Southwest Gas Holdings, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The combined filing reports separately for Southwest Gas Holdings, Inc. and its wholly owned utility subsidiary, Southwest Gas Corporation. Unless noted, amounts below are Holdings consolidated and dollars are in millions.
Business context and results
Holdings operates regulated natural gas distribution and transportation businesses in Arizona, Nevada, and California, and Centuri, a utility and energy infrastructure construction-services business. Utility earnings are seasonal, generally stronger in winter; Centuri’s activity is typically higher in summer and fall. The filing reports about 2.027 million utility customers at quarter-end.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $670.9 | $560.5 | $1,425.2 | $1,215.2 |
| Operating income | $53.3 | $48.3 | $182.9 | $172.6 |
| Net income attributable to Holdings | $21.6 | $17.9 | $100.6 | $87.2 |
| Diluted EPS | $0.44 | $0.37 | $2.07 | $1.82 |
| Declared dividend per share | $0.520 | $0.495 | $1.040 | $0.990 |
Financial position, cash flow, and liquidity
- Revenue and earnings: Q2 revenue increased 19.7% year over year, primarily reflecting higher Centuri construction activity and the Neuco acquisition. Q2 net income attributable to Holdings rose 20.6%. First-half revenue increased 17.3% and attributable net income rose 15.4%.
- Segment performance: Q2 construction revenue was $395.2 million, up $94.9 million; construction operating income was $28.9 million versus $16.5 million. Utility operating margin, a non-GAAP measure defined as gas revenue less gas cost, was $192.2 million versus $190.7 million, while utility operating income fell to $24.7 million from $32.3 million. Utility segment net income was $2.6 million versus $9.5 million. For the first half, utility segment net income increased to $93.0 million from $86.5 million, while construction segment net income rose to $8.2 million from $1.4 million.
- Cash flow: First-half operating cash flow was $247.0 million, versus $198.2 million a year earlier. Construction expenditures and property additions were $339.0 million, leaving operating cash flow below investment outlays. Financing activities provided $76.7 million. Cash and equivalents were $34.7 million at June 30, down from $43.6 million at year-end.
- Debt and liquidity: At June 30, Holdings reported $2.038 billion of long-term debt, $31.9 million of current maturities, and $22.5 million of short-term debt. Short-term debt was $214.5 million at year-end 2017. Current assets were $696.1 million and current liabilities $663.6 million. Centuri had approximately $144 million available under its revolving line, net of letters of credit. Holdings’ and Southwest’s earnings-to-fixed-charges ratios were 3.28 and 3.65, respectively, for the twelve months ended June 30.
- Capital and shareholder returns: Southwest issued $300 million of 3.7% senior notes due 2028 in March. Holdings raised approximately $62.8 million net through its at-the-market equity program in the first half; $43.5 million remained available under that program at June 30. The quarterly dividend was increased 5% to $0.52 per share.
Material changes and management commentary
- Centuri’s quarterly revenue growth reflected increased pipeline replacement work, $34 million of Neuco revenue, and a $9 million negotiated settlement of a prior water-pipe contract dispute. First-half revenue also benefited from Neuco, a customer’s resumed work after a prior-year stoppage, and the settlement. Construction expense rose with activity, labor costs, and growth-related operating costs.
- Utility first-half operating margin declined $5.7 million, including a $12.5 million reserve for anticipated customer rate reductions following federal tax reform. Lower federal tax rates reduced income-tax expense and supported higher first-half utility net income. The rate reduction from 35% to 21% took effect in 2018; management stated that some TCJA-related amounts remained provisional and under evaluation.
- Southwest recorded an approximately $49 million regulatory liability for an EPNG transmission-rate refund. It received the refund in July 2018 and expects to return the proceeds to customers through applicable rate mechanisms, generally within twelve months or less; the amount had not increased June 30 cash.
- Management estimated natural-gas-segment construction expenditures of approximately $2 billion over 2018–2020, including about $670 million in 2018. It expected operating cash flow to fund approximately 50%–60% of gas-segment construction expenditures and dividend requirements over that three-year period, with external financing for the balance. No specific consolidated earnings or EPS guidance is provided in the supplied filing text.
- Regulatory matters include a Nevada general rate case requesting approximately $32.5 million in annual revenue increases, with management expecting an order in Q4 2018 and new rates by January 1, 2019; a Nevada infrastructure replacement filing; and an Arizona tax-reform decision providing customer credits and ongoing surcredits. The southern Arizona LNG facility was expected to be completed by year-end 2019; approximately $45 million had been spent through June 2018. The Paiute pipeline expansion was expected to be completed by year-end 2018 at an estimated cost of $22 million.
Risks, contingencies, and unusual items
- Results and liquidity are sensitive to regulatory decisions and timing of rate relief, purchased-gas cost recovery, construction volumes and contract estimates, labor and weather conditions, customer awards, financing access and interest rates, and pension costs. Centuri fixed-price work and capped unit-price contracts can have profit or loss revisions when cost estimates change.
- At June 30, purchased-gas adjustment balances represented a net $26.4 million over-collection liability; these balances affect cash timing but are generally passed through to customers without direct margin impact.
- Centuri’s remaining performance obligations on 16 contracts longer than one year totaled $86 million; recognition is expected over four years, with timing substantially influenced by customers.
- The company early-adopted an accounting update allowing approximately $9.3 million of stranded tax effects to be reclassified from accumulated other comprehensive income to retained earnings. Adoption of the revenue standard had no material reported financial-statement impact. Management was evaluating the effects of the forthcoming lease and credit-loss standards.
- Management said pending legal proceedings were not expected, individually or collectively, to materially adversely affect financial position or results. The filing reported no material second-quarter changes in market-risk disclosures and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether the Nevada rate case and infrastructure-replacement approvals deliver the requested recovery, and how Arizona tax-reform credits and surcredits affect revenue.
- The timing and customer pass-through of the $49 million EPNG refund, and the final regulatory treatment of tax-reform-related deferred taxes and the $12.5 million reserve.
- Whether Centuri sustains construction growth and margins as labor, weather, contract estimates, customer awards, and Neuco integration affect results.
- How planned gas-system capital spending is funded, including future debt and equity issuance, interest costs, and the impact on leverage and dividends.
- That the interim results reflect seasonal businesses and should not be treated as a full-year earnings forecast.