Southwest Gas Holdings, Inc. quarterly report, Q3 FY2021

Southwest Gas Holdings, Inc. — Q3 2021 Form 10-Q

Business context and period. Combined quarterly filing for Southwest Gas Holdings, Inc. and its wholly owned utility subsidiary, Southwest Gas Corporation, for the quarter and nine months ended September 30, 2021. Holdings operates natural gas distribution and transportation through Southwest and utility infrastructure services through Centuri. Results are seasonal; natural gas operations generally earn more in winter.

Key financial results

Metric	Q3 2021	Q3 2020	Nine months 2021	Nine months 2020
Total operating revenue	$888.7 million	$791.2 million	$2,596.0 million	$2,384.8 million
Operating income	$23.3 million	$54.3 million	$256.0 million	$270.2 million
Net income (loss) attributable to Holdings	$(11.6) million	$18.3 million	$130.8 million	$128.8 million
Basic EPS	$(0.19)	$0.32	$2.23	$2.31
Operating cash flow	Not separately presented for the quarter	$51.5 million	$487.8 million

• Quarterly revenue rose about 12%, but operating income fell about 57%; the quarter produced a net loss. Nine-month revenue increased about 9%, while attributable net income was slightly higher and EPS lower year over year.
• Natural gas operating margin, a company-defined non-GAAP measure, was $192.1 million in Q3, up from $174.5 million; for nine months it was $774.3 million, up from $711.5 million. Rate relief and customer growth contributed, but higher operating costs weighed on earnings.
• Centuri generated Q3 revenue of $632.8 million, up from $580.4 million, but its contribution to consolidated net income declined to $18.5 million from $34.9 million. Nine-month contribution was $32.8 million versus $50.9 million.
• Holdings used $1.314 billion in investing activities in the first nine months, including $830.4 million for the Riggs Distler acquisition. Financing activities provided $1.366 billion. Cash at September 30 was $186.7 million.
• At September 30, Holdings reported $3.574 billion of long-term debt, $297.3 million of current maturities and $272.0 million of short-term debt. Total current assets were $1.393 billion and current liabilities $1.355 billion. Debt and current liabilities increased materially from year-end 2020, principally reflecting acquisition financing and other funding needs.

Material changes and notable items

• Centuri acquired Drum Parent, principally Riggs Distler, on August 27 for $830.4 million cash and assumed a financing lease obligation. Preliminary purchase accounting included $446.8 million goodwill and $335.0 million intangible assets; valuation remains subject to refinement. Acquisition-related costs were $14 million for the nine months.
• Centuri’s amended credit agreement included a $1.145 billion secured term loan and a $400 million secured revolver; $1.257 billion was outstanding at quarter-end. Holdings’ consolidated debt also reflects Southwest’s $300 million, 3.18% senior notes due 2051, issued in August.
• Southwest’s operating cash flow was sharply lower year over year, mainly because of the $293.4 million cash outflow from deferred purchased-gas costs and other working-capital effects. The PGA under-collection stood at $240.8 million at September 30; recovery from customers is expected through regulatory mechanisms.
• Southwest’s February 2021 extreme-weather gas purchases added approximately $250 million in costs, funded with a 364-day term loan and expected to be recovered from customers. A separate pipeline imbalance charge, reduced from $65 million to about $55 million, was waived after FERC approval; Southwest recorded no liability for that charge.
• A $5 million liability was recorded for an August gas-pipe explosion that injured four people and damaged property. The incident was under investigation; potential claims were expected, and the recorded amount reflected the stated maximum self-insured exposure.
• The Board increased the quarterly common dividend from $0.57 to $0.595 per share, effective with the June 2021 payment. Holdings sold shares through its at-the-market program and had approximately $341.8 million of remaining capacity at quarter-end.

Outlook, risks and contingencies

• No earnings guidance was provided. Management estimated natural gas segment construction expenditures of approximately $2.1 billion over 2021–2023, including $650–$675 million in 2021. Southwest expected operating cash flows to fund about half of its gas-operations construction and dividend requirements over that three-year period; additional needs may be financed with credit facilities, equity contributions or other external funding.
• In October 2021, after quarter-end, Holdings agreed to acquire Questar Pipelines for $1.545 billion cash, subject to adjustments, and assume approximately $430 million of existing long-term debt. Closing was expected near year-end, subject to conditions and approvals; the company planned initial funding through a new 364-day term loan followed by permanent financing. The agreement could be terminated if conditions were not met, with a possible extension through June 30, 2022.
• Management said COVID-19 had not materially disrupted operations or overall liquidity to date, but customer collections, work levels, staffing, and future effects remained uncertain. Disconnection moratoria had ended in Arizona and Nevada; California’s was expected to end in Q4 2021.
• Centuri’s results face project mix, weather, storm-restoration variability, cost overruns on bid or fixed-price work, and dependence on significant customers. In Q3, reduced work from two large gas customers weakened margins; storm work and Riggs Distler added revenue but also costs and acquisition-related interest expense.
• Other risks include regulatory timing and recovery of costs, gas-price and PGA cash-flow timing, access to capital and debt covenant compliance, LIBOR transition, and the possibility of credit-rating effects from the Questar transaction. Holdings also disclosed an October 2021 activist tender offer and threatened proxy contest by funds affiliated with Carl Icahn; it adopted preferred-stock purchase rights with general triggering thresholds of 10% ownership, or 20% for passive institutional investors.

Most important facts for investors to verify

• Whether and on what financing terms the Questar Pipelines acquisition closes, and its effect on debt, credit ratings, interest expense and future earnings.
• Whether the $240.8 million PGA under-collection is recovered on schedule and how that recovery affects liquidity and cash flows.
• Centuri’s post-acquisition profitability, leverage and ability to meet revolving-facility covenants as the Riggs Distler business is integrated.
• The outcome and potential liability from the gas-pipe explosion, and the adequacy of the $5 million reserve and insurance coverage.
• How regulatory decisions, customer collections and project costs affect margins, especially given the gap between revenue growth and quarterly earnings performance.