Southwest Gas Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; balance sheet compared with December 31, 2018. The combined filing covers Southwest Gas Holdings and its wholly owned utility subsidiary, Southwest Gas Corporation. Unless specified, financial results below are Holdings consolidated. Amounts are in millions except per-share data.
Business context and financial performance
Holdings operates regulated natural gas distribution and transportation businesses in Arizona, Nevada, and California, and Centuri, a utility infrastructure services contractor. Natural gas results are seasonal; Centuri’s activity generally increases in warmer months.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $713.0 | $670.9 | $1,546.6 | $1,425.2 |
| Operating income | $54.9 | $53.3 | $195.3 | $182.9 |
| Net income attributable to Holdings | $22.1 | $21.6 | $116.9 | $100.6 |
| Diluted earnings per share | $0.41 | $0.44 | $2.18 | $2.07 |
Q2 revenue rose about 6% year over year, while net income attributable to Holdings increased about 2%; diluted EPS declined amid a larger average share count. Six-month revenue increased about 9%, and attributable net income increased about 16%.
Segments and material changes
- Natural gas operations: Q2 gas operating margin, a company-defined non-GAAP measure equal to gas revenue less net gas cost, was $193.5 million versus $192.2 million. Six-month margin was $521.6 million versus $500.8 million. Six-month segment net income rose to $106.8 million from $93.0 million, mainly reflecting rate relief, customer growth, and higher other income; higher depreciation, operating costs, and interest partly offset gains.
- Utility infrastructure services (Centuri): Q2 revenue increased to $454.3 million from $395.2 million, including $56.7 million from Linetec, acquired in November 2018. Q2 segment net income attributable to Centuri was $18.9 million versus $19.2 million; higher revenue was offset by expenses, including acquisition-related depreciation and amortization. Six-month revenue was $767.2 million versus $655.2 million, and segment net income was $10.9 million versus $8.2 million.
- Consolidated Q2 net interest deductions increased to $26.8 million from $23.7 million. The company cited the May 2019 debt issuance, borrowings preceding issuance, and regulatory-liability carrying costs. Q2 other income improved, including higher income from company-owned life insurance policies.
Cash flow, debt, and liquidity
- For the first six months, operating cash flow was $278.4 million, versus $247.0 million. Investing cash outflow was $480.5 million, versus $332.5 million, reflecting higher construction spending and Linetec consideration payments. Financing cash inflow was $155.1 million, versus $76.7 million. Cash ended at $38.4 million, down from $85.4 million at year-end.
- At June 30, total Holdings long-term debt was $2.373 billion, with $36.8 million of current maturities and no short-term debt reported. Long-term debt excluding current maturities rose from $2.107 billion at year-end. Southwest issued $300 million of 4.15% senior notes due 2049 in May and used proceeds in part to repay credit-facility and commercial-paper borrowings.
- Holdings had $2.419 billion of equity. Current assets were $752.1 million and current liabilities $726.5 million. Southwest had $46 million outstanding on the long-term-designated portion of its $400 million facility and no short-term facility or commercial-paper borrowings. Centuri had $341 million outstanding under its $590 million secured revolving credit and term-loan facility, with approximately $216 million available under the line of credit, net of letters of credit.
- Six-month construction expenditures and property additions were $471.6 million consolidated. Management estimated natural gas segment construction expenditures of approximately $2.1 billion for 2019–2021, including about $710 million in 2019; operating cash flows were expected to fund approximately 45%–50% of gas-segment construction expenditures and dividend requirements over that period.
Outlook, regulatory matters, risks, and unusual items
- Southwest filed an Arizona general rate case in May 2019 seeking approximately $57 million in additional annual revenue, with a proposed 10.3% return on equity; a hearing was anticipated in Q1 2020. Nevada rates effective in 2019 provided net revenue increases, but management sought judicial review of the rate order. Southwest expected to file a California general rate case in Q3 2019. Paiute Pipeline filed a FERC rate case seeking approximately $7 million in additional revenue; the requested increase was suspended until December 2019.
- Southwest’s customer and gas transaction systems modernization initiative was estimated to cost $174 million, with regulatory cost-deferral requests pending in multiple jurisdictions. The southern Arizona LNG facility was in testing, with completion expected in winter 2019/2020; approximately $68 million had been spent through June.
- Management highlighted ongoing infrastructure replacement and system reliability investment. Results and liquidity remain exposed to regulatory decisions and timing of rate recovery, gas-cost recovery timing, construction costs, customer growth, weather and seasonality, Centuri contract awards and execution, and access to capital. The filing also notes that LIBOR discontinuation after 2021 may affect variable-rate debt; no impact estimate was provided.
- Centuri’s Linetec acquisition purchase accounting remained preliminary. The seller retained a 20% redeemable interest, carried as temporary equity; specified purchase or exit rights begin in 2022. No goodwill impairment was identified in the first half of 2019. Management reported no material market-risk disclosure changes, no material control changes, and no pending litigation expected to materially adversely affect results, while noting litigation outcomes are not presently determinable.
- The company adopted lease accounting Topic 842 in Q1 2019, recording $58.4 million of right-of-use assets and $60.8 million of lease liabilities consolidated, with no material income-statement impact. The quarterly dividend was increased to $0.545 per share, effective with the June 2019 payment. Holdings raised approximately $74.2 million net through its at-the-market equity program in Q2.
Key facts for investors to verify
- Progress and final outcomes of the Arizona, California, Nevada, and Paiute rate proceedings, including the timing and amount of approved recovery.
- Actual construction spending versus the stated 2019–2021 plans, and the funding mix of operating cash, debt, and equity.
- Centuri’s margins and cash conversion as Linetec integration continues, including contract execution, customer awards, and final acquisition accounting.
- Debt levels, borrowing costs, available credit capacity, and the eventual treatment of LIBOR-linked borrowings.
- Whether customer growth, regulatory recovery, and seasonal operating patterns support earnings and dividend objectives.