total capitalization was $3.420 billion.
- Dividends: $0.495 per share declared for Q2, compared with $0.450 a year earlier. The Board targets a payout ratio of 55%–65% of consolidated EPS.
- Liquidity facilities: Southwest Gas Corporation had a $400 million revolving credit facility, with $92 million outstanding at quarter-end; the holding company had a separate $100 million facility, with $2.5 million outstanding. Centuri had approximately $36 million available under its revolving line, net of letters of credit.
Material changes versus prior periods
- Q2 consolidated revenue increased 2.3% and net income attributable to Holdings roughly doubled. Operating income rose to $43.4 million from $28.1 million.
- For the first six months, revenue declined 5.0%, while operating income was nearly flat and attributable net income increased 3.3%. The filing attributes the year-to-date utility improvement mainly to higher operating margin and lower depreciation, partly offset by higher operating and maintenance costs.
- Q2 natural-gas operating income improved primarily from Arizona rate relief and lower depreciation following the Arizona rate-case decision. Utility customer growth added approximately 32,000 net customers over the prior 12 months, a 1.6% growth rate.
- Centuri’s Q2 revenue rose 3%, but its first-half revenue declined 1% and its contribution to consolidated net income fell to $1.4 million from $4.4 million. A customer work stoppage and adverse first-quarter weather weighed on results; lower depreciation partly offset the impact.
- Six-month operating cash flow fell by $219.0 million, mainly reflecting changes in deferred purchased-gas balances and other working-capital items. Cash generation is affected by the timing of gas-cost recovery and refunds.
Outlook, risks and unusual items
- No specific earnings or EPS guidance is stated. Southwest estimates natural-gas-segment construction expenditures of approximately $570 million in 2017 and $1.6–$1.8 billion over 2017–2019. It expects operating cash flows to fund about 60%–70% of gas-segment construction expenditures and dividend requirements over that three-year period; external financing may be needed for the balance.
- Southwest expects the PATH Act bonus-depreciation provision to defer approximately $21 million of federal income-tax payments in 2017.
- Arizona’s approved rate settlement took effect in April 2017 and provides a $16 million annual revenue increase and an expected $44.7 million reduction in depreciation expense. It also approved pipe-replacement initiatives and established a rate-case moratorium through May 2019.
- Southwest is targeting about $27 million of Arizona vintage-steel-pipe replacement in 2017 and has proposed approximately $66 million of Nevada replacement projects for 2018. A proposed southern Arizona LNG facility is expected to cost up to $80 million; construction was expected to begin in September 2017, with completion targeted by the end of 2019.
- Centuri’s temporary customer work stoppage reduced first-half revenue by an estimated $26.3 million and resulted in a $3.7 million pretax loss for the period. Work resumed gradually after employee requalification.
- Key risks include regulatory timing and recovery of costs, natural-gas purchase and recovery timing, construction-project margins and customer awards, weather, labor and operating costs, financing access and interest rates, and capital requirements. Management said pending legal proceedings were not expected to have a material adverse effect, though outcomes were not determinable.
- Management reported no material change in market-risk disclosures and considered disclosure controls effective. The filing notes that the impact of several upcoming accounting standards, including revenue recognition, leases, and pension-cost presentation, was still under evaluation.
Important facts for investors to verify
- Track whether Arizona and California rate relief, customer growth, and lower depreciation continue to support utility operating income.
- Monitor operating cash flow, purchased-gas balancing accounts, and the timing of customer refunds or recoveries; these materially affected first-half cash flow.
- Compare Centuri’s project costs and margins with revenue growth, and verify whether customer work levels remain normal after the stoppage.
- Assess funding for the utility’s stated capital program, debt growth, credit-facility availability, and dividend payout against cash generation.
- Check actual progress, approvals, and costs for the Nevada and Arizona pipe-replacement plans and the proposed LNG facility.