Southwest Gas Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. This combined filing reports both Southwest Gas Holdings, Inc. (the parent and consolidated group) and its wholly owned regulated utility, Southwest Gas Corporation. Unless noted otherwise, figures below are for the consolidated group and are in millions of dollars.
Business context and reporting period
The group operates natural gas distribution (Southwest), utility infrastructure services (Centuri), and pipeline and storage (MountainWest). MountainWest was acquired in December 2021, so comparisons with 2021 include a different business mix; Centuri’s 2021 comparison also reflects the August 2021 Riggs Distler acquisition. Natural gas distribution earnings are seasonal, typically stronger in winter.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenue | $1,125.6 | $888.7 | $3,539.1 | $2,596.0 |
| Operating income | $49.9 | $23.3 | $264.1 | $256.0 |
| Net income (loss) attributable to Holdings | $(12.3) | $(11.6) | $77.3 | $130.8 |
| Basic EPS | $(0.18) | $(0.19) | $1.19 | $2.23 |
| Net interest deductions | $64.4 | $31.3 | $165.9 | $81.2 |
- Q3 revenue increased 27%, reflecting higher utility infrastructure services revenue and MountainWest’s contribution. Holdings still reported a quarterly net loss; higher interest deductions and corporate costs outweighed the operating-income improvement.
- For the first nine months, revenue rose 36%, but Holdings-attributable net income fell 41%. Centuri contributed a $4.4 million loss for the period, versus $32.8 million of income a year earlier; corporate and administrative costs rose to $50.0 million from $4.5 million.
- Southwest’s regulated operating margin, a non-GAAP measure defined as regulated revenue less gas cost, was $203.5 million in Q3, up from $192.1 million. Nine-month operating margin was $814.2 million, up from $774.3 million. Rate relief, customer growth, and recovery of certain Arizona pipe-program costs contributed; higher operating and maintenance costs, depreciation, and interest weighed on earnings.
- Consolidated operating cash flow was $303.4 million for nine months, versus $51.5 million. Investing cash outflow was $604.1 million, including $612.5 million of construction expenditures and property additions; financing provided $254.0 million. Cash and equivalents were $175.3 million at September 30, 2022, down from $222.7 million at year-end 2021.
- Holdings reported long-term debt, less current maturities, of $5.866 billion, plus $41.5 million of current maturities and $381.0 million of short-term debt. The $1.15 billion MountainWest acquisition term loan was extended to December 2023. Southwest had $225 million outstanding on a separate term loan due March 2023. The company reported $156 million drawn on its $200 million parent credit facility; Centuri had about $186 million available under its revolving facility, net of letters of credit.
- Southwest’s purchased-gas under-collection was $381.4 million at quarter-end, a regulatory asset generally recoverable from customers. These balances affect cash flow and working capital, but gas costs are generally passed through and do not directly affect operating margin.
Material changes versus the prior comparable period
- Q3 utility infrastructure services revenue increased to $758.5 million from $632.8 million, while its contribution to consolidated results declined to $14.3 million from $18.5 million. Inflation, higher fuel and subcontractor costs, lower storm-related work, and a $5.7 million loss on a gas infrastructure bid project pressured results.
- MountainWest contributed $63.2 million of Q3 revenue and $12.3 million to consolidated results, including $5.7 million of stand-up and integration costs.
- Q3 natural gas distribution results improved by $5.3 million year over year, but remained a loss of $22.2 million. Nine-month distribution contribution declined to $87.3 million from $102.6 million, reflecting increased operating costs, depreciation, and interest expense.
- Holdings issued 6.325 million shares in March 2022, receiving approximately $452 million net, and used the proceeds to reduce acquisition-related borrowings. Weighted-average basic shares for the nine-month period increased to 65.0 million from 58.6 million.
Outlook, commentary, risks, and unusual items
- The filing provides no numerical consolidated earnings guidance. Management estimated natural gas distribution construction expenditures of $2.5 billion to $3.5 billion over the five years ending 2026, with approximately $650 million to $675 million expected in 2022.
- The Board’s stated course is to focus on the operating plan while continuing to review strategic alternatives for Centuri and MountainWest. Centuri may be sold or spun off, among other alternatives; the filing gives no assurance that a transaction will occur. The Icahn Group cooperation agreement was amended in October 2022, including commitments concerning director nominations for the 2023 annual meeting.
- Management said it expects to refinance the $1.15 billion acquisition term loan through debt or equity issuance or potential asset-sale proceeds, and concluded it could meet obligations for at least the next 12 months. It also cautioned that financing access and execution are not assured.
- Inflation, higher interest rates, labor and materials costs, and supply-chain constraints are risks across the businesses. Centuri said it may not be able to fully recover cost increases through contract pricing. Certain Centuri customers’ difficulty obtaining materials affected work volume and mix.
- Regulatory matters include Southwest’s pending Arizona general rate case, with a decision and new rates anticipated in Q1 2023; the FERC investigation into MountainWest Overthrust Pipeline rates; and a Nevada settlement to discontinue the Gas Infrastructure Replacement mechanism, subject to commission approval. Regulatory timing and outcomes may affect earnings or cash flows.
- Southwest recorded a $5 million liability for an August 2021 pipeline explosion that injured four people; the incident remains under investigation and related claims are pending. A separate $6.2 million contract-dispute reserve was paid in Q3 and the matter closed. The filing also describes shareholder litigation that management intends to defend.
- Goodwill testing through the reporting date identified no impairment. The MountainWest purchase-price allocation remained subject to possible refinements. No material changes to market-risk disclosures were reported.
Important facts for investors to verify
- Progress and terms of any Centuri or MountainWest sale, spin-off, or other strategic transaction.
- How the company will refinance the acquisition term loan due in December 2023 and the Southwest term loan due in March 2023, including borrowing costs and covenant capacity.
- Centuri’s ability to manage inflation and project execution risk, particularly the loss-making bid project and customer supply constraints.
- Results and timing of the Arizona rate case and the Overthrust Pipeline FERC proceeding, along with recovery and collection of the $381 million purchased-gas balance.
- Developments in the pipeline incident claims and any resulting changes to recorded liabilities or insurance recovery.