Southwest Gas Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Figures below are consolidated Southwest Gas Holdings amounts unless identified otherwise; dollar amounts are in millions except per-share data. The filing also reports separately for wholly owned Southwest Gas Corporation.
Business context and reporting period
The company operates through two segments: regulated natural gas distribution and transportation in Arizona, Nevada, and California (Southwest Gas), and utility infrastructure services across the U.S. and Canada (Centuri). Natural gas earnings are seasonal, typically stronger in winter; Centuri activity also varies with weather and project timing.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total operating revenue | $757.2 | $713.0 | $1,593.6 | $1,546.6 |
| Operating income | $67.6 | $54.9 | $215.9 | $195.3 |
| Net income attributable to Holdings | $38.0 | $22.1 | $110.5 | $116.9 |
| Basic EPS | $0.68 | $0.41 | $2.00 | $2.18 |
| Operating cash flow | Not presented by quarter | $375.1 | $278.4 |
- Natural gas operating margin, a company-defined non-GAAP measure, was $195.0 million in Q2 versus $193.5 million; for the first half it was $537.0 million versus $521.6 million.
- Six-month net cash used in investing was $414.5 million, including $423.4 million in construction expenditures and property additions. Cash and equivalents were $199.6 million at June 30, compared with $49.5 million at year-end 2019.
- At June 30, Holdings reported $2.64 billion of long-term debt excluding current maturities, $171.7 million of current maturities, and $58.0 million of short-term debt. Total debt therefore increased from year-end; the filing attributes financing activity partly to new debt issuance and changes in subsidiary borrowings.
- Management reported $679 million of borrowing capacity across company credit facilities. Southwest Gas had no borrowings outstanding on its $400 million facility; Centuri had about $298 million outstanding under its secured revolving and term-loan facility.
Material changes versus the prior comparable period
- Q2 revenue rose 6.2%, operating income rose, and attributable net income increased to $38.0 million. Gas operations contributed $11.9 million versus $3.4 million, while Centuri contributed $26.3 million versus $18.9 million.
- Q2 gas operating margin increased modestly, supported by customer growth and rate relief. Lower operations and maintenance costs and higher company-owned life insurance (COLI) income also supported gas earnings; higher depreciation partly offset those gains.
- For the first half, revenue and operating income increased, but attributable net income declined to $110.5 million from $116.9 million. Lower natural gas segment other income—principally the comparison of COLI results—offset higher gas operating margin and stronger Centuri contribution.
- Centuri’s Q2 revenue increased 8.9%, reflecting more electric infrastructure and pipe replacement work, including storm-related work. Six-month Centuri contribution to consolidated net income increased despite cost growth and the absence of certain prior-year strike-support profit.
- Six-month operating cash flow improved, primarily from purchased-gas-cost collections and recovery of Arizona decoupling balances, partly offset by a $50 million supplemental pension contribution. Cash generation is affected by regulatory working-capital timing.
Outlook, commentary, risks and unusual items
- COVID-19: Both businesses were largely able to continue operating as essential services, and management said impacts to date had not materially disrupted operations or liquidity. Southwest suspended service disconnections for nonpayment and late fees, and offered flexible payment arrangements. Management cautioned that prolonged pandemic effects, especially into winter, could increase collection risk; the full financial impact remained uncertain.
- Regulatory proceedings: The Arizona general rate case hearing was delayed, with a decision expected in Q4 2020. A California rate-case agreement in principle was filed in August, proposing a $6.4 million revenue increase and rates expected, if approved, in January 2021. Nevada’s pending case sought a $38.5 million increase; hearings were scheduled for August 2020. Timing and outcomes of rate recovery may affect earnings and cash flow.
- Capital investment and funding: Southwest estimated approximately $2.1 billion of natural gas construction expenditures for 2020–2022, including about $700 million in 2020. The company expects operating cash flows to fund about half of gas-segment construction expenditures and dividend requirements over the three-year period, with remaining needs potentially met through debt, equity, or other financing.
- Debt and financing: Southwest issued $450 million of 2.20% senior notes due 2030 in June, using part of the proceeds to reduce credit-facility borrowings and intending to redeem $125 million of 4.45% notes due December 2020. It gave notice on July 31 of redemption on September 1. The holding company and Southwest extended their credit-facility maturities to 2025.
- Other considerations: LIBOR may be discontinued after 2021; approximately 9% of consolidated debt, including current maturities, was LIBOR-linked with maturities beyond 2021. The company said replacement rates and effects could not yet be determined. Centuri received $3.4 million in Canadian wage subsidies in Q2. No material goodwill impairment was identified in the period.
- The filing provides no consolidated earnings guidance. Management’s outlook remains subject to pandemic developments, regulatory decisions and lag, customer collections, construction/project awards and costs, capital-market access, interest rates, and pension funding needs.
Important facts for investors to verify
- Progress and final decisions in the Arizona, California, and Nevada rate cases, including approved returns, effective dates, and recoverability of infrastructure and modernization costs.
- Whether customer payment delinquencies, disconnection protections, or winter COVID-19 conditions materially change the allowance for uncollectible accounts or cash collections.
- Completion of the planned September 2020 redemption of the 4.45% notes and the subsequent debt, liquidity, and interest-cost profile.
- Centuri’s project backlog, customer award decisions, work delays, margins, and ability to manage fixed-price contract and workforce risks.
- Actual spending against the estimated $2.1 billion three-year gas construction program, and the financing and regulatory recovery needed to support it.
- Actual cash flow excluding timing-related PGA and regulatory collections, as these materially influenced first-half operating cash flow.