Southwest Gas Holdings, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2018. The filing combines Southwest Gas Holdings, Inc. and its wholly owned utility subsidiary, Southwest Gas Corporation. Unless otherwise noted, figures below are for Holdings’ consolidated results and are in U.S. dollars.
Business context and financial performance
Holdings operates regulated natural gas distribution and transportation through Southwest Gas, and infrastructure construction services through Centuri. Gas operations are seasonal, with stronger demand generally in winter; Centuri’s construction activity typically rises in summer and fall. Results for the third quarter are therefore not necessarily indicative of full-year results.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $668.1 million | $593.2 million | $2,093.4 million | $1,808.4 million |
| Operating income | $39.7 million | $35.0 million | $222.6 million | $207.6 million |
| Net income attributable to Holdings | $12.3 million | $10.2 million | $113.0 million | $97.4 million |
| Diluted earnings per share | $0.25 | $0.21 | $2.31 | $2.03 |
| Dividends declared per share | $0.52 | $0.495 | $1.56 | $1.485 |
Q3 revenue growth was led by construction services: construction revenue rose to $450.6 million from $380.1 million, while gas operating revenue increased to $217.5 million from $213.1 million. Consolidated operating margin was approximately 5.9% in Q3 2018 versus 5.9% in Q3 2017; net margin was approximately 1.8% versus 1.7%.
- Natural gas operations: Q3 segment loss was $13.7 million, versus a $4.0 million loss a year earlier. Utility operating margin, a company-defined non-GAAP measure, was nearly flat at $167.6 million versus $167.5 million. Higher operations and maintenance costs and interest expense more than offset customer growth and other income. For nine months, utility operating margin fell $5.6 million to $668.4 million and segment income declined to $79.3 million from $82.4 million.
- Infrastructure services: Q3 contribution to consolidated net income rose to $26.8 million from $14.3 million; revenue increased $70.5 million. Nine-month contribution increased to $35.0 million from $15.7 million. Growth reflected more replacement work and the November 2017 Neuco acquisition, alongside higher construction expenses and interest costs.
Cash flow, debt, and liquidity
For the first nine months of 2018, operating cash flow was $407.4 million, up from $299.2 million. Investing cash outflow was $549.5 million, compared with $442.8 million, chiefly reflecting higher construction expenditures. Financing provided $167.5 million; cash and cash equivalents ended the period at $69.2 million, up from $43.6 million at year-end 2017.
At September 30, 2018, Holdings reported $2.124 billion of long-term debt excluding current maturities, $33.4 million of current maturities, and $31.5 million of short-term debt. These amounts total approximately $2.189 billion, compared with approximately $2.038 billion at December 31, 2017. Current assets were $721.2 million and current liabilities were $712.7 million. Holdings raised $84.3 million net through its at-the-market equity program in the first nine months; 1.146 million shares were sold, contributing to share-count growth.
The utility received a $49 million refund from El Paso Natural Gas related to a rate settlement. The refund contributed to a $93.0 million purchased-gas overcollection liability at quarter-end; purchased-gas adjustments affect cash timing but, according to the filing, do not directly affect profit margin.
Changes, outlook, risks, and unusual items
- Federal tax reform reduced the corporate tax rate from 35% to 21%. Lower utility rates to pass tax savings to customers reduced gas operating margin; lower income-tax expense partly offset that impact. Arizona required customer credits and ongoing tracking of refund differences. The company’s tax-reform accounting remained provisional, with management expecting to complete its assessment in Q4 2018.
- Southwest issued $300 million of 3.7% senior notes in March 2018, maturing in April 2028. The proceeds were used in part to repay credit-facility and commercial-paper borrowings. Higher debt and interest expense affected results.
- Management estimated natural-gas-segment construction expenditures of approximately $2 billion for 2018–2020, including approximately $670 million in 2018. It expected operating cash flow to fund about 50%–60% of gas-segment construction expenditures and dividend requirements, with remaining needs potentially met through credit facilities, parent contributions, or external financing. This is a capital-spending estimate, not earnings guidance.
- Southwest’s Nevada general rate case sought an overall annual increase of approximately $29.7 million; management expected a decision in Q4 2018 and new rates no later than January 1, 2019. Staff and consumer representatives proposed materially different outcomes. The filing also described ongoing tax-reform, infrastructure-recovery, and pipeline-rate proceedings.
- The Arizona LNG facility was expected to be completed by the end of 2019; approximately $51 million had been spent through September 2018. Centuri’s fixed-price work carries estimation and cost-overrun risks, and results can be affected by weather, customer work awards, and contract changes. The filing identifies regulatory timing, gas-cost recovery, financing access and costs, and construction execution among key risks.
- The Board’s stated dividend payout-ratio target was 55%–65% of consolidated earnings per share. The quarterly dividend was increased 5% to $0.52 per share, effective with the June 2018 payment. Management reported no material change in market-risk disclosures; it also stated that pending legal proceedings were not expected to have a material adverse effect.
Most important facts for investors to verify
- Outcome and timing of the Nevada rate case, and the resulting authorized rates and return.
- How tax-reform savings, deferred-tax balances, and customer refunds affect future utility revenue and cash flow.
- Collection or refund timing for the $93.0 million purchased-gas overcollection, including treatment of the $49 million El Paso Natural Gas refund.
- Delivery of the planned utility capital program and its funding mix, including any additional debt or equity issuance.
- Whether Centuri sustains construction profitability as revenue grows, particularly given Neuco integration, project-cost estimates, and customer-award variability.