Southwest Gas Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. This is a combined filing for Southwest Gas Holdings, Inc. and its wholly owned natural gas utility subsidiary, Southwest Gas Corporation. Holdings also owns Centuri Group, its utility infrastructure services business. Results are seasonal: utility gas operations generally earn more in winter, while Centuri activity typically increases in warmer months.
Key financial results
Amounts below are for Southwest Gas Holdings on a consolidated basis unless otherwise noted; dollars are in millions except per-share amounts.
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Operating revenue | $836.3 | $833.5 | Up $2.8 (0.3%) |
| Operating income | $148.4 | $140.5 | Up $7.9 |
| Income before tax | $99.2 | $120.9 | Down $21.7 |
| Net income attributable to Holdings | $72.5 | $94.8 | Down $22.3 (23.5%) |
| Diluted EPS | $1.31 | $1.77 | Down $0.46 |
| Operating cash flow | $271.6 | $188.1 | Up $83.5 |
| Construction expenditures and property additions | $210.7 | $210.7 | Essentially unchanged |
- Natural gas operations: Revenue was $502.8 million, down 3.4%. Management’s non-GAAP operating margin—gas revenue less pass-through gas costs—rose to $342.0 million from $328.1 million. Utility operating income increased to $157.8 million, but segment net income fell to $83.6 million from $103.4 million.
- Utility infrastructure services: Revenue rose 6.6% to $333.5 million, while expenses increased 6.3% to $319.3 million. Centuri’s net loss attributable to the segment widened to $10.2 million from $8.0 million.
- Margins and earnings drivers: Consolidated operating income was 17.7% of revenue versus 16.9% a year earlier; net income attributable to Holdings was 8.7% of revenue versus 11.4%. Natural gas operating margin increased on customer growth, rate relief and regulatory recoveries, but lower COLI values, higher depreciation and higher interest costs weighed on earnings.
- Cash flow: Operating cash flow improved primarily from gas-cost and regulatory-balance collections and working-capital movements, partly offset by lower net income and a $50 million pension contribution. Investing cash outflow was $200.8 million; financing cash outflow was $59.0 million.
- Balance sheet and liquidity at March 31: Cash was $61.0 million; current assets were $672.9 million and current liabilities $979.8 million. Long-term debt, including current maturities, was $2.480 billion, with an additional $157 million of short-term debt. Management reported $454 million of available borrowing capacity across credit facilities.
Material changes and unusual items
- Consolidated revenue was nearly flat as infrastructure-services growth largely offset lower gas revenue. Net income attributable to Holdings declined materially despite higher operating income.
- Other income included a $15.5 million decline in COLI cash surrender values in Q1 2020, compared with a $7.6 million increase in Q1 2019—an adverse year-over-year swing of about $23.1 million. Management attributed the volatility to movements in underlying securities markets.
- Natural gas customer growth added approximately $5 million to quarterly operating margin; 33,000 net customers were added over the prior 12 months, a 1.6% growth rate. Rate relief contributed about $1 million in the quarter.
- Centuri’s Q1 revenue growth reflected increased electric infrastructure and pipe-replacement work. COVID-related crew shutdowns, safety costs and equipment idling affected performance; management expected revenue impacts from project delays to be more pronounced in Q2 2020.
Outlook, management commentary and risks
- COVID-19: The businesses largely continued operating as essential services, with no significant supply-chain or service disruption reported through the filing date. However, project delays and workforce reductions at Centuri, customer payment risks at the utility, potential future restrictions and uncertain economic conditions could adversely affect results. Management said the full financial impact could not yet be estimated and could be material, despite not then expecting a material effect on liquidity or financial position.
- Southwest suspended gas disconnections for nonpayment and late fees, and offered flexible payment arrangements. The resulting customer-credit and lost-revenue effects may not be fully recoverable through regulation. Regulators in Nevada and California authorized tracking certain pandemic-related impacts for possible future recovery; recovery is not assured.
- Regulatory proceedings: Arizona’s general rate-case hearing was deferred due to the pandemic; Southwest’s request was updated to an approximately $90.6 million revenue increase. A Nevada general rate case filed in February 2020 seeks an approximately $38.3 million increase, with a hearing scheduled for August 2020. The California general rate case seeks a $12.8 million increase, with requested rates in 2021. These are requests, not approved outcomes.
- Capital spending and financing: Management estimated natural-gas segment construction expenditures of about $650–$700 million in 2020 and approximately $2.1 billion over 2020–2022. Funding is expected from operating cash flow, credit facilities, equity contributions and/or other financing. On April 10, 2020, after quarter-end, Holdings and Southwest amended their credit facilities, retaining borrowing capacity and extending maturities to April 2025.
- Other risks and items: LIBOR-linked borrowings with maturities beyond 2021 create benchmark-transition uncertainty; the filing states replacement-rate impacts cannot yet be determined. The Arizona rate case, Nevada rate appeal, regulatory cost recovery, Centuri contract execution and access to capital are additional uncertainties. Management reported no material change in market-risk disclosures and believed pending litigation would not materially harm financial position or results.
- The Board raised the quarterly dividend from $0.545 to $0.570 per share, effective with the June 2020 payment. The filing provides no specific quantitative earnings guidance.
Important facts for investors to verify
- Whether COVID-related utility customer arrears, Centuri work delays and cost increases develop beyond the first-quarter effects, and what amounts regulators ultimately allow to be recovered.
- Outcomes and timing of the Arizona, Nevada and California rate cases, including the impact of hearing delays and requested relief on earnings and cash flow.
- Whether Centuri restores delayed work and improves segment profitability, given its wider first-quarter loss and the expected greater impact of delays in Q2.
- Funding needs against planned utility capital expenditures, available credit capacity, debt maturities and the transition of LIBOR-linked borrowing rates.
- The effect of market-sensitive COLI values and continued depreciation, interest and pension costs on reported earnings and cash flow.