Business context and reporting period
Southwest Gas Holdings, Inc. (NYSE: SWX) filed this combined, unaudited Form 10-Q for the quarter and six months ended June 30, 2023. The company operates regulated natural gas distribution through Southwest Gas Corporation and utility infrastructure services through Centuri. MountainWest was sold on February 14, 2023; comparative periods include its results where applicable.
Key financial results
Amounts below are consolidated Southwest Gas Holdings figures in millions, except per-share data. The filing also presents separate financial statements for Southwest Gas Corporation.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Operating revenue | $1,293.6 | $1,146.1 | $2,896.9 | $2,413.5 |
| Operating income | $84.8 | $45.7 | $220.0 | $214.2 |
| Net income attributable to Holdings | $28.9 | $(6.6) | $74.8 | $89.6 |
| Basic EPS | $0.40 | $(0.10) | $1.07 | $1.40 |
- Natural gas distribution operating margin, a company-defined non-GAAP measure, was $256.8 million in Q2, up from $231.3 million; first-half margin was $670.5 million, up from $610.7 million.
- Centuri generated Q2 revenue of $805.8 million and operating income of $53.2 million, compared with $706.1 million and $21.0 million. Its first-half revenue was $1,459.1 million and operating income was $64.9 million.
- Six-month consolidated operating cash flow was $12.2 million, versus $263.6 million a year earlier. Capital expenditures and property additions were $438.7 million. The company received $1,050.9 million of net proceeds from the MountainWest sale.
- At June 30, consolidated cash was $221.4 million. Long-term debt, net of current maturities, was $5,284.8 million; current maturities were $42.1 million and short-term debt was $15.5 million. Total equity was $3,262.8 million.
- Southwest Gas Corporation reported first-half net income of $153.8 million, compared with $109.5 million, and operating cash flow of $52.2 million, compared with $241.0 million.
Material changes versus the prior comparable period
- Q2 consolidated revenue increased about 13%, and net income attributable to Holdings moved from a loss to profit. Higher regulated margin and Centuri results contributed to the improvement.
- For the first half, revenue rose about 20%, but attributable net income declined. The period included $71.2 million of goodwill impairment and loss-on-sale charges related to MountainWest; operating income was only modestly higher than the prior-year period.
- Natural gas distribution margin benefited from customer growth and rate relief, including Arizona rates effective February 2023. Higher depreciation and interest expense partly offset the improvement.
- Centuri’s quarterly improvement reflected increased electric infrastructure and storm-restoration work, offshore-wind activity, favorable work mix and operating efficiencies. Management noted continued inflationary pressures and higher interest costs.
- Consolidated operating cash flow fell substantially, largely due to working-capital movements and the timing of purchased-gas costs and their recovery from customers.
Outlook, risks and unusual items
- The company expects to complete the Centuri spin-off toward the end of Q1 2024, subject to final board approval, transaction structuring, tax and regulatory approvals, and SEC registration. The Arizona Corporation Commission approved the application in June 2023; a draft Form 10 was confidentially submitted to the SEC.
- Southwest estimates natural gas distribution construction expenditures of about $2.0 billion over 2023–2025, including approximately $700–$720 million in 2023. It expects operating cash flows to fund about 75% of gas operations construction expenditures and dividend requirements over the three-year period; additional funding may come from debt, equity contributions or other financing.
- The Board maintained the quarterly common dividend at $0.62 per share. The March 2023 public stock offering generated net proceeds of $238.4 million; shares outstanding increased.
- Southwest had $785.6 million of deferred purchased-gas under-collections at June 30. The filing says the balance is generally expected to be recovered over the following 12 months, following Arizona’s July approval of a higher gas cost balancing account rate. Recovery timing and gas prices remain liquidity risks.
- MountainWest sale-related items include a $28.4 million estimated charge for a FERC rate-case settlement pending approval and approximately $21 million of additional sale loss recognized in Q1. The company has an indemnity obligation for the rate case capped at $75 million over four years after closing.
- Management identified and corrected an $8 million purchased-gas accounting adjustment and an approximately $21 million prior estimate error in the MountainWest sale loss during Q1; management concluded these were not material to prior or current financial statements.
- Risks highlighted include regulatory timing and rate recovery, volatile gas costs, rising interest rates, inflation and labor availability, Centuri weather and contract execution, and the successful completion and tax treatment of the planned spin-off. Management reported no material change in market-risk disclosures and considered disclosure controls effective.
- A shareholder lawsuit was dismissed without prejudice on August 2, 2023. Management stated that pending legal proceedings were not expected to have a material adverse impact.
Important facts for investors to verify
- Progress and remaining approvals for the Centuri separation, including the expected timing and tax-free treatment.
- Actual recovery pace of the $785.6 million purchased-gas balance, and its effects on cash flow, borrowing needs and customer rates.
- Final FERC action on the MountainWest rate-case settlement and the company’s remaining indemnity exposure.
- Centuri’s ability to sustain margins as storm-related work fluctuates and as inflation, labor, subcontractor costs and fixed-price project risks evolve.
- Funding and refinancing needs, including the October 2024 maturity of Holdings’ $550 million term loan, debt costs and planned gas-system capital spending.