Business context and reporting period
Southwest Gas Holdings, Inc. filed this unaudited combined Form 10-Q with its wholly owned subsidiary, Southwest Gas Corporation, for the quarter and nine months ended September 30, 2023. Holdings’ principal businesses are regulated natural gas distribution (Southwest) and utility infrastructure services (Centuri). MountainWest was sold on February 14, 2023; 2023 consolidated results include its activity through February 13, while the 2022 comparisons include longer periods of MountainWest operations.
Key financial metrics
Amounts below are in millions of dollars, except per-share data and percentages. Holdings figures are consolidated unless identified as Southwest standalone.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Operating revenue | $1,169.5 | $1,125.6 | $4,066.4 | $3,539.1 |
| Operating income | $60.2 | $49.9 | $280.2 | $264.1 |
| Net income attributable to Holdings | $3.2 | $(12.3) | $78.0 | $77.3 |
| Basic EPS | $0.05 | $(0.18) | $1.11 | $1.19 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $198.4 | $303.4 |
- Business performance: Q3 regulated gas operating margin, a company-defined non-GAAP measure, was $224.5 million versus $203.5 million. Centuri’s Q3 revenue was $774.9 million, up 2%; operating income was $53.0 million versus $38.5 million, an operating margin of approximately 6.8% versus 5.1%. For nine months, Centuri revenue was $2.234 billion and operating income was $117.9 million, versus $1.988 billion and $42.6 million.
- Southwest standalone: Nine-month revenue was $1.797 billion versus $1.358 billion, and net income was $150.6 million versus $87.3 million. Q3 net loss improved to $3.3 million from $22.2 million.
- Cash flow and investment: Holdings’ nine-month investing cash flow was positive $357.1 million, including $1.022 billion of net proceeds from the MountainWest sale; construction expenditures were $664.6 million. Financing cash flow was negative $597.5 million. Cash and equivalents were $104.9 million at September 30, versus $123.1 million at year-end 2022.
- Debt and liquidity: Holdings reported $5.236 billion of long-term debt, $42.3 million of current maturities, and $57.5 million of short-term debt at September 30. The balance includes a $550 million Holdings term loan due October 2024 and Centuri borrowings; approximately $180 million of Centuri revolving capacity was available, net of letters of credit. Southwest had no borrowings under its $400 million credit facility at quarter-end.
- Gas-cost balances: Under-collected purchased-gas balances were $687.1 million, recorded as a current asset expected to be recovered from customers. The Arizona regulator approved an increased gas-cost balancing rate to support recovery of the state balance over up to two years.
Material changes versus the prior comparable period
- Consolidated Q3 revenue rose about 3.9% and operating income increased; nine-month revenue rose about 14.9%. Comparisons are affected by the MountainWest sale and therefore do not represent identical business portfolios.
- Nine-month Holdings net income was broadly steady, while basic EPS declined from $1.19 to $1.11, reflecting a higher weighted-average share count, among other factors. Holdings issued 4.1 million shares in a March offering; 71.5 million shares were outstanding at September 30, compared with 67.1 million at year-end 2022.
- Southwest’s nine-month operating margin increased $80.9 million, attributed principally to rate relief, customer growth, regulatory-program recoveries, and an $8 million first-quarter adjustment reducing gas cost expense. Higher depreciation, operating and maintenance costs, and interest expense partially offset the improvement.
- Centuri’s nine-month revenue growth reflected electric infrastructure work, offshore wind projects, and storm restoration. Storm restoration revenue was $83.4 million versus $36.5 million; improved work mix and operating efficiencies supported higher operating income, while higher variable-rate interest costs were a partial offset.
- Assets declined to $11.836 billion from $13.197 billion at December 31, 2022, principally reflecting the MountainWest disposition and the related change in assets held for sale. Long-term debt increased, while short-term debt fell substantially from year-end.
Outlook, risks, contingencies, and unusual items
- No quantified consolidated earnings guidance is provided in the supplied filing text. Management estimated natural-gas segment construction expenditures of approximately $2.0 billion for 2023–2025, including $720–$740 million in calendar 2023; operating cash flows are expected to fund about 75% of Southwest’s construction and dividend requirements over that three-year period.
- Southwest filed a Nevada general rate case in September seeking a $69.8 million statewide revenue increase; new rates were anticipated in April 2024. Arizona’s previously approved $54.3 million rate increase took effect February 1, 2023. Management reported approximately 41,000 first-time meter sets in the preceding 12 months.
- Holdings remains committed to separating Centuri and disclosed a confidential draft S-1 filing for a proposed IPO. The transaction is subject to market conditions, SEC review, and Board approval. The company reported that the IRS declined to rule on certain tax questions concerning a potential spin-off; a tax-free separation is not assured. The Board adopted a preferred stock purchase rights plan intended to protect the possibility of a tax-free spin-off.
- The MountainWest sale generated approximately $71.2 million of goodwill impairment and loss-on-sale charges in the nine-month period. These included a $28.4 million rate-case settlement and approximately $21 million of post-closing adjustments; the rate-case matter was settled and paid in Q3.
- Management disclosed nonmaterial prior-period misstatements: an $8 million first-quarter 2023 adjustment to gas costs and deferred gas costs, and a correction of an approximately $21 million understatement of the 2022 MountainWest sale loss. Management concluded these did not materially affect prior or current-period financial statements.
- Key exposures include regulatory timing and recovery of gas costs, natural-gas price volatility and associated liquidity needs, interest rates, inflation and labor availability, Centuri contract execution and weather-related variability, and the timing, tax treatment, and financing of a Centuri separation. Management stated that legal proceedings were not expected to have a material adverse effect and that disclosure controls were effective.
Important facts for investors to verify
- Centuri separation status, IPO feasibility, potential spin-off tax treatment, and the implications of the rights plan.
- Collection timing and regulatory recoverability of the $687.1 million gas-cost asset, and whether the Arizona recovery mechanism reduces related cash-flow pressure as expected.
- Debt maturities, refinancing needs, variable-rate exposure, and available borrowing capacity—particularly the Holdings term loan due October 2024 and Centuri’s secured borrowings.
- Southwest’s Nevada rate-case outcome and the actual timing and amount of future rate relief and capital spending.
- Centuri’s contract margins, customer work awards, storm-related revenue variability, and remaining performance obligations; the filing reports $383 million of unsatisfied obligations on certain longer-duration fixed-price contracts.
- Final amounts and any further costs associated with the MountainWest disposition, and the effects of the share issuance and dilution on per-share results.