Business context and reporting period
Southwest Gas Holdings, Inc. filed a combined, unaudited Form 10-Q with wholly owned Southwest Gas Corporation for the quarter ended September 30, 2019. Holdings operates a regulated natural gas utility serving Arizona, Nevada and California, and Centuri, a utility infrastructure services business. The utility had 2.066 million customers at quarter-end. Results are seasonal: gas operations typically earn more in winter, while Centuri activity generally peaks in summer and fall.
Financial results and key metrics
Amounts below are in millions, except per-share data. Consolidated figures refer to Southwest Gas Holdings.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $725.2 | $668.1 | $2,271.8 | $2,093.4 |
| Operating income | $38.3 | $39.7 | $233.6 | $222.6 |
| Net income attributable to Holdings | $5.4 | $12.3 | $122.2 | $113.0 |
| Diluted EPS | $0.10 | $0.25 | $2.26 | $2.31 |
| Operating cash flow | Not separately reported for the quarter | $378.5 | $407.4 |
- Quarterly revenue rose 8.5%, while net income attributable to Holdings fell 56.6%. Nine-month revenue increased 8.5% and attributable net income rose 8.2%; EPS declined as average shares outstanding increased.
- Natural gas operating margin, a company-defined non-GAAP measure equal to gas revenue less gas cost, was $174.9 million in Q3, up from $167.6 million, and $696.5 million for nine months, up from $668.4 million. The utility’s Q3 net loss was $20.0 million versus a $13.7 million loss; nine-month net income was $86.7 million versus $79.3 million.
- Centuri’s Q3 revenue increased to $515.3 million from $450.6 million, but its contribution to consolidated net income declined to $25.8 million from $26.8 million. Nine-month revenue was $1,282.4 million versus $1,105.8 million, and its contribution to consolidated net income was $36.7 million versus $35.0 million.
- At September 30, cash was $28.5 million, current assets $765.4 million and current liabilities $782.3 million. Holdings reported long-term debt of $2,462.1 million, current maturities of $38.2 million and short-term debt of $30.0 million. These compare with $2,107.3 million, $33.1 million and $152.0 million, respectively, at December 31, 2018.
- Nine-month investing cash use was $711.0 million, principally for construction and property additions of $719.4 million and acquisitions of $19.5 million. Financing provided $275.6 million; Holdings issued common stock and paid dividends of $129.3 million and $86.3 million, respectively.
Material changes versus the prior comparable period
- Quarterly gas operating margin improved by $7.3 million, reflecting customer growth and rate relief, but higher utility operating and depreciation costs, interest expense, and lower COLI-related income weighed on earnings. Gas utility net interest deductions increased $3.2 million in Q3, primarily after the May 2019 senior-note issuance.
- For the first nine months, gas margin increased $28.1 million, including contributions from customer growth and rate relief. Higher operations and maintenance, depreciation and interest costs partly offset the improvement.
- Centuri’s growth largely reflects the inclusion of Linetec, acquired in November 2018. The quarter also included estimated $4 million of lower revenue and productivity inefficiencies from new regulatory requirements in certain eastern states, and approximately $2 million of additional costs from delays on a Canadian industrial construction project.
- Construction spending increased substantially. Holdings’ nine-month operating cash flow declined by $28.9 million, while investing cash use increased by $161.5 million year over year.
Outlook, commentary and risks
- The filing gives no explicit consolidated earnings or EPS guidance. Management estimated natural gas segment construction expenditures of approximately $2.1 billion for 2019–2021, including about $730 million in 2019. Operating cash flows are expected to fund approximately 45%–50% of gas-segment construction expenditures and dividend requirements over that three-year period; external financing may fund the balance.
- Southwest filed an Arizona rate case seeking approximately $57 million of revenue increases and later supplemented its plant request; a hearing was scheduled for February 2020. Its California rate case requested a net $12.8 million increase, with requested rates targeted for January 2021. Regulatory decisions, timing of rate relief and cost recovery remain uncertain.
- The company identified regulatory lag, gas-cost recovery timing, capital-market access, interest rates, construction costs and Centuri’s project mix, productivity and contract performance as factors that could affect results and liquidity. Centuri’s fixed-price and unit-price work may be affected by cost overruns, customer work allocation and weather.
- Southwest expected gas-segment construction spending to require continued debt and equity financing. Holdings had an at-the-market equity program with up to $200.7 million available at quarter-end. S&P upgraded Southwest’s issuer rating from BBB+ to A- in October 2019, with outlook unchanged.
- Southwest and Centuri had $348 million of LIBOR-referenced debt with maturities extending beyond 2021. The filing notes uncertainty about the effect of LIBOR discontinuation and the suitability of replacement rates. The company also reported that Nevada regulators denied its request for regulatory-asset treatment of Customer Data Modernization Initiative costs; a reconsideration petition was pending.
- Management reported no goodwill impairment in the first nine months, no material market-risk disclosure changes, and no material effect from adopting the new lease standard. Management stated that pending litigation was not expected to have a material adverse effect, although ultimate dispositions were not determinable.
Most important facts for investors to verify
- Whether rate-case outcomes and infrastructure-program approvals allow timely recovery of planned utility investment and regulatory balances.
- Centuri’s underlying profitability excluding Linetec’s acquired revenue, and the extent to which project delays, new requirements and contract mix continue to pressure costs.
- Funding for the stated gas construction program, including future debt and equity issuance, liquidity needs and dividend capacity.
- Debt maturity, interest-rate exposure and the eventual replacement of LIBOR-based benchmarks.
- Seasonal comparability: nine-month and third-quarter results are not necessarily indicative of full-year utility performance.