Southwest Gas Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The combined filing reports Southwest Gas Holdings, Inc. and its wholly owned regulated utility, Southwest Gas Corporation. Amounts below are in U.S. dollars; financial statement amounts are unaudited.
Business context and material changes
Southwest Gas Holdings operates a natural gas distribution business (Southwest) and utility infrastructure services business (Centuri). It sold MountainWest Pipelines on February 14, 2023, and is pursuing a tax-free spin-off of Centuri, currently expected in Q4 2023 or Q1 2024, subject to approvals and other conditions.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Consolidated operating revenue | $1.603 billion | $1.267 billion |
| Operating income | $135.2 million | $168.5 million |
| Net income attributable to Holdings | $45.9 million | $96.2 million |
| Basic and diluted EPS | $0.67 | $1.58 |
| Cash from operating activities | $(185.7) million | $186.6 million |
- Revenue rose 26.5%, but operating income and earnings fell. Q1 2023 operating expenses included $71.2 million of goodwill impairment and loss-on-sale charges, primarily associated with the MountainWest disposition.
- Natural gas distribution: Southwest reported revenue of $914.9 million, operating income of $185.1 million, and net income of $134.7 million, compared with $676.5 million, $166.0 million, and $111.8 million, respectively, a year earlier. Management’s non-GAAP operating margin increased to $413.7 million from $379.4 million.
- Utility infrastructure services: Centuri revenue increased 25% to $653.3 million. Its contribution to consolidated results was a loss of $11.9 million, improved from a loss of $23.5 million. Management cited higher work volumes, storm restoration and offshore-wind activity, partly offset by inflation in fuel, subcontractor and equipment-rental costs.
- Consolidated operating cash flow was negative, primarily reflecting higher natural gas purchases and the timing of recovery through customer rates. Investing cash flow included $1.058 billion of net proceeds from the MountainWest sale; construction expenditures were $219.1 million. Cash and cash equivalents were $82.1 million at quarter end.
- Holdings’ long-term debt, less current maturities, was $4.578 billion; short-term debt was $467.5 million and current maturities were $41.9 million. Total debt on these balance-sheet categories was approximately $5.087 billion. Southwest Gas Corporation separately reported $3.498 billion of long-term debt and $450 million of short-term debt.
Liquidity, outlook and risks
- Southwest had a $970 million under-collected purchased-gas balance at March 31, 2023, compared with $450 million at year-end 2022. These balances are generally recoverable through regulatory mechanisms, but the timing of recovery affects cash flow and liquidity. Southwest sought regulatory changes to accelerate recovery of a substantial Arizona balance.
- The MountainWest sale generated cash used largely to reduce acquisition-related borrowing. In March, Holdings issued 4.1 million shares for net proceeds of $238.4 million, while Southwest issued $300 million of 5.450% senior notes due 2028. In April, Holdings entered a $550 million term loan; Southwest used an equity contribution to repay its $450 million gas-cost term loan on April 17, 2023.
- Management estimated natural gas distribution construction expenditures of $665–$685 million in 2023 and approximately $2.0 billion over 2023–2025. The Board maintained the quarterly dividend at $0.62 per share.
- Arizona’s general rate case authorized a $54.3 million revenue increase effective February 1, 2023. Management cited customer growth, rate relief and recovery of prior program costs as contributors to Southwest’s higher quarterly operating margin.
- As part of the MountainWest sale agreement, Holdings may owe indemnification for the FERC Overthrust Pipeline rate case, subject to a $75 million cap. The parties reached a settlement pending FERC approval; Holdings recorded a $28.4 million estimated loss. The filing also reports an additional approximately $21 million sale-related charge from closing adjustments.
- Key risks include gas-price volatility and delayed cost recovery, regulatory decisions and rate lag, rising interest rates and inflation, Centuri project execution and contract costs, seasonality, and completion and approvals for the planned Centuri spin-off.
Other notable items
Management corrected an $8 million out-of-period gas-cost accounting error in Q1 2023, reducing net cost of gas sold and increasing deferred purchased-gas costs. It also corrected an approximately $21 million understatement of the MountainWest impairment previously recorded in 2022. The filing states that management concluded these matters were not material to prior or current-period financial statements. Management reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Progress and approvals for the Centuri spin-off, including the targeted timing and tax treatment.
- Recovery schedule and financing cost for the $970 million under-collected gas balance, particularly in Arizona.
- Final FERC approval and financial exposure under the MountainWest settlement and indemnity.
- Actual 2023 utility capital spending, rate relief and resulting cash needs, alongside debt levels and borrowing costs.
- Centuri’s ability to sustain margins amid inflation, project risks and variable storm-restoration and offshore-wind work.