Business context and reporting period
Southwest Gas Holdings, Inc. filed a combined unaudited Form 10-Q with wholly owned utility subsidiary Southwest Gas Corporation for the quarter ended March 31, 2018. Holdings reports two segments: regulated natural gas operations in Arizona, Nevada and California, and construction services through Centuri. The comparisons below are for the three months ended March 31, 2018 and 2017 unless noted.
Key financial results
Amounts in millions of dollars except per-share data. Holdings consolidated results include Centuri.
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $754.3 | $654.7 | +15.2% |
| Operating income | $129.6 | $124.3 | +4.2% |
| Net income attributable to Holdings | $79.1 | $69.3 | +14.1% |
| Diluted EPS | $1.63 | $1.45 | +$0.18 |
| Operating cash flow | $180.6 | $161.8 | +$18.7 |
| Construction expenditures and property additions | $154.5 | $115.8 | +$38.8 |
- Gas operating revenue rose to $494.3 million from $462.6 million; construction revenue increased to $260.0 million from $192.1 million.
- Utility operating margin, a company-defined non-GAAP measure (gas revenue less gas cost), declined to $308.6 million from $315.7 million. Natural gas operations nevertheless increased net income contribution to $90.3 million from $76.9 million.
- Centuri reported a Q1 net loss contribution of $11.0 million, compared with a $7.3 million loss. Higher construction volumes were offset by elevated costs and interest expense.
- At March 31, cash was $65.1 million; current assets were $663.9 million and current liabilities $602.9 million. Holdings long-term debt, net of current maturities, was $1,998.1 million; current maturities were $24.9 million and short-term debt $22.5 million. Total debt on those carrying-value categories was approximately $2,045.5 million.
Material changes versus the prior period
- Holdings operating revenue growth was led by Centuri’s additional pipe replacement work and the contribution of acquired New England Utility Constructors (Neuco), which contributed about $14 million of Q1 revenue.
- Utility operating income increased $5.3 million. Management cited Arizona rate relief, customer growth and lower depreciation, partly offset by weaker other income and higher interest expense.
- Utility operating margin included a $14 million reduction recorded for anticipated customer benefits from federal tax reform. Lower income tax expense largely offset this for net income; customer rates had not yet been reduced pending regulatory action.
- Cash used in investing increased as construction spending rose. Long-term debt increased from year-end, while short-term debt fell substantially; Southwest Gas Corporation issued $300 million of 3.7% senior notes due 2028 and used proceeds in part to repay credit-facility and commercial-paper borrowings.
- Centuri revenue grew 35%, but construction costs also rose 35%, including higher labor costs in inclement weather. For the twelve months ended March 31, 2018, management reported pressure from an unfavorable water-pipeline project mix and said it was pursuing modified terms or additional cost recovery.
Outlook, risks and unusual items
- No specific earnings or EPS guidance is provided in the supplied filing text. Management estimated natural gas segment construction expenditures of approximately $2 billion over 2018–2020, including about $670 million in 2018. Operating cash flows were expected to fund approximately 50%–60% of gas-segment construction expenditures and dividend requirements over that three-year period; remaining needs could be funded through credit facilities, equity contributions or other financing.
- Management highlighted regulatory timing and rate relief, tax-reform pass-throughs to customers, gas-cost recovery timing, interest rates and access to capital as liquidity and earnings factors. The utility had an $18.4 million net under-collection in purchased-gas accounts at March 31; such balances affect cash flow but not profit margin directly.
- Natural gas operations are seasonally stronger in winter; Centuri typically has its lowest revenue in the first quarter due to winter weather. Centuri’s project estimates, bid outcomes, labor costs and customer-awarded work create execution and margin risks.
- Arizona and Nevada regulatory filings and proceedings were ongoing, including tax-reform treatment, infrastructure replacement recovery and a planned Nevada general rate case. The Arizona LNG facility was expected to be completed by the end of 2019; approximately $39 million had been spent through March 2018.
- The company adopted revenue-recognition guidance and pension-cost presentation changes in 2018; management said revenue-guidance adoption had no material overall impact, and the pension presentation reclassification did not change net income. It also early-adopted guidance allowing approximately $9.3 million of stranded tax effects to be reclassified from accumulated other comprehensive income to retained earnings.
- Holdings raised its quarterly dividend from $0.495 to $0.52 per share, effective with the June 2018 payment. Management said its target payout ratio is 55%–65% of consolidated EPS. Management stated that pending legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Track regulatory decisions on tax-reform refunds or rate reductions and whether the recorded $14 million customer adjustment is consistent with final outcomes.
- Assess Centuri’s project-level profitability, especially recovery prospects for the water-pipeline work, and whether revenue growth converts to improved margins.
- Compare planned capital spending and operating cash generation with future borrowing, equity issuance and dividend needs.
- Monitor debt, interest expense, credit-facility availability and the timing of purchased-gas balance recovery or refunds.
- Review the assumptions behind the construction-spending outlook and the completion schedule and cost of the Arizona LNG project.