Southwest Gas Holdings, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. This combined filing covers Southwest Gas Holdings, Inc. and its wholly owned subsidiary, Southwest Gas Corporation, for the three months ended March 31, 2021. Holdings operates natural gas distribution and transportation through Southwest Gas and utility infrastructure services through Centuri. The income and cash flow figures below are for the quarter; the filing also presents trailing 12-month results. Amounts are in millions unless stated otherwise.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total operating revenue | $885.9 | $836.3 |
| Operating income | $173.5 | $148.4 |
| Net income attributable to Holdings | $117.3 | $72.5 |
| Basic / diluted EPS | $2.04 / $2.03 | $1.31 / $1.31 |
| Operating cash flow | $(52.5) | $271.6 |
| Construction expenditures and property additions | $152.7 | $210.7 |
- Gas operating revenue was $521.9 million, up from $502.8 million. Southwest Gas’s non-GAAP operating margin—gas revenue less net gas cost—rose to $365.9 million from $342.0 million.
- Utility infrastructure services revenue increased to $364.0 million from $333.5 million. Centuri’s contribution to Holdings’ net income was a loss of $0.9 million, improved from a $10.2 million loss.
- Cash and cash equivalents were $92.3 million at quarter-end. Holdings reported $310.0 million of short-term debt, $67.3 million of current long-term debt maturities, and $2.697 billion of long-term debt, net of current maturities.
- Current assets were $1.001 billion and current liabilities were $1.036 billion. The quarter-end balance sheet included a $238.9 million deferred purchased-gas-cost asset.
Changes and drivers versus the prior-year quarter
- Revenue increased about 6% and Holdings-attributable net income rose about 62%. Natural gas operations contributed $118.7 million of net income, compared with $83.6 million.
- Southwest Gas operating margin increased $23.9 million: management attributed approximately $18 million to rate relief and $6 million to customer growth, including 37,000 first-time meter sets over the preceding 12 months. The filing also cites reduced late fees and connection charges as offsets.
- Natural gas operating results benefited from a $2.7 million increase in company-owned life insurance (COLI) cash surrender value, compared with a $15.5 million decline in Q1 2020. This was a material year-over-year contributor to higher other income.
- Centuri revenue growth reflected electric infrastructure work and approximately $9 million of emergency restoration revenue after storms and winter weather. Gains on equipment sales were $1.5 million.
- Operating cash flow fell sharply, chiefly because of the timing and amount of purchased-gas-cost deferrals, including the February 2021 price spike, and lower Arizona decoupling-mechanism recoveries. The cash outflow is not, by itself, a measure of quarterly earnings.
Liquidity, financing, outlook, and risks
- Extreme cold in the central U.S. drove approximately $250 million of incremental gas supply costs. Southwest Gas funded these costs with a 364-day $250 million term loan issued in March 2021, due March 2022. The costs are expected to be recovered through purchased gas adjustment mechanisms; recovery timing affects cash flow.
- Southwest Gas disputed a pipeline company’s $65 million claim for imbalance charges and recorded no liability, stating it believes no amount is due. The outcome remains a contingency to monitor.
- Management estimated natural gas segment construction expenditures of approximately $2.1 billion over the three years ending December 31, 2023, including approximately $700 million in 2021. Southwest expects operating cash flows to fund about half of gas-segment construction expenditures and dividend requirements over that period; other needs may require debt, equity contributions, or other financing.
- The prior $300 million at-the-market equity program was essentially completed in Q1, generating $46 million of net proceeds during the quarter. In April 2021, Holdings established a new at-the-market program for up to $500 million of common stock. Additional issuance may dilute existing shareholders.
- The Board increased the quarterly dividend from $0.57 to $0.595 per share, effective with the June 2021 payment. Management stated a target payout ratio of 55%–65% of consolidated EPS.
- Arizona’s new rates took effect in January 2021 following an approved annual revenue increase of $36.8 million. California’s rate case was approved for a $6.4 million combined increase, with rates effective April 1, 2021. Regulatory decisions and timing of cost recovery can affect earnings and cash flows.
- Arizona regulators denied Southwest’s request to defer Customer Data Modernization Initiative costs as a regulatory asset; costs will be considered in a future rate proceeding. The estimated initiative cost was approximately $174 million company-wide.
- COVID-19 disconnection moratoria continued, with late fees recommencing in Arizona and Nevada in April 2021 and expected to resume in California in the latter half of 2021. Management reported no material overall financial-position impact to date but noted uncertainty around collections, customer hardship, and future operating effects.
- Management identified LIBOR discontinuation after 2021 as a financing risk for variable-rate debt; the impact and replacement benchmark were not yet certain. Centuri’s infrastructure-services results are also exposed to weather, customer project awards and scheduling, contract costs, and work mix.
- Management reported no material adverse impact expected from pending litigation, but stated ultimate dispositions were not determinable. The filing also says legal proceedings were not expected individually or collectively to materially adversely affect financial position or results.
Important facts for investors to verify
- Whether the $238.9 million purchased-gas under-collection is recovered on the anticipated schedule, and how that recovery affects liquidity.
- The resolution of the disputed $65 million pipeline imbalance charge and any related regulatory or legal developments.
- Debt repayment or refinancing for the $250 million term loan due March 2022, covenant compliance, and any effects of LIBOR transition.
- Actual capital spending against the stated gas-segment plan and the company’s future reliance on debt or equity financing, including use of the new $500 million ATM program.
- Regulatory recovery and earnings treatment for CDMI costs, Arizona replacement-program investments, and other rate proceedings.
- Customer payment trends and collection experience as COVID-19 disconnection and late-fee policies change.
- Centuri’s ability to sustain operating performance without unusually favorable storm-restoration work and to manage costs on awarded contracts.