Southwest Gas Holdings, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The combined filing covers Southwest Gas Holdings, Inc. and its wholly owned utility subsidiary, Southwest Gas Corporation. Unless noted, financial figures below are consolidated Holdings amounts; dollars are in millions. Comparisons are with the three months ended March 31, 2018.
Business context and financial performance
Holdings operates regulated natural gas distribution and transportation through Southwest Gas and utility infrastructure services through Centuri. Natural gas operations are generally strongest in winter; Centuri’s activity is typically lower in the first quarter and rises in warmer months.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total operating revenue | $833.5 | $754.3 | +10.5% |
| Operating income | $140.5 | $129.6 | +8.4% |
| Net income attributable to Holdings | $94.8 | $79.1 | +19.9% |
| Diluted earnings per share | $1.77 | $1.63 | +$0.14 |
| Operating cash flow | $188.1 | $180.6 | +$7.5 |
| Construction expenditures and property additions | $210.7 | $154.5 | +$56.1 |
Calculated consolidated operating margin (operating income divided by revenue) was approximately 16.8%, versus 17.2%; net margin attributable to Holdings was approximately 11.4%, versus 10.5%. Southwest Gas’s non-GAAP gas operating margin—gas revenue less gas cost—rose to $328.1 million from $308.6 million.
Liquidity, debt and cash flow
- Cash and cash equivalents were $97.0 million at March 31, 2019, versus $85.4 million at December 31, 2018. Current assets were $830.4 million and current liabilities $974.5 million.
- Consolidated borrowings, including current maturities and short-term debt, totaled approximately $2.329 billion at quarter-end, compared with approximately $2.292 billion at year-end. Short-term debt was $188 million, up from $152 million.
- Operating cash flow of $188.1 million was below investing cash outflow of $207.3 million, principally reflecting $210.7 million of construction expenditures. Financing cash flow was $30.8 million.
- Southwest Gas had $188 million outstanding on the short-term portion of its $400 million credit facility and $50 million under its commercial paper program, supported by that facility. Centuri had approximately $300 million available under its revolving line, net of letters of credit.
Material changes and management commentary
- Revenue growth reflected Centuri’s Linetec acquisition, which contributed $47.6 million of Q1 revenue, and increased pipe-replacement work. Centuri revenue rose to $312.9 million from $260.0 million; its contribution to consolidated net income remained a loss, improving to $8.0 million from $11.0 million.
- Natural gas operations contributed $103.4 million of net income, up from $90.3 million. Management cited rate relief, customer growth, and higher other income; 32,000 net customers were added over the prior 12 months, a 1.6% growth rate.
- Southwest Gas’s other income improved substantially in the quarter, including a $7.6 million increase in company-owned life insurance cash surrender value, versus a $0.7 million loss in the prior-year quarter. Higher depreciation, operations and maintenance, and interest expense partly offset operating gains.
- Quarter-end utility plant investment and accelerated pipeline replacement contributed to increased capital spending. Management estimates natural gas segment construction expenditures of approximately $2.1 billion for 2019–2021, including about $710 million in 2019; operating cash flow is expected to fund approximately 45%–50% of construction expenditures and dividend requirements over that three-year period.
Outlook, risks and unusual items
- In May 2019, Southwest filed an Arizona general rate case seeking approximately $57 million of additional revenue, including a proposed 10.3% return on equity. This is a request, not an approved increase. A California rate case was expected in Q3 2019; Southwest also planned to seek judicial review of Nevada rate orders.
- The estimated $174 million Customer Data Modernization Initiative is a multi-year project. Applications seeking regulatory accounting and cost-recovery treatment were pending across jurisdictions; resolution was expected before year-end 2019.
- The southern Arizona LNG facility was expected to be substantially complete in Q2 2019 and available for winter 2019–2020. Approximately $64 million had been spent through March 2019.
- The Board increased the quarterly dividend from $0.52 to $0.545 per share, effective with the June 2019 payment. Its stated target payout ratio is 55%–65% of consolidated earnings per share.
- Key risks include regulatory decisions and timing of rate recovery, gas-cost under- or over-collections and related liquidity needs, capital-market access and interest rates, construction execution and costs, and Centuri’s seasonal and customer-award-dependent work. The Linetec purchase-price allocation remained preliminary. Management said pending litigation was not expected to have a material adverse effect.
- The company adopted lease accounting Topic 842 in Q1, recording $58.4 million of right-of-use assets and $60.8 million of lease liabilities; management reported no material income-statement impact.
Most important facts for investors to verify
- Progress and regulatory outcomes for the Arizona rate case, Nevada judicial review, California rate filing, and CDMI cost-recovery applications.
- Whether planned pipeline investment and LNG construction remain on schedule and within estimated costs, and how capital needs will be financed.
- Centuri’s post-acquisition performance, including Linetec integration, contract margins, customer awards, and remaining purchase-accounting adjustments.
- Cash generation relative to capital expenditures and dividends, and the trend in short-term borrowing and total debt.
- The sustainability of Q1 earnings growth, including the contribution from COLI value changes, regulatory adjustments, seasonality, and customer growth.